----

----

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

| Class                                   | Number of Shares Outstanding |
|-----------------------------------------|------------------------------|
| Common Stock, par value $0.01 per share | 20,039,145 shares            |
|                                    |                         |

----

----

|     |                                                    |   Page |
|----------|---------------------------------------------------------|-------------|
| PART I   | FINANCIAL INFORMATION                                   |        |
|     |                                                    |        |
| Item 1.  | Unaudited Consolidated Financial Statements             |        |
|     |                                                    |        |
|     | Consolidated Balance Sheets as of                       |        |
|     | September 30, 2010 and December 31, 2009                | 3           |
|     |                                                    |        |
|     | Consolidated Statements of Operations for the           |        |
|     | Three and Nine Months Ended September 30, 2010 and      |        |
|     | September 30, 2009                                      | 4           |
|     |                                                    |        |
|     | Consolidated Statements of Cash Flows for the           |        |
|     | Nine Months Ended September 30, 2010 and                |        |
|     | September 30, 2009                                      | 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                                             | 17          |
|     |                                                    |        |
| Item 4.  | Controls and Procedures                                 | 17          |
|     |                                                    |        |
| PART II  | OTHER INFORMATION                                       |        |
|     |                                                    |        |
| Item 1.  | Legal Proceedings                                       | 18          |
|     |                                                    |        |
| Item 1A. | Risk Factors                                            | 18          |
|     |                                                    |        |
| Item 6.  | Exhibits                                                | 19          |
|     |                                                    |        |
|     | Signatures                                              | 19          |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | September 30,2010 |       |   | December 31,2009 |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|--------|------------------|--------|
| ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |              |       |   |             |   |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |              |       |   |             |   |
|      Cash and cash equivalents                                                                                                                                                                                                                                        |   | $                 | 39,041     |   |             | $      | 39,669 |   |
|      Accounts receivable, net                                                                                                                                                                                                                                         |   |              | 5,165      |   |             |   | 3,565 |   |
|      Inventories                                                                                                                                                                                                                                                      |   |              | 1,468      |   |             |   | 1,113 |   |
|      Prepaid expenses and other current assets                                                                                                                                                                                                                        |   |              | 501        |   |             |   | 363 |   |
|            Total current assets                                                                                                                                                                                                         |   |              | 46,175     |   |             |   | 44,710 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |              |       |   |             |   |   |   |
| Property and equipment, net                                                                                                                                                                                                                                                                    |   |              | 6,465      |   |             |   | 6,744 |   |
| Other assets, net                                                                                                                                                                                                                                                                              |   |              | 29         |   |             |   | - |   |
|            Total assets                                                                                                                                                                                                                 |   | $                 | 52,669     |   |             | $      | 51,454 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |              |       |   |             |   |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |              |       |   |             |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |              |       |   |             |   |   |   |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |              |       |   |             |   |   |   |
|      Accounts payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $                 | 783        |   |             | $      | 327 |   |
|      Accrued expenses                                                                                                                                                                                                                                                 |   |              | 112        |   |             |   | 127 |   |
|      Accrued compensation                                                                                                                                                                                                                                             |   |              | 929        |   |             |   | 1,202 |   |
|      Accrued professional                                                                                                                                                                                                                                             |   |              | 201        |   |             |   | 282 |   |
|      Deferred revenue                                                                                                                                                                                                                                                 |   |              | 835        |   |             |   | 563 |   |
|              Total current liabilities                                                                                                                                                                                        |   |              | 2,860      |   |             |   | 2,501 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |              |       |   |             |   |   |   |
| Long-term deferred revenue                                                                                                                                                                                                                                                                     |   |              | 489        |   |             |   | 593 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |              |       |   |             |   |   |   |
| 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 20,039,145 as of September 30, 2010 and 19,809,315             as of December 31, 2009                                                                                                                                                                                                                                                                                                                                                                                                                     |   |              |   200 |   |             |   |   198 |   |
|       Additional paid-in capital                                                                                                                                                                                                                                 |   |              | 77,040     |   |             |   | 76,032 |   |
|       Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |              | (27,920    | )      |             |   | (27,870 | ) |
|              Total stockholders’ equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |              | 49,320     |   |             |   | 48,360 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |              |       |   |             |   |   |   |
|              Total liabilities and stockholders’ equity                                                                                                                                                                 |   | $                 | 52,669     |   |             | $      | 51,454 |   |

----

|                                               |   | Three Months Ended |   |   | Nine Months Ended |   |
|----------------------------------------------------|--------|--------------------|--------|--------|-------------------|--------|
|                                               |   | September 30,      |   |   | September 30,     |   |
|                                               |   | 2010               |   |   | 2009              |   |   | 2010 |   |   | 2009 |   |
|                                               |   |               |   |   |              |   |   |   |   |   |   |   |
| Revenue:                                           |   |               |   |   |              |   |   |   |   |   |   |   |
|     Product sales              |   | $                  | 5,026  |   |              | $      | 4,661 |   |   | $ | 13,588 |   |   | $ | 11,332 |   |
|     Contract revenue           |   |               | 488    |   |              |   | 1,005 |   |   |   | 1,043 |   |   |   | 3,725 |   |
|     Royalties                  |   |               | 637    |   |              |   | 554 |   |   |   | 2,107 |   |   |   | 1,500 |   |
| Total revenue                                      |   |               | 6,151  |   |              |   | 6,220 |   |   |   | 16,738 |   |   |   | 16,557 |   |
|                                               |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Costs and expenses:                                |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
|     Cost of product sales      |   |               | 1,236  |   |              |   | 857 |   |   |   | 3,112 |   |   |   | 2,413 |   |
|     Cost of contract revenue   |   |               | 206    |   |              |   | 717 |   |   |   | 352 |   |   |   | 2,534 |   |
|     Research and development   |   |               | 2,082  |   |              |   | 3,175 |   |   |   | 6,198 |   |   |   | 9,344 |   |
|     Selling and marketing      |   |               | 1,029  |   |              |   | 1,251 |   |   |   | 3,148 |   |   |   | 3,517 |   |
|     General and administrative |   |               | 1,650  |   |              |   | 1,383 |   |   |   | 4,469 |   |   |   | 3,812 |   |
| Total costs and expenses                           |   |               | 6,203  |   |              |   | 7,383 |   |   |   | 17,279 |   |   |   | 21,620 |   |
|                                               |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Loss from operations                               |   |               | (52    | )      |              |   | (1,163 | ) |   |   | (541 | ) |   |   | (5,063 | ) |
| Other income                                       |   |               | 100    |   |              |   | - |   |   |   | 425 |   |   |   | - |   |
| Interest income                                    |   |               | 28     |   |              |   | 31 |   |   |   | 67 |   |   |   | 217 |   |
|                                               |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss) before provision for income taxes    |   |               | 76     |   |              |   | (1,132 | ) |   |   | (49 | ) |   |   | (4,846 | ) |
| Provision for income taxes                         |   |               | -      |   |              |   | 1 |   |   |   | 1 |   |   |   | 5 |   |
|                                               |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                  |   | $                  | 76     |   |              | $      | (1,133 | ) |   | $ | (50 | ) |   | $ | (4,851 | ) |
|                                               |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
|                                               |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss) per share – basic     |   | $                  | 0.00   |   |              | $      | (0.06 | ) |   | $ | (0.00 | ) |   | $ | (0.23 | ) |
| Net income (loss) per share – diluted        |   | $                  | 0.00   |   |              | $      | (0.06 | ) |   | $ | (0.00 | ) |   | $ | (0.23 | ) |
|                                               |   |               |   |   |              |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average shares – basic              |   |               | 20,000 |   |              |   | 19,782 |   |   |   | 19,947 |   |   |   | 21,230 |   |
| Weighted average shares - diluted                  |   |               | 20,344 |   |              |   | 19,782 |   |   |   | 19,947 |   |   |   | 21,230 |   |

----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | Nine Months Ended |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | September 30,     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | 2010              |   |   | 2009 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |              |   |   |   |   |
| Cash flows from operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |              |   |   |   |   |
|    Net loss                                                                                                                                                                                                  |   | $                 | (50    | ) |   | $ | (4,851 | ) |
|    Adjustments to reconcile net loss to net cash   used in operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |              |   |   |   |   |   |   |
| Depreciation and amortization                                                                                                                                                                                                                   |   |              | 388    |   |   |   | 662 |   |
| Stock-based compensation                                                                                                                                                                                                                        |   |              | 1,169  |   |   |   | 1,476 |   |
|       Increase (decrease) from changes in assets and liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |              |   |   |   |   |   |   |
|          Accounts receivable                                                                                                                                                   |   |              | (1,600 | ) |   |   | (1,568 | ) |
|          Inventories                                                                                                                                                           |   |              | (355   | ) |   |   | 526 |   |
|          Prepaid expenses                                                                                                                                                      |   |              | (138   | ) |   |   | (166 | ) |
|          Accounts payable                                                                                                                                                      |   |              | 479    |   |   |   | (47 | ) |
|          Accrued expenses                                                                                                                                                      |   |              | (269   | ) |   |   | (463 | ) |
|          Deferred revenue                                                                                                                                                      |   |              | 168    |   |   |   | 621 |   |
|             Net cash used in operating activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |              | (208   | ) |   |   | (3,810 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |              |   |   |   |   |   |   |
| Cash flows from investing activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |              |   |   |   |   |   |   |
|     Purchases of property and equipment                                                                                                                                                                 |   |              | (101   | ) |   |   | (131 | ) |
|     Expenses from sale of assets                                                                                                                                                                        |   |              | (100   | ) |   |   | - |   |
|     Purchases of other assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |              | (60    | ) |   |   | - |   |
|             Net cash used in investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |              | (261   | ) |   |   | (131 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |              |   |   |   |   |   |   |
| Cash flows from financing activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |              |   |   |   |   |   |   |
|      Proceeds from issuance of common stock                                                                                                                                                        |   |              | 2      |   |   |   | 3 |   |
|      Shares surrendered by employees to pay taxes related to       unrestricted stock                                                                           |   |              | (161   | ) |   |   | - |   |
|      Repurchase of common stock                                                                                                                                                                    |   |              | -      |   |   |   | (8,950 | ) |
|             Net cash used in financing activities                                                                                                               |   |              | (159   | ) |   |   | (8,947 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |              |   |   |   |   |   |   |
| Decrease in cash and cash equivalents                                                                                                                                                                                       |   |              | (628   | ) |   |   | (12,888 | ) |
| Cash and cash equivalents, beginning of period                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |              | 39,669 |   |   |   | 45,516 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |              |   |   |   |   |   |   |
| Cash and cash equivalents, end of period                                                                                                                                                                                    |   | $                 | 39,041 |   |   | $ | 32,628 |   |

----

| 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, 2010, and of operations and cash flows for the interim periods ended September 30, 2010 and 2009. |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| B) | Fair Value Measurements. The Financial Accounting Standards Board (“FASB”) issued authoritative guidance for fair value measurements in September 2006, which defines fair value, establishes a framework for measuring fair value, and expands disclosures assets and liabilities measured at fair value in financial statements. This guidance is set forth in FASB Accounting Standards Codification 820 (ASC 820). We adopted the provisions of ASC 820 as of January 1, 2008, for our financial instruments. Although the adoption of ASC 820 did not materially impact our financial condition, results of operations, or cash flow, we are now required to provide additional disclosures as part of our financial statements. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| C) | Inventories. Inventories are stated at the lower of cost or net realizable value with cost being determined by the first-in, first-out (“FIFO”) method.  Inventory reserves are established for estimated excess and obsolete inventory. Inventories consist primarily of the following (in thousands): |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                                |   | September 30,2010 |    |   | December 31,2009 |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|--------|------------------|--------|
| Raw materials                                                                                                             |   | $                 | 1,468   |   |             | $      | 1,112 |   |
| Finished goods                                                                                                                                                                                                                                                                                                                                                       |   |              |  - |   |             |   | 1 |   |
|         Total                                                      |   | $                 | 1,468   |   |             | $      | 1,113 |   |

----

| D) | Computation of Earnings per Share. Basic earnings per share are 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. |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                                           |   | Three Months EndedSeptember 30, |   |   | Nine Months EndedSeptember 30, |   |
|----------------------------------------------------------------|--------|---------------------------------|--------|--------|--------------------------------|--------|
|                                                           |   | 2010                            |   |   | 2009                           |   |   | 2010 |   |   | 2009 |   |
|                                                           |   |                            |   |   |                           |   |   |   |   |   |   |   |
|    Net income (loss)                            |   | $                               | 76     |   |                           | $      | (1,133 | ) |   | $ | (50 | ) |   | $ | (4,851 | ) |
|                                                           |   |                            |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|    Weighted average common shares outstanding   |   |                            | 20,000 |   |                           |   | 19,782 |   |   |   | 19,947 |   |   |   | 21,230 |   |
|    Additional dilutive common stock equivalents |   |                            | 344    |   |                           |   | - |   |   |   | - |   |   |   | - |   |
|    Diluted shares outstanding                   |   |                            | 20,344 |   |                           |   | 19,782 |   |   |   | 19,947 |   |   |   | 21,230 |   |
|                                                           |   |                            |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |
|    Net income (loss) per share – basic    |   | $                               | 0.00   |   |                           | $      | (0.06 | ) |   | $ | (0.00 | ) |   | $ | (0.23 | ) |
|    Net income (loss) per share – diluted  |   | $                               | 0.00   |   |                           | $      | (0.06 | ) |   | $ | (0.00 | ) |   | $ | (0.23 | ) |

| E) | Stock-Based Compensation.  The following table presents stock-based employee compensation expenses included in our unaudited consolidated statements of operations (in thousands): |
|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                   |   | Three Months EndedSeptember 30, |   |   | Nine Months EndedSeptember 30, |   |
|----------------------------------------|--------|---------------------------------|--------|--------|--------------------------------|--------|
|                                   |   | 2010                            |   |   | 2009                           |   |   | 2010 |   |   | 2009 |   |
|                                   |   |                            |   |   |                           |   |   |   |   |   |   |   |
| Cost of product sales                  |   | $                               | 3      |   |                           | $      | 3 |   |   | $ | 8 |   |   | $ | 8 |   |
| Cost of contract revenue               |   |                            | 4      |   |                           |   | 36 |   |   |   | 11 |   |   |   | 105 |   |
| Research and development               |   |                            | 101    |   |                           |   | 174 |   |   |   | 269 |   |   |   | 458 |   |
| Selling and marketing                  |   |                            | 25     |   |                           |   | 140 |   |   |   | 76 |   |   |   | 249 |   |
| General and administrative             |   |                            | 488    |   |                           |   | 324 |   |   |   | 805 |   |   |   | 656 |   |
| Stock-based compensation expense  |   | $                               | 621    |   |                           | $      | 677 |   |   | $ | 1,169 |   |   | $ | 1,476 |   |
|                                   |   |                            |   |   |                           |   |   |   |   |   |   |   |   |   |   |   |

----

| F) | Business Segments. We manage the business as one segment and conduct our operations in the United States. We sell our 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,     |   |
|                                                                                                                                                                                                                                                                                                                      |   | 2010               |   |   | 2009              |   |   | 2010 |   |   | 2009 |   |
|                                                                                                                                                                                                                                                                                                                      |   |               |   |   |              |   |   |   |   |   |   |   |
|   United States                                                 |   | $                  | 3,460  |   |              | $      | 3,837 |   |   | $ | 9,871 |   |   | $ | 9,336 |   |
|   Germany                                                       |   |               | 693    |   |              |   | 1,353 |   |   |   | 2,136 |   |   |   | 3,922 |   |
|   Rest of World                                                 |   |               | 1,998  |   |              |   | 1,030 |   |   |   | 4,731 |   |   |   | 3,299 |   |
|                                                                                                                                                                                                                                                                                                                      |   | $                  | 6,151  |   |              | $      | 6,220 |   |   | $ | 16,738 |   |   | $ | 16,557 |   |

----

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

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

| H) | Recent Accounting Pronouncements. We describe below recent pronouncements that have had or may have a significant effect on our financial statements. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, or disclosures. |
|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| I) | Share Repurchase Program. On March 5, 2009, we announced a modified Dutch auction self-tender offer to purchase up to 3,500,000 shares, or approximately 15%, of our outstanding common stock (including the associated preferred share purchase rights), at a price in the range of $2.20 to $2.60 per share, for a maximum aggregate purchase price of approximately $9.1 million.  The terms of the tender offer also provided the right for us to purchase up to an additional 2% of our shares if the offer was oversubscribed. |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| J) | Spin-off Plans.  In September 2010, we announced plans to pursue a spin-off of our patent licensing operations. The spin-off will allow the spun-off entity to focus on patent licensing operations.  After the spin-off, Aware will continue as a supplier of test and diagnostics products and biometrics and imaging software. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

|                       |   | Three Months EndedSeptember 30, |   |   | Nine Months EndedSeptember 30, |   |   |
|----------------------------|--------|---------------------------------|--------|--------|--------------------------------|--------|--------|
|                       |   | 2010                            |   |   | 2009                           |   |   | 2010 |   |   |  2009 |   |
| GAAP net income (loss)     |   | $                               | 76     |   |                           | $      | (1,133 | ) |   | $ | (50 | ) |   | $ | (4,851 | ) |
| Stock-based compensation   |   |                            | 621    |   |                           |   | 677    |   |   |   | 1,169 |   |   |   | 1,476 |   |
| Non-GAAP net income (loss) |   | $                               | 697    |   |                           | $      | (456   | ) |   | $ | 1,119 |   |   | $ | (3,375 | ) |

|                                 |   | Three Months EndedSeptember 30, |   |   | Nine Months EndedSeptember 30, |   |
|--------------------------------------|--------|---------------------------------|--------|--------|--------------------------------|--------|
|                                 |   | 2010                            |   |   | 2009                           |   |   | 2010 |   |   | 2009 |   |
| GAAP net income (loss) per share     |   | $                               | 0.00   |   |                           | $      | (0.06 | ) |   | $ | (0.00 | ) |   | $ | (0.23 | ) |
| Stock-based compensation             |   |                            | 0.03   |   |                           |   | 0.04 |   |   |   | 0.06 |   |   |   | 0.07 |   |
| Non-GAAP net income (loss) per share |   | $                               | 0.03   |   |                           | $      | (0.02 | ) |   | $ | 0.06 |   |   | $ | (0.16 | ) |

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

| ●     | Short-term investments, which consist of financial instruments with remaining maturities of twelve months or less; and |
|----------------------------|------------------------------------------------------------------------------------------------------------------------|

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

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|   | 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. |
|--------|--------------|---------------------------------------------------------------------------------------------------------------------------------|

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