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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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, 1997

COMMISSION FILE NUMBER 000-21129

AWARE, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

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

40 MIDDLESEX TURNPIKE, BEDFORD, MASSACHUSETTS, 01730
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(Address of Principal Executive Offices)
(Zip Code)

(617) 276-4000
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(Registrant's Telephone Number, Including Area Code)

Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES X NO
--- ---

Indicate the number of shares outstanding of the issuer's common stock as of
November 4, 1997:

CLASS NUMBER OF SHARES OUTSTANDING
- --------------------------------------- ----------------------------
Common Stock, par value $0.01 per share 19,443,511 shares

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AWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997

TABLE OF CONTENTS

PAGE
----

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Condensed Balance Sheets as of
September 30, 1997 and December 31, 1996.......................... 3

Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1997
and September 30, 1996............................................ 4

Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1997
and September 30, 1996............................................ 5

Notes to Consolidated Condensed Financial Statements.............. 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 8

PART II OTHER INFORMATION

Item 1. Legal Proceedings................................................. 14

Item 2. Changes in Securities and Use of Proceeds......................... 14

Item 6. Exhibits and Reports on Form 8-K.................................. 15

Signatures........................................................ 15

PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)

SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------

ASSETS
Current assets:
Cash and cash equivalents................................................ $ 25,376,442 $ 31,092,273
Short-term investments................................................... 2,569,409 5,626,725
Accounts receivable (less allowance for doubtful
accounts of $50,000 in 1997 and $35,000 in 1996)...................... 1,037,503 1,654,980
Unbilled accounts receivable............................................. 31,870 110,722
Inventories.............................................................. 206,217 447,534
Prepaid expenses......................................................... 296,084 23,426
------------ ------------
Total current assets 29,517,525 38,955,660

Property and equipment, net of accumulated depreciation and
amortization of $1,131,605 in 1997 and $557,901 in 1996.................. 9,184,652 1,166,928
------------ ------------

Total assets............................................................... $ 38,702,177 $ 40,122,588
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable........................................................ $ 460,251 $ 337,339
Accrued expenses ........................................................ 97,018 60,091
Accrued compensation .................................................... 275,503 173,692
Accrued professional fees................................................ 48,829 65,000
Deferred revenue......................................................... 40,000 40,000
------------ ------------
Total current liabilities........................................ 921,601 676,122

Stockholders' equity:
Preferred stock, $1.00 par value; 1,000,000 shares authorized,
none outstanding................................................. -- --
Common stock, $.01 par value; 30,000,000 shares authorized; issued
and outstanding, 19,442,792 in 1997 and 18,959,897 in 1996...... 194,428 189,600
Additional paid-in capital.............................................. 51,052,476 50,025,548
Accumulated deficit.................................................... $(13,013,366) (10,315,720)
Treasury stock.......................................................... (452,962) (452,962)
------------ ------------
Total stockholders' equity...................................... 37,780,576 39,446,466

Total liabilities and stockholders' equity................................. $ 38,702,177 $ 40,122,588
============ ============

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

AWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------

Revenue:
Product................................ $ 323,430 $ 379,926 $ 574,523 $ 529,945
License and royalty.................... 146,344 782,047 2,301,462 2,221,652
Research and development............... 252,726 343,847 1,518,017 844,701
----------- ----------- ----------- -----------
Total revenue 722,500 1,505,820 4,394,002 3,596,298

Costs and expenses:
Cost of product revenue............... 387,375 266,125 879,433 364,705
Research and development............... 1,815,765 808,826 4,681,977 1,990,910
Selling and marketing.................. 605,016 178,568 1,472,006 509,117
General and administrative............. 484,043 248,051 1,403,014 691,366
----------- ----------- ----------- -----------
Total costs and expenses 3,292,199 1,501,570 8,436,430 3,556,098

Income (loss) from operations.............. (2,569,699) 4,250 (4,042,428) 40,200
Interest income............................ 423,753 257,433 1,344,782 311,301
----------- ----------- ----------- -----------

Income (loss) before provision for
income taxes............................. (2,145,946) 261,683 (2,697,646) 351,501
Provision for income taxes................. -- -- -- --
----------- ----------- ----------- -----------

Net income (loss).......................... $(2,145,946) $ 261,683 $(2,697,646) $ 351,501
=========== =========== =========== ===========

Net income (loss) per share................ $ (0.11) $ 0.01 $ (0.14) $0.02
=========== =========== =========== ===========

Weighted average common and common
equivalent shares outstanding............. 19,430,032 19,071,834 19,257,651 17,544,989
=========== =========== =========== ===========

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

AWARE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)

NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1997 1996
----------- -----------

Cash flows from operating activities:
Net income (loss).......................................... $(2,697,646) $ 351,501
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................. 573,704 194,720
Increase (decrease) from changes in assets and
liabilities:
Accounts receivable...................................... 617,477 (524,951)
Unbilled accounts receivable............................. 78,852 (77,012)
Inventories.............................................. 241,317 (845,703)
Prepaid expenses......................................... (272,658) (66,895)
Accounts payable......................................... 122,912 462,898
Accrued expenses......................................... 122,567 189,835
----------- -----------
Net cash used in operating activities......................... (1,213,475) (315,607)

Cash flows from investing activities:
Purchases of property and equipment........................ (8,591,428) (510,415)
Net purchases of short-term investments.................... 3,057,316 (6,042,896)
----------- -----------
Net cash used in investing activities (5,534,112) (6,553,311)

Cash flows from financing activities:
Proceeds from issuance of common stock..................... 1,031,756 36,198,644
----------- -----------

Decrease in cash and cash equivalents......................... (5,715,831) 29,329,726
Cash and cash equivalents, beginning of period................ 31,092,273 2,153,681
----------- -----------
Cash and cash equivalents, end of period...................... $25,376,442 $31,483,407
=========== ===========

SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest..................................... -- $ 820

SUPPLEMENTAL NONCASH DISCLOSURES:
Conversion of preferred stock to common stock.............. -- $ 127,998

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

AWARE, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

A) BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed balance sheets,
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, 1997, and of operations and cash
flows for the interim periods ended September 30, 1997 and 1996.

The accompanying unaudited consolidated condensed 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 operations, the financial position, and
cash flows of the Company, 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 years ended December 31, 1996 and December 31,
1995 in conjunction with its 1996 Annual Report on Form 10-K.

The results of operations for the interim period ended September 30,
1997 are not necessarily indicative of the results to be expected for
the year.

B) INVENTORY

Inventory consists primarily of the following:

SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------

Raw materials............................... $136,217 $408,643
Work-in-process............................. 70,000 38,891
Finished goods.............................. -- --
-------- --------
Total................................ $206,217 $447,534
======== ========

C) NET INCOME (LOSS) PER SHARE

Net income (loss) per share is based on the weighted average number of
common and dilutive common equivalent shares (common stock options and
convertible preferred stock) outstanding. Common equivalent shares for
the three months and nine months ended September 30, 1996 include the
effect of Securities and Exchange Commission Staff Accounting Bulletin
No. 83. The Bulletin requires all common shares issued and options to
purchase shares of common stock granted by the Company during the
twelve-month period prior to the filing of a proposed initial public
offering to be included in the calculation as if they were outstanding
for all periods.

In accordance with the provisions of Statement of Financial Accounting
Standard No. 128, "Earnings per Share", the Company was not permitted
to early adopt SFAS No. 128 for the quarter ended September 30, 1997.
Had SFAS No. 128 been effective for the three and nine month periods
ended September 30, 1997 and 1996, pro forma net income (loss) per
common share amounts would have been as follows:

Three Months Ended
September 30,
------------------
1997 1996
-------- -----

Basic net income (loss) per share ($0.11) $0.02
Diluted net income (loss) per share ($0.11) $0.01

Nine Months Ended
September 30,
-----------------
1997 1996
------- -----

Basic net income (loss) per share ($0.14) $0.04
Diluted net income (loss) per share ($0.14) $0.02

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

The statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations which are not
historical are "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events, however the
Company cautions that such statements are qualified by important factors. Such
factors, which are identified under the heading "Risk Factors" below, could
cause actual results to differ materially from those indicated in Management's
Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

Product Revenue. Product revenue consists primarily of revenue from the
sale of Asymmetric Digital Subscriber Line ("ADSL") modems, transceiver modules,
and development systems. Product revenue decreased by 15% from $379,926 in the
third quarter of 1996 to $323,430 in the current year quarter. Product revenue
as a percentage of total revenue was 45% in the third quarter of 1997 as
compared to 25% in the corresponding quarter of 1996. The revenue decline in the
current quarter was due to lower modem shipments, which were partially offset by
new revenue from the sale of modules and development systems. The relatively low
level of product revenue is primarily due to a market for ADSL equipment that
remains in its early stages. The Company believes that volume deployment of ADSL
technology and equipment will not commence before the second half of 1998.
Further, the Company anticipates that product revenue will represent a greater
proportion of total revenue in future periods, if volume deployment of ADSL
technology occurs.

For the nine months ended September 30, product revenue increased by 8%
from $529,945 in 1996 to $574,523 in 1997. Product revenue as a percentage of
total revenue was 13% for the first nine months of 1997 as compared to 15% in
the corresponding period in 1996. The increase in dollar revenue in 1997 is
primarily due to the timing of ADSL product shipments. The Company began nominal
shipments of ADSL products in the first quarter of 1996, therefore the
year-to-date periods in 1997 and 1996 reflect essentially three and two quarters
of product shipments, respectively.

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

License and royalty revenue decreased by 81% from $782,047 in the third quarter
of 1996 to $146,344 in the current year quarter. License and royalty revenue as
a percentage of total revenue was 20% in the third quarter of 1997 as compared
to 52% in the corresponding quarter of 1996. The dollar decrease as well as the
decrease as a percentage of total revenue is primarily due to telecommunications
license and chipset royalty revenue that declined from $600,000 in the third
quarter of 1996 to $0 in the current year quarter. The Company anticipates that
license and royalty revenue will decline as a percentage of total revenue if
volume deployment of ADSL technology occurs and the Company is able to increase
product revenue.

For the nine months ended September 30, license and royalty revenue increased 4%
from $2,221,652 in 1996 to $2,301,462 in 1997. License and royalty revenue as a
percentage of total revenue was 52% for the first nine months of 1997 as
compared to 62% in the corresponding period of 1996. The dollar increase is
primarily due to an increase in compression software license sales, which was
partially offset by lower telecommunication license and chipset royalty revenue.

Research and Development Revenue. Research and development revenue
consists primarily of revenue from commercial contract engineering and
development, and government research contracts. Research and development revenue
decreased by 27% from $343,847 in the third quarter of 1996 to $252,726 in the
current year quarter. Research and development revenue as a percentage of total
revenue was 35% in the third quarter of 1997 as compared to 23% in the
corresponding quarter of 1996. The dollar decrease is primarily due to a
decrease in commercial contract engineering revenue this quarter, which was
partially offset by an increase in U.S. government research contract revenue.

For the nine months ended September 30, research and development revenue
increased by 80% from $844,701 in 1996 to $1,518,017 in 1997. Research and
development revenue as a percentage of total revenue was 35% for the first nine
months of 1997 as compared to 24% in the corresponding period of 1996. The
dollar increase as well as the increase as a percentage of total revenue is
primarily due to an increase in non-recurring engineering revenue and an
increase in U.S. government research contract revenue. The non-recurring
engineering revenue is primarily related to agreements with commercial
telecommunication customers who have engaged the Company to assist them with the
integration of the Company's technology into their products.

Cost of Product Revenue. Cost of product revenue consists primarily of
direct material, direct labor and overhead costs to produce the Company's
products, and cost of goods for purchases of finished goods inventory from a
third party supplier, as well as provisions for excess and obsolete inventory.
Cost of product revenue as a percentage of product revenue was 120% in the third
quarter of 1997 as compared to 70% in the prior year quarter. The cost of
product revenue as a percentage of product revenue in the third quarter of 1997
primarily reflects: (i) high material and labor unit costs due to relatively low
production volumes, (ii) high fixed manufacturing costs relative to product
shipments, and (iii) a $50,000 provision for excess and obsolete inventory. In
the third quarter of 1997, the Company entered into an agreement with a contract
manufacturer, that will supply finished goods to the Company. The Company
anticipates that this arrangement will reduce per unit cost of sales,
particularly as product volumes increase.

Cost of product revenue as a percentage of product revenue was 153% for the
first nine months of 1997 as compared to 69% in the corresponding 1996 period.
The cost of product revenue as a percentage of product revenue for the first
nine months of 1997 primarily reflects: (i) high

material and labor unit costs due to relatively low production volumes, (ii)
high fixed manufacturing costs relative to product shipments, and (iii) a
$225,000 provision for excess and obsolete inventory.

Research and Development Expense. Research and development expense
consists primarily of salaries for engineers, expenses for consultants,
recruiting, supplies, equipment, depreciation and facilities related to the
development and enhancement of the Company's products and technology. Research
and development expense increased by 124% from $808,826 in the third quarter of
1996 to $1,815,765 in the current year quarter. For the nine month period ended
September 30, research and development expense increased 135% from $1,990,910 in
1996 to $4,681,977 in 1996. For the three and nine month periods, the increase
in research and development expense is primarily driven by projects to
commercialize the Company's core technology and to add hardware and software
functionality to the Company's ADSL products. The Company anticipates that
research and development spending will continue to grow in future periods.

Selling and Marketing Expense. Selling and marketing expense consists
primarily of salaries for sales and marketing personnel, travel, advertising and
promotion, recruiting, and facilities expense. Selling and marketing expense
increased 239% from $178,568 in the third quarter of 1996 to $605,016 in the
current year quarter. For the nine month period ended September 30, sales and
marketing expense increased 189% from $509,117 in 1996 to $1,472,006 in 1997.
For the three and nine month periods, the increase is primarily due to: (i) the
addition of sales staff to establish channels of distribution for the Company's
products and technology, (ii) the addition of marketing staff, and (iii)
increased levels of advertising and promotion to create awareness for the
Company's products, including participation in major industry tradeshows. The
Company anticipates that selling and marketing spending will continue to grow in
future periods.

General and Administrative Expense. General and administrative expense
consists primarily of salaries for administrative personnel, facilities costs,
public company expenses, and professional services, such as legal and audit
expenses. General and administrative expense increased by 95% from $248,051 in
the third quarter of 1996 to $484,043 in the current year quarter. For the nine
month period ended September 30, general and administrative expense increased
103% from $691,366 in 1996 to $1,403,014 in 1997. For the three and nine month
periods, the increase is primarily due to: (i) additions to the Company's
finance, information systems and administrative organizations to support
organizational growth, and (ii) investor relations and public company expenses.

Interest Income. Interest income increased from $257,433 in the third
quarter of 1996 to $423,753 in the current year quarter. For the nine months
ended September 30, interest income increased from $311,301 in 1996 to
$1,344,782 in 1997. The increase in both periods is primarily a result of higher
cash balances due to the investment of net proceeds from the Company's initial
public offering.

Income Taxes. The Company has made no provision for income taxes as it
has a history of net losses, which has resulted in tax loss carryforwards. As of
December 31, 1996, the Company had available federal net operating loss
carryforwards of approximately $9,773,000 which expire in 2004 through 2010, and
federal research and development credit carryforwards of approximately $493,000
which expire in 2003 through 2011. As of December 31, 1996, the Company also had
available state net operating loss carryforwards of approximately $5,448,000

which expire in 1997 through 2000 and state research and development and
investment tax credit carryforwards of approximately $268,000 which expire in
2006 and 2011.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1997, the Company had cash, cash equivalents and short-term
investments of $27,945,851, a decrease of $8,773,147 from December 31, 1996. The
decrease is primarily due to purchases of property and equipment. Cash used in
operations was essentially offset by proceeds from the issuance of common stock
under the Company's stock option plans.

Cash invested in property and equipment of $8,591,428 were primarily related to:
(i) the purchase and renovation of a 72,000 square foot commercial office
building for $6,944,264, and (ii) the acquisition of computers, software and
other equipment used in research and development activities.

While there can be no assurance that the Company will not require additional
financing, or that such financing will be available to the Company, the Company
believes that its financial resources are adequate to meet its liquidity
requirements over the next twelve months.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", both of which will be effective for the Company in fiscal 1998.
SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. SFAS No. 131 establishes
standards for the way that public business enterprises report selected
information about operating segments in annual and interim financial reports.
SFAS No. 131 also established standards for related disclosures about products
and services, geographic areas, and major customers. The implementation of SFAS
No. 130 and 131 are not expected to have a material effect on the Company's
financial statements.

RISK FACTORS

The Company believes that the occurrence of any one or some combination of the
following risk factors could have a material adverse effect on the Company's
business, financial condition and results of operations.

History of Operating Losses

The Company has incurred operating losses in every fiscal year since
inception. Substantial additional research and development expenses to enhance
the performance and reduce the manufacturing costs of the Company's products
will be required before market acceptance can be determined. Also, the Company
anticipates that substantial selling and marketing expenses will be required to
establish sales channels for the Company's products and technology. There can be
no assurance that the Company will achieve profitable operations in any future
period.

Dependence on Acceptance of ADSL Technology

The Company's future success is substantially dependent upon whether
ADSL technology gains widespread commercial acceptance by the telephone
companies ("telcos") and end users of telco services. The Company has invested
substantial resources in the development of ADSL technology implemented through
the Discrete Multi-Tone ("DMT") modulation technique. Telcos have only begun
evaluating DMT-based ADSL technology, and there can be no assurance that the
telcos will pursue the deployment of such ADSL technology. The Company believes
that volume deployment of ADSL technology and equipment will not commence before
the second half of 1998.

Reliance on Telcos; Dependence on a Limited Number of Customers

Even if telcos adopt policies favoring full-scale implementation of
ADSL technology, there can be no assurance that sales of the Company's ADSL
products will become significant. The Company's customers, including Regional
Bell Operating Companies ("RBOCs"), OEMs and other telcos, are relatively few in
number and have significantly greater resources than that of the Company. The
Company has limited ability to influence or control decisions made by these
customers. There can be no assurance that these customers will not use their
size and bargaining power to demand unfavorable terms and conditions (including
price), seek alternative suppliers, or undertake internal development of
products comparable to those of the Company's.

Substantial Dependence on Analog Devices, Inc.

The Company and Analog Devices, Inc. ("ADI") have entered into a series
of agreements to develop integrated chipsets based on the Company's technology.
The inability or refusal of ADI to manufacture, market and sell such chipsets in
substantial quantities would prevent telcos from adopting the Company's
technology and would have a material adverse effect on the Company's business.
There can be no assurance that ADI will succeed or, in the event that ADI is not
successful, that the Company would be able to find a substitute chipset
manufacturer without significant delays.

Proprietary Technology; Risk of Third Party Claims of Infringement

The Company's ability to compete effectively will depend to a
significant extent on its ability to protect its proprietary information and to
operate without infringing the intellectual property rights of others. Despite
the precautions the Company has taken to protect its intellectual property,
there can be no assurance that such steps will be adequate to prevent the
misappropriation of its technology. In addition, third parties may assert
exclusive patent, copyright and other intellectual property rights to
technologies that are important to the Company. There can be no assurance that
other third parties will not assert such claims against the Company in the
future.

Rapid Technological Change; Dependence on New Products

The markets for the Company's products are characterized by rapid
technological advances, evolving industry standards, changes in end-user
requirements, frequent new product introductions, and evolving telco offerings.
The Company's business will be materially adversely affected if technologies or
standards on which Company's products are based become obsolete, or if the
Company is unable to develop and introduce new products in a timely manner in
response to changing market conditions. In such an environment, product cycles
tend to be short, and therefore, the Company may need to write-off excess and
obsolete inventory from time-to-

time. In the fourth quarter of 1996 and the first nine months of 1997, the
Company recorded provisions for excess and obsolete inventory of $350,000 and
$225,000, respectively.

Competition

The markets for the Company's products are intensely competitive and
the Company expects competition to increase in the immediate future. Many of the
Company's competitors and potential competitors have significantly greater
financial, technological, manufacturing, marketing and personnel resources than
the Company. There can be no assurance that the Company will be able to compete
successfully or that competition will not adversely affect the Company's
business.

Manufacturing

The Company has limited experience in manufacturing or in supervising
the manufacture of its products, including its ADSL modems, modules, and
development systems. There can be no assurance that the Company will not
encounter significant difficulties in manufacturing or controlling the quality
of its products, or that its products will be reliable in the field.

Dependence on Hiring and Retaining Personnel

The Company believes that its future success will depend significantly
on its ability to attract, motivate and retain additional highly skilled
technical, managerial and marketing personnel. During the first nine months of
1997, the Company experienced difficulty in hiring the additional engineers it
contemplated in its business plans. Competition for such personnel is intense,
and there can be no assurance that the Company will be successful in attracting,
assimilating and retaining the personnel required to grow and operate
profitably.

PART II. OTHER INFORMATION

ITEM 1:
LEGAL PROCEEDINGS

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

ITEM 2:
CHANGES IN SECURITIES AND USE OF PROCEEDS

(d) Use of Proceeds

The Company sold 3,910,000 shares of the Company's Common Stock, par
value $.01 per share, on August 14, 1996 and September 9, 1996, pursuant to a
Registration Statement on Form S-1 ( File No. 333-06807), which was declared
effective by the Securities and Exchange Commission on August 8, 1996 (the
"Effective Date"). The managing underwriters of the offering were BancAmerica
Robertson Stephens and Furman Selz LLC. The aggregate gross proceeds of the
offering were $39,100,000. The Company's total expenses in connection with the
offering were $3,937,000, of which $2,737,000 was for underwriting discounts and
commissions and $1,200,000 was for other expenses paid to persons other than
directors or officers of the Company, persons owning more than 10 percent of any
class of equity securities of the Company, or affiliates of the Company
(collectively, "Affiliates"). The Company's net proceeds from the offering were
$35,163,000. From the Effective Date through September 30, 1997, the Company
used (i) approximately $9,491,000 of such net proceeds to purchase and renovate
a commercial office building, which the Company now uses as its headquarters,
and to acquire computers, software and other equipment and (ii) approximately
$1,491,000 of such net proceeds for working capital. None of these payments were
made to Affiliates. As of September 30, 1997 the Company had approximately
$24,181,000 of proceeds remaining from the offering, and pending use of the
proceeds, the Company intends to invest such proceeds primarily in short-term,
interest-bearing, investment-grade securities, including money market
instruments.

PART II. OTHER INFORMATION
ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

Exhibit 10.1* - Agreement of Purchase and Sale by and between Aware, Inc.
and The Mitre Corporation dated as of June 6, 1997
Exhibit 11.1* - Computation of Net Income (Loss) per Share

(B) REPORTS ON 8-K

None.

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

*filed herewith

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

AWARE, INC.

Date: November 14, 1997 By: /s/ James C. Bender
-------------------
James C. Bender, Chief Executive
Officer and President

Date: November 14, 1997 By: /s/ Richard P. Moberg
---------------------
Richard P. Moberg, Vice President and
Chief Financial Officer (Principal
Financial and Accounting Officer)