----

----

|   |  AWARE, INC. |   |
|--------|-------------------|--------|

|                                                                       |  Massachusetts                        |   |   |  04-2911026 |   |
|----------------------------------------------------------------------------|--------------------------------------------|--------|--------|------------------|--------|
| (State or Other Jurisdiction of   Incorporation or Organization) |  (I.R.S. Employer Identification No.) |

|   |  40 Middlesex Turnpike, Bedford, Massachusetts 01730 |   |
|--------|-----------------------------------------------------------|--------|
|   |  (Address of Principal Executive Offices)(Zip Code)  |   |

|                                                                   | (781) 276-4000 |   |
|------------------------------------------------------------------------|----------------|--------|
|   (Registrant’s Telephone Number, Including Area Code) |

|   |                                        |   |                     |                                      |   |
|--------|---------------------------------------------|--------|--------------------------|-------------------------------------------|--------|
|   | Title of Each Class                         |   |                     | Name of Each Exchange on Which Registered |   |
|   | Common Stock, par value $.01 per share |   | The Nasdaq Global Market |                                      |

----

----

| PART I                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |
| Item 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Business                                                                                                              | 3 |
| Item 1A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Risk Factors                                                                                                              | 10 |
| Item 1B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Unresolved Staff Comments                                                                                                              | 17 |
| Item 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Properties                                                                                                              | 18 |
| Item 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Legal Proceedings                                                                                                              | 18 |
| Item 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Submission of Matters to a Vote of Security Holders                                                                                                              | 18 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |
| PART II                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |
| Item 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  | 19 |
| Item 6.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Selected Financial Data  | 22 |
| Item 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Management’s Discussion and Analysis of Financial Condition and Results of Operations  | 23 |
| Item 7A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Quantitative and Qualitative Disclosures About Market Risk                                                                                                              | 32 |
| Item 8.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Consolidated Financial Statements and Supplementary Data                                                                                                              | 33 |
| Item 9.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 53 |
| Item 9A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Controls and Procedures                                                                                                              | 53 |
| Item 9B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Other Information                                                                                                              | 53 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |
| PART III                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |
| Item 10.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Directors, Executive Officers and Corporate Governance                                                                                                              | 54 |
| Item 11.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Executive Compensation                                                                                                              | 54 |
| Item 12.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 54 |
| Item 13.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Certain Relationships and Related Transactions, and Director Independence | 54 |
| Item 14.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Principal Accountant Fees and Services                                                                                                              | 54 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| PART IV                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |
| Item 15.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Exhibits and Financial Statement Schedules                                                                                                              | 55 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |
| Signatures                                                                                                                                    | 57 |

----

----

----

| ●   | Data formatting and interchange software components that support NIST, ISO, INCITS, ICAO, and FIPS 201 standards and enable interoperability. |
|---------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|

| ●   | Image compression software components for fingerprint and facial image compression such as WSQ and JPEG2000. |
|---------------------|--------------------------------------------------------------------------------------------------------------|

| ●   | Biometric ID cards. Our PIVSuiteTM family of software development kits (SDKs) supports registration, identity proofing, ID card personalization and issuance applications in compliance with FIPS 201. CaptureSuiteTM is a family of SDKs for automatic capture and processing of fingerprints. |
|---------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ●   | Image processing for biometric quality analysis, capture and transaction processing applications. |
|---------------------|---------------------------------------------------------------------------------------------------|

| ●   | Networking software for building and deploying multimodal biometric data workflow solutions. Our Biometrics Services Platform (BioSPTM) is a service-oriented platform for biometrics data processing and integration applications. BioSP supports the collection of biometricsfrom a distributed network, and subsequent aggregation, analysis, processing and integration of this data into larger systems. |
|---------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

----

| ● | market acceptance of our hardware and software products; |
|---------|----------------------------------------------------------|

| ● | fluctuations in the demand for our hardware and software products; |
|---------|--------------------------------------------------------------------|

| ● | competitive pressures resulting in lower software or hardware product revenues; |
|---------|---------------------------------------------------------------------------------|

| ● | the loss of a significant OEM relationship or termination of a professional services project by a customer; |
|---------|-------------------------------------------------------------------------------------------------------------|

| ● | the loss by an OEM customer of a strategic relationship with an equipment company customer; |
|---------|---------------------------------------------------------------------------------------------|

| ● | announcements or introductions of new technologies or products by us or our competitors; |
|---------|------------------------------------------------------------------------------------------|

| ● | delays or problems in the introduction or performance of enhancements or of future generations of our technology; |
|---------|-------------------------------------------------------------------------------------------------------------------|

| ● | failures or problems in our hardware or software products; |
|---------|------------------------------------------------------------|

| ● | pricing pressure from our competitors in the markets in which we compete; |
|---------|---------------------------------------------------------------------------|

| ● | delays in the adoption of new industry standards or changes in market perception of the value of new or existing standards; |
|---------|-----------------------------------------------------------------------------------------------------------------------------|

| ● | personnel changes, particularly those involving engineering, technical, sales and marketing personnel; |
|---------|--------------------------------------------------------------------------------------------------------|

| ● | costs associated with protecting our intellectual property; |
|---------|-------------------------------------------------------------|

| ● | the potential that customers could fail to make payments under their agreements with us; |
|---------|------------------------------------------------------------------------------------------|

| ● | hardware manufacturing issues, including yield problems in our hardware platforms, and inventory buildup and obsolescence; |
|---------|----------------------------------------------------------------------------------------------------------------------------|

----

| ● | product gross margins may be affected by various factors including, but not limited to, product mix, product life cycle, and provisions for excess and obsolete inventory; |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ● | new laws, changes to existing laws, or regulatory developments; and |
|---------|---------------------------------------------------------------------|

| ● | general economic trends and other factors. |
|---------|--------------------------------------------|

| ● | the test and diagnostics or biometrics markets decline; |
|---------|---------------------------------------------------------|

| ● | new and/or existing customers do not choose to use our software or hardware products; or |
|---------|------------------------------------------------------------------------------------------|

| ● | customers do not choose to license and/or buy our patents. |
|---------|------------------------------------------------------------|

----

| ● | reduced demand for our products or our customers’ products that incorporate our technology; |
|---------|---------------------------------------------------------------------------------------------------|

| ● | increased risk of order cancellations or delays; |
|---------|--------------------------------------------------|

| ● | increased pressure on the prices for our products or our customers’ products that incorporate our technology; |
|---------|---------------------------------------------------------------------------------------------------------------------|

| ● | greater difficulty in collecting accounts receivable; and |
|---------|-----------------------------------------------------------|

| ● | risks to our liquidity, including the possibility that we might not have access to our cash when needed. |
|---------|----------------------------------------------------------------------------------------------------------|

----

| ● | quarterly fluctuations in our operating results; |
|---------|--------------------------------------------------|

| ● | changes in future financial guidance that we may provide to investors and public market analysts; |
|---------|---------------------------------------------------------------------------------------------------|

| ● | changes in our relationships with our customers; |
|---------|--------------------------------------------------|

| ● | announcements of technological innovations or new products by us, our customers or our competitors; |
|---------|-----------------------------------------------------------------------------------------------------|

| ● | changes in DSL or biometrics market growth rates as well as investor perceptions regarding the investment opportunity that companies participating in the DSL or biometrics industry afford them; |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ● | changes in earnings estimates by public market analysts; |
|---------|----------------------------------------------------------|

| ● | key personnel losses; |
|---------|-----------------------|

| ● | sales of our common stock; |
|---------|----------------------------|

| ● | our stock repurchase activities; and |
|---------|--------------------------------------|

| ● | developments or announcements with respect to industry standards, patents or proprietary rights. |
|---------|--------------------------------------------------------------------------------------------------|

----

| ● | The competitiveness of DSL chipsets offered by Lantiq and Ikanos and the willingness of their customers to purchase DSL chipsets from them; |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------|

| ● | The promotional and marketing efforts of Lantiq and Ikanos; and |
|---------|-----------------------------------------------------------------|

| ● | DSL market risks in general, including: i) industry wide chipset demand; and ii) competitive pressures and cyclical demand for DSL chipsets, which may result in reduced average selling prices and channel inventory build-up. |
|---------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ● | market acceptance of our biometric technologies and products; |
|---------|---------------------------------------------------------------|

| ● | changes in contracting practices of government or law enforcement agencies; |
|---------|-----------------------------------------------------------------------------|

| ● | the failure of the biometrics market to experience continued growth; |
|---------|----------------------------------------------------------------------|

| ● | delays or problems in the introduction or performance of enhancements or of future generations of our technology; |
|---------|-------------------------------------------------------------------------------------------------------------------|

| ● | failures or problems in our biometric software products; |
|---------|----------------------------------------------------------|

| ● | delays in the adoption of new industry biometric standards or changes in market perception of the value of new or existing standards; |
|---------|---------------------------------------------------------------------------------------------------------------------------------------|

----

| ● | growth of proprietary biometric systems which do not conform to industry standards; |
|---------|-------------------------------------------------------------------------------------|

| ● | competitive pressures resulting in lower software product revenues; |
|---------|---------------------------------------------------------------------|

| ● | personnel changes, particularly those involving engineering, technical and sales and marketing personnel; |
|---------|-----------------------------------------------------------------------------------------------------------|

| ● | costs associated with protecting our intellectual property; |
|---------|-------------------------------------------------------------|

| ● | litigation by third parties for alleged infringement of their proprietary rights; |
|---------|-----------------------------------------------------------------------------------|

| ● | the potential that customers could fail to make payments under their current contracts; |
|---------|-----------------------------------------------------------------------------------------|

| ● | new laws, changes to existing laws, or regulatory developments; and |
|---------|---------------------------------------------------------------------|

| ● | general economic trends and other factors. |
|---------|--------------------------------------------|

| ● | our ability to structure and price technology contracts in a manner that is consistent with our business model; |
|---------|-----------------------------------------------------------------------------------------------------------------|

| ● | our ability to structure ourselves to successfully bid on U.S. government contracts and meet the requirements of U.S. contracting rules and regulations; |
|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

| ● | our ability to deliver contract milestones: i) in a timely and cost efficient manner, and ii) in a form and condition acceptable to customers; |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------|

| ● | the risk that customers could terminate projects; |
|---------|---------------------------------------------------|

| ● | the risk that we rely substantially on third party contractors and consultants to deliver certain contract milestones; and |
|---------|----------------------------------------------------------------------------------------------------------------------------|

| ● | the potential that customers could fail to make payments under their contracts. |
|---------|---------------------------------------------------------------------------------|

| ● | the willingness and ability of OEM customers to design, build and sell automated test heads, hand-held testers, and DSLAMs that incorporate or work with our products; |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ● | our ability to market and sell to service providers; and |
|---------|----------------------------------------------------------|

| ● | our ability to provide effective sales, marketing, and customer service to our customers. |
|---------|-------------------------------------------------------------------------------------------|

----

----

----

| 1. | 72,000 square feet of office space in Bedford, Massachusetts, which serves as our headquarters. This site is used for our research and development, sales and marketing, and administrative activities. We own this facility. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| 2. | 411 square feet of research and development space in Orinda, California. This facility is currently leased for a 3-year term, which expires on August 31, 2010. |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                                                                                                                                                                                   |   | First   |   |   | Second  |   |   | Third   |   |   | Fourth  |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
|                                                                                                                                                                                                                   |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |
| 2009                                                                                                                                                                                                                   |   |    |   |   |    |   |   |    |   |   |    |   |
| High                                    |   | $       | 2.35   |   |    | $      | 2.99   |    |   | $      | 3.02    |   |   | $ | 2.90 |   |
| Low                                     |   |    | 1.60   |   |    |   | 1.83   |    |   |   | 2.25    |   |   |   | 1.94 |   |
|                                                                                                                                                                                                                   |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| 2008                                                                                                                                                                                                                   |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |
| High                                    |   | $       | 4.30   |   |    | $      | 3.96   |    |   | $      | 3.39    |   |   | $ | 2.96 |   |
| Low                                     |   |    | 3.65   |   |    |   | 2.85   |    |   |   | 2.43    |   |   |   | 1.58 |   |

----

|                                                                                                                                                                                                                                                                                                                                                     |   | Value of Investment ($) |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                     |   | 12/31/04                |   |   | 12/31/05 |   |   | 12/31/06 |   |   | 12/31/07 |   |   | 12/31/08 |   |   | 12/31/09 |   |
| Aware, Inc.                                                                          |   | $                       | 100.00 |   |   | $ | 91.75 |   |   | $ | 109.90 |   |   | $ | 86.60 |   |   | $ | 38.56 |   |   | $ | 57.73 |   |
| Nasdaq Composite Index                                                     |   |                    | 100.00 |   |   |   | 101.33 |   |   |   | 114.01 |   |   |   | 123.71 |   |   |   | 73.11 |   |   |   | 105.61 |   |
| RDG Technology Composite                                                             |   |                    | 100.00 |   |   |   | 102.13 |   |   |   | 111.45 |   |   |   | 127.27 |   |   |   | 71.89 |   |   |   | 115.97 |   |

----

|                                  |   |                              |   |   |                          |   |   |                                                                                |   |   |                                                                                                      |   |   |   |   |   |
|---------------------------------------|--------|-----------------------------------|--------|--------|-------------------------------|--------|--------|-------------------------------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
|   Period                    |   | (a)Total Number ofSharesPurchased |   |   | (b)Average PricePaidper Share |   |   | (c)Total Number of SharesPurchased as Part ofPublicly Announced Plansor Programs(1) |   |   | (d)Maximum Number (orApproximate DollarValue) of Shares thatMay Yet Be PurchasedUnderthe Plansor Programs |   |
| October 1, 2009 to December 31, 20091 |   |                              | -      |   |                          |   | -      |                                                                                |   |   | -                                                                                                         |   |   |   | -      |   |

| (1)    | On August 28, 2007, we issued a press release announcing that our board of directors had approved the repurchase from time to time through December 31, 2008 of up to $5,000,000 of our common stock. On October 29, 2008, we announced that our board of directors had approved an amendment to the program that increased the total amount of common stockthat may be repurchased from $5,000,000 to $10,000,000. The amendment also extended the period of time that shares may be repurchased from December 31, 2008 to December 31, 2009. The repurchase program ended on December 31, 2009. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | During 2007 and 2008, we purchased 9,107 and 712,024 shares, respectively, at a total cost of $38,716 and $2,357,410, respectively, under this plan. We did not purchase any shares under the plan in 2009.                                                                                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (2)    | On March 5, 2009, we announced a modified Dutch auction tender offer to purchase up to 3,500,000 shares of our common stock at a price per share of not less than $2.20 and not greater than $2.60. The terms of the tender offer also provided the right for us to purchase up to an additional 2% of our shares if the offer was oversubscribed. The tenderoffer closed on April 17, 2009, and on April 23, 2009 we repurchased 3,500,252 shares at $2.50 per share for a total cost of $9.0 million, including expenses.                                                                       |

----

|  Year ended December 31,                                                                                                                                                                                                                                                                                      |   | 2009                                  |   |   | 2008   |   |   | 2007   |   |   | 2006   |   |   | 2005   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                                                                                                                                                                                                                                                                                               |   | (in thousands, except per share data) |   |
|                                                                                                                                                                                                                                                                                                               |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Statements of Operations Data                                                                                                                                                                                                                                                                                      |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                                                                                                                                                                                                                                                                            |   | $                                     | 22,042 |   |   | $      | 30,517 |   |   | $      | 26,437 |   |   | $      | 24,056 |   |   | $ | 15,667 |   |
| Income (loss) from operations                                                                                                                                                                                                                                                                                      |   |                                  | (5,482 | )      |   |   | 629    |   |   |   | (1,830 | )      |   |   | (399   | ) |   |   | (3,618 | ) |
| Gain on sale of assets                                                                                                                                                                                                                                                                                             |   |                                  | 6,230  |   |   |   | -      |   |   |   | -      |   |   |   | -      |   |   |   | - |   |
| Net income (loss)                                                                                                                                                                                                                                                                                                  |   |                                  | 982    |   |   |   | 1,776  |   |   |   | 160    |   |   |   | 1,034  |   |   |   | (2,468 | ) |
| Net income (loss) per share – basic                                                                                                                                                                                                                                                                          |   | $                                     | 0.05   |   |   | $      | 0.08   |   |   | $      | 0.01   |   |   | $      | 0.04   |   |   | $ | (0.11 | ) |
| Net income (loss) per share – diluted                                                                                                                                                                                                                                                                        |   | $                                     | 0.05   |   |   | $      | 0.07   |   |   | $      | 0.01   |   |   | $      | 0.04   |   |   | $ | (0.11 | ) |
|                                                                                                                                                                                                                                                                                                               |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance Sheet Data                                                                                                                                                                                                                                                                                                 |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and short-term investments                                                                                                                                                                                                                                                                                    |   | $                                     | 39,669 |   |   | $      | 45,516 |   |   | $      | 38,055 |   |   | $      | 37,834 |   |   | $ | 36,763 |   |
| Working capital                                                                                                                                                                                                                                                                                                    |   |                                  | 42,209 |   |   |   | 47,288 |   |   |   | 45,031 |   |   |   | 41,372 |   |   |   | 39,124 |   |
| Total assets                                                  |   |                                  | 51,454 |   |   |   | 57,546 |   |   |   | 56,383 |   |   |   | 54,586 |   |   |   | 49,741 |   |
| Total liabilities                                                                                                                                                                                                                                                                                                  |   |                                  | 3,094  |   |   |   | 3,023  |   |   |   | 3,147  |   |   |   | 3,216  |   |   |   | 2,238 |   |
| Total stockholders’ equity                                                                                                                                                                                                                                                                                   |   |                                  | 48,360 |   |   |   | 54,523 |   |   |   | 53,236 |   |   |   | 51,370 |   |   |   | 47,503 |   |
|                                                                                                                                                                                                                                                                                                               |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

----

|                                     |   | Year ended December 31, |                       |
|------------------------------------------|--------|-------------------------|----------------------------|
| Revenue:                                 |   | 2009                    |                       |   | 2008 |   |   | 2007 |   |
| Product sales                            |   |                    | 70                         | % |   |   | 46 | % |   |   | 66 | % |
| Contract revenue                         |   |                    |     21 |   |   |   | 48 |   |   |   | 24 |   |
| Royalties                                |   |                    | 9                          |   |   |   | 6 |   |   |   | 10 |   |
| Total revenue                            |   |                    | 100                        |   |   |   | 100 |   |   |   | 100 |   |
|                                     |   |                    |                       |   |   |   |   |   |   |   |   |   |
| Costs and expenses:                      |   |                    |                       |   |   |   |   |   |   |   |   |   |
| Cost of product sales                    |   |                    | 13                         |   |   |   | 8 |   |   |   | 15 |   |
| Cost of contract revenue                 |   |                    | 13                         |   |   |   | 14 |   |   |   | 21 |   |
| Research and development                 |   |                    | 54                         |   |   |   | 43 |   |   |   | 41 |   |
| Selling and marketing                    |   |                    | 22                         |   |   |   | 16 |   |   |   | 14 |   |
| General and administrative               |   |                    | 23                         |   |   |   | 17 |   |   |   | 16 |   |
| Total costs and expenses                 |   |                    | 125                        |   |   |   | 98 |   |   |   | 107 |   |
|                                     |   |                    |                       |   |   |   |   |   |   |   |   |   |
| Income (loss) from operations            |   |                    | (25                        | ) |   |   | 2 |   |   |   | (7 | ) |
|                                     |   |                    |                       |   |   |   |   |   |   |   |   |   |
| Gain on sale of assets                   |   |                    | 28                         |   |   |   | - |   |   |   | - |   |
| Interest income                          |   |                    | 1                          |   |   |   | 4 |   |   |   | 8 |   |
|                                     |   |                    |                       |   |   |   |   |   |   |   |   |   |
| Income before provision for income taxes |   |                    | 4                          |   |   |   | 6 |   |   |   | 1 |   |
| Provision for income taxes               |   |                    | -                          |   |   |   | - |   |   |   | - |   |
| Net income                               |   |                    | 4                          | % |   |   | 6 | % |   |   | 1 | % |

----

|                     |   | Years ended December 31, |   |
|--------------------------|--------|--------------------------|--------|
|                     |   | 2009                     |   |   | 2008 |   |   | 2007 |   |
| GAAP net income          |   | $                        | 982    |   |   | $ | 1,776 |   |   | $ | 160 |   |
| Stock-based compensation |   |                     | 1,737  |   |   |   | 1,505 |   |   |   | 1,138 |   |
| Non-GAAP net income      |   | $                        | 2,719  |   |   | $ | 3,281 |   |   | $ | 1,298 |   |

|                               |   | Years ended December 31, |   |
|------------------------------------|--------|--------------------------|--------|
|                               |   | 2009                     |   |   | 2008 |   |   | 2007 |   |
| GAAP net income per share          |   | $                        | 0.05   |   |   | $ | 0.07 |   |   | $ | 0.01 |   |
| Stock-based compensation per share |   |                     | 0.08   |   |   |   | 0.07 |   |   |   | 0.04 |   |
| Non-GAAP net income per share      |   | $                        | 0.13   |   |   | $ | 0.14 |   |   | $ | 0.05 |   |

----

----

----

----

----

|                          |   |   | Payments Due By Period |   |
|-------------------------------|--------|--------|------------------------|--------|
|  Contractual Obligations |   |   | Total                  |   |   | Less than1 year |   |   | 1-3 years |   |   | 3-5 years |   |   | More than5 years |   |
|                          |   |   |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases              |   |   | $                      | 9      |   |   | $ | 9 |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |
| Purchase orders               |   |   |                   | 984    |   |   |   | 984 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Total                         |   |   | $                      | 993    |   |   | $ | 993 |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |

----

----

----

| ●       | Cash and cash equivalents, which consist of financial instruments with original maturities of three months or less; |
|---------------------------------------------|---------------------------------------------------------------------------------------------------------------------|

| ●       | Short-term investments, which consist of financial instruments with remaining maturities of twelve months or less, and auction rate securities that typically have interest reset dates of twenty-eight days; and |
|---------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ●       | Investments, which consist of financial instruments that mature in three years or less. |
|---------------------------------------------|-----------------------------------------------------------------------------------------|

----

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | December 31, |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 2009         |       |   | 2008 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |         |       |   |   |   |
| ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |         |       |   |   |   |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |         |       |   |   |   |
| Cash and cash equivalents                                                                                                                                                      |   | $            | 39,669     |   |   | $ | 45,516 |   |
| Accounts receivable (less allowance for doubtful accounts of $30 in 2009 and $30 in 2008)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |         | 3,565      |   |   |   | 2,211 |   |
| Inventories                                                                                                                                                                    |   |         | 1,113      |   |   |   | 1,656 |   |
| Prepaid expenses and other current assets                                                                                                                                      |   |         | 363        |   |   |   | 598 |   |
| Total current assets                                                                                                                                                           |   |         | 44,710     |   |   |   | 49,981 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |         |       |   |   |   |   |   |
| Property and equipment, net                                                                                                                                                    |   |         | 6,744      |   |   |   | 7,463 |   |
| Other assets, net                                                                                                                                                              |   |         | -          |   |   |   | 102 |   |
| Total assets                                                                                                                                                                   |   | $            | 51,454     |   |   | $ | 57,546 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |         |       |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |         |       |   |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |         |       |   |   |   |   |   |
| Accounts payable                                                                                                                                                               |   | $            | 327        |   |   | $ | 466 |   |
| Accrued expenses                                                                                                                                                               |   |         | 127        |   |   |   | 241 |   |
| Accrued compensation                                                                                                                                                           |   |         | 1,202      |   |   |   | 1,480 |   |
| Accrued professional                                                                                                                                                           |   |         | 282        |   |   |   | 167 |   |
| Deferred revenue                                                                                                                                                               |   |         | 563        |   |   |   | 339 |   |
| Total current liabilities                                                                                                                                                      |   |         | 2,501      |   |   |   | 2,693 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |         |       |   |   |   |   |   |
| Long-term deferred revenue                                                                                                                                                     |   |         | 593        |   |   |   | 330 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |         |       |   |   |   |   |   |
| Commitments and contingent liabilities (Note 8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |         |       |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |         |       |   |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |         |       |   |   |   |   |   |
| Preferred stock, $1.00 par value; 1,000,000 shares authorized, none outstanding                                                                                           |   |         | -          |   |   |   | - |   |
| Common stock, $.01 par value; shares authorized, 70,000,000 in 2009 and 2008; issued and outstanding, 19,809,315 in 2009 and 23,281,204 in 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |         |   198 |   |   |   |   233 |   |
| Additional paid-in capital                                                                                                                                                     |   |         | 76,032     |   |   |   | 83,143 |   |
| Accumulated deficit                                                                                                                                                            |   |         | (27,870    | ) |   |   | (28,853 | ) |
| Total stockholders’ equity                                                                                                                                               |   |         | 48,360     |   |   |   | 54,523 |   |
| Total liabilities and stockholders’ equity                                                                                                                               |   | $            | 51,454     |   |   | $ | 57,546 |   |

| The accompanying notes are an integral part of the consolidated financial statements. |
|---------------------------------------------------------------------------------------|

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | Years ended December 31, |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 2009                     |   |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                     |   |   |   |   |   |   |   |
| Revenue:                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                     |   |   |   |   |   |   |   |
| Product sales                                                                                               |   | $                        | 15,376 |   |   | $ | 14,022 |   |   | $ | 17,491 |   |
| Contract revenue                                                                                            |   |                     | 4,611  |   |   |   | 14,658 |   |   |   | 6,337 |   |
| Royalties                                                                                                   |   |                     | 2,055  |   |   |   | 1,837 |   |   |   | 2,609 |   |
| Total revenue                                                                                               |   |                     | 22,042 |   |   |   | 30,517 |   |   |   | 26,437 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
| Costs and expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
| Cost of product sales                                                                                       |   |                     | 2,887  |   |   |   | 2,589 |   |   |   | 3,998 |   |
| Cost of contract revenue                                                                                    |   |                     | 2,896  |   |   |   | 4,180 |   |   |   | 5,425 |   |
| Research and development                                                                                    |   |                     | 11,920 |   |   |   | 13,171 |   |   |   | 10,869 |   |
| Selling and marketing                                                                                       |   |                     | 4,707  |   |   |   | 4,739 |   |   |   | 3,738 |   |
| General and administrative                                                                                  |   |                     | 5,114  |   |   |   | 5,209 |   |   |   | 4,237 |   |
| Total costs and expenses                                                                                    |   |                     | 27,524 |   |   |   | 29,888 |   |   |   | 28,267 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from operations                                                                               |   |                     | (5,482 | ) |   |   | 629 |   |   |   | (1,830 | ) |
| Gain on sale of assets                                                                                      |   |                     | 6,230  |   |   |   | - |   |   |   | - |   |
| Interest income                                                                                             |   |                     | 238    |   |   |   | 1,163 |   |   |   | 2,016 |   |
| Income before provision for income taxes                                                                    |   |                     | 986    |   |   |   | 1,792 |   |   |   | 186 |   |
| Provision for income taxes                                                                                  |   |                     | 4      |   |   |   | 16 |   |   |   | 26 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                  |   | $                        | 982    |   |   | $ | 1,776 |   |   | $ | 160 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
| Net income per share – basic                                                                          |   | $                        | 0.05   |   |   | $ | 0.08 |   |   | $ | 0.01 |   |
| Net income per share – diluted                                                                        |   | $                        | 0.05   |   |   | $ | 0.07 |   |   | $ | 0.01 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares – basic                                                                       |   |                     | 20,869 |   |   |   | 23,638 |   |   |   | 23,738 |   |
| Weighted average shares – diluted                                                                     |   |                     | 20,874 |   |   |   | 23,697 |   |   |   | 25,084 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | Years ended December 31, |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 2009                     |   |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                     |   |   |   |   |   |   |   |
| Cash flows from operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                     |   |   |   |   |   |   |   |
| Net income                                                                                                                                                |   | $                        | 982    |   |   | $ | 1,776 |   |   | $ | 160 |   |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                     |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                                                                                             |   |                     | 823    |   |   |   | 921 |   |   |   | 878 |   |
| Provision for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                     | -      |   |   |   | (25 | ) |   |   | (20 | ) |
| Stock-based compensation                                                                                                                                  |   |                     | 1,737  |   |   |   | 1,505 |   |   |   | 1,138 |   |
| Gain on sale of assets                                                                                                                                    |   |                     | (6,230 | ) |   |   | - |   |   |   | - |   |
| Increase (decrease) from changes in assets and liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                     |   |   |   |   |   |   |   |   |   |   |
| Accounts receivable                                                                                                                                                                          |   |                     | (1,353 | ) |   |   | 5,475 |   |   |   | (2,903 | ) |
| Inventories                                                                                                                                                                                  |   |                     | 542    |   |   |   | (232 | ) |   |   | (605 | ) |
| Prepaid expenses and other current assets                                                                                                                                                    |   |                     | 131    |   |   |   | 110 |   |   |   | 160 |   |
| Accounts payable                                                                                                                                                                             |   |                     | (139   | ) |   |   | (473 | ) |   |   | 247 |   |
| Accrued expenses                                                                                                                                                                             |   |                     | (377   | ) |   |   | 423 |   |   |   | 69 |   |
| Deferred revenue                                                                                                                                                                             |   |                     | 487    |   |   |   | (74 | ) |   |   | (386 | ) |
| Net cash (used in) provided by operating activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                     | (3,397 | ) |   |   | 9,406 |   |   |   | (1,262 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
| Cash flows from investing activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
| Purchases of property and equipment                                                                                                                       |   |                     | (168   | ) |   |   | (445 | ) |   |   | (559 | ) |
| Proceeds from sale of assets, net                                                                                                                         |   |                     | 6,661  |   |   |   | - |   |   |   | - |   |
| Sales of investments                                                                                                                                      |   |                     | -      |   |   |   | 38,743 |   |   |   | 24,497 |   |
| Purchases of investments                                                                                                                                  |   |                     | -      |   |   |   | (2,000 | ) |   |   | (30,009 | ) |
| Net cash provided by (used in) investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                     | 6,493  |   |   |   | 36,298 |   |   |   | (6,071 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
| Cash flows from financing activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                     |   |   |   |   |   |   |   |   |   |   |
| Proceeds from issuance of common stock                                                                                                                    |   |                     | 7      |   |   |   | 363 |   |   |   | 647 |   |
| Shares surrendered by employees to pay taxes related to unrestricted stock                                                                           |   |                     | -      |   |   |   | - |   |   |   | (41 | ) |
| Repurchase of common stock                                                                                                                                |   |                     | (8,950 | ) |   |   | (2,357 | ) |   |   | (38 | ) |
| Net cash (used in) provided by financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                     | (8,943 | ) |   |   | (1,994 | ) |   |   | 568 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
| (Decrease) increase in cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                     | (5,847 | ) |   |   | 43,710 |   |   |   | (6,765 | ) |
| Cash and cash equivalents, beginning of year                                                                                                              |   |                     | 45,516 |   |   |   | 1,806 |   |   |   | 8,571 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                     |   |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents, end of year                                                                                                                    |   | $                        | 39,669 |   |   | $ | 45,516 |   |   | $ | 1,806 |   |

----

|                                                                            |   |         |   |   |    |   |   |        |   |   |                |   |   |   |    |   |   |   |   |   |
|---------------------------------------------------------------------------------|--------|--------------|--------|--------|---------|--------|--------|-------------|--------|--------|---------------------|--------|--------|--------|---------|--------|--------|--------|--------|--------|
|                                                                            |   |         |   |   |    |   |   | Additional  |   |   |                |   |   | Total  |    |
|                                                                            |   | Common Stock |   |   | Paid-In |   |   | Accumulated |   |   | Stockholders’ |   |
|                                                                            |   | Shares       |   |   | Amount  |   |   | Capital     |   |   | Deficit             |   |   | Equity |    |
|                                                                            |   |         |   |   |    |   |   |        |   |   |                |   |   |   |    |   |   |   |   |   |
| Balance at December 31, 2006                                                    |   |         | 23,643 |   |    | $      | 236    |        |   | $      | 81,923              |   |   | $      | (30,789 | )      |   | $      | 51,370 |   |
|                                                                            |   |         |   |   |    |   |   |        |   |   |                |   |   |   |    |   |   |   |   |   |
| Exercise of common stock options                                                |   |         | 198    |   |    |   | 3      |        |   |   | 632                 |   |   |   |    |   |   |   | 635    |   |
| Repurchase of common stock                                                 |   |         | (9     | )      |    |   | -      |        |   |   | (38                 | )      |   |   |    |   |   |   | (38    | )      |
| Issuance of unrestricted stock                                                  |   |         | 29     |   |    |   | -      |        |   |   | 153                 |   |   |   |    |   |   |   | 153    |   |
| Shares surrendered by employees to pay taxes related to unrestricted stock |   |         | (8     | )      |    |   | -      |        |   |   | (41                 | )      |   |   |    |   |   |   | (41    | )      |
| Issuance of common stock under employee stock purchase plan                |   |         | 2      |   |    |   | -      |        |   |   | 12                  |   |   |   |    |   |   |   | 12     |   |
| Stock-based compensation expense                                                |   |         | -      |   |    |   | -      |        |   |   | 985                 |   |   |   |    |   |   |   | 985    |   |
| Net income                                                                      |   |         |   |   |    |   |   |        |   |   |                |   |   |   | 160     |   |   |   | 160    |   |
|                                                                            |   |         |   |   |    |   |   |        |   |   |                |   |   |   |    |   |   |   |   |   |
| Balance at December 31, 2007                                                    |   |         | 23,855 |   |    |   | 239    |        |   |   | 83,626              |   |   |   | (30,629 | )      |   |   | 53,236 |   |
|                                                                            |   |         |   |   |    |   |   |        |   |   |                |   |   |   |    |   |   |   |   |   |
| Exercise of common stock options                                                |   |         | 136    |   |    |   | 1      |        |   |   | 358                 |   |   |   |    |   |   |   | 359    |   |
| Repurchase of common stock                                                 |   |         | (712   | )      |    |   | (7     | )           |   |   | (2,350              | )      |   |   |    |   |   |   | (2,357 | )      |
| Issuance of common stock under employee stock purchase plan                |   |         | 2      |   |    |   | -      |        |   |   | 4                   |   |   |   |    |   |   |   | 4      |   |
| Stock-based compensation expense                                                |   |         | -      |   |    |   | -      |        |   |   | 1,505               |   |   |   |    |   |   |   | 1,505  |   |
| Net income                                                                      |   |         |   |   |    |   |   |        |   |   |                |   |   |   | 1,776   |   |   |   | 1,776  |   |
|                                                                            |   |         |   |   |    |   |   |        |   |   |                |   |   |   |    |   |   |   |   |   |
| Balance at December 31, 2008                                                    |   |         | 23,281 |   |    |   | 233    |        |   |   | 83,143              |   |   |   | (28,853 | )      |   |   | 54,523 |   |
|                                                                            |   |         |   |   |    |   |   |        |   |   |                |   |   |   |    |   |   |   |   |   |
| Exercise of common stock options                                                |   |         | -      |   |    |   | -      |        |   |   | -                   |   |   |   |    |   |   |   | -      |   |
| Repurchase of common stock                                                 |   |         | (3,500 | )      |    |   | (35    | )           |   |   | (8,915              | )      |   |   |    |   |   |   | (8,950 | )      |
| Issuance of unrestricted stock                                                  |   |         | 25     |   |    |   | -      |        |   |   | 60                  |   |   |   |    |   |   |   | 60     |   |
| Issuance of common stock under employee stock purchase plan                |   |         | 3      |   |    |   | -      |        |   |   | 7                   |   |   |   |    |   |   |   | 7      |   |
| Stock-based compensation expense                                                |   |         | -      |   |    |   | -      |        |   |   | 1,737               |   |   |   |    |   |   |   | 1,737  |   |
| Net income                                                                      |   |         |   |   |    |   |   |        |   |   |                |   |   |   | 982     |   |   |   | 982    |   |
|                                                                            |   |         |   |   |    |   |   |        |   |   |                |   |   |   |    |   |   |   |   |   |
| Balance at December 31, 2009                                                    |   |         | 19,809 |   |    | $      | 198    |        |   | $      | 76,032              |   |   | $      | (27,870 | )      |   | $      | 48,360 |   |

----

| 1. | NATURE OF BUSINESS |
|----|--------------------|

| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|----|--------------------------------------------|

----

|   | Building and improvements                                                                                                                                                                                                                                                                                                                                                                                                                            | 30 years      |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------|
|   | Building improvements                                                                       | 5 to 20 years |
|   | Furniture and fixtures                                                                                                                                                                                                                                                                                                                                                                                                                               | 5 years       |
|   | Computer, office & manufacturing equipment                                                                                                                                                                                                                                                                                                                                                                                                       | 3 years       |
|   | Purchased software                                                                                                                                                                                                                                                                                                                                                                                                                                   | 3 years       |

----

| ●   | Services and software. When engineering services and software licenses are sold together, the total fee is generally recognized by applying contract accounting. We have adopted the percentage-of-completionmethod of contract accounting and we use an output method (i.e., contract milestones) to determine our completion percentage. The software license portion of the arrangement is classified as product sales and the engineering services portion is classified as contract revenue. |
|---------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ●   | Services, software and maintenance. When we sell services, software and maintenance together, revenue is recognized as follows: i) maintenance revenue is separated from the other two elementsand is recognized ratably over the related contract period; provided we have VSOE for the fair value of the maintenance element; and ii) the total fee from the software license and engineering service elements is recognized by applying the contract accounting method described in the previous paragraph. If we do not have VSOE for the fair value of the maintenance element, we recognize revenue for the entire arrangement ratably over a period that begins at the start of the engineering services project and endswhen all elements of the arrangement have been delivered. |
|---------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

| 3.   | ASSETS SOLD |
|----------------|-------------|

| 4. | INVENTORIES |
|----|-------------|

|   |                                                                                                                                                                                                                                                                                                                                |   | 2009   |   |   | 2008   |   |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|
|   | Raw materials                                                                                                                                                                                                                                                                                                                  |   | $      | 1,112  |   |   | $      | 1,650 |   |
|   | Finished goods                                                                                                                                                                                                                                                                                                                 |   |   | 1      |   |   |   | 6 |   |
|   | Total                                                      |   | $      | 1,113  |   |   | $      | 1,656 |   |

----

| 5. | PROPERTY AND EQUIPMENT |
|----|------------------------|

|                                                 |   | 2009   |   |   | 2008   |   |
|------------------------------------------------------|--------|--------|--------|--------|--------|--------|
| Land                                            |   | $      | 1,080  |   |   | $      | 1,080 |   |
| Building and improvements                       |   |   | 8,869  |   |   |   | 8,869 |   |
| Computer equipment                              |   |   | 1,272  |   |   |   | 2,065 |   |
| Purchased software                              |   |   | 257    |   |   |   | 1,241 |   |
| Furniture and fixtures                          |   |   | 820    |   |   |   | 817 |   |
| Office equipment                                |   |   | 209    |   |   |   | 203 |   |
| Manufacturing equipment                         |   |   | 76     |   |   |   | 76 |   |
| Total                                           |   |   | 12,583 |   |   |   | 14,351 |   |
| Less accumulated depreciation and amortization  |   |   | (5,839 | )      |   |   | (6,888 | ) |
| Property and equipment, net                     |   | $      | 6,744  |   |   | $      | 7,463 |   |

| 6. | INCOME TAXES |
|----|--------------|

|   |                                                              |   | 2009   |    |   | 2008   |   |
|--------|-------------------------------------------------------------------|--------|--------|---------|--------|--------|--------|
|   | Federal net operating loss carryforwards                     |   | $      | 15,872  |   |   | $      | 15,679 |   |
|   | Research and development and other tax credit carryforwards  |   |   | 18,116  |   |   |   | 17,208 |   |
|   | State net operating loss carryforwards                       |   |   | 599     |   |   |   | 660 |   |
|   | Capitalized research and development costs                   |   |   | 4,719   |   |   |   | 6,245 |   |
|   | Other                                                        |   |   | 3,464   |   |   |   | 2,689 |   |
|   | Total                                                        |   |   | 42,770  |   |   |   | 42,481 |   |
|   | Less valuation allowance                                     |   |   | (42,770 | )      |   |   | (42,481 | ) |
|   | Deferred tax assets, net                                     |   | $      | -       |   |   | $      | - |   |

|   | A reconciliation of the U.S. federal statutory rate to the effective tax rate is as follows: |
|--------|----------------------------------------------------------------------------------------------|

|   |                               |   | Year ended December 31, |   |
|--------|------------------------------------|--------|-------------------------|--------|
|   |                               |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|   | Federal statutory rate             |   |                    | 34     | % |   |   | 34 | % |   |   | 34 | % |
|   | State rate, net of federal benefit |   |                    | 9      |   |   |   | 4 |   |   |   | (16 | ) |
|   | Tax credits                        |   |                    | (88    | ) |   |   | (52 | ) |   |   | (545 | ) |
|   | Change in valuation allowance      |   |                    | 38     |   |   |   | 12 |   |   |   | 504 |   |
|   | Nondeductible compensation expense |   |                    | 6      |   |   |   | 3 |   |   |   | 31 |   |
|   | Other                              |   |                    | 2      |   |   |   | 0 |   |   |   | 6 |   |
|   | Effective tax rate                 |   |                    | 1      | % |   |   | 1 | % |   |   | 14 | % |

----

| 7. | EQUITY AND STOCK COMPENSATION PLANS |
|----|-------------------------------------|

----

|   |                             |   | 2009   |   |   | 2008   |   |   | 2007   |   |
|--------|----------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|   | Cost of product sales            |   | $      | 10     |   |   | $      | 11     |   |   | $ | 13 |   |
|   | Cost of contract revenue         |   |   | 114    |   |   |   | 135    |   |   |   | 176 |   |
|   | Research and development         |   |   | 521    |   |   |   | 611    |   |   |   | 483 |   |
|   | Selling and marketing            |   |   | 293    |   |   |   | 186    |   |   |   | 119 |   |
|   | General and administrative       |   |   | 799    |   |   |   | 562    |   |   |   | 347 |   |
|   | Stock-based compensation expense |   | $      | 1,737  |   |   | $      | 1,505  |   |   | $ | 1,138 |   |

|   |                           |   |                        |   |                        |   |                        |   |
|--------|--------------------------------|--------|-----------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|   |                           |   | Year EndedDecember 31, 2009 |   | Year EndedDecember 31, 2008 |   | Year EndedDecember 31, 2007 |   |
|   |                           |   |                        |   |                        |   |                        |   |
|   | Expected term(1)               |   | 6.58-6.73 years             |   | 6.70-7.16 years             |   | 6.25 years                  |   |
|   | Expected volatility factor(2)  |   | 60-62%                      |   | 51-54%                      |   | 51-56%                      |   |
|   | Risk-free interest rate(3)     |   | 1.76-2.47%                  |   | 2.17-3.16%                  |   | 3.80-4.73%                  |   |
|   | Expected annual dividend yield |   | —                     |   | —                     |   | —                     |   |

|   |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|--------|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (1)        |  The expected term for each grant for the years ended December 31, 2009 and 2008 were determined based on the historical average term of grants issued over the past seven years. The expected term for each grant for the year ended December 31, 2007 was determined as the midpoint between the vesting date and the end of the contractualterm, also known as the “simplified method” for estimating the expected term described by Staff Accounting Bulletin No. 107 (“SAB 107”). |
|   |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   | (2)   | The expected volatility for each grant is estimated based on an average of historical volatility over a period of time which we believe to be representative of our future volatility.                                                                                                                                                                                                                                                                                                                              |

----

|   |   |                                                                                                                                                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (3)    | The risk-free interest rate for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for a period equal to the expected term of the stock option. |

|                                                                                                                                                                                                                                                                                     |   | 2009               |       |   | 2008                         |   |   | 2007               |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|--------|------------------------------|--------|--------|--------------------|--------|
|                                                                                                                                                                                                                                                                                     |   |   Shares |       |   | WeightedAverageExercisePrice |   |   |   Shares |   |   | WeightedAverageExercisePrice |   |   |   Shares |   |   | WeightedAverageExercisePrice |   |
| Outstanding at beginning of year                                                                                                                                                                                                                                                         |   |               | 7,538,993  |   |                         | $      | 4.68   |               |   |   | 6,974,705 |   |   | $ | 4.84 |   |   |   | 6,489,812 |   |   | $ | 4.80 |   |
| Granted                                                           |   |               | 113,400    |   |                         |   | 2.51   |               |   |   | 1,093,200 |   |   |   | 3.57 |   |   |   | 737,000 |   |   |   | 4.79 |   |
| Exercised                                                         |   |               | (187       | )      |                         |   | 1.68   |               |   |   | (136,158 | ) |   |   | 2.64 |   |   |   | (197,853 | ) |   |   | 3.21 |   |
| Forfeited or cancelled                                            |   |               | (1,632,234 | )      |                         |   | 5.48   |               |   |   | (392,754 | ) |   |   | 5.13 |   |   |   | (54,254 | ) |   |   | 5.87 |   |
| Outstanding at end of year                                                                                                                                                                                                                                                          |   |               | 6,019,972  |   |                         | $      | 4.42   |               |   |   | 7,538,993 |   |   | $ | 4.68 |   |   |   | 6,974,705 |   |   | $ | 4.84 |   |
|                                                                                                                                                                                                                                                                                     |   |               |       |   |                         |   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Options exercisable at year end                                                                                                                                                                                                                                                          |   |               | 5,269,969  |   |                         | $      | 4.51   |               |   |   | 6,059,397 |   |   | $ | 4.80 |   |   |   | 5,809,280 |   |   | $ | 4.80 |   |

|                |   |   |                |      |                         |   |                                                          |   |   |   |                         |   |      |   |   |   |   |
|---------------------|--------|--------|---------------------|-----------|------------------------------|--------|---------------------------------------------------------------|--------|--------|--------|------------------------------|--------|-----------|--------|--------|--------|--------|
|                |   |   | Options Outstanding |      | Options Exercisable          |   |
|                |   |   |                |      |                         |   |                                                          |   |   |   |                         |   |
| Exercise PriceRange |   |   | Number              |      | WeightedAverageExercisePrice |   | Weighted AverageRemainingContractualTerm (in years) |   | Number |   | WeightedAverageExercisePrice |   |
| $0 to $3            |   |   |                | 733,368   |                         | $      | 2.83                                                          |   |   | 5.08   |                         |   | 667,140   |   | $      | 2.86   |   |
| $3 to $4            |   |   |                | 2,798,442 |                         |   | 3.39                                                          |   |   | 5.22   |                         |   | 2,313,502 |   |   | 3.34   |   |
| $4 to $5            |   |   |                | 288,650   |                         |   | 4.64                                                          |   |   | 7.78   |                         |   | 169,249   |   |   | 4.65   |   |
| $5 to $6            |   |   |                | 530,762   |                         |   | 5.18                                                          |   |   | 3.82   |                         |   | 451,673   |   |   | 5.20   |   |
| $6 to $7            |   |   |                | 1,599,500 |                         |   | 6.08                                                          |   |   | 5.00   |                         |   | 1,599,155 |   |   | 6.08   |   |
| $7 to $10           |   |   |                | 43,000    |                         |   | 7.71                                                          |   |   | 1.47   |                         |   | 43,000    |   |   | 7.71   |   |
| $10 to $63          |   |   |                | 26,250    |                         |   | 35.54                                                         |   |   | 0.45   |                         |   | 26,250    |   |   | 35.54  |   |
|                |   |   |                | 6,019,972 |                         | $      | 4.42                                                          |   |   | 5.10   |                         |   | 5,269,969 |   | $      | 4.51   |   |

----

----

| 8. | COMMITMENTS AND CONTINGENT LIABILITIES |
|----|----------------------------------------|

| 9. | BUSINESS SEGMENTS AND MAJOR CUSTOMERS |
|----|---------------------------------------|

|   |          |   | Year ended December 31, |   |
|--------|---------------|--------|-------------------------|--------|
|   |          |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|   | United States |   | $                       | 12,235 |   |   | $ | 24,070 |   |   | $ | 15,508 |   |
|   | Germany       |   |                    | 5,375  |   |   |   | 4,881 |   |   |   | 5,759 |   |
|   | Rest of world |   |                    | 4,432  |   |   |   | 1,566 |   |   |   | 5,170 |   |
|   |          |   | $                       | 22,042 |   |   | $ | 30,517 |   |   | $ | 26,437 |   |

----

|   |             |   | Year ended December 31, |   |
|--------|------------------|--------|-------------------------|--------|
|   |             |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|   | Customer A       |   |                    | 19     | % |   |   | 12 | % |   |   | 19 | % |
|   | Customer B       |   |                    | 8      | % |   |   | 4 | % |   |   | 16 | % |
|   | Customer C       |   |                    | 6      | % |   |   | 1 | % |   |   | 10 | % |
|   | Customer D  |   |                    | 4      | % |   |   | 10 | % |   |   | - |   |
|   | Customer E  |   |                    | -      |   |   |   | 28 | % |   |   | - |   |

| 10. | EMPLOYEE BENEFIT PLAN |
|-----|-----------------------|

| 11. | NET INCOME PER SHARE |
|-----|----------------------|

|                                                                                                                                                                                                                                                                                                                                                                                                                     |   | Year ended December 31, |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                     |   | 2009                    |   |   | 2008 |   |   | 2007 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                    |   |   |   |   |   |   |   |
| Net income                                                                                                                                                                                                                                                                                                                                                                                                               |   | $                       | 982    |   |   | $ | 1,776 |   |   | $ | 160 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding                                                                                                                                                                                                                                                                                                                                                                          |   |                    | 20,869 |   |   |   | 23,638 |   |   |   | 23,738 |   |
| Additional dilutive common stock equivalents                                                                                                                                                                                                                                                                                                                                                                        |   |                    | 5      |   |   |   | 59 |   |   |   | 1,346 |   |
| Diluted shares outstanding                                                                                                                                                                                                                                                                                                                                                                                          |   |                    | 20,874 |   |   |   | 23,697 |   |   |   | 25,084 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                    |   |   |   |   |   |   |   |   |   |   |
| Net income per share – basic                                                                 |   | $                       | 0.05   |   |   | $ | 0.08 |   |   | $ | 0.01 |   |
| Net income per share – diluted                                                               |   | $                       | 0.05   |   |   | $ | 0.07 |   |   | $ | 0.01 |   |

| 12. | QUARTERLY RESULTS OF OPERATIONS – UNAUDITED |
|-----|---------------------------------------------------|

|                                        |   | 2009 Quarters Ended |   |
|---------------------------------------------|--------|---------------------|--------|
|                                        |   | March 31            |   |   | June 30 |   |   | September 30 |   |   | December 31 |   |
|                                        |   |                |   |   |   |   |   |   |   |   |   |   |
| Revenue                                     |   | $                   | 4,573  |   |   | $ | 5,764 |   |   | $ | 6,220 |   |   | $ | 5,486 |   |
| Gross profit                                |   |                | 3,152  |   |   |   | 3,812 |   |   |   | 4,646 |   |   |   | 4,649 |   |
| Loss from operations                        |   |                | (2,253 | ) |   |   | (1,646 | ) |   |   | (1,163 | ) |   |   | (419 | ) |
| Gain on sale of assets                      |   |                | -      |   |   |   | - |   |   |   | - |   |   |   | 6,230 |   |
| Net income (loss)                           |   |                | (2,131 | ) |   |   | (1,586 | ) |   |   | (1,133 | ) |   |   | 5,834 |   |
|                                        |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share – basic   |   | $                   | (0.09  | ) |   | $ | (0.08 | ) |   | $ | (0.06 | ) |   | $ | 0.29 |   |
| Net income (loss) per share – diluted |   | $                   | (0.09  | ) |   | $ | (0.08 | ) |   | $ | (0.06 | ) |   | $ | 0.29 |   |

----

|                                        |   | 2008 Quarters Ended |   |
|---------------------------------------------|--------|---------------------|--------|
|                                        |   | March 31            |   |   | June 30 |   |   | September 30 |   |   | December 31 |   |
| Revenue                                     |   | $                   | 5,876  |   |   | $ | 6,167 |   |   | $ | 6,390 |   |   | $ | 12,084 |   |
| Gross profit                                |   |                | 4,034  |   |   |   | 4,414 |   |   |   | 4,497 |   |   |   | 10,803 |   |
| Income (loss) from operations               |   |                | (1,656 | ) |   |   | (1,568 | ) |   |   | (904 | ) |   |   | 4,757 |   |
| Net income (loss)                           |   |                | (1,282 | ) |   |   | (1,257 | ) |   |   | (663 | ) |   |   | 4,978 |   |
|                                        |   |                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share – basic   |   | $                   | (0.05  | ) |   | $ | (0.05 | ) |   | $ | (0.03 | ) |   | $ | 0.21 |   |
| Net income (loss) per share – diluted |   | $                   | (0.05  | ) |   | $ | (0.05 | ) |   | $ | (0.03 | ) |   | $ | 0.21 |   |

| 13. | SUBSEQUENT EVENT |
|-----|------------------|

----

| Col. A                                                                                                                                                                                   |   | Col. B     |   |   | Col. C(1)  |   |   | Col. C(2) |   |   | Col. D     |   |   | Col. E    |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|--------|------------|--------|--------|-----------|--------|--------|------------|--------|--------|-----------|--------|
|                                                                                                                                                                                     |   |       |   |   | Additions  |   |   |      |   |   |       |   |
|                                                                                                                                                                                     |   | Balance at |   |   | Charged to |   |   | Charged   |   |   | Deductions |   |   | Balance   |   |
|                                                                                                                                                                                     |   | Beginning  |   |   | Costs and  |   |   | to Other  |   |   | Charged to |   |   | at End    |   |
|                                                                                                                                                                                     |   | of Period  |   |   | Expenses   |   |   | Accounts  |   |   | Reserves   |   |   | of Period |   |
| Allowance for doubtful accounts receivable:                                                                                                                                              |   |       |   |   |       |   |   |      |   |   |       |   |   |      |   |
| 2009                               |   | $          | 30     |   |       | $      | -      |      |   | $      | -          |   |   | $         | -      |   |   | $ | 30 |   |
| 2008                               |   | $          | 55     |   |       | $      | (25    | )         |   | $      | -          |   |   | $         | -      |   |   | $ | 30 |   |
| 2007                               |   | $          | 97     |   |       | $      | (20    | )         |   |   | -          |   |   | $         | 22     |   |   | $ | 55 |   |
|                                                                                                                                                                                     |   |       |   |   |       |   |   |      |   |   |       |   |   |      |   |   |   |   |   |   |
| Inventory reserves:                                                                                                                                                                      |   |       |   |   |       |   |   |      |   |   |       |   |   |      |   |   |   |   |   |   |
| 2009                               |   | $          | 738    |   |       | $      | 399    |      |   | $      | -          |   |   | $         | -      |   |   | $ | 1,137 |   |
| 2008                               |   | $          | 409    |   |       | $      | 316    |      |   | $      | 13         |   |   | $         | -      |   |   | $ | 738 |   |
| 2007                               |   | $          | 313    |   |       | $      | 102    |      |   |   | -          |   |   | $         | 6      |   |   | $ | 409 |   |
|                                                                                                                                                                                     |   |       |   |   |       |   |   |      |   |   |       |   |   |      |   |   |   |   |   |   |
| Warranty reserves:                                                                                                                                                                       |   |       |   |   |       |   |   |      |   |   |       |   |   |      |   |   |   |   |   |   |
| 2009                               |   | $          | 118    |   |       | $      | -      |      |   | $      | -          |   |   | $         | 118    |   |   | $ | 0 |   |
| 2008                               |   | $          | 0      |   |       | $      | 118    |      |   | $      | -          |   |   | $         | -      |   |   | $ | 118 |   |
| 2007                               |   | $          | 0      |   |       |   | -      |      |   |   | -          |   |   |      | -      |   |   | $ | 0 |   |
|                                                                                                                                                                                     |   |       |   |   |       |   |   |      |   |   |       |   |   |      |   |   |   |   |   |   |
| Deferred tax asset valuation allowance:                                                                                                                                                  |   |       |   |   |       |   |   |      |   |   |       |   |   |      |   |   |   |   |   |   |
| 2009                               |   | $          | 42,481 |   |       | $      | -      |      |   | $      | 289        |   |   | $         | -      |   |   | $ | 42,770 |   |
| 2008                               |   | $          | 42,825 |   |       | $      | -      |      |   | $      | (344       | )      |   | $         | -      |   |   | $ | 42,481 |   |
| 2007                               |   | $          | 43,772 |   |       |   | -      |      |   | $      | (947       | )      |   |      | -      |   |   | $ | 42,825 |   |

----

----

----

|                                                                                                                               | Page     |
|------------------------------------------------------------------------------------------------------------------------------------|----------|
| (1) Report of Independent Registered Public Accounting Firm                                                                        |  33 |
| Consolidated Balance Sheets as of December 31, 2009 and 2008                                                                  | 34       |
| Consolidated Statements of Operations for each of the three years in the period ended December 31, 2009                       | 35       |
| Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2009                       | 36       |
| Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2009  | 37       |
| Notes to Consolidated Financial Statements                                                                                    | 38       |
| (2) Schedule II - Valuation and Qualifying Accounts                                                                                | 52       |

|   | Exhibit No. |   | Description of Exhibit                                                                                                                                                                                                                                                                                     |   |
|--------|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   | 3.1         |   | Amended and Restated Articles of Organization, as amended (filed as Exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 2008 and incorporated herein by reference).                                                                                                               |
|   | 3.2         |   | Amended and Restated By-Laws (filed as Exhibit 3.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on December 10, 2007 and incorporated herein by reference).                                                                                                           |
|   | 4.1         |   | Rights Agreement dated as of October 2, 2001 between Aware, Inc. and Equiserve Trust Company, N.A., as Rights Agent (filed as Exhibit 4(a) to the Company’s Form 8-K filed with the Securities and Exchange Commission on October 3, 2001 and incorporated herein by reference).                     |
|   | 4.2         |   | Terms of Series A Participating Cumulative Preferred Stock of Aware, Inc. (attached as Exhibit A to the Rights Agreement filed as Exhibit 4.1 hereto).                                                                                                                                                     |
|   | 4.3         |   | Form of Right Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.1 hereto).                                                                                                                                                                                                     |
|   | 4.4         |   | Amendment No. 1 to Rights Agreement dated September 6, 2007 between Aware, Inc. and Computershare Trust Company, N.A., as Rights Agent (filed as Exhibit 4.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on September 7, 2007 and incorporated herein by reference). |
|   | 10.1*       |   | 1996 Stock Option Plan, as amended and restated (filed as Annex A to the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on April 11, 2000 and incorporated herein by reference).                                                                             |
|   | 10.2*       |   | 1996 Employee Stock Purchase Plan, as amended and restated (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 29, 2005 and incorporated herein by reference).                                                          |
|   | 10.3*       |   | Form of Director and Officer Indemnification Agreement (filed as Exhibit 10.4 to the Company’s Form 10-K for the year ended December 31, 2002 and incorporated herein by reference).                                                                                                                 |
|   | 10.4*       |   | 2001 Nonqualified Stock Plan (filed as Exhibit 99(d)(4) to the Company’s Schedule TO filed with the Securities and Exchange Commission on March 3, 2003 and incorporated herein by reference).                                                                                                       |
|   | 10.5*       |   | Form of Nonqualified Stock Option Agreement under the 2001 Nonqualified Stock Plan for options granted to executive officers and directors prior to May 21, 2008 (filed as Exhibit 10.6 to Company’s Form 10-K for the year ended December 31, 2006 and incorporated herein by reference).           |

----

|   | 10.6* |   | Form of Nonqualified Stock Option Agreement under the 2001 Nonqualified Stock Plan for options granted to executive officers and directors from and after May 21, 2008 (filed as Exhibit 10.8 to Company’s Form 8-K on May 22, 2008 and incorporated herein by reference) |
|--------|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.7* |   | Offer letter dated December 17, 2007 by and between Richard Moberg and Aware, Inc. (filed as Exhibit 99.2 to Company’s Form 8-K filed with the Securities and Exchange Commission on December 18, 2007 and incorporated herein by reference).                             |
|   | 10.8  |   | Asset Purchase Agreement by and between Aware, Inc. and Lantiq Broadband Holdco, Inc. and Lantiq Deutschland GmbH dated October 14, 2009.                                                                                                                                       |
|   | 21.1  |   | Subsidiaries of Registrant.                                                                                                                                                                                                                                                     |
|   | 23.1  |   | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                       |
|   | 31.1  |   | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                             |
|   | 31.2  |   | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                             |
|   | 32.1  |   | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                 |

----

|   | AWARE, INC.                                             |                 |
|--------|---------------------------------------------------------|----------------------|
|   |                                                    |                 |   |
|   | By:                                                     | /s/ Edmund C. Reiter |
|   | Edmund C. Reiter, President and Chief Executive Officer |
|   |                                                    |                 |
|   | Date: February 12, 2010                                 |                 |

|                     | Signature |                                            |   |   | Title  |   |
|--------------------------|-----------|-------------------------------------------------|--------|--------|--------|--------|
|                     |      |                                            |   |   |   |   |
| /s/ Michael A. Tzannes   |      | Executive Chairman, Director                    |
| Michael A. Tzannes       |      |                                            |   |   |
|                     |      |                                            |   |   |   |   |
| /s/ Edmund C. Reiter     |      | President and Chief Executive Officer, Director |
| Edmund C. Reiter         |      | (Principal Executive Officer)                   |
|                     |      |                                            |   |   |   |   |
| /s/ Richard P. Moberg    |      | Chief Financial Officer                         |
| Richard P. Moberg        |      | (Principal Financial and Accounting Officer)    |
|                     |      |                                            |   |   |   |   |
| /s/ John K. Kerr         |      | Director                                        |   |
| John K. Kerr             |      |                                            |   |   |
|                     |      |                                            |   |   |   |   |
| /s/ G. David Forney, Jr. |      | Director                                        |   |
| G. David Forney, Jr.     |      |                                            |   |   |
|                     |      |                                            |   |   |   |   |
| /s/ Adrian F. Kruse      |      | Director                                        |   |
| Adrian F. Kruse          |      |                                            |   |   |
|                     |      |                                            |   |   |   |   |
| /s/ Mark G. McGrath      |      | Director                                        |   |
| Mark G. McGrath          |      |                                            |   |   |
|                     |      |                                            |   |   |   |   |
| /s/ Charles K. Stewart   |      | Director                                        |   |
| Charles K. Stewart       |      |                                            |   |   |