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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 MARCH 31, 2002

COMMISSION FILE NUMBER 000-21129

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

MASSACHUSETTS 04-2911026
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(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)

(781) 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
April 30, 2002:

CLASS NUMBER OF SHARES OUTSTANDING
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Common Stock, par value $0.01 per share 22,667,009 shares

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AWARE, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2002

TABLE OF CONTENTS

Page
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PART I FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001................. 3

Consolidated Statements of Operations for the
Three Months Ended March 31, 2002
and March 31, 2001................................... 4

Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002
and March 31, 2001................................... 5

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

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 9

Item 3. Quantitative and Qualitative Disclosures about
Market Risk.......................................... 20

PART II OTHER INFORMATION

Item 1. Legal Proceedings.................................... 21

Item 6. Exhibits and Reports on Form 8-K..................... 22

Signatures........................................... 22

PART I. FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
AWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)

MARCH 31, DECEMBER 31,
2002 2001
-------------- --------------
ASSETS

Current assets:
Cash and cash equivalents .............................................. $ 52,323 $ 36,056
Short-term investments ................................................. 1,200 21,228
Accounts receivable, net ............................................... 2,243 1,383
Inventories ............................................................ 237 282
Deferred tax assets .................................................... 1,811 1,811
Prepaid expenses and other assets ...................................... 667 795
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Total current assets ................................................ 58,481 61,555
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Property and equipment, net .............................................. 10,892 10,937
Deferred tax assets ...................................................... 5,282 5,282
Other assets, net ........................................................ 298 329
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Total assets ........................................................ $ 74,953 $ 78,103
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LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ......................................................... $ 340 $ 353
Accrued expenses ......................................................... 217 521
Accrued compensation ..................................................... 586 948
Accrued professional ..................................................... 169 125
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Total current liabilities ............................................. 1,312 1,947
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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, 22,667,009 in 2002 and 22,657,741 in 2001 ............ 227 227
Additional paid-in capital ............................................... 77,212 77,151
Retained earnings ........................................................ (3,798) (1,222)
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Total stockholders' equity ............................................ 73,641 76,156
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Total liabilities and stockholders' equity ............................ $ 74,953 $ 78,103
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The accompanying notes are an integral part of the financial statements.

AWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2002 2001
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Revenue:
Product sales .......................................... $ 1,007 $ 1,452
Contract revenue ....................................... 2,093 2,647
Royalties .............................................. 476 4,119
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Total revenue ....................................... 3,576 8,218

Costs and expenses:
Cost of product sales .................................. 166 180
Cost of contract revenue ............................... 1,465 2,191
Research and development ............................... 3,365 1,837
Selling and marketing .................................. 683 672
General and administrative ............................. 712 705
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Total costs and expenses ............................ 6,391 5,585

Income (loss) from operations ............................ (2,815) 2,633
Interest income .......................................... 239 794
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Income (loss) before provision for income taxes .......... (2,576) 3,427
Provision for income taxes ............................... -- 1,371
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Net income (loss) ........................................ ($2,576) $ 2,056
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Net income (loss) per share - basic ...................... ($0.11) $ 0.09
Net income (loss) per share - diluted .................... ($0.11) $ 0.09

Weighted average shares - basic .......................... 22,664 22,614
Weighted average shares - diluted ........................ 22,664 22,945

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

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

THREE MONTHS ENDED
MARCH 31,
--------------------------------
2002 2001
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Cash flows from operating activities:
Net income (loss) .................................................... ($ 2,576) $ 2,056
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................................... 479 407
Provision for doubtful accounts .................................... -- 25
Increase (decrease) from changes in assets and liabilities:
Accounts receivable .............................................. (860) 2,043
Inventories ...................................................... 45 (83)
Deferred tax assets .............................................. -- 1,371
Prepaid expenses ................................................. 128 (64)
Accounts payable ................................................. (13) 116
Accrued expenses ................................................. (622) (140)
Deferred revenue ................................................. -- (1,416)
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Net cash provided by (used in) operating activities ............ (3,419) 4,315
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Cash flows from investing activities:
Purchases of property and equipment .................................. (403) (440)
Net sales of short-term investments .................................. 20,028 3,602
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Net cash provided by investing activities ...................... 19,625 3,162
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Cash flows from financing activities:
Proceeds from issuance of common stock ............................... 61 118
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Net cash provided by financing activities ...................... 61 118
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Increase in cash and cash equivalents .................................. 16,267 7,595
Cash and cash equivalents, beginning of period ......................... 36,056 51,662
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Cash and cash equivalents, end of period ............................... $ 52,323 $ 59,257
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The accompanying notes are an integral part of the financial statements.

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

A) BASIS OF PRESENTATION

The accompanying unaudited consolidated 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
March 31, 2002, and of operations and cash flows for the interim periods
ended March 31, 2002 and 2001.

The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and therefore
do not include all information and footnotes necessary for a complete
presentation of 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 three years ended
December 31, 2001 in conjunction with its 2001 Annual Report on Form 10-K.

The results of operations for the interim period ended March 31, 2002 are
not necessarily indicative of the results to be expected for the year.

B) INVENTORY

Inventory consists primarily of the following (in thousands):

MARCH 31, DECEMBER 31,
2002 2001
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Raw materials................... $143 $146
Finished goods.................. 94 136
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Total....................... $237 $282
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C) COMPUTATION OF EARNINGS PER SHARE

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

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

THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
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Net income (loss)............................. ($2,576) $2,056

Weighted average common shares outstanding.... 22,664 22,614
Additional dilutive common stock equivalents.. - 331
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Diluted shares outstanding.................... 22,664 22,945
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Net income (loss) per share - basic........... ($0.11) $0.09
Net income (loss) per share - diluted......... ($0.11) $0.09

For the three month period ended March 31, 2002, potential common stock
equivalents of 447,572 were not included in the per share calculation for
diluted EPS, because we had a net loss and the effect of their inclusion
would be anti-dilutive. For the three month periods ended March 31, 2002
and 2001, options to purchase 5,213,516 and 2,758,691 shares of common
stock, respectively, were outstanding, but were not included in the
computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common shares and thus would
be anti-dilutive.

D) BUSINESS SEGMENTS

The Company organizes itself as one segment and conducts its operations in
the United States.

The Company sells its products and technology to domestic and
international customers. Revenues were generated from the following
geographic regions (in thousands):

THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
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United States............................ $3,018 $8,074
Asia/Pacific............................. 427 31
Rest of World............................ 131 113
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$3,576 $8,218
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E) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS 144 supercedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets
(including discontinued operations) and consequently amends Accounting
Principles Board Opinion No. 30, "Reporting Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business." SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001. We adopted SFAS 144 in the first quarter of 2002. The
implementation of SFAS No. 144 did not have an effect on our financial
statements.

ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

SOME OF THE INFORMATION IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY THESE
STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "CONTINUE" AND SIMILAR WORDS. YOU SHOULD
READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY: (1) DISCUSS OUR
FUTURE EXPECTATIONS; (2) CONTAIN PROJECTIONS OF OUR FUTURE OPERATING RESULTS OR
FINANCIAL CONDITION; OR (3) STATE OTHER "FORWARD-LOOKING" INFORMATION. HOWEVER,
WE MAY NOT BE ABLE TO PREDICT FUTURE EVENTS ACCURATELY. THE RISK FACTORS LISTED
IN THIS SECTION, AS WELL AS ANY CAUTIONARY LANGUAGE IN THIS FORM 10-Q, PROVIDE
EXAMPLES OF RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THE EXPECTATIONS WE DESCRIBE IN OUR FORWARD-LOOKING
STATEMENTS. YOU SHOULD BE AWARE THAT THE OCCURRENCE OF ANY OF THE EVENTS
DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS FORM 10-Q COULD MATERIALLY
AND ADVERSELY AFFECT OUR BUSINESS.

RESULTS OF OPERATIONS

PRODUCT SALES. Product sales consist primarily of revenue from the sale of
asymmetric digital subscriber line ("ADSL") equipment and compression software
products. The products that comprise ADSL equipment sales are primarily test and
development systems, modules, and modems.

Product sales decreased 31% from $1.5 million in the first quarter of 2001 to
$1.0 million in the current year quarter. As a percentage of total revenue,
product sales increased from 18% in the first quarter of 2001 to 28% in the
current year quarter. The dollar decrease was primarily due to a decrease in
revenue from the sale of compression software. The decline in compression
software sales was due to a large electronic identification product sale in the
prior year quarter that did not repeat in the current quarter.

CONTRACT REVENUE. Contract revenue consists primarily of license and
engineering service fees that we receive under agreements with our customers to
develop ADSL chipsets.

Contract revenue decreased 21% from $2.6 million in the first quarter of 2001 to
$2.1 million in the current year quarter. As a percentage of total revenue,
contract revenue increased from 32% in the first quarter of 2001 to 59% in the
current year quarter. The dollar decrease was primarily due to a difficult
semiconductor industry environment. Both existing and prospective ADSL chipset
licensees have been reluctant or slow to begin new development projects with us.
We believe this is a result of the uncertainty in the semiconductor and
telecommunications industries. We are uncertain when the market conditions we
faced over the last four quarters will improve.

ROYALTIES. Royalties consist of royalty payments that we receive under
licensing agreements. We receive royalties from customers for the right to use
our technology in their chipsets or solutions.

Royalties decreased 88% from $4.1 million in the first quarter of 2001 to $0.5
million in the current year quarter. As a percentage of total revenue, royalties
decreased from 50% in the first quarter of 2001 to 13% in the current year
quarter. The decrease in royalties was primarily due to a decrease in ADSL
chipset sales by our largest customer, Analog Devices, Inc. ("ADI"). We believe
that sluggish chipset demand and lower chipset prices were the primary reasons
behind the decline in ADI's chipset sales. While worldwide demand for ADSL
service remains strong, demand for ADSL chipsets has been weaker because of
excess equipment capacity at telephone companies' central offices. Also, the
availability of ADSL chipsets from a number of suppliers and intense competition
among those suppliers has caused chipset prices to drop sharply over the last
year. We are uncertain when these market conditions will improve.

COST OF PRODUCT SALES. Since the cost of compression software license
sales is minimal, cost of product sales consists primarily of ADSL equipment
sales. Cost of product sales decreased 8% from $180,000 in the first quarter of
2001 to $166,000 in the current year quarter. As a percentage of product sales,
cost of product sales increased from 12% in the first quarter of 2001 to 16% in
the current year quarter. In terms of dollars, the decrease in cost of product
sales is primarily due to lower provisions for potentially obsolete or excess
inventory during the current quarter. The decline in product margins was
primarily due to a smaller proportion of compression software sales in the
product sales revenue mix.

COST OF CONTRACT REVENUE. Cost of contract revenue consists primarily of
salaries for engineers and expenses for consultants, recruiting, supplies,
equipment, depreciation and facilities associated with customer development
projects. Our total engineering costs are allocated between cost of contract
revenue and research and development expense. In a given period, the allocation
of engineering costs between cost of contract revenue and research and
development is a function of the level of effort expended on each. As a
particular technology matures from the development stage to integration into
customer chips, engineering costs typically shift from research and development
to cost of contract revenue.

Cost of contract revenue decreased 33% from $2.2 million in the first quarter of
2001 to $1.5 million in the current year quarter. As a percentage of contract
revenue, cost of contract revenue decreased from 83% in the first quarter of
2001 to 70% in the current year quarter. In terms of dollars, the decrease in
cost of contract revenue was primarily due to fewer customer projects in the
first quarter of 2002 as compared with the first quarter of 2001. The percentage
decrease is primarily due to the mix of license fees and engineering service
fees in contract revenue in the first quarter of 2001 as compared with the
current year quarter.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
consists primarily of salaries for engineers and expenses for consultants,
recruiting, supplies, equipment, depreciation and facilities related to
engineering projects to enhance and extend our broadband intellectual property
offerings, and our compression software technology. Research and development
expense increased by 83% from $1.8 million in the first quarter of 2001 to $3.4
million in the current year quarter. As a percentage of total revenue, research
and development expense increased from 22% in the first quarter of 2001 to 94%
in the current year quarter. The dollar increase was primarily due to increased
spending on internal research and development projects, including core ADSL
technology, VeDSL, Dr. DSL, G.SHDSL, wireless local area network communications,
powerline communications as well as other development projects.

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. Sales and marketing expense
increased 2% from $672,000 in the first quarter of 2001 to $683,000 in the
current year quarter. As a percentage of total revenue, sales and marketing
expense increased from 8% in the first quarter of 2001 to 19% in the current
year quarter. The dollar increase was primarily due to the addition of sales and
marketing staff, which was mostly offset by lower spending on advertising and
public relations.

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
consists primarily of salaries for administrative personnel, facilities costs,
and public company, bad debt, legal, and audit expenses. General and
administrative expense increased 1% from $705,000 in the first quarter of 2001
to $712,000 in the current year quarter. As a percentage of total revenue,
general and administrative expense increased from 9% in the first quarter of
2001 to 20% in the current year quarter.

INTEREST INCOME. Interest income decreased 70% from $794,000 in the first
quarter of 2001 to $239,000 in the current year quarter. The dollar decrease is
primarily due to lower interest rates earned on our cash balances and to a
lesser extent lower cash balances.

INCOME TAXES. In the first quarter of 2001, we recorded a $1.4 million
provision for income taxes based on our profitability in that quarter and our
projected taxable income for 2001. As 2001 progressed, it became apparent that
deteriorating ADSL market conditions would adversely affect our full year
revenue and profit expectations. Consequently, we revised our 2001 effective tax
rate and reversed the $1.4 million provision we recorded in the first quarter of
2001 in subsequent quarters during 2001. For the full year 2001, we made no
provision for income taxes, because we had a net loss. Similarly, we made no
provision for income taxes in the first quarter of 2002 because we had a net
loss in that period as well.

As of March 31, 2002 [and December 31, 2001], we had net deferred tax assets of
$7.1 million, which we believed was more likely than not that we would realize
based on our projected taxable income in the next two years. The remaining
deferred tax assets were fully reserved due to the uncertainty of realization.
We will continue to evaluate, on a quarterly basis, the positive and negative
evidence affecting the realizability of our deferred tax assets.

At December 31, 2001, we had federal net operating loss carryforwards of
approximately $56.1 million, which begin to expire in 2003, and federal research
and development credit carryforwards of approximately $6.7 million, which begin
to expire in 2003. At December 31, 2001, we also had available state net
operating loss carryforwards of approximately $53.7 million, which begin to
expire in 2002, and state research and development and investment tax credit
carryforwards of approximately $3.9 million, which begin to expire in 2003.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2002, we had cash, cash equivalents and short-term investments of
$53.5 million, which represents a decrease of $3.8 million from December 31,
2001. The decrease is primarily due to $3.4 million of cash used in operations,
and $403,000 of cash invested in capital equipment.

Cash used in operations in the first three months of 2002 was primarily the
result of operating losses and working capital requirements. Capital spending
was primarily related to the purchase of computer hardware and software, and
laboratory equipment used principally in engineering activities.

While we can not assure you that we will not require additional financing, or
that such financing will be available to us, we believe that our cash, cash
equivalents and short-term investments will be sufficient to fund our operations
for at least the next twelve months.

RISK FACTORS

We believe that the occurrence of any one or some combination of the following
risk factors could seriously harm our business.

OUR QUARTERLY RESULTS ARE UNPREDICTABLE AND MAY FLUCTUATE SIGNIFICANTLY

Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. Because our revenue components
fluctuate and are difficult to predict, and our expenses are largely independent
of revenues in any particular period, it is difficult for us to accurately
forecast revenues and profitability. We generally recognize contract revenues
ratably over the period during which we expect to provide engineering services.
While this means that contract revenues from current licenses are generally
predictable, changes can be introduced by a reevaluation of the length of the
development period. The initial estimate of this period is subject to revision
as the product being developed under a contract nears completion, and a revision
may result in an increase or decrease to the quarterly revenue for that
contract. In addition, accurate prediction of revenues from new licensees is
difficult because the development of a business relationship with a potential
licensee is a lengthy process, frequently spanning a year or more, and the
fiscal period in which a new license agreement will be entered into, if at all,
and the financial terms of such an agreement are difficult to predict. Contract
revenues also include fees for engineering services, which are dependent upon
the varying level of assistance desired by licensees and, therefore, the revenue
from these services is also difficult to predict.

It is also difficult for us to make accurate forecasts of royalty revenues.
Royalties are generally recognized in the quarter in which we receive a report
from a licensee regarding the shipment of licensed integrated circuits in the
prior quarter, and are dependent upon fluctuating sales volumes and/or prices of
chips containing our technology, all of which are beyond our ability to control
or assess in advance.

Our business is subject to a variety of additional risks, which could materially
adversely affect quarterly and annual operating results, including:

o market acceptance of our broadband technologies by semiconductor
companies;
o the extent and timing of new license transactions with semiconductor
companies;
o changes in our and our licensees' development schedules and levels
of expenditure on research and development;
o the loss of a strategic relationship with a licensee;
o equipment companies' acceptance of integrated circuits produced by
our licensees;
o the loss by a licensee of a strategic relationship with an equipment
company customer;
o announcements or introductions of new technologies or products by us
or our competitors;
o delays or problems in the introduction or performance of
enhancements or of future generations of our technology;
o delays in the adoption of new industry standards or changes in
market perception of the value of new or existing standards;
o competitive pressures resulting in lower contract revenues or
royalty rates;
o personnel changes, particularly those involving engineering and
technical personnel;
o costs associated with protecting our intellectual property;
o the potential that licensees could fail to make payments under their
current contracts;
o ADSL market-related issues, including lower ADSL chipset unit demand
brought on by excess channel inventory and lower average selling
prices for ADSL chipsets as a result of market surpluses;
o regulatory developments;
o and general economic trends and other factors.

WE HAVE BEGUN TO EXPERIENCE NET LOSSES

We had a net loss during 2001 and the first quarter of 2002. We expect that we
will have a net loss during the second quarter of 2002. We may continue to
experience losses beyond the second quarter of 2002 if the semiconductor and
telecommunications markets do not recover from the downturn that began in 2001.

WE HAVE A UNIQUE BUSINESS MODEL

The success of our business model depends upon our ability to license our
technology to semiconductor and equipment companies, and our customers'
willingness and ability to sell products that incorporate our technology so that
we may receive significant royalties that are consistent with our plans and
expectations.

We face numerous risks in successfully obtaining suitable licensees on terms
consistent with our business model, including, among others:

o we must typically undergo a lengthy and expensive process of
building a relationship with a potential licensee before there is
any assurance of a license agreement with such party;
o we must persuade semiconductor and equipment manufacturers with
significant resources to rely on us for critical technology on an
ongoing basis rather than trying to develop similar technology
internally;

o we must persuade potential licensees to bear development costs
associated with our technology applications and to make the
necessary investment to successfully produce chipsets and products
using our technology; and
o we must successfully transfer technical know-how to licensees.

Moreover, the success of our business model also depends on the receipt of
royalties from licensees. Royalties from our licensees are often based on the
selling prices of our licensees' chipsets and products, over which we have
little or no control. We also have little or no control over our licensees'
promotional and marketing efforts. Our licensees are not required to pay us
royalties unless they use our technology. They are not prohibited from competing
against us.

Our business could be seriously harmed if:

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

WE DEPEND SUBSTANTIALLY UPON A LIMITED NUMBER OF LICENSEES

There are a relatively limited number of semiconductor and equipment companies
to which we can license our broadband technology in a manner consistent with our
business model. If we fail to maintain relationships with our current licensees
or fail to establish a sufficient number of new licensee relationships, our
business could be seriously harmed. We cannot assure you that our prospective
customers will not use their superior size and bargaining power to demand
license terms that are unfavorable to us.

WE DERIVE A SIGNIFICANT AMOUNT OF REVENUE FROM ONE CUSTOMER

In 2001 and the first quarter of 2002, we derived a significant amount of our
total revenue from ADI. ADI was the first customer to license ADSL technology
from us in 1993 and their chipsets are the most mature implementations of our
technology in the market. Our royalty revenues to date have been primarily due
to sales of ADI chipsets that use our ADSL technology. While we expect to see an
increase in the number of our customers with ADSL chipsets on the market, our
revenue in the near term is highly dependent upon ADI's ability to maintain its
market share and pricing. The ADSL market has experienced significant price
erosion, which has adversely affected ADI's ADSL revenue, which in turn has
adversely affected our royalty revenue. To the extent that ADI has lost market
share, or loses market share in the future, or experiences further price erosion
in its ADSL chipsets, our royalty revenue could continue to decline.

OUR SUCCESS REQUIRES ACCEPTANCE OF OUR TECHNOLOGY BY EQUIPMENT COMPANIES

Due to our business strategy, our success is dependent on our ability to
generate significant royalties from our licensing arrangements with
semiconductor manufacturers. Our ability to generate significant royalties is
materially affected by the willingness of equipment companies to purchase
integrated circuits that incorporate our technology from our licensees. There
are other competitive solutions available for equipment companies seeking to
offer broadband communications products. We face the risk that equipment
manufacturers will choose those alternative solutions. Generally, our ability to
influence equipment companies' decision whether to purchase integrated circuits
that incorporates our technology is limited.

We also face the risk that equipment companies that elect to use integrated
circuits that incorporate our technology into their products will not compete
successfully against other equipment companies. Many factors beyond our control
could influence the success or failure of a particular equipment company that
uses integrated circuits based on our technology, including:

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

Even if equipment companies incorporate our chipsets based on our intellectual
property into their products, we cannot be sure that their products will achieve
commercial acceptance or result in significant royalties to us.

OUR SUCCESS REQUIRES TELEPHONE COMPANIES TO INSTALL ADSL SERVICE IN VOLUME

The success of our ADSL licensing business depends upon telephone companies
installing ADSL service in significant volumes. Factors that affect the volume
deployment of ADSL service include:

o the desire of telephone companies to install ADSL service, which is
dependent on the development of a viable business model for ADSL
service, including the capability to market, sell, install and
maintain the service;
o the pricing of ADSL services by telephone companies;
o the quality of telephone companies' networks;
o government regulations; and
o the willingness of residential telephone customers to demand ADSL
service in the face of competitive service offerings, such as cable
modems.

If telephone companies do not install ADSL service in significant volumes, or if
telephone companies install ADSL service in significant volumes, but their
service offerings are not based on our technology, our business will be
seriously harmed.

WE RELY ON THE ADSL MARKET; UNIT VOLUMES AND CHIPSET PRICING

The royalties we receive are influenced by many of the risks faced by the ADSL
market in general; including reduced average selling prices ("ASPs") during
periods of surplus. In 2000 and 2001, the ADSL industry experienced an
oversupply of ADSL chipsets and central office equipment. Excessive inventory
levels led to soft chipset demand, which in turn led to declining ASPs. Such
price decreases, and the corresponding decreases in per unit royalties received
by us, can be sudden and dramatic. Lower unit demand and pricing pressures may
continue during the second quarter of 2002 and beyond. There can be no assurance
that decreases in ADSL chipset prices or in per unit royalties received by us
will not seriously harm our business.

OUR INTELLECTUAL PROPERTY IS SUBJECT TO LIMITED PROTECTION

Because we are a technology provider, our ability to protect our intellectual
property and to operate without infringing the intellectual property rights of
others is critical to our success. We regard our technology as proprietary, and
we have a number of patents and pending patent applications. We also rely on a
combination of trade secrets, copyright and trademark law and non-disclosure
agreements to protect our unpatented intellectual property. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our technology without authorization.

As part of our licensing arrangements, we typically work closely with our
semiconductor and equipment manufacturer licensees, many of whom are also our
potential competitors, and provide them with proprietary know-how necessary for
their development of customized chipsets based on our ADSL technology. Although
our license agreements contain non-disclosure provisions and other terms
protecting our proprietary know-how and technology rights, it is possible that,
despite these precautions, some of our licensees might obtain from us
proprietary information that they could use to compete with us in the
marketplace. Although we intend to defend our intellectual property as
necessary, we cannot be sure that the steps we have taken will be adequate to
prevent misappropriation.

In the future, we may choose to bring legal action to enforce our intellectual
property rights. Any such litigation could be costly and time-consuming for us,
even if we were to prevail. Moreover, even if we are successful in protecting
our proprietary information, we cannot be sure that our competitors will not
independently develop technologies substantially equivalent or superior to our
technology. The misappropriation of our technology or the development of
competitive technology could seriously harm our business.

Our technology may infringe the intellectual property rights of others. A large
and increasing number of participants in the telecommunications industry have
applied for or obtained patents. Some of these patent holders have demonstrated
a readiness to commence litigation based on allegations of patent and other
intellectual property infringement. Third parties may assert exclusive patent,
copyright and other intellectual property rights to technologies that are
important to our business. From time to time, we have received claims from other
companies that our technology infringes their patent rights. While we believe
our technology offerings do not infringe the intellectual property of others, we
cannot be sure. Intellectual property rights can be uncertain and can involve
complex legal and factual questions. We may be unknowingly infringing the
proprietary rights of others, which could result in significant liability for
us. If we

were found to have infringed any third party's patents, then we could be subject
to substantial damages and an injunction preventing us from conducting our
business.

OUR BUSINESS IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE

The semiconductor and telecommunications industries, as well as the market for
high-speed network access technologies, are characterized by rapid technological
change, with new generations of products being introduced regularly and with
ongoing evolutionary improvements. We expect to depend on our ADSL technology
for a substantial portion of our revenue for the foreseeable future. Therefore,
we face risks that others could introduce competing technology that renders our
ADSL technology less desirable or obsolete. Also, the announcement of new
technologies could cause our licensees or their customers to delay or defer
entering into arrangements for the use of our existing technology. Either of
these events could seriously harm our business.

We expect that our business will depend to a significant extent on our ability
to introduce enhancements and new generations of our ADSL technology as well as
new technologies that keep pace with changes in the telecommunications and
broadband industries and that achieve rapid market acceptance. We must
continually devote significant engineering resources to achieving technical
innovations. These innovations are complex and require long development cycles.
Moreover, we may have to make substantial investments in technological
innovations before we can determine their commercial viability. We may lack
sufficient financial resources to fund future development. Also, our licensees
may decide not to share certain research and development costs with us. Revenue
from technological innovations, even if successfully developed, may not be
sufficient to recoup the costs of development.

One element of our business strategy is to assume the risks of technology
development failure while reducing such risks for our licensees. In the past, we
have spent significant amounts on development projects that did not produce any
marketable technologies or products, and we cannot assure you that it will not
occur again.

WE FACE INTENSE COMPETITION FROM A WIDE RANGE OF COMPETITORS

Our success as an intellectual property supplier depends on the willingness and
ability of semiconductor manufacturers to design, build and sell integrated
circuits based on our intellectual property. The semiconductor industry is
intensely competitive and has been characterized by price erosion, rapid
technological change, short product life cycles, cyclical market patterns and
increasing foreign and domestic competition.

As an intellectual property supplier to the semiconductor industry, we face
intense competition from internal development teams within potential
semiconductor customers. We must convince potential licensees to license from us
rather than develop technology internally. Furthermore, semiconductor customers,
who have licensed our intellectual property, may choose to abandon joint
development projects with us and develop chipsets themselves without using our
technology. In addition to competition from internal development teams, we
compete against other independent suppliers of intellectual property. We
anticipate intense competition from suppliers of intellectual property for DSL,
wireless local area networking, and powerline applications.

The market for ADSL chipsets is also intensely competitive. Our success within
the ADSL industry requires that ADSL equipment manufacturers buy chipsets from
our semiconductor licensees, and that telephone companies buy ADSL equipment
from those equipment manufacturers. Our customers' chipsets compete with
products from other vendors of standards-based and ADSL chipsets, including
Alcatel, Broadcom, Centillium, Conexant, GlobespanVirata, and TI.

ADSL services offered over copper telephone networks also compete with
alternative broadband transmission technologies that use the telephone network
as well as other network architectures. Alternative technologies for the
telephone network include symmetric high speed DSL (also known as HDSL, SDSL and
G.SHDSL), and very high speed DSL, also known as VDSL. These DSL technologies
are based on techniques other than those used by ADSL to transport high-speed
data over telephone lines. Alternative technologies that use other network
architectures to provide high-speed data service include cable modems using
cable networks, and wireless solutions using wireless networks. We cannot assure
you that these alternative broadband technologies will not be more successful
than ADSL.

Many of our current and prospective ADSL licensees, as well as chipset
competitors that compete with our semiconductor licensees, including Alcatel,
Broadcom, Conexant, GlobespanVirata and TI, have significantly greater
financial, technological, manufacturing, marketing and personnel resources than
we do. We cannot assure you that we will be able to compete successfully or that
competitive pressures will not seriously harm our business.

WE MAY REQUIRE ADDITIONAL HIGHLY QUALIFIED ENGINEERING PERSONNEL

Our future success will depend significantly on our ability to attract, motivate
and retain additional highly qualified engineering personnel. Competition for
qualified engineers can be intense and there are a limited number of available
persons with the necessary knowledge and experience in DSL, chip design and
related technologies. Finding, training and integrating additional qualified
personnel is likely to be difficult and expensive, and we may be unable to do so
successfully. In the past, we were not able to hire all of the engineers that we
wanted to hire. If we are unable to hire and retain a sufficient number of
engineers, our business could be seriously harmed.

OUR STOCK PRICE MAY BE EXTREMELY VOLATILE

Volatility in our stock price may negatively affect the price you may receive
for your shares of common stock and increases the risk that we could be the
subject of costly securities litigation. The market price of our common stock
has fluctuated substantially and could continue to fluctuate based on a variety
of factors, including:

o quarterly fluctuations in our operating results;
o changes in future financial guidance that we may provide to
investors and public market analysts;
o changes in our relationships with our licensees;
o announcements of technological innovations or new products by us,
our licensees or our competitors;

o changes in ADSL market growth rates as well as investor perceptions
regarding the investment opportunity that companies participating in
the ADSL industry afford them;
o changes in earnings estimates by public market analysts;
o key personnel losses;
o sales of common stock; and
o developments or announcements with respect to industry standards,
patents or proprietary rights.

In addition, the equity markets have experienced volatility that has
particularly affected the market prices of equity securities of many high
technology companies and that often has been unrelated or disproportionate to
the operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock.

OUR BUSINESS MAY BE AFFECTED BY GOVERNMENT REGULATIONS

The extensive regulation of the telecommunications industry by federal, state
and foreign regulatory agencies, including the Federal Communications
Commission, and various state public utility and service commissions, could
affect us through the effects of such regulation on our licensees and their
customers. In addition, our business may also be affected by the imposition of
certain tariffs, duties and other import restrictions on components that our
customers obtain from non-domestic suppliers or by the imposition of export
restrictions on products sold internationally and incorporating our technology.
Changes in current or future laws or regulations, in the United States or
elsewhere, could seriously harm affect our business.

ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk relates primarily to our investment portfolio, and
the effect that changes in interest rates would have on that portfolio. Our
investment portfolio has included:

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

We do not use derivative financial instruments for speculative or trading
purposes. As of March 31, 2002, all of our investments matured in twelve months
or less. Due to the short duration of the financial instruments we invest in, we
do not expect that an increase in interest rates would result in any material
loss to our investment portfolio.

PART II. OTHER INFORMATION

ITEM 1:
LEGAL PROCEEDINGS

From time to time we are involved in litigation incidental to the conduct of our
business. We are not party to any lawsuit or proceeding that, in our opinion, is
likely to seriously harm our business.

ITEM 6:
EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

None

(B) REPORTS ON 8-K

None.

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SIGNATURES

Pursuant to the requirements of the Securities 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: May 10, 2002 By: /s/ Michael A. Tzannes
-----------------------
Michael A. Tzannes, Chief Executive
Officer

Date: May 10, 2002 By: /s/ Richard P. Moberg
---------------------
Richard P. Moberg, Vice President
and Chief Financial Officer
(Principal Financial and Accounting
Officer)