10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 28, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 001-33552

AuthenTec, Inc.

(Exact name of registrant as specified in its charter)

Delaware	59-3521332
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)	(I.R.S. EMPLOYER IDENTIFICATION NO.)

AuthenTec, Inc.

100 Rialto Place, Suite 400

Melbourne, FL 32901

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)

(321) 308-1300

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

N/A

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

Indicate by check mark 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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨     Accelerated filer  x

Non-accelerated filer  ¨ (Do not check if a smaller reporting company) Smaller Reporting Company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At April 30, 2008 there were 28,177,368 shares of common stock outstanding.

AUTHENTEC, INC.

TABLE OF CONTENTS

			Page No.
Part I — Financial Information
	Item 1.	Consolidated Financial Statements	3
		Consolidated Balance Sheets at March 28, 2008 and December 28, 2007	3
		Consolidated Statements of Operations for the three months ended March 28, 2008 and March 30, 2007	4
		Consolidated Statements of Cash Flows for the three months ended March 28, 2008 and March 30, 2007	5
		Notes to Consolidated Financial Statements	6
	Item 2.	Management’s discussion and analysis of financial condition and results of operation	14
	Item 3.	Quantitative and Qualitative Disclosure About Market Risks	19
	Item 4.	Controls and Procedures	20
PART II — OTHER INFORMATION
	Item 1.	Legal Proceedings	21
	Item 1A.	Risk Factors	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
	Item 3.	Defaults Upon Senior Securities	23
	Item 4.	Submission of Matters to a Vote of Security Holders	23
	Item 5.	Other Information	23
	Item 6.	Exhibits	23
Signatures			24
Exhibit Index
EX-10.16 Office lease dated March 3, 2008, by and between Authentec, Inc. and Rialto, LLC.			25
EX-31.1 Section 302 CEO Certification			35
EX-31.2 Section 302 CFO Certification			36
EX-32.1 Section 906 CEO Certification			37
EX-32.2 Section 906 CFO Certification			38

2

Part I — Financial Information

Item 1. Consolidated Financial Statements

AuthenTec, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except par value amounts)

(Unaudited)

	As of
	March 28, 2008			December 28, 2007
Assets
Current assets
Cash and cash equivalents	$	21,076		$	15,703
Short-term investments		28,861			42,573
Accounts receivable, net of allowances of $40 and $23, respectively		6,518			6,374
Prepaid expenses		696			820
Inventory		4,119			5,120
Total current assets		61,270			70,590
Long-term investments		17,161			8,066
Other long-term assets		615			673
Property and equipment, net		2,556			2,605
Total assets	$	81,602		$	81,934
Liabilities and stockholders’ equity
Current liabilities
Accounts payable	$	4,727		$	3,917
Accrued compensation and benefits		1,332			1,998
Other accrued liabilities		3,577			4,983
Total current liabilities		9,636			10,898
Stockholders’ equity
Common stock, $.01 par value; 100,000 shares authorized; 28,062 and 27,745 issued and outstanding at March 28, 2008 and December 28, 2007		281			277
Additional paid-in capital		147,337			146,729
Accumulated other comprehensive income		130			—
Accumulated deficit		(75,782	)		(75,970	)
Total stockholders’ equity		71,966			71,036
Total liabilities and stockholders’ equity	$	81,602		$	81,934

See Notes to Consolidated Financial Statements

3

AuthenTec, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended
	March 28, 2008			March 30, 2007
Revenue	$	15,514		$	9,295
Cost of revenue		7,828			5,015
Gross profit		7,686			4,280
Operating expenses
Research and development		4,098			2,774
Selling and marketing		2,472			1,985
General and administrative		1,668			1,467
Total operating expenses		8,238			6,226
Loss from operations		(552	)		(1,946	)
Other income (expense):
Warrant expense		—			(3,753	)
Interest expense		—			(26	)
Interest income		740			70
Total other income (expense), net		740			(3,709	)
Net income (loss)	$	188		$	(5,655	)
Net income (loss) per common share, basic	$	0.01		$	(7.30	)
Net income (loss) per common share, diluted	$	0.01		$	(7.30	)
Shares used in computing basic net income (loss) per common share		27,927			774
Shares used in computing diluted net income (loss) per common share		30,525			774

See Notes to Consolidated Financial Statements

4

AuthenTec, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Three Months Ended
	March 28, 2008			March 30, 2007
Cash flows from operating activities
Net income (loss)	$	188		$	(5,655	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation		233			168
Increase in bad debt provision		17			19
Increase in inventory provision		236			90
Stock-based compensation expense		399			175
Warrant expense		—			3,753
Interest earned on investments		(375	)		(28	)
Purchase of research and development software		250			—
Decrease (increase) in current assets:
Accounts receivable		(161	)		(764	)
Inventory		765			(687	)
Prepaid expenses		182			(33	)
Increase (decrease) in liabilities:
Accounts payable		810			1,725
Accrued compensation and benefits and other accrued liabilities		(1,999	)		1,617
Net cash provided by operating activities		545			380
Cash flows from investing activities
Purchase of property and equipment		(184	)		(870	)
Purchase of research and development software		(250	)		—
Purchase of available-for-sale investments		(7,008	)		(2,800	)
Redemption of available-for-sale investments		19,551			—
Purchase of held-to-maturity investments		(16,940	)		—
Redemption of held-to-maturity investments		9,519			—
Net cash provided by (used in) investing activities		4,688			(3,670	)
Cash flows from financing activities
Payment of initial public offering costs		(66	)		(196	)
Proceeds from exercise of stock options		206			27
Proceeds from the sale of convertible note payable		—			7,500
Net cash provided by financing activities		140			7,331
Net increase in cash and cash equivalents		5,373			4,041
Cash and cash equivalents, beginning of period		15,703			6,076
Cash and cash equivalents, end of period	$	21,076		$	10,117
Supplemental disclosure of cash flow information
Cashless exercise of 54 common stock warrants	$	137			—
Non-cash stock issuance	$	9			—

See Notes to Consolidated Financial Statements

5

AuthenTec, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Description of Business and Basis of Presentation

AuthenTec, Inc (“our”, “we”, etc.) is a leading mixed-signal semiconductor company providing fingerprint authentication sensors and solutions to the high-volume PC, wireless device and access control markets. Our products are based on our patented TruePrint technology which uses radio-frequency signals to detect fingerprint patterns from the live, conductive layer of skin that lies just beneath the skin’s dry outer surface layer. We primarily sell our products to original equipment manufacturers, or OEMs, original design manufacturers, or ODMs or contract manufacturers. We operate a fabless manufacturing model, whereby manufacturing requirements are outsourced to third parties.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited consolidated financial statements include the accounts of AuthenTec, Inc and its wholly owned subsidiaries. All significant intercompany transactions are eliminated in consolidation. In our opinion, all adjustments, consisting primarily of normal recurring accruals, considered necessary for a fair statement of our results of operations for the interim periods reported and of our financial condition as of the date of the interim balance sheet have been included. Operating results for the three months ended March 28, 2008 are not necessarily indicative of the results that may be expected for the year ending January 2, 2009 or for any other period.

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 28, 2007 contained in our Form 10-K.

The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

We utilize a 52/53 week fiscal year. Our current 53 week fiscal year will end on January 2, 2009. References to past or future quarterly or annual periods in our financial statements are to those respective fiscal periods which vary from exact calendar quarters or years.

2. Net Income (Loss) Per Share

We calculate net income (loss) per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share. Under SFAS No. 128, basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the reporting period. Diluted net income (loss) per common share reflects the effects of potentially dilutive securities, which consist of convertible preferred stock, senior convertible notes, common stock options and warrants. The following table sets forth the computation of basic and diluted income (loss) per common share (in thousands, except per share amounts).

	Three Months Ended
	March 28, 2008		March 30, 2007
	(In thousands, except per share data)
Numerator:
Net income (loss)	$	188	$	(5,655	)
Denominator:
Denominator for basic income (loss) per share - weighted average common shares outstanding		27,927		774
Effect of dilutive securities:
Stock options		2,590		—
Warrants to purchase common stock		8		—
Denominator for diluted income (loss) per share - weighted average common shares and potential common shares outstanding		30,525		774
Basic net income (loss) per share	$	0.01	$	(7.30	)
Diluted net income (loss) per share	$	0.01	$	(7.30	)

6

Notes to Consolidated Financial Statements (Continued)

Basic and diluted net income (loss) per common share was the same for the three months ended March 30, 2007. The following table presents the potentially dilutive securities outstanding that were excluded from the computation of diluted net income (loss) per common share as of March 28, 2008 and March 30, 2007 because their inclusion would have had an anti-dilutive effect:

	As of
	March 28, 2008	March 30, 2007
Mandatorily redeemable convertible preferred stock	—	17,983
Options to purchase common stock	498	3,627
Warrants to purchase common or preferred stock	—	2,127
	498	23,738

3. Cash, Cash Equivalents and Investments

We invest our cash in diversified types of investments in order to maximize the interest we could earn. We consider all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Our other investments that include auction rate securities, corporate and euro bonds, medium and short term notes and certificates of deposits are classified as investments and are accounted for under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities. We have classified our auction rate securities as available for sale (AFS) and reported at fair value, with unrealized gains and losses, if any, excluded from earnings and reported in other comprehensive income, a separate component of stockholders’ equity. At December 28, 2007, we classified our corporate and euro bonds, medium and short term notes and certificates of deposit as held-to-maturity (HTM) investments and reported them at amortized cost. Due to recent lack of liquidity in the auction rate securities market and instability in various financial markets experienced in the month of March, we decided to reevaluate our investment strategies. Although we had a positive intent and ability to hold our HTM investments at the time of their purchase, we redeemed some of our HTM investments prior to their maturity in order to balance our investment portfolio. Even though we consider the environment at the time of the decision to sell these securities to be unprecedented, we have reclassified all of our remaining HTM investments to AFS and reported unrealized gains in other comprehensive income at March 28, 2008.

The following table reports redemptions of investments, classified as HTM at December 28, 2007 and before reclassification to AFS, during the three months ended March 28, 2008.

	Net carrying value		Realized gain/(loss)
	(In thousands)
Corporate bonds	$	1,000	$	11
Notes		3,313		(5	)
Total	$	4,313	$	6

The table above does not include $5.2 million in redemptions of certificates of deposit upon their maturity during the three months ended March 28, 2008.

The following table represents transfers of investments from HTM to AFS during the three months ended March 28, 2008.

	Net carrying value		Unrealized gain
	(In thousands)
Certificates of deposits	$	5,585	$	32
Corporate bonds		17,499		66
Euro bonds		2,094		14
Notes		9,289		18
Total	$	34,467	$	130

7

Notes to Consolidated Financial Statements (Continued)

The following table reports investment holdings at period end.

	As of
	Value				Unrealized Gains/(Losses)				Maturity Range
	March 28, 2008		December 28, 2007		March 28, 2008		December 28, 2007
			(In thousands)						(In years)
Auction rate securities (AFS)	$	11,425	$	23,945	$	—	$	—	>6 yrs
Certificates of deposits (AFS)		5,617		10,931		32		—	0 - 1.2 yrs
Corporate bonds (AFS)		17,566		11,609		66		—	0.4 - 1.3 yrs
Euro bonds (AFS)		2,107		1,025		13		—	0.7 yrs
Notes (AFS)		9,307		3,129		18		—	0.8 - 1.4 yrs
Total	$	46,022	$	50,639	$	130	$	—

As of March 28, 2008 and December 28, 2007, $11.4 million and $23.9 million, respectively of our $46.0 million and $50.6 million in short-term and long-term investments, respectively, were comprised of municipal notes and preferred stock investments with an auction reset feature (“auction rate securities”). The municipal notes are issued by various state and local municipal entities for the purpose of financing student loans, public projects and other activities. The preferred stock is issued by various closed-end mutual funds that invest primarily in common stock and fixed income securities.

Due to auction rate securities markets being disrupted, in mid-February 2008, we experienced auction failures for the first time. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar short-term instruments. The securities for which auctions have failed will continue to accrue interest at the contractual rate and be auctioned every seven, 28 or 35 days until the auction succeeds, the issuer calls the securities, or they mature.

All of our auction rate securities held at March 28, 2008 had experienced failed auctions. As a result, our ability to liquidate and fully recover the carrying value of our remaining auction rate securities in the near term may be limited or not exist. Accordingly, we have determined that $8.8 million of these securities should be reclassified as noncurrent available-for-sale securities. In addition, while all of our auction rate securities are currently rated AA or above, if the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments.

4. Fair Value Measurements

Effective December 29, 2007, we adopted SFAS No. 157, Fair Value Measurements (“SFAS 157” or “the Standard”.) The Standard defines fair value, provides a consistent framework for measuring fair value under accounting principles generally accepted in the United States and expands fair value financial statement disclosure requirements. SFAS 157 does not require any new fair value measurements. It only applies to accounting pronouncements that already require or permit fair value measures, except for standards that relate to share-based payments (SFAS 123R Share Based Payment.)

SFAS 157’s valuation techniques are based on observable and unobservable inputs. The Standard classifies these inputs into the following hierarchy:

Level 1 inputs are observable inputs and use quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date and are deemed to be most reliable measure of fair value.

Level 2 inputs are observable inputs and reflect assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Level 2 inputs includes 1) quoted prices for similar assets or liabilities in active markets, 2) quoted prices for identical or similar assets or liabilities in markets that are not active, 3) observable inputs such as interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, credits risks, default rates, and 4) market-corroborated inputs.

8

Notes to Consolidated Financial Statements (Continued)

Level 3 inputs are unobservable inputs and reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available under the circumstances.

At March 28, 2008 we had $63.3 million in cash equivalents, short-term and long-term investments that were subject to fair value measurements in accordance to SFAS 157.

The fair values of our investments based on the level of inputs are summarized below:

Description	Fair Value as of March 28, 2008		Level 1		Level 2		Level 3
	(In Thousands)
Money market funds	$	17,323	$	17,323	$	—	$	—
Corporate bonds		17,566		—		17,566		—
Medium and short term notes		9,307		—		9,307		—
Euro bonds		2,107		—		2,107		—
Certificates of deposit		5,617		—		5,617		—
Auction rate securities - municipal notes		5,500		—		5,500		—
Auction rate securities - preferred		5,925		—		5,925		—
Total	$	63,345	$	17,323	$	46,022	$	—

In measuring fair value where Level 1 inputs were available, we used a single valuation technique which valued our securities based on quoted market prices. At March 28, 2008 our money market funds were measured using Level 1 inputs and the fair value was based on daily observable trades.

In measuring fair value where Level 2 inputs were available, we used a single valuation technique which valued our securities based on the valuations performed by an independent pricing vendor utilized by our investment broker for our bonds, notes and CDs. In measuring fair value of our auction rate securities (ARS), we used valuation performed by the same pricing vendor as well as a the most recent history of successful auctions where similar securities were sold in an active market for our auction rate notes issued by various municipalities and a discounted cash flow model for preferred auction rate securities and auction rate municipal notes that had no recent successful auctions. The discounted cash flow model took into consideration the interest being earned on similar investments and various liquidation scenarios. All of these assumptions are observable in the market place and can be derived from or are supported by observable data at which transactions executed in the market place.

As of March 28, 2008, we had $11.4 million of principal invested in ARS that had experienced failed auctions. Of this amount we were able to liquidate $1.8 million for cash, at par, subsequent to the balance sheet date. We have also received a notice of tender for one of our auction rate securities with a value of $0.8 million. Accordingly, as of March 28, 2008, we classified the remaining $8.8 million in ARS as non-current, since they were unable to be liquidated subsequent to our quarter-end. Although we have uncertainty with regard to the short-term liquidity of these securities, we continue to believe that the fair value of these investments is equal to par value. This conclusion is based on the utilization of fair market values from an independent pricing service, which value these investments at par, as well as the overall quality of the underlying investments and their current credit ratings which range between AA and AAA. Furthermore, the fact that these investments consist solely of collateralized debt obligations and do not include mortgage-backed securities, we do not believe a lack of liquidity associated with our ARS will adversely affect our ability to conduct business, and we have the ability to hold the securities throughout the currently estimated recovery period.

9

Notes to Consolidated Financial Statements (Continued)

5. Comprehensive Income (Loss)

Comprehensive income (loss) is defined as a change in equity resulting from non-owner sources. The components of our comprehensive income are as follows:

	For the three months ended
	March 28, 2008		March 30, 2007
Net income (loss)	$	188	$	(5,655	)
Unrealized gain on AFS investments		130		—
Comprehensive income (loss)	$	318	$	(5,655	)

6. Inventory

	As of
	March 28, 2008			December 28, 2007
	(In thousands)
Work-in-process	$	3,357		$	3,578
Finished goods		2,108			2,652
Valuation allowance		(1,346	)		(1,110	)
	$	4,119		$	5,120

7. Property and Equipment

		As of
	Useful Life (Years)	March 28, 2008			December 28, 2007
		(In thousands)
Production and lab equipment	5	$	3,226		$	3,199
Computer equipment	3 -5		1,068			1,020
Office furniture and fixtures	3		482			452
Computer software	3 -5		738			659
Leasehold improvements	3		334			334
			5,848			5,664
Less: accumulated depreciation			(3,292	)		(3,059	)
		$	2,556		$	2,605

8. Product Warranty

We typically offer a one-year product replacement warranty. We accrue for estimated returns of defective products based on historical activity for the prior twelve months at the time revenue is recognized as well as any specific known product issues. The determination of these accruals requires us to make estimates of the frequency and extent of warranty activity and estimated future costs to replace the products under warranty. If the actual warranty activity and/or repair and replacement costs differ significantly from these estimates, adjustments to recognize additional cost of revenue may be required in future periods. The following table presents a reconciliation of our product warranty liability, which is included in other accrued liabilities in the consolidated balance sheets:

	Three months Ended March 28, 2008
	(In thousands)
Balance — beginning of period	$	135
Net provisions for the period		3
Costs incurred		(6	)
Balance — end of period	$	132

10

Notes to Consolidated Financial Statements (Continued)

9. Commitments

Legal Proceedings

Our industry is marked by a significant number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights.

On March 22, 2006, Atmel Corporation filed a complaint in the United States District Court, Northern District of California, alleging that our fingerprint sensors infringe an Atmel patent. The complaint was amended on November 1, 2006 to add certain Atmel affiliates as plaintiffs, as well as an allegation we are infringing a second patent. The second patent is the basis for allegations that our fingerprint image software infringes Atmel’s intellectual property rights. Atmel is seeking a preliminary and permanent injunction as well as treble damages, though the plaintiffs’ claimed damages have not been quantified. We have filed a counterclaim challenging the validity of the patents and seeking a judgment of non-infringement. We have also filed dispositive motions that seek findings of non-infringement, a dismissal of the case and recovery of our attorney’s fees. A hearing scheduled for May 2008 will address claim construction and summary judgment arguments of infringement made by Atmel and summary judgment arguments of non-infringement by AuthenTec. We believe that we have meritorious defenses to all of Atmel’s claims, and we intend to defend our interests vigorously. Should Atmel obtain an adverse judgment for treble damages or obtain an injunction, such judgment may have a material adverse impact on our financial condition. At December 29, 2006, we accrued the future estimated costs associated with defending this lawsuit in the amount of approximately $2,781,000. Based on our estimate, the balance remaining at March 28, 2008, is sufficient.

On March 12, 2008, we filed a patent infringement lawsuit against Atrua Technologies, Inc. in the United States District Court, Northern District of California, alleging that Atrua’s fingerprint sensors infringe three of our patents. Two of the patents relate to fingerprint sensor packaging and the third relates to fingerprint sensor circuitry. We seek monetary damages for infringement by Atrua’s fingerprint sensor products and an injunction against Atrua’s future infringement of the patents. Atrua has not yet answered the complaint and there has been no scheduling order issued by the Court. Additionally, it is difficult to estimate with any degree of probability the timing of future costs associated with this lawsuit.

In addition to these legal proceedings, from time to time, we may be involved in various legal proceedings arising from the normal course of business activities. Depending on the amount and timing, an unfavorable resolution of a matter could materially affect our future results of operations, cash flows or financial position in a particular period.

10. Warrants

During the three months ended March 28, 2008, warrants to purchase approximately 54,000 shares of common stock were exercised and approximately 44,000 shares of common stock were issued after the net exercise through a cashless transaction.

As of March 28, 2008, approximately 25,000 warrants to purchase shares of our common stock were outstanding and exercisable. These warrants were issued on September 25, 2000 and January 5, 2001 with an exercise price of $9.00 and will expire on September 25, 2010.

11

Notes to Consolidated Financial Statements (Continued)

11. Stock Options

A summary of the stock option activity for the three months ended March 28, 2008 is presented below:

	Number of Shares (in thousands)		Weighted Average Exercise Price
Outstanding as of December 28, 2007	3,779		$	2.51
Granted	91			10.65
Forfeited	(35	)		10.88
Exercised	(352	)		0.58
Outstanding as of March 28, 2008	3,483		$	2.83

The total intrinsic value of options exercised during the three months ended March 28, 2008 was approximately $3,907,000.

The total unrecognized stock-based compensation for options granted accounted for under SFAS No. 123(R) was approximately $4,591,000 as of March 28, 2008. These options had a remaining weighted-average period over which they are expected to be recognized of 3.1 years as of March 28, 2008.

We estimated the fair value of options granted after January 1, 2006 using the Black-Scholes option-pricing valuation model. This valuation model requires us to make assumptions and judgments about the variables used in the calculation. These variables and assumptions include the fair value of our common stock, weighted average period of time that the options granted are expected to be outstanding, the estimated volatility of comparable companies, the risk free interest rate and the estimated rate of forfeitures of unvested stock options.

The weighted average estimated values of stock option grants, as well as the weighted average assumptions used in calculating these values were based on estimates at the date of grant as follows:

	Three Months Ended
	March 28, 2008			March 30, 2007
Estimated fair values	$	5.19		$	3.16
Expected life (in years)		4.9			6.3
Risk-free rate		2.6	%		4.7	%
Volatility		55	%		108	%
Dividend yield		0	%		0	%
Estimated forfeiture rate		8	%		10	%

For the period of January 1, 2006 through June 29, 2007, we used the simplified calculation of expected life described in the Securities and Exchange Commission Staff Accounting Bulletin 107, and we estimated our stock’s volatility based on an average of historical volatilities of the common stock of several entities with characteristics similar to us. Given our current public company status, for stock options granted after June 29, 2007, we refined our pool of peer companies that reflect characteristics similar to us taking into account industry trends, market capitalization, annual revenue, option life and option vesting terms. The risk-free rate is based on U.S. Treasury securities. We estimated expected forfeitures based on our historical experience. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future.

12

Notes to Consolidated Financial Statements (Continued)

12. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. The purpose of SFAS 157 is to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value in generally accepted accounting principles, and expanding disclosures about fair value measurements. SFAS 157 emphasizes that fair value is market-based measurement, not an entity-specific measurement. It clarifies the extent to which fair value is used to measure recognized assets and liabilities, the inputs used to develop measurements, and the effect of certain measurements on earnings for the period. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and is applied on a prospective basis. In February 2008, the FASB released a FASB Staff Position, which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS No. 157 was first effective for us on December 29, 2007. The adoption of SFAS No. 157 on our financial assets and liabilities, which are primarily comprised of cash equivalents and investments, did not have a significant impact on their fair value measurements. We are currently evaluating the potential impact of the deferred part of SFAS 157 related to non-financial assets and liabilities on our results of operations and financial condition.

In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations, to increase relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141R replaces SFAS 141, “Business Combinations”, but, retains the fundamental requirements of SFAS 141 that the acquisition method of accounting be used and an acquirer be identified for all business combinations. SFAS 141R expands the definition of a business and of a business combination and establishes how the acquirer is to: (1) recognize and measure in its financial statements the identifiable assets acquired, the liabilities assumed, and any non controlling interest in the acquiree ; (2) recognize and measure the goodwill acquired in the business combination or a gain from a bargain purchase; and (3) determine what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Early adoption is prohibited. SFAS 141R will impact us if we elect to enter into a business combination subsequent to January 2, 2009.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115”. This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This statement does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. This statement does not establish requirements for recognizing and measuring dividend income, interest income, or interest expense. We adopted FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115” (“FAS No. 159”) on December 29, 2007, the first day of our 2008 fiscal year. This standard permits entities to choose to measure many financial instruments and certain other items at fair value. While FAS No. 159 became effective for our 2008 fiscal year, we did not elect the fair value measurement option for any of our financial assets or liabilities.

13. Segment Information

We currently operate in one reportable segment, the designing, marketing and selling of fingerprint sensors to the biometric and security markets. Our chief operating decision maker is the Chief Executive Officer.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with, and is qualified in its entirety by reference to our consolidated financial statements, including the notes thereto. Except for the historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10Q contains statements relating to expected future results and business trends that are based upon our current estimate, expectations, and projections about the industry, and upon our beliefs, and certain assumptions we have made that are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Words such as “anticipates,” “guidance,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “may,” “will,” “prospects,” “outlook,” “forecast,” and variations of these words or similar expressions are intended to identify “forward-looking statements.” In addition, any statements that refer to expectations, projections, or other characterizations of future events or circumstances, including any underlying assumptions, are “forward-looking statements.” Such statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict. Therefore, our actual results may differ materially and adversely from those expressed in any “forward-looking statement” as a result of various factors. These factors include, but are not limited to: demand for, and market acceptance of, new and existing fingerprint sensors in the PC and wireless markets, our ability to secure design wins for enterprise and consumer laptops and wireless devices, the adoption of our sensors in desktops and PC peripherals, the rate at which we increase our activity and opportunities in the wireless market, and additional opportunities in various markets for applications that might use our products, and changes in product mix, as well as other risks detailed from time to time in our SEC filings. These “forward-looking statements” are made only as of the date hereof, and we undertake no obligation to update or revise the “forward-looking statements,” whether as a result of new information, future events or otherwise.

Overview

We are a leading mixed-signal semiconductor company providing fingerprint authentication sensors and solutions to the high-volume PC, wireless device and access control markets. We believe our products, which are based on our patented TruePrint-based technology, are the most accurate, reliable, cost-effective, easy to use and versatile products commercially available today. Since our inception in 1998, we have shipped over 30 million sensors which have been integrated into over 200 different models of laptops, desktops and PC peripherals as well as over 8 million mobile phones. In response to accelerating customer demand, we shipped over 4 million sensor units in the three months ended March 28, 2008, more than double the 1.9 million sensor units we shipped in the three months ended March 30, 2007.

Since inception, we have invested heavily in research and development and had not achieved quarterly profitability prior to the three months ended September 28, 2007. We have not yet achieved profitability on an annual basis. From our incorporation through 2000, we were primarily engaged in the design and development of our first products, which we began shipping commercially in 2000. Our revenue has grown from $16.9 million in 2003 to $52.3 million in 2007, driven primarily by demand in the PC and wireless device markets. We expect sales of our products for use in the PC and wireless device markets to continue to represent a substantial portion of our revenue in the foreseeable future.

We primarily sell our products to OEMs, ODMs, or contract manufacturers. Our customers’ products are complex and require significant time to define, design and ramp to volume production. Our sales cycle begins with our selling and marketing staff and application engineers engaging with our customers’ system designers and management, which is typically a multi-month, or even multi-year, process. If we are successful, a customer will decide to incorporate our solution in its product, which we refer to as a design-win. Because the sales cycles for our products are long, we incur expenses to develop and sell our products, regardless of whether we achieve the design-win and well in advance of generating revenue, if any, from those expenditures. We do not have long-term purchase commitments from any of our customers, as sales of our products are generally made under individual purchase orders. However, once one of our products is incorporated into a customer’s design, it is likely to remain designed in for the life cycle of its product. We believe this to be the case because a redesign would generally be time consuming and expensive. We have experienced revenue growth due to an increase in the number of our products offered, an expansion of our customer base, an increase in the number of design-wins within any one customer and an increase in the average revenue per design-win.

We do not own or operate our own semiconductor fabrication, wafer coating, assembly or test facilities. We depend on independent vendors to manufacture, assemble and test our fingerprint sensor products. By outsourcing manufacturing, we are able to avoid the cost associated with owning and operating our own manufacturing facility and take advantage of the scale of operations these third parties provide.

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Our future profitability and rate of growth, if any, will be directly affected by the continued acceptance of our products in the marketplace, as well as the timing and size of orders, product mix, average selling prices and costs of our products, timely introduction of new products and general economic conditions. Our ability to attain profitability will also be affected by the extent to which we must incur additional expenses to expand our sales, marketing, development, and general and administrative capabilities to expand our business. The largest component of our operating expenses is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation, including bonuses and stock-based compensation, for our employees. Our operating expenses will continue to grow in absolute dollars, assuming our revenue continues to grow. As a percentage of revenue, we expect these expenses to decrease, although there can be no assurance that they will.

The following are material trends that are creating opportunities and risks to our business, and a discussion of how we are responding.

• Our customers are increasingly integrating fingerprint sensors in products sold into price-sensitive high volume end markets, which requires cost-effective solutions. We are responding by continuing to focus our design efforts to create fingerprint sensors that are smaller, easier to manufacture, and at a resulting lower cost. As average selling prices decline, lowering the costs of our fingerprint sensors is critical in maintaining or improving our gross margins.

• Outside of Japan, wireless network carriers are still evaluating the value proposition of integrating fingerprint sensors into devices sold for use on their networks. We expect eventual widespread integration of fingerprint sensors into wireless devices, however, the timing of adoption by wireless network carriers will have a significant impact on our future revenues. In response, we are working with wireless device manufacturers to support their efforts to accelerate the adoption of fingerprint verification technology in wireless communications.

• In both the PC and wireless device markets, our customers are increasingly looking to suppliers such as us to integrate additional functionality into our components or sub-systems. This benefits the customer by reducing manufacturing assembly steps and the amount of space required for components, of particular importance in the case of cell phones. We have been investing engineering resources in developing additional functionality on our sensors. For example, our TrueNav navigation feature which allows wireless device manufacturers to eliminate the mechanical navigation button on their cell phones. Our future revenues and gross margins will be impacted by the extent that we are successful in integrating additional functionality into our sensors.

• As a public company, we have experienced increases in certain general and administrative expenses to comply with the laws and regulations applicable to public companies. These laws and regulations include the provisions of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission and the Nasdaq Stock Market. To comply with the corporate governance and operating requirements of being a public company, we have incurred increases in such items as personnel costs, professional services fees, fees for independent directors and the cost of directors and officers’ liability insurance.

Description of Our Revenue, Cost of Revenue and Expenses

Revenue. Our revenue is generated primarily from shipments of our fingerprint authentication sensors and solutions. The price of our products is based upon market and competitive conditions. Therefore, the main factors that impact our revenue are unit volumes and average selling prices.

Cost of revenue and gross margin. We outsource all manufacturing activities associated with our products, which includes wafer fabrication, wafer coating, assembly and test functions. A significant portion of our cost of revenue consists of the costs to manufacture our products. Cost of revenue also includes items such as equipment depreciation, royalty expense, production planning personnel and related expenses, warranty costs, inventory valuation write-downs and, beginning in 2006, stock-based compensation under SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”). The primary factors that impact our cost of revenue are the mix of products sold, wafer and other raw material costs, outsourced manufacturing costs and product yields. We expect cost of revenue to increase in absolute dollars in the future from an expected increase in revenue. Cost of revenue as a percentage of total revenue may increase over time if decreases in average selling prices are not offset by corresponding decreases in our product costs.

We use third-party foundries, coating, assembly and test subcontractors, who are primarily located in Asia, to manufacture our semiconductor products. We purchase processed wafers from our fabrication suppliers, which are currently TSMC and Chartered. We also outsource the coating, assembly, test and other processing of our products to third-party subcontractors, primarily Chipbond and Signetics. We do not have long-term agreements with any of our third-party subcontractors. A significant disruption in the operations of one or more of these subcontractors would impact the production of our products and could have a material adverse impact on our business, financial condition and results of operation.

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Our gross margin has been and will continue to be affected by a variety of factors, including average selling prices of our products, product mix, and timing of cost reductions for outsourced manufacturing services, inventory write downs and the timing and changes in production yields. In addition, we tend to experience lower yields on the initial production release of a new product.

Research and development expenses. Research and development expenses primarily include personnel, the cost of fabrication masks, engineering development software, depreciation associated with capital equipment, third- party development support, allocated facilities expense and, beginning in 2006, stock-based compensation under SFAS 123(R). All research and development costs are expensed as incurred.

We expect that research and development expenses will continue to increase in absolute dollars in the future as we increase our investment in developing new products, although we expect these expenses to decrease as a percentage of revenue. Additionally, as a percentage of revenue, these costs fluctuate from one period to another.

Selling and marketing expenses. Selling and marketing expenses consist primarily of salaries and commissions for our sales and marketing personnel, independent sales representative commissions, travel, marketing communications, press releases, advertising, costs for tradeshows, marketing programs, allocated facilities expense, consultants and market studies, and beginning in 2006, stock-based compensation under SFAS 123(R). We expect selling and marketing expenses to continue to increase in absolute dollars, but such expenses may decline as a percentage of revenue.

General and administrative expenses. General and administrative expenses consist primarily of general corporate costs, including personnel expenses, financial reporting, corporate governance and compliance and outside legal, audit, tax compliance fees, allocated facilities expense, and, beginning in 2006, stock-based compensation under SFAS 123(R). We expect general and administrative expenses to increase on an absolute dollar basis to support our anticipated growth and cover additional costs associated with being a public company, such as regulatory reporting requirements, compliance with the Sarbanes-Oxley Act of 2002, higher insurance premiums and investor relations, but such expenses, as a percentage of revenue, may fluctuate from one period to another.

Other income (expense) net. Other income (expense) net includes interest income earned on our short term and long term investments of cash and cash equivalents, and interest expense incurred on our borrowings. It also includes adjustments we made to record our preferred stock warrants at fair value in accordance with FSP FAS 150-5 — Issuer’s Accounting under Statement 150 for Freestanding Warrants and Other Similar Instruments on Shares That Are Redeemable (“FSP 150-5”). We adopted FSP 150-5 and accounted for the change in accounting principle on July 1, 2005. Upon the July 2, 2007 closing of our initial public offering, these warrants converted into warrants to purchase shares of our common stock and, as a result, the liability was reclassified to additional paid in capital. We do not anticipate future charges of this nature.

Provision for income taxes. As of December 28, 2007, we had federal net operating loss carry forwards of approximately $51.1 million. These federal net operating loss carry forwards will expire commencing in 2018. Utilization of these net operating loss carry forwards may be subject to an annual limitation due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable if we have experienced an “ownership change” in the past, or if an ownership change occurs in the future aggregated with certain other sales of our stock after our initial public offering.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or GAAP. These accounting principles require us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the dates of the consolidated financial statements, the disclosure of contingencies as of the dates of the consolidated financial statements, and the reported amount of revenue and expenses during the periods represented. Although we believe that our judgments and estimates are reasonable under the circumstances, actual results may differ from those estimates.

Our critical accounting policies as of March 28, 2008 are consistent with those discussed in our annual report on Form 10-K for the year ended December 28, 2007 with an exception of Fair Value Measurements which became applicable to us on December 29, 2008.

Fair Value Measurements. Effective December 29, 2007, we adopted SFAS 157, Fair Value Measurements , which defines fair value, provides a consistent framework for measuring fair value under accounting principles generally accepted in the United States and expands fair value financial statement disclosure requirements. SFAS 157 does not require any new fair value measurements. It only applies to accounting pronouncements that already require or permit fair value measures, except for standards that relate to share-based payments (SFAS 123R Share Based Payment.) SFAS 157’s valuation techniques are based on observable and unobservable inputs that are classified into level 1,2 and 3 inputs according to various market participants’ and reporting entity’s assumptions.

        In February 2008, the FASB released a FASB Staff Position, which delayed the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of SFAS No. 157 on our financial assets and liabilities, which are principally comprised of cash equivalents and investments, did not have a significant impact on their fair value measurements.

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Results of Operations

The following table sets forth selected statement of operations data for the periods indicated expressed as a percentage of revenue:

	Three Months Ended
	March 28, 2008		March 30, 2007
Revenue	100.0	%	100.0	%
Cost of revenue	50.5		54.0
Gross margin	49.5		46.0
Operating expenses
Research and development	26.4		29.8
Selling and marketing	15.9		21.4
General and administrative	10.8		15.8
Total operating expenses	53.1		67.0
Loss from operations	(3.6	)	(21.0	)
Total other income (expense), net	4.8		(39.9	)
Net Income (loss)	1.2	%	-60.8	%

Comparison of the Three Months Ended March 28, 2008 and March 30, 2007

Revenue. Our revenue was $15.5 million for the three months ended March 28, 2008 as compared to $9.3 million for the three months ended March 30, 2007, an increase of approximately $6.2 million, or 67%. Our higher revenues were primarily due to increased shipments to customers in the PC market. The growth reflected new design-wins reaching commercial production, as well as platform expansions at existing customers, driven by increased demand by consumers and businesses for fingerprint sensors on their PCs. Revenue was also favorably impacted by increased demand in 2008 for our products for use in cell phones in Japan.

Cost of revenue and gross margin. Our cost of revenue was $7.8 million for the three months ended March 28, 2008 as compared to $5.0 million for the three months ended March 30, 2007. This resulted in a gross profit of $7.7 million for the three months ended March 28, 2008 as compared to $4.3 million for the three months ended March 30, 2007, an increase of $3.4 million, or approximately 79%. The increase in gross margin in the first quarter of 2008 was driven by higher revenues, more favorable product mix, improved manufacturing yields and lower manufacturing costs.

Research and development expenses. Research and development expenses were $4.1 million for the three months ended March 28, 2008 as compared to $2.8 million for the three months ended March 30, 2007, an increase of $1.3 million, or approximately 46%. Research and development expenses were approximately 26% and 30% of revenue for the three months ended March 28, 2008 and March 30, 2007, respectively. The increase in the first quarter of 2008 was due to $0.6 million higher compensation costs, including stock option compensation, incentives and hiring costs, resulting from the growth in the number of research and development personnel, $0.3 million of additional outside services related costs as a result of new product development expenses and software contractor support, $0.3 million attributable to the purchase of research and development software and $0.1 increase in travel expenses.

Selling and marketing expenses. Selling and marketing expenses were $2.5 million for the three months ended March 28, 2008 as compared to $2.0 million for the three months ended March 30, 2007, an increase of approximately $0.5 million, or 25%. Selling and marketing expenses were approximately 16% and 22% of revenue for the three months ended March 28, 2008 and March 30, 2007, respectively. The increase in selling and marketing expenses in the first quarter of 2008 resulted from $0.3 million higher compensation costs, including stock option compensation, incentives and hiring costs related to the growth in the number of personnel, $0.1 million increase in sales commissions due to higher revenue and additional $0.1 million in travel costs.

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General and administrative expenses. General and administrative expenses were $1.7 million for the three months ended March 28, 2008 as compared to $1.5 million for the three months ended March 30, 2007, an increase of $0.2 million, or approximately 13%. General and administrative expenses were 11% and 16% of revenue for the three months ended March 28, 2008 and March 30, 2007, respectively. The increase in the three months ended March 28, 2008 was primarily due to additional spending of $0.1 million related to outside services and an increase of $0.1 million in facilities costs as we expanded into a new facility to accommodate our growth.

Other income (expense), net. Other income (expense), net increased $4.4 million to a net other income of $0.7 million for the three months ended March 28, 2008 from a net other expense of $3.7 million for the three months ended March 30, 2007, primarily due to a $3.8 million decrease in warrant revaluation expense recognized in accordance with FSP 150-5 and $0.6 million increase in interest income as proceeds from initial public offering were invested in various short-term and long-term investments.

Liquidity and Capital Resources

Since our inception, we have financed our growth primarily with funds generated from operations, the issuance and sale of our common and preferred stock and secured convertible debt. Our cash, cash equivalents and investments were $67.1 million as of March 28, 2008, an increase of $0.8 million from December 28, 2007. The increase in our cash, cash equivalents and investments as of March 28, 2008 was primarily attributable to the cash generated by operations.

	Three Months Ended
	March 28, 2008			March 30, 2007
	(In thousands)
Consolidated statement of cash flows data:
Purchase of property and equipment	$	(184	)	$	(870	)
Cash flows from operating activities		545			187
Cash flows from investing activities		4,688			(3,670	)
Cash flows from financing activities		140			7,525

Operating activities. Net cash provided by operating activities was $0.5 million in the three months ended March 28, 2008, primarily due to net income for the period, decrease in inventory offset by a decrease in accrued liabilities related to the payment of litigation related legal expenses and employee bonuses.

Investing activities. Net cash provided by investing activities was $4.7 million in the three months ended March 28, 2008, due to redemption of our investments, primarily medium and short term notes.

Financing Activities. Net cash provided by our financing activities was $0.1 million in the three months ended March 28, 2008, due primarily to the proceeds received from exercise of stock options.

We believe our $49.9 million of cash and cash equivalents and short term investments at March 28, 2008 and expected cash flow from operations will be sufficient to fund our projected operating requirements for at least the next twelve months.

Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets. As of March 28, 2008, our investment portfolio consisted primarily of fixed-income securities. The weighted average maturity is less than twelve months. We utilize investment vehicles such as money market funds,, certificates of deposit, auction rate securities, notes and bonds.

As of March 28, 2008, $11.4 million of our $46.0 million in short-term and long term investments were comprised of municipal notes and preferred stock investments with an auction reset feature (“auction rate securities”). The municipal notes are issued by various state and local municipal entities for the purpose of financing student loans, public projects and other activities. All of the municipal notes carry AA credit ratings or above. The preferred stock is issued by various closed-end mutual funds that invest primarily in common stock and fixed income securities. All of the preferred stock investments carry AAA credit ratings.

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Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually every seven, 28 or 35 days. In mid- February 2008 the auction rate securities markets became disrupted and we experienced auction failures for the first time. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar short-term instruments. The securities for which auctions have failed will continue to accrue interest at the contractual rate and be auctioned every seven, 28 or 35 days until the auction succeeds, the issuer calls the securities, or they mature. As a result, our ability to liquidate and fully recover the carrying value of our remaining auction rate securities in the near term may be limited. These developments resulted in the reclassification of $8.8 million of these securities as long-term investments in our consolidated financial statements at March 28, 2008. In addition, while all of our auction rate securities are currently rated AA or above, if the issuers are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments.

We believe we will be able to liquidate our auction rate securities without significant loss, and we currently believe these securities are not impaired, primarily due to government guarantees and municipal bond insurance in the case of our municipal notes investments and substantial over-collateralization in the case of our preferred stock investments. We currently have the ability and intent to hold the remaining $11.4 million of auction rate securities, until market stability is restored with respect to these securities. We believe that, even allowing for the reclassification of these securities to long-term and the possible requirement to hold all such securities for an indefinite period of time, our remaining cash and cash equivalents and short-term investments will be sufficient to support our projected operating requirements over the next twelve months.

Our long-term future capital requirements will depend on many factors, including our level of revenue, the timing and extent of spending to support our research and development efforts, the expansion of selling and marketing activities, acquisitions, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. We could be required, or could elect, to seek additional funding through public or private equity or debt financing. These additional funds may not be available on terms acceptable to us or at all.

Contractual Obligations

On March 3, 2008, we have entered into a five (5) year operating lease agreement with Rialto, LLC related to extending the existing lease and providing for additional office space at 100Rialto Place, Melbourne, FL, commencing September 1, 2008. Under this agreement, our rent expense will amount to approximately $60,000 per month.

There were no other significant changes during the three months ended March 28, 2008 in our reported payments due under contractual obligations and disclosed contingent contractual obligations at December 28, 2007, as described in our Form 10K.

Off-Balance Sheet Arrangements

We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial condition or results of operations.

Recent Accounting Pronouncements

See Note 11 of the Notes to Consolidated Financial Statements for recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosure About Market Risks

Foreign currency risk. All of our revenue is presently denominated in U.S. dollars. We therefore have no foreign currency risk associated with sales of our products at this time. However, we do have risk of our products being more expensive outside the United States if the value of the U.S. dollar increases as compared to the local currency of our customer. This could result in pricing pressure, lower revenue and lower gross margins. Our international sales and research and development operations incur expenses that are denominated in foreign currencies. These expenses could be materially affected by currency fluctuations; however, we do not presently consider this currency risk to be material as the related costs do not presently constitute a significant portion of our total spending.

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Interest rate risk. We had cash, cash equivalents and investments of $67.0 million as of March 28, 2008, which were held for working capital and strategic purposes. The primary objectives of our investment activity are to preserve principal, provide liquidity and maximize income without significantly increasing the risk. Some of the securities we invest in are subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk and reduce exposure, we maintain our portfolio of cash equivalents and short-term and long-term investments in investment grade securities that are primarily of a conservative nature. Since our results of operations are not dependent on investments, the risk associated with fluctuating interest rates is limited to our investment portfolio, and we believe that a 10% change in interest rates would not have a significant impact on our results from operations.

Market risk. Our short term and long term investments consist of money market funds, certificates of deposit, auction rate securities, corporate and Euro bonds and medium and short-term notes that are exposed to certain risks. Although these various investments are managed to a standard designed to avoid principal loss, market forces can have an adverse effect on asset valuations, and it is possible for these investment grade securities to lose a portion of the principal. The ability to determine the risks presented by these investments is limited by, among other things, restrictions on the ability to know the holdings or the collateral backing of the securities.

At March 28, 2008 we held $11.4 million in auction rate securities. The rate of interest paid on these securities is determined at auctions held at pre-determined intervals, usually every seven, 28 or 35 days. If sufficient clearing bids are not made in a particular auction, that can result in the inability to liquidate the asset-backed securities in the auction. All of these securities held as of March 28, 2008 had experienced failed auctions. There can be no assurance that auctions on the auction rate securities in our investment portfolio will succeed. If the issuers are unable to successfully close future auctions and their credit ratings deteriorate, the fair value of those auction rate securities may decline and we may record impairment charges. For more information on fair value assumptions please see Note 4, “Fair Value Measurements”, of the financial statements.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer performed an evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), which have been designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure and (ii) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. They concluded that the controls and procedures were effective as of March 28, 2008 to provide reasonable assurance of the achievement of these objectives.

Changes in Internal Controls. There was no change in our internal control over financial reporting during the quarter ended March 28, 2008, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Our industry is marked by a significant number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights.

On March 22, 2006, Atmel Corporation filed a complaint in the United States District Court, Northern District of California, alleging that our fingerprint sensors infringe an Atmel patent. The complaint was amended on November 1, 2006 to add certain Atmel affiliates as plaintiffs, as well as an allegation we are infringing a second patent. The second patent is the basis for allegations that our fingerprint image software infringes Atmel’s intellectual property rights. Atmel is seeking a preliminary and permanent injunction as well as treble damages, though the plaintiffs’ claimed damages have not been quantified. We have filed a counterclaim challenging the validity of the patents and seeking a judgment of non-infringement. We have also filed dispositive motions that seek findings of non-infringement, a dismissal of the case and recovery of our attorney’s fees. A hearing scheduled for May 2008 will address claim construction and summary judgment arguments of infringement made by Atmel and summary judgment arguments of non-infringement by AuthenTec. We believe that we have meritorious defenses to all of Atmel’s claims, and we intend to defend our interests vigorously. Should Atmel obtain an adverse judgment for treble damages or obtain an injunction, such judgment may have a material adverse impact on our financial condition. At December 29, 2006, we accrued the future estimated costs associated with defending this lawsuit in the amount of approximately $2,781,000. Based on our estimate, the balance remaining at March 28, 2008, is sufficient.

On March 12, 2008, AuthenTec filed a patent infringement lawsuit against Atrua Technologies, Inc. in the United States District Court, Northern District of California, alleging that Atrua’s fingerprint sensors infringe three AuthenTec patents. Two of the patents relate to fingerprint sensor packaging and the third relates to fingerprint sensor circuitry. We seek monetary damages for infringement by Atrua’s fingerprint sensor products and an injunction against Atrua’s future infringement of the patents. Atrua has not yet answered the complaint and there has been no scheduling order issued by the Court. Additionally, it is difficult to estimate with any degree of probability the timing of future costs associated with this lawsuit.

In addition to these legal proceedings, from time to time, we may be involved in various legal proceedings arising from the normal course of business activities. Depending on the amount and timing, an unfavorable resolution of a matter could materially affect our future results of operations, cash flows or financial position in a particular period.

Item 1A. Risk Factors

In addition to the information set forth under Item 1A of Part I to our Annual Report on Form 10-K for the year ended December 28, 2007, you should carefully consider each of the following risk factors and all of the other information included or incorporated by reference in this Form 10-Q. If any of the following risks, or other risks not presently known to us or that we currently believe not to be significant, develop into actual events, then our business, financial condition and results of operations could be adversely affected. In that case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock.

Risks Related to Our Business

Resolution of claims that we have violated or may violate the intellectual property rights of others could materially harm our business and could require us to indemnify our customers, resellers or vendors, redesign our products, pay significant royalties to third parties or expend additional development resources to redesign our products.

Our industry is marked by a large number of patents, copyrights, trade secrets and trademarks and by frequent litigation based on allegations of infringement or other violation of intellectual property rights. At any time, a third-party may assert that our technology or products violates such party’s intellectual property rights. For example, we are presently subject to a patent infringement lawsuit filed by Atmel Corporation, or Atmel, and certain of its affiliates alleging that our fingerprint sensors and related software infringe two of Atmel’s patents.

Successful intellectual property claims against us from Atmel or others could result in significant financial liability or prevent us from operating our business or portions of our business as currently conducted. In addition, resolution of claims may require us to redesign our solutions, to obtain licenses to use intellectual property belonging to third parties, which we may not be able to obtain on reasonable terms, to cease using the technology covered by those rights and to indemnify our customers, resellers or vendors. Any claim, regardless of its merits, could be expensive and time consuming to defend against and divert the attention of our technical and management resources.

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Questions of infringement in the biometrics and semiconductor market involve highly technical and subjective analyses. Litigation may be necessary in the future to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity, and we may not prevail in any such future litigation. Litigation, whether or not determined in our favor or settled, is costly, could harm our reputation, could cause our customers to use our competitors’ products and could divert the efforts and attention of our management and technical personnel from normal business operations.

Our investments in auction rate securities are subject to risks that may cause losses and have a material adverse effect on our liquidity.

As of March 28, 2008, $11.4 million of our short-term investments were comprised of municipal note and preferred stock investments with auction reset features (“auction rate securities”). The municipal notes are issued by various state and local municipal entities for the purpose of financing student loans, public projects and other activities. All of the municipal notes carry AA credit ratings or above. The preferred stock is issued by various closed-end mutual funds that invest primarily in common stock and fixed income securities. All of the preferred stock investments carry AAA credit ratings. Liquidity for these auction rate securities is typically provided by an auction process which allows holders to sell their notes and resets the applicable interest rate at pre-determined intervals, usually every seven, 28 or 35 days.

Recently, auctions for most of the auction rate securities held at March 28, 2008 have failed and there is no assurance that auctions on the remaining auction rate securities in our investment portfolio will continue to succeed. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar short-term instruments. The securities for which auctions have failed will continue to accrue interest at the contractual rate and be auctioned every seven, 28 or 35 days until the auction succeeds, the issuer calls the securities, or they mature. As a result, our ability to liquidate and fully recover the carrying value of our auction rate securities in the near term may be limited. $8.8 million of these investments held at March 28, 2008 have been classified as long-term investments in our consolidated financial statements.

If the issuers of these auction rate securities are unable to successfully close future auctions and their credit ratings deteriorate, we may in the future be required to record an impairment charge on these investments. We may be required to wait until market stability is restored for these instruments or until the final maturity of the underlying notes to realize our investments’ recorded value.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

On December 31, 2007 we issued 43,461 shares of our common stock upon the net exercise of warrants to purchase 49,881 shares of our common stock held by investors. On February 21, 2008 we issued 1,021 shares of our common stock upon the net exercise of warrants to purchase 4,115 shares of our common stock held by investors. The securities issued in the foregoing transactions were offered and sold in reliance on exemptions from registration set forth in Section 4(2) of the Securities Act of 1933, as amended, or regulations promulgated thereunder, relating to sales by an issuer not involving any public offering.

Use of Proceeds from Registered Securities

As part of our initial public offering, on July 2, 2007 we registered 7,500,000 shares of our common stock under Form S-1 (File No. 333-141348), which was declared effective by the Securities and Exchange Commission on June 26, 2007, at an offering price to the public of $11.00 per share. We registered 5,625,000 of these shares on our behalf and 1,875,000 of these shares on behalf of certain of our selling stockholders.

The offering of the common stock resulted in net proceeds of approximately $56 million to us after deducting underwriting discounts and commissions of approximately $5.8 million and offering costs of approximately $1.6 million. The net proceeds from our initial public offering will be used for working capital and general corporate purposes, including potential acquisitions. We currently have no agreements or commitments with respect to any material acquisitions.

This expected use of the net proceeds represents our current intentions based upon our present plans and business condition. The amounts and timing of our actual expenditures will depend upon numerous factors, including cash flows from operations and the anticipated growth of our business. We will retain broad discretion in the allocation and use of our net proceeds.

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Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

10.16	Office lease dated March 3, 2008, by and between AuthenTec, Inc. and Rialto, LLC.
31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.†
32.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†
32.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.†

^† Filed herewith.

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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.

AUTHENTEC, INC.
By:	/s/ F. Scott Moody
	F. Scott Moody
	Chief Executive Officer
	(on behalf of the Registrant and as the Registrant’s Principal Executive Officer)

DATE: May 1, 2008

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EX-10.16

EXHIBIT 10.16

FIRST AMENDMENT TO LEASE

THIS FIRST AMENDMENT TO LEASE (The “AMENDMENT”) is made and entered into as of the ^3rd day of March 2008, by and between RIALTO LLC, (“Landlord”) and AUTHENTEC, INC. (“Tenant”).

RECITALS

WHEREAS, on or about February 1, 2007, Landlord and Tenant made and entered into that certain lease arrangement (the “Original Lease”), relating to certain premises located at 100 Rialto Place, Suite 400, Melbourne, Florida, 32901 (the “Building”) comprising approximately 10,052 rentable square feet area (the “Current Premises”); and

WHEREAS, Tenant wishes to lease additional space from Landlord; and

WHEREAS, Landlord has agreed to amend the Lease to include the leasing of such additional space, subject to the provisions of this Amendment.

NOW THEREFORE, for and in consideration of Ten Dollars ($10.00), the mutual covenants and conditions set forth herein, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows:

1. The foregoing Recitals are true and correct and are incorporated herein by reference. Capitalized terms used herein which are not otherwise defined shall have the same meaning ascribed to them in the Lease.

2. Tenant hereby leases from Landlord, on the terms and conditions set forth in this Amendment, approximately 26,625 rentable square feet of additional space, which space is commonly referred to as Suite 100, 500, and 450. Landlord shall deliver and Tenant shall occupy such additional space incrementally as follows:

a.) Suite 100 which comprises approximately 3,583 rentable square feet (Expansion Space #1) shall be made available to Tenant by Landlord for occupancy no later than September 1, 2008 (“Commencement Date for Expansion Space #1”); and

b.) Suite 500 which comprises approximately 16,542 rentable square feet (Expansion Space #2) shall be made available to Tenant by Landlord for occupancy no later than October 1, 2008 (“Commencement Date for Expansion Space #2”); and

c.) Suites 450 which comprises approximately 6,500 rentable square feet (Expansion Space #3) shall be made available to Tenant no later than November 1, 2008 (“Commencement Date for Expansion Space #3).

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Expansion Space #1, Expansion Space #2 and Expansion Space #3 may collectively be referred to as the “Total Expansion Space”, all of which are as outlined on Exhibit A attached hereto.

Commencement Date for Expansion Space #1, Commencement Date for Expansion Space #2 and Commencement Date for Expansion Space #3, may collectively be referred to as the “Commencement Date for Expansion Space” or individually as its “Commencement Date”.

In the event any one or all of the Expansion Space becomes available earlier than their respective Commencement Date for Expansion Space, Landlord shall so notify Tenant in writing and Tenant shall have the option to take early delivery of such Expansion Space on the same terms and conditions as stated herein. In the event Tenant elects not to take earlier delivery, Landlord shall still be obligated to deliver the Expansion Space pursuant to its Commencement Date as identified above.

Subject to the exceptions set forth in 2.5 below, if Landlord is unable to deliver any of the Expansion Space on its designated Commencement Date the date so identified herein, Landlord shall be obligated to so notify Tenant in writing no later than ninety (90) calendar days prior to the date of scheduled delivery; in which case Tenant will have the following options:

(i) Tenant may request that Landlord deliver similar space within the Building on the same terms and conditions as stated herein, including but not limited to the Expansion Space and Commencement Date, as that which Landlord was unable to deliver; or

(ii) Tenant may request Landlord to locate temporary space for Tenant to occupy which is similar space that the Tenant would have occupied had such Expansion Space been available to Tenant as required. In which case Landlord shall be responsible for costs to relocate Tenant to and from the temporary space and Landlord shall be required to compensate Tenant for any costs incurred by Tenant to make such temporary space suitable for its intended purpose, however such costs shall not exceed Five Hundred Thousand Dollars $500,000.00; or

(iii) Tenant may elect not to extend the Lease Term of the Original Lease, nor add certain Expansion Space, such that the Original Lease will only be modified to allow for that additional space which Tenant elects to accept and for the term; or

(iv) Tenant and Landlord shall mutually negotiate terms and conditions for a second amendment to address Landlord’s failure to so deliver the Expanded Space; such terms and conditions may include, among terms, a reduced Base Rent.

Irrespective of which option is selected by Tenant, Landlord agrees to act in good faith and to exert best efforts to perform its stated obligations.

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2.5 Notwithstanding anything contained herein to the contrary, should delivery of the Expansion Space be delayed by matters not within Landlord’s control, including but not limited to, Acts of God or unavailability of construction materials, the notification to Tenant shall be in writing no later than thirty (30) calendar days prior to the date of the scheduled delivery date of Expansion Space prior to Tenant’s ability to exercise any of the four options set forth above.

3. Following the delivery of all the Expansion Space, the Tenant shall occupy a total of 36,679 rentable square feet comprised of the Expansion Space of 26,627 rentable square feet and 10,052 rentable square feet of the Current Premises, together once so occupied by Tenant the Expansion Space and Current Premises shall be referred to as the “Demised Premises” with the same meaning as identified in the Original Lease.

4. Following Tenant’s occupancy of all of the Expansion Space, the Landlord and Tenant agree that the term of the Original Lease shall be extended by five (5) years on the same terms and conditions of the Original Lease except as modified by this Amendment; such that the new termination date shall be September 30, 2013 (“New Termination Date”). Tenant shall also be granted two (2) renewal options for an additional five (5) year term each (“Renewal Period”). The Base Rent for such Renewal Period shall be mutually negotiated by the parties but in no event greater than 95% of the then current market rate for similar properties within the area.

5. The Base Rent for each Expansion Space shall be $21.00 per rental square feet of each Expansion Space; provided all of the Expansion Space is delivered to Tenant in accordance with its Commencement Date; otherwise, Tenant has the option to renegotiate such base rent to a lower amount pursuant to Article 2 herein. The Base Rent for the Current Premises shall be reduced to $21.00 per rental square feet upon the earlier of (i) occupancy of Expansion Space #3; or (ii) November 1, 2008 provided Landlord delivers Expansion Space #3 on November 1, 2008. Following the occupancy of all the Expansion Space by Tenant (hereinafter referred to as the “New Commencement Date”) the Lease shall include all of the Demised Premises and shall continue in effect until the New Termination Date. The Base Rent as of the New Commencement Date for the Demised Premises shall be $21.00 per rentable square fee, which shall increase annually, thereafter, at the rate of 3%.

6. “Tenant’s Proportionate Share” as identified in the Original Lease for purposes of calculating additional expenses such as Taxes and Insurance, Tenant’s Proportionate Share shall incrementally increase over the Term of this Lease in accordance with Tenant’s occupancy of the individual Expansion Spaces. The increase is identified below, assuming occupancy occurs pursuant to the stated Commencement Date, with the Tenant’s Proportionate Share equaling a total of 25.07% following Tenant’s occupancy of all the Expansion Space.

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Date	Square Footage of Occupancy	Tenant’s Proportionate Share
1/30/2008	10,052	6.87%
9/1/2008	13,635	9.32%
10/1/2008	30,177	20.62%
11/1/2008	36,677	25.07%

7. This Amendment is contingent upon Landlord entering into lease terminations and relocations with tenants who currently occupy Suites 100, 500, and 450. If Landlord has not entered into lease terminations or relocations at least ninety (90) days prior to the Commencement Dates identified in Article 2 herein, then Tenant shall have the option to exercise the remedies identified in Article 2.

8. Landlord agrees to provide to Tenant a build-out allowance in the amount of Five Hundred Thousand Dollars ($500,000.00) upon an agreed scope of work (“Tenant Allowance”) for renovations to Suites 100, 450 and 500 and shall not be obligated to pay any Tenant Allowance specified in the Original Lease. To utilize the Tenant Allowance, Landlord shall identify to Tenant the contractors and suppliers, whom Landlord intends to utilize to construct the renovations to Suites 100, 500, and 450; however, Tenant has the right to approve or disapprove any such contractors and suppliers. Prior to commencement of any renovations, Landlord shall provide Tenant with an estimate of the costs of each renovation and require Tenant’s approval with respect to the costs and the contractors and or suppliers proposed by Landlord. In the event either the cost or the contractors or suppliers are deemed unacceptable to Tenant, then Landlord and Tenant shall act in good faith and negotiate acceptable costs and identify acceptable contractors and/or suppliers. In the event Landlord performs the renovations at a cost not pre approved by Tenant, then Tenant shall not be responsible for any costs incurred by Landlord that exceed the Tenant Allowance. Furthermore, any work performed by contractors and/or suppliers selected by Landlord, whom Tenant has not had agreed are acceptable, shall be at Landlord’s sole cost and expense. Landlord shall enter into contracts with contractors and suppliers and Landlord shall pay the amounts specified in the contracts with its contractors and suppliers. In the event that Tenant does not use the entire Tenant Allowance, Tenant shall be deemed to have waived any unused portion of the Tenant Allowance, after Tenant had an opportunity to inspect the renovations and ninety days (90) following the Commencement Date have elapsed. This additional time will give Tenant an opportunity to occupy the space and ensure the renovations have been satisfactorily completed. Tenant shall not be entitled to any excess monies not used in the Tenant Allowance nor shall Tenant be entitled to any rent reduction or other compensation. In the event that the renovations to Suites 100, 450, and 500 exceed the amount of the Tenant Allowance, Tenant shall reimburse Landlord all costs of such renovations in excess of this amount; which Tenant had approved prior to Landlord incurring such costs. Notwithstanding the foregoing, Landlord shall have no obligation to make any renovations to Suites 100, 450, and 500 that cost in excess of the Tenant Allowance. It shall be the Landlord’s responsibility to ensure that all agreed to renovations have been satisfactorily completed prior to Tenant’s occupancy of the

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Expansion Space being renovated. Failure of the Landlord to so complete the renovations satisfactory shall entitle Tenant to the remedies afforded Tenant in Article 2, as Landlord will be deemed in default of delivery Expansion Space on its Commencement Date. Prior to Tenant’s obligation to occupy any Expansion Space will require Landlord to have the renovations completed. Notwithstanding anything contained herein to the contrary, any matter that requires the consent of Tenant must be made within three calendar (3) days of written notification by Landlord to Tenant. If such notice is not provided by Tenant, consent shall be deemed to be given.

9. Landlord shall install a restroom within Suite 100, the cost of which is included in Article 8 as part of the build-out allowance of Five Hundred Thousand Dollars ($500,000.00) and which shall be completed prior to the Commencement Date for Expansion Space #1.

10. The occupancy of the Expansion Space entitles Tenant to increased signage (at Tenant’s sole expense) on both the exterior of the Building and all street signs adjacent or in close proximity to the Building. At a minimum, Tenant shall be entitled to a sign on both the front and back of the building, at the maximum size and dimensions allowed by local laws rules and regulations.

11. Following the occupancy of Tenant of all the Expansion Space shall enable the parties to modify the Original Lease as following with respect to definitions:

a.) Original Lease and this Amendment may be referred to together as the “Lease”;

b.) “Lease Term or Terms: The period of time commencing with the New Commencement Date, as defined herein, and terminating sixty-months (60) after the New Commencement Date unless renewed in accordance with Article 4 herein. The Lease Term or Terms may be referred to as the “Term”.

12. Tenant shall be solely responsible for the cost of utilities which are incurred for times of operations which exceed normal operating hours set forth in the Original Lease. Furthermore, Landlord shall provide 24 HVAC for one IT room. Tenant will also be required to install a separate meter (at its sole cost) at the test room on the first floor.

13. This Amendment may be executed in multiple counterparts, each of which shall be deemed to be an original, and all of such counterparts shall constitute one agreement. To facilitate execution of this Amendment, the parties may execute and exchange facsimile counterparts of the signature pages, and facsimile counterparts shall serve as originals. The parties agree to provide original hard copies of such signature pages to the other party within five (5) business days of execution by such party.

14. Tenant has the option to terminate this Lease effective as of September 1, 2011 by providing written notice to Landlord, at least one hundred twenty (120) days prior September 1, 2011. In which event, Tenant’s obligation will be to pay any outstanding rent due as of the date of termination plus Tenant shall pay Landlord three (3) additional monthly rental payments ($210,434.29), prorated build-out costs ($200,000.00) and leasing commissions (49,073.83).

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15. During the Term, Landlord agrees to maintain certain types and levels of insurance for the Building, which is described on Exhibit B, attached hereto, and immediately following occupancy by Tenant of all the Expansion Space, Landlord shall name Tenant as additional insured on the insurance maintained by Landlord with respect to this Building.

16. Except for the modifications made herein, all other terms and conditions contained in the Original Lease shall remain in full force and effect.

Landlord and Tenant have signed this Amendment on the dates specified adjacent to their signature below.

“LANDLORD”

Signed on this      day of March 2008	RIALTO, LLC a Florida limited liability company
	By:
	Name:
	Title:	President of Property Management

‘TENANT”
Signed on this 3rd day of March 2008	AUTHENTEC, INC. a Delaware corporation
	By:
	Name:
	Title:

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EXHIBIT A

OUTLINE OF TOTAL EXPANSION SPACE

31

32

EXHIBIT B

LANDLORD INSURANCE REQUIREMENTS DURING TERM FOR THE BUILDING

33

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EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

AUTHENTEC, INC.

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

(CHAPTER 98, TITLE 15 U.S.C. SS. 7241)

I, F. Scott Moody, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AuthenTec, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: May 1, 2008

/s/ F. Scott Moody

F. Scott Moody, Chief Executive Officer

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EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

AUTHENTEC, INC.

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

(CHAPTER 98, TITLE 15 U.S.C. SS. 7241)

I, Gary R. Larsen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of AuthenTec, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: May 1, 2008

/s/ Gary R. Larsen

Gary R. Larsen, Chief Financial Officer

36

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned hereby certifies that the Quarterly Report on Form 10-Q for the period ended March 28, 2008 of AuthenTec, Inc. (the “Company”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 1, 2008

/s/ F. Scott Moody

F. Scott Moody, Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AuthenTec, Inc. and will be retained by AuthenTec, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

37

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned hereby certifies that the Quarterly Report on Form 10-Q for the period ended March 28, 2008 of AuthenTec, Inc. (the “Company”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 and that the information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: May 1, 2008

/s/ Gary R. Larsen

Gary R. Larsen, Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to AuthenTec, Inc. and will be retained by AuthenTec, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

38