-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WJoda6we4W4jkwDpr+6MA/bXDL2FlSbWpJPs6NE1fI3l9a9I0MAN5IjmHEBcbo7K Lh2+q2F48T4k3eJnKax3wg== 0001133884-02-000874.txt : 20020812 0001133884-02-000874.hdr.sgml : 20020812 20020812163340 ACCESSION NUMBER: 0001133884-02-000874 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AWARE INC /MA/ CENTRAL INDEX KEY: 0001015739 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 042911026 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21129 FILM NUMBER: 02727160 BUSINESS ADDRESS: STREET 1: 40 MIDDLESEX TURNPIKE CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 6172764000 MAIL ADDRESS: STREET 1: 40 MIDDLESEX TURNPIKE CITY: BEDFORD STATE: MA ZIP: 01730 10-Q 1 g10q-29466.txt 10-Q ================================================================================ 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 June 30, 2002 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 ---------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (781) 276-4000 -------------- (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 July 31, 2002: CLASS NUMBER OF SHARES OUTSTANDING ----- ---------------------------- Common Stock, par value $0.01 per share 22,686,030 shares ================================================================================ AWARE, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002 TABLE OF CONTENTS Page PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001............................ 3 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and June 30, 2001.............................................. 4 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and June 30, 2001.............................................. 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.................................................... 23 PART II OTHER INFORMATION Item 1. Legal Proceedings.............................................. 24 Item 4. Submission of Matters to a Vote of Security Holders............ 24 Item 5. Other Information.............................................. 25 Item 6. Exhibits and Reports on Form 8-K............................... 25 Signatures..................................................... 26 2 PART I. FINANCIAL INFORMATION ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS AWARE, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
JUNE 30, DECEMBER 31, 2002 2001 ---------------- ---------------- ASSETS Current assets: Cash and cash equivalents................................................ $44,129 $36,056 Short-term investments................................................... 7,892 21,228 Accounts receivable, net................................................. 2,604 1,383 Inventories.............................................................. 103 282 Deferred tax assets...................................................... - 1,811 Prepaid expenses and other assets........................................ 439 795 ---------------- ---------------- Total current assets 55,167 61,555 ---------------- ---------------- Property and equipment, net................................................... 10,524 10,937 Deferred tax assets........................................................... 7,093 5,282 Other assets, net............................................................. 267 329 ---------------- ---------------- Total assets....................................................... $73,051 $78,103 ================ ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................................ $201 $353 Accrued expenses ........................................................ 180 521 Accrued compensation .................................................... 856 948 Accrued professional..................................................... 194 125 Deferred revenue......................................................... 49 - ---------------- ---------------- Total current liabilities........................................ 1,480 1,947 ---------------- ---------------- 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, 22,686,030 in 2002 and 22,657,741 in 2001...... 227 227 Additional paid-in capital.............................................. 77,272 77,151 Accumulated deficit.................................................... (5,928) (1,222) ---------------- ---------------- Total stockholders' equity...................................... 71,571 76,156 ---------------- ---------------- Total liabilities and stockholders' equity....................... $73,051 $78,103 ================ ================ The accompanying notes are an integral part of the financial statements.
3 AWARE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------------- ------------------------------ 2002 2001 2002 2001 --------------- --------------- --------------- -------------- Revenue: Product sales....................................... $1,095 $687 $2,102 $2,139 Contract revenue.................................... 2,158 2,228 4,251 4,875 Royalties........................................... 759 1,102 1,235 5,221 --------------- --------------- --------------- -------------- Total revenue..................................... 4,012 4,017 7,588 12,235 Costs and expenses: Cost of product sales............................... 176 95 342 275 Cost of contract revenue............................ 1,527 1,949 2,992 4,140 Research and development............................ 3,172 2,074 6,537 3,910 Selling and marketing............................... 818 810 1,501 1,482 General and administrative.......................... 681 744 1,393 1,450 --------------- --------------- --------------- -------------- Total costs and expenses........................... 6,374 5,672 12,765 11,257 Income (loss) from operations........................... (2,362) (1,655) (5,177) 978 Interest income......................................... 232 637 471 1,431 --------------- --------------- --------------- -------------- Income (loss) before provision for income taxes......... (2,130) (1,018) (4,706) 2,409 Benefit from (provision for) income taxes............... - 1,058 - (313) --------------- --------------- --------------- -------------- Net income (loss)....................................... ($2,130) $40 ($4,706) $2,096 =============== =============== =============== ============== Net income (loss) per share............................. ($0.09) $0.00 ($0.21) $0.09 Net income (loss) per share............................. ($0.09) $0.00 ($0.21) $0.09 Weighted average shares - basic......................... 22,673 22,625 22,669 22,619 Weighted average shares - diluted....................... 22,673 22,754 22,669 22,866 The accompanying notes are an integral part of the financial statements.
4 AWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------------------ 2002 2001 ---------------- ---------------- Cash flows from operating activities: Net income (loss).......................................... ($4,706) $2,096 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization........................... 941 815 Provision for doubtful accounts......................... - 25 Increase (decrease) from changes in assets and liabilities: Accounts receivable.................................. (1,221) 1,348 Inventories.......................................... 179 (98) Deferred tax assets.................................. - 313 Prepaid expenses and other assets ................... 356 (3) Accounts payable..................................... (152) (57) Accrued expenses..................................... (364) 142 Deferred revenue..................................... 49 (1,249) ---------------- ---------------- Net cash provided by (used in) operating activities..................................... (4,918) 3,332 ---------------- ---------------- Cash flows from investing activities: Purchases of property and equipment....................... (466) (870) Net sales of short-term investments....................... 13,336 822 ---------------- ---------------- Net cash provided by (used in) investing activities..................................... 12,870 (48) ---------------- ---------------- Cash flows from financing activities: Proceeds from issuance of common stock................... 121 259 ---------------- ---------------- Net cash provided by financing activities......... 121 259 ---------------- ---------------- Increase in cash and cash equivalents......................... 8,073 3,543 Cash and cash equivalents, beginning of period................ 36,056 51,662 ---------------- ---------------- Cash and cash equivalents, end of period...................... $44,129 $55,205 ================ ================ The accompanying notes are an integral part of the financial statements.
5 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 June 30, 2002, and of operations and cash flows for the interim periods ended June 30, 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 June 30, 2002 are not necessarily indicative of the results to be expected for the year. B) INVENTORY Inventory consists primarily of the following (in thousands): JUNE 30, DECEMBER 31, 2002 2001 ------------------- ------------------- Raw materials................ $ 85 $146 Finished goods............... 18 136 ------------------- ------------------- Total................. $103 $282 =================== =================== 6 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 SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------- --------------------------- 2002 2001 2002 2001 ------------- ------------- ------------- ------------- Net income (loss)................................. ($2,130) $40 ($4,706) $2,096 Weighted average common shares outstanding........ 22,673 22,625 22,669 22,619 Additional dilutive common stock equivalents...... - 129 - 247 ------------- ------------- ------------- ------------- Diluted shares outstanding ....................... 22,673 22,754 22,669 22,866 ============= ============= ============= ============= Net income (loss) per share - basic............... ($0.09) $0.00 ($0.21) $0.09 Net income (loss) per share - diluted............. ($0.09) $0.00 ($0.21) $0.09
For the three and six month periods ended June 30, 2002, potential common stock equivalents of 148,885 and 305,905 respectively, 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 June 30, 2002 and 2001, options to purchase 5,427,845 and 3,551,090 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. For the six month periods ended June 30, 2002 and 2001, options to purchase 5,175,682 and 3,323,248 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. 7 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2002 2001 2002 2001 ------------- ------------- ------------- -------------- United States....... $3,123 $3,584 $6,142 $11,658 Asia/Pacific........ 662 6 1,089 37 Rest of World....... 227 427 357 540 ------------- ------------- ------------- -------------- $4,012 $4,017 $7,588 $12,235 ============= ============= ============= ============== E) 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. As of June 30, 2002, 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 future. The remaining deferred tax assets, including the amounts related to losses incurred in 2002, were fully reserved due to the uncertainty of realization. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets, and any valuation allowance recorded against our net deferred tax assets. Our deferred tax assets relate to net operating losses and research and development tax credits that we are carrying forward into future tax periods. If our actual results differ from our estimates, such as incurring higher losses or lower profits than expected, we may need to change our valuation allowance related to our existing net deferred tax assets. To the extent we increase our valuation allowance for all or a portion of our net deferred tax assets, an expense will be recorded as a tax provision in our statement of operations. 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 began 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. 8 F) 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. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. EITF 94-3 allowed for an exit cost liability to be recognized at the date of an entity's commitment to an exit plan. SFAS 146 also requires that liabilities recorded in connection with exit plans be initially measured at fair value. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. We do not expect the adoption of SFAS 146 will have a material impact on our financial position or results of operations. 9 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 increased 59% from $0.7 million in the second quarter of 2001 to $1.1 million in the current year quarter. As a percentage of total revenue, product sales increased from 17% in the second quarter of 2001 to 27% in the current year quarter. The dollar increase was primarily due to an increase in revenue from the sale of compression software and modules. Compression software revenue increased primarily due to higher demand by our OEM customers. Module sales were higher primarily due to sales of modules to a customer that licensed our Dr. DSL(R) technology and designs. For the six months ended June 30, product sales were essentially the same at $2.1 million in 2001 and in 2002. As a percentage of total revenue, product sales increased from 17% in the first six months of 2001 to 28% in the corresponding period of 2002. Revenue from the sale of modules increased during the six month period in 2002, but was mostly offset by a decrease in revenue from the sale of test and development systems. Revenue from compression software was essentially the same in both six month periods in 2002 and 2001. 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 3% to $2.2 million in the current year quarter as compared to the second quarter of 2001. As a percentage of total revenue, contract revenue decreased from 55% in the second quarter of 2001 to 54% in the current year quarter. For the six months ended June 30, contract revenue decreased 13% from $4.9 million in 2001 to $4.3 million in 2002. As a 10 percentage of total revenue, contract revenue increased from 40% in the second quarter of 2001 to 56% in the current year quarter. For the three and six month periods, 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 five 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 31% from $1.1 million in the second quarter of 2001 to $0.8 million in the current year quarter. As a percentage of total revenue, royalties decreased from 27% in the second quarter of 2001 to 19% in the current year quarter. For the six months ended June 30, royalties decreased 76% from $5.2 million in 2001 to $1.2 million in 2002. As a percentage of total revenue, royalties decreased from 43% in the first six months of 2001 to 16% in the corresponding period of 2002. For the three and six month periods, 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 five quarters. 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 increased 85% from $95,000 in the second quarter of 2001 to $176,000 in the current year quarter. As a percentage of product sales, cost of product sales increased from 14% in the second quarter of 2001 to 16% in the current year quarter. For the six months ended June 30, cost of product sales increased 24% from $275,000 in 2001 to $342,000 in 2002. As a percentage of product sales, cost of product sales increased from 13% in the first six months of 2001 to 16% in the corresponding period of 2002. For the three and six month periods, the increase in cost of product sales was primarily due to a greater proportion of module sales in the sales mix. Modules have lower gross margins than other products that comprise our product revenue. 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. 11 Cost of contract revenue decreased 22% from $1.9 million in the second quarter of 2001 to $1.5 million in the current year quarter. As a percentage of contract revenue, cost of contract revenue decreased from 87% in the second quarter of 2001 to 71% in the current year quarter. For the six months ended June 30, cost of contract revenue decreased 28% from $4.1 million in 2001 to $3.0 million in 2002. As a percentage of contract revenue, cost of contract revenue decreased from 85% in the first six months of 2001 to 70% in the corresponding period of 2002. For the three and six month periods, the dollar decrease in cost of contract revenue was primarily due to two factors: (i) contract revenue was lower in 2002 as compared to 2001, therefore cost of contract revenue was lower as well, and (ii) the mix of license fees and engineering service fees in contract revenue in 2002 produced more profitable business than in 2001. 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 53% from $2.1 million in the second quarter of 2001 to $3.2 million in the current year quarter. As a percentage of total revenue, research and development expense increased from 52% in the second quarter of 2001 to 79% in the current year quarter. For the six months ended June 30, research and development expense increased by 67% from $3.9 million in 2001 to $6.5 million in 2002. As a percentage of total revenue, research and development expense increased from 32% in the first six months of 2001 to 86% in the corresponding period of 2002. For the three and six month periods, the dollar increase in research and development spending was primarily due to two factors: (i) we hired a number of new engineers during 2001, therefore our 2002 spending reflects the full period effect of those new hires, whereas 2001 spending reflects that portion of the period that these employees were with us; and (ii) as our customer contract revenue projects decreased over the past year, we have shifted engineers who were working on these customer projects to internal research and development projects. Our research and development spending is principally focused on projects related to 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. Selling and marketing expense increased 1% from $810,000 in the second quarter of 2001 to $818,000 in the current year quarter. As a percentage of total revenue, selling and marketing expense was 20% for the second quarter of 2001 and the current year quarter. For the six months ended June 30, selling and marketing expense were essentially the same at $1.5 million in 2001 and in 2002. As a percentage of total revenue, selling and marketing expense increased from 12% in the first six months of 2001 to 20% in the corresponding period of 2002. For the three and six month periods, our selling and marketing headcount and related activities were relatively constant in 2002 and 2001, which is reflected in our flat selling and marketing expenses. 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 decreased 8% from $744,000 in 12 the second quarter of 2001 to $681,000 in the current year quarter. As a percentage of total revenue, general and administrative expense decreased from 19% in the second quarter of 2001 to 17% in the current year quarter. For the six months ended June 30, general and administrative expense decreased 4% from $1.5 million in 2001 to $1.4 million in 2002. As a percentage of total revenue, general and administrative expense increased from 12% in the first six months of 2001 to 18% in the corresponding period of 2002. For the three and six month periods, the dollar decrease was primarily due to lower provisions for bad debts. INTEREST INCOME. Interest income decreased 64% from $637,000 in the second quarter of 2001 to $232,000 in the current year quarter. For the six months ended June 30, interest income decreased 67% from $1,431,000 in 2001 to $471,000 in 2002. For the three and six month periods, 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. As of June 30, 2002, 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 future. The remaining deferred tax assets, including the amounts related to losses incurred in 2002, were fully reserved due to the uncertainty of realization. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets, and any valuation allowance recorded against our net deferred tax assets. Our deferred tax assets relate to net operating losses and research and development tax credits that we are carrying forward into future tax periods. If our actual results differ from our estimates, such as incurring higher losses or lower profits than expected, we may need to change our valuation allowance related to our existing net deferred tax assets. To the extent we increase our valuation allowance for all or a portion of our net deferred tax assets, an expense will be recorded as a tax provision in our statement of operations. 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 began 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. 13 LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, we had cash, cash equivalents and short-term investments of $52.0 million, which represents a decrease of $5.3 million from December 31, 2001. The decrease is primarily due to $4.9 million of cash used in operations, and $466,000 of cash invested in capital equipment, which was partially offset by $121,000 of proceeds from the issuance of common stock. Cash used in operations in the first six 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. 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. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. EITF 94-3 allowed for an exit cost liability to be recognized at the date of an entity's commitment to an exit plan. SFAS 146 also requires that liabilities recorded in connection with exit plans be initially measured at fair value. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. We do not expect the adoption of SFAS 146 will have a material impact on our financial position or results of operations. RISK FACTORS We believe that the occurrence of any one or some combination of the following risk factors could seriously harm our business. 14 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: |X| market acceptance of our broadband technologies by semiconductor companies; |X| the extent and timing of new license transactions with semiconductor companies; |X| changes in our and our licensees' development schedules and levels of expenditure on research and development; |X| the loss of a strategic relationship with a licensee; |X| equipment companies' acceptance of integrated circuits produced by our licensees; |X| the loss by a licensee of a strategic relationship with an equipment company customer; |X| announcements or introductions of new technologies or products by us or our competitors; |X| delays or problems in the introduction or performance of enhancements or of future generations of our technology; |X| delays in the adoption of new industry standards or changes in market perception of the value of new or existing standards; |X| competitive pressures resulting in lower contract revenues or royalty rates; |X| personnel changes, particularly those involving engineering and technical personnel; |X| costs associated with protecting our intellectual property; |X| the potential that licensees could fail to make payments under their current contracts; |X| 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; |X| regulatory developments; and |X| general economic trends and other factors. 15 WE HAVE EXPERIENCED NET LOSSES We had a net loss during 2001 and the first half of 2002. We expect that we will have a net loss during the third quarter of 2002. We may continue to experience losses beyond the third quarter of 2002 if: |X| the semiconductor and telecommunications markets do not recover from the downturn that began in 2001; |X| our existing customers do not increase their revenues from sales of chipsets with our technology; or |X| new customers do not choose to license our intellectual property for new chipset products. 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: |X| 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; |X| 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; |X| 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 |X| 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: |X| we cannot obtain suitable licensees; |X| our licensees fail to achieve significant sales of chipsets or products incorporating our technology; or |X| we otherwise fail to implement our business strategy successfully. 16 THERE IS AN OVERSUPPLY OF ADSL CHIPSETS, WHICH HAS CAUSED OUR ROYALTY REVENUE TO DECLINE The royalties we receive are influenced by many of the risks faced by the ADSL market in general; including reduced average selling prices ("ASPs") for ADSL chipsets during periods of surplus. Since late 2000, the ADSL industry has 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. As a result of the soft demand and declining prices for ADSL chipsets, our royalty revenue has decreased substantially from the levels we achieved in 2000. Price decreases for ADSL chipsets, 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 third quarter of 2002 and beyond. We cannot assure you that our royalty revenue will not decline. 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 or that prospective customers will elect to license from us. WE DERIVE A SIGNIFICANT AMOUNT OF REVENUE FROM ONE CUSTOMER In 2001 and the first half 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 may decline. 17 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: |X| competition from other businesses in the same industry; |X| market acceptance of its products; |X| its engineering, sales and marketing, and management capabilities; |X| technical challenges of developing its products unrelated to our technology; and |X| 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: |X| 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; |X| the pricing of ADSL services by telephone companies; |X| the quality of telephone companies' networks; |X| government regulations; and |X| 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. 18 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 19 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 ADSL, 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 Texas Instruments. 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- 20 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 Texas Instruments, 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 may depend 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 may be difficult and expensive, and we may be unable to do so successfully. If we are unable to hire and retain a sufficient number of specialized 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: |X| quarterly fluctuations in our operating results; |X| changes in future financial guidance that we may provide to investors and public market analysts; |X| changes in our relationships with our licensees; |X| announcements of technological innovations or new products by us, our licensees or our competitors; |X| changes in ADSL market growth rates as well as investor perceptions regarding the investment opportunity that companies participating in the ADSL industry afford them; |X| changes in earnings estimates by public market analysts; |X| key personnel losses; |X| sales of common stock; and |X| 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. 21 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. 22 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: |X| Cash and cash equivalents, which consist of financial instruments with original maturities of three months or less; and |X| 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 June 30, 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. 23 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 4: Submission of Matters to a Vote of Security Holders On May 31, 2002, we held our Annual Meeting of Stockholders (the "Annual Meeting"). Matters voted on and the results of those votes are set forth below: (1) Edmund C. Reiter was elected to serve as a Class III director of the Company for a term expiring at the annual meeting of stockholders of the Company in 2005 or a special meeting in lieu thereof. Each of Michael A. Tzannes, John K. Kerr, David Ehreth and G. David Forney continued to serve as a director following the Annual Meeting. The votes cast to elect the Class III director were: Name For Abstain Edmund C. Reiter 19,147,327 302,998 (2) The Company's Restated Articles of Organization were amended to increase the Company's authorized common stock from 30,000,000 shares to 70,000,000 shares. The votes cast to amend the Company's Restated Articles of Organization were: For Against Abstain 17,040,630 2,387,128 22,567 24 ITEM 5: OTHER INFORMATION CERTIFICATION UNDER SARBANES-OXLEY ACT Our chief executive officer and chief financial officer have furnished to the SEC the certification with respect to this Report that is required by Section 906 of the Sarbanes-Oxley Act of 2002. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS None (b) REPORTS ON 8-K None. ____________________ 25 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: August 12, 2002 By: /s/ Michael A. Tzannes ----------------------------------- Michael A. Tzannes, Chief Executive Officer Date: August 12, 2002 By: /s/ Richard P. Moberg ----------------------------------- Richard P. Moberg, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 26 -----END PRIVACY-ENHANCED MESSAGE-----