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**UNITED        STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**FORM        10-Q**

**Quarterly        Report Pursuant To Section 13 Or 15(d) Of The**

**Securities        Exchange Act of 1934**

**For        the quarter ended September 30, 2007**

**Commission        file number 000-21129**

**AWARE,        INC.**

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

**40      Middlesex Turnpike, Bedford, Massachusetts, 01730**

**(781)      276-4000**

| **Class**                                              | **Number                of Shares Outstanding** |
|--------------------------------------------------------|-------------------------------------------------|
| Common                Stock, par value $0.01 per share | 23,781,820                shares                |

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**AWARE,      INC.**

**FORM      10-Q**

**FOR      THE QUARTER ENDED SEPTEMBER 30, 2007**

**TABLE      OF CONTENTS**

|                    |                                                                                                                                                             | Page   |
|-------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| PART                I   | FINANCIAL                INFORMATION                                                                                                                             |   |
|                    |                                                                                                                                                             |   |
| Item                1.  | Unaudited                Consolidated Financial Statements                                                                                                       |   |
|                    |                                                                                                                                                             |   |
|                    | Consolidated                Balance Sheets as of September 30, 2007 and December 31,                2006                                                         | 3      |
|                    |                                                                                                                                                             |   |
|                    | Consolidated                Statements of Operations for the Three and Nine Months Ended September                30,                2007 and September 30, 2006 | 4      |
|                    |                                                                                                                                                             |   |
|                    | Consolidated                Statements of Cash Flows for the Nine Months Ended September 30,                2007 and                September 30, 2006           | 5      |
|                    |                                                                                                                                                             |   |
|                    | Notes                to Consolidated Financial Statements                                                                                                        | 6      |
|                    |                                                                                                                                                             |   |
| Item                2.  | Management’s                Discussion and Analysis of Financial Condition and Results of                Operations                                        | 10     |
|                    |                                                                                                                                                             |   |
| Item                3.  | Quantitative                and Qualitative Disclosures about Market Risk                                                                                        | 15     |
|                    |                                                                                                                                                             |   |
| Item                4.  | Controls                and Procedures                                                                                                                           | 16     |
|                    |                                                                                                                                                             |   |
| PART                II  | OTHER                INFORMATION                                                                                                                                 |   |
|                    |                                                                                                                                                             |   |
| Item                1.  | Legal                Proceedings                                                                                                                                 | 16     |
|                    |                                                                                                                                                             |   |
| Item                1A. | Risk                Factors                                                                                                                                      | 17     |
|                    |                                                                                                                                                             |   |
| Item                2.  | Unregistered                Sales of Equity Securities and Use Of Proceeds                                                                                       | 26     |
|                    |                                                                                                                                                             |   |
| Item                6.  | Exhibits                                                                                                                                                         | 27     |
|                    |                                                                                                                                                             |   |
|                    | Signatures                                                                                                                                                       | 27     |

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**PART      I. FINANCIAL INFORMATION**

**ITEM      1: CONSOLIDATED FINANCIAL STATEMENTS**

**AWARE,      INC.**

**CONSOLIDATED      BALANCE SHEETS**

**(in      thousands, except share and per share data)**

**(unaudited)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **September                30,****2007** |    |   | **December                31,****2006** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|--------|-----------------------------------------|--------|
| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                     |    |   |                                    |   |
| Current                assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                     |    |   |                                    |   |
|      Cash                and cash                equivalents                                                                                                                                                                                                                                        |   | $                                        | 4,807   |   |                                    | $      | 8,571 |   |
|      Short-term                investments                                                                                                                                                                                                                                                          |   |                                     | 32,848  |   |                                    |   | 29,263 |   |
|      Accounts                receivable,                net                                                                                                                                                                                                                                         |   |                                     | 7,697   |   |                                    |   | 4,738 |   |
|      Inventories                                                                                                                                                                                                                                                                                    |   |                                     | 1,423   |   |                                    |   | 819 |   |
|      Prepaid                expenses and other current                assets                                                                                                                                                                                                                        |   |                                     | 690     |   |                                    |   | 867 |   |
|            Total                current                assets                                                                                                                                                                                                         |   |                                     | 47,465  |   |                                    |   | 44,258 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                     |    |   |                                    |   |   |   |
| Property                and equipment,                net                                                                                                                                                                                                                                                                    |   |                                     | 8,022   |   |                                    |   | 8,123 |   |
| Investments                                                                                                                                                                                                                                                                                                                  |   |                                     | 492     |   |                                    |   | 1,968 |   |
| Other                assets,                net                                                                                                                                                                                                                                                                              |   |                                     | 186     |   |                                    |   | 237 |   |
|            Total                assets                                                                                                                                                                                                                                |   | $                                        | 56,165  |   |                                    | $      | 54,586 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                     |    |   |                                    |   |   |   |
| **LIABILITIES                AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                     |    |   |                                    |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                     |    |   |                                    |   |   |   |
| Current                liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                     |    |   |                                    |   |   |   |
|      Accounts                payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $                                        | 1,146   |   |                                    | $      | 692 |   |
|      Accrued                expenses                                                                                                                                                                                                                                                                |   |                                     | 130     |   |                                    |   | 153 |   |
|      Accrued                compensation                                                                                                                                                                                                                                                            |   |                                     | 1,474   |   |                                    |   | 1,043 |   |
|      Accrued                professional                                                                                                                                                                                                                                                            |   |                                     | 179     |   |                                    |   | 198 |   |
|      Deferred                revenue                                                                                                                                                                                                                                                                |   |                                     | 359     |   |                                    |   | 800 |   |
|              Total                current                liabilities                                                                                                                                                                                        |   |                                     | 3,288   |   |                                    |   | 2,886 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                     |    |   |                                    |   |   |   |
| Long-term                deferred                revenue                                                                                                                                                                                                                                                                     |   |                                     | 330     |   |                                    |   | 330 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                     |    |   |                                    |   |   |   |
| Stockholders’                equity:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                                     |    |   |                                    |   |   |   |
|       Preferred                stock, $1.00 par value; 1,000,000 shares authorized,             none                outstanding                                                                                               |   |                                     | -       |   |                                    |   | - |   |
|       Common                stock, $.01 par value; 70,000,000 shares authorized; issued             and                outstanding, 23,775,720 as of September 30, 2007 and                23,642,753             as                of December 31, 2006                                                                                                                                                                                                                                                                                                                                                                                      |   |                                     | 238     |   |                                    |   | 236 |   |
|       Additional                paid-in                capital                                                                                                                                                                                                                                 |   |                                     | 83,130  |   |                                    |   | 81,923 |   |
|       Accumulated                deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                                     | (30,821 | )      |                                    |   | (30,789 | ) |
|              Total                stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                     | 52,547  |   |                                    |   | 51,370 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                     |    |   |                                    |   |   |   |
|              Total                liabilities and stockholders’                equity                                                                                                                                                                 |   | $                                        | 56,165  |   |                                    | $      | 54,586 |   |

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**AWARE,      INC.**

**CONSOLIDATED      STATEMENTS OF OPERATIONS**

**(in      thousands, except per share data)**

**(unaudited)**

|                                                              |   | **Three                Months Ended** |   |   | **Nine                Months Ended** |   |
|-------------------------------------------------------------------|--------|---------------------------------------|--------|--------|--------------------------------------|--------|
|                                                              |   | **September                30,**      |   |   | **September                30,**     |   |
|                                                              |   | **2007**                              |   |   | **2006**                             |   |   | **2007** |   |   | **2006** |   |
|                                                              |   |                                  |   |   |                                 |   |   |   |   |   |   |   |
| Revenue:                                                          |   |                                  |   |   |                                 |   |   |   |   |   |   |   |
|     Product                sales              |   | $                                     | 5,097  |   |                                 | $      | 1,736 |   |   | $ | 12,333 |   |   | $ | 4,973 |   |
|     Contract                revenue           |   |                                  | 1,851  |   |                                 |   | 3,990 |   |   |   | 5,260 |   |   |   | 9,924 |   |
|     Royalties                                 |   |                                  | 508    |   |                                 |   | 956 |   |   |   | 2,092 |   |   |   | 2,710 |   |
| Total                revenue                                      |   |                                  | 7,456  |   |                                 |   | 6,682 |   |   |   | 19,685 |   |   |   | 17,607 |   |
|                                                              |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Costs                and expenses:                                |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|     Cost                of product sales      |   |                                  | 901    |   |                                 |   | 286 |   |   |   | 3,087 |   |   |   | 615 |   |
|     Cost                of contract revenue   |   |                                  | 1,553  |   |                                 |   | 1,363 |   |   |   | 4,315 |   |   |   | 3,759 |   |
|     Research                and development   |   |                                  | 2,528  |   |                                 |   | 2,602 |   |   |   | 7,735 |   |   |   | 8,200 |   |
|     Selling                and marketing      |   |                                  | 936    |   |                                 |   | 784 |   |   |   | 2,808 |   |   |   | 2,518 |   |
|     General                and administrative |   |                                  | 1,009  |   |                                 |   | 964 |   |   |   | 3,269 |   |   |   | 3,354 |   |
| Total                costs and                expenses            |   |                                  | 6,927  |   |                                 |   | 5,999 |   |   |   | 21,214 |   |   |   | 18,446 |   |
|                                                              |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Income/(loss)                from operations                      |   |                                  | 529    |   |                                 |   | 683 |   |   |   | (1,529 | ) |   |   | (839 | ) |
| Interest                income                                    |   |                                  | 512    |   |                                 |   | 490 |   |   |   | 1,520 |   |   |   | 1,342 |   |
|                                                              |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Income/(loss)                before provision for income taxes    |   |                                  | 1,041  |   |                                 |   | 1,173 |   |   |   | (9 | ) |   |   | 503 |   |
| Provision                for income taxes                         |   |                                  | 6      |   |                                 |   | 333 |   |   |   | 23 |   |   |   | 352 |   |
|                                                              |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net                income/(loss)                                  |   | $                                     | 1,035  |   |                                 | $      | 840 |   |   | $ | (32 | ) |   | $ | 151 |   |
|                                                              |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
|                                                              |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net                income/(loss) per share – basic     |   | $                                     | 0.04   |   |                                 | $      | 0.04 |   |   | $ | (0.00 | ) |   | $ | 0.01 |   |
| Net                income/(loss) per share – diluted        |   | $                                     | 0.04   |   |                                 | $      | 0.03 |   |   | $ | (0.00 | ) |   | $ | 0.01 |   |
|                                                              |   |                                  |   |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                average shares – basic              |   |                                  | 23,757 |   |                                 |   | 23,552 |   |   |   | 23,710 |   |   |   | 23,433 |   |
| Weighted                average shares - diluted                  |   |                                  | 24,996 |   |                                 |   | 24,987 |   |   |   | 23,710 |   |   |   | 24,976 |   |

----

**AWARE,      INC.**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**(in      thousands)**

**(unaudited)**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **Nine                Months Ended** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **September                30,**     |    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **2007**                             |    |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                 |    |   |   |   |
| Cash                flows from operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                 |    |   |   |   |
|    Net                income                (loss)                                                                                                            |   | $                                    | (32     | ) |   | $ | 151 |   |
|    Adjustments                to reconcile net income (loss) to net cash      provided                by (used in) operating activities:                                                                                                                                                                                                                                                                                                                                                                          |   |                                 |    |   |   |   |   |   |
| Depreciation                and                amortization                                                                                                                                      |   |                                 | 652     |   |   |   | 491 |   |
| Stock                based                compensation                                                                                                                                           |   |                                 | 792     |   |   |   | 1,694 |   |
|       Increase                (decrease) from changes in assets and liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                                 |    |   |   |   |   |   |
|          Accounts                receivable                                                                                     |   |                                 | (2,959  | ) |   |   | (2,106 | ) |
|          Inventories                                                                                                            |   |                                 | (604    | ) |   |   | (666 | ) |
|          Prepaid                expenses                                                                                        |   |                                 | 177     |   |   |   | 17 |   |
|          Accounts                payable                                                                                        |   |                                 | 454     |   |   |   | (151 | ) |
|          Accrued                expenses                                                                                        |   |                                 | 389     |   |   |   | 567 |   |
|          Deferred                revenue                                                                                        |   |                                 | (441    | ) |   |   | 551 |   |
|             Net                cash provided by (used in) operating activities                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                 | (1,572  | ) |   |   | 548 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                 |    |   |   |   |   |   |
| Cash                flows from investing activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                 |    |   |   |   |   |   |
|     Purchases                of property and                equipment                                                                                    |   |                                 | (500    | ) |   |   | (301 | ) |
|     Sales                of                investments                                                                                                   |   |                                 | 18,338  |   |   |   | 14,031 |   |
|     Purchases                of investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                 | (20,447 | ) |   |   | (15,316 | ) |
|             Net                cash used in investing activities                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                 | (2,609  | ) |   |   | (1,586 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                 |    |   |   |   |   |   |
| Cash                flows from financing activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                 |    |   |   |   |   |   |
|      Proceeds                from issuance of common                stock                                                                           |   |                                 | 455     |   |   |   | 649 |   |
|      Repurchase                of common                stock                                                                                       |   |                                 | (38     | ) |   |   | - |   |
|             Net                cash provided by financing activities                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                 | 417     |   |   |   | 649 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                 |    |   |   |   |   |   |
| Decrease                in cash and cash                equivalents                                                                                                          |   |                                 | (3,764  | ) |   |   | (389 | ) |
| Cash                and cash equivalents, beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                                 | 8,571   |   |   |   | 13,068 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                                 |    |   |   |   |   |   |
| Cash                and cash equivalents, end of                period                                                                                                       |   | $                                    | 4,807   |   |   | $ | 12,679 |   |

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**AWARE,      INC.**

**NOTES      TO CONSOLIDATED FINANCIAL      STATEMENTS**

**(unaudited)**

| A)     | ***Basis                of Presentation***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | The                accompanying unaudited consolidated balance sheet, statements of                operations, and statements of cash flows reflect all adjustments                (consisting only of normal recurring items) which are, in the opinion                of                management, necessary for a fair presentation of financial position                at                September 30, 2007, and of operations and cash flows for the interim                periods ended September 30, 2007 and 2006. Certain reclassifications                have                been made to the prior year financial statements to conform to the                current                year presentation.                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | The                accompanying unaudited consolidated financial statements have been                prepared in accordance with the instructions for Form 10-Q and therefore                do not include all information and footnotes necessary for a complete                presentation of our financial position, results of operations and                cash                flows, in conformity with generally accepted accounting                principles.  The Company filed audited financial statements                which included all information and footnotes necessary for such                presentation for the three years ended December 31, 2006 in conjunction                with our 2006 Annual Report on Form 10-K. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | The                results of operations for the interim period ended September 30,                2007 are                not necessarily indicative of the results to be expected for the                year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| B)     | ***Inventory***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | Inventories                are stated at the lower of cost or market with cost being determined                by                the first-in, first-out (“FIFO”) method.  Inventory reserves are                established for estimated excess and obsolete                inventory.                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

|                                                                                                                                                                                                                                                                                                                                                       |   | **September                30,****2007** |   |   | **December                31,****2006** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|--------|-----------------------------------------|--------|
| Raw                materials                                                      |   | $                                        | 1,423  |   |                                    | $      | 819 |   |

| C)     | ***Computation                of Earnings per Share***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | Basic                earnings per share is                computed by dividing net income or loss by the weighted average number                of                common shares outstanding.  Diluted earnings per share is                computed by dividing net income or loss by the weighted average number                of                common shares outstanding plus additional common shares that would                have                been outstanding if dilutive potential common shares had been                issued.  For the purposes of this calculation, stock options are                considered common stock equivalents in periods in which they have                a                dilutive effect.  Stock options that are anti-dilutive are                excluded from the calculation. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

----

|   |                                                                                                                                      |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|   | Net                income or loss per share is calculated as follows (in thousands,                except                per share data): |

|                                                                          |   | **Three                Months Ended****September                30,** |   |   | **Nine                Months Ended****September                30,** |   |
|-------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|
|                                                                          |   | **2007**                                                              |   |   | **2006**                                                             |   |   | **2007** |   |   | **2006** |   |
|                                                                          |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |
|    Net                income (loss)                            |   | $                                                                     | 1,035  |   |                                                                 | $      | 840 |   |   | $ | (32 | ) |   | $ | 151 |   |
|                                                                          |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
|    Weighted                average common shares outstanding   |   |                                                                  | 23,757 |   |                                                                 |   | 23,552 |   |   |   | 23,710 |   |   |   | 23,433 |   |
|    Additional                dilutive common stock equivalents |   |                                                                  | 1,239  |   |                                                                 |   | 1,435 |   |   |   | - |   |   |   | 1,543 |   |
|    Diluted                shares outstanding                   |   |                                                                  | 24,996 |   |                                                                 |   | 24,987 |   |   |   | 23,710 |   |   |   | 24,976 |   |
|                                                                          |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |   |   |   |   |
|    Net                income (loss) per share – basic    |   | $                                                                     | 0.04   |   |                                                                 | $      | 0.04 |   |   | $ | (0.00 | ) |   | $ | 0.01 |   |
|    Net                income (loss) per share – diluted  |   | $                                                                     | 0.04   |   |                                                                 | $      | 0.03 |   |   | $ | (0.00 | ) |   | $ | 0.01 |   |

|   | For                the nine month period ended September 30, 2007 potential common stock                equivalents of 1,423,513 were not included in the per share calculation                for diluted EPS, because we had net losses and the effect of their                inclusion would be anti-dilutive.  For the three month periods                ended September 30, 2007 and 2006, options to purchase 3,173,175                and                2,441,742 shares of common stock, respectively, were outstanding,                but were                not included in the computation of diluted EPS because the options’                exercise prices were greater than the average market price of the                common                stock and thus would be anti-dilutive.  For the nine month                periods ended September 30, 2007 and 2006, options to purchase 2,420,025                and 2,415,492 shares of common stock, respectively, were outstanding,                but                were not included in the computation of diluted EPS because the options’                exercise prices were greater than the average market price of the                common                stock and thus would be anti-dilutive. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| D)     | ***Stock-Based                Compensation***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | The                following table presents stock-based employee compensation expense                included in the Company’s unaudited consolidated statements of operations                (in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

|                                                           |   | **Three                Months Ended****September                30,** |   |   | **Nine                Months Ended****September                30,** |   |
|----------------------------------------------------------------|--------|-----------------------------------------------------------------------|--------|--------|----------------------------------------------------------------------|--------|
|                                                           |   | **2007**                                                              |   |   | **2006**                                                             |   |   | **2007** |   |   | **2006** |   |
|                                                           |   |                                                                  |   |   |                                                                 |   |   |   |   |   |   |   |
| Cost                of product                sales            |   | $                                                                     | 4      |   |                                                                 | $      | 4 |   |   | $ | 8 |   |   | $ | 12 |   |
| Cost                of contract                revenue         |   |                                                                  | 54     |   |                                                                 |   | 13 |   |   |   | 133 |   |   |   | 98 |   |
| Research                and                development         |   |                                                                  | 127    |   |                                                                 |   | 241 |   |   |   | 311 |   |   |   | 786 |   |
| Selling                and                marketing            |   |                                                                  | 32     |   |                                                                 |   | 88 |   |   |   | 78 |   |   |   | 266 |   |
| General                and                administrative       |   |                                                                  | 88     |   |                                                                 |   | 106 |   |   |   | 262 |   |   |   | 532 |   |
| Stock-based                compensation                expense |   | $                                                                     | 305    |   |                                                                 | $      | 452 |   |   | $ | 792 |   |   | $ | 1,694 |   |

|   | The                Company estimates the fair value of stock options using the Black-Scholes                valuation model. This valuation model takes into account the exercise                price of the award, as well as a variety of significant assumptions.                These                assumptions used to estimate the fair value of stock options include                the                expected term, the expected volatility of the Company’s stock over the                expected term, the risk-free interest rate over the expected term,                and the                Company’s expected annual dividend yield. The Company believes that the                valuation technique and the approach utilized to develop the underlying                assumptions are appropriate                in calculating the fair values of the Company’s stock options granted in                the nine months ended September 30, 2007. Estimates of fair value are                not intended to predict actual future events or the value ultimately                realized by persons who receive equity awards. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

----

| E)     | ***Business                Segments***                                                                                                                                                                                       |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                         |
|   | The                Company organizes itself as one segment and conducts its operations                in the                United States.                                                                                   |
|   | The                Company sells its products and technology to domestic and international                customers.  Revenues were generated from the following                geographic regions (in thousands): |

|                                                                                                                                                                                                                                                                                                                                                    |   | **Three                Months Ended** |   |   | **Nine                Months Ended** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------|--------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                    |   | **September                30,**      |   |   | **September                30,**     |   |
|                                                                                                                                                                                                                                                                                                                                                    |   | **2007**                              |   |   | **2006**                             |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                    |   |                                  |   |   |                                 |   |   |   |   |   |   |   |
|   United                States                                                                |   | $                                     | 4,610  |   |                                 | $      | 2,832 |   |   | $ | 12,225 |   |   | $ | 9,498 |   |
|   Germany                                                                                     |   |                                  | 1,534  |   |                                 |   | 1,111 |   |   |   | 4,274 |   |   |   | 4,613 |   |
|   Rest                of                World                                                 |   |                                  | 1,312  |   |                                 |   | 2,739 |   |   |   | 3,186 |   |   |   | 3,496 |   |
|                                                                                                                                                                                                                                                                                                                                                    |   | $                                     | 7,456  |   |                                 | $      | 6,682 |   |   | $ | 19,685 |   |   | $ | 17,607 |   |

| F)     | ***Income                Taxes***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | The                Company adopted the provisions of Financial Standards Accounting                Board                Interpretation No. 48 Accounting for Uncertainty in Income Taxes                (“FIN                48”) an interpretation of FASB Statement No. 109 (“SFAS 109”) on January                1, 2007.  As a result of the implementation of FIN 48, the                Company recognized no material adjustment in the liability for                unrecognized income tax benefits.  At the adoption date of                January 1, 2007 and also at September 30, 2007, the Company had no                unrecognized tax benefits.                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | The                Company recognizes interest and penalties related to uncertain tax                positions in income tax expense.  As of September 30, 2007, the                Company had no accrued interest or penalties related to uncertain                tax                positions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | The                tax years 2003 through 2006 remain open to examination by the major                taxing                jurisdictions to which the Company is subject.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | As                of December 31, 2006, the Company had federal net operating loss                and                research and experimentation credit carryforwards of approximately                $49.9                million and $11.4 million respectively, which may be available to                offset                future federal income tax liabilities and expire at various dates                from                2007 through 2026.  In addition, at December 31, 2006, the                Company had approximately $8.3 million and $5.8 million of state                net                operating losses and state research and development and investment                tax                carryforwards, respectively, which expire at various dates from 2007                through 2021. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

----

|   | Utilization                of net operating loss and research and development credit carryforwards                may be subject to a substantial annual limitation due to ownership                change                limitations that have occurred previously or that could occur in                the                future provided by Section 382 of the Internal Revenue Code of 1986,                as                well as similar state provisions.  These ownership changes may                limit the amount of net operating loss and research and development                credit                carryforwards that can be utilized annually to offset future taxable                income and tax, respectively.  The Company has not currently                completed a study to assess whether a change of control has                occurred.  Until a study is completed and any limitation known,                no amounts are being presented as an uncertain tax position under                FIN                48.                                                                                                                                                                                          |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| G)     | ***Recent                Accounting Pronouncements***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | In                September 2006, the FASB issued Statement No. 157, “Fair Value                Measurements”* *(“SFAS 157”).  The Statement provides                guidance for using fair value to measure assets and liabilities.                 This Statement references fair value as the price that would be                received to sell an asset or paid to transfer a liability in an orderly                transaction between market participants in the market in which the                reporting entity transacts. The Statement applies whenever other                standards                require (or permit) assets or liabilities to be measured at fair                value.                 The Statement does not expand the use of fair value in any new                circumstances.  It is expected to be effective for financial                statements issued for fiscal years beginning after November 15, 2007,                and                interim periods within those fiscal years.  The adoption of SFAS 157                is not expected to have a material impact on the Company’s financial                position, results of operations or cash flows. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | In                February 2007, the FASB issued Statement of Financial Accounting                Standards                No. 159, “The Fair Value Option for Financial Assets and Financial                Liabilities, including an amendment of FASB Statements No. 115”                (“SFAS 159”). SFAS 159 permits entities to choose, at specified                election dates, to measure eligible items at fair value (the “fair value                option”). A business entity shall report unrealized gains and losses on                items for which the fair value option has been elected in earnings                at each                subsequent reporting period. This accounting standard is effective                as of                the beginning of an entity’s first fiscal year that begins after                November 15, 2007. The effect, if any, of adopting SFAS 159 on                the Company’s financial position and results of operations has not been                finalized.                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| H)     | ***Share                Repurchase Program***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | On                August 28, 2007, the Company announced a stock repurchase program                to                purchase up to $5 million of our common stock, subject to market                conditions and other factors. Any purchases under the Company’s stock                repurchase program may be made from time to time without prior notice.                The                authorization to repurchase Company stock expires on December 31,                2008. As                of September 30, 2007, the Company had repurchased 9,107 shares of                common stock under this program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

----

**ITEM      2:**

**Management’s      Discussion and Analysis of**

**Financial      Condition and Results of Operations**

**Cautionary      Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities      Litigation Reform Act of 1995**

*Some      of the information in this Form 10-Q contains forward-looking statements that      involve substantial risks and uncertainties.  You can identify these      statements by forward-looking words such as “may,” “will,” “expect,”“anticipate,” “believe,” “estimate,” “continue” and similar      words.  You should read statements that contain these words carefully      because they: (1) discuss our future expectations; (2) contain projections      of      our future operating results or financial condition; or (3) state other“forward-looking” information.  However, we may not be able to predict      future events accurately.  The risk factors listed in this Form 10-Q,      as well as any cautionary language in this Form 10-Q, provide examples of risks,      uncertainties and events that may cause our actual results to differ materially      from the expectations we describe in our forward-looking      statements.  You should be aware that the occurrence of any of the      events described in these risk factors and elsewhere in this Form 10-Q could      materially and adversely affect our business.*

**Results      of Operations**

***Product      Sales***
**.**

***Contract      Revenue.***
* *

----

***Royalties.***

***Cost      of Product Sales.***

----

***Cost      of Contract      Revenue***
*.*

***Research      and Development Expense.***

----

***Selling      and Marketing Expense.***

***General      and Administrative Expense.***

***Interest      Income.***

----

***Income      Taxes.***

**Liquidity      and Capital Resources**

----

**Recent      Accounting Pronouncements**

* *

**ITEM      3:**

**Quantitative      and Qualitative Disclosures about Market Risk**

|   |    |                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | — | Cash                and cash equivalents, which consist of financial instruments with                original                maturities of three months or less; and                                                                                                                                                                                                                                                 |
|   | — | Investments,                which consist of financial instruments that meet the high quality                standards specified in our investment policy.  This policy                dictates that all instruments mature in three years or less, and                limits                the amount of credit exposure to any one issue, issuer, and type                of                instrument. |

----

|                                                        |   | **Valuation                of securities****given                an interest rate****decrease                of** |   |   |                       |   |   | **Valuation                of securities****given                an interest rate****increase                of** |   |
|-------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|--------|--------|----------------------------|--------|--------|-------------------------------------------------------------------------------------------------------------------|--------|
| Type                of security                             |   | **(100BP)**                                                                                                       |   |   | **(50                BP)** |   |   | **No                change****in                interest****rates**                                               |   |   | **100                BP** |   |   | **50                BP** |   |
| Long-term                investments with                   |   |                                                                                                              |   |   |                       |   |   |                                                                                                              |   |   |   |   |   |   |   |
|   maturities                of one to three years |   | $                                                                                                                 | 499    |   |                       | $      | 496    |                                                                                                              |   | $ | 492 |   |   | $ | 485 |   |   | $ | 489 |   |

**ITEM      4:**

**Controls      and Procedures**

**PART      II.  OTHER INFORMATION**

**ITEM      1:**

**Legal      Proceedings**

----

**ITEM      1A:**

**Risk      Factors**

**Risk      Factors**

***Our      Quarterly Results are Unpredictable and May Fluctuate      Significantly***

|   |   |                                                                                                                                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | market                acceptance of  broadband technologies we supply by semiconductor                or equipment companies;            |
|   | · | the                extent and timing of new license transactions with semiconductor                companies;                                      |
|   | · | changes                in our and our licensees’ development schedules and levels of expenditure                on research and development; |
|   | · | the                loss of a strategic relationship or termination of a project by a                licensee;                                      |
|   | · | equipment                companies' acceptance of integrated circuits produced by our                licensees;                                    |
|   | · | the                loss by a licensee 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;                                                                                                                                                                                                  |
|   | · | price                pressure in the biometrics or test and diagnostics markets from our                competitors;                                                                                                                                                       |
|   | · | delays                in the adoption of new industry standards or changes in market perception                of the value of new or existing standards;                                                                                                                  |
|   | · | competitive                pressures resulting in lower contract revenues or royalty                rates;                                                                                                                                                                 |
|   | · | competitive                pressures resulting in lower software or hardware product                revenues;                                                                                                                                                              |
|   | · | personnel                changes, particularly those involving engineering and technical                personnel;                                                                                                                                                         |
|   | · | costs                associated with protecting our intellectual property;                                                                                                                                                                                                 |
|   | · | the                potential that licensees could fail to make payments under their                current                contracts;                                                                                                                                       |
|   | · | ADSL                market-related issues, including lower ADSL chipset unit demand brought                on                by excess channel inventory and lower average selling prices for                ADSL                chipsets as a result of market surpluses; |
|   | · | VDSL                market-related issues, including lower VDSL chipset unit demand brought                on                by excess channel inventory and lower average selling prices for                VDSL                chipsets as a result of market surpluses; |
|   | · | hardware                manufacturing issues, including yield problems in our hardware platforms,                and inventory buildup and obsolescence;                                                                                                                   |
|   | · | product                gross margin may be affected by various factors including, but not                limited                to, product mix, product life cycle, and provision for excess and                obsolete                inventory.;                       |
|   | · | significant                fluctuations in demand for our hardware products;                                                                                                                                                                                               |
|   | · | regulatory                developments; and                                                                                                                                                                                                                                |
|   | · | general                economic trends and other factors.                                                                                                                                                                                                                  |

***We      Experienced Net Losses***

|   | · | the                semiconductor and telecommunications markets decline;                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|   | · | our                existing customers do not increase their revenues from sales of chipsets                with our technology;         |
|   | · | new                or existing customers do not choose to license our intellectual property                for new chipset products; or |
|   | · | new                or existing customers do not choose to use our software or hardware                products.                         |

***We      Have a Unique Business Model***

----

|   | · | we                must typically undergo a lengthy and expensive process of building                a                relationship with a potential licensee before there is any assurance                of a                license agreement with such party;                                        |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | we                must persuade semiconductor and equipment manufacturers with significant                resources to rely on us for critical technology on an ongoing basis                rather                than trying to develop similar technology internally;                               |
|   | · | we                must persuade potential licensees to bear development costs associated                with our technology applications and to make the necessary investment                to                successfully manufacture chipsets and products using our technology;                and |
|   | · | we                must successfully transfer technical know-how to                licensees.                                                                                                                                                                                                           |

|   | · | we                cannot obtain suitable licensees;                                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|   | · | our                licensees fail to achieve significant sales of chipsets or products                incorporating our technology; or |
|   | · | we                otherwise fail to implement our business strategy                successfully.                                       |

***There      Has Been and May Continue to be a Cyclical Demand for DSL Chipsets, and There      is      Intense Competition for DSL Chipsets, Which Has Caused Our Royalty Revenue      to      Decline ***

***We      Depend Substantially Upon a Limited Number of      Licensees***

----

***We      Derive a Significant Amount of Revenue from a Small Number of      Customers***

***Our      Success Requires Acceptance of Our Technology by Equipment      Companies***

|   | · | competition                from other businesses in the same industry;                                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------|
|   | · | market                acceptance of its products;                                                              |
|   | · | its                engineering, sales and marketing, and management                capabilities;               |
|   | · | technical                challenges of developing its products unrelated to our technology;                and |
|   | · | its                financial and other resources.                                                              |

***Our      Success Requires Telephone Companies to Install DSL Service in      Volume***

----

|   | · | the                desire of telephone companies to install ADSL or VDSL service, which                is                dependent on the development of a viable business model for ADSL                or VDSL                service, including the capability to market, sell, install and maintain                the service; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | the                pricing of ADSL or VDSL services by telephone                companies;                                                                                                                                                                                                                                          |
|   | · | the                success of internet protocol TV (“IPTV”) or video-based services as viable                consumer service offerings;                                                                                                                                                                                |
|   | · | the                transition by telephone companies to new ADSL technologies, such                as ADSL2,                ADSL2+ and VDSL2;                                                                                                                                                                                       |
|   | · | the                quality of telephone companies’ networks;                                                                                                                                                                                                                                                                  |
|   | · | deployment                by phone companies of fiber-to-the-home or broadband wireless                services;                                                                                                                                                                                                                    |
|   | · | government                regulations; and                                                                                                                                                                                                                                                                                          |
|   | · | the                willingness of residential telephone customers to demand DSL service                in                the face of competitive service offerings, such as cable modems,                fiber-based service or broadband wireless                access.                                                           |

***Our      Intellectual Property is Subject to Limited      Protection***

----

***Our      Business is Subject to Rapid Technological Change***

***We      Face Intense Competition from a Wide Range of      Competitors***

----

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

----

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

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

      business. Because of our reliance      on these      vendors, we may also be subject to increases in component costs. These increases      could significantly harm our business. If any one or more of our single source      suppliers cease to provide us with sufficient quantities of our components      in a      timely manner or on terms acceptable to us, we would have to seek alternative      sources of supply. We could incur delays while we locate and engage alternative      qualified suppliers and we might be unable to engage alternative suppliers      on      favorable terms. We could incur substantial hardware and software redesign      costs      if we are required to replace the components.  Any such disruption or      increased expenses could harm our commercialization efforts and adversely affect      our ability to generate revenues.

***Biometrics      Business      Risks***

|   | — | 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;                                                                                 |
|   | — | announcements                or introductions of new technologies or products 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 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 licensees could fail to make payments under their                current                contracts;                                               |
|   | — | regulatory                developments; and                                                                                                                                        |
|   | — | general                economic trends and other factors.                                                                                                                          |

----

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

***Our      Stock Price May Be Extremely Volatile***

|   | · | 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 licensees;                                                                                                                                                                                               |
|   | · | announcements                of technological innovations or new products by us, our licensees                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; and                                                                                                                                                                                                                 |
|   | · | developments                or announcements with respect to industry standards, patents or                proprietary rights.                                                                                                                                |

***Our      Business May Be Affected by Government Regulations***

----

**ITEM      2:**

**Unregistered      Sales of Equity Securities and Use of Proceeds**

**Issuer      Purchases of Equity      Securities**

| **Period**                                                    |   | **(a)****Total                Number                of****Shares                Purchased** |   | **(b)****Average                Price****Paid                per                Share** |   | **(c)****Total                Number of                Shares****Purchased                as Part                of****Publicly                Announced                Plans****or                Programs(1)** |   | **(d)****Maximum                Number(or****Appr****oximate                Dollar****Value)                of Shares that****May                Yet Be                Purchased****Under                the                Plans****or                Programs** |   |
|--------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| August                28, 2007 to August 30,                2007   |   | -                                                                                           |   |                                                                                    |   |                                                                                                                                                                                                             |   |                                                                                                                                                                                                                                                              |   |   |   |
| September                1, 2007, to Sept. 30,                2007 |   | 9,107                                                                                       |   | $                                                                                       | 4.19   |                                                                                                                                                                                                             | 9,107  |                                                                                                                                                                                                                                                              | $      | 4,961,830 |   |

----

*(1)*

----

**ITEM      6:**

**Exhibits**

***(a)  Exhibits***

|   | Exhibit                31.1 | Certification                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley                Act of 2002.                                                           |
|--------|-----------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                        |                                                                                                                                                                                        |
|   | Exhibit                31.2 | Certification                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley                Act of 2002.                                                           |
|   |                        |                                                                                                                                                                                        |
|   | Exhibit                32.1 | Certification                of Chief Executive Officer and Chief Financial Officer pursuant to                Section                906 of the Sarbanes-Oxley Act of                2002. |

**SIGNATURES**

|                                  | **AWARE,                INC.** |
|---------------------------------------|--------------------------------|
|                                  |                           |   |
|                                  |                           |   |
| Date:                November 8, 2007 | By:                            | /s/                Michael A. Tzannes |
|                                  |                           | Michael                A. Tzannes, Chief Executive Officer |
|                                  |                           |   |
|                                  |                           |   |
| Date:                November 8, 2007 | By:                            | /s/                Keith E. Farris |
|                                  |                           | Keith                E. Farris, Chief Financial Officer (Principal                Financial and Accounting Officer) |