The increasing proliferation of portable computing and communications devices including laptop PCs and wireless devices has been driven by improvements in computing power, battery life, performance, communications infrastructure and decreases in cost and size.

The PC market, particularly laptops, currently represents the largest market segment using fingerprint sensors. According to IDC, a leading market research and analysis firm, approximately 82 million laptops were shipped worldwide in 2006. Of this amount, it is believed approximately 10% of laptops shipped in 2006 had an integrated sensor. Laptop shipments are expected to grow at a compounded annual growth rate, or CAGR, of approximately 17.2% from 2006 to 2010.

It is believed the integration of fingerprint sensors into wireless devices is in its early stages and will accelerate consistent with the adoption rates of other wireless device features that first found acceptance in the Japanese market such as camera functionality, internet access and mobile television. According to IDC, over 1.0 billion wireless devices were shipped worldwide in 2006, and this market is expected to grow at a CAGR of approximately 6.9% from 2006 to 2010.

Biometrics is the process of gathering and processing a certain set of physical or behavioral characteristics in order to identify an individual. The International Biometrics Group, or IBG, estimates that worldwide biometric revenue will reach approximately $3.0 billion in 2007, and expect revenue to reach approximately $7.4 billion in 2012, representing a CAGR of 19.8%. The largest share of these revenue are generally criminal justice and civil oriented applications and includes such applications as the federal, local and state criminal justice systems, driver licenses, the US-Visit program and similar programs throughout the world.

The Company’s products are used in a wide range of PC products and related peripherals including laptops, desktops, memory keys, hard drives, keyboards, mice and other devices. The Company’s products have also been integrated into a number of wireless devices including mobile phones and PDAs as well as access control devices such as door locks, time and attendance devices and remote wireless entry keys.

The Company offers a complete solution to its customers including the sensors, matching algorithms and device level software (device drivers, graphic user interfaces and applications programming interfaces), along with a complete set of documentation and application support. In addition to internally developed software included in its products, the Company supports third-party software vendors whose products interact with its sensor products.

The Company currently provides fingerprint sensor products to three major markets:

- The AES4000, AES3400, AES2501B and AES1610 series of touch and swipe sensors are designed for integration into laptops, desktops and PC peripherals. These devices enable both security and convenience features and can be found in products sold into the business and consumer markets;

- The Company’s AES2510 and AES1510 families of swipe sensors are designed for integration into mobile phones and other wireless communications devices. These devices enable both security and a variety of convenience features used today worldwide in full featured mobile phones;

- The Company’s AFS2 and AFS8600 series of sensors are designed for integration into a wide range of access control applications including physical access control systems and time and attendance devices. These sensors can be used in applications that provide secure physical access control in corporate and home environments.

Cost of revenue was $19.3 million in 2006 as compared to $11.3 million in 2005, resulting in a gross profit of $13.9 million in 2006 as compared to $7.9 million in 2005, an increase of $6.0 million, or 75.9%.

Research and development expenses were $9.6 million in 2006 as compared to $7.4 million in 2005, an increase of $2.2, million or 29.7%.

Selling and marketing expenses were $7.1 million in 2006 as compared to $5.4 million in 2005, an increase of $1.7 million, or 31.5%.

Other income (expense), net increased $1.4 million to net expense of $1.9 million in 2006 from net expense of $0.5 million in 2005.