Research and development expenses decreased 35% from $3.1 million in the first quarter of 2009 to $2.0 million in the current year quarter. As a percentage of total revenue, research and development expense decreased from 68% in the first quarter of 2009 to 36% in the current year quarter. The dollar decrease in research and development expense was primarily due to a $1.8 million reduction of engineering expenses as a result of the sale of our licensing product line to Lantiq.  This expense reduction was partially offset by $0.6 million less engineering expenses allocated to cost of contract.

 

After the closing of the Lantiq transaction, our future research and development activities will be focused on developing biometrics and imaging software, and developing test and diagnostics hardware and software. We will also continue to expand our patent portfolio.

 

Selling and Marketing Expense. Selling and marketing expense consists primarily of compensation costs for sales and marketing personnel, travel, advertising and promotion, recruiting, and facilities expense.

 

Sales and marketing expense in the first quarter of 2010 was essentially unchanged at $1.1 million from the first quarter of 2009.  As a percentage of total revenue, sales and marketing expense decreased from 24% in the first quarter of 2009 to 19% in the current year quarter.

 

Flat sales and marketing spending reflects a steady state sales and marketing organization.  Moreover, since the Lantiq transaction did not involve any of our sales or marketing personnel, the transaction had a minimal impact on current quarter expenses and we expect that it will have a minimal impact on future sales and marketing expenses.

 

General and Administrative Expense. General and administrative expense consists primarily of compensation costs for administrative personnel, facility costs, bad debt, audit, legal, stock exchange and insurance expenses.

 

General and administrative expenses increased 16% from $1.2 million in the first quarter of 2009 to $1.4 million in the current year quarter. As a percentage of total revenue, general and administrative expense decreased from 27% in the first quarter of 2009 to 25% in the current year quarter.

 

The dollar increase in general and administrative expense was mainly attributable to higher spending on legal fees, director fees, and stock-based compensation.

 

 

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Since the Lantiq transaction did not involve any of our administrative personnel, the transaction had a minimal impact on current quarter expenses and we expect that it will have a minimal impact on future general and administrative expenses.

 

Interest Income.  Interest income decreased 86% from $125,000 in the first quarter of 2009 to $18,000 in the current year quarter.  The dollar decrease was primarily due to a significant decline in money market interest rates.

 

Income Taxes.  We made no provision for income taxes in the first three months of 2010 and 2009 due to minimal net income in the 2010 period, net losses in the 2009 period, and the uncertainty of the timing of profitability in future periods.  We did record $1,000 and $3,000 of state excise taxes in the first three months of 2010 and 2009, respectively.  In 2002, we determined that due to our continuing operating losses as well as the uncertainty of the timing of profitability in future periods, we should fully reserve our deferred tax assets.  As of March 31, 2010, our deferred tax assets continue to be fully reserv ed.  We will continue to evaluate, on a quarterly basis, the positive and negative evidence affecting the realizability of our deferred tax assets.

 

As of December 31, 2009, we had federal net operating loss (“NOLs”) and research and experimentation credit carryforwards of approximately $47.6 million and $13.4 million respectively, which may be available to offset future federal income tax liabilities and expire at various dates from 2010 through 2029.  In addition, at December 31, 2009, we had approximately $10.3 million and $7.1 million of state net operating losses and state research and development and investment tax carryforwards, respectively, which expire at various dates from 2010 through 2024.

 

Based on an analysis that we performed under Internal Revenue Code Section 382 on our NOLs generated for the period 1997 through 2009, we have not experienced a change in ownership as defined by Section 382, and, therefore, the NOLs are not currently under any Section 382 limitation.

 

Liquidity and Capital Resources

 

At March 31, 2010, we had cash and cash equivalents of $39.0 million, which represented a decrease of $649,000 from December 31, 2009. The decrease in cash was primarily due to: i) $341,000 of cash used by operations; ii) $47,000 of cash used to purchase capital equipment; iii) $161,000 of cash used to pay withholding taxes for employees who surrendered shares of common stock in connection with an employee option exchange program; and iv) $100,000 of transaction expenses paid in the first quarter of 2010 that related to the 2009 sale of assets to Lantiq.

 

We used $341,000 of cash in operations in the first three months of 2010. This cash usage was primarily the result of $837,000 of cash used to fund working capital items, which was partially offset by net income of $22,000, and non-cash items related to depreciation and amortization of $129,000, and stock based compensation expense of $345,000.

 

Capital spending was primarily related to the purchase of computer hardware, and laboratory equipment used principally in engineering activities.

 

 

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In January 2010, we completed an employee option exchange program in which we allowed participating employees to surrender a portion of their shares of common stock in return for the Company paying withholding taxes related to their stock grants.  As a result of this provision, employees surrendered 60,659 shares of common stock and we paid approximately $161,000 of withholding taxes on their behalf.

 

While we cannot assure you that we will not require additional financing, or that such financing will be available to us, we believe that our cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months.

 

Recent Accounting Pronouncements

 

See Note H to our Consolidated Financial Statements in Item 1.

 

ITEM 3:

Quantitative and Qualitative Disclosures about Market Risk

 

Our exposure to market risk relates primarily to our investment portfolio, and the effect that changes in interest rates would have on that portfolio.  Our investment portfolio has included:

 

	●	Cash and cash equivalents, which consist of financial instruments with original maturities of three months or less;
	●	Short-term investments, which consist of financial instruments with remaining maturities of twelve months or less; and
	●	Investments, which consist of financial instruments that mature in three years or less.

 

All of our investments meet the high quality standards specified in our investment policy. This policy dictates the maturity period and limits the amount of credit exposure to any one issue, issuer, and type of instrument.

 

As of March 31, 2010, our cash and cash equivalents of $39.0 million were invested in money market accounts.  Due to the nature and short duration of these financial instruments, we do not expect that an increase in interest rates would result in any material loss to our investment portfolio. As of March 31, 2010, we had no investments that matured in more than twelve months.  We do not use derivative financial instruments for speculative or trading purposes.

 

ITEM 4:

Controls and Procedures

 

Our management, including our chief executive officer and chief financial officer, has evaluated our disclosure controls and procedures as of the end of the quarterly period covered by this Form 10-Q and has concluded that our disclosure controls and procedures are effective.  They also concluded that there were no changes in our internal control over financial reporting that occurred during the quarterly period covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

 

ITEM 1:

Legal Proceedings

 

From time to time we are involved in litigation incidental to the conduct of our business.  We are not party to any lawsuit or proceeding that, in our opinion, is likely to seriously harm our business.

 

ITEM 1A:

Risk Factors

 

Risk Factors

 

GENERAL BUSINESS RISKS

 

Our Quarterly Results are Unpredictable and May Fluctuate Significantly

 

Our quarterly revenue and operating results are difficult to predict and may fluctuate significantly from quarter-to-quarter due to the unpredictably of our revenue components.

 

It is difficult for us to make accurate forecasts of product revenues.  Product revenues consist of sales of test and diagnostics hardware and software as well as biometrics and medical imaging software. Sales of hardware and software products fluctuate based upon demand by our customers which is difficult to predict. We generally ship customer orders as we receive them, and, therefore, we have no meaningful backlog of product orders.  Since our product revenues include the sales of hardware products which typically have lower gross margins than our other sources of revenue, product gross margins and overall profitability are also difficult to predict.

 

Contract revenues are also unpredictable.  Making accurate predictions regarding the timing of contract revenues from new and existing customers is difficult.

 

It is also difficult for us to make accurate forecasts of royalty revenues.  Royalties are typically recognized in the quarter when we receive a report from a customer detailing sales and royalties due from the prior quarter, such as from the shipment of licensed integrated circuits. Royalties depend upon customer revenues which can be affected by factors beyond our ability to control or assess in advance. These factors include our customers’ ability to generate sales and fluctuating sales volumes and prices of products containing our technology.

 

Our business is subject to a variety of risks, which could materially adversely affect quarterly and annual operating results, including:

 

	●	market acceptance of our hardware and software products;
	●	fluctuations in the demand for our hardware and software products;
	●	competitive pressures resulting in lower software or hardware product revenues;
	●	the loss of a significant OEM relationship or termination of a professional services project by a customer;
	●	the loss by an OEM customer of a strategic relationship with an equipment company customer;

 

 

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	●	announcements or introductions of new technologies or products by us or our competitors;
	●	delays or problems in the introduction or performance of enhancements or of future generations of our technology;
	●	failures or problems in our hardware or software products;
	●	pricing pressure from our competitors in the markets in which we compete;
	●	delays in the adoption of new industry standards or changes in market perception of the value of new or existing standards;
	●	personnel changes, particularly those involving engineering, technical, sales and marketing personnel;
	●	costs associated with protecting our intellectual property;
	●	the potential that customers could fail to make payments under their agreements with us;
	●	hardware manufacturing issues, including yield problems in our hardware platforms, and inventory buildup and obsolescence;
	●	product gross margins may be affected by various factors including, but not limited to, product mix, product life cycle, and provisions for excess and obsolete inventory;
	●	new laws, changes to existing laws, or regulatory developments; and
	●	general economic trends and other factors.

  

As a result of these factors, we believe that period-to-period comparisons of our revenue levels and operating results are not necessarily meaningful.  You should not rely on our quarterly revenue and operating results to predict our future performance.

 

We Have Experienced Net Losses

 

We had net losses in 2001, 2002, 2003, 2004, and 2005, and operating losses in 2006, 2007, and 2009.  We may experience losses in the future if:

 

	●	the test and diagnostics or biometrics markets decline;
	●	new and/or existing customers do not choose to use our software or hardware products; or
	●	customers do not choose to license and/or buy our patents.

 

Our Business is Subject to Rapid Technological Change

 

The telecommunications and biometrics industries are characterized by rapid technological change and uncertainty.  In these industries, new generations of products are introduced regularly and evolutionary improvements to existing products are required.  Therefore, we face risks that others could introduce competing technologies that render our technologies and products less desirable or obsolete.  Also, the announcement of new technologies could cause: i) our customers to delay purchasing our products; or ii) our customers’ customers to delay purchasing OEM products that incorporate our products.  Either of these events could seriously harm our business.

 

We expect that our business will depend to a significant extent on our ability to introduce new generations of products as well as new technologies and products that keep pace with changes in these industries. We must continually devote significant engineering resources to achieving technical innovations and product developments.  These developments are complex and require long development cycles.  Moreover, we may have to make substantial investments in technological innovations and product developments before we can determine their commercial viability.  We may lack sufficient financial resources to fund future development.   Revenue from technological innovations, even if successfully developed, may not be sufficient to recoup the costs of development.

 

 

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Our Intellectual Property is Subject to Limited Protection

 

Because we are a technology provider, our ability to protect our intellectual property and to operate without infringing the intellectual property rights of others is critical to our success.  We regard our technology as proprietary. Our patent portfolio includes approximately 135 U.S. and foreign patents as well as approximately 240 pending patent applications.  We also rely on a combination of trade secrets, copyright and trademark law and non-disclosure agreements to protect our unpatented intellectual property.  Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our technology without authorization.

 

We typically work closely with our customers, who may also be potential competitors, and provide them with proprietary know-how.  Although our agreements contain non-disclosure provisions and other terms protecting our proprietary know-how and technology rights, it is possible that, despite these precautions, some of our customers might obtain from us proprietary information that they could use to compete with us in the marketplace.  Although we intend to defend our intellectual property as necessary, the steps we have taken may be inadequate to prevent misappropriation.

 

In the future, we may be involved in legal action to enforce our intellectual property rights relating to our patents, copyrights or trade secrets.  Any such litigation could be costly and time-consuming for us, even if we were to prevail.  Moreover, even if we are successful in protecting our proprietary information, our competitors may independently develop technologies substantially equivalent or superior to our technology.  The misappropriation of our technology or the development of competitive technology could seriously harm our business.

 

Our technology, software or hardware may infringe the intellectual property rights of others.  A large and increasing number of participants in the telecommunications and compression industries have applied for or obtained patents.  Some of these patent holders have demonstrated a readiness to commence litigation based on allegations of patent and other intellectual property infringement.  Third parties may assert patent, copyright and other intellectual property rights to technologies that are important to our business.  In the past, we have received claims from other companies that our technology infringes their patent rights.  Intellectual property rights can be uncertain and can involve complex legal and factual questions.  We may infringe the proprietary rights of others, which could result in significant liability for us.  If we were found to have infringed any third party’s patents, we could be subject to substantial damages or an injunction preventing us from conducting our business.

 

Our Business May Be Affected by Government Regulations

 

The extensive regulation of the telecommunications industry by federal, state and foreign regulatory agencies, including the Federal Communications Commission, and various state public utility and service commissions, could affect us through the effects of such regulation on our customers and their customers.  In addition, our business may also be affected by the imposition of certain tariffs, duties and other import restrictions on components that our customers obtain from non-domestic suppliers or by the imposition of export restrictions on products sold internationally and incorporating our technology.  Changes in current or future laws or regulations, in the United States or elsewhere, could seriously harm our business.

 

 

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Current Economic Conditions, Including The Credit Crisis Affecting The Financial Markets And The Global Recession, Could Adversely Affect Our Business, Results Of Operations And Financial Condition

 

Over the past several years, the world’s financial markets have been experiencing turmoil, characterized by reductions in available credit, increased costs of credit, volatility in security prices, rating downgrades of investments and reduced valuations of securities generally.  These events have materially and adversely impacted the availability of financing to a wide variety of businesses, and the resulting uncertainty has led to reductions in capital investments, overall spending levels, future product plans, and sales projections across industries and markets.  These trends could have a material adverse impact on our business, our ability to achieve targeted results of operations and our financial condition as a result of:

 

	●	reduced demand for our products or our customers’ products that incorporate our technology;
	●	increased risk of order cancellations or delays;
	●	increased pressure on the prices for our products or our customers’ products that incorporate our technology;
	●	greater difficulty in collecting accounts receivable; and
	●	risks to our liquidity, including the possibility that we might not have access to our cash when needed.

 

We are unable to predict the likely duration and severity of disruptions in financial markets and adverse economic conditions in the U.S. and other countries, but the longer the duration, the greater the risks we face in operating our business.

 

We Must Make Judgments in the Process of Preparing Our Financial Statements

 

We prepare our financial statements in accordance with generally accepted accounting principles and certain critical accounting policies that are relevant to our business.  The application of these principles and policies requires us to make significant judgments and estimates.  In the event that judgments and estimates we make are incorrect, we may have to change them, which could materially affect our financial position and results of operations.

 

Moreover, accounting standards have been subject to rapid change and evolving interpretations by accounting standards setting organizations over the past few years.  The implementation of new standards requires us to interpret and apply them appropriately.  If our current interpretations or applications are later found to be incorrect, our financial position and results of operations could be materially affected.

 

 

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If We are Unable to Maintain Effective Internal Controls Over Financial Reporting, Investors Could Lose Confidence In The Reliability of Our Financial Statements, Which Could Result In a Decline in the Price of Our Common Stock

 

As a public company, we are required to enhance and test our financial, internal and management control systems to meet obligations imposed by the Sarbanes-Oxley Act of 2002. Consistent with the Sarbanes-Oxley Act and the rules and regulations of the SEC, management’s assessment of our internal controls over financial reporting and the audit opinion of our independent registered accounting firm as to the effectiveness of our controls is required in connection with our filing of our Annual Report on Form 10-K. If we are unable to identify, implement and conclude that we have effective internal controls over financial reporting or if our independent auditors are unable to conclude that our internal controls over financial reporting are effective, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock. Our assessment of our internal controls over financial reporting may also uncover weaknesses or other issues with these controls that could also result in adverse investor reaction.

 

Our Stock Price May Be Extremely Volatile

 

Volatility in our stock price may negatively affect the price you may receive for your shares of common stock and increases the risk that we could be the subject of costly securities litigation.  The market price of our common stock has fluctuated substantially and could continue to fluctuate based on a variety of factors, including:

 

	●	quarterly fluctuations in our operating results;
	●	changes in future financial guidance that we may provide to investors and public market analysts;
	●	changes in our relationships with our customers;
	●	announcements of technological innovations or new products by us, our customers or our competitors;
	●	changes in DSL or biometrics market growth rates as well as investor perceptions regarding the investment opportunity that companies participating in the DSL or biometrics industry afford them;
	●	changes in earnings estimates by public market analysts;
	●	key personnel losses;
	●	sales of our common stock;
	●	our stock repurchase activities; and
	●	developments or announcements with respect to industry standards, patents or proprietary rights.

 

In addition, the equity markets have experienced volatility that has particularly affected the market prices of equity securities of many high technology companies and that often has been unrelated or disproportionate to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of our common stock.

 

 

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LICENSING PRODUCT LINE RISKS

 

We Sold Substantially All of the Assets of Our DSL Silicon IP Licensing Product Line, And This Product Line Will No Longer Contribute Meaningful Contract Revenues

 

In November 2009, we sold substantially all of the assets associated with our DSL and home networking licensing product line to Lantiq for $6.75 million. Lantiq is a fabless semiconductor company that was spun out of Infineon. Prior to the spinout, Infineon was our largest DSL licensing customer. The sale included: i) our DSL and home networking technology products; ii) certain patents and patent applications related to these technologies; and iii) a group of 41 engineers and the equipment used by those engineers.

 

As a result of the sale, we will no longer license DSL silicon technology to semiconductor customers for the foreseeable future, nor will we derive DSL contract revenue from Infineon or Lantiq.  In 2009, 2008, and 2007, we derived approximately 19%, 12% and 19% of our total revenue from Infineon/Lantiq, including contract revenue and royalties.

 

We Expect to Continue to Receive Royalty Revenues After the Sale to Lantiq; However Future Royalty Revenue May Decline Because of Factors That Are Beyond Our Control

 

Under the terms of our amended license with Lantiq, we expect to continue to receive royalties for DSL chipsets Lantiq sells. We also expect to continue to derive royalties and a minimal amount of contract revenue from Ikanos as our agreement with Ikanos remains in effect after the sale to Lantiq. Future royalties we may receive from Lantiq and Ikanos are influenced by factors that are beyond our control, including:

 

	●	The competitiveness of DSL chipsets offered by Lantiq and Ikanos and the willingness of their customers to purchase DSL chipsets from them;
	●	The promotional and marketing efforts of Lantiq and Ikanos; and
	●	DSL market risks in general, including: i) industry wide chipset demand; and ii) competitive pressures and cyclical demand for DSL chipsets, which may result in reduced average selling prices and channel inventory build-up.

 

Any or all of these factors may cause our royalty revenue to decline in the future.

 

Our Ability to Obtain, Sell, License, or Enforce Patents Could be Affected by New Laws, Regulations or Rules

 

We intend to continue to pursue the license, sale or enforcement of patents in our patent portfolio.  Our patent portfolio includes approximately 135 U.S. and foreign patents as well as approximately 240 pending patent applications. We also have an active program to protect our proprietary technology through the filing of additional patents. New laws, regulations or rules implemented either by Congress, the United States Patent and Trademark Office, foreign patent offices, or the courts that impact the patent application process, the patent enforcement process or the rights of patent holders could significantly increase our expenses related to patent prosecution or decrease revenues associated with our patents.  While we are not aware that any such changes are likely to occur in the foreseeable future, we cannot assure y ou that such changes will not occur.

 

 

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BIOMETRICS PRODUCT LINE RISKS

 

Our Biometrics Product Line Faces Intense Competition

 

The markets for our biometrics products and services are competitive and uncertain. Many of our biometric software competitors have significantly greater financial, technological, marketing and personnel resources than we do. We also face intense competition from internal development teams within potential customers.  We must convince potential customers to purchase products and services from us rather than develop software or perform services internally.  Furthermore, customers, who have already purchased from us, may choose to stop purchasing our software and develop their own software.

 

In addition, announcements or introductions of new technologies or products by our competitors may adversely affect our business.

 

Biometrics Software Business Risks

 

Our biometrics software business is subject to a variety of additional risks, which could materially adversely affect our revenue and operating results, including:

 

	●	market acceptance of our biometric technologies and products;
	●	changes in contracting practices of government or law enforcement agencies;
	●	the failure of the biometrics market to experience continued growth;
	●	delays or problems in the introduction or performance of enhancements or of future generations of our technology;
	●	failures or problems in our biometric software products;
	●	delays in the adoption of new industry biometric standards or changes in market perception of the value of new or existing standards;
	●	growth of proprietary biometric systems which do not conform to industry standards;
	●	competitive pressures resulting in lower software product revenues;
	●	personnel changes, particularly those involving engineering, technical and sales and marketing personnel;
	●	costs associated with protecting our intellectual property;
	●	litigation by third parties for alleged infringement of their proprietary rights;
	●	the potential that customers could fail to make payments under their current contracts;
	●	new laws, changes to existing laws, or regulatory developments; and
	●	general economic trends and other factors.

 

Biometrics Professional Services Business Risks

 

Our biometrics professional services business is subject to additional risks, which could materially adversely affect our revenue and operating results, including:

 

	●	our ability to structure and price technology contracts in a manner that is consistent with our business model;
	●	our ability to structure ourselves to successfully bid on U.S. government contracts and meet the requirements of U.S. contracting rules and regulations;
	●	our ability to deliver contract milestones: i) in a timely and cost efficient manner, and ii) in a form and condition acceptable to customers;
	●	the risk that customers could terminate projects;
	●	the risk that we rely substantially on third party contractors and consultants to deliver certain contract milestones; and
	●	the potential that customers could fail to make payments under their contracts.

 

 

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TEST & DIAGNOSTIC PRODUCT LINE RISKS

 

Our DSL Test and Diagnostics Business Depends Upon a Limited Number of Customers, Therefore We Derive Revenue from a Small Number of Customers

 

There are a relatively limited number of OEM suppliers and service providers to which we can sell our DSL test and diagnostics products in a manner consistent with our business model. While no single test and diagnostics customer represented more than 10% of our total revenue in 2008 and 2009, Spirent and Alcatel contributed significant revenue to our test and diagnostics business in those years.

 

If we fail to maintain relationships with our current customers or fail to establish a sufficient number of new customer relationships, our business could be seriously harmed.  In addition, our current and prospective customers may use their superior size and bargaining power to demand terms that are unfavorable to us.

 

Our DSL Test and Diagnostics Business Faces Intense Competition

 

The markets for our DSL test and diagnostics hardware and software products are competitive and uncertain.  Our success as a supplier of hardware and software products for DSL test and diagnostics depends in large part on:

 

	●	the willingness and ability of OEM customers to design, build and sell automated test heads, hand-held testers, and DSLAMs that incorporate or work with our products;
	●	our ability to market and sell to service providers; and
	●	our ability to provide effective sales, marketing, and customer service to our customers.

 

Our OEM customers, their competitors and service providers have significantly greater financial, technological, manufacturing, marketing and personnel resources than we do.   We can give no assurance that our customers will continue to purchase products from us or that we will be able to compete effectively or that competitive pressures will not seriously harm our business.

 

The Success of Our DSL Test and Diagnostics Business Requires Telephone Companies to Install DSL Services in Volume

 

The success of our DSL test and diagnostics business depends upon telephone companies installing DSL services in significant volumes. Moreover, our business depends on capital equipment spending by telephone companies.  If telephone companies reduce their budgets for or decide not to install or utilize equipment dedicated to DSL service or test infrastructure, our test and diagnostics business could be harmed.

 

DSL services offered over telephone networks also compete with alternative broadband services that use other broadband network architectures, such as cable networks, fiber-to-the-home networks, and wireless networks. These alternative broadband networks may be more successful than DSL. If telephone companies cannot compete effectively with alternative broadband services our test and diagnostics business could be harmed.

 

 

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The Success of Our DSL Test and Diagnostics Products Depends On Our Ability to Develop Commercially Available Products in a Timely Fashion

 

Our success in developing and introducing, new and enhanced test and diagnostics products depends on the ability of our engineering organization to design and develop such products.   Because of the complexity of our hardware and software products, it may take us a significant amount of time to develop commercially available products. If we cannot successfully develop and introduce new and enhanced test and diagnostics products on a timely basis, our DSL test and diagnostics business could be seriously harmed.

 

If Our Test and Diagnostics Hardware and Software Products Have Quality Problems, Our Business Could Be Harmed

 

If our test and diagnostics products have actual or perceived reliability, quality, functionality or other problems, we may suffer reduced orders, higher manufacturing costs, inability to recognize revenue, delays in collecting accounts receivable and higher service, support and warranty expenses or inventory write-offs, among other effects. We believe that the acceptance, volume production, timely delivery and customer satisfaction of our test and diagnostics products is important to our future financial results. As a result, any inability to correct any technical, reliability, parts shortages or other difficulties or to manufacture and ship our test and diagnostics products on a timely basis meeting customer requirements could damage our relationships and reputation with current and prospective customers, which would harm our revenue s and operating results.  Any product problems that may require repair or replacement may adversely affect our customer and/or vendor relationships and have an impact on support costs, warranty reserves, or inventory reserves, among other effects.

 

We are Dependent On a Single Source Contract Manufacturer for the Manufacture of Our DSL Hardware Products, the Loss of Which Would Harm Our Business

 

We currently depend on one contract manufacturer to manufacture our DSL hardware products. If this company was to terminate its arrangement with us or fail to provide the required capacity and quality on a timely basis, we would be unable to manufacture our products until replacement contract manufacturing services could be obtained. To qualify a new contract manufacturer, familiarize it with our products, quality standards and other requirements, and commence production is a costly and time-consuming process. We cannot assure you that we would be able to establish alternative manufacturing relationships on acceptable terms.  Although we make reasonable efforts to ensure that our contract manufacturer performs to our standards, our reliance on a single source limits our control over quality assurance and delivery schedules. D efects in workmanship, inadequate yields, and manufacturing disruptions and difficulties may impair our ability to manage inventory and cause delays in shipments and cancellation of orders that may adversely affect our relationships with current and prospective customers.  As a result, our test and diagnostics business could be harmed.

 

 

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Our Manufacturing Systems May Not Be Adequate For Our DSL Test and Diagnostics Hardware Product Offerings

 

Our manufacturing systems have been adequate to manage current product configurations and production volumes.  However, our manufacturing systems have not been tested by more complex hardware products or by production volumes higher than current levels.  If our manufacturing systems are inadequate or have other problems, our test and diagnostics business could be harmed.

 

We are Dependent on Single Source Suppliers for Components in Our DSL Hardware Products

 

We rely on single source suppliers for components and materials used in our DSL hardware products. Our dependence on single source suppliers involves several risks, including limited control over pricing, availability, quality, and delivery schedules. Any delays in delivery of such components or shortages of such components could cause delays in the shipment of our products, which could significantly harm our business. Because of our reliance on these vendors, we may also be subject to increases in component costs. These increases could significantly harm our business.

 

If any one or more of our single source suppliers cease to provide us with sufficient quantities of our components in a timely manner or on terms acceptable to us, we would have to seek alternative sources of supply. We could incur delays while we locate and engage alternative qualified suppliers and we might be unable to engage alternative suppliers on favorable terms. We could incur substantial hardware and software redesign costs if we are required to replace the components.  Any such disruption or increased expenses could harm our business.

 

 

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ITEM 2:

Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

Period		(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2010 to January  31,  2010		60,659(1)		$2.66(1)		-		$-
February 1, 2010 to February 28, 2010		-		-		-		$-
March 1, 2010 to March 31, 2010		-		-		-		$-

 

 

(1)

During January 2010, we accepted 60,659 shares of our common stock as a tax withholding from certain of our employees, in connection with the issuance of unrestricted stock awards that occurred during the period, at a share price of $2.66.

 

 

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ITEM 6:

Exhibits

 

(a)  Exhibits

 

	Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	Exhibit 32.1	Certification of Chief Executive Officer and Chief Financial Officer 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.

		AWARE, INC.
	Date: April 29, 2010	By:	/s/ Edmund C. Reiter
			Edmund C. Reiter, President &
			Chief Executive Officer
	Date: April 29, 2010	By:	/s/ Richard P. Moberg
			Richard P. Moberg, Chief Financial
			Officer (Principal Financial and
			Accounting Officer)

 

 

 

 

29

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Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

I, Edmund C. Reiter, President and Chief Executive Officer of Aware, Inc., certify that:
1.	I have reviewed this quarterly report on Form 10-Q of Aware, Inc.;
2.	Based on my knowledge, this quarterly 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 quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
4.	The registrant’s other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we 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 quarterly report is being prepared;
	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
	d)	disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer 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:	April 29, 2010			/s/ Edmund C. Reiter
				Edmund C. Reiter
				President & Chief Executive Officer

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Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

 

I, Richard P. Moberg, Chief Financial Officer of Aware, Inc., certify that:
1.	I have reviewed this quarterly report on Form 10-Q of Aware, Inc.;
2.	Based on my knowledge, this quarterly 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 quarterly report;
3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report;
4.	The registrant’s other certifying officer 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we 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 quarterly report is being prepared;
	b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
	c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
	d)	disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.	The registrant’s other certifying officer 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:	April 29, 2010			/s/ Richard P. Moberg
				Richard P. Moberg
				Chief Financial Officer

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 Exhibit 32.1

 

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

(18 U.S.C.  SECTION 1350)

 

In connection with the Quarterly Report on Form 10-Q of Aware, Inc. (the “Company”) for the quarter ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned Chief Executive Officer and Chief Financial Officer of the Company, certifies, to the best knowledge and belief of the signatory, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

	(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.

 

 

 

/s/   Edmund C. Reiter		/s/  Richard P. Moberg
President & Chief Executive Officer		Chief Financial Officer
Date:  April 29, 2010		Date: April 29, 2010

The certification set forth above is being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Form 10-Q or as a separate disclosure document of the Company or the certifying officers.