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 SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2005

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

Indicate by check mark whether the registrant is a shell company (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 28, 2005, was 17,973,829.

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			December 31
	2005			2004
	*(Unaudited)*			*(Note 1)*
Assets
Current assets :
Cash and cash equivalents	$	18,845		$	12,291
Short-term investments	21,024			28,867
Accounts receivable, less allowances for doubtful accounts of $266 at September 30, 2005 and $219 at December 31, 2004	2,285			3,155
Inventory	70			34
Prepaid expenses and other current assets	213			355
Total current assets	42,437			44,702

Equipment, net	500			565
Other assets	26			21
Total assets	$	42,963		$	45,288

Liabilities and shareholders’ equity
Current liabilities :
Accounts payable	$	517		$	155
Accrued expenses	1,171			1,134
Accrued compensation and related accruals	296			821
Accrued restructuring, current portion	270			720
Advance payments from customers	178			35
Deferred revenues	2,763			3,403
Total current liabilities	5,195			6,268

Accrued restructuring, less current portion	—			245
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, 17,971,849 shares issued and outstanding at September 30, 2005; 17,638,400 issued and outstanding at December 31, 2004	180			176
Additional paid-in capital	103,642			103,155
Accumulated deficit	(66,054		)	(64,556		)
Total shareholders’ equity	37,768			38,775
Total liabilities and shareholders’ equity	$	42,963		$	45,288

See notes to condensed consolidated financial statements.

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
	2005			2004			2005			2004
Revenue
Software licenses	$	1,047		$	1,731		$	3,505		$	5,357
Services and other	3,016			3,249			9,226			9,751
Total revenue	4,063			4,980			12,731			15,108

Cost of goods and services
Cost of software	83			172			179			459
Cost of services and other	904			897			2,976			2,769
Total cost of goods and services	987			1,069			3,155			3,228

Gross margin	3,076			3,911			9,576			11,880

Operating expenses
Sales and marketing	1,525			1,887			5,018			5,320
Research and development	1,079			1,021			3,335			3,105
General and administrative	1,101			1,132			3,284			3,175
Restructuring and other charges (credits)	0			836			(187		)	1,291
Merger transaction cost	468			0			468			0
Total operating expenses	4,173			4,876			11,918			12,891

Loss from operations	(1,097		)	(965		)	(2,342		)	(1,011		)

Other income (expense)
Interest income	339			145			866			347
Other, net	0			5			(22		)	(27		)
Total other income (expense)	339			150			844			320
Net loss	$	(758	)	$	(815	)	$	(1,498	)	$	(691	)
Basic and diluted net loss per share	$	(0.04	)	$	(0.05	)	$	(0.08	)	$	(0.04	)
Weighted average shares outstanding	17,961			17,343			17,877			17,240

See notes to condensed consolidated financial statements.

Apropos Technology, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
In thousands

	Nine months ended September 30
	2005			2004
Cash flows from operating activities
Net loss	$	(1,498	)	$	(691	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities :
Depreciation and amortization	279			353
Provision for doubtful accounts	91			—
Non-cash restructuring charge	(187		)	895
Changes in operating assets and liabilities :
Accounts receivable	779			36
Inventory	(36		)	(8		)
Prepaid expenses and other current assets	142			120
Other assets	(5		)	9
Accounts payable	363			57
Accrued expenses	34			(50		)
Accrued compensation and related accruals	(525		)	436
Accrued restructuring	(507		)	(188		)
Advanced payments from customers	143			(68		)
Deferred revenue	(639		)	314
Net cash (used in) provided by operating activities	(1,566		)	1,215

Cash flows from investing activities
Maturities and sales of short-term investments	48,257			4,750
Purchases of short-term investments	(40,414		)	(5,377		)
Purchases of equipment	(214		)	(152		)
Net cash provided by (used in) investing activities	7,629			(779		)

Cash flows from financing activities
Proceeds from exercise of options	446			692
Proceeds from employee stock purchase plan	45			64
Net cash provided by financing activities	491			756

Net change in cash and cash equivalents	6,554			1,192
Cash and cash equivalents, beginning of period	12,291			9,971
Cash and cash equivalents, end of period	$	18,845		$	11,163

See notes to condensed consolidated financial statements.

Apropos Technology, Inc.
Notes To Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The consolidated financial statements include the accounts of Apropos Technology, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity 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, 2004, 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, 2004, included with its Annual Report on Form 10-K filed with the SEC on March 30, 2005. 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.

Certain prior period amounts have been reclassified to conform to the current period presentation.

Recently Issued Accounting Standards

In December 2004, the FASB issued FAS No. 123(R), “Share-Based Payment” (FAS 123(R)). This statement requires that the compensation cost relating to share based payment transactions be recognized in the financial statements. Compensation cost is to be measured based on the estimated fair value of the equity-based compensation awards issued as of the grant date. The related compensation expense will be based on the estimated number of awards expected to vest and will be recognized over the requisite service period (often the vesting period) for each grant. The statement requires the use of assumptions and judgments about future events and some of the inputs to the valuation models will require considerable judgment by management. FAS No. 123(R) replaces FAS No. 123, “Accounting for Stock Based Compensation,” and supersedes APB 25, “Accounting for Stock Issued to Employees.” The provisions of FAS 123(R) are required to be applied by public companies as of the first interim or annual reporting period that begins after June 15, 2005.

On April 14, 2005, the SEC adopted a new rule amending the effective date for Statement 123(R). The amended rule allows registrants to implement Statement 123(R) as of the first annual period after June 15, 2005, which is January 1, 2006 for the Company.

Apropos intends to continue applying APB 25 to equity-based compensation awards until the effective date of FAS 123(R). At the effective date of FAS 123(R), Apropos expects to use the modified prospective application transition method without restatement of prior interim periods in the year of adoption. This will result in recognizing compensation cost based on the requirements of FAS 123(R) for all equity-based compensation awards issued after January 1, 2006. For all equity-based compensation awards that are unvested as of January 1, 2006, compensation cost will be recognized for the unamortized portion of compensation cost not previously included in the FAS No. 123 pro forma footnote disclosure. The impact on the Company’s results of operations or financial position as of the adoption of this pronouncement is not expected to be materially different from the pro-forma results included in Note 3 below.

2. Income or Loss Per Share

Basic net income or loss per share is based upon the net income or loss and upon the weighted-average number of common shares outstanding during the period. Diluted net income per common share adjusts for the effect of common share equivalents, such as stock options and stock warrants, net of assumed repurchases, only in the periods presented in which such effect would have been dilutive. Diluted net loss per share for the three and nine months ended September 30, 2005 is not presented separately, as the effect of the common share equivalents is anti-dilutive for the respective period presented. Accordingly, diluted net loss per share is the same as basic net loss per share.

	Three months ended September 30								Nine months ended September 30
*In thousands, except per share amounts*	2005				2004				2005				2004
Basic and diluted loss per share
Net loss	$		(758	)	$	(815		)	$	(1,498		)	$	(691		)

Weighted average shares outstanding	17,961				17,343				17,877				17,240

Loss per share	$	(0.04		)	$		(0.05	)	$		(0.08	)	$		(0.04	)

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, 2005 and 2004, respectively, as determined under the fair value method, is shown below.

	Three months ended September 30								Nine months ended September 30
*In thousands, except per share amounts*	2005				2004				2005				2004
Net loss, as reported	$		(758	)	$	(815		)	$		(1,498	)	$		(691		)
Add: Stock-based employee compensation expense included in reported net loss	—				246				—				246
Less: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects	(107			)	(457			)	(446			)	(890				)
Net loss, pro forma	$		(865	)	$	(1,026		)	$	(1,944		)	$		(1,335		)
Basic and diluted net loss per share, as reported	$	(0.04		)	$		(0.05	)	$	(0.08		)	$			(0.04	)
Basic and diluted net loss per share, pro forma	$	(0.05		)	$		(0.06	)	$	(0.11		)	$	(0.08			)

Options to purchase 1,894,019 Common Shares with exercise prices of $0.10 to $22.00 per share were outstanding as of September 30, 2005, and 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.

4. Geographic Information

Revenues derived from customers outside of North America accounted for 16.3% and 20.8% of the Company’s total revenues in the three months ended September 30, 2005 and 2004, respectively. Revenues derived from customers outside of North America accounted for 24.2% and 18.9% of the Company’s total revenues in the nine months ended September 30, 2005 and 2004, 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

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 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 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. The Court also denied the underwriter defendants’ motion to dismiss in all respects.

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 IPO’s.

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.

Consummation of the proposed settlement is conditioned upon obtaining approval by the Court. On September 1,2005, the Court preliminarily approved the proposed settlement, directed that notice of the terms of the proposed settlement be provided by class members, and scheduled a fairness hearing, at which objections to 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.

In October 2005, the local tax authorities conducted an audit of the payroll tax returns of the Company’s United Kingdom subsidiary. The audit covered calendar years 2000 through 2004. The audit identified potential payroll tax underpayments related to severance payments and exercise of stock options. Along with the potential payroll tax underpayments, there may be additional costs for penalty assessments and interest charges. We have estimated the potential costs range between $120,000 and $300,000. Based on our current assessment, the Company has established a reserve of $177,000 at September 30, 2005.

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.

6. Restructuring and Other Charges (credits)

For the nine months ended September 30, 2005, restructuring charges totaled a credit of $187,000. In the second quarter of 2005, the Company recorded a credit of $187,000. The credit relates to the successful sublet of vacated space at the corporate headquarters. For the nine months ended September 30, 2004, restructuring and other charges totaled $1,291,000. 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 was unable to find a tenant to sublet the excess facility space. 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 was unable to find a tenant to sublet the excess facility space and thereby delayed the start of anticipated sublet income by nine 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.

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

*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

*In thousands*	Employee termination costs			Facility termination costs			Asset impairment charge		Other		Total
Balance as of December 31, 2004	$	181		$	784		$	—	$	—	$		965

2005 Provision (Credit)	—			(187		)	—		—		(187			)
2005 Adjustments	—			—			—		—		—
2005 Cash Payments	(181		)	(327		)	—		—		(508			)
Balance as of September 30, 2005	$	—		$	270		$	—	$	—	$	270

Included in Accrued restructuring at September 30, 2005 is approximately $270,000, which is net of sublet income, relates to the facility termination costs, which the Company estimates will be disbursed over the remaining life of the lease through the second quarter of 2006.

7. Pending Merger Transaction

On September 26, 2005, the Company entered into an Agreement and Plan of Merger with Syntellect Inc. and Amelia Acquisition Corporation, pursuant to which the Company will become a wholly-owned subsidiary of Syntellect Inc. Syntellect is a wholly-owned subsidiary of Enghouse Systems Limited (TSX: ESL). In the merger, shareholders of the Company will receive $2.76 per share in cash for a total consideration of approximately $49.6 million. Completion of the merger requires, among other things, the affirmative vote of shareholders holding at least two-thirds of the outstanding common shares of the Company. A special meeting of shareholders is scheduled to be held on November 21, 2005 for shareholders of record on October 19, 2005. The Board of Directors of the Company unanimously recommends that shareholders vote for approval of the proposed merger. Shareholders representing approximately 41.4% of the total shares of common stock outstanding have entered into voting agreements with Syntellect pursuant to which they have agreed to vote for the approval of the merger.

In the third quarter of 2005, the Company recorded acquisition-related transaction costs of $468,000. The transaction costs consisted of legal fees, investment banking fees, and other miscellaneous costs.

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, 2004, as filed with the Securities and Exchange Commission. The Company does not undertake any obligation to revise or update these forward-looking statements to reflect future events or circumstances.

Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies,

among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

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 recognition. The Company recognizes revenue from the sale of software licenses 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 12.9% and 23.4% of the Company’s total revenue for the three months ended September 30, 2005 and 2004, respectively. Revenue generated via resellers and OEMs accounted for 22.6%, and 26.7% of the Company’s total revenue for the nine months ended September 30, 2005 and 2004, respectively. Management expects that revenue derived from sales to resellers and OEMs may increase as a percentage of total revenue as the Company expands its product capabilities and focuses its sales efforts on its distribution channels.

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

• payment terms and conditions;

• warranties and repair procedures; and

• 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.

Sales to customers outside the United States accounted for 16.3% and 20.8% of the Company’s total revenue during the three months ended September 30, 2005 and 2004, respectively. Revenues derived from customers outside of North America accounted for 24.2% and 18.9% of the Company’s total revenues in the nine months ended September 30, 2005 and 2004, respectively.

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.

Capitalization of certain software development costs. Research and development expenditures are charged to operations as incurred. SFAS No. 86, “Accounting for the Costs of Computer Software To Be Sold, Leased, or Otherwise Marketed,” requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon completion of a working model. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release have not been significant. Through September 30, 2005, all software development costs have been expensed.

Allowance for doubtful accounts. 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.

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 regularly 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
	2005		2004		2005		2004
Revenue
Software licenses	25.8	%	34.8	%	27.5	%	35.5	%
Services and other	74.2	%	65.2	%	72.5	%	64.5	%
Total revenue	100.0	%	100.0	%	100.0	%	100.0	%

Costs of goods and services
Cost of software	2.0	%	3.5	%	1.4	%	3.0	%
Cost of services and other	22.3	%	18.0	%	23.4	%	18.3	%
Total costs of goods and services	24.3	%	21.5	%	24.8	%	21.3	%

Gross margin	75.7	%	78.5	%	75.2	%	78.7	%

Operating expenses
Sales and marketing	37.5	%	37.9	%	39.4	%	35.3	%
Research and development	26.6	%	20.5	%	26.2	%	20.6	%
General and administrative	27.1	%	22.7	%	25.8	%	21.0	%
Restructuring and other charges	0	%	16.8	%	(1.5	)%	8.5	%
Merger transaction cost	11.5	%	0	%	3.7	%	0	%
Total operating expenses	102.7	%	97.9	%	93.6	%	85.4	%

Operating loss	(27.0	)%	(19.4	)%	(18.4	)%	(6.7	)%

Other income (expense)	8.4	%	3.0	%	6.6	%	2.1	%
Net loss	(18.6	)%	(16.4	)%	(11.8	)%	(4.6	)%

Quarter Ended September 30, 2005, Compared to Quarter Ended September 30, 2004

Revenue. Revenue decreased 18.4% to $4.1 million in the quarter ended September 30, 2005, from $5.0 million in the quarter ended September 30, 2004.

Revenue from software licenses decreased 39.5% to $1.1 million in the quarter ended September 30, 2005, from $1.7 million in the quarter ended September 30, 2004. The Company primarily attributes this decrease in software revenue to fewer orders from new and existing customers in the current quarter. The lengthy sales cycle and the resultant unpredictability of the timing of closing new business may cause the Company’s software revenue to vary significantly from quarter to quarter.

Revenue from services and other, consisting of professional services, customer support and rebillable costs, decreased 7.2% to $3.0 million in the quarter ended September 30, 2005, from $3.3 million in the quarter ended September 30, 2004. Professional services revenue was lower by $0.2 million. The decrease in professional services revenue reflected a change in service project mix. The current quarter service mix had fewer higher value new system implementations and more upgrades and special projects than the year ago quarter.

Gross margin. Gross margins declined to 75.7% of total revenue in the quarter ended September 30, 2005, from 78.5% of total revenue in the quarter ended September 30, 2004. This decline is due primarily to a lower product mix of higher margin software.

Gross margins from software licenses increased to 92.1% of software revenue in the quarter ended September 30, 2005 from 90.1% of software revenue in the quarter ended September 30, 2004. Product costs consist primarily of third party software used in conjunction with the Company’s software, which varies based on customer configurations.

Gross margin from services and other represented 70.0% of services and other revenue in the quarter ended September 30, 2005, and 72.4% of services and other revenue in the quarter ended September 30, 2004. This decline is due primarily to the decline in professional services revenue without a corresponding decrease in employee related expenses.

Operating expenses. Operating expenses decreased 14.4% to $4.2 million in the quarter ended September 30, 2005, from $4.9 million in the quarter ended September 30, 2004. Excluding restructuring activity, ongoing operating costs decreased by 8.3% due principally to lower incentive costs, accounting, director and officers insurance, and legal costs, partially offset by the reserve for the UK payroll audit and use of outside services. As a percentage of total revenue, operating expenses were 102.7% in the quarter ended September 30, 2005, and 97.9% in the quarter ended September 30, 2004.

Sales and marketing expenses decreased 19.2% to $1.5 million in the quarter ended September 30, 2005, from $1.9 million in the quarter ended September 30, 2004. The decrease in sales and marketing expenses resulted primarily from lower commissions and bonuses offset to a lesser extent by expenses related to the worldwide customer user conference held in September 2005.

Research and development expenses increased 5.7% to $1.1 million in the quarter ended September 30, 2005, from $1.0 million in the quarter ended September 30, 2004. The increase in research and development expenses related primarily from increased use of outside services, including off-shore engineering resources, partially offset by a reduction in bonus expenses.

General and administrative expenses decreased 2.7% to $1.1 million in the quarter ended September 30, 2005, from $1.1 million in the quarter ended September 30, 2004. The decreases in general and administrative expenses were primarily due to reductions in accounting, legal, and director and officer insurance principally offset by increases in outside services and the establishment of a reserve related to a UK payroll audit.

Restructuring and other charges. There were no restructuring charges in the third quarter of 2005. 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 was unable to find a tenant to sublet the excess facility space.

Merger transaction costs. In the third quarter of 2005, the Company recorded acquisition-related transaction costs of $468,000. The transaction costs consisted of legal fees, investment banking fees, and other miscellaneous costs.

Other income and expense. Interest income was $339,000 in the quarter ended September 30, 2005, and $145,000 in the quarter ended September 30, 2004. 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, 2005, the Company had approximately $56.7 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, 2005, the Company had foreign operating losses of approximately $3.4 million, which may be limited. The Company’s use of these net operating losses may be limited in future periods.

Net income (loss). The net loss for the three months ended September 30, 2005 was $758,000. The Company recorded a net loss for the three months ended September 30, 2004 of $815,000. The change is primarily due to lower revenues offset to a lesser extent by lower operating expenses and lower restructuring activity.

Nine months Ended September 30, 2005, Compared to Nine months Ended September 30, 2004

Revenue. Revenue decreased 15.7% to $12.7 million in the nine months ended September 30, 2005, from $15.1 million in the nine months ended September 30, 2004.

Revenue from software licenses decreased 34.6% to $3.5 million in the nine months ended September 30, 2005, from $5.4 million in the nine months ended September 30, 2004. The Company primarily attributes this decrease in software revenue to fewer add-on orders from existing customer deals in the first nine months of 2005 compared to the first nine months of 2004. The Company also received fewer new customer orders in the current period compared to the prior period. The lengthy sales cycle and the resultant unpredictability of the timing of closing new business may cause the Company’s software revenue to vary significantly from quarter to quarter.

Revenue from services and other, consisting of professional services, customer support and rebillable costs, decreased 5.4% to $9.2 million in the nine months ended September 30, 2005, from $9.7 million in the nine months ended September 30, 2004. Professional services revenues were lower by $.4 million. The Company primarily attributes this decrease to fewer customers purchasing new systems. The decrease was also the result of lower customer support revenues due to certain customers downsizing their systems thereby lowering their support costs.

Gross margin. Gross margins declined to 75.2% of total revenue in the nine months ended September 30, 2005, from 78.6% of total revenue in the nine months ended September 30, 2004. This decline is due primarily to a lower product mix of higher margin software.

Gross margins from software licenses increased to 94.9% of software revenue in the nine months ended September 30, 2005 from 91.4% of software revenue in the nine months ended September 30, 2004. Product costs consist primarily of third party software used in conjunction with the Company’s software, which varies based on customer configurations.

Gross margin from services and other represented 67.7% of services and other revenue in the nine months ended September 30, 2005, and 71.6% of services and other revenue in the nine months ended September 30, 2004. The decrease is primarily due to lower professional services revenue without a corresponding decrease in employee related expenses.

Operating expenses. Operating expenses decreased 7.5% to $11.9 million in the nine months ended September 30, 2005, from $12.9 million in the nine months ended September 30, 2004. This decrease primarily reflects lower restructuring activity, employee related expenses, legal, director and officer insurance, offset by increased marketing program costs, bad debt, reserve related to the UK payroll audit and outside services. As a percentage of total revenue, operating expenses were 93.6% in the nine months ended September 30, 2005, and 85.3% in the nine months ended September 30, 2004.

Sales and marketing expenses decreased 5.7% to $5.0 million in the nine months ended September 30, 2005, from $5.3 million in the nine months ended September 30, 2004. The decrease in sales and marketing expenses resulted primarily from decreased commissions and bonuses partially offset by marketing programs.

Research and development expenses increased 7.4% to $3.3 million in the nine months ended September 30, 2005, from $3.1 million in the nine months ended September 30, 2004. The increase in research and development expenses related primarily to an increase in outside services and recruiting costs partially offset by reductions in bonuses.

General and administrative expenses increased 3.4% to $3.3 million in the nine months ended September 30, 2005, from $3.2 million in the nine months ended September 30, 2004. The increases in general and administrative expenses were primarily due to increased recruiting costs, bad debt expense, expenses related to the UK payroll audit, and outside services, partially offset by lower personnel related compensation, legal fees and insurance costs.

Restructuring and other charges (credits). For the nine months ended September 30, 2005, restructuring and other charges totaled a credit of $187,000. In the second quarter of 2005, the Company recorded a credit of $187,000. The credit relates to the successful sublet of vacated space at the corporate headquarters. For the nine months ended September 30, 2004, restructuring and other charges totaled $1,291,000. 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 telecommunications contracts. The existing reserve for the corporate headquarters vacated space was increased by $232,000 due to the fact the Company was unable to find a tenant to sublet the excess facility space. 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 was unable to find a tenant to sublet the excess facility space and thereby delayed the start of anticipated sublet income by nine 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 was unable to find a tenant to sublet the excess facility space and thereby delayed the start of anticipated sublet income by three months.

Other income and expense. Interest income was $866,000 in the nine months ended September 30, 2005, and $347,000 in the nine months ended September 30, 2004. The increase in interest income is a 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, 2005, the Company had approximately $56.7 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, 2005, the Company had foreign operating losses of approximately $3.4 million, which use of may be limited. The Company’s use of these net operating losses may be limited in future periods.

Net income (loss). The Company recorded a loss of $1,498,000 in the nine months ended September 30, 2005. The Company recorded a loss for the nine months ended September 30, 2004 of $691,000. The change is primarily due to a decrease in revenue partially offset by lower operating expenses and increased interest income.

Liquidity and Capital Resources

The Company’s operating activities resulted in net cash outflows of $1,566,000 for the nine months ended September 30, 2005 compared to net cash inflows of $1,215,000 for the nine months ended September 30, 2004. The operating cash outflow for 2005 was primarily the result of net losses, acquisition related transaction costs, a net reduction in restructuring accruals due to the successful sublet of unused space at corporate headquarters and other payments, reductions in deferred revenue, and payments for compensation accruals. These outflows were offset to a lesser extent by a reduction of accounts receivable, prepaid expenses, deposits received from customers, and increases in accounts payable. The operating cash inflow for 2004 was primarily the result of a net increase in deferred revenues, accrued compensation, and prepaid expenses, offset to a lesser extent by outflows as a result of a net loss and decreases in deposits received from customers, accrued expenses, and restructuring accruals.

The Company’s investing activities resulted in net cash inflows of $7.6 million and outflows of $779,000 for the nine months ended September 30, 2005 and 2004, respectively. The changes were the result of the timing of maturities of short-term investments or purchases of short-term investments and, to a lesser extent, capital expenditures.

Financing activities generated $491,000 and $756,000 in cash in the first nine months ended September 30, 2005 and 2004, 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, 2005, the Company had no long-term obligations, other than operating leases related to facilities and equipment utilized by the Company and a purchase obligation associated with third party software utilized with its product. The following table summarizes the minimum lease payments for these operating leases as of September 30, 2005:

*in thousands*	Total			Less than 1 year			1-3 years		3-5 years	More than 5 years
Operating leases	$		963	$	963		None		None	None
Purchase obligations	135			85			50		None	None
Total contractual cash obligations	$	1,098		$		1,048	$	50	None	None

The Company believes that its capital requirements, in large part, depend on future results of operations. Management believes that the existing cash and short-term investment balances will be sufficient to meet the working capital and capital expenditure requirements for at least the next twelve months.

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 $21.0 million at September 30, 2005. The Company’s short-term investments consist primarily of government agency notes, bank certificates of deposit and corporate commercial paper. The Company considers all investments with original maturities of less than one year, but greater than 90 days, 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, 2004, 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

Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our senior management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report (the “Evaluation Date”).

Based on this evaluation, our chief executive officer and chief financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2005 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Part II. Other Information.

Item 1. Legal Proceedings.

See Note 5 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 Sale 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.

(a) The following exhibits are included herein:

2.1	*	Agreement and Plan of Merger by and among Apropos Technology, Inc., Syntellect and Amelia Acquisition Corporation dated September 26, 2005
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.

Previously filed with the Securities and Exchange Commission as an exhibit to the Company’s Report on form 8-K on September 27, 2005 and incorporated herein by reference.

	Apropos Technology, Inc.


	/s/ FRANCIS J. LEONARD
	Francis J. Leonard
	Chief Financial Officer and Vice President
	(Principal Financial Officer and Authorized Officer)

Part I.

Financial Information

Item 1.

Financial Statements (Unaudited)

Condensed consolidated balance sheets at September 30, 2005 and December 31, 2004

Condensed consolidated statements of operations for the three and nine months ended September 30, 2005 and 2004

Part II.

Other Information

Signatures


Part I.	Financial Information

Item 1.	Financial Statements (Unaudited)

	Condensed consolidated balance sheets at September 30, 2005 and December 31, 2004

	Condensed consolidated statements of operations for the three and nine months ended September 30, 2005 and 2004

	Condensed consolidated statements of cash flows for the nine months ended September 30, 2005 and 2004

	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

Certifications