SEC Filing | Aware, Inc.

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Filed pursuant to Rule 424(b)(1)
Registration No. 333-6807

[AWARE LOGO]

3,400,000 SHARES

COMMON STOCK

All of the 3,400,000 shares of Common Stock offered hereby are being sold
by Aware, Inc. ("Aware" or the "Company"). Prior to this offering, there has
been no public market for the Common Stock of the Company. See "Underwriting"
for information relating to the method of determining the initial public
offering price. DSC Communications Corporation, a customer of the Company, has
expressed an interest in purchasing $2,000,000 of Common Stock in this offering
at the initial public offering price per share. See "Business -- Strategic
Relationship and Customers" and "Underwriting."

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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 6.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
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Per Share............................ $10.00 $0.70 $9.30
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Total(2)............................. $34,000,000 $2,380,000 $31,620,000
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(1) Before deducting expenses payable by the Company, estimated at $800,000.

(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 510,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $39,100,000, $2,737,000 and $36,363,000,
respectively.

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The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about August 14, 1996.

ROBERTSON, STEPHENS & COMPANY FURMAN SELZ

The date of this Prospectus is August 9, 1996.

What is ADSL?

- - ADSL = Asymmetric Digital Subscriber Line

- - Works over existing twisted-pair copper phone lines

- - Provides data downstream at up to 8 Mbps and upstream at up to 640 Kbps,
depending upon the configuration chosen and the distance of the local loop

- - Allows for simultaneous data and voice service

[Diagram showing link between telephone company central office and home or
business using Aware ADSL Modem]

The Company believes that the ADSL Internet Access Modem provides the
highest performance/distance combination available today.

Potential ADSL Applications

[Photograph showing person at computer]
Internet Access

[Photograph showing two persons at computer]
Telecommuting

[Diagram showing a local area network]
LAN Interconnect

[Photograph showing computer]
Video on Demand

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.

UNTIL SEPTEMBER 3, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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TABLE OF CONTENTS

PAGE
-----

Summary............................................................................... 4
Risk Factors.......................................................................... 6
Use of Proceeds....................................................................... 17
Dividend Policy....................................................................... 17
Capitalization........................................................................ 18
Dilution.............................................................................. 19
Selected Financial Data............................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 21
Business.............................................................................. 29
Management............................................................................ 43
Certain Transactions.................................................................. 51
Principal Stockholders................................................................ 52
Description of Capital Stock.......................................................... 54
Shares Eligible for Future Sale....................................................... 58
Underwriting.......................................................................... 60
Legal Matters......................................................................... 62
Experts............................................................................... 62
Changes in Independent Accountants.................................................... 62
Additional Information................................................................ 62
Technical Glossary.................................................................... 64
Index to Financial Statements......................................................... F-1

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The Company intends to distribute to its stockholders annual reports
containing financial statements examined by its independent public accounting
firm and make available to its stockholders quarterly reports for the first
three quarters of each fiscal year containing unaudited financial information.

AccuPress is a registered trademark of the Company. Aware, DWMT, SeisPact,
WaveTel HFC and WSQ by Aware are trademarks of the Company. This Prospectus also
includes tradenames, trademarks and registered trademarks of other companies.

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SUMMARY

This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption "Risk Factors," which could cause actual results to differ materially
from those indicated in such forward-looking statements. The following summary
is qualified in its entirety by the more detailed information, including "Risk
Factors," and Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus.

THE COMPANY

Aware designs, develops and markets telecommunications software, chipsets
and modems which incorporate ADSL technology and increase the speed of data
communications over conventional copper telephone lines. The Company's products
and services are designed to allow telephone companies to utilize their
installed bases of dedicated copper lines to provide both residential and
business customers with interactive data transmission at speeds much higher than
currently available.

The Company's products include software and hardware interfaces that
integrate ADSL chipsets into modems and other communications devices, and high
speed ADSL Internet Access Modems that incorporate the Company's proprietary
technology and software. The Company also develops ADSL chipsets with Analog
Devices, Inc. ("ADI"). ADI has an exclusive license to manufacture and sell the
chipsets for which the Company receives royalty payments and therefore the
Company is substantially dependent on ADI to achieve its business objectives.
Several large telcos, including GTE Corporation and BellSouth Corporation, and a
number of OEMs that supply telcos, including DSC Communications Corporation and
RelTec Corporation, are testing the Company's products. The Company has only
recently introduced products incorporating ADSL technology and had approximately
$140,000 in revenue from the sale of these products as of June 30, 1996.

Telecommunications service providers are experiencing a fundamental shift
in the type of communications traffic transmitted over their networks. Existing
infrastructures of twisted-pair copper wiring, originally designed to provide
analog voice service ("Plain Old Telephone Service" or "POTS"), are increasingly
required to carry the data-intensive, digital communications produced by
computers. This communications traffic has increased dramatically in recent
years with the rapid expansion of computer-based communication on the Internet
and elsewhere. Telcos are faced with the challenge of providing high-speed data
communications at reasonable costs, while preserving their large existing
investments in copper wire networks. Current technologies for high speed data
transmission, including ISDN, T-1 or E-1, and HDSL, increase the transmission
speed of data over copper lines but share certain limitations, including an
inability to accommodate simultaneous data transmission and POTS on the same
line. In a typical configuration, the Company's ADSL Internet Access Modem,
which uses digital signal processing to expand the useable bandwidth of copper
telephone wire, allows transmission of data at a distance of 12,000 feet at a
rate of 4.4 Mbps downstream to the customer and 440 Kbps upstream from the
customer while allowing simultaneous POTS on the same telephone line.

Aware designs and develops products that incorporate proprietary software
and algorithms based on digital signal processing technology as well as ASICs.
In contrast to the approach taken by some competing developers of ADSL
technology, Aware's approach is to maintain a high level of functionality in the
software component of the product as opposed to the ASIC. The Company believes
that this approach allows it to engineer improvements in its technology quickly
and efficiently, rather than having to design and produce a new ASIC each time
an improvement is made.

Aware was incorporated in Massachusetts in 1986. The Company's executive
offices are located at One Oak Park, Bedford, Massachusetts 01730 and its
telephone number is (617) 276-4000.

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THE OFFERING

Common Stock Offered by the Company................ 3,400,000 shares
Common Stock Outstanding after the Offering........ 18,392,397 shares(1)
Use of Proceeds.................................... For working capital and general corporate
purposes.
Nasdaq National Market Symbol...................... AWRE

SUMMARY FINANCIAL DATA
(In thousands, except per share data)

THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- ------ -----

STATEMENT OF OPERATIONS DATA:
Total revenue.................................. $ 3,172 $ 3,827 $3,260 $ 950 $ 962
Income (loss) from operations.................. (1,028) (1,095) (454) (116) 18
Net income (loss).............................. (992) (1,012) (343) (87) 41
Pro forma net income (loss) per common
share(2).................................... $(0.17) $(0.04) $0.00
Pro forma weighted average number of common
shares outstanding(2)....................... 2,045 2,032 15,109

MARCH 31, 1996
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ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and cash equivalents......................................... $2,047 $32,867
Working capital................................................... 2,617 33,437
Total assets...................................................... 3,351 34,171
Total liabilities................................................. 382 382
Total stockholders' equity........................................ 2,969 33,789

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(1) Based on shares outstanding at June 30, 1996 and excludes (i) 3,175,158
shares of Common Stock issuable upon exercise of options outstanding under
the Company's stock option plans at a weighted average exercise price of
$4.48 per share, (ii) 1,642,287 shares of Common Stock reserved for future
issuance pursuant to such plans and (iii) 100,000 shares of Common Stock
reserved for future issuance pursuant to the Company's employee stock
purchase plan.

(2) See Note 1 of Notes to Financial Statements for an explanation of the method
of calculation of the pro forma weighted average number of common shares
outstanding.

(3) Adjusted to reflect the sale of 3,400,000 shares of Common Stock offered
hereby at the initial public offering price of $10.00 per share and the
application of the net proceeds therefrom. Does not reflect the receipt
subsequent to March 31, 1996 of aggregate consideration of approximately
$1.0 million from the exercise of options to purchase an aggregate of
1,019,252 shares of Common Stock.

Unless otherwise indicated, all information contained in this Prospectus
assumes (i) no exercise of the Underwriters' over-allotment option and (ii) the
conversion of all outstanding shares of Preferred Stock of the Company into
Common Stock on or before the closing of this offering. See "Description of
Capital Stock" and "Underwriting."
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RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company's business
before purchasing shares of the Common Stock offered hereby.

HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT

The Company has incurred net losses in every fiscal year since inception.
In fiscal 1993, 1994 and 1995, the Company sustained net losses of approximately
$992,000, $1,012,000 and $343,000, respectively and had total revenue in each of
those years of $3.2 million, $3.8 million and $3.3 million, respectively. At
March 31, 1996, the Company had an accumulated deficit of approximately $10.5
million and stockholders' equity of approximately $3.0 million. Since inception,
the Company has made significant expenditures for research and development.
Substantial additional research and development expenses to enhance the
performance and reduce the manufacturing costs of the Company's products will be
required before market acceptance can be determined. In addition, significant
expenditures will be necessary to develop, market and sell the Company's ADSL
products. As a result, the Company may continue to incur losses in the future.
There can be no assurance that the Company will achieve profitable operations in
any future period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

DEPENDENCE ON ACCEPTANCE OF ADSL TECHNOLOGY

The Company's future success, financial condition and results of operations
are substantially dependent upon whether Asymmetric Digital Subscriber Line
("ADSL") technology, a new technology that increases the efficiency of digital
transmission over copper wire, gains widespread commercial acceptance by
telephone companies ("telcos") and end users of telco services. The Company has
invested substantial resources in the development of ADSL technology implemented
through the Discrete Multi-Tone ("DMT") modulation technique and expects for the
foreseeable future to invest substantial resources in the development, marketing
and sale of products incorporating such technology. Because telcos have only
recently begun to consider implementing DMT-based ADSL technology in their
networks, the market for products using DMT-based ADSL technology has not yet
developed. Many factors may delay or preclude the development of such a market,
including the existence of other technologies that increase the efficiency of
digital transmission over copper wire, such as ADSL technology implemented
through the Carrierless Amplitude Phase ("CAP") modulation technique, Integrated
Service Digital Network ("ISDN"), T-1 and High bit-rate Digital Subscriber Line
("HDSL"), as well as technologies that increase digital transmission speeds over
other media, such as hybrid fiber coaxial cable ("HFC"), coaxial cable, fiber
optic cable, digital broadcast satellite and other wireless technologies. Many
of these competing technologies, including CAP-based ADSL technology, are
already available and may soon gain widespread commercial acceptance, a result
which could materially limit acceptance of DMT-based ADSL technology. Moreover,
many telcos have adopted policies that favor the deployment of fiber optic
technologies. The failure of DMT-based ADSL technology to gain widespread
commercial acceptance by telcos and end users of telco services would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Last Mile Technology."

In order to achieve widespread commercial acceptance, DMT-based ADSL
technology must first undergo the rigorous approval processes that telcos impose
on new products before deploying them on a broad basis. The approval process
usually involves a number of different phases, including (i) laboratory
evaluation, in which the product is tested against relevant industry standards;
(ii) technical trials, in which the product is tested in the field with a small
number of users; (iii) marketing trials, in which the product is tested in the
field with a larger number of users and telcos begin to train their personnel to
install and maintain the product; (iv) initial commercial deployment, in which
telcos make the product available to selected customers for selected
applications; and (v) full commercial deployment, in which telcos make the
product available to a substantial

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number of customers. See "Business -- ADSL Evaluations and Trials." To date,
telcos have deployed ADSL systems primarily for technical trials and have begun
very limited marketing trials and commercial deployment of ADSL systems.
Although certain of the Company's products have been selected for participation
in such technical trials, the Company is unable to predict when such trials will
be concluded, whether such trials will be successful or whether the Company's
products will be reviewed favorably by the telcos. As of June 30, 1996, revenue
from the sale of the Company's ADSL Internet Access Modem was approximately
$140,000, substantially all of which was derived in the three months ended June
30, 1996. The Company's revenue from the ADSL market has been derived
principally from research and development payments and prepaid royalties
relating to potential future sales of its ADSL products. There can be no
assurance that telcos will pursue the deployment of ADSL systems of the type
sold by the Company or that, if deployment occurs, telcos or others will
purchase the Company's ADSL products in quantities and at a rate sufficient for
the Company to operate profitably.

RELIANCE ON TELCOS

The Company's future success, financial condition and results of operations
will depend to a significant degree upon purchasing decisions by telcos and
other prospective customers of the Company and its current and future OEMs. All
of these customers have significantly greater resources than the Company, and
the Company has little, if any, ability to influence or control decisions made
by these customers. Before purchasing products such as those of the Company,
telcos subject such products to lengthy approval processes, which can take
several years or more for complex products based on new technologies such as
ADSL. The Company expects to be required to submit each successive generation of
its products as well as new products to its customers for approval. The length
of the approval process will depend upon a number of factors, including the
complexity of the product involved, priorities of telcos, telcos' budgets and
regulatory issues affecting telcos. Moreover, the need for approval from the
Federal Communications Commission (the "FCC") for certain new telco services
prior to their implementation may delay the approval process. Any such delay
would have a material adverse effect on the Company's business, financial
condition and results of operations.

Historically, telcos have been cautious in implementing new technologies.
Telcos' deployment of ADSL technology may be prevented or delayed by a number of
factors, including telcos' lengthy product approval and purchase processes;
cost; regulatory barriers that may prevent or restrict telcos from providing
interactive multimedia services; the lack of demand for Internet access and
other interactive multimedia services; the lack of sufficient programming
content for interactive multimedia services; the availability of alternative
technologies, such as CAP-based ADSL, ISDN, HFC, coaxial cable, fiber optic
cable and wireless technologies; and telcos' policies that favor the use of such
alternative technologies over ADSL technology. Moreover, certain competing
technologies, such as HFC, coaxial cable, fiber optic cable and certain wireless
technologies, have greater transmission speeds than that of the ADSL products
being developed by the Company. In addition, telcos are generally reluctant to
deploy new technologies available only from a single source, especially when the
supplier is as small as the Company, and often require alternative sources
before deploying a new technology. This reluctance may put the Company at a
competitive disadvantage relative to some of its competitors. Even if telcos
adopt policies favoring full-scale implementation of ADSL technology, there can
be no assurance that sales of the Company's ADSL products will become
significant or that the Company will be able successfully to introduce its ADSL
products on a timely basis or to sell those products in material quantities. The
failure of telcos to deploy the Company's ADSL systems would have a material
adverse effect on the Company's business, financial condition and results of
operations. Even if demand for the Company's products is high, telcos may have
sufficient bargaining power to demand low prices and other terms and conditions
which may have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Last Mile Technology."

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SUBSTANTIAL DEPENDENCE ON ANALOG DEVICES, INC.

The Company is substantially dependent on Analog Devices, Inc. ("ADI") and
will not achieve its business objectives without the support and cooperation of
ADI. In September 1993, the Company and ADI entered into an agreement to develop
an integrated ADSL chipset that is based on system designs, algorithms and
software developed by the Company and that incorporates application specific
integrated circuits ("ASICs") and digital signal processors developed by ADI
(the "ADSL Chipset"). In connection with this development agreement, the Company
granted ADI a perpetual, worldwide, exclusive license to make, use and sell ADSL
Chipsets and other products that incorporate the Company's proprietary ADSL
software. In June 1994 and September 1995, the Company entered into similar
arrangements with ADI with respect to certain other technology, including HFC
and Very high speed Digital Subscriber Line ("VDSL"). The Company has also
agreed that, if it develops and sells ADSL technology that implements the
Company's Discrete Wavelet Multi-Tone ("DWMT") transform technology, it would
license such technology to ADI on substantially the same terms as those for the
Company's ADSL technology. Accordingly, the Company is entirely dependent on ADI
for the manufacture and sale of chipsets based on the Company's ADSL, HFC and
VDSL technology. The inability or refusal of ADI to manufacture, market and sell
such chipsets in substantial quantities would prevent telcos from adopting the
Company's technology and would have a material adverse effect on the Company's
business, financial condition and results of operations. ADI is not obligated to
manufacture, market or sell any chipsets that incorporate the Company's
technology, and accordingly, there can be no assurance that ADI will continue to
manufacture, market or sell such chipsets. Even if the Company were permitted to
license its technology to other parties, the Company has agreed that it will not
grant licenses to other parties under terms more favorable than those given to
ADI. Because of the limited period during which ADI has manufactured the ADSL
Chipset, the Company has not had sufficient opportunity to evaluate ADI's
responsiveness or performance or the extent to which manufacturing problems may
be encountered. In the past, ADI has experienced certain delays associated with
the manufacture of the ADSL Chipsets. On occasion, such delays have been
substantial. There can be no assurance that ADI will succeed in producing ADSL
Chipsets that satisfy the Company's quality requirements on a timely basis, if
at all. Any failure by ADI to produce ADSL Chipsets of a quality and a quantity
to meet demand may have a material adverse effect on the Company's business,
financial condition and results of operations. In the event of such a failure,
there can be no assurance that the Company would be able to find a substitute
manufacturer for ADSL Chipsets or that, if a substitute is found, shifting
production to such substitute would not involve significant delays, start-up
costs and other unforeseeable difficulties, the occurrence of any of which would
have a material adverse effect on the Company's business, financial condition
and results of operations. In 1993, 1994, 1995 and the three months ended March
31, 1996, the Company derived approximately 12%, 10%, 23% and 8%, respectively,
of its total revenue from ADI. The Company has agreed with ADI that if ADI can
show that the royalty paid to the Company does not allow ADI to compete in the
marketplace, the Company will engage in good faith negotiations to reduce the
royalty. Any such reduction could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
has also agreed with ADI that if the Company's HFC or VDSL technology becomes an
industry standard, the Company will license such technology on fair, equitable
and nondiscriminatory terms. See "Business -- Relationship with ADI."

PROPRIETARY TECHNOLOGY; RISK OF THIRD-PARTY CLAIMS OF INFRINGEMENT

The Company's ability to compete effectively will depend to a significant
extent on its ability to protect its proprietary information and to operate
without infringing the intellectual property rights of others. Although the
Company regards its technology as proprietary and has a number of patents and
pending patent applications, none of such issued patents relates to technology
embodied in the Company's current ADSL products. The Company relies on a
combination of trade secrets, copyright and trademark law and nondisclosure
agreements to protect its unpatented proprietary know-how. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's technology or products without authorization. Although the
Company intends to defend its

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intellectual property, there can be no assurance that the steps taken by the
Company to protect its proprietary information will be adequate to prevent
misappropriation of its technology. Moreover, there can be no assurance that the
Company's competitors will not independently develop technologies substantially
equivalent or superior to the Company's technology or that such competitive
technology will not have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, many participants in
the telecommunications industry have an increasing number of patents and have
frequently demonstrated a readiness to commence litigation based on allegations
of patent and other intellectual property infringement. Third parties may assert
exclusive patent, copyright and other intellectual property rights to
technologies that are important to the Company. The Company has received letters
from two companies, Amati Communications Corporation ("Amati") and Telebit
Corporation ("Telebit"), each asserting that it owns certain U.S. and foreign
patents that are necessary for products that comply with the American National
Standards Institute ("ANSI") standard for ADSL, claiming that the Company's ADSL
technology would infringe such patents, and offering the Company the opportunity
to enter into a license agreement with respect to such patents. The Company has
been informed that ADI has received similar letters. The Company has reviewed
the Amati and Telebit patents and has received an opinion of its patent counsel,
Cesari and McKenna, based upon the Company's oral description of its technology,
to the effect that the Company's ADSL Internet Access Modem which it intends to
sell does not infringe any valid claim of any of the Amati and Telebit patents.
Based upon this opinion, the Company believes that it does not require a license
under the Amati or Telebit patents in order to conduct its proposed business.

Despite this opinion, there can be no assurance that a court to which the
issue is submitted would not find that the Company's products infringe the Amati
or Telebit patents, nor that Amati or Telebit will not continue to assert
infringement. If the Company is found to have infringed any of such patents, the
Company could be subject to substantial damages and/or an injunction preventing
it from conducting its proposed business, and the Company's business could be
materially and adversely affected. The Company has also received notice from
Amati of the pendency of various patent applications which Amati considers to be
pertinent to the design and operation of ADSL modems. Unless and until a patent
actually issues, there can be no infringement, and the Company has not examined
any such patent applications or received an opinion of patent counsel with
respect thereto. Although Amati and Telebit have offered to license their
patents and their patent applications to the Company, there can be no assurance
that any license would be available on acceptable terms should the Company
choose to pursue such license or be found to infringe such patents. In addition,
there can be no assurance that other third parties will not assert infringement
claims against the Company in the future, that these assertions or those of
Amati and Telebit, will not result in protracted and costly litigation, or that
the Company would prevail in any such litigation or be able to license any valid
patents from third parties on commercially reasonable terms. Further, such
litigation, regardless of its outcome, could result in substantial costs to and
diversion of effort by the Company. Litigation may also be necessary to enforce
the Company's intellectual property rights. Any infringement claim or other
litigation against or by the Company could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Intellectual Property."

RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS

The markets for the Company's products are characterized by rapid
technological advances, evolving industry standards, changes in end-user
requirements, frequent new product introductions and enhancements, and evolving
telco service offerings, all of which are outside the control of the Company. If
technologies or standards applicable to the Company's products or telco services
based on the Company's products become obsolete or fail to gain widespread
commercial acceptance, the Company's business, financial condition and results
of operations will be materially adversely affected. Moreover, the introduction
of products embodying new technology, the emergence of new industry standards or
changes in telco services could render the Company's existing products, as well
as products under development, obsolete and unmarketable. ANSI, an organization
that establishes certain industry standards for the markets in which the Company
competes, has not yet established

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standards for certain of the Company's existing products and products under
development. There can be no assurance that, upon ANSI's adoption of any new
industry standard, the Company's products will comply with such standard, that
the Company will not encounter substantial financial, technological and other
obstacles in modifying its existing products or developing new products to
comply with such standard, or that the Company will be able to obtain rights
necessary to comply with such standard on commercially acceptable terms. The
failure of the Company's products to comply with any industry standard may have
a material adverse effect on the market acceptance of such products and on the
Company's business, financial condition and results of operations. The Company's
future success will also depend upon its ability to enhance its existing
products, to develop new products that address the increasingly sophisticated
needs of its customers and to respond to technological advances and emerging
industry standards and practices. Although certain of the Company's ADSL
products are presently being tested by certain of its customers, these products
are not being generally distributed at this time. There can be no assurance that
the Company will be successful in developing, introducing and marketing new
versions of its existing products or any product enhancements or new products,
or will not experience difficulties that could delay or prevent the successful
development, introduction or marketing of these products, or that its new
products and product enhancements will adequately address the needs of the
marketplace and achieve market acceptance. Delays in the introduction of new
products and enhancements will result in customer dissatisfaction and delay or
loss of revenues. Any inability of the Company to develop and introduce new
products or enhancements of existing products in a timely manner in response to
changing market conditions or customer requirements will have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Telecommunications Products."

RISKS ASSOCIATED WITH MANAGING A CHANGING BUSINESS

In order to achieve its business objectives, the Company must undergo
substantial changes in its operations to transition from a company primarily
involved in sponsored research and development to a company which develops,
manufactures, markets, and supports products and services for the commercial
telecommunications marketplace. These changes have placed, and are expected to
continue to place, a significant strain on the Company's limited administrative,
operational and financial resources. The Company has only recently begun the
process of developing the management and operational capabilities and financial
and accounting systems and controls necessary for this transition. For example,
the Company hired its current Chief Financial Officer, Richard P. Moberg, on
June 14, 1996. From January 1995 to June 1996, the Company did not have a Chief
Financial Officer and had a financial and accounting staff consisting of a
single individual. The Company believes that, without additional personnel and
other resources, its financial and accounting systems and controls will not be
adequate to conduct the commercial telecommunications business which the Company
proposes to conduct. Mr. Moberg will be responsible for hiring sufficient
accounting personnel and establishing financial and accounting systems and
controls adequate to conduct the Company's proposed business as described in
this Prospectus. There can be no assurance that the Company will be successful
in achieving these objectives. Similarly, the head of the Company's
manufacturing operations joined the Company in May 1996, and is responsible for
building a manufacturing capability within the Company. The ability of the
Company to achieve its business objectives will depend in large part on its
ability to build effective financial and accounting systems, to build or
subcontract efficient manufacturing operations, to generally improve and expand
its operational and sales and marketing capabilities and its financial and
management information systems, to develop the management skills of its managers
and supervisors, and to train, motivate and manage both its existing employees
and the additional employees that will be required if the Company is to achieve
its business objectives. There can be no assurance that the Company will succeed
in developing all or any of these capabilities, and any failure to do so would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Management."

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11

NEW MANAGEMENT TEAM; DEPENDENCE ON KEY PERSONNEL

A significant portion of the Company's senior management team has been in
place for only a relatively short period of time. James C. Bender, David C.
Hunter and Richard P. Moberg, the Company's President and Chief Executive
Officer, Senior Vice President, Product Development, and Treasurer and Chief
Financial Officer, respectively, joined the Company in October 1994, May 1996
and June 1996, respectively. Accordingly, each of these individuals has been
involved with only the most recent operating activity of the Company. The
Company's success will depend to a significant extent on the ability of its new
executive officers to integrate themselves into the Company's daily operations,
to gain the trust and confidence of the Company's other employees and to work
effectively as a team. The Company's future success will also depend to a
significant extent on its executive officers, including Mr. Bender and Michael
A. Tzannes, Ph.D., its Senior Vice President, Telecommunications, and other
technical, managerial and marketing personnel. The loss of the services of any
of these individuals would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company does not
currently have employment agreements with any of its key employees other than
Mr. Bender. The Company does not have, and is not contemplating securing, key
man life insurance on any of its executive officers or other key personnel.
There can be no assurance that any of these individuals or any other key
employee will not voluntarily terminate his or her employment with the Company.
The Company believes that its future success will also depend significantly on
its ability to attract, motivate and retain additional highly skilled technical,
managerial and marketing personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be successful in attracting,
assimilating and retaining the personnel required to grow and operate
profitably. See "Business -- Employees," "Management -- Executive Officers and
Directors" and "-- Employment Agreement."

DEPENDENCE ON DISTRIBUTION AND MARKETING RELATIONSHIPS

Until recently, the Company was primarily engaged in research and
development and, accordingly, did not devote substantial resources to marketing
and sales. At June 30, 1996, the Company's sales force was comprised of six
employees. Consequently, the Company is, and for the foreseeable future will
continue to be, substantially dependent on other companies for the marketing,
sale and distribution of the Company's products. The Company is currently
negotiating OEM and other agreements with a number of such companies and expects
that these agreements will be nonexclusive and that many of the companies with
which the Company is negotiating will have similar agreements with its
competitors or potential competitors. The Company believes that its success in
penetrating markets for its ADSL telecommunications products will depend to a
significant degree on its ability to establish these relationships and to
cultivate additional relationships. There can be no assurance that the Company's
future distributors and OEM partners, most of which will have significantly
greater financial and marketing resources than the Company, will not develop and
market products in competition with the Company or form additional competing
arrangements with the Company's competitors. See "Business -- Strategic
Relationships and Customers," "-- Sales and Marketing " and "-- Competition."

COMPETITION

The markets for the Company's products are intensely competitive and the
Company expects competition to increase in the immediate future, especially in
the emerging ADSL market. The Company intends to compete on the basis of
technology, price, the timing of product delivery, product features, quality,
reliability and customer satisfaction. The Company currently competes, or
expects to compete in the future, with the following categories of companies:
(i) other vendors of DMT-based ADSL technology, such as Amati and Orckit
Communications Limited; (ii) vendors of alternative ADSL technologies, such as
AT&T Paradyne Corp., which is currently marketing its CAP-based ADSL technology;
(iii) the Regional Bell Operating Companies ("RBOCs"), which as a result of the
Telecommunications Act of 1996 are no longer prohibited from manufacturing
telecommunications

11
12

equipment; and (iv) OEMs and other systems integrators, such as U.S. Robotics
Corporation, Ericsson, Inc., Motorola, Inc. and Alcatel Network Systems, Inc.

In the HFC market, the Company is attempting to sell its products to system
integrators such as Tellabs, Inc., Northern Telecom Ltd., Scientific-Atlanta,
Inc. and General Instrument Corporation. The Company believes that these
companies have developed or are developing proprietary modulation schemes using
in-house technology that may be competitive with the Company's technology.
Although the Company believes that its DWMT technology will offer more robust
communications than these proprietary modulation schemes, the Company has not
manufactured any marketable products based on its DWMT technology and there can
be no assurance that the Company will be able to do so or that a market for such
products will develop. The markets for the Company's wavelet image compression
technology are competitive, and are expected to become increasingly so in the
near future. In addition, the Company's WSQ product is an implementation of an
open standard and is therefore subject to competition.

Many of the Company's competitors and potential competitors, including AT&T
Paradyne Corp. and the RBOCs, have significantly greater financial,
technological, manufacturing, marketing and personnel resources than the
Company. There can be no assurance that the Company will be able to compete
successfully or that competition will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Competition."

DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS

The Company expects to derive a substantial portion of its revenues through
OEMs from the RBOCs and other telcos, both of which are relatively few in
number. Consequently, the Company's future success will depend to a large extent
upon the timing and size of future purchase orders for the Company's products
from the RBOCs, the financial and operating success of the RBOCs, and the
success of the RBOCs' services that use the Company's products. Any attempt by
the Company's OEMs or by an RBOC or other telco to seek out additional or
alternative suppliers or to undertake the internal development and sale of
products comparable to those of the Company could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company derived approximately 23%, 18%, 12% and 10% of its total revenue in 1995
from ADI, General Instrument Corporation, the United States government and
GSS/Array Technology, respectively, and derived approximately 38% and 10% of its
total revenue in 1994 from the United States government and ADI, respectively.
These revenues consisted of contract and consulting fees from technology
development agreements and government research contracts. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

MANUFACTURING RISKS

The Company has limited experience in manufacturing or in supervising the
manufacture of its products, including its ADSL Internet Access Modem. To date,
the Company has manufactured only extremely limited quantities of a technical
evaluation model of its ADSL Internet Access Modem and has shipped such models
to a limited number of customers for technical trials. As a result of the
Company's limited manufacturing capabilities, the Company has encountered
capacity constraints and has been unable to supply all orders for the technical
evaluation model, which was designed solely to demonstrate technological
feasibility and will not be suitable for mass production without additional
redesign to reduce the power requirements, size and cost of the model. The
Company relies, and expects to continue to rely, on ADI for the manufacture of
chipsets incorporating the Company's ADSL technology. In order to meet any
demand for its ADSL Internet Access Modem and other board and system level
products, the Company may be required to manage successfully and in a relatively
short period the transition to high volume manufacturing, including the
establishment of adequate facilities, the control of overhead expenses and
inventories and the management and training of its employee base. There can be
no assurance that the Company will be successful in these respects, that the
Company will not encounter significant difficulties in manufacturing or
controlling the quality of

12
13

its products, or that its products will be reliable in the field. The Company
may use a portion of the proceeds of this offering to acquire and equip
manufacturing facilities. If such expansion is required and cannot be
implemented in a timely manner, the Company may experience capacity constraints
that may cause production and shipping delays. Any such constraints or delays
could have a material adverse effect on the Company's business, financial
condition and results of operations. Alternatively, the Company may continue to
subcontract its manufacturing operations to independent third party
manufacturers and may become substantially dependent on them. There are
additional risks associated with the use of independent manufacturers, including
the lack of availability of or delays in obtaining adequate supplies of products
and reduced control of manufacturing quality and production costs. There can be
no assurance that the Company's third-party manufacturers will provide adequate
supplies of quality products on a timely basis. The inability to obtain such
products on a timely basis would have a material adverse effect on the Company's
business, financial condition, and results of operations. See
"Business -- Manufacturing."

DEPENDENCE ON SOLE OR LIMITED SOURCE SUPPLIERS

Certain key components used in the Company's ADSL Internet Access Modem,
such as the ADSL Chipset and ADI's digital signal processors, are currently
available from only one source or a limited number of suppliers. There can be no
assurance that the Company will be able to obtain sufficient quantities of ADSL
Chipsets or other electronic components as required, or that such components, if
obtained, will be available to the Company on commercially reasonable terms. In
addition, the Company anticipates that the production capacity for ADSL Chipsets
and the availability of certain other electronic components from its suppliers
may be insufficient to meet demand in the future. ADSL Chipsets and other
electronic components are fundamental to the Company's business strategy of
developing new and succeeding generations of products at reduced unit costs
without compromising functionality. There can be no assurance that delays in
product deliveries will not occur in the future due to shortages resulting from
the limited number of suppliers, the financial or other difficulties of such
suppliers, or the possible limitations in production capacity or component
availability because of significant worldwide demand for those components. The
inability to obtain sufficient key components or to develop alternative sources
for such components, if and as required in the future, could limit or delay
product shipments, which in turn could have a material adverse effect on the
Company's customer relationships and its business, financial condition and
results of operations. See "Business -- Telecommunications Products."

CAPITAL REQUIREMENTS

Expansion of the Company's business, including the development and
marketing of its ADSL products, will require significant additional expenditures
for research and development, capital equipment and working capital. The Company
has experienced extended periods during which cash flows from operations were
negative, and there can be no assurance that the Company will not have negative
cash flows from operations in the future. The Company expects that the net
proceeds from this offering and its current cash balances will be sufficient to
fund its operations for at least the next twelve months. The Company's capital
requirements will depend on many factors, including the progress of its research
and development efforts, the receipt of software license fees and other product
revenue, the timely acceptance of its ADSL technology, the need to devote
resources to manufacturing operations, and the demand for the Company's
products. There can be no assurance that the Company will not need to raise
additional funds through public or private financings or that, if needed, such
funds will be available on acceptable terms. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate one or
more of its research and development or manufacturing programs or to obtain
funds through arrangements that may require the Company to relinquish rights to
certain of its technologies or potential products or other assets that the
Company would not otherwise relinquish. The inability of the Company to raise
needed funds would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

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14

FLUCTUATIONS IN QUARTERLY RESULTS; LACK OF BACKLOG

The Company has experienced, and expects to continue to experience,
significant fluctuations in its quarterly results of operations. Factors that
have contributed or may contribute to future fluctuations in the Company's
quarterly results of operations include the size and timing of customer orders
and subsequent shipments, customer order deferrals in anticipation of new
products, timing of product introductions or enhancements by the Company or its
competitors, market acceptance of new products, technological changes in the
telecommunications industry, competitive pricing pressures, accuracy of customer
forecasts of end-user demand, changes in the Company's operating expenses,
personnel changes, changes in the mix of product sales and contract and
consulting fees, quality control of products sold, disruption in sources of
supply, regulatory changes, capital spending, delays of payments by customers
and general economic conditions. The timing and volume of customer orders are
difficult to forecast. The Company does not have a material backlog of orders
for its products.

The Company intends to continue to make significant ongoing research and
development expenditures for new products and technologies, which may have a
material adverse effect on the Company's quarterly results of operations. The
Company's expense levels are based in part on expectations of future revenues
and are relatively fixed in the short term. The Company intends to increase
operating expenditures as the Company expands its operations to develop and
market the ADSL Internet Access Modem and other products based upon ADSL
technology. Consequently, a shortfall in quarterly revenues due to a lack of
sales of ADSL products or otherwise would adversely impact the Company's
business, financial condition and results of operations in a given quarter due
to the Company's inability to adjust expenses or inventory to match revenues for
that quarter. In addition, there can be no assurance that, as the Company
increases sales of ADSL products, warranty returns will not become significant
or that warranty returns, if significant, will not have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Telecommunications Products."

GOVERNMENT REGULATION

Although the extensive regulation of telcos by Federal, state and foreign
regulatory agencies, including the FCC and various state public utility and
service commissions, does not directly affect the Company, the effects of such
regulation on the Company's customers may have a material adverse effect on the
Company's business, financial condition and results of operations. For example,
FCC regulatory policies affecting the availability of telco services, and other
terms on which telcos conduct their business, may impede the Company's
penetration of certain markets. Although the Telecommunications Act of 1996
eliminated or modified many FCC restrictions on telcos' ability to provide
interactive multimedia services, the remaining or any future restrictions may
have a material adverse effect on telcos' demand for products based upon ADSL
technology. Cable operators, which may become another market for the Company's
products, are also subject to extensive governmental regulations that may
discourage them from deploying the Company's HFC technology. In addition, rates
for telecommunications services are generally governed by tariffs of licensed
carriers that are subject to regulatory approval. These tariffs could have a
material adverse effect on the demand for the Company's products. The imposition
of certain tariffs, duties and other import restrictions on components which the
Company intends to obtain from non-domestic suppliers, the imposition of export
restrictions on products which the Company intends to sell internationally or
other changes in laws or regulations in the United States or elsewhere could
also have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Government Regulation."

POTENTIAL PRODUCT LIABILITIES

One or more of the Company's products may contain undetected component,
hardware, software or mechanical defects or failures when first introduced or
may develop defects or failures after

14
15

commencement of commercial production or shipments. Any such defects or failures
could cause loss of goodwill, if any, with distributors and with customers,
prevent or delay market acceptance of the Company's products, result in
cancellations or rescheduling of orders or shipments or product recalls or
returns and expose the Company to claims from customers. The Company could also
incur unexpected and significant costs, including product redesign costs and
costs associated with customer support. The Company expects to sell its products
with a limited warranty against defects in materials and workmanship. If any of
the Company's products are found within the warranty period to contain such
defects, the Company could be required to repair or replace the defective
products or refund the purchase price. The occurrence of any such defect or
failure could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not maintain
insurance to protect against claims associated with the use of its products and
there can be no assurance that the Company will be able to satisfy claims that
may be asserted against the Company.

CONTROL BY EXISTING STOCKHOLDERS

Upon completion of this offering, the Company's directors and officers will
beneficially own approximately 24.1% of the Company's outstanding Common Stock.
As a result, these stockholders, if acting together, will have the ability to
influence the election of the Company's directors and the outcome of corporate
actions requiring stockholder approval. See "Management" and "Principal
Stockholders."

BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS

The Company intends to use the net proceeds of this offering for working
capital and general corporate purposes, including possible acquisitions of
businesses, technologies or products. Accordingly, the Company will have broad
discretion in the application of such net proceeds. Purchasers of Common Stock
in this offering will not have the opportunity to evaluate the economic,
financial or other information which the Company will use to determine the
application of such proceeds. See "Use of Proceeds."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active public market for the Common
Stock will develop or be sustained after the offering. The initial public
offering price was determined by negotiations between the Company and the
representatives of the Underwriters based upon several factors and may not be
indicative of future market prices. The market price of the Common Stock could
be subject to wide fluctuations in response to the announcement of operating
results below those of financial analysts' projections, changes in such
projections, quarterly variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
trends or changes in the telecommunications industry, and other events or
factors. In addition, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices for many high
technology companies. This market volatility has had a substantial effect on the
market prices of securities issued by companies for reasons unrelated to the
operating performance of such companies. These broad market fluctuations may
have a material adverse effect on the market price of the Common Stock. See
"Underwriting."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of shares in the public market or the prospect
of such sales could adversely affect the market price of the Company's Common
Stock. The number of shares of Common Stock available for sale in the public
market is limited by restrictions under the Securities Act of 1933, as amended
(the "Securities Act"), and lock-up agreements under which the holders of
13,657,310 shares of Common Stock have agreed that they will not, directly or
indirectly, without the prior written consent of Robertson, Stephens & Company
LLC, sell, offer, contract to sell, pledge, grant any option to purchase or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for, or any rights to purchase or acquire, shares of Common
Stock beneficially

15
16

owned by them for a period of 180 days from the effective date of the
registration statement of which this Prospectus forms a part (the "Effective
Date"). In its sole discretion and at any time without notice, Robertson,
Stephens & Company LLC may release all or any portion of the securities subject
to lock-up agreements. Robertson, Stephens & Company LLC has no present
intention to release any of the securities from the lock-up agreements. It has
been the practice of Robertson, Stephens & Company LLC to consider releasing
securities from the lock-up agreements based on a variety of factors, including
the market price of the Common Stock, the volume of shares traded and other
market conditions. To the extent any of the securities are released from the
lock-up agreements, it could have an adverse effect on the market price of the
Common Stock. As a result of these restrictions, based on the shares outstanding
as of June 30, 1996, the following shares of Common Stock will be eligible for
future sale: the 3,400,000 shares offered hereby will be eligible for immediate
sale without restriction in the public market; 360,158 shares will be eligible
for immediate sale on the Effective Date under Rule 144(k) promulgated under the
Securities Act; an additional 969,609 shares will first become eligible for sale
90 days after the Effective Date under Rule 144 or Rule 701 promulgated under
the Securities Act; and an additional 13,538,968 shares will first become
eligible for sale 180 days after the Effective Date. In addition, 90 days after
the Effective Date, the Company intends to register 5,774,715 shares issued or
reserved for issuance under its stock option plans and 100,000 shares reserved
for issuance under its employee stock purchase plan. As of June 30, 1996,
options to purchase a total of 3,175,158 shares were outstanding under the
Company's stock option plans and no shares were outstanding under the Company's
employee stock purchase plan. See "Management -- Stock Option Plans," "-- 1996
Employee Stock Purchase Plan" and "Shares Eligible for Future Sale."

EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND ANTI-TAKEOVER PROVISIONS;
POSSIBLE ISSUANCES OF PREFERRED STOCK

The Company's Articles of Organization, its By-Laws and certain
Massachusetts laws contain provisions that may discourage acquisition bids for
the Company and that may reduce temporary fluctuations in the trading price of
the Company's Common Stock which may be caused by accumulations of stock,
thereby depriving stockholders of certain opportunities to sell their stock at
temporarily higher prices. The Company's Articles of Organization provide for a
classified Board of Directors and directors who are so classified may be removed
by the stockholders only for cause. The Company's Articles of Organization also
permit the issuance of 1,000,000 shares of Preferred Stock without stockholder
approval and upon such terms as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority of the outstanding stock
of the Company. The Company has no present plans to issue any shares of
Preferred Stock. See "Description of Capital Stock -- Preferred Stock" and
"-- Massachusetts Law and Certain Provisions of the Company's Articles of
Organization and By-Laws."

IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS

The initial public offering price is substantially higher than the net
tangible book value per share of the Common Stock. Investors purchasing shares
of Common Stock in this offering will therefore incur immediate and substantial
net tangible book value dilution, in the amount of $8.05 per share. To the
extent that outstanding options to purchase shares of Common Stock are
exercised, there will be further dilution. See "Dilution."

ABSENCE OF DIVIDENDS

The Company intends to retain future earnings, if any, for use in the
development of its business and does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future. See "Dividend Policy."

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17

USE OF PROCEEDS

The net proceeds from the sale of the 3,400,000 shares of Common Stock
offered hereby at the initial public offering price of $10.00 per share, after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company, are estimated to be approximately $30.8 million ($35.6
million if the Underwriters' over-allotment option is exercised in full).

The Company intends to use the net proceeds of the offering to continue to
develop and market its ADSL products and for other general corporate purposes,
including working capital, research and development, and the hiring of
additional personnel. In the normal course of business, the Company evaluates
potential acquisitions of businesses, technologies and products that could
complement or expand the Company's business. A portion of the net proceeds of
the offering may be used for one or more such transactions, although the Company
has no present understandings, commitments or agreements, nor is it currently
engaged in any negotiations, with respect to any such transaction. Pending such
uses, the Company intends to invest the net proceeds in short-term,
interest-bearing, investment-grade securities, including government obligations
and money market instruments. The Company has no other specific uses for the
proceeds of this offering, and the exact use of such proceeds will be subject to
the discretion of management.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock.
The Company currently intends to retain any earnings to fund its business and
therefore does not anticipate paying cash dividends in the foreseeable future.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

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CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996 (i) on an actual basis, (ii) on a pro forma basis to give effect
to (A) the amendment and restatement of the Company's Articles of Organization
on July 1, 1996, which increased the authorized capital stock of the Company by
11,350,000 shares of Common Stock and 1,000,000 shares of undesignated Preferred
Stock and (B) the conversion of all outstanding shares of Preferred Stock of the
Company into Common Stock on or before the closing of this offering, and (iii)
on a pro forma basis as adjusted to reflect the sale of the Common Stock offered
hereby at the initial public offering price of $10.00 per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company.

MARCH 31, 1996
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)

Stockholders' Equity:
Preferred Stock, $1.00 par value; no shares authorized,
actual; 1,000,000 shares authorized and no shares
outstanding, pro forma and as adjusted................ $ -- $ -- $ --
Series B Convertible Preferred Stock, $1.00 par value
(aggregate liquidation preference of $1,587,500);
15,875 shares authorized; 15,875 shares outstanding,
actual; no shares outstanding, pro forma and as
adjusted.............................................. 16 -- --
Series C Convertible Preferred Stock, $1.00 par value
(aggregate liquidation preference of $1,352,500);
13,525 shares authorized; 13,525 shares outstanding,
actual; no shares outstanding, pro forma and as
adjusted.............................................. 14 -- --
Series D Convertible Preferred Stock, $1.00 par value
(aggregate liquidation preference of $6,916,575);
74,800 shares authorized; 69,165.75 shares
outstanding, actual; no shares outstanding, pro forma
and as adjusted....................................... 69 -- --
Series E Convertible Preferred Stock, $1.00 par value
(aggregate liquidation preference of $3,826,160);
45,000 shares authorized; 29,432 shares outstanding,
actual; no shares outstanding, pro forma and as
adjusted.............................................. 29 -- --
Common Stock, $0.01 par value; 18,650,000 shares
authorized, actual; 30,000,000 shares authorized, pro
forma and as adjusted; 1,173,370 shares outstanding,
actual; 13,973,145 shares outstanding, pro forma;
17,373,145 shares outstanding, as adjusted(1)......... 12 140 174
Additional paid-in capital.............................. 13,816 13,816 44,602
Accumulated deficit..................................... (10,534) (10,534) (10,534)
Treasury stock, at cost................................. (453) (453) (453)
-------- -------- --------
Total stockholders' equity............................ 2,969 2,969 33,789
-------- -------- --------
Total capitalization.......................... $ 2,969 $ 2,969 $ 33,789
======== ======== ========

- ---------------
(1) Excludes 2,741,500 shares of Common Stock issuable upon exercise of options
outstanding at March 31, 1996. Between March 31, 1996 and June 30, 1996,
options to purchase 1,019,252 shares of Common Stock were exercised for
aggregate consideration of approximately $1.0 million, options to purchase
an additional 1,456,000 shares of Common Stock were granted at an exercise
price of $8.25 per share, and 1,742,287 shares of Common Stock were
reserved for issuance upon the grant of options in the future pursuant to
the Company's stock option and stock purchase plans. See
"Management -- Stock Option Plans" and "-- 1996 Employee Stock Purchase
Plan."

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DILUTION

The pro forma net tangible book value of the Common Stock as of March 31,
1996 was approximately $3.0 million or $0.21 per share. Pro forma net tangible
book value per share represents the amount of total tangible assets less total
liabilities, divided by the pro forma number of shares of Common Stock
outstanding. As of March 31, 1996, the Company had no intangible assets. After
giving effect to the sale by the Company of the 3,400,000 shares of Common Stock
offered hereby (based upon the initial public offering price of $10.00 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company), the pro forma as adjusted net
tangible book value of the Company as of March 31, 1996 would have been
approximately $33.8 million or $1.95 per share. This represents an immediate
increase in net tangible book value of $1.74 per share to existing stockholders
and an immediate dilution in net tangible book value of $8.05 per share to new
investors purchasing shares in this offering. The following table illustrates
this per share dilution:

Initial public offering price....................................... $10.00
Pro forma net tangible book value as of March 31, 1996............ $0.21
Increase in pro forma net tangible book value attributable to new
investors...................................................... 1.74
-----
Pro forma as adjusted net tangible book value after offering........ 1.95
------
Dilution to new investors........................................... $ 8.05
======

The following table sets forth, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and to be paid by new investors (at the initial public
offering price of $10.00 per share and before deducting underwriting discounts
and commissions and estimated offering expenses payable by the Company):

SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- -------------

Existing stockholders.......... 13,973,145 80.4% $13,502,984 28.4% $ 0.97
New investors.................. 3,400,000 19.6 34,000,000 71.6 10.00
---------- ----- ----------- -----
Total........................ 17,373,145 100.0% $47,502,984 100.0%
========== ===== =========== =====

The calculation of pro forma net tangible book value and the other
computations above assume no exercise of options outstanding at March 31, 1996
to purchase an aggregate of 2,741,500 shares of Common Stock. Between March 31,
1996 and June 30, 1996, options to purchase 1,019,252 shares of Common Stock
were exercised for aggregate consideration of approximately $1.0 million and
options to purchase an additional 1,456,000 shares of Common Stock were granted
at an exercise price of $8.25 per share. To the extent that any of the options
outstanding at June 30, 1996 are exercised or that any of the remaining
1,742,287 shares of Common Stock currently reserved for issuance under the
Company's stock option and stock purchase plans are issued, there may be
additional dilution to new investors. See "Capitalization," "Management -- Stock
Option Plans" and "-- 1996 Employee Stock Purchase Plan."

19
20

SELECTED FINANCIAL DATA

The following selected financial data for the years ended December 31, 1994
and 1995 have been derived from, and are qualified by reference to, the
financial statements of the Company audited by Deloitte & Touche LLP,
independent accountants, included elsewhere in this Prospectus, and should be
read in conjunction with those financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The following selected financial data for the year ended December
31, 1993 have been derived from, and are qualified by reference to, the
financial statements of the Company audited by Price Waterhouse LLP, independent
accountants, included elsewhere in this Prospectus, and should be read in
conjunction with those financial statements and notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
following selected financial data for the years ended December 31, 1991 and 1992
have been derived from audited financial statements not included in this
Prospectus. The following selected financial data for the three months ended
March 31, 1995 and 1996 have been derived from, and are qualified by reference
to, the unaudited financial statements of the Company included elsewhere in this
Prospectus, and should be read in conjunction with those financial statements
and Management's Discussion and Analysis of Financial Condition and Results of
Operations. In the opinion of management of the Company, such unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments and accruals, that the Company considers necessary for a
fair presentation. The results of operations for the three-month period ended
March 31, 1996 are not necessarily indicative of the results which may be
expected for the full year.

THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Revenue:
Product...................................... 107 21 $ 219 $ 181 $ 406 $ 202 $ 5
License and royalty.......................... -- -- 608 1,009 1,037 337 648
Research and development..................... $ 5,417 $ 1,887 2,345 2,637 1,817 411 309
------- ------- ------- ------- ------ ------ -------
Total revenue.............................. 5,524 1,908 3,172 3,827 3,260 950 962
------- ------- ------- ------- ------ ------ -------
Costs and expenses:
Cost of product revenue...................... 15 96 122 113 243 84 4
Cost of research and development revenue..... 2,810 1,790 1,701 2,054 1,178 364 248
Research and development..................... 2,067 1,886 1,341 1,438 1,155 346 352
Selling and marketing........................ 16 49 221 329 412 90 141
General and administrative................... 1,627 1,354 815 988 726 182 199
------- ------- ------- ------- ------ ------ -------
Total costs and expenses................... 6,535 5,175 4,200 4,922 3,714 1,066 944
------- ------- ------- ------- ------ ------ -------
Income (loss) from operations.................. (1,011) (3,267) (1,028) (1,095) (454) (116) 18
Interest income................................ 77 18 36 83 111 29 23
------- ------- ------- ------- ------ ------ -------
Net income (loss).............................. $ (934) $(3,249) $ (992) $(1,012) $ (343) $ (87) $ 41
======= ======= ======= ======= ====== ====== =======
Pro forma net income (loss) per common
share(1)..................................... $(0.17) $(0.04) $ 0.00
====== ====== =======
Pro forma weighted average number of common
shares outstanding(1)........................ 2,045 2,032 15,109
====== ====== =======

DECEMBER 31, MARCH
--------------------------------------------------- 31,
1991 1992 1993 1994 1995 1996
------- ------- ------- ------- ------- -------

BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 335 $ 813 $186 $2,566 $2,154 $2,047
Working capital.............................. 765 1,114 281 2,877 2,516 2,617
Total assets................................. 2,158 1,902 978 3,930 3,228 3,351
Total liabilities............................ 738 405 493 684 309 382
Total stockholders' equity................... 1,419 1,497 485 3,246 2,920 2,969

- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the method
of calculation of the pro forma weighted average number of common shares
outstanding.

20
21

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Aware was founded in March 1986. During its first seven years, the Company
was engaged primarily in research, specializing in wavelet mathematics
applications, digital compression, and telecommunications and channel modulation
and coding. The Company holds thirteen patents in areas related to wavelet
mathematics, digital compression and similar technologies. The Company's revenue
during this period consisted largely of research grants from agencies of the
U.S. government and certain commercial companies. As the Company has moved from
research to commercialization, the percentage of funding from the U.S.
government has declined significantly and is expected to decline further. Most
of the Company's recent work for the U.S. government has been done pursuant to
contracts on a time and materials basis, as and when requested by the
government.

In 1993, the Company shifted its business from contract research toward
development of ADSL and other broadband technologies and data and video
compression products. The Company now offers software and modems incorporating
its ADSL technology and software-based compression products and will receive
royalties on the sale, if any, of ADSL Chipsets by ADI.

Most of the Company's revenue to date related to ADSL and other broadband
technologies has come from ADI and certain telco suppliers as fees for
development work and as nonrefundable prepaid royalties. The Company has only
recently introduced products incorporating ADSL technology and had not received
any revenue from sale of these products as of March 31, 1996. Accordingly, the
comparisons for the years 1994 and 1995 and for the three months ended March 31,
1995 and 1996 may not be indicative of future performance because the Company
was changing its management team, strategic direction, customer base, revenue
sources and product offerings.

The Company has sustained annual losses since its inception and the effort
needed to bring products to commercialization will require the Company to
increase significantly the amount of its expenditures in technical development,
sales and marketing and manufacturing. While the Company achieved modest
profitability in the third and fourth quarters of 1995, and the first quarter of
1996, there can be no assurance that this will continue. The Company's product
revenue has increased in each of the last three years as the Company has begun
to obtain revenue from sales of its compression products.

The Company's operating expenses are based in part on its expectations of
future sales, and the Company's expense levels are generally committed in
advance of sales. The Company currently plans to continue to expand and increase
its operating expenses in an effort to generate and support additional future
revenue. If sales for any quarter do not materialize as expected, the Company's
results of operations for that quarter would be adversely affected. Net income
may be disproportionately affected by a reduction of revenues because only a
small portion of the Company's expenses vary in proportion to its revenue. See
"Risk Factors -- Fluctuations in Quarterly Results; Lack of Backlog."

The Company has only recently begun the process of developing the
management and operational capabilities and financial and accounting systems and
controls necessary for the transition from its historic business of research and
development to a business that develops, manufactures, markets and supports
products and services for the commercial telecommunications marketplace. The
Company hired its current Chief Financial Officer on June 14, 1996. From January
1995 to June 1996, the

21
22

Company did not have a Chief Financial Officer and had a financial and
accounting staff consisting of a single individual. The Company believes that,
without additional personnel and other resources, its financial and accounting
systems and controls will not be adequate to conduct the commercial
telecommunications business which the Company proposes to conduct. The Company
will be responsible for hiring sufficient accounting personnel and establishing
financial and accounting systems and controls adequate to conduct the Company's
proposed business as described in this Prospectus. There can be no assurance
that the Company will be successful in achieving these objectives. See "Risk
Factors -- Risks Associated with Managing a Changing Business."

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
statement of operations data as a percentage of total revenue:

YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
------------------------- -----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----

Revenue:
Product...................................... 6.9% 4.7% 12.5% 21.3% .5%
License and royalty.......................... 19.2 26.4 31.8 35.5 67.3
Research and development..................... 73.9 68.9 55.7 43.2 32.2
----- ----- ----- ----- -----
Total revenue............................. 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of product revenue...................... 3.9 2.9 7.5 8.9 .5
Cost of research and development revenue..... 53.6 53.7 36.1 38.3 25.8
Research and development..................... 42.3 37.6 35.4 36.4 36.5
Selling and marketing........................ 6.9 8.6 12.6 9.5 14.7
General and administrative................... 25.7 25.8 22.3 19.1 20.7
----- ----- ----- ----- -----
Total costs and expenses.................. 132.4 128.6 113.9 112.2 98.2
----- ----- ----- ----- -----
Income (loss) from operations.................. (32.4) (28.6) (13.9) (12.2) 1.8
Interest income................................ 1.1 2.2 3.4 3.0 2.4
----- ----- ----- ----- -----
Net income (loss).............................. (31.3)% (26.4)% (10.5)% (9.2)% 4.2%
===== ===== ===== ===== =====

THREE MONTHS ENDED MARCH 31, 1996 AND 1995

Product Revenue. Product revenue consists primarily of revenue from the
sale of tangible products, such as ADSL modems and video editing chipset
products, which are manufactured by the Company or third party suppliers.
Product revenue decreased by 98% from $202,000 in the first three months of 1995
to $5,000 in the first three months of 1996. As a percentage of total revenue,
product revenue decreased from 21% in the first three months of 1995 to 1% in
the first three months of 1996. The decline is primarily attributable to the
Company having no revenue in the first quarter of 1996 from the sale of video
editing chipset products, which the Company discontinued in the fourth quarter
of 1995. Revenue in the first quarter of 1996 included a nominal amount of
revenue from the sale of ADSL modems.

License and Royalty Revenue. License and royalty revenue consists
primarily of revenue from the sale of intellectual property, such as hardware
and software technology licenses, compression software licenses, and royalties
from the sale of chipsets by customers who have licensed the Company's
technology. As such revenue has only a nominal cost associated with it, the
Company does not report a separate cost of license and royalty revenue line in
its Statements of Operations.

License and royalty revenue increased by 92% from $337,000 in the first
three months of 1995 to $648,000 in the first three months of 1996. As a
percentage of total revenue, license and royalty

22
23

revenue increased from 36% in the first three months of 1995 to 67% in the first
three months of 1996. The increase is primarily attributable to a significant
technology license sale to DSC Telecom L.P. in the first quarter of 1996.

Research and Development Revenue. Research and development revenue
consists primarily of revenue from commercial contract engineering and
development, and government research contracts. Research and development revenue
decreased by 25%, from $411,000 in the first three months of 1995 to $309,000 in
the first three months of 1996. As a percentage of total revenue, research and
development revenue decreased from 43% in the first three months of 1995 to 32%
in the first three months of 1996. This decrease in dollar amount and as a
percentage of total revenue is due to the Company's shift away from contract
research activities toward the development of commercial products.

Cost of Product Revenue. Cost of product revenue consists primarily of
direct material, direct labor and overhead costs to produce the Company's
products, and cost of goods for purchases of finished goods inventory from third
party suppliers. Cost of product revenue decreased by 95% from $84,000 in the
first three months of 1995 to $4,000 in the first three months of 1996. The
dollar decrease in cost of product revenue and the percentage increase in cost
of product revenue is primarily related to the discontinuance of the sale of
video editing chipset products in the fourth quarter of 1995, and the
commencement of ADSL modem shipments in the first quarter of 1996.

Cost of Research and Development Revenue. Cost of research and development
revenue consists primarily of direct labor, direct material and travel expenses
associated with commercial contract engineering and development, and government
research contracts. Costs of research and development revenue decreased by 32%,
from $364,000 in the first three months of 1995 to $248,000 in the first three
months of 1996. As a percentage of research and development revenue, related
costs decreased from 89% in the first three months of 1995 to 80% in the first
three months of 1996. The decrease in dollar amount is due to lower revenue from
research contracts in the first quarter of 1996 as compared to the first quarter
of 1995. The decrease as a percentage of research and development revenue is a
result of higher margin contracts in the first quarter of 1996.

Research and Development Expense. Research and development expense
consists primarily of employee and consultant costs and supplies necessary to
develop and enhance the Company's products, as well as a portion of the
Company's operating expenses, including rent, attributable to its research and
development activities. These expenses increased from $346,000 in the first
three months of 1995 to $352,000 in the first three months of 1996. As a
percentage of total revenue, research and development expense remained
consistent at 36%. Higher research and development spending in the first three
months of 1996 was driven by increased spending on research and development
efforts related to ADSL and HFC projects. These expense increases were largely
offset by lower spending as a result of the discontinuance of research involving
audio compression technology and lower facilities cost as a result of the
relocation of the Company's facilities in June 1995.

Selling and Marketing Expense. Selling and marketing expense consists
primarily of salaries for sales and marketing personnel and travel and product
advertising expenses. These expenses increased by 57% from $90,000 in the first
three months of 1995 to $141,000 in the first three months of 1996. As a
percentage of total revenue, selling and marketing expense increased from 10% in
the first three months of 1995 to 15% in the first three months of 1996. This
increase in dollar amount and as a percentage of total revenue is due primarily
to increased product advertising.

General and Administrative Expense. General and administrative expense
consists of salary and benefits for administrative officers and support
personnel, allocated rent expense and professional services, such as legal and
audit expenses. These expenses increased by 10%, from $182,000 in the first
three months of 1995 to $199,000 in the first three months of 1996. As a
percentage of total revenue, general and administrative expense increased from
19% in the first three months of 1995 to 21% in the first three months of 1996.
This increase in dollar amount and as a percentage of total revenue is due
primarily to additions to the Company's management team.

23
24

Interest Income. Interest income is generated primarily from the Company's
investment of proceeds from sales of its capital stock. Interest income
decreased by 21%, from $29,000 in the first three months of 1995 to $23,000 in
the first three months of 1996. This decrease is due primarily to lower average
cash balances and lower average interest rates during the first three months of
1996 as compared to the first three months of 1995.

YEARS ENDED DECEMBER 31, 1995 AND 1994

Product Revenue. Product revenue increased by 124% from $181,000 in 1994
to $406,000 in 1995. As a percentage of total revenue, product revenue increased
from 5% in 1994 to 13% in 1995. Product revenue in 1995 and 1994 was comprised
of sales of video editing chipset products. The increase in video editing
chipset product revenue was due primarily to significant orders from a customer
purchasing large quantities in 1995 before the Company discontinued that product
line.

License and Royalty Revenue. License and royalty revenue increased by 3%
from $1,009,000 in 1994 to $1,037,000 in 1995. As a percentage of total revenue,
license and royalty revenue increased from 26% in 1994 to 32% in 1995. The
increase in dollar amount and as a percentage of total revenue is due primarily
to increased sales of compression software products and royalty revenue in 1995,
offset by a decline in revenue from sales of technology licenses.

Research and Development Revenue. Research and development revenue
decreased by 31%, from $2,637,000 in 1994 to $1,817,000 in 1995. As a percentage
of total revenue, research and development revenue decreased from 69% in 1994 to
56% in 1995. This decrease in dollar amount and as a percentage of total revenue
is due primarily to a significant decrease in U.S. government research revenue
as a result of the Company's decision in 1995 to reduce its government research
activities. The decrease in government research revenue was partially offset by
an increase in commercial contract engineering revenue.

Cost of Product Revenue. Cost of product revenue increased by 115% from
$113,000 in 1994 to $243,000 in 1995. As a percentage of product revenue, cost
of product revenue decreased from 62% in 1994 to 60% in 1995. The slight
improvement in cost as a percentage of product revenue is due primarily to
marginally lower pricing from the third party supplier of video editing chipset
products as a result of higher volumes in 1995.

Cost of Research and Development Revenue. Cost of research and development
revenue decreased by 43%, from $2,054,000 in 1994 to $1,178,000 in 1995. As a
percentage of research and development revenue, related costs decreased from 78%
in 1994 to 65% in 1995. This decrease in dollar amount and as a percentage of
research and development revenue is due primarily to a decrease in expenses
associated with the reduction in U.S. government research activity.

Research and Development Expense. Research and development expense
decreased by 20%, from $1,438,000 in 1994 to $1,155,000 in 1995. As a percentage
of total revenue, research and development expense decreased from 38% in 1994 to
35% in 1995. This decrease in dollar amount and as a percentage of total revenue
is due primarily to the discontinuance, in January 1995, of research and
development efforts associated with audio compression technology, and lower
facilities costs as a result of the relocation of the Company's facilities in
June 1995. The Company anticipates that research and development spending will
increase in 1996 as the Company continues to develop and enhance its
telecommunications products.

Selling and Marketing Expense. Selling and marketing expense increased by
25%, from $329,000 in 1994 to $412,000 in 1995. As a percentage of total
revenue, selling and marketing expense increased from 9% in 1994 to 13% in 1995.
This increase in dollar amount and as a percentage of total revenue is due
primarily to increases in the Company's sales force and product advertising.

General and Administrative Expense. General and administrative expense
decreased by 27%, from $988,000 in 1994 to $726,000 in 1995. As a percentage of
total revenue, general and administrative

24
25

expense decreased from 26% in 1994 to 22% in 1995. This decrease in dollar
amount and as a percentage of total revenue is due primarily to management and
support staff reductions in January 1995.

Interest Income. Interest income increased by 34%, from $83,000 in 1994 to
$111,000 in 1995. This increase is due primarily to higher average cash balances
in 1995 as compared to 1994.

YEARS ENDED DECEMBER 31, 1994 AND 1993

Product Revenue. Product revenue decreased by 17% from $219,000 in 1993 to
$181,000 in 1994. As a percentage of total revenue, product revenue decreased
from 7% in 1993 to 5% in 1994. Product revenue in 1994 and 1993 was comprised of
sales of video editing chipset products. The decrease in dollars and as a
percentage of revenue was attributable to lower video editing chipset sales in
1994.

License and Royalty Revenue. License and royalty revenue increased by 66%
from $608,000 in 1993 to $1,009,000 in 1994. As a percentage of total revenue,
license and royalty revenue increased from 19% in 1993 to 26% in 1994. The
increase in dollar amount and as a percentage of total revenue is due primarily
to increased sales of compression software products and revenue from a
significant technology licensing sale in 1994.

Research and Development Revenue. Research and development revenue
increased by 12%, from $2,345,000 in 1993 to $2,637,000 in 1994. As a percentage
of total revenue, research and development revenue decreased from 74% in 1993 to
69% in 1994. This increase in dollar amount is due primarily to revenue from a
new U.S. government research contract and increased commercial research and
engineering business in 1994. The decrease as a percentage of total revenue is
attributable to the 44% increase in product revenue.

Cost of Product Revenue. Cost of product revenue decreased by 8% from
$122,000 in 1993 to $113,000 in 1994. As a percentage of product revenue, cost
of product revenue increased from 56% in 1993 to 62% in 1994. The increase in
cost as a percentage of product revenue is due primarily to marginally higher
pricing from the third party supplier of video editing chipset products as a
result of lower volumes in 1994 as compared to 1993.

Cost of Research and Development Revenue. Cost of research and development
revenue increased by 21%, from $1,701,000 in 1993 to $2,054,000 in 1994. As a
percentage of research and development revenue, related costs increased from 73%
in 1993 to 78% in 1994. This increase in dollar amount is due primarily to
increased direct material and labor costs associated with research and
development revenue growth in 1994.

Research and Development Expense. Research and development expense
increased by 7%, from $1,341,000 in 1993 to $1,438,000 in 1994, but decreased as
a percentage of total revenue from 42% in 1993 to 38% in 1994. This increase in
dollar amount is due primarily to increased spending related to the development
of the commercial product business. The decrease as a percentage of total
revenue is due to revenue growth which exceeded the rate of growth of research
and development spending.

Selling and Marketing Expense. Selling and marketing expense increased by
49%, from $221,000 in 1993 to $329,000 in 1994. As a percentage of total
revenue, selling and marketing expense increased from 7% in 1993 to 9% in 1994.
This increase in dollar amount and as a percentage of total revenue is due
primarily to increases in the Company's sales force and product advertising.

General and Administrative Expense. General and administrative expense
increased by 22%, from $815,000 in 1993 to $988,000 in 1994. As a percentage of
total revenue, general and administrative expense remained consistent at 26% in
1993 and 1994. This increase in dollar amount is due primarily to additions to
the Company's management team.

Interest Income. Interest income increased by 131%, from $36,000 in 1993
to $83,000 in 1994. This increase is due primarily to higher average cash
balances in 1994 as compared to 1993.

25
26

PRELIMINARY RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1996

Information with respect to the three months ended June 30, 1996 is based
upon the Company's preliminary and unaudited financial statements, which remain
subject to change. Interim periods are not necessarily indicative of results to
be expected for the entire fiscal year.

Total revenue for the second quarter of 1996 increased 213% from $361,000
in the second quarter of 1995 to approximately $1,129,000 in the second quarter
of 1996. The growth in total revenue was principally attributable to increases
in product revenue and license and royalty revenue, which was partially offset
by a decrease in research and development revenue. Product revenue increased
534% from $23,000 in the second quarter of 1995 to approximately $146,000 in the
second quarter of 1996. The increase in product revenue in the second quarter of
1996 is primarily due to the sale of ADSL modems to telcos and others who are
evaluating the Company's products. License and royalty revenue increased from
$55,000 in the second quarter of 1995 to approximately $792,000 in the second
quarter of 1996. The increase in license and royalty revenue in the second
quarter of 1996 is primarily due to an increase in the sale of compression
software licenses, and sales of ADSL and other broadband technology licenses.
Research and development revenue declined by 33% from $283,000 in the second
quarter of 1995 to approximately $191,000 in the second quarter of 1996. The
decrease is primarily the result of lower revenue from commercial research and
development contracts partially offset by a modest increase in revenue from U.S.
government research and development contracts.

Income or loss from operations improved from a loss of $562,000 in the
second quarter of 1995 to a profit of approximately $18,000 during the second
quarter of 1996. Net income in the second quarter of 1996 was approximately
$48,000 as compared to a net loss of $530,000 in the second quarter of 1995. The
improvement in profitability was principally driven by a 213% increase in
revenue. Total costs and expenses increased by 20% from $923,000 in the second
quarter of 1995 to approximately $1,111,000 in the second quarter of 1996. The
lower rate of spending increase than that for revenue growth is primarily the
result of cost containment efforts initiated by the Company in 1995.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly financial data
for the eight quarters ended March 31, 1996. In the opinion of management, this
information has been presented on the same basis as the audited financial
statements appearing elsewhere in this Prospectus, and includes all adjustments,
consisting only of normal recurring adjustments and accruals, that the Company
considers necessary for a fair presentation. Such quarterly results are not
necessarily indicative of future results of operations and should be read in
conjunction with the financial statements and notes thereto.

THREE MONTHS ENDED
----------------------------------------------------------------------------------------
JUN. SEP. DEC. MAR.
30, 30, 31, 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31,
1994 1994 1994 1995 1995 1995 1995 1996
------- ------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)

Revenue:
Product............................. $ 26 $ 37 $ 61 $ 202 $ 23 $ 100 $ 82 $ 5
License and royalty................. 133 375 426 337 55 350 294 648
Research and development............ 582 749 784 411 283 513 610 309
------- ------- ------- ------- -------- -------- -------- --------
Total revenue..................... 741 1,161 1,271 950 361 963 986 962
------- ------- ------- ------- -------- -------- -------- --------
Costs and expenses:
Cost of product revenue............. 25 24 31 84 62 46 50 4
Cost of research and development
revenue........................... 476 525 631 364 242 259 312 248
Research and development............ 320 328 486 346 313 237 260 352
Selling and marketing............... 71 84 114 90 112 101 109 141
General and administrative.......... 216 274 306 182 194 165 186 199
------- ------- ------- ------- -------- -------- -------- --------
Total costs and expenses.......... 1,108 1,235 1,568 1,066 923 808 917 944
------- ------- ------- ------- -------- -------- -------- --------
Income (loss) from operations......... (367) (74) (297) (116) (562) 155 69 18
Interest income....................... 7 24 45 29 32 25 25 23
------- ------- ------- ------- -------- -------- -------- --------
Net income (loss)..................... $ (360) $ (50) $ (252) $ (87) $ (530) $ 180 $ 94 $ 41
======= ======= ======= ======= ======= ====== ======= =======

26
27

The following table sets forth certain unaudited quarterly financial data
for the eight quarters ended March 31, 1996 as a percentage of total revenue.

THREE MONTHS ENDED
----------------------------------------------------------------------------------------
JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31,
1994 1994 1994 1995 1995 1995 1995 1996
------- -------- -------- -------- -------- -------- -------- --------

Revenue:
Product............................. 3.5% 3.2% 4.8% 21.3% 6.4% 10.4% 8.3% .5%
License and royalty................. 18.0 32.3 33.5 35.5 15.2 36.3 29.8 67.3
Research and development............ 78.5 64.5 61.7 43.2 78.4 53.3 61.9 32.2
----- ----- ----- ----- ------ ----- ----- -----
Total revenue..................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of product revenue............. 3.4 2.1 2.5 8.9 17.2 4.8 5.1 .5
Cost of research and development
revenue........................... 64.2 45.2 49.6 38.3 67.0 26.9 31.6 25.8
Research and development............ 43.2 28.3 38.2 36.4 86.7 24.6 26.3 36.5
Selling and marketing............... 9.6 7.2 9.0 9.5 31.0 10.5 11.1 14.7
General and administrative.......... 29.1 23.6 24.0 19.1 53.8 17.1 18.9 20.7
----- ----- ----- ----- ------ ----- ----- -----
Total costs and expenses.......... 149.5 106.4 123.3 112.2 255.7 83.9 93.0 98.2
Income (loss) from operations......... (49.5) (6.4) (23.3) (12.2) (155.7) 16.1 7.0 1.8
Interest income....................... 0.9 2.1 3.5 3.0 8.9 2.6 2.5 2.4
----- ----- ----- ----- ------ ----- ----- -----
Net income (loss)..................... (48.6)% (4.3)% (19.8)% (9.2)% (146.8)% 18.7% 9.5% 4.2%
===== ===== ===== ===== ====== ===== ===== =====

LIQUIDITY AND CAPITAL RESOURCES

Since its inception in March 1986, the Company has financed its operations
primarily through private sales of equity securities, raising a total of
approximately $14,000,000 through March 31, 1996. In 1994, the Company raised
$3,789,000 from the sale of its Series E Preferred Stock. In 1995 and the three
months ended March 31, 1996, the Company received $16,000 and $8,000,
respectively, from the exercise of employee stock options.

The Company's operating activities used net cash of $1,022,000, $194,000
and $109,000 in 1994, 1995 and the three months ended March 31, 1996,
respectively. The reduction in cash used is primarily attributable to improved
cost management.

On March 31, 1996, the Company had working capital of $2,617,000 as
compared to $2,516,000 on December 31, 1995. Working capital on March 31, 1996
included $2,047,000 in cash and cash equivalents, $803,000 in accounts
receivable, $41,000 in unbilled accounts receivable, $97,000 in inventories and
$11,000 in prepaid expenses. From December 31, 1995 to March 31, 1996, the
Company's accounts receivable increased $302,000 primarily due to license sales
in March 1996. The Company's inventories increased $57,000 from December 31,
1995 to March 31, 1996 in anticipation of increased product sales by the Company
in the second quarter of 1996. The Company had no debt outstanding on March 31,
1996 or December 31, 1995.

The Company's investing activities in 1994, 1995 and the three months ended
March 31, 1996 consisted primarily of purchases of engineering, manufacturing,
computer and phone equipment. The substantially depreciated base of property and
equipment results from capital purchases approximating depreciation and
amortization expense in the past three years. Capital purchases were $6,000 in
the three months ended March 31, 1996 primarily as a result of the timing of
such purchases. The Company expects that capital purchases will equal or exceed
historical levels during the remainder of 1996. The Company does not currently
have significant commitments outstanding to acquire additional property or
equipment.

The Company intends to use the net proceeds from this offering to continue
to develop and market its products and for other general corporate purposes,
including working capital, research and development, capital expenditures, and
hiring of additional personnel. See "Use of Proceeds." The Company believes that
cash generated from operations and the net proceeds to the Company of this

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offering will be sufficient, based on the Company's presently anticipated needs,
to fund necessary capital expenditures, to provide adequate working capital and
to finance the Company's planned expansion for at least the next twelve months.
There can be no assurance, however, that the Company will not require additional
financing prior to such date to fund operations. In addition, the Company may
require additional financing after such date to fund its operations. There can
be no assurance that any additional financing will be available to the Company
on acceptable terms, or at all, when required by the Company. If additional
funds are raised by issuing equity securities, further dilution to the existing
stockholders will result. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its research and
development or manufacturing programs or to obtain funds through arrangements
that may require the Company to relinquish rights to certain of its technologies
or potential products or other assets that the Company would not otherwise
relinquish. Accordingly, the inability to obtain such financing could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Capital Requirements."

INCOME TAXES

The Company has a history of net losses and therefore has not paid any
material amount of federal or state income taxes. As of December 31, 1995, the
Company had net operating loss carryforwards of approximately $9,664,000 and
approximately $576,000 of research and development tax credit carryforwards to
offset future federal taxable income and liabilities. To the extent not
utilized, the net operating loss and tax credit carryforwards expire between
2003 and 2010.

OTHER INFORMATION

The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets to Be Disposed Of." The Company adopted this standard on
January 1, 1996. This statement establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used for long-lived assets and certain
identifiable intangibles to be disposed of. Adoption did not have a material
effect on the Company's financial position or results of operations.

In November 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company adopted this standard on January 1, 1996. As
permitted by SFAS 123, the Company intends to continue to apply Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
will make the pro forma disclosures required by SFAS No. 123. The adoption of
SFAS No. 123 did not have a material impact on the Company's financial condition
or results of operations.

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BUSINESS

OVERVIEW

Aware, Inc. ("Aware" or the "Company") designs, develops and markets
telecommunications software, chipsets and modems which incorporate ADSL
technology and increase the speed of data communications over conventional
copper telephone lines. The Company's products and services are designed to
allow telephone companies ("telcos") to utilize their installed bases of
dedicated copper lines to provide both residential and business customers with
interactive data transmission at speeds much higher than currently available.

The Company's products include software and hardware interfaces that
integrate ADSL chipsets into modems and other communications devices, and high
speed ADSL Internet Access Modems that incorporate the Company's proprietary
technology and software. The Company has developed chipsets incorporating the
Company's ADSL technology (the "ADSL Chipset") with Analog Devices, Inc.
("ADI"), a leading supplier of integrated circuits. ADI has an exclusive license
to manufacture and sell the chipsets for which the Company receives royalty
payments and therefore the Company is substantially dependent on ADI to achieve
its business objectives. Several large telcos, including GTE Corporation and
BellSouth Corporation, and a number of OEMs that supply telcos, including DSC
Communications Corporation and RelTec Corporation, are testing the Company's
products. The Company has only recently introduced products incorporating ADSL
technology and had approximately $140,000 in revenue from sale of these products
as of June 30, 1996.

BACKGROUND

Copper wire networks, developed and installed over decades to provide POTS
to customers worldwide, are estimated to include over 150 million lines in the
United States and over 550 million lines worldwide, according to industry
sources. These networks represent an undepreciated capital investment of
approximately $100 billion.

To date, telcos' copper wire infrastructures have not proven adequate for
the increasing volume of traffic generated by computers remotely connected to
each other and the Internet. Digital information requires more bandwidth than
traditional analog voice communication if it is to be transmitted at a speed
that is satisfactory to the computer user. Currently, the fastest transmission
rate readily available to typical home or remote office computer users over
existing copper wire is achieved through the use of a 28.8 kilobits per second
("Kbps") modem, although many users still employ modems with speeds ranging from
2.4 Kbps to 14.4 Kbps. Even at 28.8 Kbps, the transmission of a typical one
megabyte data file requires three to four minutes. For the over 56 million
estimated Internet users in 1995 and the over 199 million estimated to be using
the Internet by 1999, this transmission rate is one of the chief

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frustrations of using the World Wide Web, which is the fastest growing and most
data intensive part of the Internet.

Increasingly, telcos are seeking to upgrade their networks by replacing
copper wire with fiber optic cable which permits high speed data transmission,
particularly throughout the backbone of the network that links their central
offices to one another. However, installing fiber optic cable all the way into
the home or business is, in most cases, prohibitively expensive, with
fiber-to-the-curb only marginally less so. Therefore, the Company believes that,
for the foreseeable future, the "last mile" of the phone network will continue
to consist of existing copper wire.

In addition to increasing demands for greater bandwidth from consumers,
telcos are facing new competition brought about by recent telecommunications
deregulation. The enactment of the Telecommunications Act of 1996 (the
"Telecommunications Act") has reduced barriers to entry to the
telecommunications market and has eliminated many restrictions on the provision
of a wide range of telecommunications services by telcos and other service
providers. For example, cable companies and alternative access providers are now
able to offer phone service to customers. Cable companies are exploring ways to
use new technologies to compete with telcos in order to satisfy their customers'
need for greater bandwidth. Some cable companies are testing cable modems, which
permit a customer to effect two-way data transmission over the customer's
existing cable connection. The increased competition, together with the
opportunity to fulfill their customers' demands for more services, have caused
telcos to accelerate their efforts to provide their customers with faster and
higher quality data transmission.

Technologies for Increased Bandwidth

Telcos are seeking cost-effective technology to accommodate high speed data
transmission over copper wires. Some of these technologies are described below:

ISDN. In the early 1980s, telcos introduced Integrated Service Digital
Network ("ISDN") technology, which provides digital transmission over copper
wire typically at basic rates up to 144 Kbps. Telcos have only recently begun to
offer ISDN technology on a broad basis. Using ISDN technology, a customer can
download a one megabyte file in approximately one minute. Although this is
several times faster than a voiceband modem, the market penetration of existing
ISDN technology has been limited because its equipment and installation costs
are relatively high, and it does not allow simultaneous POTS and data
transmission on those wires.

T-1. T-1 (E-1 in countries outside the U.S.) is a multiplexing format that
allows digital conversion of an analog line. Once converted, a T-1 digital line
can deliver data at speeds up to 1.544 megabits per second ("Mbps") (2.048 Mbps
for E-1). A customer can download a one megabyte file using a T-1 line in
approximately 5 seconds. However, T-1 service cannot use the existing copper
wire networks without expensive and time consuming modifications, including
installation of repeaters every 3,000 to 5,000 feet to regenerate the signal as
it passes along the line. T-1 also requires two sets of twisted-pair copper
wires and does not allow simultaneous POTS and data transmission on those wires.

HDSL. In 1992, telcos introduced High bit-rate Digital Subscriber Line
("HDSL") technology, which reduces the costs of installing T-1 service. HDSL
increases the distance of T-1 transmission over copper wires to approximately
12,000 feet, which reduces the need for repeaters. As a result, some telcos are
deploying HDSL technology in their local access networks. However, HDSL still
requires two sets of twisted-pair copper wires and does not allow simultaneous
POTS and data transmission on those wires.

ADSL. Telcos are currently considering deployment of Asymmetric Digital
Subscriber Line ("ADSL") technology, which uses digital signal processing
technology to expand the useable bandwidth of copper telephone wire. ADSL was
initially created in the late 1980s by Bellcore, the research entity jointly
created and funded by the Regional Bell Operating Companies ("RBOCs"). ADSL
technology allows non-repeated transmission of data at a distance of up to
18,000 feet over

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telcos' existing copper networks at a rate of up to 8 Mbps downstream to the
customer and at a rate of up to 640 Kbps upstream from the customer, with the
speed of transmission decreasing as distance increases. A typical ADSL
application is expected to allow a customer to download a one megabyte file in
approximately two seconds. In addition, ADSL allows simultaneous POTS and high
speed digital data transmission on a single set of twisted-pair copper wires.

THE AWARE SOLUTION

Aware is developing software, chipsets and modems incorporating ADSL
technology that will provide high speed data transmission over telcos' extensive
installed bases of copper wire networks. The Company's technology and products
are intended to permit telcos to upgrade the last mile of their networks in a
flexible and cost-effective way, compared to more costly alternatives such as
complete replacement of copper wires with fiber optic cable into customers'
premises. The Company's initial ADSL product, the ADSL Internet Access Modem, is
designed to enable telcos to achieve much higher transmission speeds using the
existing copper wires that make the final connection between their central
offices and their customers.

The Company designs and develops products utilizing its proprietary
software to implement ADSL that it believes have advantages over its
competitors' ADSL products. The ADSL products developed by Aware incorporate
proprietary software and algorithms based on digital signal processing
technology as well as application specific integrated circuits ("ASICs"). In
contrast to the approach taken by some competing developers of ADSL technology,
Aware's approach is to maintain a high level of functionality in the software
component of the product as opposed to the ASIC. The Company believes that this
approach allows it to engineer improvements in its technology quickly and
efficiently, rather than having to design and produce a new ASIC each time an
improvement is made. The Company's ADSL technology enables data communications
protocols, such as Frame Relay, TCP/IP and ATM, to operate at higher
transmission rates. The Company has chosen to use the multi-carrier Discrete
Multi-Tone ("DMT") modulation technique for ADSL, rather than the single-carrier
Carrierless Amplitude Phase ("CAP") modulation technique. The Company believes
that its ADSL/DMT technology allows it to offer software and products that
transmit data at a higher rate and with greater reliability than software and
products using the CAP technique. As a result of its collaboration with ADI, a
chipset incorporating the Company's ADSL technology is currently available for
testing by telcos.

STRATEGY

The Company's objective is to be the leading supplier of last mile
technologies for high speed, interactive networks. The Company's strategy to
achieve this objective encompasses the following elements:

Encourage Adoption of the Company's ADSL Technology. The Company has
entered into development agreements with leading OEMs of telecommunications
infrastructure equipment to permit incorporation of the Company's ADSL
technology into OEMs' systems. The Company intends to partner with these and
other OEMs to encourage telcos to adopt the Company's ADSL technology. The
Company plans to introduce its technology to the marketplace by selling its ADSL
products to telcos and telco suppliers, including GTE Corporation ("GTE") and
the RBOCs, for evaluation purposes. By participating in trials of ADSL
technology conducted by telcos and their suppliers, the Company hopes to
demonstrate the superiority of its ADSL technology and to encourage broad
deployment of systems using the Company's products.

Offer Products Throughout the Distribution Chain. The Company intends to
incorporate its core ADSL technology into multiple product offerings. The
Company currently offers a high speed ADSL Internet Access Modem and separately
licenses software and hardware interfaces for ADSL systems. The Company
developed the ADSL Chipset with ADI and will receive royalty payments from ADI
upon the sale, if any, of the ADSL Chipset. The Company also intends to offer
board and system level

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products that incorporate the Company's ADSL technology and the ADSL Chipset.
The Company believes that, by offering multiple products, it can participate at
various points of sale in the distribution chain and offer solutions for a wide
range of customers, including OEMs, telcos, businesses and home users.

Leverage DMT Technology Leadership in ADSL. The Company believes that, as
a result of its significant investment in telecommunications technologies over
the last decade, it has a lead over its competitors in the development of
products and services incorporating ADSL technology. The Company has developed
expertise in its ADSL applications using DMT multi-carrier technology. The
Company intends to continue to use its experience in digital communications
systems and software design to develop additional solutions for last mile
communications. The Company believes that its expertise in this area gives it a
competitive advantage by reducing product development costs and shortening the
time-to-market of its products and services and those of its OEM customers.

Continue to Emphasize Software Solutions. Telecommunications chipsets
today are built using a combination of ASICs and programmable devices, a
development made possible using digital signal processing technology. The
Company has expertise in digital signal processing technology, which allows it
to develop software that efficiently implements complex mathematical algorithms.
The Company intends to continue to maintain a high level of functionality in the
software component of products it develops. By adopting an approach in which
many critical functions are contained in the software and programmable devices
rather than in the ASIC, the Company believes it can respond more rapidly to
changes in the marketplace and offer OEMs and telcos products that are
customized for their specific needs.

Develop Technologies Using DWMT. The Company intends to continue to
develop new technologies that increase the speed of data transmission over
copper wires. The Company has invented and patented its own core technology in
multi-carrier modulation, called Discrete Wavelet Multi-Tone ("DWMT"), which the
Company believes will allow it to develop products that transmit data at higher
speeds than products using DMT technology. The Company is applying its DWMT
technology to develop new products addressing emerging technologies, such as
Symmetrical Digital Subscriber Line ("SDSL") and Very high speed Digital
Subscriber Line ("VDSL").

Develop Solutions for Cable Networks. With the deregulation of the
telecommunications industry, cable companies have started testing upgrades to
their hybrid fiber coaxial cable ("HFC") networks to provide two-way
communications. While existing cable networks are not well suited for two-way
communication, the Company believes that, using its DWMT technology, it may be
able to offer cable companies and telcos products that provide cost-effective,
high speed, two-way communications on HFC networks. The Company has an agreement
with a subsidiary of DSC Communications Corporation ("DSC") to develop telephony
modems for HFC networks.

TELECOMMUNICATIONS PRODUCTS

Existing ADSL Products

Modems. The Company developed and markets the ADSL Internet Access Modem,
which contains the ADSL Chipset and software and hardware interfaces developed
by the Company. In a typical configuration, the Company's ADSL Internet Access
Modem is designed to receive data at speeds of up to 4.4 Mbps and send it at
speeds of up to 440 Kbps at a distance of up to 12,000 feet over standard copper
wire. Through June 30, 1996, the Company had manufactured and sold only 28
technical evaluation models of the ADSL Internet Access Modem for trial use by
OEMs and telcos. This technical evaluation model was designed to demonstrate
technical feasibility and will not be suitable for mass production without
additional redesign to reduce the power requirements, size and cost of the
model.

Chipsets. The Company and ADI developed the ADSL Chipset, which ADI
markets. The Company will receive a royalty from ADI on any sales of the ADSL
Chipset. The ADSL Chipset uses a

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combination of ASICs, digital signal processors and proprietary software
developed by the Company to provide all the functions necessary in a modem. The
ADSL Chipset meets the performance objectives of the DMT multi-carrier
modulation technique chosen by the American National Standards Institute
("ANSI") as the standard for ADSL.

Software and Hardware Interfaces. The Company develops software and
hardware interfaces for the ADSL Chipset which can be used to connect the
chipset with PCs, network and central office equipment and other telephony and
data communications devices. The interfaces are custom developed by the Company
for OEMs' systems to incorporate ADSL technology.

Telecommunications Product Development

In addition to modems, chipsets, and software and hardware interfaces, the
Company intends to continue to develop products that it plans to market and sell
throughout the product development and distribution chain.

Board-Level Products. Aware plans to manufacture board-level products for
installation into ADSL systems offered by OEMs. The Company's board-level
products will combine the ADSL Chipset with appropriate software and hardware
interfaces developed by the Company. At the present time, the Company has no
agreements to manufacture board-level products, except in connection with
equipment trials, and has not manufactured any products in any substantial
quantity.

System-Level Products. The Company intends to continue development of its
ADSL Internet Access Modem and other system-level products and offer them
directly to telcos and through OEMs. The Company's system-level products will
consist of a complete turnkey system designed to integrate ADSL technology with
data communications technology to enable customers to use ADSL throughout their
network. At present, the Company does not have the manufacturing capability to
provide system-level products, if such products were developed, in any
substantial quantity. See "-- Manufacturing."

Advanced ADSL, SDSL, VDSL and HFC. The Company plans to offer new
generations of advanced ADSL products, as well as chipsets, interfaces, modems,
boards and systems incorporating SDSL, VDSL and HFC technology. The Company is
currently in the process of developing an SDSL product with RelTec Corporation,
a leading telco supplier. The Company has entered into an agreement with ADI
under which the Company granted ADI a perpetual, worldwide, exclusive license to
make, use and sell chipsets that incorporate VDSL and HFC software that the
Company may develop. The Company has also agreed that, if it develops and sells
ADSL technology that implements DWMT, it would license such technology to ADI on
substantially the same terms as those for the Company's ADSL technology. See
"-- Relationship with ADI."

ADSL EVALUATIONS AND TRIALS

Telcos typically put new products through a rigorous approval process
before deploying them on a broad basis. The approval process usually involves a
number of different phases, including (i) laboratory evaluation, in which the
product is tested against relevant industry standards; (ii) technical trial, in
which the product is tested in the field with a small number of users; (iii)
marketing trial, in which the product is tested in the field with a larger
number of users and telcos begin to train their personnel to install and
maintain the product; (iv) initial commercial deployment, in which telcos make
the product available to selected customers for selected applications; and (v)
commercial deployment, in which telcos make the product available to a
substantial number of customers.

A number of telcos are evaluating and testing the Company's ADSL products
as part of their approval process. For example, GTE started a trial of the
Company's products earlier this year in its laboratories. Several other telcos
have also begun laboratory evaluations of the Company's ADSL products. Although
the Company believes that its ADSL technology is competitive, there can be no
assurance that it will be reviewed favorably by any of these telcos, or that
ADSL will emerge as a

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technology in which the telcos wish to invest. Moreover, neither GTE nor any
other telco has given the Company information as to the possible timing of its
approval process. See "Risk Factors -- Dependence on Acceptance of ADSL
Technology" and "-- Reliance on Telcos."

RELATIONSHIP WITH ADI

ADI produces broadband chipsets incorporating the Company's ADSL technology
pursuant to an agreement entered into between ADI and the Company in 1993. The
Company's relationship with ADI enables the Company to take advantage of ADI's
ASIC and digital signal processor and analog integrated circuit manufacturing
capabilities. Pursuant to its agreement with ADI, the Company received
development funding from ADI to create software, which it licensed to ADI for
ADI's digital signal processors. The Company receives a royalty from ADI for
every ADSL Chipset sold by ADI. In 1994 and 1995, the Company and ADI entered
into additional agreements to expand their relationship to include the
development and marketing of chipsets for HFC and VDSL data communications. In
1995, ADI accounted for approximately 23% of the Company's total revenue. As of
June 30, 1996, the Company had not received any revenue from sales of ADSL
Chipsets.

The relationship between ADI and the Company is an exclusive arrangement,
under which neither party may enter into competing agreements with third
parties. In order to maintain the exclusivity provisions of the ADI agreement,
ADI is obligated to make certain minimum royalty payments to the Company. The
Company has agreed with ADI that if ADI can show that the royalty paid to the
Company does not allow ADI to compete in the marketplace, the Company will
engage in good faith negotiations to reduce the royalty. Any such reduction
could have a material adverse effect on the Company's business, financial
condition and results of operations. Even if the Company were permitted to
license its technology to other parties, the Company has agreed that it will not
grant licenses to other parties under terms more favorable than those given to
ADI. The Company has also agreed that, if it develops and sells ADSL technology
that implements DWMT technology, it would license such technology to ADI on
substantially the same terms as those for the Company's ADSL technology. In
addition, the Company has agreed with ADI that if the Company's HFC or VDSL
technology becomes an industry standard, the Company will license such
technology on fair, equitable and non-discriminatory terms.

Chipsets manufactured pursuant to the agreements with ADI, including the
ADSL Chipset, will be sold by ADI. Therefore, the Company's ability to achieve
its business objectives will depend on ADI's ability and desire to deliver
chipsets to the marketplace. See "Risk Factors -- Substantial Dependence on
Analog Devices, Inc." Jerald G. Fishman, ADI's President and Chief Operating
Officer, is a director of the Company. See "Management."

STRATEGIC RELATIONSHIPS AND CUSTOMERS

In an effort to facilitate the deployment of its products and technology,
the Company has entered into the strategic development relationships described
below.

DSC. Pursuant to a development agreement with the Company, DSC is
developing a product called Mediaspan, which incorporates the Company's
proprietary DWMT technology to permit telephony over an HFC network. A prototype
of this product was publicly demonstrated at a trade show by the Company and DSC
in May 1996. The Company is licensing certain software and board-level designs
to DSC for Mediaspan in return for software license and royalty fees. DSC has
exclusive marketing and sales responsibility for Mediaspan, including setting
the price at which Mediaspan may be sold. The Company is responsible for
providing DSC with support for software licensed by the Company to DSC at no
extra charge. DSC may call upon the Company to provide consulting services to
DSC's customers, in which case the Company is permitted to charge for its
services. DSC has expressed an interest in purchasing $2,000,000 of Common Stock
in this offering at the initial public offering price per share. See
"Underwriting."

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RelTec Corporation. RelTec Corporation ("RelTec") and the Company are
negotiating an agreement pursuant to which they plan to develop an SDSL product
incorporating chipsets from ADI and custom software from the Company that is
based upon the Company's proprietary DWMT technology. The Company expects to
receive from RelTec development funding to create the software and software
license fees when RelTec sells the SDSL product. The Company also plans to
develop ADSL board-level products with RelTec. There can be no assurance,
however, that the Company and RelTec will reach an agreement or that, if an
agreement is reached, they will be successful in their development efforts.

Broadband Technologies, Inc. The Company has an agreement with Broadband
Technologies, Inc. ("BBT") to develop a prototype for upstream VDSL
transmissions, based upon the Company's DWMT technology. The Company and ADI are
developing a VDSL chipset for BBT to use in its fiber-to-the-curb systems. The
Company received a one time payment from BBT upon signing of the agreement and
will receive a further payment from BBT upon acceptance by BBT of prototypes
that the Company delivers on time to BBT. The Company is required to make
payments to BBT in the event the Company performs services or provides
prototypes to other companies that are similar to those provided or performed by
the Company for BBT under the agreement. BBT may terminate the agreement at any
time.

The Company's strategy is to maintain and strengthen its existing
relationships with OEMs that supply telcos and to establish new relationships
with additional OEMs of this type and with leading LAN and WAN data and
telecommunications systems manufacturers and equipment providers. Through
existing and future relationships, the Company's strategy is to encourage OEMs
to integrate the Company's technology into their systems and assist the Company
in obtaining market share for its technology. However, there can be no assurance
that the Company will successfully maintain its existing relationships or
develop new relationships, and the failure by the Company to maintain and
develop successful relationships with a sufficient number of OEMs could have a
material adverse effect on the Company's business, financial condition and
results of operations.

In addition to partnering with OEMs, the Company intends to sell its
products directly to telcos such as GTE and the RBOCs and through
telecommunications providers such as Westell Technologies, Inc. The Company
typically provides technical support services to its OEM and telco customers,
often without charge, as part of its strategy to encourage testing and
deployment of its products.

LAST MILE TECHNOLOGY

Telcos' copper wire networks have several limitations that make high speed
data transmission difficult. A significant portion of these networks is old and
has been implemented and repaired over many years. Consequently, these networks
consist of several different grades of wire. Telco wiring is also unshielded,
making data transmission susceptible to interference from noise, including
sources such as motors, lightning, broadcast radio and POTS. In addition, telco
wiring has a basic transmission property that causes the signal quality to
degrade rapidly as the frequency increases or the distance travelled by the
signal increases.

ADSL Technology

ADSL is a method for expanding the useable bandwidth of copper wire.
Typically, ADSL systems divide a one megahertz (MHz) bandwidth on copper wire
into three segments: (i) the 0 to 4 kilohertz (KHz) range is used for POTS, (ii)
the 25 KHz to 100 KHz range is used to transmit data upstream and (iii) the 100
KHz to 1 MHz range is used to transmit information downstream (see Figure 1).
The ANSI specification for ADSL calls for operation rates of 1.5 to 8 Mbps
downstream and 64 to 640 Kbps upstream when operating over existing copper wires
at a distance of up to 18,000 feet.

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[GRAPHIC]

Figure 1. ADSL systems divide a 1MHz bandwidth on copper wire into three
segments.

DMT versus CAP

There are two primary modulation techniques for transmitting the data
signals involved in ADSL: DMT, which the Company uses, and CAP. DMT is a
multi-carrier modulation technique that was chosen by ANSI as the
telecommunications industry standard for ADSL. CAP is a single-carrier
modulation technique developed by AT&T Paradyne Corp. The fundamental difference
between CAP and DMT is that CAP treats each of the upstream and downstream
frequency ranges as a single element over which as many information bits as
possible are transmitted. In contrast, DMT divides the upstream and downstream
bands into groups of different smaller subchannel frequency ranges
(approximately 4 KHz each) into which a much smaller number of bits are coded
and transmitted simultaneously (see Figure 2).

The Company believes that DMT technology is better able than CAP technology
to address the inherent problems of the telcos' copper wire networks. Because of
its multiple small frequency bands, DMT is able to adjust and adapt the movement
of information to both extract more throughput from a wire and to avoid sending
information into frequency ranges that are not useable. Since CAP treats the
entire frequency range as a single element, it does not have the ability to
balance as easily the use of the frequency spectrum to match efficiently the
performance of a given wire. DMT-based systems have greater flexibility than
CAP-based systems because even if a system is unable to achieve the full rated
speed, DMT-based modems can adapt and operate at a speed where information can
move reliably.

[GRAPHIC]

Figure 2. CAP treats each of the upstream and downstream frequency ranges as a
single element, while DMT divides the upstream and downstream bands
into a number of smaller subchannels.

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DWMT Technology

In addition to its DMT technology, the Company has invented a proprietary
technology based on wavelet mathematics called DWMT. The Company believes that,
as a result of its research and development of DWMT technology, it is a leader
in commercialization of wavelets for signal processing and telecommunications
applications.

Multi-carrier systems divide a frequency range into the desired number of
subchannels by using a mathematical numerical process. Because of basic limits
of the form of mathematics and the limits of time and computerization speeds,
the process of creating isolated subchannels is imperfect. These imperfections
inhibit modems from achieving theoretical performance limits. The
subchannelization method used in creating DMT modems utilizes a technique called
a Fourier transform. This technique has been used in the telecommunications
industry since the 1960s, but has become more practical for high speed, high
volume use as digital signal processors have improved. The wavelet transform
yields significantly better subchannelization than the Fourier transform.
Because this technique more closely approximates ideal subchannelization, the
performance of a wavelet-based DWMT system can produce performance superior to a
non-wavelet DMT system operating in a noisy environment.

DWMT Application to SDSL, VDSL, HFC

Although Aware's ADSL Internet Access Modem uses DMT technology, the
Company intends to apply DWMT technology to new products using SDSL, VDSL and
HFC applications. The Company is seeking to incorporate DWMT techniques into
industry standards body recommendations. The following is a brief description of
possible applications using SDSL, VDSL and HFC:

SDSL. Symmetric Digital Subscriber Line technology is similar to ADSL but
allows two-way data transmission at the same rates. The Company is developing an
SDSL application using its DWMT technology. SDSL provides up to 2 Mbps of data
in both directions on single twisted-pair copper wire at distances up to 18,000
feet while allowing simultaneous POTS. The Company expects that this SDSL
application can be used for LAN interconnecting and enhanced telephony
applications.

VDSL. The Company believes that Very high-speed Digital Subscriber Line
technology will be the next generation of high-speed user access, critical to
the implementation of fiber-to-the-neighborhood and fiber-to-the-curb
architectures. These architectures involve the deployment of an access node that
utilizes fiber optic cable from a telco's central office to the access node,
thus bringing fiber closer to the user. The final connection to the user is new
or existing copper wire or new coaxial cable. VDSL is being designed with the
objective of providing performance up to six times faster than ADSL but over a
shorter distance. The goal of VDSL is to enable telcos to provide a combination
of digital TV, data dial-tone and regular telephony service on a single
twisted-pair of copper wire. The Company is using DWMT to develop the upstream
portion of a VDSL system.

HFC. By using the frequency band from 5 to 40 MHz for upstream
transmission and the frequency band from 450 to 750 MHz for downstream
transmission, it is possible to provide two-way services such as telephony and
data communications on existing HFC networks. Each of these frequency bands is
typically divided into smaller bands, 1 to 2 MHz wide. The Company's HFC
technology, called WaveTel HFC, is based upon DWMT and will provide up to 8 Mbps
transmission over a 2 MHz band. HFC telephony and cable modem technology enables
cable companies to re-use their existing network to provide two-way services.
New HFC networks are also being installed by telcos so that they can offer
television services as well as telephone and data services.

HFC MARKET

Cable companies are also seeking to meet customers' demands for higher
speed data transmission. Like telcos, cable companies possess substantial
installed infrastructures. Ninety percent of homes in the U.S. now have access
to cable and sixty-five percent of homes in the U.S. subscribe to the services
offered by cable companies. The cable companies' HFC networks are capable of
carrying more data downstream than existing copper wire networks but have
limitations with upstream transmissions.

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Rather than establishing a dedicated link to each home or office, customers on a
cable network share a portion of the bandwidth. Consequently, this architecture
causes bottlenecks when multiple end-users attempt simultaneously to use
available upstream bandwidth. As a result, the cable companies' networks require
new technologies to meet customer demand for high speed two-way data
transmission.

In an effort to address this problem, cable company suppliers are working
to improve HFC technology, which would permit two-way broadband digital
communications over typical cable networks. HFC technology uses digital signal
processing to allow efficient sharing of the upstream bandwidth so that a cable
line can be used for two-way transmissions. New HFC networks are also being
installed by telcos so that they can offer television service as well as
telephone and data dial-tone services.

The Company is using its expertise in digital communications and digital
signal processing technology to develop products for use on HFC networks that
increase the speed and reliability of data communications over these networks.
In particular, the Company is developing a product using its proprietary DWMT
technology designed to work with DSC's equipment to enable data and telephone
service over HFC networks.

OTHER PRODUCTS AND TECHNOLOGY

The Company also develops data and video compression products. Since 1988,
the Company has developed expertise, trade secrets and intellectual property in
the field of wavelet transform-based data compression and has obtained several
patents in this area. The Company's wavelet compression technology enables
digital image, video and certain types of data to be compressed to between 1%
and 10% of their original size. Using wavelet compression, the decompressed data
are not bit for bit identical to the original data. A risk with this technique
is that, as the original data get smaller, a larger amount of error is
introduced into the decompressed data. However, compressed data can be
transmitted across networks faster and storage costs are reduced. The Company's
wavelet compression technology uses progressive transmission, which allows a
user to begin displaying immediately a low resolution version of an image as it
is being transmitted across a network.

In 1993, the Company began an effort to produce commercially marketable
wavelet data compression software products. The Company currently offers five
software-based compression products and has an agreement with ADI to produce a
wavelet video compression ASIC. The Company's compression products include the
following: AccuPress for Multimedia (which is a general purpose compression
product); AccuPress for Remote Sensing (which is designed for compression of
satellite-based remote sensing imagery); AccuPress for Radiology (which is used
to compress digital radiographs and other types of medical imagery); SeisPact
(which companies in the oil and gas industry can use to store and handle large
amounts of seismic data); and WSQ by Aware (which compresses digital fingerprint
data for use by law enforcement agencies such as the FBI).

SALES AND MARKETING

The Company's telecommunications products are complex, requiring the
Company's sales people to have a high degree of technical sophistication in
order to market the products effectively. The Company believes that technology
selections involving the Company's products are frequently made at senior levels
within a prospective customer's organization. Consequently, the Company has
implemented a sales and marketing strategy that relies primarily on
presentations by senior management to key employees of telcos and OEMs. As ADSL
technologies are adopted more broadly, the Company expects to hire additional
employees in sales and marketing to support the efforts of senior management.

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39

COMPETITION

The markets for the Company's products are intensely competitive and the
Company expects competition to increase in the immediate future, especially in
the emerging ADSL market. The Company intends to compete on the basis of
technology, price, the timing of product delivery, product features, quality,
reliability and customer satisfaction. The Company currently competes, or
expects to compete in the future, with the following categories of companies:
(i) other vendors of DMT-based ADSL technology, such as Amati Communications
Corporation ("Amati") and Orckit Communications Limited ("Orckit"); (ii) vendors
of alternative ADSL technologies, such as AT&T Paradyne Corp., which is
currently marketing its CAP-based ADSL technology; (iii) the RBOCs, which as a
result of the Telecommunications Act are no longer prohibited from manufacturing
telecommunications equipment; and (iv) OEMs and other systems integrators, such
as U.S. Robotics Corporation, Ericsson, Inc., Motorola, Inc. and Alcatel Network
Systems, Inc.

The Company's success will depend on telcos' willingness to invest in
broadband digital services based on its ADSL technology. The Company expects
that its ADSL products will compete not only with other products that increase
the efficiency of digital transmission over copper wire, such as ISDN for
Internet Access, but also with other broadband transmission technologies, such
as HFC, coaxial cable, fiber optic cable, digital broadcast satellite and other
wireless technologies. The Company believes its current and future broadband
products will permit telcos to upgrade their networks in a flexible and
cost-effective way, but telcos may choose to deploy products using better
established technologies to upgrade their networks including fiber optic cable,
which many telcos favor. To the extent that telcos choose to install fiber,
optic and other transmission media between central offices and end users, the
Company's business, financial condition and results of operations will be
materially adversely affected.

The Company believes that, in the ADSL market, its DMT-based products will
transmit data at a higher rate and with greater reliability than products using
the CAP technique. However, AT&T Paradyne Corp., which has significantly greater
financial resources than the Company, offers CAP-based ADSL products that were
introduced prior to the Company's products and are more readily available than
the Company's products.

To date there has been only limited commercial deployment of the Company's
competitors' DMT-based ADSL products and therefore the Company is uncertain how
its products will compare with products sold by Amati and Orckit, each of which
manufactures DMT-based ADSL products. Each of Amati and Orckit has made claims
in its sales literature suggesting that its products provide data transmission
at rates that are equal to or faster than the transmission rate provided by the
Company's products. However, there is no independent means by which the Company
can corroborate these claims.

The markets for the Company's wavelet image compression technology are
competitive, and are expected to become increasingly so in the near future. In
addition, the Company's WSQ product is an implementation of an open standard and
is therefore subject to competition.

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40

compete successfully or that competition will not have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors -- Dependence on Acceptance of ADSL Technology," "-- Reliance on
Telcos," "-- Rapid Technological Change; Dependence on New Products,"
"-- Competition" and "Business -- Last Mile Technology."

INTELLECTUAL PROPERTY

In the field of telecommunications technology, the Company holds three
patents for applying wavelet mathematics to communications systems. The Company
has five pending patent applications that pertain to the application of
multi-carrier technology to broadband communications. The Company also holds six
patents for image compression and processing, three patents for video
compression, one patent for audio compression and one patent for certain optical
applications.

Although the Company has patented certain of its technology, the Company
relies primarily on know-how and trade secrets to protect its intellectual
property. The Company attempts to protect its trade secrets and other
proprietary information through agreements with its customers, suppliers,
employees and consultants, and through other security measures. Each of the
Company's employees is required to sign a nondisclosure and noncompetition
agreement. Although the Company intends to protect its rights vigorously, there
can be no assurance that these measures will be successful. In addition, the
laws of certain countries in which products incorporating the Company's
technology may be developed, manufactured or sold may not protect the Company's
products and intellectual property rights to the same extent as the laws of the
United States.

While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the telecommunications industry, its
technical expertise and ability to introduce new products on a timely basis will
be more important in maintaining its competitive position than protection of its
existing intellectual property and that patent, trade secret and copyright
protections are important but must be supported by other factors such as the
expanding knowledge, ability and experience of the Company's personnel, new
technology and products and product enhancements. Although the Company continues
to implement protective measures and intends to defend vigorously its
intellectual property rights, there can be no assurance that these measures will
be successful.

Many participants in the telecommunications industry have an increasing
number of patents and have frequently demonstrated a readiness to commence
litigation based on allegations of patent and other intellectual property
infringement. Third parties may assert exclusive patent, copyright and other
intellectual property rights to technologies that are important to the Company.
The Company has received letters from two companies, Amati and Telebit
Corporation ("Telebit"), each asserting that it owns certain U.S. and foreign
patents that are necessary for products that comply with the ANSI standard for
ADSL, claiming that the Company's ADSL technology would infringe such patents,
and offering the Company the opportunity to enter into a license agreement with
respect to such patents. The Company has been informed that ADI has received
similar letters. The Company has reviewed the Amati and Telebit patents and has
received an opinion of its patent counsel, Cesari and McKenna, based upon the
Company's oral description of its technology, to the effect that the Company's
ADSL Internet Access Modem which it intends to sell does not infringe any valid
claim of any of the Amati and Telebit patents. Based upon this opinion, the
Company believes that it does not require a license under the Amati or Telebit
patents in order to conduct its proposed business.

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41

Unless and until a patent actually issues, there can be no infringement, and the
Company has not examined any such patent applications or received an opinion of
patent counsel with respect thereto. Although Amati and Telebit have offered to
license their patents and their patent applications to the Company, there can be
no assurance that any license would be available on acceptable terms should the
Company choose to pursue such license or be found to infringe such patents. In
addition, there can be no assurance that other third parties will not assert
infringement claims against the Company in the future, that these assertions or
those of Amati and Telebit, will not result in protracted and costly litigation,
or that the Company would prevail in any such litigation or be able to license
any valid patents from third parties on commercially reasonable terms. Further,
such litigation, regardless of its outcome, could result in substantial costs to
and diversion of effort by the Company. Litigation may also be necessary to
enforce the Company's intellectual property rights. Any infringement claim or
other litigation against or by the Company could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Risk Factors -- Proprietary Technology; Risk of Third-Party Claims of
Infringement."

MANUFACTURING

The Company does its own assembly and testing of its ADSL products, of
which only a limited number have been manufactured to date. The Company obtains
ADSL Chipsets directly from ADI and other parts needed for its ADSL products
from a variety of suppliers. The Company's manufacturing capacity is very
limited and the Company intends to use a combination of its internal
manufacturing capacity and third party manufacturers to assemble and test its
products. The Company expects that third party manufacturers will obtain product
parts directly from the Company and from suppliers chosen by the Company. Other
than the ADSL Chipset, which is available through ADI, the Company believes that
other parts necessary for its ADSL products are available from a large number of
suppliers and that there exist many qualified manufacturers to assemble and test
the Company's products.

GOVERNMENT REGULATION

The telecommunications industry, including most of the Company's customers,
is subject to regulation by federal and state agencies, including the Federal
Communications Commission ("FCC") and various state public utility and service
commissions. While such regulation does not necessarily affect the Company
directly, the effects of such regulations on the Company's customers may, in
turn, adversely affect the Company's business and results of operations. For
example, FCC regulatory policies affecting the availability of telco services
and other terms on which telcos conduct their business may impede the Company's
plans for deployment of its technology.

In February 1996, the Telecommunications Act was enacted. A primary factor
in passage of the Telecommunications Act was the desire to deregulate and foster
competition in the telecommunications markets. While the Company believes
deregulation and increased competition, in general, will be favorable to its
operations and business plan, the effect of the Telecommunications Act on the
telecommunications industry is unclear. The Company's strategy depends, in part,
on the RBOCs and other leading telcos remaining in a dominant position as
consumers of ADSL equipment from the Company or its OEMs. If the product market
for ADSL equipment or other such products becomes more fragmented as a result of
deregulation, then the Company could experience a material adverse effect on its
business, financial condition or results of operations.

In addition, the Company's business and operating results may also be
adversely affected by the imposition of certain tariffs, duties and other import
restrictions on components that the Company or its OEM customers obtains from
non-domestic suppliers or by the imposition of export restrictions on products
sold internationally and incorporating the Company's technology.
Internationally, governments of the United Kingdom, Canada, Australia and
numerous other countries actively promote and create competition in the
telecommunications industry. Changes in current or future laws or regulations,
in the U.S. or elsewhere, could materially and adversely affect the Company's
business, financial condition or results of operations.

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RESEARCH AND DEVELOPMENT

The Company believes that its future success depends on its ability to
adapt to the rapidly changing telecommunications environment and to meet its
customers' needs. The timely development and introduction of new products is
essential to maintain the Company's competitive position. The Company develops
most of its products in-house and, at June 30, 1996, had a research and
development staff of 19 employees, including nine employees holding doctorate
degrees in areas related to digital signal processing and digital communications
theory. The Company is focusing its current development efforts primarily on
improvements of its ADSL technology as well as on products incorporating DWMT
technology for SDSL, VDSL and HFC applications. See "-- Telecommunications
Products -- Telecommunications Product Development."

EMPLOYEES

As of June 30, 1996, Aware had a total of 35 employees, including 19 in
research and development, 6 in sales and marketing, 8 in administration and 2 in
manufacturing. The Company believes that its future success will depend in large
part on the continued service of its technical and senior management personnel
and upon the Company's continuing ability to attract and retain highly qualified
technical and managerial personnel. Competition for highly qualified personnel
is intense, and there can be no assurance that the Company will be able to
retain its key managerial and technical employees or that it will be able to
attract and retain additional highly qualified technical and managerial
personnel in the future. None of the Company's employees is represented by a
labor union. The Company considers its employee relations to be good.

FACILITIES

The Company is located in an 11,000 square foot leased facility in Bedford,
Massachusetts under a lease that expires in 1998. Aware believes that its
existing facilities are adequate to meet its current requirements and that
suitable space will be available as needed.

LITIGATION

There are no pending legal proceedings to which the Company is a party or
to which any of its properties are subject which, either individually or in the
aggregate, are expected by the Company to have a material adverse effect on its
business, financial position or results of operations.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information with respect to the
executive officers and directors of the Company as of June 30, 1996:

NAME AGE POSITION
---- --- --------

Charles K. Stewart(1)(2).................. 49 Chairman of the Board of Directors
James C. Bender(1)........................ 43 President, Chief Executive Officer and Director
Michael A. Tzannes, Ph.D.................. 35 Senior Vice President, Telecommunications
David C. Hunter........................... 40 Senior Vice President, Product Development
Richard P. Moberg, C.P.A.................. 41 Chief Financial Officer and Treasurer
Edmund C. Reiter, Ph.D.................... 32 Vice President, Advanced Products
John K. Kerr(1)(2)(3)..................... 58 Director
Jerald G. Fishman......................... 51 Director
John S. Stafford, Jr.(3).................. 58 Director

- ---------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee

Charles K. Stewart has been a director of the Company since 1988 and
Chairman of the Board of Directors since April 1995. Mr. Stewart previously
served as Chairman of the Board of Directors from 1988 to 1990 and from March
1994 to November 1994. From 1975 to December 1993, he traded options, futures
and securities on the Chicago Board of Options Exchange and has been involved in
private venture capital transactions since 1984. Mr. Stewart received an M.B.A.
from Northwestern University and a B.A. from Yale University.

James C. Bender has been President, Chief Executive Officer and a director
of the Company since October 1994. From April 1992 to February 1994, Mr. Bender
served as President and Chief Executive Officer of Logicraft, Inc., a network
server company. From 1986 to April 1992, Mr. Bender served as Logicraft's
President and Chief Operating Officer. Mr. Bender received an M.B.A. from the
Harvard Graduate School of Business Administration and a B.S. from Lowell
Technological Institute.

Michael A. Tzannes, Ph.D. has been the Company's Senior Vice President,
Telecommunications since April 1996. Dr. Tzannes served as the Company's Vice
President, Telecommunications from December 1992 to April 1996, as a Senior
Member of the Company's Technical Staff from January 1991 to November 1992 and
as a consultant to the Company from October 1990 to December 1990. From 1986 to
1990, he was a Staff Engineer at Signatron, Inc., a telecommunications
technology and systems developer. Dr. Tzannes received a Ph.D. in electrical
engineering from Tufts University, an M.S. from the University of Michigan at
Ann Arbor and a B.S. from the University of Patras, Greece.

David C. Hunter joined the Company in May 1996 as Senior Vice President,
Product Development. From 1982 to April 1996, Mr. Hunter served as Vice
President, Research and Development of I.D.E. Corporation ("IDEA"), a
manufacturer of data communications equipment. Mr. Hunter was a founder and a
director of IDEA. Mr. Hunter received an M.B.A. with high distinction from the
Harvard Graduate School of Business Administration and a B.S. with distinction
from Cornell University.

Richard P. Moberg, C.P.A. joined the Company in June 1996 as Chief
Financial Officer and Treasurer. From December 1990 to June 1996, Mr. Moberg
held a number of positions at Lotus Development Corporation, a computer software
developer, including Corporate Controller from June 1995 to June 1996, Assistant
Corporate Controller from May 1993 to June 1995 and Director of Financial
Services from December 1990 to May 1993. Mr. Moberg received an M.B.A. from
Bentley College and a B.B.A. in accounting from the University of Massachusetts
at Amherst.

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Edmund C. Reiter, Ph.D. has been the Company's Vice President, Advanced
Products since August 1995. Prior to that, he served as the Company's Manager of
Product Development for still image compression products from June 1994 to
August 1995, as a Senior Member of the Company's Technical Staff from November
1993 to June 1994, and as a Member of the Technical Staff from December 1992 to
November 1993. Dr. Reiter served as Senior Scientist at New England Research,
Inc. from January 1991 to October 1992. Dr. Reiter received a B.S. from Boston
College and a Ph.D. from the Massachusetts Institute of Technology.

John K. Kerr has been a director of the Company since 1990. Mr. Kerr
previously served as a director of the Company from 1988 to 1989 and as the
Chairman of the Board of Directors from November 1992 to March 1994. From June
1992 to November 1994, Mr. Kerr served as the Company's Assistant Vice President
of Marketing. Mr. Kerr has been General Partner of Grove Investment Partners, a
private investment partnership, since 1990. Mr. Kerr received an M.A. and a B.A.
from Baylor University.

Jerald G. Fishman has been a director of the Company since May 1996 and
President, Chief Operating Officer and a director of ADI since November 1991.
Mr. Fishman joined ADI in 1971 and held a variety of management positions in
marketing, operations and strategic planning, including Group Vice President
from 1982 to 1988 and Executive Vice President from 1988 to November 1991. Mr.
Fishman received a B.S. in electrical engineering from the City College of New
York, an M.S. in electrical engineering from Northeastern University, an M.B.A.
from Boston University and a J.D. from Suffolk Law School.

John S. Stafford, Jr. has been a director of the Company since 1988. Mr.
Stafford has been a Member of the Chicago Board of Options Exchange since 1975,
where he trades financial futures, options and equity instruments. Mr. Stafford
received an M.B.A. from the University of North Carolina and a B.A. from
Davidson College.

The Board of Directors is divided into three classes, one class of which is
elected each year at the annual meeting of stockholders to hold office for a
term of three years. Each director holds office until his successor has been
duly elected and qualified. Messrs. Bender and Fishman serve in the class whose
terms expire in 1997; Mr. Kerr serves in the class whose terms expire in 1998;
and Messrs. Stafford and Stewart serve in the class whose terms expire in 1999.
The Company has agreed to use its best efforts to cause Mr. Bender to be elected
to the Company's Board of Directors. See "-- Employment Agreement." Executive
officers are elected annually by the Board of Directors and serve at the
discretion of the Board or until their respective successors have been duly
elected and qualified. Except for Mr. Bender, no executive officer of the
Company has an employment agreement with the Company. There are no family
relationships among the directors and executive officers of the Company.

The Board of Directors has established an Executive Committee, which has
all of the powers of the Board of Directors except the power to: (i) change the
number of directors or fill vacancies on the Board of Directors; (ii) elect or
fill vacancies in the offices of President, Treasurer or Clerk; (iii) remove any
officer or director; (iv) amend the By-Laws of the Company; (v) change the
principal office of the Company; (vi) authorize the payment of any dividend or
distribution to shareholders of the Company; (vii) authorize the reacquisition
of capital stock for value; and (viii) authorize a merger. The Board of
Directors has established a Compensation Committee, which provides
recommendations concerning salaries and incentive compensation for senior
management of the Company and administers the Company's stock option plans. See
"-- Stock Option Plans." The Board of Directors has also established an Audit
Committee, which reviews the results and scope of the annual audit of the
Company's financial statements conducted by the Company's independent
accountants, the scope of other services provided by the Company's independent
accountants, proposed changes in the Company's financial and accounting
standards and principles, and the Company's policies and procedures with respect
to its internal accounting, auditing and financial controls. The Audit Committee
also makes recommendations to the Board of Directors on the engagement of the
independent accountants, as well as other matters which may come before the
Audit Committee or at the direction of the Board of Directors.

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company's Compensation Committee is currently composed of Messrs. Kerr
and Stafford. In fiscal 1995, the Company did not have a Compensation Committee
and the compensation of the Company's executive officers was determined by the
Board of Directors. William N. Sick, Jr. served on the Board of Directors
throughout 1995. Howard L. Resnikoff, Ph.D., a director of the Company from
inception to April 1995, served as Chairman of the Board of Directors from
November 1994 to April 1995 and as President from inception to October 1994. Mr.
Bender, the Company's President and Chief Executive Officer, served on the Board
of Directors throughout 1995 and participated in the deliberations of the Board
of Directors concerning the compensation of the Company's executive officers
other than himself. In 1995, no other officer or employee of the Company
participated in any such deliberations. No interlocking relationship has existed
between the Company's Board of Directors or Compensation Committee and the board
of directors or compensation committee of any other company since January 1,
1995.

In June 1994, Mr. Sick purchased 770 shares of Series E Preferred Stock for
$100,100. In December 1992, in connection with the issuance of its Series D
Convertible Preferred Stock ("Series D Stock") the Company entered into a
Secured Non-Recourse Adjustable Rate Promissory Note and Pledge Agreement with
Dr. Resnikoff in the principal amount of $344,000. The note was issued to permit
Dr. Resnikoff to acquire shares of Series D Stock and was secured by a pledge of
the 3,440 shares so acquired and additional collateral. In March 1995, the
Company accepted the shares of Series D Stock as payment for the principal and
accrued interest on the note, and cancelled the note. See "Certain
Transactions."

DIRECTOR COMPENSATION

Each non-employee director of the Company is reimbursed for expenses
incurred in attending meetings of the Board of Directors. Directors of the
Company are not paid any separate fees for serving as directors. On May 23,
1996, the Company granted Messrs. Stewart and Fishman nonstatutory options under
the 1996 Option Plan to purchase 330,000 and 150,000 shares of Common Stock,
respectively, at an exercise price of $8.25 per share. The options vest in equal
monthly installments over a period of three years, commencing June 1, 1996,
except that 30,000 of Mr. Stewart's options were fully vested as of the date
they were granted. For information concerning certain options granted to Mr.
Bender, see "-- Stock Option Plans -- Option Grants During 1995" and
"-- Employment Agreement."

EXECUTIVE COMPENSATION

SUMMARY OF CASH AND OTHER COMPENSATION

The following table provides certain summary information concerning
compensation earned for services rendered in all capacities to the Company in
the fiscal year ended December 31, 1995 by the Company's President and Chief
Executive Officer and the other executive officer whose salary during such
fiscal year was in excess of $100,000 (collectively, the "Named Executive
Officers").

SUMMARY COMPENSATION TABLE

LONG-TERM
COMPENSATION
AWARDS(1)
ANNUAL ------------
COMPENSATION SECURITIES
------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) OPTIONS(#)
- -------------------------------------------------------------- ------------ ------------

James C. Bender............................................... $179,013 500,000
President and Chief Executive Officer
Michael A. Tzannes, Ph.D...................................... $103,815 220,000
Senior Vice President, Telecommunications

- ---------------
(1) Represents stock options granted under the Company's 1990 Incentive and Nonstatutory Stock
Option Plan. In fiscal 1995, the Company did not make any restricted stock awards, grant any
stock appreciation rights or make any long-term incentive plan payouts. Other compensation
in the form of perquisites and other personal benefits has been omitted because the
aggregate amount of such perquisites and other personal benefits constituted less than
$50,000 or 10% of the executive's total annual salary.

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STOCK OPTION PLANS

1990 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN

In January 1990, the Board of Directors adopted, and the stockholders
approved, the 1990 Incentive and Nonstatutory Stock Option Plan (as amended to
date, the "1990 Option Plan"). The 1990 Option Plan authorizes the issuance of
options to purchase an aggregate of 2,873,002 shares of Common Stock. As of June
30, 1996, options to purchase 1,055,557 shares of Common Stock had been
exercised, options to purchase 1,719,158 shares of Common Stock were outstanding
under the 1990 Option Plan at a weighted average exercise price of $1.29 per
share and 98,287 shares of Common Stock were available for future option grants.
The Board of Directors does not intend to grant further options under the 1990
Option Plan. The 1990 Option Plan will terminate in January 2000 unless earlier
terminated by the Board of Directors. Under the 1990 Option Plan, the Board of
Directors has granted (i) options to purchase Common Stock intended to qualify
as incentive stock options ("Incentive Options"), as defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") and (ii) options that
do not so qualify ("Nonstatutory Options").

1996 STOCK OPTION PLAN

In May 1996, the Board of Directors adopted, and the stockholders approved,
the Aware, Inc. 1996 Stock Option Plan (the "1996 Option Plan"), authorizing the
issuance of options to purchase an aggregate of 3,000,000 shares of Common
Stock. As of June 30, 1996, options to purchase 1,456,000 shares of Common Stock
at an exercise price of $8.25 per share were outstanding under the 1996 Option
Plan and 1,544,000 shares of Common Stock were available for future option
grants. The 1996 Option Plan is administered by the Compensation Committee (the
"Committee"), none of the members of which is an officer or employee of the
Company. All members of the Committee are "disinterested persons" as that term
is defined under rules promulgated by the Securities and Exchange Commission.
The Committee selects the individuals to whom options will be granted and
determines the option exercise price and other terms of each option, subject to
the provisions of the 1996 Option Plan. The 1996 Option Plan authorizes the
grant of both Incentive Options and Nonstatutory Options. Incentive Options and
Nonstatutory Options may be granted under the 1996 Option Plan to employees of
the Company or a subsidiary, including directors and officers who are employees
of the Company or a subsidiary. Nonstatutory Options may also be granted under
the 1996 Option Plan to directors of the Company or a subsidiary who are not
employees of the Company or a subsidiary and to consultants and other persons
who render services to the Company or a subsidiary.

Under the terms of the 1996 Option Plan, each director of the Company who
is not an employee of the Company or any subsidiary (a "Non-Employee Director")
shall, at the first meeting of the Board of Directors following each annual
meeting of stockholders, commencing with the first meeting of the Board of
Directors following the Company's annual meeting of stockholders in 1997, be
automatically granted a Nonstatutory Option (a "Director Option") to purchase
that number of shares of Common Stock determined by dividing $100,000 by the
fair market value of the Common Stock on the date of grant. No Director Option
shall be granted prior to the first meeting of the Board of Directors following
the annual meeting of stockholders in 1999 to any individual who was or became a
director of the Company, and was granted an option to purchase Common Stock of
the Company, after December 31, 1995 and before the first meeting of the Board
of Directors following the annual meeting of stockholders in 1997. Each Director
Option shall have a term of six years and shall vest in 12 equal consecutive
quarterly installments, the first to vest on the last day of the month following
the month in which the grant occurs. Each Director Option will become fully
exercisable upon the occurrence of a sale or merger with a change in control (as
defined in the 1996 Option Plan). In the event that a director's position as
such terminates or is terminated by reason of his death, disability, resignation
(other than resignation at the request of the Board of Directors) or removal as
director, or his refusal to accept the Company's nomination for reelection, any
Director Option held by such director shall cease to vest upon such director's
termination and shall expire 60 days after termination. In all other cases,
Director Options shall continue to vest and shall expire on the sixth
anniversary of the date of

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grant. The provisions of the 1996 Option Plan relating to Director Options may
be modified or abrogated at any time if the Board of Directors determines that
such provisions are unnecessary for compliance or are in conflict with Rule
16b-3 under the Exchange Act.

Shares of Common Stock issuable upon exercise of options granted under the
1996 Option Plan to executive officers, directors and beneficial owners of more
than ten percent of the Common Stock may not be sold or transferred by such
officer, director or beneficial owner for a period of six months following the
date of grant.

OPTION GRANTS DURING 1995

The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during fiscal 1995.

OPTION GRANTS IN LAST FISCAL YEAR

POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------------------- ANNUAL RATE OF
PERCENT OF STOCK PRICE
NUMBER OF SHARES TOTAL APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM(1)
OPTIONS GRANTED TO EMPLOYEES IN BASE PRICE EXPIRATION -------------------
NAME (#)(2) FISCAL YEAR ($/SHARE)(3) DATE 5%($) 10%($)
---- ---------------- --------------- ------------ ---------- -------- --------

James C. Bender............ 300,000(4) 26.3% $1.30 November 1, 2002 $158,769 $370,000
200,000 17.5 1.30 August 9, 2003 124,138 297,333
Michael A. Tzannes,
Ph.D..................... 90,000 7.9 1.30 February 1, 2005 73,581 186,467
100,000 8.8 1.30 August 9, 2005 81,756 207,187
30,000 2.6 1.30 December 11, 2005 24,527 62,156

- ---------------
(1) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming the specified compounded rates of appreciation of the
Company's Common Stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission and do not represent the Company's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and Common Stock
holdings are dependent on the timing of such exercise and the future
performance of the Company's Common Stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that the
amounts reflected will be received by the Named Executive Officers. This
table does not take into account any appreciation in the price of the Common
Stock from the date of grant to the current date. The values shown are net
of the option exercise price, but do not include deductions for taxes or
other expenses associated with the exercise.

(2) Generally, the options vest in equal monthly installments over periods of
three years, commencing on the first day of the month following the month in
which the options were granted. The option granted to Mr. Bender to purchase
300,000 shares of Common Stock was exercisable for 74,997 shares of Common
Stock on August 1, 1995; the remaining 225,003 shares vest in equal monthly
installments over a period of 27 months, commencing on September 1, 1995.
This option becomes exercisable in full upon a change in control of the
Company.

(3) All options were granted at fair market value as determined by the Board of
Directors of the Company on the date of grant. The Board of Directors
determined the market value of the Common Stock based on various factors,
including the illiquid nature of an investment in the Company's Common
Stock, the Company's historical financial performance and the Company's
future prospects.

(4) Represents an option granted in 1995 upon surrender of an option granted in
1994 to purchase 300,000 shares of Common Stock. See "-- Employment
Agreement."

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In May 1996, the Company granted Mr. Bender, Dr. Tzannes and Mr. Hunter
Nonstatutory Options under the 1996 Option Plan to purchase 110,000, 50,000 and
284,000 shares of Common Stock, respectively, at an exercise price of $8.25 per
share. The Company also granted Messrs. Hunter and Reiter Incentive Options
under the 1996 Option Plan to purchase 36,000 and 20,000 shares of Common Stock,
respectively, at an exercise price of $8.25 per share. In June 1996, the Company
granted Mr. Moberg Nonstatutory Options and Incentive Options under the 1996
Option Plan to purchase 39,000 and 36,000 shares of Common Stock, respectively,
at an exercise price of $8.25 per share. In general, the options vest in equal
monthly installments over periods of three years. The options held by Messrs.
Hunter and Moberg provide that they shall become exercisable in full upon a
change in control of the Company. See "-- Employment Agreement."

FISCAL YEAR-END OPTION VALUES

The following table sets forth certain information with respect to (i) the
number of unexercised options held by the Named Executive Officers as of
December 31, 1995, and (ii) the value of unexercised in-the-money options
(options for which the fair market value of the Common Stock exceeds the
exercise price) as of December 31, 1995. Neither Named Executive Officer
exercised any options during the fiscal year ended December 31, 1995.

FISCAL YEAR-END OPTION VALUES

NUMBER OF SHARES OF
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1995(#) AT DECEMBER 31, 1995($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --- ----------- ------------- ----------- -------------

James C. Bender..................... 311,105 688,895 $2,706,614 $5,993,387
Michael A. Tzannes, Ph.D............ 88,360 191,640 779,138 1,667,363

- ---------------

(1) There was no public trading market for the Common Stock on December 31,
1995. Accordingly, solely for purposes of this table, the values in this
column have been calculated on the basis of the initial public offering
price of $10.00 (rather than a determination of the fair market value of the
Common Stock on December 31, 1995), less the aggregate exercise price of the
options.

1996 EMPLOYEE STOCK PURCHASE PLAN

In May 1996, the Company adopted the Aware, Inc. Employee Stock Purchase
Plan (the "Stock Purchase Plan"), under which options to purchase up to 100,000
shares of Common Stock may be granted to employees of the Company. The Stock
Purchase Plan is administered by the Compensation Committee. During each six
month offering period under the Stock Purchase Plan, participating employees
will be entitled to purchase shares through payroll deductions of up to six
percent of the employees' respective base pay. The maximum number of shares
which an employee may purchase in an offering period is twice the number
obtained by dividing the amount of the employee's compensation withheld during
the offering period (plus any amounts carried over from earlier offering
periods) by 85% of the fair market value of the Common Stock on the first day of
the offering period. During each offering period, the price at which employees
will be able to purchase shares of Common Stock will be 85% of the last trading
price of the Common Stock as reported on the Nasdaq National Market on the date
that the offering period commences or the date the offering period concludes,
whichever is lower.

Each employee of the Company is eligible to participate in the Stock
Purchase Plan on the first day of the offering period commencing after the
employee completes six months of continuous service with the Company, except
that no employee will be granted an option under the Stock Purchase Plan if (i)
immediately after the grant, the employee owns or has options to purchase stock
possessing five percent or more of the total combined voting power or value of
all classes of stock of the Company or

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any subsidiary, (ii) the option would permit the employee to purchase more than
$25,000 (determined in accordance with the fair market value of such stock at
the time the option is granted) of Common Stock in a calendar year, or (iii) the
employee is an officer of the Company who is a "highly compensated employee"
under Section 414(q) of the Code. Upon termination of employment for any reason
other than death, the employee is no longer eligible to purchase shares of
Common Stock under the Stock Purchase Plan. Upon the death of an employee, the
employee's beneficiary may elect to use the employee's accumulated payroll
deductions to purchase shares of Common Stock under the Stock Purchase Plan at
the end of the offering period.

A participant who is an officer or director of the Company and who elects
either to withdraw from participation or not to exercise an option will not be
eligible for the grant any options under the Stock Purchase Plan for a period of
six months. Officers and directors and their beneficiaries may not transfer
shares of Common Stock purchased under the Stock Purchase Plan for a period of
six months following the end of the offering period; other employees and their
beneficiaries may not transfer such shares for a period of three months
following the end of the offering period.

401(K) PLAN

The Company maintains the Aware Employee 401(k) Savings Plan (the "401(k)
Plan"), qualified under Section 401(k) of the Code. All employees of the Company
who have attained the age of twenty-one and have completed six consecutive
months of service are eligible to participate in the 401(k) Plan. The 401(k)
Plan provides that each participant may contribute to the 401(k) Plan up to 15%
of the participant's annual pre-tax compensation, but not more than an annual
limit prescribed by law, which limit is $9,500 in 1996. The percentage elected
by certain highly compensated participants may be required to be lower. The
Company may, but is not required to, elect to make contributions to the 401(k)
Plan for the benefit of the participants. Any amounts contributed to the 401(k)
Plan by the Company and earnings on the Company's contributions would vest 20%
after two years of service to the Company and an additional 20% each year
thereafter until contributions are fully vested.

EMPLOYMENT AGREEMENT

On October 27, 1994, Mr. Bender entered into an employment agreement with
the Company, pursuant to which he agreed to serve as the President and Chief
Executive Officer of the Company for a term expiring December 31, 1997. Under
the agreement, the term of Mr. Bender's employment will be extended for up to
ten one-year periods, the first to commence on January 1, 1998, until the
Company gives Mr. Bender one year's notice of non-renewal. The Company also
agreed to use its best efforts to cause Mr. Bender to be elected to the Board of
Directors. The agreement provides that Mr. Bender shall receive an annual salary
of $180,000 and bonuses at the discretion of the Board of Directors. Mr. Bender
is entitled to participate in the Company's insurance and other employee benefit
programs on the same basis as all other employees. Mr. Bender agreed to be bound
by the terms of the Company's standard employee agreement concerning inventions,
confidentiality and non-competition. In the event of termination as a result of
death or disability, the Company will continue Mr. Bender's compensation and
benefits for a period of six months thereafter. The Company may terminate Mr.
Bender's employment for cause upon ten days' notice and an opportunity to be
heard at a meeting of the Board of Directors or the Executive Committee; for
purposes of the agreement, "cause" means negligent acts or omissions that have
been or will be the sole or primary cause of material harm to the Company,
conviction of a crime involving moral turpitude or conviction of a crime the
principal victim of which is the Company. In the event that the Company
terminates Mr. Bender's employment without cause or in the event of a change in
control of the Company (as defined in the agreement), the Company will pay Mr.
Bender a severance payment upon such termination equal to the salary he would
have earned through the expiration of his employment, such payment not to be
less than $180,000 nor more than $270,000.

The Company agreed to grant Mr. Bender on November 1, 1994 an incentive
option to purchase 230,769 shares of Common Stock at an exercise price of $1.30
per share and nonstatutory options to

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50

purchase 269,231 and 300,000 shares of Common Stock at exercise prices of $1.30
and $2.00 per share, respectively. The first two options vest in equal monthly
installments over periods of three years ending October 1997. The third option
(the "Performance Option") vested at the rate of 50 shares for each $1,000 of
pre-tax profit realized by the Company during the period from January 1, 1995 to
December 31, 1997. Each option expires on the eighth anniversary of the date of
grant.

On February 13, 1995, the Board of Directors of the Company voted to reduce
the exercise price of the Performance Option option from $2.00 per share to
$1.30 per share, a price which the Board determined to be the fair market value
of the Common Stock at that time. The Board also voted to amend the Performance
Option to provide that fifty percent of the shares subject to the Performance
Option would vest regardless of profit earned if Mr. Bender were still employed
by the Company on January 15, 1998. On July 24, 1995, the Board voted that upon
Mr. Bender's surrender of the Performance Option, the Company would cancel the
Performance Option and issue a new nonstatutory option to purchase 300,000
shares of Common Stock at an exercise price of $1.30 per share, which option
would vest in equal monthly installments over a period of three years,
commencing December 1, 1994. Mr. Bender thereafter surrendered the Performance
Option and the Company issued the replacement option.

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51

CERTAIN TRANSACTIONS

ADI AGREEMENTS

In 1993, the Company entered into a Development Contract and a License
Agreement with ADI to produce broadband chipsets. The Development Contract was
amended in June 1994 and September 1995. In 1993, 1994 and 1995, the Company
received revenue from ADI of $365,000, $400,000 and $750,000, respectively.
Jerald G. Fishman, ADI's President and Chief Operating Officer, is a director of
the Company. See "Risk Factors -- Substantial Dependence on Analog Devices,
Inc."

LOANS FROM STOCKHOLDERS

In 1994, the Company borrowed $90,000 from Novon, L.P., then the holder of
more than five percent of the Company's outstanding voting stock, and $20,000
from Charles K. Stewart, then a director of the Company and the general partner
of Novon, L.P., each at an interest rate of 10% per year. The Company repaid the
loans in 1994, together with interest in the amounts of approximately $1,550 and
$750 to Novon, L.P. and Mr. Stewart, respectively.

SALES OF SERIES E PREFERRED STOCK

In June and July 1994, Richard J. Naegele, James S. Stafford and John S.
Stafford III, each a holder of more than five percent of the Company's
outstanding voting stock, purchased 4,420, 3,500 and 3,500 shares of Series E
Preferred Stock, respectively, for consideration of $574,000, $455,000 and
$455,000, respectively.

REPURCHASE OF SERIES D SHARES

In December 1992, in connection with the issuance of its Series D
Convertible Preferred Stock ("Series D Stock") the Company entered into Secured
Non-Recourse Adjustable Rate Promissory Note and Pledge Agreements with each of
Howard L. Resnikoff and John Huffman, then an officer of the Company, in the
respective principal amounts of $344,000 and $66,000. The notes were issued to
permit Dr. Resnikoff and Mr. Huffman to acquire 3,440 and 660 shares of Series D
Stock, respectively, and were secured, in the case of Dr. Resnikoff, by a pledge
of the 3,440 shares so acquired and additional collateral, and, in the case of
Mr. Huffman, the 660 shares so acquired. In March 1995, the Company accepted the
shares of Series D Stock as payment for the principal and accrued interest on
the notes, and cancelled the notes.

The Company believes that all of the foregoing transactions were made on
terms no less favorable to the Company than would have been obtained from
unaffiliated third parties. On or before the closing of this offering, the
Company intends to adopt a policy whereby all future transactions between the
Company and its directors, officers and affiliates will be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
and will be approved by a majority of the disinterested members of the Company's
Board of Directors.

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PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership of the Common Stock as of June 30, 1996, and as adjusted to
reflect the sale of the Common Stock offered hereby, by (i) each person known by
the Company to be the beneficial owner of more than five percent of the Common
Stock; (ii) each of the Company's directors; (iii) each of the Named Executive
Officers; and (iv) the Company's directors and executive officers as a group.

PERCENTAGE OF SHARES
BENEFICIALLY OWNED(2)
-----------------------
SHARES PRIOR TO AFTER
BENEFICIALLY THIS THIS
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- -------------------------------------------------------- ------------ -------- --------

Richard J. Naegele...................................... 2,084,695 13.9% 11.3%
401 S. LaSalle Street
Suite 1502
Chicago, Illinois 60605
John S. Stafford, Jr.................................... 1,748,783 11.7 9.5
440 S. LaSalle Street
Suite 3904
Chicago, Illinois 60605
Charles K. Stewart(3)................................... 1,193,693 7.9 6.5
401 S. LaSalle Street
Suite 1502
Chicago, Illinois 60605
Howard L. Resnikoff..................................... 1,036,261 6.9 5.6
P.O. Box 812127
Wellesley, Massachusetts 02181
John K. Kerr(4)......................................... 896,293 6.0 4.9
336 Essex Road
Kenilworth, Illinois 60043
James Stafford(5)....................................... 874,391 5.8 4.8
440 S. LaSalle Street
Suite 3904
Chicago, Illinois 60605
John S. Stafford III(6)................................. 874,391 5.8 4.8
440 S. LaSalle Street
Suite 3904
Chicago, Illinois 60605
James C. Bender(7)...................................... 554,176 3.6 2.9
Michael A. Tzannes(8)................................... 147,368 * *
Jerald G. Fishman(9).................................... 12,510 * *
All directors and executive
officers as a group (9 persons)(10)................... 4,632,008 29.3 24.1

- ---------------
* Less than one percent.

(1) The number of shares beneficially owned by each stockholder is determined
in accordance with the rules promulgated by the Securities and Exchange
Commission, and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which the person has sole or shared voting power
or investment power and also any shares which the person has the right to
acquire within 60 days after June 30, 1996 through the exercise of any
stock option or other right. The inclusion herein of such shares, however,
does not constitute an admission that the named stockholder is a direct or
indirect beneficial owner of such shares. To the Company's knowledge, each
person named in the table has sole voting power and investment power (or
shares such power with his or her spouse) with respect to all shares of
Common Stock shown as beneficially owned by such person, except as
otherwise indicated. Solely for purposes of computing the percentage of shares

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beneficially owned by a person, shares of Common Stock which the person has
the right to acquire within 60 days of June 30, 1996 are deemed
outstanding.

(2) Percentage ownership is based on (i) 14,992,397 shares of Common Stock
outstanding before this offering, and (ii) 18,392,397 shares of Common
Stock outstanding after this offering.

(3) Includes 71,688 shares subject to options exercisable within 60 days of
June 30, 1996; 242,431 shares held in trust for Mr. Stewart's children; and
80,575 shares held as trustee of the Dawson Family Trust. Does not include
299,970 shares subject to options not exercisable within 60 days of June
30, 1996.

(4) Includes 324,193 shares held by Grove Investment Partners, of which Mr.
Kerr is a general partner.

(5) Includes 202,052 shares held in a trust for the benefit of James Stafford.

(6) Includes 202,052 shares held in a trust for the benefit of John S. Stafford
III.

(7) Includes 544,176 shares subject to stock options exercisable within 60 days
of June 30, 1996. Does not include 555,824 shares subject to options not
exercisable within 60 days of June 30, 1996.

(8) Represents shares subject to stock options exercisable within 60 days of
June 30, 1996. Does not include 180,132 shares subject to options not
exercisable within 60 days of June 30, 1996.

(9) Represents shares subject to stock options exercisable within 60 days of
June 30, 1996. Does not include 137,490 shares subject to options not
exercisable within 60 days of June 30, 1996.

(10) Includes 839,785 shares subject to options exercisable within 60 days of
June 30, 1996. Does not include 1,571,873 shares subject to options not
exercisable within 60 days of June 30, 1996.

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DESCRIPTION OF CAPITAL STOCK

Following the closing of the sale of the shares of Common Stock offered
hereby, the authorized capital stock of the Company will consist of 30,000,000
shares of common stock, $0.01 par value per share ("Common Stock"), and
1,000,000 shares of preferred stock, $1.00 par value per share ("Preferred
Stock"). Pursuant to the provisions of the Company's Articles of Organization,
as of the closing of this offering, each issued and outstanding share of Series
C Convertible Preferred Stock, Series D Convertible Preferred Stock and Series E
Convertible Preferred Stock will automatically convert into 100 shares of Common
Stock.

COMMON STOCK

As of June 30, 1996, assuming conversion into shares of Common Stock of all
of the issued and outstanding shares of Series C Convertible Preferred Stock,
Series D Convertible Preferred Stock and Series E Convertible Preferred Stock,
there were outstanding 14,992,397 shares of Common Stock held of record by 103
persons. Upon the closing of this offering, there will be outstanding 18,392,397
shares of Common Stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of options to purchase an aggregate of 3,175,158 shares
of Common Stock outstanding as of June 30, 1996.

Holders of Common Stock are entitled to one vote per share held of record
on all matters submitted to a vote by the stockholders of the Company. Subject
to preferences that may be applicable to the holders of outstanding shares of
Preferred Stock, if any, the holders of Common Stock are entitled to receive
such dividends when and as declared by the Board of Directors out of funds
legally available therefor. In the event of any liquidation, dissolution or
winding up of the affairs of the Company, and subject to the rights of the
holders of outstanding shares of Preferred Stock, if any, the remaining assets
of the Company available to stockholders shall be distributed equally per share
to the holders of shares of Common Stock irrespective of class. Holders of
shares of Common Stock have no cumulative voting rights nor any preemptive,
subscription, redemption or conversion rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are validly issued, fully paid and nonassessable, and the shares
of Common Stock offered hereby will be, when issued and paid for, validly
issued, fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of holders of shares of Preferred Stock which the Company may designate
and issue in the future.

PREFERRED STOCK

The Company's Articles of Organization authorize the issuance of 1,000,000
shares of undesignated Preferred Stock, $1.00 par value per share. The Board of
Directors will be authorized, subject to any limitations prescribed by
Massachusetts law, to issue shares of Preferred Stock in one or more series, to
establish from time to time the number of shares to be included in each such
series, to establish or alter the voting powers, designations, preferences and
relative, participating, optional or other rights, or the qualifications,
limitations or restrictions thereof, and to increase (but not above the total
number of authorized shares of the class) or decrease (but not below the number
of shares of such series then outstanding) the number of shares of any such
series without any further vote or action by the stockholders. The Board of
Directors will be authorized to issue Preferred Stock with voting, conversion
and other rights and preferences that could adversely affect the voting power or
other rights of the holders of Common Stock. Although the Company has no current
plans to issue any such shares, the issuance of Preferred Stock or of rights to
purchase Preferred Stock could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding voting stock of the Company. See "Risk
Factors -- Effect of Certain Charter and By-Law Provisions and Anti-Takeover
Provisions; Possible Issuances of Preferred Stock."

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MASSACHUSETTS LAW AND CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF
ORGANIZATION AND BY-LAWS

Certain Anti-takeover Provisions. After the closing of this offering, the
Company will be subject to the provisions of Chapter 110F of the Massachusetts
General Laws, an anti-takeover law. In general, this statute prohibits a
Massachusetts corporation with more than 200 stockholders of record from
engaging in a "business combination" with "interested stockholders" for a period
of three years after the date of the transaction in which the person becomes an
interested stockholder, unless (i) prior to such date, the board of directors
approves either the business combination or the transaction which results in the
stockholder becoming an interested stockholder, (ii) the interested stockholder
acquires 90% of the outstanding voting stock of the corporation (excluding
shares held by certain affiliates of the corporation) at the time the
stockholder becomes an interested stockholder or (iii) the business combination
is approved by both the board of directors and holders of two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder). A "business combination" includes a merger,
consolidation, certain stock or asset sales, and certain other specified
transactions involving the corporation or any direct or indirect majority-owned
subsidiary of the corporation resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is (i) a person who, alone
or together with affiliates and associates, owns five percent or more of the
corporation's voting stock, (ii) an affiliate or associate of the corporation
who at any time within the three year period preceding the date of the
transaction owned five percent or more of the corporation's voting stock, or
(iii) the affiliates and associates of any such affiliate or associate of the
corporation. A person is not an "interested stockholder" if its ownership of
shares in excess of the five percent limitation is the result of action taken
solely by the Company, provided, however, that such a person will become an
"interested stockholder" if the person thereafter acquires additional shares of
voting stock, except as a result of further corporate action not caused,
directly or indirectly, by such person. The Company may at any time elect not to
be governed by Chapter 110F by amending its Articles of Organization and By-Laws
by a vote of a majority of the stockholders entitled to vote, but such an
amendment would not be effective for 12 months and would not apply to a business
combination with any person who became an interested stockholder prior to the
adoption of the amendment.

In addition, Massachusetts General Laws Chapter 110D, entitled "Regulation
of Control Share Acquisitions," provides, in general, that any stockholder of a
Massachusetts corporation with more than 200 stockholders of record who acquires
voting stock of such corporation in a "control share acquisition" may not vote
the shares so acquired (or shares acquired within 90 days before or after the
"control share acquisition") unless a majority of the other stockholders of such
corporation entitled to vote so authorize. In general, a "control share
acquisition" includes the acquisition by any person of beneficial ownership of
shares which, when added to all other shares of such corporation beneficially
owned by such person, would entitle such person to vote (i) between 20% and
33 1/3%, (ii) between 33 1/3% and 50% or (iii) more than 50% of the outstanding
voting stock of such corporation. A "control share acquisition" generally does
not include, among other transactions, the acquisition of shares directly from
the issuing corporation. On or before the closing of this offering, the Company
intends to amend its By-Laws to opt out of the provisions of Chapter 110D.

Massachusetts General Laws Chapter 156B, Section 50A, requires that
publicly held Massachusetts corporations that have not "opted out" of Section
50A have a classified board of directors consisting of three classes as nearly
equal in size as possible. Section 50A also provides that directors who are so
classified shall be subject to removal by the stockholders only for cause. The
Company's Articles of Organization reflect the requirements of Section 50A.

The Company's Articles of Organization authorize the issuance of 1,000,000
shares of undesignated Preferred Stock, the terms of which may be fixed from
time to time by the Board of Directors, without further stockholder approval.

The Company's By-Laws provide that, after the Company has a class of voting
stock registered under the Exchange Act, a special meeting of stockholders may
be called by the President, the Board

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56

of Directors or by the holders of 35% or more of the outstanding voting stock of
the Company. Certain other provisions of the Company's By-Laws, its Articles of
Organization and Massachusetts law may also make more difficult or discourage a
proxy contest or the acquisition of control by a holder of a substantial block
of the Company's Common Stock or the removal of the incumbent Board of Directors
and could also have the effect of discouraging a third party from making a
tender offer or otherwise attempting to obtain control of the Company, even
though such an attempt might be beneficial to the Company and its stockholders.
In addition, because such provisions also have the effect of discouraging
accumulations of large blocks of Common Stock by purchasers whose objective is
to have such Common Stock repurchased by the Company at a premium, such
provisions could tend to reduce the temporary fluctuations in the market price
of the Company's Common Stock that are caused by such accumulations.
Accordingly, stockholders could be deprived of certain opportunities to sell
their Common Stock at a temporarily higher market price.

Reference is made to the full text of the foregoing statutes, the Company's
Articles of Organization and its By-Laws for their entire terms. The partial
summary contained in this Prospectus is not intended to be complete. See "Risk
Factors -- Effect of Certain Charter and By-Law Provisions and Anti-Takeover
Provisions; Possible Issuances of Preferred Stock."

Elimination of Monetary Liability for Officers and Directors. The
Company's Articles of Organization also incorporate certain provisions permitted
under the Massachusetts General Laws relating to the liability of directors. The
provisions eliminate to the maximum extent permitted by Chapter 156B of the
Massachusetts General Laws a director's personal liability to the Company for
monetary damages arising out of a breach of the director's fiduciary duty as a
director of the Company, except in circumstances involving certain wrongful
acts, such as the breach of a director's duty of loyalty or acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law or authorization of distributions in violation of the Articles of
Organization or in violation of Chapter 156B or of loans to officers or
directors of the Company or any transaction from which the director derived an
improper personal benefit. These provisions do not prevent recourse against
directors through equitable remedies such as injunctive relief.

Indemnification of Officers and Directors. The Company's By-Laws contain
provisions to indemnify each of the directors and officers of the Company (as
well as the former directors and officers) to the fullest extent permitted by
Massachusetts law against any and all claims and liabilities to which he may be
or become subject by reason of his being or having been an officer or director
of the Company, or by reason of his alleged acts or omissions as an officer or
director of the Company, except in relation to such matters as to which such
officer or director shall have been guilty of wilful malfeasance, bad faith,
gross negligence or reckless disregard of his duties in the conduct of his
office. The By-Laws further provide that the Company shall indemnify and
reimburse each such officer and director against and for any and all legal and
other expenses reasonably incurred by him in connection with any such claims and
liabilities, actual or threatened, whether or not, at or prior to the time when
so indemnified, held harmless and reimbursed, he had ceased being an officer or
director of the Company, except in relation to such matters as to which such
officer or director shall have been guilty of wilful malfeasance, bad faith,
gross negligence or reckless disregard of his duties in the conduct of his
office; provided that the Company prior to such final adjudication may
compromise and settle any such claims and liabilities and pay such expenses, if
such settlement or payment or both appears, in the judgment of a majority of the
Board of Directors, to be for the best interest of the Company, evidenced by a
resolution to that effect after receipt by the Company of a written opinion of
counsel for the Company that such officer or director has not been guilty of
wilful malfeasance, bad faith, gross negligence or reckless disregard of his
duties in the conduct of his office in connection with the matters involved in
such compromise, settlement and payment.

The Company has entered into separate indemnification agreements with each
current director and a former director of the Company. Pursuant to these
agreements, the Company has agreed to indemnify each director to the fullest
extent permitted by law from claims to which he may become subject by reason of
his service or actions as a director or officer of the Company, except as to
matters

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as to which he shall have been guilty of wilful malfeasance, bad faith, gross
negligence or reckless disregard of his duties in the conduct of his office. The
agreements also contain provisions regarding reimbursement of expenses incurred
in connection with such claims.

These agreements and the indemnification provisions of the Company's
By-Laws may have the practical effect in certain cases of eliminating the
ability of stockholders to collect monetary damages from directors. The Company
believes that these indemnification provisions will assist the Company in
attracting and retaining qualified individuals to serve as directors or
officers. At present, the Company is not aware of any pending or threatened
litigation or proceeding involving any director, officer or person serving at
the request of the Company in any capacity that might result in a claim for such
indemnification.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is State
Street Bank and Trust Company.

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58

SHARES ELIGIBLE FOR FUTURE SALE

Upon the closing of this offering, the Company will have 18,392,397 shares
of Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option or of options outstanding as of June 30, 1996. Of these
shares, the 3,400,000 shares sold in this offering will be freely tradable
without restriction or further registration under the Act, except that any
shares purchased by "affiliates" of the Company, as that term is defined in Rule
144 under the Securities Act ("Affiliates"), may generally only be sold in
compliance with the limitations of Rule 144 described below.

SALES OF RESTRICTED SECURITIES

The remaining 14,992,397 shares of Common Shares outstanding upon the
closing of this offering are deemed "Restricted Securities" under Rule 144, of
which 13,657,310 shares are subject to the lock-up agreements described below
(the "Lock-up Agreements"). On the effective date of the Registration Statement
of which this Prospectus forms a part (the "Effective Date"), 360,158 shares of
Common Stock will be eligible for immediate sale under Rule 144(k) promulgated
under the Securities Act. Beginning 90 days after the Effective Date, an
additional 969,609 Restricted Securities will first become eligible for sale in
the public market pursuant to Rule 144 or Rule 701 under the Securities Act.
Beginning 180 days after the Effective Date, 13,538,968 shares will first become
eligible for sale in the public market.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated),
including an Affiliate, who has beneficially owned Restricted Securities for at
least two years, is entitled to sell within any three month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of Common Stock (approximately 183,924 shares immediately
after this offering) or (ii) the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding the
date on which notice of the sale is filed under Rule 144, provided certain
requirements concerning availability of public information, manner of sale and
notice of sale are satisfied. In addition, Affiliates must comply with the
restrictions and requirements of Rule 144, other than the two-year holding
period requirement, in order to sell shares of Common Stock which are not
Restricted Securities. Under Rule 144(k), a person who is not an Affiliate and
has not been an Affiliate for at least three months prior to the sale and who
has beneficially owned Restricted Securities for at least three years may resell
such shares without compliance with the foregoing requirements. In meeting the
two-year and three-year holding periods described above, a holder of Restricted
Securities may under certain circumstances include the holding period of a prior
owner. The two-year and three-year periods described above do not begin until
the full purchase price or other consideration is paid by the person acquiring
the Restricted Securities from the Company or an Affiliate.

The Securities and Exchange Commission has proposed certain amendments to
Rule 144 that would reduce by one year the holding period for shares subject to
Rule 144 to become eligible for sale in the public market. This proposal, if
adopted, would substantially increase the number of shares of Common Stock
eligible for immediate resale following the expiration of the Lock-up
Agreements. No assurance can be given concerning whether or when the proposal
will be adopted by the Securities and Exchange Commission.

OPTIONS

As of June 30, 1996, there were outstanding options to purchase 3,175,158
shares of Common Stock. The holders of outstanding options to purchase 2,441,658
shares of Common Stock have entered into Lock-up Agreements, the terms of which
are described below.

Any director, officer or employee of or consultant to the Company who has
been granted options to purchase shares or who has purchased shares pursuant to
a written compensatory benefit plan or written contract relating to the
compensation of such person prior to the Effective Date pursuant to

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59

Rule 701 may be entitled to rely on the resale provisions of Rule 701, which
permit non-Affiliates to sell their Rule 701 shares under Rule 144 without
having to comply with the public information, holding period, volume limitation
or notice provisions of Rule 144 and permits Affiliates to sell their Rule 701
shares under Rule 144 without having to comply with the Rule 144 holding period
restrictions, in each case commencing 90 days after the Effective Date.

The Company intends to file, approximately 90 days after the Effective
Date, registration statements on Form S-8 under the Securities Act to register
approximately 5,774,715 shares of Common Stock issued pursuant to the exercise
of options granted under the Company's stock option plans (including certain
shares for which an exemption under Rule 144 or Rule 701 would also be
available) or issuable upon the exercise of outstanding stock options and
options that may be granted pursuant to the Company's stock option plans and
100,000 shares issuable pursuant to the Company's employee stock purchase plan.
The Company has agreed with the Underwriters that it will not file any
registration statements on Form S-8 until 90 days after the Effective Date.
Shares covered by such registration statements will thereupon be eligible for
sale in the public market to the extent applicable.

LOCK-UP AGREEMENTS

All directors and executive officers of the Company and certain
stockholders of the Company, which in the aggregate hold 13,657,310 shares of
Common Stock and options to purchase 2,411,658 shares of Common Stock, have
agreed, pursuant to the Lock-up Agreements, that they will not, directly or
indirectly, without the prior written consent of Robertson, Stephens & Company
LLC, sell, offer, contract to sell, pledge, grant any option to purchase or
otherwise dispose of any of shares of Common Stock or any securities convertible
into or exchangeable for, or any rights to purchase or acquire, shares of Common
Stock beneficially owned by them for a period of 180 days from the Effective
Date, otherwise than (a) as a bona fide gift or gifts or (b) as a distribution
to such person's limited partners or shareholders, provided that any such
transferee agrees to be bound by the Lock-up Agreement. Robertson, Stephens &
Company LLC, in its discretion, may waive the foregoing restrictions in whole or
in part, with or without a public announcement of such action. Robertson,
Stephens & Company LLC has no present intention to release any of the securities
from the Lock-up Agreements. It has been the practice of Robertson, Stephens &
Company LLC to consider releasing securities from the Lock-up Agreements based
on a variety of factors, including the market price of the Common Stock, the
volume of shares traded and other market conditions. To the extent any of the
securities are released from the Lock-up Agreements, it could have an adverse
effect on the market price of the Common Stock.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of the Common Stock. See
"Risk Factors -- Shares Eligible for Future Sale."

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60

UNDERWRITING

The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC and Furman Selz LLC (the "Representatives"),
have severally agreed with the Company, subject to the terms and conditions of
the Underwriting Agreement, to purchase from the Company the numbers of shares
of Common Stock set forth opposite their respective names below. The
Underwriters are committed to purchase and pay for all of such shares if any are
purchased.

NUMBER OF
UNDERWRITER SHARES
----------- ---------

Robertson, Stephens & Company LLC........................................ 1,866,667
Furman Selz LLC.......................................................... 933,333
Hambrecht & Quist LLC.................................................... 100,000
William Blair & Company, L.L.C. ......................................... 100,000
Punk, Ziegel & Knoell.................................................... 100,000
Raymond James & Associates, Inc. ........................................ 100,000
The Robinson-Humphrey Company, Inc. ..................................... 100,000
Dakin Securities Corporation............................................. 100,000
---------
Total.......................................................... 3,400,000
=========

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not in excess of $0.40 per share, of which $0.10
may be reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.

The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 510,000
additional shares of Common Stock, at the same price per share as the Company
will receive for the 3,400,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
3,400,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 3,400,000
shares are being sold.

DSC, a customer of the Company, has expressed an interest in purchasing
$2,000,000 of Common Stock in this offering at the initial public offering price
per share. Any such sale to DSC will be made on the same terms as sales to other
investors in this offering. There can be no assurance that DSC will in fact make
such purchase.

The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.

Pursuant to the terms of lock-up agreements, all executive officers and
directors and certain other securityholders of the Company have agreed that, for
a period of 180 days from the Effective Date, they will not, directly or
indirectly, sell, offer, contract to sell, pledge, grant any option to purchase
or otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for, or any rights to purchase or acquire, shares of Common
Stock beneficially owned by them, without the prior written consent of
Robertson, Stephens & Company LLC, which may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. See "Shares Eligible for Future Sale." The Company has also
agreed not to offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, or any options or warrants to purchase Common
Stock other than options issued under the Company's Option Plans and Stock
Purchase Plan for a

60
61

period of 180 days from the Effective Date, except with the prior written
consent of Robertson, Stephens & Company LLC.

The Underwriters will not make sales to accounts over which they exercise
discretionary authority (i) in excess of 5% of the number of shares of Common
Stock offered hereby and (ii) unless they obtain specific written consent from
the customer.

Robert J. Nowlin, a stockholder of the Company, is a Managing Director of
Robertson, Stephens & Company LLC, one of the Representatives of the
Underwriters. Robertson, Stephens & Company LLC is a subsidiary of Robertson,
Stephens & Company Group, L.L.C., which is the managing member of both
Robertson, Stephens & Company LLC and Robertson, Stephens & Company Private
Equity Group, L.L.C. Robertson, Stephens & Company Private Equity Group, L.L.C.
is the sole general partner of Bayview Investors, Ltd., another stockholder of
the Company. Mr. Nowlin and Bayview Investors, Ltd. own 192,199 and 342,400
shares of Common Stock of the Company, respectively.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock has been determined through negotiations between the Company and
the Representatives. Among the factors considered in such negotiations were the
history of, and the prospects for, the Company's business and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for earnings of the Company, the present state
of the Company's development, the general condition of the securities market at
the time of the offering, the market prices and earnings of similar securities
of comparable companies at the time of the offering, the current state of the
economy as a whole and other factors deemed relevant.

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LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Foley, Hoag & Eliot LLP, Boston, Massachusetts. The statements in
this Prospectus under the captions "Risk Factors -- Proprietary Technology; Risk
of Third-Party Claims of Infringement" and "Business -- Intellectual Property"
and other references herein to patent matters have been reviewed and will be
passed upon by Cesari and McKenna, Boston, Massachusetts, special patent counsel
to the Company. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston,
Massachusetts.

EXPERTS

The balance sheets as of December 31, 1994 and 1995 and the statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1994 and December 31, 1995, included in this Prospectus, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein and are included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing. The statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1993, included in this Prospectus, have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.

CHANGES IN INDEPENDENT ACCOUNTANTS

In April 1996, the Company's Board of Directors authorized the Company to
retain Deloitte & Touche LLP as its independent accountants and dismissed
DiBenedetto & Company, P.A. The financial statements for December 31, 1994 and
1995 were audited by Deloitte & Touche LLP. DiBenedetto & Company, P.A. had been
retained to audit the Company's financial statements as of and for the year
ended December 31, 1994. The report of DiBenedetto & Company, P.A. for the year
ended December 31, 1994, which is not included herein, contained no adverse
opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or application of accounting principles. During the
year ended December 31, 1994 and through the date of replacement, there were no
disagreements with DiBenedetto & Company, P.A. on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure or "reportable events" as described in Item 304 of Regulation S-K.

Price Waterhouse LLP was retained to audit the Company's financial
statements for the year ended December 31, 1993. On January 10, 1995, Price
Waterhouse LLP resigned and the Company replaced them with DiBenedetto &
Company, P.A. The report of Price Waterhouse LLP for the year ended December 31,
1993, which is included herein, contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
application of accounting principles. During the year ended December 31, 1993
and through the date of replacement, there were no disagreements with Price
Waterhouse LLP on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure or "reportable events" as
described in Item 304 of Regulation S-K.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549 a Registration Statement on Form S-1 under the Securities
Act with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules to the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement and the exhibits and schedules filed as a
part of the Registration Statement. Statements contained in this Prospectus
concerning the contents of any contract or any other document referred to are
not necessarily complete; reference is made in each instance to the copy of such
contract or document filed as an exhibit to the Registration Statement. Each
such statement is qualified in all respects by such reference to such exhibit.
The Registration Statement, including the exhibits and

62
63

schedules thereto, may be inspected and copied at the public reference
facilities maintained by the Securities and Exchange Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Regional Offices of the Securities and Exchange Commission at Suite 1400, 500
West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center,
Thirteenth Floor, New York, New York 10048. Copies also may be obtained from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. The Commission
maintains a Web site (http://www.sec.gov.) that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission.

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64

TECHNICAL GLOSSARY

ADSL (ASYMMETRIC DIGITAL SUBSCRIBER LINE): A modulation technique using digital
signal processing technology to expand the useable bandwidth of copper telephone
wire.

ASIC (APPLICATION SPECIFIC INTEGRATED CIRCUIT): An integrated circuit that is
custom designed to execute specified functions.

BANDWIDTH: A measure of the frequency range in which a signal can be transmitted
through a specific medium, such as copper telephone wire.

CAP (CARRIERLESS AMPLITUDE PHASE): a "single-carrier" modulation technique that,
in contrast to DMT (discrete multitone), treats the entire available upstream
and downstream frequency ranges as a single medium through which bits of
information are transmitted.

DMT (DISCRETE MULTI-TONE): a "multi-carrier" modulation technique that splits up
the available upstream and downstream frequency ranges into numerous sections,
through each of which bits of information are coded and simultaneously
transmitted.

DWMT (DISCRETE WAVELET MULTI-TONE): a multicarrier modulation technique based on
wavelet mathematics, intended to better partition the band into sections than
DMT and enable data transmission at rates greater than those achievable with DMT
technology.

HFC (HYBRID FIBER COAX): A tree-and-branch architecture consisting of a
combination of fiber and coaxial cable connecting cable company terminals to
residences, designed to implement two-way transmission of data over existing
cable television networks.

ISDN (INTEGRATED SERVICE DIGITAL NETWORK): a digital transmission technology for
transmission of data over copper wire at rates greater than those achievable by
analog voiceband modems.

MODEM: A modulator/demodulator circuit pair that transmits and receives digital
information over communications links, e.g., the public switched telephone
network.

OEM (ORIGINAL EQUIPMENT MANUFACTURER): The producer of a product.

RBOC (REGIONAL BELL OPERATING COMPANY): A telephone company resulting from the
breakup of AT&T.

SDSL (SYMMETRIC DIGITAL SUBSCRIBER LINE): A modulation technique similar to
ADSL, but which allows two-way data transmission at identical transmission
rates.

TELCO: A telephone company.

VDSL (VERY HIGH-SPEED DIGITAL SUBSCRIBER LINE): A modulation technique intended
to permit data transmission at rates faster than ADSL or SDSL, over shorter
distances of copper wire.

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65

AWARE, INC.

INDEX TO FINANCIAL STATEMENTS

Deloitte & Touche LLP Independent Auditors' Report.................................... F-2

Price Waterhouse LLP Report of Independent Accountants................................ F-3

Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (Unaudited)........ F-4

Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and the
Three Months Ended March 31, 1995 and 1996 (Unaudited).............................. F-5

Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993,
1994 and 1995 and the Three Months Ended March 31, 1996 (Unaudited)................. F-6

Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the
Three Months ended March 31, 1995 and 1996 (Unaudited).............................. F-7

Notes to Financial Statements......................................................... F-8

F-1
66

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
Aware, Inc.:

We have audited the accompanying balance sheets of Aware, Inc. as of
December 31, 1995 and 1994 and the related statements of operations, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Aware, Inc. as of December 31, 1995 and
1994, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.

/s/ Deloitte & Touche LLP

Boston, Massachusetts
April 26, 1996
(June 6, 1996 as to Note 9)

F-2
67

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Aware, Inc.

In our opinion, the accompanying statements of operations, of stockholders'
equity and of cash flows for the year ended December 31, 1993 present fairly, in
all material respects, the results of operations and cash flows of Aware, Inc.
for the year ended December 31, 1993, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
financial statements of Aware, Inc. for any period subsequent to December 31,
1993.

/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP

Boston, Massachusetts
February 1, 1994

F-3
68

AWARE, INC.

BALANCE SHEETS

December 31, Pro Forma
------------ March 31, March 31,
1994 1995 1996 1996
---- ---- ---------- ----------
(Uanudited) (Unaudited)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 2,566,128 $ 2,153,681 $ 2,047,038 $ 2,047,038
Accounts receivable (less allowance for doubtful accounts of
$0, $5,300 and $10,300 in 1994, 1995 and 1996,
respectively)................................................ 594,996 500,828 803,067 803,067
Unbilled accounts receivable................................... 304,101 116,261 40,521 40,521
Inventories.................................................... 21,669 39,713 96,751 96,751
Prepaid expenses............................................... 73,542 14,471 11,259 11,259
------------ ------------ ----------- -----------
Total current assets.................................... 3,560,436 2,824,954 2,998,636 2,998,636

PROPERTY AND EQUIPMENT -- Net.................................... 369,975 403,405 352,049 352,049
------------ ------------ ----------- -----------
TOTAL ASSETS..................................................... $ 3,930,411 $ $3,228,359 $ 3,350,685 $ 3,350,685
============ ============ =========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable............................................... $ 96,762 $ 111,519 $ 102,877 $ 102,877
Accrued expenses............................................... 84,667 65,404 83,972 83,972
Accrued compensation........................................... 199,901 67,887 113,209 113,209
Accrued professional fees...................................... 19,894 14,000 31,594 31,594
Accrued rent................................................... 192,979 -- -- --
Deferred revenue............................................... 89,720 50,000 50,000 50,000
------------ ------------ ----------- -----------
Total current liabilities............................... 683,923 308,810 381,652 381,652
------------ ------------ ----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)

STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; no shares authorized;
1,000,000 shares authorized and no shares outstanding pro
forma........................................................ -- -- -- --
Preferred stock, $1.00 par value:
Series B convertible preferred stock, 15,875 shares
authorized, issued, and outstanding in 1994, 1995 and 1996
(none outstanding pro forma in 1996); liquidation
preference of $1,587,500................................... 15,875 15,875 15,875 --
Series C convertible preferred stock, 13,525 shares
authorized, issued, and outstanding in 1994, 1995 and 1996
(none outstanding pro forma in 1996); liquidation
preference of $1,352,500................................... 13,525 13,525 13,525 --
Series D convertible preferred stock, 74,800 shares
authorized, 73,266 issued in 1994, 69,166 in 1995 and 1996
(none outstanding pro forma in 1996); liquidation
preference of $6,916,600................................... 73,266 69,166 69,166 --
Series E convertible preferred stock, 45,000 shares
authorized, 29,432 shares issued and outstanding in 1994,
1995 and 1996 (none outstanding pro forma in 1996);
liquidation preference of $3,826,160....................... 29,432 29,432 29,432 --
Common stock, $.01 par value; 30,000,000 shares authorized;
issued and outstanding, 1,150,093, 1,166,960 and 1,173,370 in
1994, 1995 and 1996, respectively (13,973,145 shares pro
forma in 1996)............................................... 11,501 11,670 11,734 139,732
Additional paid-in capital..................................... 13,792,091 13,807,945 13,816,214 13,816,214
Accumulated deficit............................................ (10,232,140) (10,575,102) (10,533,951) (10,533,951)
------------ ------------ ----------- -----------
3,703,550 3,372,511 3,421,995 3,421,995
Notes receivable for issued stock.............................. (457,062) -- -- --
Treasury stock at cost......................................... -- (452,962) (452,962) (452,962)
------------ ------------ ----------- -----------
Total stockholders' equity.............................. 3,246,488 2,919,549 2,969,033 2,969,033
------------ ------------ ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $ 3,930,411 $ 3,228,359 $ 3,350,685 $ 3,350,685
============ ============ =========== ===========

See notes to financial statements.

F-4
69

AWARE, INC.

STATEMENTS OF OPERATIONS

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------- ---------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------

(UNAUDITED)
REVENUE:
Product............................... $ 219,349 $ 181,217 $ 406,459 $ 202,179 $ 5,125
License and royalty................... 607,625 1,008,434 1,036,615 337,160 647,436
Research and development.............. 2,345,150 2,637,199 1,816,820 411,037 309,442
----------- ----------- ---------- ---------- -----------
Total revenue.................. 3,172,124 3,826,850 3,259,894 950,376 962,003
----------- ----------- ---------- ---------- -----------
COSTS AND EXPENSES:
Cost of product revenue............... 122,684 112,925 242,983 84,184 4,120
Cost of research and development
revenue............................. 1,700,934 2,054,265 1,177,790 363,601 247,614
Research and development.............. 1,341,286 1,437,984 1,155,410 346,572 351,625
Selling and marketing................. 220,812 329,068 411,777 90,260 141,691
General and administrative............ 814,623 987,640 725,511 181,596 199,302
----------- ----------- ---------- ---------- -----------
Total costs and expenses....... 4,200,339 4,921,882 3,713,471 1,066,213 944,352
----------- ----------- ---------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS........... (1,028,215) (1,095,032) (453,577) (115,837) 17,651
INTEREST INCOME......................... 36,048 82,683 110,615 28,624 23,500
----------- ----------- ---------- ---------- -----------
NET INCOME (LOSS)....................... $ (992,167) $(1,012,349) $ (342,962) $ (87,213) $ 41,151
=========== =========== ========== ========== ===========
PRO FORMA INCOME (LOSS) PER COMMON
SHARE................................. $ (0.17) $ (0.04) $ 0.00
========== ========== ===========
PRO FORMA WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING........................... 2,045,006 2,032,416 15,108,599
========== ========== ===========

See notes to financial statements.

F-5
70

AWARE, INC

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK ADDITIONAL
------------------------------------------ COMMON PAID-IN
SERIES B SERIES C SERIES D SERIES E STOCK CAPITAL
-------- -------- -------- -------- -------- -----------

BALANCE AT JANUARY 1, 1993.................................... $ 15,875 $ 13,525 $ 73,266 $ -- $ 11,376 $10,020,302
Exercise of common stock options, 2,500 shares............... -- -- -- -- 25 2,350
Accrued interest on notes receivable for stock issuances..... -- -- -- -- -- --
Net loss..................................................... -- -- -- -- -- --
-------- --------- -------- --------- -------- -----------
BALANCE AT DECEMBER 31, 1993.................................. 15,875 13,525 73,266 -- 11,401 10,022,652
Sale of 29,432 shares of Series E convertible preferred
stock, net of issuance costs of $36,689.................... -- -- -- 29,432 -- 3,760,039
Exercise of common stock options, 10,000 shares.............. -- -- -- -- 100 9,400
Accrued interest on notes receivable for stock issuances..... -- -- -- -- -- --
Net loss..................................................... -- -- -- -- -- --
-------- --------- -------- -------- -------- -----------
BALANCE AT DECEMBER 31, 1994.................................. 15,875 13,525 73,266 29,432 11,501 13,792,091
Exercise of common stock options, 16,867 shares.............. -- -- -- -- 169 15,854
Repurchase of Series D preferred stock, 4,100 shares......... -- -- (4,100) -- -- --
Net loss..................................................... -- -- -- -- -- --
-------- --------- -------- -------- -------- -----------
BALANCE AT DECEMBER 31, 1995.................................. 15,875 13,525 69,166 29,432 11,670 13,807,945
Issuance of common stock (Unaudited)......................... -- -- -- -- 64 8,269
Net income (Unaudited)....................................... -- -- -- -- -- --
-------- --------- -------- -------- -------- -----------
BALANCE AT MARCH 31, 1996 (Unaudited)......................... 15,875 13,525 69,166 29,432 11,734 13,816,214
Pro forma adjustments (Unaudited)............................ (15,875) (13,525) (69,166) (29,432) 127,998 --
-------- --------- -------- -------- -------- -----------
PRO FORMA BALANCE AT MARCH 31,
1996 (Unaudited)............................................. $ -- $ -- $ -- $ -- $139,732 $13,816,214
======== ========= ======== ======== ======== ===========

NOTES TOTAL
ACCUMULATED RECEIVABLE FOR TREASURY STOCKHOLDERS'
DEFICIT ISSUED STOCK STOCK EQUITY
------------ -------------- --------- ------------

BALANCE AT JANUARY 1, 1993.................................... $ (8,227,624) $(410,000) $ -- $ 1,496,720
Exercise of common stock options, 2,500 shares............... -- -- -- 2,375
Accrued interest on notes receivable for stock issuances..... -- (21,,649) -- (21,649)
Net loss..................................................... (992,167) -- -- (992,167)
------------ --------- --------- -----------
BALANCE AT DECEMBER 31, 1993.................................. (9,219,791) (431,649) -- 485,279
Sale of 29,432 shares of Series E convertible preferred
stock, net of issuance costs of $36,689.................... -- -- -- 3,789,471
Exercise of common stock options, 10,000 shares.............. -- -- -- 9,500
Accrued interest on notes receivable for stock issuances..... -- (25,413) -- (25,413)
Net loss..................................................... (1,012,349) -- -- (1,012,349)
------------ --------- --------- -----------
BALANCE AT DECEMBER 31, 1994.................................. (10,232,140) (457,062) -- 3,246,488
Exercise of common stock options, 16,867 shares.............. -- -- -- 16,023
Repurchase of Series D preferred stock, 4,100 shares......... -- 457,062 (452,962) --
Net loss..................................................... (342,962) -- -- (342,962)
------------ --------- --------- -----------
BALANCE AT DECEMBER 31, 1995.................................. (10,575,102) -- (452,962) 2,919,549
Issuance of common stock (Unaudited)......................... -- -- -- 8,333
Net income (Unaudited)....................................... 41,151 -- -- 41,151
------------ --------- --------- -----------
BALANCE AT MARCH 31, 1996 (Unaudited)......................... (10,533,951) -- (452,962) 2,969,033
Pro forma adjustments (Unaudited)............................ -- -- -- --
------------ --------- --------- -----------
PRO FORMA BALANCE AT MARCH 31,
1996 (Unaudited)............................................. $(10,533,951) $ -- $(452,962) $ 2,969,033
============ ========= ========= ===========

See notes to financial statements.

F-6
71

AWARE, INC.

STATEMENTS OF CASH FLOWS

THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------ ------------------------
1993 1994 1995 1995 1996
--------- ----------- ---------- ---------- ----------
(UNAUDITED)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................. $(992,167) $(1,012,349) $ (342,962) $ (87,213) $ 41,151
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization................... 263,614 206,140 200,701 60,000 57,457
Increase (decrease) in cash from:
Short-term investments.......................... 201,642 -- -- -- --
Accounts receivable............................. (135,047) (326,756) 94,168 282,773 (302,239)
Unbilled accounts receivable.................... 19,493 (55,603) 187,840 131,730 75,740
Inventories..................................... (46,740) 25,071 (18,044) (259) (57,038)
Prepaid expenses................................ 53,934 (49,385) 59,071 29,221 3,212
Accounts payable................................ 40,256 (115,045) 14,757 (31,790) (8,642)
Accrued expenses................................ (24,339) 314,595 (350,150) (137,195) 81,484
Deferred revenue................................ 98,128 (8,408) (39,720) (39,720) --
Notes receivable from officers.................. (21,649) -- -- -- --
--------- ----------- ---------- ---------- ----------
Net cash provided by (used in) operating
activities............................... (542,875) (1,021,740) (194,339) 207,547 (108,875)
--------- ----------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
-- Purchases of property and equipment............ (85,158) (371,658) (234,131) (12,271) (6,101)
--------- ----------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stockholders' loans............... -- 150,000 -- -- --
Repayment of stockholders' loans................ -- (150,000) -- -- --
Proceeds from issuance of preferred stock, net
of issuance costs............................. -- 3,764,058 -- -- --
Proceeds from issuance of common stock.......... 2,375 9,500 16,023 95 8,333
Repayment of capital lease obligations.......... (1,339) -- -- -- --
--------- ----------- ---------- ---------- ----------
Net cash provided by financing
activities............................... 1,036 3,773,558 16,023 95 8,333
--------- ----------- ---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... (626,997) 2,380,160 (412,447) 195,371 (106,643)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... 812,965 185,968 2,566,128 2,566,128 2,153,681
--------- ----------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............ $ 185,968 $ 2,566,128 $2,153,681 $2,761,499 $2,047,038
========= =========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -- Cash paid for interest............. $ 127 $ 4,359 $ 877 $ -- $ --
========= =========== ========== ========== ==========
SUPPLEMENTAL NONCASH DISCLOSURES:
Increase in notes receivable for accrued
interest........................................ $ -- $ 25,413 $ -- $ -- $ --
========= =========== ========== ========== ==========
Repurchase of Series D preferred shares for
cancelation of notes.............................. $ -- $ -- $ 457,062 $ -- $ --
========= =========== ========== ========== ==========

See notes to financial statements.

F-7
72

AWARE, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS ENDED
MARCH 31, 1996 AND MARCH 31, 1995 IS UNAUDITED)

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Aware, Inc. (the "Company") designs, develops and markets
telecommunications software, chipsets and modems which incorporate ADSL
technology and increase the speed of data communications over conventional
copper telephone lines. The Company's products and services are designed to
allow telephone companies to utilize their installed bases of dedicated copper
lines to provide both residential and business customers with interactive data
transmission at speeds much higher than currently available. The Company also
offers video compression products. The Company was in the development stage at
December 31, 1994; during the year ended December 31, 1995 the Company completed
its development activities and commenced its planned principal operations.

The Company is dependent on Analog Devices, Inc. ("ADI") for the
manufacture and sale of chipsets based on the Company's broadband technology.
The relationship between ADI and the Company is an exclusive arrangement, under
which neither party may enter into competing agreements with third parties.

Use of Estimates -- The preparation of the Company's financial statements
in conformity with generally accepted accounting principles necessarily requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the balance sheet date. Estimates include reserves for doubtful accounts, useful
lives of fixed assets and accrued liabilities. Actual results may differ from
these estimates.

Fair Value of Financial Instruments -- Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of the fair value of certain financial
instruments. The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value because
of their short-term nature.

Cash and Cash Equivalents -- Cash equivalents consist primarily of
investments in a bank money market fund.

Allowance for Doubtful Accounts -- Accounts are charged to bad debt expense
as they are deemed uncollectible based on a review of the accounts at each
balance sheet date. Bad debt expense was $0, $5,300 and $5,000 for 1994, 1995
and the three months ended March 31, 1996, respectively.

Inventories -- Inventories are stated at the lower of cost or market with
cost being determined by the first-in, first-out ("FIFO") method.

Property and Equipment -- Property and equipment are stated at cost.
Depreciation and amortization of property and equipment is provided using the
straight-line method over the estimated useful lives of the assets (3 to 5
years).

Revenue Recognition -- Product revenue consists primarily of revenue from
the sale of tangible products, such as modems and compression chipsets. Revenue
is recognized upon shipment.

License and royalty revenue consists primarily of revenue from the sale of
intellectual property, such as hardware and software technology licenses,
compression software licenses, and royalties from the sale of chipsets by
customers who have licensed the Company's technology. Revenue from the sale of
technology licenses for the initial transfer of hardware and software designs is
recognized when a definitive agreement is reached, the transfer has been
effected, and no contingent factors are present. Revenue from the sale of
compression software licenses is recognized upon shipment. Royalty revenue

F-8
73

AWARE, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS ENDED
MARCH 31, 1996 AND MARCH 31, 1995 IS UNAUDITED) -- (CONTINUED)

is recognized based upon billing schedules when no right to return exists or
upon sales reports from customers.

Research and development revenue is comprised of revenue from government
and commercial research and development contracts. Revenue on government
contracts is generally recognized when services are performed. Certain long-term
contracts are accounted for using the percentage-of-completion method, whereby
revenue and profit are recognized throughout the performance period of the
contract based on the ratio that incurred costs bear to estimated total costs to
complete. Losses, if any, on contracts are provided for in the period in which
the losses are first identified. Revenue on commercial contracts is generally
recognized as research is performed under the terms of the respective
agreements.

Unbilled accounts receivable are stated at estimated realizable value.
These amounts will be billable to customers based on the terms of contracts
which include achievement of milestones or completion of the contract.

Deferred revenue consists of customer prepayments which will be recorded as
revenue as earned.

Income Taxes -- The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." This Statement requires the Company to compute
deferred income taxes based on the differences between the financial statement
and tax basis of assets and liabilities using enacted rates in effect in the
years in which the differences are expected to reverse.

Capitalization of Software Costs -- The Company capitalizes certain
internally generated software development costs after technological feasibility
of the product has been established. Technological feasibility is established
upon the completion of a detail program design, or in its absence, a working
model. Capitalized software costs also include amounts paid for purchased
software which has reached technological feasibility. Such costs are amortized,
on a product-by-product basis, on a straight-line basis over their useful
economic lives (generally two to four years), or the ratio of current gross
revenue to total gross current and future revenue, whichever is greater. There
were no capitalized software costs at December 31, 1994 and 1995 or March 31,
1996, because such costs incurred subsequent to the establishment of
technological feasibility, but prior to commercial availability, were
immaterial.

Concentration of Risk -- At December 31, 1994 and 1995, the Company had
bank cash balances, including money market investments, in excess of federally
insured deposit limits of approximately $2,582,000 and $2,079,000, respectively.

Concentration of credit risk with respect to accounts receivable is limited
to $250,000 with one customer at December 31, 1995 and $177,000, $125,000 and
$112,000 with three customers at December 31, 1994.

Recently Issued Accounting Standards -- The Financial Accounting Standards
Board ("FASB") has issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Company
adopted this standard on January 1, 1996. This Statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
Adoption did not have a material effect on the Company's financial position or
results of operations.

Recently Issued Accounting Standards (Continued) -- In November 1995, the
FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." The Company
adopted this standard on

F-9
74

AWARE, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS ENDED
MARCH 31, 1996 AND MARCH 31, 1995 IS UNAUDITED) -- (CONTINUED)

January 1, 1996. As permitted by SFAS No. 123, the Company intends to continue
to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and will make the pro forma disclosures required by SFAS
No. 123. Adoption did not have a material effect on the Company's financial
position or results of operations.

Pro Forma Income Per Common Share -- Pro forma net income (loss) per common
share is based on the weighted average number of common and dilutive common
equivalent shares (common stock options and convertible preferred stock)
outstanding (see Note 4). Common equivalent shares are not included in the per
share calculations where the effect of their inclusion would be antidilutive,
except in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 83. The Bulletin requires all common shares issued and options to
purchase shares of common stock granted by the Company during the twelve-month
period prior to the filing of a proposed initial public offering be included in
the calculation as if they were outstanding for all periods.

Pro Forma Balance Sheet Information -- The unaudited pro forma balance
sheet information is adjusted to give effect to the conversion of all
outstanding convertible preferred stock (see Note 4) that would happen
immediately prior to the effectiveness of a registration statement.

Interim Results (Unaudited) -- The accompanying balance sheet at March 31,
1996, the statement of stockholders' equity for the three months ended March 31,
1996 and the statements of operations and cash flows for the three months ended
March 31, 1995 and 1996 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of financial data for such
periods.

2. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following at December 31:

DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- ----------

Computer equipment....................................... $ 1,462,535 $ 1,556,790 $ 1,563,674
Office equipment......................................... 39,546 88,390 85,744
Furniture and fixtures................................... 45,207 106,499 106,499
Purchased software....................................... 103,060 117,638 119,041
Leasehold improvements................................... 105,750 14,702 14,702
---------- ----------- -----------
Total.................................................... 1,756,098 1,884,019 1,889,660
Less accumulated depreciation and amortization........... (1,386,123) (1,480,614) (1,537,611)
----------- ---------- -----------
Net...................................................... $ 369,975 $ 403,405 $ 352,049
=========== =========== ===========

F-10
75

AWARE, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS ENDED
MARCH 31, 1996 AND MARCH 31, 1995 IS UNAUDITED) -- (CONTINUED)

3. INCOME TAXES

Deferred income tax assets are attributable to the following:

DECEMBER 31,
------------------------ MARCH 31,
1994 1995 1996
---------- ---------- ----------

Depreciation............................................. $ 133,000 $ 75,000 $ 77,000
Accrued expenses......................................... 67,000 28,000 31,000
Deferred revenues........................................ 37,000 21,000 21,000
Federal net operating loss carryforwards................. 3,130,000 3,383,000 3,383,000
State net operating loss carryforwards................... 643,000 587,000 590,000
Research and development tax credit carryforwards........ 561,000 576,000 576,000
----------- ----------- -----------
Total.................................................... 4,571,000 4,670,000 4,678,000
Valuation allowance...................................... (4,571,000) (4,670,000) (4,678,000)
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========

A valuation allowance is provided against temporary deductible differences,
net operating loss carryforwards and tax credits which are not likely to be
realized. During 1994, 1995 and through March 31, 1996, the net valuation
allowance was changed to fully reserve gross deferred tax assets.

At December 31, 1995, the Company had available federal net operating loss
carryforwards of approximately $9,664,000 which expire in 2003 through 2010, and
research and development tax credit carryforwards of approximately $576,000
which expire in 2003 through 2010.

4. STOCKHOLDERS' EQUITY

Common Stock -- In May 1994, the Company increased its authorized common
stock to 18,650,000 shares from 13,650,000 shares.

Convertible Preferred Stock -- At the option of the holder at any time, or
at the discretion of the Board of Directors at any time after the Company has
earned a cumulative profit of at least $5,000,000, each share of Series B, C, D,
and E preferred stock shall be automatically converted into common stock. The
Company has reserved 13,209,775 shares of common stock for possible conversion
of preferred stock.

Each preferred stockholder is entitled to 100 votes for each share of
preferred stock held.

If common stock dividends are declared, the preferred stockholders shall
receive dividends at 100 times the amount paid on each common share.

The Series E preferred stockholders have liquidation preference and are
entitled to receive a distribution of $130 per share prior to any distributions
to the Series B, C, and D preferred stockholders and the common stockholders. In
order of preference, the Series D, C, and B preferred stockholders, as separate
groups, are entitled to receive a distribution of $100 per share prior to any
distributions to the common stockholders.

In the event of a public offering, pursuant to an effective registration
under the Securities Act of 1933, covering the offer and sale of common stock
for the account of the Company to the public for not less than $1.00 per share
with an aggregate offering price of not less than $7,500,000, each share of
Series B, C, D and E preferred stock shall automatically be converted into
shares of common stock.

F-11
76

AWARE, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS ENDED
MARCH 31, 1996 AND MARCH 31, 1995 IS UNAUDITED) -- (CONTINUED)

Notes Receivable for Stock Issuances -- In December 1992, the Company
issued 4,100 shares of Series D preferred stock to two officers of the Company
in exchange for notes receivable totaling $410,000. Interest was payable
quarterly at the applicable federal rate (approximately 5.3% at December 31,
1994). At December 31, 1994, unpaid interest on the notes amounted to $47,062.
The notes were secured by the related Series D preferred stock. Upon the
resignation of the two officers from the Company in March 1995, the Company
accepted the Series D preferred stock in payment of the notes and unpaid
interest thereon.

Stock Option Plan -- In January 1990, the Company adopted an Incentive and
Nonstatutory Stock Option Plan (the "Plan"). At the discretion of the Board of
Directors, options granted may be either incentive stock options or nonqualified
stock options. Under the Plan, the Company may grant options to purchase up to
2,873,002 shares of common stock.

The stock options are exercisable over a period determined by the Board of
Directors, not to exceed ten years from the date of grant, except for stock
options granted to directors, which must be exercised within eight years from
the date of grant. Unexercised incentive stock options lapse upon termination of
employment. The exercise price shall be determined by the Board of Directors,
except that the exercise price of any incentive stock option shall not be less
than the fair market value of the shares, as determined by the Board of
Directors at the date of grant (not less than 110% of such value in the case of
holders of 10% or more of the total combined voting power of all classes of the
Company's stock).

In 1994, upon resolution by the Board of Directors and by agreement of the
option holders, the Company canceled incentive stock options and nonqualified
options previously issued at $2.00 per share and reissued replacement options
with the same terms and vesting schedule at $1.30 per share.

F-12
77

AWARE, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS ENDED
MARCH 31, 1996 AND MARCH 31, 1995 IS UNAUDITED) -- (CONTINUED)

A summary of activity of the Plan is as follows:

INCENTIVE STOCK
OPTIONS NONQUALIFIED STOCK OPTIONS
------------------------- --------------------------
NUMBER NUMBER
OF OPTION OF OPTION
SHARES PRICE SHARES PRICE
-------- ------------ --------- ------------

Options outstanding at January 1, 1993..... 459,261 $ .95 977,687 $ .95
Options granted.......................... 169,500 $ .95-$2.00 -- $ --
Options canceled......................... (70,500) $ .95 -- --
Options exercised........................ (2,500) $ .95 -- --
-------- ---------
Options outstanding at December 31, 1993... 555,761 $ .95-$2.00 977,687 $ .95
Options granted.......................... 418,769 $1.30-$2.00 719,231 $1.30-$2.00
Options canceled......................... (174,500) $ .95-$2.00 (5,000) $ .95
Options exercised........................ (10,000) $ .95 -- --
-------- ---------
Options outstanding at December 31, 1994... 790,030 $ .95-$1.30 1,691,918 $ .95-$2.00
Options granted.......................... 619,750 $ 1.30 520,000 $ 1.30
Options canceled......................... (491,311) $ .95-$1.30 (356,020) $ .95-$2.00
Options exercised........................ (200) $ .95 (16,667) $ .95
-------- ---------
Options outstanding at December 31, 1995... 918,269 $ .95-$1.30 1,839,231 $ .95-$1.43
Options granted.......................... -- --
Options canceled......................... (9,590) $ 1.30 --
Options exercised........................ (6,410) $ 1.30 --
-------- ---------
Options outstanding at March 31, 1996...... 902,269 $ .95-$1.30 1,839,231 $ .95-$1.43
======== =========
Options exercisable at March 31, 1996...... 346,474 $ .95-$1.30 1,336,325 $ .95-$1.43
======== =========

At March 31, 1996, 95,197 shares of common stock were available for future
grant under the Plan, and 2,836,697 shares of common stock remained reserved for
the exercise of options under the Plan.

5. COMMITMENTS AND CONTINGENCIES

Lease Commitments -- During December 1994, management of the Company
decided to relocate its office and research facilities and initiated
negotiations to terminate its lease. In March 1995, the Company completed
negotiations to terminate the lease effective May 31, 1995. The Company's cost
to terminate the lease of approximately $180,000 was included in rent expense in
1994.

The Company entered into a new three-year noncancelable operating lease for
its office and research facilities commencing June 1, 1995. The new lease
provides that the Company pay a base monthly rental of $10,500 plus, as
additional rent, a proportionate annual share of the building common expenses
and real estate taxes in excess of a specified amount.

Rental expense approximated $312,000, $494,000 and $283,000 in 1993, 1994
and 1995, respectively, and $120,000 and $31,000 for the three months ended
March 31, 1995 and 1996, respectively.

F-13
78

AWARE, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE PERIODS ENDED
MARCH 31, 1996 AND MARCH 31, 1995 IS UNAUDITED) -- (CONTINUED)

Future annual minimum lease payments under the leases are as follows:

1996...................................................... $ 94,100
1997...................................................... 125,500
1998...................................................... 52,300

Litigation -- There are no pending legal proceedings to which the Company
is a party or to which any of its properties are subject which, either
individually or in the aggregate, are expected by the Company to have a material
adverse effect on its business, financial position or results of operations.

6. TRANSACTIONS WITH RELATED PARTIES

Consulting Agreements -- The Company pays consulting fees for scientific
research and development services provided by certain stockholders. The total
charges from related parties approximated $26,000, $27,000 and $66,000 in 1993,
1994 and 1995, respectively, and $11,000 and $4,000 for the three months ended
March 31, 1995 and 1996, respectively. There were no amounts due to related
parties at December 31, 1995 and 1994 or March 31, 1996.

Loans from Stockholders -- During 1994, certain stockholders made
short-term loans totaling $150,000 to the Company, at an interest rate of 10%.
The Company repaid the loans in 1994. No such loans were made during 1995.

7. MAJOR CUSTOMERS

The portion of total revenue that was derived from major customers was as
follows:

1993 1994 1995
---- ---- ----

Customer A............................................................ 12% 10% 23%
Customer B............................................................ 44 38 12
Customer C............................................................ -- -- 18
Customer D............................................................ -- -- 10

8. EMPLOYEE BENEFIT PLAN

In 1994, the Company established a qualified 401(k) Retirement Plan (the
"Plan") under which employees are allowed to contribute certain percentages of
their pay, up to the maximum allowed under Section 401(k) of the Internal
Revenue Code. Company contributions to the Plan are at the discretion of the
Board of Directors. There were no Company contributions in 1995 and 1994.

9. SUBSEQUENT EVENTS

On May 23, 1996, the Company adopted a new 1996 Stock Option Plan with
3,000,000 shares authorized. Additionally, the Company adopted an Employee Stock
Purchase Plan with 100,000 shares authorized. The Company granted options for
1,378,000 shares at $8.25 per share under the new 1996 Stock Option Plan.

On June 6, 1996, the stockholders of the Company approved the filing of
amended and restated articles of organization that authorize an additional
11,350,000 shares of $.01 par value common stock and 1,000,000 shares of $1.00
par value preferred stock.

F-14
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3 SECONDS DOWNLOAD TIME
28.8 KBPS
[Picture showing computer screen with incomplete image]
3 SECONDS DOWNLOAD TIME
4.4 MBPS
[Picture showing computer screen with image]

The Aware ADSL Internet Access Modem is designed to download data at a rate
of up to 4.4 Mbps over a distance of 12,000 feet. The screen simulations above
illustrate the difference in performance between this data rate and the data
rate available from a conventional 28.8 modem.
80

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