SEC Filing | Synaptics Incorporated

View:

Download DOC

Download PDF

Download XLS

s-1a

As filed with the Securities and Exchange Commission on January 9, 2002

Registration No. 333-56026

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

AMENDMENT NO. 2

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

SYNAPTICS INCORPORATED

(Exact Name of Registrant as Specified in its Charter)






California (prior to reincorporation) Delaware
(after reincorporation)	3679	77-0118518




(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification Number)

2381 Bering Drive

San Jose, California 95131

(408) 434-0110

(Address, Including Zip Code, and Telephone Number, Including Area Code,

of Registrant’s Principal Executive Offices)

Francis F. Lee

President and Chief Executive Officer

Synaptics Incorporated

2381 Bering Drive

San Jose, California 95131

(408) 434-0110

(Name, Address Including Zip Code, and Telephone Number,

Including Area Code, of Agent for Service)

Copies to:






Robert S. Kant, Esq. Jean E. Harris, Esq. Brian H. Blaney, Esq. Greenberg Traurig, LLP 2375 East Camelback Road Phoenix, Arizona 85016 (602) 445-8000		Curtis L. Mo, Esq. Richard C. Leska, Esq. Peter S. Buckland, Esq. Brobeck, Phleger & Harrison LLP 2200 Geng Road Palo Alto, California 94303 (650) 424-0160

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed without notice. Synaptics may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and Synaptics is not soliciting offers to buy these securities, in any jurisdiction where the offer or sale of these securities is not permitted.

TABLE OF CONTENTS


PROSPECTUS SUMMARY
RISK FACTORS
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
CERTAIN RELATIONSHIPS AND TRANSACTIONS
PRINCIPAL AND SELLING STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
UNDERWRITING
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND ADDITIONAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT
Exhibit 1
Exhibit 5
EX-10.6
EX-10.7
EX-10.16
EX-23.2
EX-23.3

SUBJECT TO COMPLETION, DATED JANUARY 9, 2002

PROSPECTUS

5,000,000 Shares

synaptics logo

Common Stock

This is the initial public offering of Synaptics Incorporated. We are selling 5,000,000 shares of our common stock.

There is currently no public market for our shares. We anticipate that the initial public offering price will be between $9.00 and $11.00 per share. We have applied to have our common stock approved for listing on the Nasdaq National Market under the symbol “SYNA.”

See “Risk Factors” beginning on page 7 to read about certain risks that you should consider before buying shares of our common stock.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.


	Per Share	Total

Public offering price	$	$




Underwriting discount	$	$




Proceeds, before expenses, to us	$	$

The underwriters may purchase up to an additional 750,000 shares of common stock from selling stockholders at the initial public offering price less the underwriting discount to cover over-allotments.

The underwriters expect to deliver the shares against payment in New York, New York on , 2002.

Bear, Stearns & Co. Inc.


	SG Cowen


	SoundView Technology Group

The date of this prospectus is , 2002

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information that you should consider before investing in our common stock. You should read this entire prospectus carefully, especially “Risk Factors” and our consolidated financial statements and related notes.

The Company

Our Business

We are the leading worldwide developer and supplier of custom-designed user interface solutions for notebook computers. In our fiscal year ended June 30, 2001, we supplied approximately 61% of the touch pads used in notebook computers throughout the world. Our new pointing stick is designed to address the portion of the notebook market that uses the pointing stick as an interface solution. We estimate that in fiscal 2001 approximately 55% of all notebook computers sold used solely a touch pad interface, 29% used solely a pointing stick interface, 10% used a dual pointing interface, which consists of both a touch pad and a pointing stick, and 6% used some other type of interface. Our new pointing stick can be used with our touch pad to take advantage of the growing trend toward dual pointing interface solutions. Our original equipment manufacturer, or OEM, customers include Acer, Apple, Compaq, Dell, Hewlett-Packard, and Samsung, as well as Fujitsu/Siemens, IBM, NEC, Sony, and Toshiba. We generally supply our OEM customers through their contract manufacturers, which take delivery of our products and pay us directly for them. These contract manufacturers include Arima, Compal, Inventec, Mitac, Nypro, Quanta, and Wistron.

Our TouchPad(TM) is a small, touch-sensitive pad that senses the position of a person’s finger on its surface to provide screen navigation, cursor movement, and a platform for interactive input. Our TouchPads offer various advanced features, such as virtual scrolling; customizable tap zones to simulate mouse clicks, launch applications, or perform other select functions; Palm Check to eliminate false activation; and Edge Motion to continue cursor movement when the user’s finger reaches the edge of the touch pad. Our TouchPads are custom designed to meet our OEM customers’ specifications regarding electrical interface, size, thickness, functionality, and driver software for various advanced features. We have added stylus capabilities to our TouchPad to allow pen-based applications, such as drawing, electronic signature capture, and handwriting recognition, without sacrificing the accurate, comfortable finger input capabilities of the TouchPad. TouchStyk(TM), our recently introduced pointing stick solution, enables computer manufacturers to offer end users the choice of a touch pad, a pointing stick, or a combination of both interface devices. TouchStyk is a self-contained, easily integrated module that uses the same sensing technology as our TouchPad. Our QuickStroke® provides a fast, easy, and accurate way to input Chinese characters and has the potential to become a primary interface for the Chinese language market. Using our proprietary pattern recognition technology that combines our patented software with our TouchPad, QuickStroke can recognize handwritten, partially finished Chinese characters, thereby saving considerable time and effort.

We believe our extensive intellectual property portfolio, our experience in providing interface solutions to major OEMs, and our proven track record of growth in our expanding core notebook computer interface business position us to be a key technological enabler for multiple applications in many fast-growing markets. Based on these strengths, we are addressing the opportunities created by the growth of a new class of mobile computing and communications devices, which we call information appliances, or “iAppliances.” These iAppliances include personal digital assistants, or PDAs, and smart phones as well as a variety of mobile, handheld, wireless, and Internet devices. We believe our existing technologies, our new product solutions, and our emphasis on ease of use, small size, low power consumption, advanced functionality, durability, and reliability will enable us to penetrate the markets for iAppliances. We have not yet, however, penetrated these markets in a manner that has resulted in significant revenue to us.

Our user interface solutions for the evolving iAppliance markets include ClearPad(TM) and Spiral(TM) in addition to our TouchPad. Our ClearPad touch screen solution is a thin sensor that can be placed over any surface, including display devices, such as liquid crystal displays, or LCDs. The ClearPad is a lightweight,

low power consumption solution, and its flexible design allows it to be mounted on curved surfaces. ClearPad is an extension of our capacitive TouchPad technologies. Unlike standard resistive touch screens, ClearPad eliminates the need for an internal air gap, which causes internal reflections and their associated adverse impact on display quality. This performance advantage makes ClearPad an excellent solution for devices with color displays or for use outdoors. Our Spiral is a thin, lightweight, low power consumption, inductive pen-sensing system. The Spiral sensor lies behind an LCD screen, effectively permitting 100% light transmissivity and lower overall power consumption resulting from reduced backlighting requirements. Spiral uses a patented inductive coupling technology that offers the unique feature of proximity sensing to measure the position of the pen relative to the pen-based device.

We have demonstrated ClearPad at trade shows for the notebook computer market and are providing samples to a customer in anticipation of the shipment of units for production in the March 2002 quarter. We are currently supplying iAppliance OEMs with TouchPads. We also plan to introduce ClearPad and Spiral solutions for the iAppliance markets. ClearPad and Spiral are available in prototype for design into iAppliances. We have devoted considerable resources to develop our iAppliance solutions. In the second quarter of fiscal 2000, we acquired for $3.1 million Absolute Sensors Limited, which initiated the development of the inductive pen-sensing technology used in Spiral. Apart from this acquisition, we expended approximately $2.5 million and $4.8 million in fiscal 2000 and fiscal 2001 for research and development relating to Spiral and other technologies associated with the iAppliance markets, which represents approximately 30% and 41% of our total research and development expenditures during those fiscal years. There can be no assurance that our user interface solutions for the iAppliance markets will gain market acceptance or will result in meaningful revenue to us. The failure to succeed in these markets would result in no return on the substantial investments we have made to date and plan to make in the future to penetrate these markets.

Our Opportunity

We believe our company is well positioned to benefit from the continuing growth in the notebook computer market as well as the growth that is occurring in the iAppliance markets.

Technological Leadership. We have developed and own an extensive array of application specific integrated circuits, or ASICs, firmware, software, and pattern recognition and touch sensing technologies, which provide us with significant competitive advantages. Our intellectual property includes 58 patents issued and 25 patents pending. We conduct ongoing research, development, and engineering programs that concentrate on advancing our technologies and expanding them to serve new markets, enhancing the quality and performance of our product solutions, and developing new product solutions. Our technology and engineering know-how enable us to develop innovative, intuitive, user-friendly interfaces that address the needs of our customers and improve their competitive positions. Our vision is to develop interface solutions that integrate touch, handwriting, voice, and vision capabilities that can be readily incorporated into various electronic devices.

Expanding Market Leadership. We believe significant growth potential exists in our core notebook computer interface market. The market for notebook computer interfaces continues to grow as businesses are increasingly replacing desktop computers with notebooks. International Data Corporation, or IDC, forecasts a compound annual growth rate, or CAGR, of 12.1% for notebook computers during the period from 2001 (based on estimated units shipped) to 2005 compared to 8.1% for desktop computers during the same period. In addition, our TouchStyk will enable us to address the approximately 29% of the notebook computer market that utilizes pointing sticks as the sole interface; new TouchPad offerings will provide us with the opportunity to expand our leadership in the approximately 55% of the notebook computer market that utilizes touch pads as the sole interface; and our dual pointing solutions will enable us to serve that expanding portion of the market.

Significant iAppliance Opportunity. We believe our interface solutions address the need for portability, connectivity, and functionality demanded by manufacturers and end users in the rapidly growing iAppliance markets. Our cost-effective solutions are intended to offer ease of use, low power

consumption, a small form factor, high reliability, and durability and foster larger and clearer-resolution display screens. We believe these characteristics will become increasingly important to those iAppliances that allow for information access, management, and exchange anywhere and anytime, and will facilitate our penetration into those markets.

Marquee Global Customer Base. Our customers include the world’s ten largest notebook computer OEMs. We expect that our long-standing relationships with many of these customers, as well as our relationships with consumer electronic manufacturers, should support our efforts to supply them with interfaces for the iAppliances that a number of those manufacturers are developing. We provide worldwide customer sales and support from our offices in the United States, the United Kingdom, China, Hong Kong, Taiwan, and Thailand.

Our Strategy

Our objective is to expand our position as the world’s leading supplier of interface solutions for the notebook computer market and to become a leading supplier of interface solutions for the evolving high-growth iAppliance markets. Key elements of our strategy to achieve this objective include the following:


	•	continue to pursue research and development in order to enhance our technological leadership, develop new technologies, extend the functionality of our product solutions, and offer innovative product solutions to our customers;

	•	enhance our leadership in the notebook interface market by continuing to introduce market-leading interface solutions in terms of performance, features, size, and ease of use; address the pointing stick and expanding dual pointing segments of the notebook interface market; and expand our business with several OEMs;

	•	capitalize on the evolution and growth of the worldwide iAppliance markets;

	•	emphasize and expand our strong and long-lasting customer relationships and continue to provide the most advanced interface solutions for our customers’ products;

	•	develop strategic relationships and pursue strategic acquisitions to enhance our research and development capabilities, leverage our technology, introduce new value-added customer solutions, and enter new markets; and

	•	conduct virtual manufacturing in which we outsource our production requirements to third parties to provide a scalable business model; enable us to focus on our core competencies of research and development, technological advances, and product solution design; and reduce our capital expenditures and inventory requirements.

Our Offices

We maintain our principal executive offices at 2381 Bering Drive, San Jose, California 95131, and our telephone number is (408) 434-0110. Our Website is located at http://www.synaptics.com. The information contained at our Website does not constitute part of this prospectus.

Recent Events

Our net revenue is expected to be $26.4 million for the three months ended December 31, 2001 compared to $18.4 million for the three months ended December 31, 2000, an increase of 43.2%. Gross margin is expected to be $11.0 million, or 41.8% of net revenue, for the three months ended December 31, 2001 compared to $5.3 million, or 28.5% of net revenue, for the three months ended December 31, 2000. We expect operating income to be $4.3 million for the three months ended December 31, 2001 compared to an operating loss of $214,000 for the three months ended December 31, 2000. Finally, we expect to report net income of $2.8 million for the three months ended December 31, 2001 compared to a net loss of $184,000 for the three months ended December 31, 2000. Our cash and cash equivalents were $10.6 million at December 31, 2001 compared to $3.8 million at June 30, 2001.

The Offering


Common stock offered		5,000,000 shares


Common stock to be outstanding after this offering		22,782,052 shares


Use of proceeds		We intend to use the proceeds from this offering to expand sales and marketing activities, for strategic relationships and acquisitions, and for working capital and general corporate purposes. See “Use of Proceeds.”

Proposed Nasdaq National Market Symbol		SYNA

The number of shares of common stock to be outstanding after this offering is based upon our outstanding shares as of September 30, 2001, assuming the exercise of a warrant to purchase 32,000 shares of our Series E preferred stock and the conversion of our outstanding preferred stock into common stock. These shares exclude 4,205,995 shares of common stock issuable upon the exercise of outstanding stock options at September 30, 2001 with a weighted average exercise price of $3.30 per share, of which 296,866 shares were issued pursuant to options that have been exercised since September 30, 2001, and 1,033,244 shares reserved for future grants under our stock option plans at September 30, 2001. These shares also exclude up to 37,500 shares issuable in connection with an acquisition completed in fiscal 2000.

Except when otherwise indicated, the information in this prospectus


	•	gives effect to a change-of-domicile merger in which we will be reincorporated in Delaware;

	•	assumes the exercise of a warrant to purchase 32,000 of our Series E preferred stock prior to the closing of this offering;

	•	assumes the automatic conversion of all of our preferred stock into 11,105,517 shares of our common stock prior to the closing of this offering; and

	•	assumes no exercise by the underwriters of their option to purchase additional shares of stock from the selling stockholders to cover over-allotments, if any.

All references to “we,” “us,” “our,” “Synaptics,” or “the company” in this prospectus mean Synaptics Incorporated and all entities owned or controlled by Synaptics Incorporated, except where it is clear that the term means only the parent company.

TouchPad(TM), TouchStyk(TM), ClearPad(TM), and Spiral(TM) are trademarks of Synaptics, and QuickStroke® is a registered trademark of Synaptics. All other trademarks, service marks, and trade names referred to in this prospectus are the property of their respective owners. As used in this prospectus, the terms “iAppliance” and “iAppliance markets” refer to a class of mobile computing and communication devices that include PDAs, smart phones, and a variety of mobile, handheld, wireless, and Internet devices, and the markets for those products. The term iAppliance is not a trademark, service mark, or trade name of our company, and these devices are referred to by others in a variety of ways, including Internet devices, smart handheld devices, digital appliances, information appliances, and Internet or net appliances.

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table sets forth our summary historical consolidated financial data. You should read this information in conjunction with our consolidated financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The financial data as of September 30, 2001 and for the three months ended September 30, 2000 and 2001 are derived from financial statements that are unaudited.



									Three Months Ended
		Years Ended June 30,							September 30,

		1999		2000			2001*		2000			2001


									(unaudited)

		(in thousands, except for share and per share data)




Consolidated Statement of Operations Data:




Net revenue		$	29,842	$	43,447		$	73,698	$	13,988		$	23,569




Cost of revenue(1)			17,824		25,652			50,811		8,959			14,607

Gross margin			12,018		17,795			22,887		5,029			8,962




Operating expenses:




	Research and development(1)		4,851		8,386			11,590		2,792			3,691




	Selling, general, and administrative(1)		5,534		7,407			9,106		1,961			2,674




	Acquired in-process research and development		—		855			—		—			—




	Amortization of goodwill and other acquired intangible assets		—		605			784		197			13




	Amortization of deferred stock compensation		—		82			597		154			121

Total operating expenses			10,385		17,335			22,077		5,104			6,499

Operating income (loss)			1,633		460			810		(75	)		2,463




Interest income (expense), net			334		365			180		102			(31	)

Income before income taxes and equity losses			1,967		825			990		27			2,432




Provision for income taxes			40		120			180		26			845




Equity in losses of an affiliated company			—		(2,712	)		—		—			—

Net income (loss)		$	1,927	$	(2,007	)	$	810	$	1		$	1,587

Net income (loss) per share:




	Basic	$	0.46	$	(0.38	)	$	0.13	$	**		$	0.24

	Diluted	$	0.12	$	(0.38	)	$	0.04	$	**		$	0.08

Shares used in computing net income (loss) per share:




	Basic		4,147,159		5,222,738			6,133,866		5,769,262			6,623,353

	Diluted		15,897,146		5,222,738			19,879,491		18,654,042			20,362,095

Pro forma net income per share:




	Basic						$	0.05				$	0.09

	Diluted						$	0.04				$	0.08

Shares used in computing pro forma net income per share:




	Basic							17,207,403					17,696,870

	Diluted							19,879,491					20,362,095


*	Fiscal year ended June 30, 2001 consisted of 53 weeks.


	**	Less than $0.01 per share.

(1)

Cost of revenue excludes $23,000, $2,000, and $7,000 of amortization of deferred stock compensation for the year ended June 30, 2001 and the three months ended September 30, 2000 and 2001, respectively. Research and development expense excludes $162,000, $10,000, and $49,000 of amortization of deferred stock compensation for the year ended June 30, 2001 and the three months ended September 30, 2000 and 2001, respectively. Selling, general, and administrative expense excludes $82,000, $412,000, $142,000, and $65,000 of amortization of deferred stock compensation for the years ended June 30, 2000 and 2001 and the three months ended September 30, 2000 and 2001, respectively. These amounts have been aggregated and reflected as “Amortization of deferred stock compensation.”



	September 30, 2001

	Actual		As Adjusted


	(unaudited)

	(in thousands)




Consolidated Balance Sheet Data:




Cash and cash equivalents	$	5,475	$	50,455




Working capital		14,334		59,314




Total assets		27,504		72,484




Long-term debt, capital leases, and equipment financing obligations, less current portion		1,708		1,708




Total stockholders’ equity		15,572		60,552

The as adjusted consolidated balance sheet data gives effect to the following:


	•	the assumed exercise of a warrant to purchase 32,000 shares of our Series E preferred stock prior to the closing of this offering;

	•	the conversion into common stock of our outstanding preferred stock prior to the closing of this offering; and

	•	the sale of 5,000,000 shares of common stock to be sold in this offering at an assumed initial public offering price of $10.00 per share, less underwriting discounts and commissions and other estimated offering expenses.

We calculated basic net income per common share and basic and diluted net loss per common share by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period, less weighted shares subject to repurchase. Diluted net income per common share also includes the effect of potentially dilutive securities, including stock options, warrants, and convertible preferred stock, when dilutive.

We calculated pro forma net income per common share, basic and diluted, using the weighted average number of common shares described above and also assumed the conversion of all outstanding shares of preferred stock into common stock as if the shares had converted immediately upon issuance.

RISK FACTORS

Before you invest in our common stock, you should be aware that there are risks, including those set forth below. You should carefully consider these risk factors, together with all the other information included in this prospectus, before you decide to purchase shares of our common stock.

Risks Related to our Business

We depend on one product family, TouchPads, and one market, notebook computers, for our revenue, and a downturn in this product or market could have a more disproportionate impact on our revenue than if we were more diversified.

Historically, we have derived substantially all of our revenue from the sale of our TouchPads for notebook computers. Our new TouchStyk product solution also addresses the notebook computer market. The personal computer, or PC, market as a whole recently has experienced a slowdown in growth. While our long-term objective is to derive revenue from multiple interface solutions for both the notebook computer market and the iAppliance markets, we anticipate that sales of our TouchPads and TouchStyks for notebooks will continue to represent the most substantial portion of our revenue, at least in the near term. Although our revenue has continued to expand during the recent decline in demand for notebook computers as a result of an increase in our market share and the accelerating use of dual pointing solutions, we do not know whether we will be able to sustain or continue to increase our market share, that the use of dual pointing solutions will continue to expand, or that the notebook computer market will not continue to soften. As a result, a continuing or accelerating softening in the demand in the notebook portion of the PC market or the level of our participation in that market would cause our business, financial condition, and results of operations to suffer more than they would have if we offered a more diversified line of products.

Our emerging iAppliance interface business may not be successful.

Our emerging iAppliance interface business, from which we expect to derive substantial revenue in the future, faces many uncertainties. Our inability to address these uncertainties successfully and to become a leading supplier of interfaces to the iAppliance markets would result in a slower growth rate than we currently anticipate. We have not yet penetrated the iAppliance markets in a manner that has resulted in meaningful revenue to us. We do not know whether our user interface solutions for the iAppliance markets will gain market acceptance or will ever result in meaningful revenue to us. The failure to succeed in these markets would result in no return on the substantial investments we have made to date and plan to make in the future to penetrate these markets.

Various target markets for our iAppliance interfaces, such as those for PDAs, smart phones, smart handheld devices, Web terminals, Internet appliances, and interactive games and toys, are uncertain, may develop slower than anticipated, or could utilize competing technologies. The market for these products depends in part upon the development and deployment of wireless and other technologies, which may or may not address the needs of users of these new products.

Our ability to generate significant revenue from the iAppliance markets will depend on various factors, including the following:


	•	the development and growth of these markets;

	•	the ability of our technologies and product solutions to address the needs of these markets, the requirements of OEMs, and the preferences of end users; and

	•	our ability to provide OEMs with interface solutions that provide advantages in terms of size, power consumption, reliability, durability, performance, and value-added features compared to alternative solutions.

Many manufacturers of these products have well-established relationships with competitive suppliers. Penetrating these markets will require us to offer better performance alternatives to existing solutions at competitive costs. We do not have any significant backlog of orders for our interface solutions to be incorporated in products in these markets. The revenue and income potential from these markets is unproven. The failure of any of these target markets to develop as we expect, or our failure to penetrate these markets, will impede our anticipated sales growth and could result in substantially reduced earnings from those we anticipate. We cannot predict the size or growth rate of these markets or the market share of these markets that we will achieve.

If our emerging TouchStyk, ClearPad, and Spiral solutions are not commercially accepted, our revenue growth will be negatively impacted.

Our emerging TouchStyk, ClearPad, and Spiral solutions have no established track record. The failure to incorporate these technologies successfully into our customers’ products as the interface of choice would adversely affect our revenue growth. To succeed, we must help potential customers recognize the performance advantages of our solutions. The ability to produce these new products in sufficient quantities and the revenue and income potential of our new solutions are unproven.

Our historical financial information is based on sales of interface solutions to the notebook computer market and may not be indicative of our future performance in the iAppliance markets.

Our historical financial information primarily reflects the sale of interface solutions for notebook computers. While we expect sales of our interface solutions for notebook computers to continue to generate a substantial percentage of our revenue, we expect to derive an increasing percentage of our revenue from sales of our product solutions for the iAppliance markets. We do not have an operating history in these markets upon which you can evaluate our prospects, which may make it difficult to predict our actual results in future periods. Actual results of our future operations may differ materially from our anticipated results.

The products of our customers may not achieve market acceptance, particularly in the case of iAppliances, and our sales will decline if sales of those products do not develop or decline.

We do not sell any products to end users. Instead, we design various interface solutions that our OEM customers incorporate into their products. As a result, our success depends almost entirely upon the widespread market acceptance of our customers’ products, many of which are just emerging, particularly in the case of iAppliances. We do not control or influence the manufacture, promotion, distribution, or pricing of the products that incorporate our interface solutions. Instead, we depend on our customers to manufacture and distribute products and to generate consumer demand through marketing and promotional activities. Even if our technologies successfully meet our customers’ price and performance goals, our sales would decline or fail to develop if our customers do not achieve commercial success in selling their products that incorporate our interface solutions.

Our current customer base consists primarily of major U.S.-based OEMs that sell notebook computers worldwide. Competitive advances by Japan-based OEMs at the expense of U.S.-based OEMs could result in lost sales opportunities for our customers. Any significant slowdown in the demand for our customers’ products or the failure in the marketplace of new products of our customers would adversely affect the demand for our interface solutions and our future sales would decline.

If we fail to maintain and build relationships with our customers and do not continue to satisfy our customers, we may lose future sales and our revenue may stagnate or decline.

Because our success depends on the widespread market acceptance of our customers’ products, we must continue to maintain our relationships with the leading notebook computer OEMs. In addition, we must identify areas of significant growth potential in the emerging iAppliance markets, establish relationships with OEMs in those markets, and assist those OEMs in developing products that use our interface technologies.

Our failure to identify potential growth opportunities, particularly in the iAppliance markets, or establish and maintain relationships with OEMs in those markets, would prevent our business from growing in those markets.

Our ability to meet the expectations of our customers requires us to provide innovative interface solutions for customers on a timely and cost-effective basis and to maintain customer satisfaction with our interface solutions. We must match our design and production capacity with customer demand, maintain satisfactory delivery schedules, and meet performance goals. If we are unable to achieve these goals for any reason, our customers could reduce their purchases from us and our sales would decline or fail to develop.

Our customer relationships also can be affected by factors affecting our customers that are unrelated to our performance. These factors can include a myriad of situations, including business reversals of customers, determinations by customers to change their product mix or abandon business segments, or mergers, consolidations, or acquisitions involving our customers, such as the proposed combination of operations announced by Compaq and Hewlett-Packard.

We relied on two companies in fiscal 2001 for an aggregate of 43% of our sales and the loss of sales to either of those companies could harm our business, financial condition, and results of operations.

Sales to two companies that provide manufacturing services for major notebook computer OEMs accounted for 32% and 11% of our net revenue during the fiscal year ended June 30, 2001, and four companies accounted for 24%, 13%, 13%, and 12% of our net revenue for the fiscal year ended June 30, 2000. These companies are Quanta and Nypro in fiscal 2001 and Quanta, Arima, Inventec, and Compal in fiscal 2000. Additionally, receivables from Quanta and Nypro comprised 37% and 13% of our accounts receivable at June 30, 2001.

These contract manufacturers serve our OEM customers. Any material delay, cancellation, or reduction of orders from any one or more of these contract manufacturers or the OEMs they serve could harm our business, financial condition, and results of operations. The adverse effect would be more substantial if our other customers in the notebook computer industry do not increase their orders or if we are unsuccessful in generating orders for iAppliance interface solutions from existing or new customers. Many of these contract manufacturers sell to the same OEMs, and therefore our concentration with certain OEMs may be higher than with any individual contract manufacturer. Concentration in our customer base may make fluctuations in revenue and earnings more severe and make business planning more difficult.

Our revenue may decline if customers for which we are sole source providers seek alternative sources of supply.

We serve as the sole source provider for many of our customers. Those customers may choose to reduce their dependence on us by seeking second sources of supply, which could reduce our revenue. To remain a sole source provider, we must continue to demonstrate to our customers that we have adequate alternate sources for components, that we maintain adequate alternatives for production, and that we can deliver our products on a timely basis.

We rely on others for our production, and any interruptions of these arrangements could disrupt our ability to fill our customers’ orders.

We contract for all of our production requirements. The majority of our manufacturing is conducted in China, Thailand, and Taiwan by manufacturing subcontractors that also perform services for numerous other companies. We do not have a guaranteed level of production capacity. Qualifying new manufacturing subcontractors, and specifically semiconductor foundries, is time-consuming and might result in unforeseen manufacturing and operations problems. The loss of our relationships with our manufacturing subcontractors or assemblers or their inability to conduct their manufacturing and assembly services for us as anticipated in terms of cost, quality, and timeliness could adversely affect our ability to fill customer

orders in accordance with required delivery, quality, and performance requirements. If this were to occur, the resulting decline in revenue would harm our business.

We depend on third parties to maintain satisfactory manufacturing yields and delivery schedules, and their inability to do so could increase our costs, disrupt our supply chain, and result in our inability to deliver our products, which would adversely affect our results of operations.

We depend on our manufacturing subcontractors to maintain high levels of productivity and satisfactory delivery schedules at manufacturing and assembly facilities in China, Thailand, and Taiwan. We provide our manufacturing subcontractors with six-month rolling forecasts of our production requirements. We do not, however, have long-term agreements with any of our manufacturing subcontractors that guarantee production capacity, prices, lead times, or delivery schedules. Our manufacturers serve many other customers, a number of which have greater production requirements than we do. As a result, our manufacturing subcontractors could determine to prioritize production capacity for other customers or reduce or eliminate deliveries to us on short notice. At times, we have experienced lower than anticipated manufacturing yields and lengthening of delivery schedules. Lower than expected manufacturing yields could increase our costs or disrupt our supplies. We may encounter lower manufacturing yields and longer delivery schedules in commencing volume production of our new products. Any of these problems could result in our inability to deliver our product solutions in a timely manner and adversely affect our operating results.

Shortages of components and materials may delay or reduce our sales and increase our costs, thereby harming our results of operations.

The inability to obtain sufficient quantities of components and other materials necessary for the production of our products could result in reduced or delayed sales or lost orders. Any delay in or loss of sales could adversely impact our operating results. Many of the materials used in the production of our products are available only from a limited number of foreign suppliers, particularly suppliers located in Asia. In most cases, neither we nor our manufacturing subcontractors have long-term supply contracts with these suppliers. As a result, we are subject to economic instability in these Asian countries as well as to increased costs, supply interruptions, and difficulties in obtaining materials. Our customers also may encounter difficulties or increased costs in obtaining the materials necessary to produce their products into which our product solutions are incorporated.

From time to time, materials and components used in our product solutions or in other aspects of our customers’ products have been subject to allocation because of shortages of these materials and components. During portions of fiscal 2000 and 2001, limited manufacturing capacity for ASICs resulted in significant cost increases of our ASICs. Similar shortages in the future could cause delayed shipments, customer dissatisfaction, and lower revenue.

We are subject to lengthy development periods and product acceptance cycles, which can result in development and engineering costs without any future revenue.

We provide interface solutions that are incorporated by OEMs into the products they sell. OEMs make the determination during their product development programs whether to incorporate our interface solutions or pursue other alternatives. This process requires us to make significant investments of time and resources in the custom design of interface solutions well before our customers introduce their products incorporating these interfaces and before we can be sure that we will generate any significant sales to our customers or even recover our investment. During a customer’s entire product development process, we face the risk that our interfaces will fail to meet our customer’s technical, performance, or cost requirements or that our products will be replaced by a competitive product or alternative technological solutions. Even if we complete our design process in a manner satisfactory to our customer, the customer may delay or terminate its product development efforts. The occurrence of any of these events could cause sales to be deferred or to be cancelled, which would adversely affect our operating results for that period.

We do not have long-term purchase commitments from our customers, and their ability to cancel, reduce, or delay an order could reduce our revenue and increase our costs.

Our customers do not provide us with firm, long-term volume purchase commitments. As a result, customers can cancel purchase commitments or reduce or delay orders at any time. The cancellation, delay, or reduction of customer commitments could result in reduced revenue, excess inventory, and unabsorbed overhead. Substantially all of our sales to date have been in the notebook computer market, and we expect an increasing portion of our sales will be in the emerging iAppliance markets. All of these markets are subject to severe competitive pressures, rapid technological change, and product obsolescence, which increase our inventory and overhead risks resulting in increased costs.

We face intense competition that could result in our losing or failing to gain market share and suffering reduced revenue.

We serve intensely competitive markets that are characterized by price erosion, rapid technological change, and competition from major domestic and international companies. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share. Some of our competitors, particularly in the iAppliance markets, have greater market recognition, larger customer bases, and substantially greater financial, technical, marketing, distribution, and other resources than we possess and that afford them competitive advantages. As a result, they may be able to devote greater resources to the promotion and sale of products, to negotiate lower prices on raw materials and components, to deliver competitive products at lower prices, and to introduce new product solutions and respond to customer requirements more quickly than we can. Our competitive position could suffer if one or more of our customers decide to design and manufacture their own interfaces, to contract with our competitors, or to use alternative technologies.

Our ability to compete successfully depends on a number of factors, both within and outside our control. These factors include the following:


	•	our success in designing and introducing new interface solutions, including those implementing new technologies;

	•	our ability to predict the evolving needs of our customers and to assist them in incorporating our technologies into their new products;

	•	our ability to meet our customer’s requirements for low power consumption, ease of use, reliability, durability, and small form factor;

	•	the quality of our customer services;

	•	the rate at which customers incorporate our interface solutions into their own products;

	•	product or technology introductions by our competitors; and

	•	foreign currency fluctuations, which may cause a foreign competitor’s products to be priced significantly lower than our product solutions.

If we do not keep pace with technological innovations, our products may not be competitive and our revenue and operating results may suffer.

We operate in rapidly changing markets. Technological advances, the introduction of new products, and new design techniques could adversely affect our business unless we are able to adapt to the changing conditions. Technological advances could render our solutions obsolete, and we may not be able to respond effectively to the technological requirements of evolving markets. As a result, we will be required to expend substantial funds for and commit significant resources to


	•	continue research and development activities on existing and potential interface solutions;

	•	hire additional engineering and other technical personnel; and

	•	purchase advanced design tools and test equipment.

Our business could be harmed if we are unable to develop and utilize new technologies that address the needs of our customers, or our competitors or customers do so more effectively than we do.

Our efforts to develop new technologies may not result in commercial success, which could cause a decline in our revenue and could harm our business.

Our research and development efforts with respect to new technologies may not result in customer or market acceptance. Some or all of those technologies may not successfully make the transition from the research and development lab to cost-effective production as a result of technology problems, competitive cost issues, yield problems, and other factors. Even when we successfully complete a research and development effort with respect to a particular technology, our customers may decide not to introduce or may terminate products utilizing the technology for a variety of reasons, including the following:


	•	difficulties with other suppliers of components for the products;

	•	superior technologies developed by our competitors and unfavorable comparisons of our solutions with these technologies;

	•	price considerations; and

	•	lack of anticipated or actual market demand for the products.

The nature of our business requires us to make continuing investments for new technologies. To facilitate the development of our inductive technology, we completed the acquisition of Absolute Sensors Limited during fiscal 2000. We may be required to make similar acquisitions and other investments in the future to maintain or enhance our ability to offer technological solutions.

Significant expenses relating to one or more new technologies that ultimately prove to be unsuccessful for any reason could have a material adverse effect on us. In addition, any investments or acquisitions made to enhance our technologies may prove to be unsuccessful. If our efforts are unsuccessful, our business could be harmed.

We may not be able to enhance our existing product solutions and develop new product solutions in a timely manner.

Our future operating results will depend to a significant extent on our ability to continue to provide new interface solutions that compare favorably with alternative solutions on the basis of time to introduction, cost, and performance. Our success in maintaining existing and attracting new customers and developing new business depends on various factors, including the following:


	•	innovative development of new solutions for customer products;

	•	utilization of advances in technology;

	•	maintenance of quality standards;

	•	efficient and cost-effective services; and

	•	timely completion of the design and introduction of new interface solutions.

Our inability to enhance our existing product solutions and develop new product solutions on a timely basis could harm our operating results and impede our growth.

A technologically new interface solution that achieves significant market share could harm our business.

Our interface solutions are designed to integrate touch, handwriting, and vision capabilities. New computing and communications devices could be developed that call for a different interface solution. Existing devices also could be modified to allow for a different interface solution. Our business could be harmed if our products become noncompetitive as a result of a technological breakthrough that allows a new interface solution to displace our solutions and achieve significant market acceptance.

International sales and manufacturing risks could adversely affect our operating results.

Our manufacturing and assembly operations are conducted in China, Thailand, and Taiwan, and we have subsidiaries in Taiwan and the United Kingdom. These international operations expose us to various economic, political, and other risks that could adversely affect our operations and operating results, including the following:


	•	difficulties and costs of staffing and managing a multi-national organization;

	•	unexpected changes in regulatory requirements;

	•	differing labor regulations;

	•	potentially adverse tax consequences;

	•	tariffs and duties and other trade barrier restrictions;

	•	possible employee turnover or labor unrest;

	•	greater difficulty in collecting accounts receivable;

	•	the burdens and costs of compliance with a variety of foreign laws;

	•	potentially reduced protection for intellectual property rights; and

	•	political or economic instability in certain parts of the world.

Sales to Taiwan-based contract manufacturers for OEMs based in the United States account for a significant percentage of our net sales. In fiscal 2001, sales to Taiwan-based contract manufacturers for U.S.-based OEMs alone accounted for 80% of our net sales. In the future, we expect sales to contract manufacturers for OEMs based in Europe and Japan to increase. The risks associated with international operations could negatively affect our operating results.

Our business may suffer if international trade is hindered, disrupted, or economically disadvantaged.

Political and economic conditions abroad may adversely affect the foreign production and sale of our products. Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export or import compliance laws, or other trade policies, could adversely affect our ability to sell interface solutions in foreign markets and to obtain materials or equipment from foreign suppliers.

Changes in policies by the U.S. or foreign governments resulting in, among other things, higher taxation, currency conversion limitations, restrictions on the transfer of funds, or the expropriation of private enterprises also could have a material adverse effect on us. Any actions by countries in which we conduct business to reverse policies that encourage foreign investment or foreign trade also could adversely affect our operating results. In addition, U.S. trade policies, such as “most favored nation” status and trade preferences for certain Asian nations, could affect the attractiveness of our services to our U.S. customers and adversely impact our operating results.

Our operating results could be adversely affected by fluctuations in the value of the U.S. dollar against foreign currencies.

We transact business predominantly in U.S. dollars and bill and collect our sales in U.S. dollars. A weakening of the dollar could cause our overseas vendors to require renegotiation of the prices we pay for their goods and services. In the future, customers may make payments in non-U.S. currencies. In addition, a portion of our costs, such as payroll, rent, and indirect operating costs, are denominated in non-U.S. currencies, including British pounds and Taiwan dollars.

Fluctuations in foreign currency exchange rates could affect our cost of goods and operating margins and could result in exchange losses. In addition, currency devaluation can result in a loss to us if we hold

deposits of that currency. Hedging foreign currencies can be difficult, especially if the currency is not freely traded. We cannot predict the impact of future exchange rate fluctuations on our operating results.

A majority of our outsourced operations are located in Taiwan, increasing the risk that a natural disaster, labor strike, war, or political unrest in that country would disrupt our operations.

A majority of our outsourced operations are located in Taiwan. Events out of our control, such as earthquakes, fires, floods, or other natural disasters in Taiwan or political unrest, war, labor strikes, or work stoppages in Taiwan, would disrupt our operations. The risk of earthquakes in Taiwan is significant because of its proximity to major earthquake fault lines. An earthquake, such as the one that occurred in Taiwan in September 1999, could cause significant delays in shipments of our product solutions until we are able to shift our outsourced operations. In addition, there is currently significant political tension between Taiwan and China, which could lead to hostilities. If any of these events occur, we may not be able to obtain alternative capacity. Failure to secure alternative capacity could cause a delay in the shipment of our product solutions, which would cause our revenue to fluctuate or decline.

Variability of customer requirements resulting in cancellations, reductions, or delays may adversely affect our operating results.

OEM suppliers must provide increasingly rapid product turnaround and respond to ever-shorter lead times. A variety of conditions, both specific to individual customers and generally affecting the demand for their products, may cause customers to cancel, reduce, or delay orders. Cancellations, reductions, or delays by a significant customer or by a group of customers could adversely affect our operating results. On occasion, customers require rapid increases in production, which can strain our resources and reduce our margins. Although we have been able to obtain increased production capacity from our third-party manufacturers, we may be unable to do so at any given time to meet our customers’ demands if their demands exceed anticipated levels.

Our operating results may experience significant fluctuations that could result in a decline of the price of our stock.

In addition to the variability resulting from the short-term nature of our customers’ commitments, other factors contribute to significant periodic and seasonal quarterly fluctuations in our results of operations. These factors include the following:


	•	the cyclicality of the markets we serve;

	•	the timing and size of orders;

	•	the volume of orders relative to our capacity;

	•	product introductions and market acceptance of new products or new generations of products;

	•	evolution in the life cycles of our customers’ products;

	•	timing of expenses in anticipation of future orders;

	•	changes in product mix;

	•	availability of manufacturing and assembly services;

	•	changes in cost and availability of labor and components;

	•	timely delivery of product solutions to customers;

	•	pricing and availability of competitive products;

	•	pressures on gross margins; and

	•	changes in economic conditions.

Accordingly, you should not rely on period-to-period comparisons as an indicator of our future performance. Fluctuations in our operating results may result in a decline in the price of our stock.

If we fail to effectively manage our growth, our infrastructure, management, and resources could be strained, our ability to effectively manage our business could be diminished, and our operating results could suffer.

The failure to manage our growth effectively could strain our resources, which would impede our ability to increase revenue. We have increased the number of our interface solutions and plan to expand further the number and diversity of our solutions and their use in the future. Our ability to manage our planned growth effectively will require us to


	•	successfully hire, train, retain, and motivate additional employees;

	•	enhance our operational, financial, and management systems; and

	•	expand our production capacity.

As we expand and diversify our product and customer base, we may be required to increase our overhead and selling expenses. We also may be required to increase staffing and other expenditures, including expenses in order to meet the anticipated demand of our customers. Our customers, however, do not commit to firm production schedules for more than a short time in advance. Any increase in expenses in anticipation of future orders that do not materialize would adversely affect our profitability. Our customers also may require rapid increases in design and production services that place an excessive short-term burden on our resources and the resources of our third-party manufacturers. If we cannot manage our growth effectively, our business and results of operations could suffer.

We depend on key personnel who would be difficult to replace and our business will likely be harmed if we lose their services or cannot hire additional qualified personnel.

Our success depends substantially on the efforts and abilities of our senior management and technical personnel. The competition for qualified management and technical personnel, especially engineers, is intense. Although we maintain noncompetition and nondisclosure covenants with most of our key personnel, we do not have employment agreements with any of them. The loss of services of one or more of our key employees or the inability to hire, train, and retain key personnel, especially engineers and technical support personnel, could delay the development and sale of our products, disrupt our business and interfere with our ability to execute our business plan.

Our inability to protect our intellectual property could impair our competitive advantage, reduce our revenue, and increase our costs.

Our success and ability to compete depend in part on our ability to maintain the proprietary aspects of our technologies and products. We rely on a combination of patents, copyrights, trade secrets, trademarks, confidentiality agreements, and other contractual provisions to protect our intellectual property, but these measures may provide only limited protection. We license from third parties certain technology used in and for our products. These third-party licenses are granted with restrictions, and there can be no assurances that such third-party technology will remain available to us on terms beneficial to us. Our failure to enforce and protect our intellectual property rights or obtain from third parties the right to use necessary technology could have a material adverse effect on our business, financial condition, and results of operations. In addition, the laws of some foreign countries do not protect proprietary rights as fully as do the laws of the United States.

There can be no assurances that we will obtain registrations of principle or other trademarks in key markets. Failure to obtain registrations could compromise our ability to protect fully our trademarks and brands and could increase the risk of challenge from third parties to our use of our trademarks and brands.

We do not consistently rely on written agreements with our customers, suppliers, manufacturers and other recipients of our technologies and products, and therefore some trade secret protection may be lost and our ability to enforce our intellectual property rights may be limited. Additionally, our customers, suppliers, manufacturers, and other recipients of our technologies and products may seek to use our technologies and products without appropriate limitations. In the past, we did not consistently require our employees and consultants to enter into confidentiality agreements, employment agreements, or proprietary information and invention agreements. Therefore, our former employees and consultants may try to claim some ownership interest in our technologies and products and may use our technologies and products competitively and without appropriate limitations.

We may be required to incur substantial expenses and divert management attention and resources in defending intellectual property litigation against us.

We may receive notices from third parties that claim our products infringe their rights. From time to time, we receive notice from third parties of the intellectual property rights such parties have obtained. We cannot be certain that our technologies and products do not and will not infringe issued patents or other proprietary rights of others. While we are not currently subject to any infringement claim, any future claim, with or without merit, could result in significant litigation costs and diversion of resources, including the attention of management, and could require us to enter into royalty and licensing agreements, all of which could have a material adverse effect on our business. There can be no assurance that such licenses could be obtained on commercially reasonable terms, if at all, or that the terms of any offered licenses would be acceptable to us. If forced to cease using such technology, there can be no assurance that we would be able to develop or obtain alternate technology. Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing, using, or selling certain of our products, which could have a material adverse effect on our business, financial condition, and results of operations.

Furthermore, parties making such claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to make, use, or sell our products in the United States or abroad. Such a judgment would have a material adverse effect on our business, financial condition, and results of operations. In addition, we are obligated under certain agreements to indemnify the other party in connection with infringement by us of the proprietary rights of third parties. In the event we are required to indemnify parties under these agreements, it could have a material adverse effect on our business, financial condition, and results of operations.

We may incur substantial expenses and divert management resources in prosecuting others for their unauthorized use of our intellectual property rights.

The markets in which we compete are characterized by frequent litigation regarding patents and other intellectual property rights. Other companies, including our competitors, may develop technologies that are similar or superior to our technologies, duplicate our technologies, or design around our patents and may have or obtain patents or other proprietary rights that would prevent, limit, or interfere with our ability to make, use, or sell our products. Effective intellectual property protection may be unavailable or limited in some foreign countries, such as China and Taiwan, in which we operate. Unauthorized parties may attempt to copy or otherwise use aspects of our technologies and products that we regard as proprietary. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop similar technologies. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market for our technologies and products.

Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions because if we fail to enforce and protect our intellectual property rights, our business would be harmed. Even if the outcome is favorable, this proceeding could result in substantial cost to us and disrupt our business.

In the future, we also may need to file lawsuits to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. This litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on our business, financial condition, and results of operations.

If we become subject to product returns and product liability claims resulting from defects in our products, we may fail to achieve market acceptance of our products and our business could be harmed.

We develop complex products in an evolving marketplace. Despite testing by us and our customers, defects may be found in existing or new products. In fiscal 2001, a manufacturing error of one of our manufacturing subcontractors was discovered. Although the error was promptly discovered without significant interruption of supply and the manufacturing subcontractor rectified the problem at its own cost, any such manufacturing errors or product defects could result in a delay in recognition or loss of revenue, loss of market share, or failure to achieve market acceptance. Additionally, these defects could result in financial or other damages to our customers; cause us to incur significant warranty, support, and repair costs; and divert the attention of our engineering personnel from our product development efforts. In such circumstances, our customers could also seek and obtain damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend. The occurrence of these problems would likely harm our business.

Potential strategic alliances may not achieve their objectives, and the failure to do so could impede our growth.

We anticipate that we will enter into various additional strategic alliances. Among other matters, we will explore strategic alliances designed to enhance or complement our technology or to work in conjunction with our technology; to provide necessary know-how, components, or supplies; and to develop, introduce, and distribute products utilizing our technology. Any strategic alliances may not achieve their intended objectives, and parties to our strategic alliances may not perform as contemplated. The failure of these alliances may impede our ability to introduce new products and enter new markets.

Any acquisitions that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value, and harm our operating results.

We expect to review opportunities to acquire other businesses or technologies that would complement our current interface solutions, expand the breadth of our markets, enhance our technical capabilities, or otherwise offer growth opportunities. While we have no current agreements or negotiations underway, we may acquire businesses, products, or technologies in the future. If we make any future acquisitions, we could issue stock that would dilute existing stockholders’ percentage ownership, incur substantial debt, or assume contingent liabilities. Our experience in acquiring other businesses and technologies is limited. Potential acquisitions also involve numerous risks, including the following:


	•	problems assimilating the purchased operations, technologies, or products;

	•	unanticipated costs associated with the acquisition;

	•	diversion of management’s attention from our core businesses;

	•	adverse effects on existing business relationships with suppliers and customers;

	•	risks associated with entering markets in which we have little or no prior experience; and

	•	potential loss of key employees of purchased organizations.

We cannot assure you that we would be successful in overcoming problems encountered in connection with any acquisitions, and our inability to do so could disrupt our operations and adversely affect our business.

The PC and electronics industries are cyclical and may result in fluctuations in our operating results and share price.

The PC and electronics industries have experienced significant economic downturns at various times, such as the downturn currently being experienced. These downturns are characterized by diminished product demand, accelerated erosion of average selling prices, and production over-capacity. In addition, the PC and electronics industries are cyclical in nature. We seek to reduce our exposure to industry downturns and cyclicality by providing design and production services for leading companies in rapidly expanding industry segments. We may, however, experience substantial period-to-period fluctuations in future operating results because of general industry conditions or events occurring in the general economy.

Legislation affecting the markets in which we compete could adversely affect our ability to implement our iAppliance strategy.

Our ability to expand our business may be adversely impacted by future laws or regulations. Our customers’ products may be subject to laws relating to communications, encryption technology, electronic commerce, e-signatures, and privacy. Any of these laws could be expensive to comply with, and the marketability of our products could be adversely affected.

We must finance the growth of our business and the development of new products, which could have an adverse effect on our operating results.

To remain competitive, we must continue to make significant investments in research and development, marketing, and business development. Our failure to increase sufficiently our net sales to offset these increased costs would adversely affect our operating results.

From time to time, we may seek additional equity or debt financing to provide for expenses required to expand our business. We cannot predict the timing or amount of any such requirements at this time. If such financing is not available on satisfactory terms, we may be unable to expand our business or to develop new business at the rate desired and our operating results may suffer. Debt financing increases expenses and must be repaid regardless of operating results. Equity financing could result in additional dilution to existing stockholders.

Our business operations may be adversely affected by the California energy crisis.

Our principal executive offices are located in the Silicon Valley in Northern California. California recently experienced an energy crisis that resulted in disruptions in power supply and increases in utility costs to consumers and businesses throughout the state. Should the energy crisis reoccur, we may experience power interruptions and shortages along with many other Silicon Valley companies and be subject to significantly higher costs of energy. Although we have not experienced any material disruption to our business to date, if the energy crisis reoccurs and power interruptions or shortages occur in the future, any inability to continue operations at our California executive offices could delay the development of our products and disrupt communications with our customers, suppliers, or manufacturing operations and thereby adversely affect our business.

Continuing uncertainty of the U.S. economy may have serious implications for the growth and stability of our business and may negatively affect our stock price.

The revenue growth and profitability of our business depends significantly on the overall demand in the notebook computer market and in the iAppliance markets. Softening demand in these markets caused by ongoing economic uncertainty may result in decreased revenue or earnings levels or growth rates. The U.S. economy has weakened and market conditions continue to be challenging, which has resulted in individuals and companies delaying or reducing expenditures. Further delays or reductions in spending could have a material adverse effect on demand for our products, and consequently on our business, financial condition, results of operations, prospects, and stock price.

Risks Related to this Offering

The market price for our common stock may be volatile, and you may not be able to sell our stock at a favorable price or at all.

Before this offering, there has been no public market for our common stock. An active public market for our common stock may not develop or be sustained after this offering. The price of our common stock in any such market may be higher or lower than the price you pay. If you purchase shares of common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay the price that we negotiated with the representatives of the underwriters. Many factors could cause the market price of our common stock to rise and fall, including the following:


	•	variations in our quarterly results;

	•	announcements of technological innovations by us or by our competitors;

	•	introductions of new products or new pricing policies by us or by our competitors;

	•	acquisitions or strategic alliances by us or by our competitors;

	•	recruitment or departure of key personnel;

	•	the gain or loss of significant orders;

	•	the gain or loss of significant customers;

	•	changes in the estimates of our operating performance or changes in recommendations by any securities analysts that elect to follow our stock; and

	•	market conditions in our industry, the industries of our customers, and the economy as a whole.

In addition, stocks of technology companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to these companies’ operating performance. Public announcements by technology companies concerning, among other things, their performance, accounting practices, or legal problems could cause the market price of our common stock to decline regardless of our actual operating performance.

Our charter documents and Delaware law could make it more difficult for a third party to acquire us, and discourage a takeover.

Our certificate of incorporation and the Delaware General Corporation Law contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our company, even when these attempts may be in the best interests of stockholders. Our certificate of incorporation also authorizes the board of directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Delaware law also imposes conditions on certain business combination transactions with “interested stockholders.”

Our officers, directors, and affiliated entities own a large percentage of our company, and they could make business decisions with which you disagree that will affect the value of your investment.

We anticipate that our executive officers, directors, entities affiliated with them, and other 5% or greater stockholders will, in total, beneficially own approximately 46% of our outstanding common stock after this offering. These stockholders, acting together, would be able to influence significantly all matters requiring approval by our stockholders, including the election of directors. Thus, actions might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company, which could cause our stock price to decline.

Management will have discretion over the use of proceeds from this offering and could spend or invest those proceeds in ways with which you might not agree.

Our management will have broad discretion with respect to the use of the net proceeds of this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. We

currently expect to use these proceeds to increase working capital and for other general corporate purposes. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses, products, or technologies. These investments may not yield a favorable return. If our expectations regarding financial performance and business needs prove to be inaccurate as a result of changes in our business and industry, we may use the proceeds in a manner significantly different from our current plans.

The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could cause our stock price to decline.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering or the perception that these sales could occur. Based on shares outstanding as of September 30, 2001, and assuming the exercise of a warrant to acquire 32,000 shares of our Series E preferred stock and the conversion of all of our preferred stock into 11,105,517 shares of common stock upon completion of this offering, we will have outstanding 22,782,052 shares of common stock. Of these shares, the common stock sold in this offering will be freely tradable, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933. Of the remaining 17,782,052 shares of common stock, 17,518,254 shares held by our officers, directors, and certain stockholders will be subject to 180-day lock-up agreements with the underwriters. Bear, Stearns & Co. Inc., in its sole discretion, may release any portion of the securities subject to these lock-up agreements. After the 180-day lock-up period, these shares may be sold in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, compliance with volume restrictions. After the lock-up period, 10,349,807 of these shares will be immediately available for sale in the public market under Rule 144(k) without registration. The remaining 7,432,245 shares held by our existing stockholders will become available for sale under Rule 144 or Rule 701 at varying times following this offering and after 90 days after this offering.

Stockholders owning 11,105,517 shares are entitled, under contracts providing for registration rights, to require us to register our securities owned by them for public sale. In addition, based on options outstanding as of September 30, 2001, after this offering, 4,205,995 shares will be subject to outstanding options. We intend to file registration statements to register shares issuable upon the exercise of outstanding stock options and shares reserved for future issuance under our stock option and stock purchase plans as well as to register for resale 3,460,898 shares previously issued upon exercise of options.

Sales as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

You will pay more for our common stock than your pro rata portion of our assets is worth; as a result, you will likely receive much less than you paid for our stock if we liquidate our assets and distribute the proceeds.

If you purchase shares of common stock in this offering, you will experience immediate and substantial dilution of $7.38 per share, based on an assumed initial public offering price of $10.00 per share. This dilution arises because our earlier investors paid substantially less than the public offering price when they purchased their shares of common stock. You will also experience dilution upon the exercise of outstanding stock options to purchase our common stock. As of September 30, 2001, there were options outstanding to purchase 4,205,995 shares of common stock with a weighted average exercise price of $3.30 per share.

You should not rely on forward-looking statements because they are inherently uncertain.

This prospectus contains forward-looking statements that involve risks and uncertainties. We use words such as “anticipate,” “believe,” “plan,” “expect,” “future,” “intend,” and similar expressions to identify forward-looking statements. Our actual results could differ materially from the results contemplated by these forward-looking statements because of any of the risks to our business described in this prospectus. You should not unduly rely on these forward-looking statements, which apply only as of the date of this prospectus.

USE OF PROCEEDS

Assuming an initial public offering price of $10.00 per share, we estimate that we will receive net proceeds of $44.9 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use the net proceeds from this offering


	•	for the expansion of sales and marketing activities,

	•	for strategic relationships and acquisitions, and

	•	for working capital and general corporate purposes, including continued enhancement of our research and development and engineering capabilities.

We have not yet determined the exact amounts that we will spend for any of these uses. We are not in any discussions regarding acquisitions. The amounts and purposes for which we allocate the net proceeds of this offering may vary significantly depending upon a number of factors, including future revenue and the amount of cash generated by our operations. We may utilize up to 50% of the net proceeds of this offering in connection with our initiative to penetrate the iAppliance markets, which would include research and development, establishment of sales and marketing infrastructure, and potential strategic acquisitions. The actual amount, however, will depend on market conditions, the growth of the iAppliance markets, and our success in those markets. As a result, we will retain broad discretion in the allocation of the net proceeds from this offering. Pending the uses described above, we will invest the net proceeds in interest-bearing, investment-grade securities.

We will not receive any proceeds from the sale of common stock to be sold by the selling stockholders if the over-allotment option is exercised.

DIVIDEND POLICY

We have never declared or paid cash dividends on our preferred stock or our common stock. We currently plan to retain any earnings to finance the growth of our business rather than to pay cash dividends. Payments of any cash dividends in the future will depend on our financial condition, results of operations, and capital requirements as well as other factors deemed relevant by our board of directors.

Our revolving line of credit places restrictions on the payment of any dividends.

CAPITALIZATION

The table below sets forth the following:



	•	our unaudited capitalization as of September 30, 2001;



	•	our pro forma capitalization as of September 30, 2001, reflecting the assumed exercise of a warrant to purchase 32,000 shares of Series E preferred stock, the automatic conversion prior to the closing of this offering of our preferred stock into 11,105,517 shares of our common stock, and our reincorporation in Delaware; and



	•	our pro forma as adjusted capitalization as of September 30, 2001 to give effect to the sale of 5,000,000 shares of common stock at an assumed initial public offering price of $10.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.



				September 30, 2001

										Pro Forma
				Actual			Pro Forma			As Adjusted


				(unaudited)

				(in thousands, except for share
				and per share data)




Long-term debt, capital leases, and equipment financing obligations, less current portion				$	1,708		$	1,708		$	1,708

Stockholders’ equity:




	Preferred stock, 12,000,000 shares (without par value) authorized, 8,170,207 shares issued and outstanding, actual; 10,000,000 shares ($.001 par value) authorized, no shares issued and outstanding, pro forma and pro forma as adjusted				18,650			—			—




	Common stock, 25,000,000 shares (without par value) authorized, 6,676,535 shares issued and outstanding, actual; 60,000,000 shares ($.001 par value) authorized, 17,782,052 shares issued and outstanding, pro forma; 60,000,000 shares ($.001 par value) authorized, 22,782,052 shares issued and outstanding, pro forma as adjusted				6,304			18			23




	Additional paid-in capital				—			25,016			69,911




	Deferred stock compensation				(1,528	)		(1,528	)		(1,528	)




	Notes receivable from stockholders				(906	)		(906	)		(906	)




	Accumulated deficit				(6,948	)		(6,948	)		(6,948	)

		Total stockholders’ equity			15,572			15,652			60,552

			Total capitalization	$	17,280		$	17,360		$	62,260

The number of shares of our common stock outstanding excludes the following:



	•	4,205,995 shares issuable upon exercise of options outstanding at September 30, 2001 under our stock option plans, with a weighted average exercise price of $3.30 per share, of which 296,866 shares were issued pursuant to options that have been exercised since September 30, 2001;



	•	1,033,244 shares reserved for future grants under our stock option plans at September 30, 2001; and



	•	up to 37,500 shares issuable in connection with an acquisition completed in fiscal 2000.

For a discussion of our stock plans, see Notes 6 and 8 to our consolidated financial statements.

Please read the capitalization table together with the sections of this prospectus entitled “Selected Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

DILUTION

Our pro forma net tangible book value as of September 30, 2001 was $14,726,000, or $0.83 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of outstanding shares of common stock. Pro forma outstanding shares of common stock as of September 30, 2001 assumes the exercise of a warrant to purchase 32,000 shares of our Series E preferred stock and the automatic conversion of our preferred stock outstanding into 11,105,517 shares of our common stock.

Dilution in net tangible book value per share represents the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after completion of this offering. After giving effect to our sale of 5,000,000 shares at an assumed initial public offering price of $10.00 per share and after deducting estimated underwriting discounts and commissions and our estimated offering expenses, our adjusted pro forma net tangible book value at September 30, 2001 would have been $59,626,000, or $2.62 per share. This represents an immediate increase in net tangible book value of $1.79 per share to existing stockholders and an immediate dilution in net tangible book value of $7.38 per share to purchasers of shares in this offering. The following table illustrates this per share dilution:






Assumed initial public offering price per share			$	10.00




Pro forma net tangible book value per share as of September 30, 2001	$	0.83




Increase per share attributable to new investors		1.79

Adjusted pro forma net tangible book value per share after the offering				2.62

Dilution per share to new investors			$	7.38

The following table summarizes on a pro forma basis as of September 30, 2001, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders (including consideration received in connection with acquisitions) and by the new investors at an assumed initial public offering price of $10.00 per share before deducting the estimated underwriting discounts and commissions and estimated expenses of this offering.



		Shares Purchased					Total Consideration
												Average Price
		Number		Percent			Amount		Percent			Per Share

Existing stockholders			17,782,052		78.1	%	$	21,657,000		30.2	%	$	1.22




New investors			5,000,000		21.9	%		50,000,000		69.8	%		10.00

	Total		22,782,052		100.0	%		71,657,000	$	100.0	%

If the underwriters’ over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced to 17,032,052 shares, or 74.8% of the total number of shares of common stock to be outstanding after this offering, and the number of shares held by new investors will increase to 5,750,000 shares, or 25.2% of the total number of shares of common stock to be outstanding after this offering. See “Principal and Selling Stockholders.”

In the discussion and tables above, we assume no exercise of outstanding options. At September 30, 2001, there were outstanding options to purchase 4,205,995 shares of our common stock at a weighted average exercise price of $3.30 per share, of which 296,866 shares were issued pursuant to options that have been exercised since September 30, 2001. The discussion and tables also exclude any shares available for future grant under our stock option plans. The issuance of common stock in connection with the exercise of these options will result in further dilution to new investors.

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and the notes to those statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

The consolidated statements of operations data presented below for the fiscal years ended June 30, 1999, 2000, and 2001 and the consolidated balance sheet data as of June 30, 2000 and 2001 has been derived from our financial statements, which have been audited by Ernst & Young LLP, independent auditors, except for the financial statements of Foveon, Inc., an investment accounted for under the equity method, for the year ended July 1, 2000, which was audited by other auditors and which appear elsewhere in this prospectus. The consolidated statements of operations data for the fiscal years ended June 30, 1997 and 1998 and the consolidated balance sheet data as of June 30, 1997, 1998, and 1999 has been derived from our audited financial statements that are not included in this prospectus. The results for 1998, 1999, and 2000 have been restated. See Note 1 of notes to consolidated financial statements. The consolidated statements of operations data for the three months ended September 30, 2000 and 2001 and the consolidated balance sheet data as of September 30, 2001 have been derived from our unaudited consolidated financial statements that appear elsewhere in this prospectus. These unaudited consolidated financial statements include all adjustments that we consider necessary for a fair presentation of that information. These adjustments are only of a normal and recurring nature. Historical operating results are not necessarily indicative of the results that may be expected for any future period.



														Three Months Ended
		Years Ended June 30,												September 30,

		1997		1998			1999		2000			2001*		2000			2001


		(in thousands, except for share and per share data)




Consolidated Statement of Operations Data:




Net revenue		$	29,450	$	23,167		$	29,842	$	43,447		$	73,698	$	13,988		$	23,569




Cost of revenue(1)			18,878		17,734			17,824		25,652			50,811		8,959			14,607

Gross margin			10,572		5,433			12,018		17,795			22,887		5,029			8,962




Operating expenses:




	Research and development(1)		4,057		3,874			4,851		8,386			11,590		2,792			3,691




	Selling, general, and administrative(1)		3,834		4,142			5,534		7,407			9,106		1,961			2,674




	Acquired in-process research and development		—		—			—		855			—		—			—




	Amortization of goodwill and other acquired intangible assets		—		—			—		605			784		197			13




	Amortization of deferred stock compensation		—		—			—		82			597		154			121

Total operating expenses			7,891		8,016			10,385		17,335			22,077		5,104			6,499

Operating income (loss)			2,681		(2,583	)		1,633		460			810		(75	)		2,463




Interest income (expense), net			402		397			334		365			180		102			(31	)

Income (loss) before income taxes and equity losses			3,083		(2,186	)		1,967		825			990		27			2,432




Provision for income taxes			121		—			40		120			180		26			845




Equity in losses of an affiliated company			—		(1,500	)		—		(2,712	)		—		—			—

Net income (loss)		$	2,962	$	(3,686	)	$	1,927	$	(2,007	)	$	810	$	1		$	1,587



														Three Months Ended
		Years Ended June 30,												September 30,

		1997		1998			1999		2000			2001*		2000		2001


		(in thousands, except for share and per share data)




Net income (loss) per share:




	Basic	$	0.79	$	(0.93	)	$	0.46	$	(0.38	)	$	0.13	$	**	$	0.24

	Diluted	$	0.19	$	(0.93	)	$	0.12	$	(0.38	)	$	0.04	$	**	$	0.08

Shares used in computing net income (loss) per share:




	Basic		3,743,936		3,978,703			4,147,159		5,222,738			6,133,866		5,769,262		6,623,353

	Diluted		15,516,288		3,978,703			15,897,146		5,222,738			19,879,491		18,654,042		20,362,095

Pro forma net income per share:




	Basic											$	0.05			$	0.09

	Diluted											$	0.04			$	0.08

Shares used in computing pro forma net income per share:




	Basic												17,207,403				17,696,870

	Diluted												19,879,491				20,362,095


*	Fiscal year ended June 30, 2001 consisted of 53 weeks.


**	Less than $0.01 per share.



(1)	Cost of revenue excludes $23,000, $2,000, and $7,000 of amortization of deferred stock compensation for the year ended June 30, 2001 and the three months ended September 30, 2000 and 2001, respectively. Research and development expense excludes $162,000, $10,000, and $49,000 of amortization of deferred stock compensation for the year ended June 30, 2001 and the three months ended September 30, 2000 and 2001, respectively. Selling, general, and administrative expense excludes $82,000, $412,000, $142,000, and $65,000 of amortization of deferred stock compensation for the years ended June 30, 2000 and 2001 and the three months ended September 30, 2000 and 2001, respectively. These amounts have been aggregated and reflected as “Amortization of deferred stock compensation.”



	June 30,										September 30,

	1997		1998		1999		2000		2001		2001


	(in thousands)




Consolidated Balance Sheet Data:




Cash and cash equivalents	$	12,204	$	11,513	$	11,711	$	6,507	$	3,766	$	5,475




Working capital		12,744		10,681		13,057		10,695		12,974		14,334




Total assets		17,594		16,564		18,051		20,661		27,157		27,504




Long-term debt, capital leases, and equipment financing obligations, less current portion		449		1,831		1,850		1,700		1,829		1,708




Total stockholders’ equity		13,314		9,729		11,757		11,538		13,754		15,572

Amounts for the year ended June 30, 2000 include the results of operations of Synaptics (UK) Limited (formerly Absolute Sensors Limited) from the date of acquisition in October 1999.

Our fiscal year ends on the last Saturday in June. For ease of presentation in this prospectus, however, all fiscal years have been shown as ending on June 30. Fiscal year 2001 consisted of 53 weeks. Each of the prior years presented consisted of 52 weeks.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion and analysis in conjunction with our financial statements and related notes contained elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are the leading worldwide developer and supplier of custom-designed user interface solutions that enable people to interact more easily and intuitively with a wide variety of mobile computing and communications devices. From our inception in 1986 through 1994, we were a development stage company, focused on developing and refining our pattern recognition and capacitive sensing technologies, and generated revenue by providing contract engineering and design services. In 1995, we introduced our proprietary TouchPad and are now the leading supplier of touch pads to the notebook computer market. We estimate our market share to be approximately 61% for touch pads and approximately 40% for all notebook computer interfaces for fiscal 2001. We believe our market share penetration results from the combination of our customer focus and the strength of our intellectual property, which allows us to design products that meet the demanding design specifications of OEMs.

Although we derive substantially all of our revenue from sales of our interface solutions to contract manufacturers that provide manufacturing services to OEMs, the OEMs typically determine the design and pricing requirements and make the overall decision regarding the use of our interface solutions in their products. Therefore, we consider both the OEMs and their contract manufacturers to be our customers. The term “customer” as used in this prospectus refers to both our OEM and contract manufacturer customers. Our financial statements reflect the revenue we receive from the sale of our products to the contract manufacturers, most of which are located in Taiwan. The contract manufacturers place orders with us for the purchase of our products, take title to the products purchased upon shipment by us, and pay us directly for those purchases. These customers have no return privileges, except for warranty provisions.

In April 2000, we began shipping our initial dual pointing solutions, which include third-party products, that enable notebook OEMs to offer end users the combination of both a touch pad and a pointing stick. In January 2001, we achieved our first design win incorporating our proprietary pointing stick solution, TouchStyk, into a dual pointing application for use in a notebook computer. A design win means that we and a customer have agreed on the product design specifications, the pricing, and the development and production schedules. With the introduction of our TouchStyk, we now offer OEMs the choice of a touch pad, a pointing stick, or a combination of both of our proprietary interface devices for dual pointing applications. We believe that our proprietary TouchStyk will enable us to penetrate the approximate 29% portion of the notebook market that utilizes the pointing stick as the interface solution and thereby increase our total market share of the overall notebook interface market. In addition, we plan to leverage our industry-leading capacitive sensing technology and introduce our new ClearPad and Spiral technologies into the emerging iAppliance markets.

We have experienced significant demand for our dual pointing solutions, which results in higher revenue because we are able to sell two interface solutions for each notebook computer. Most of our dual pointing revenue has been derived from product solutions that include a significant percentage of third-party products, which we either resell or license. As a consequence, the gross margin on our dual pointing revenue was initially well below the gross margin we experience from the sale of our proprietary interface solutions. In the second half of fiscal 2001, we began to see the benefits from phasing in cost improvement programs aimed at reducing the cost of our current dual pointing solutions. For fiscal 2001, however, dual pointing revenue had a significant negative impact on our gross margin compared to fiscal 2000. Although our dual pointing solutions containing third-party products will continue to represent a significant portion of

our dual pointing revenue for the foreseeable future, we began shipments of our new proprietary dual pointing solutions in the first fiscal quarter of 2002. The combination of the full implementation of our cost-improvement programs for our dual pointing solutions containing third-party products together with our new proprietary dual pointing solutions have improved our gross margin in the first quarter of fiscal 2002 as compared to our gross margin in fiscal 2001.

We recognize revenue upon shipment of our products and passage of title to our customers. Our revenue increased from $29.5 million in fiscal 1997 to $73.7 million in fiscal 2001, a compound annual growth rate of approximately 26%. During that period, our revenue increased each year, except fiscal 1998 when a major competitor initiated an aggressive pricing strategy, which significantly reduced the average selling price for our products, causing our revenue to decline approximately 21% while our unit shipments increased. That competitor has since exited the touch pad business, and we have established ourselves as a market leader in providing interface solutions to the notebook market. Through fiscal 2000, all of our product revenue was derived from the notebook computer market. We began to generate revenue from the iAppliance markets in fiscal 2001.

While we have been awarded design wins by several Japanese OEMs of notebook computers, some of which are currently ordering and receiving products from us, our largest customers are the major U.S.-based OEMs that sell notebook computers worldwide. Any downturn in the notebook computer market or a competitive shift from U.S. to Japanese OEMs could have a material adverse effect on our business, financial condition, results of operations, and prospects. We work closely with our customers to design interface solutions to meet their specific requirements and provide both pre-sale custom-design services and post-sale support. During the design phase, we typically do not have any commitment from our customers to pay for our non-recurring engineering costs should any customer decide not to introduce that specific product or choose not to incorporate our interface solution in its products. We believe our focus on customer service and support has allowed us to develop strong customer relationships in the PC market, which we plan to expand in the future, and has provided us with the experience necessary to develop strong customer relationships in the new markets we intend to penetrate.

Our manufacturing operations are based on a variable cost model in which we outsource all of our production requirements, eliminating the need for significant capital expenditures and allowing us to minimize our investment in inventories. This approach requires us to work closely with our manufacturing subcontractors to ensure adequate production capacity to meet our forecasted volume requirements. We provide our manufacturing subcontractors with six-month rolling forecasts and issue purchase orders based on our anticipated requirements for the next 90 days. We do not have any long-term supply contracts with any of our manufacturing subcontractors. Currently, we primarily use one third-party manufacturer to provide our ASICs, and in certain cases, we also rely on single source or a limited number of suppliers to provide other key components of our products. Our cost of sales includes all costs associated with the production of our products, including materials, manufacturing, and assembly costs paid to third-party manufacturers and related overhead costs associated with our manufacturing operations personnel. Additionally, all warranty costs and any inventory provisions or write-downs are expensed as cost of sales.

Our gross margin generally reflects the combination of the added value we bring to our customers’ products in meeting their custom design requirements and our ongoing cost-improvement programs. The decline in gross margin in fiscal 1998, primarily reflected the impact of intense price competition initiated by a key competitor, as was discussed above. In fiscal 2001, we experienced significant pressure on our gross margin, resulting from the increasing revenue mix of dual pointing solutions containing third-party products. We have been successful in implementing cost reductions that have significantly improved the gross margins of these dual pointing solutions. These cost-improvement programs include reducing component costs and design and process improvements. In addition, our gross margin has been positively impacted by shipments of our proprietary dual pointing solutions. In the future, we plan to introduce additional new products, which may initially negatively impact our gross margin, as has been the case with our dual pointing solutions.

Our research and development expenses include expenses related to product development, engineering, materials costs, and the costs incurred to design interface solutions for customers prior to the customers’ commitment to incorporate those solutions into their products. These expenses have generally increased, both as a percentage of revenue and in absolute dollars, reflecting our continuing commitment to the technological and design innovation required to maintain a leadership position in our existing market and to develop new technologies for new markets. The significant increase in research and development expenses in fiscal 2000 was primarily attributable to our October 1999 acquisition of Absolute Sensors Limited, or ASL, a company located in Cambridge, United Kingdom, which has been developing inductive pen-sensing technology applicable to new markets we intend to address. Also related to this acquisition was the write-off in fiscal 2000 of acquired in-process research and development of $855,000 and the amortization of goodwill and other intangible assets of approximately $502,000. The amortization of goodwill and other intangible assets related to this acquisition totaled $753,000 in fiscal 2001. We expect to record significantly lower amortization in future periods as a result of the adoption of FAS 142, under which goodwill is no longer subject to amortization.

Selling, general, and administrative expenses include expenses related to sales, marketing, and administrative personnel; internal sales and outside sales representatives’ commissions; market research and consulting; and other marketing and sales activities. These expenses have increased in absolute dollars, reflecting increased headcount, commission expense associated with higher revenue levels, and additional management personnel in anticipation of our continued growth in our existing market and penetration into new markets. We utilize both inside sales personnel and outside sales representatives and agents. Some of the growth in our sales personnel resulted from the acquisition of the employees of a former Taiwanese sales agent in June 1999. The amortization of goodwill and other intangible assets related to this acquisition totaled $103,000 and $31,000 in fiscal 2000 and fiscal 2001, respectively.

In connection with the grant of stock options to our employees, we recorded deferred stock compensation of approximately $2.1 million through fiscal 2001, representing the difference between the deemed fair value of our common stock for financial reporting purposes and the exercise price of these options at the date of grant. Deferred stock compensation is presented as a reduction of stockholders’ equity and is amortized on a straight-line basis over the vesting period. Options granted are typically subject to a four-year vesting period. Restricted stock acquired through the exercise of unvested stock options is subject to our right to repurchase the unvested stock at the price paid, which right to repurchase lapses over the vesting period. We have also recorded $303,000 of deferred compensation related to options granted to consultants through fiscal 2001. (See Note 6 of notes to consolidated financial statements.) We are amortizing the deferred stock compensation over the vesting periods of the applicable options and the repurchase periods for the restricted stock. We recorded amortization of deferred stock compensation of approximately $82,000 and $597,000 in fiscal 2000 and 2001, respectively, and approximately $121,000 for the three months ended September 30, 2001. We will incur substantial expense in future periods as a result of the amortization of the remaining $1.5 million of deferred stock compensation relating to previously granted stock options.

In August 1997, we entered into an agreement with National Semiconductor in connection with a new development-stage company, Foveon, which focuses on developing digital imaging technology and products. Under the agreement, National Semiconductor invested cash and we contributed certain non-core technology and $1.5 million of cash, financed with a limited-recourse loan to us from National Semiconductor, in exchange for a minority interest in Foveon in the form of voting convertible preferred stock. During the fiscal year ended June 30, 2000, we advanced Foveon approximately $2.7 million in the form of convertible promissory notes to help fund its on-going operating losses. Our investment in Foveon is accounted for under the equity method under which we record our share of losses incurred by Foveon on the basis of our proportionate ownership of equity and debt securities issued by that company. As we do not have any contractual obligation to provide additional funding to Foveon, for accounting purposes our share of losses is limited to the maximum amount of our total investment in that company. During fiscal 1998, we recorded equity losses of $1.5 million as our share of Foveon’s loss (limited to our investment), which reduced our carrying value of our investment in Foveon to zero. During fiscal 2000, we

recorded additional equity losses of $2.7 million and accordingly had no carrying value associated with our investment in Foveon as of June 30, 2000 or 2001. We do not expect Foveon to have a material adverse impact on our future financial performance.

Utilization of tax loss carryforwards and tax credit carryforwards have either eliminated or minimized our provision for income taxes over the last five years. As of June 30, 2001, we had federal research and development tax credit carryforwards of approximately $700,000. The federal credit carryforwards will expire at various dates beginning in 2012 through 2021, if not utilized.

From inception to date, operations have been funded through a combination of private equity financings and stock option exercises totaling $21.5 million and cash generated from operations. The last private equity financing occurred in November 1995 and totaled $4.7 million. Cash and cash equivalents as of September 30, 2001 were $5.5 million.

Results of Operations

The following table presents our historical operating results for the periods indicated as a percentage of revenue.



												Three Months
												Ended
			Years Ended June 30,									September 30,

			1999			2000			2001			2000			2001

Net revenue				100.0	%		100.0	%		100.0	%		100.0	%		100.0	%




Cost of revenue				59.7	%		59.0	%		68.9	%		64.0	%		62.0	%

Gross margin				40.3	%		41.0	%		31.1	%		36.0	%		38.0	%




Operating expenses:




	Research and development			16.3	%		19.3	%		15.7	%		20.0	%		15.7	%




	Selling, general, and administrative			18.5	%		17.0	%		12.4	%		14.0	%		11.3	%




	Acquired in-process research and development			—			2.0	%		—			0.0	%		0.0	%




	Amortization of goodwill and other acquired intangible assets			—			1.4	%		1.1	%		1.4	%		0.1	%




	Amortization of deferred stock compensation			—			0.2	%		0.8	%		1.1	%		0.5	%

		Total operating expenses		34.8	%		39.9	%		30.0	%		36.5	%		27.6	%

Operating income (loss)				5.5	%		1.1	%		1.1	%		(0.5	)%		10.4	%




Interest income (expense), net				1.1	%		0.8	%		0.2	%		0.7	%		(0.1	)%

Income before income taxes and equity losses				6.6	%		1.9	%		1.3	%		0.2	%		10.3	%




Provision for income taxes				0.1	%		0.3	%		0.2	%		0.2	%		3.6	%




Equity in losses of an affiliated company				—			(6.2	)%		—			0.0	%		0.0	%

Net income (loss)				6.5	%		(4.6	)%		1.1	%		0.0	%		6.7	%

Three months ended September 30, 2001 compared to three months ended September 30, 2000

Revenue was $23.6 million for the three months ended September 30, 2001 compared to $14.0 million for the three months ended September 30, 2000, an increase of 68.5%. The increase in revenue was attributable to an increase in unit shipments, higher average selling prices resulting from the inclusion of both a touch pad and a pointing stick in our dual pointing solutions, which began shipping in the June 2000 quarter, and non-recurring engineering services. Revenue from our dual pointing solutions represented approximately 49% of our revenue for the three months ended September 30, 2001 compared to 16% for the three months ended September 30, 2000.

Gross margin as a percentage of revenue was 38.0% for the three months ended September 30, 2001 compared to 36.0% for the three months ended September 30, 2000. The improvement in gross margin as

a percentage of revenue resulted from the implementation of cost-improvement programs, which reduced the cost of our dual pointing solutions through the combination of design and process improvements, lower outside assembly costs, generally lower costs for materials and electronic components, and non-recurring engineering revenue.

Research and development expenses increased 32% to $3.7 million, or 15.7% of revenue, for the three months ended September 30, 2001 from $2.8 million, or 20.0% of revenue, for the three months ended September 30, 2000. The major contributor to the increase in spending was higher compensation costs associated with increased staffing levels. Higher product development related expenses, including outside services and materials costs, also contributed to this increase.

Selling, general, and administrative expenses increased to $2.7 million, or 11.3% of revenue, for the three months ended September 30, 2001 from $2.0 million, or 14.0% of revenue, for the three months ended September 30, 2000. The $713,000 increase reflected higher sales commissions and increased staffing and expenses related to our higher revenue and operating levels.

The three months ended September 30, 2000 reflect a $197,000 charge for the amortization of goodwill and other acquired intangible assets related to the acquisition of ASL. In connection with the adoption of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” on July 1, 2001, amortization of goodwill was terminated, which resulted in significantly lower amortization charges in the three months ended September 30, 2001 compared to the three months ended September 30, 2000. Amortization of other intangible assets continued in accordance with the previously determined useful economic lives.

The three months ended September 30, 2001 includes amortization expense for deferred stock compensation of $121,000 compared to $154,000 for the three months ended September 30, 2000. We expect to record amortization expense of $361,000 in the remaining nine months of fiscal 2002, $475,000 in fiscal 2003, and the balance of $692,000 in future years.

We generated operating income of $2.5 million for the three months ended September 30, 2001 compared to an operating loss of $75,000 for the three months ended September 30, 2000. The major contributors to the improvement in operating income included the increased revenue levels, the higher gross margin percentage resulting from the implementation of our cost improvement programs for our dual pointing solutions, lower assembly costs, lower materials and electronic components costs, non-recurring engineering revenue, and lower amortization expense for acquired intangible assets. These factors were partially offset by higher compensation costs resulting from our increased staffing levels, higher research and development project costs, and higher commissions associated with the increased revenue level.

The provision for income taxes for the three months ended September 30, 2001 was $845,000 compared to $26,000 for the three months ended September 30, 2000, reflecting the higher pre-tax profit levels. The income tax provisions represent both the estimated federal and state taxes and the foreign taxes associated with our operations in the United Kingdom and Taiwan. The effective tax rate for the first three months of fiscal 2002 was 35%, reflecting the benefits of a research and development tax credit, partially offset by nondeductible deferred compensation.

Fiscal year ended June 30, 2001 compared to fiscal year ended June 30, 2000

Revenue was $73.7 million for the year ended June 30, 2001 compared to $43.4 million for the year ended June 30, 2000, an increase of 69.6%. The increase in revenue was attributable to an increase in unit volume shipments, an increase in market share, and higher average selling prices resulting from the inclusion of both a touch pad and pointing stick in our dual pointing solutions, which we began shipping in production volumes in the June 2000 quarter. Revenue from our dual pointing solutions represented approximately 41% of our revenue for the year ended June 30, 2001.

Gross margin as a percentage of revenue was 31.1% for the year ended June 30, 2001 compared to 41.0% for the year ended June 30, 2000. The decline in gross margin as a percentage of revenue resulted from sales of our dual pointing solutions, which during the year had significantly lower margins than our

touch pad products as a result of the high content of third-party products, and higher costs for materials and components, which resulted from general market supply-demand imbalances during the year.

Research and development expenses increased to $11.6 million, or 15.7% of revenue, for the year ended June 30, 2001 from $8.4 million, or 19.3% of revenue, for the year ended June 30, 2000. Major contributors to the increase in spending included the ongoing development of the inductive pen-sensing technology acquired in connection with the acquisition of ASL in October 1999, additional staffing, product development, and related materials expense in our San Jose research and development organization.

Selling, general, and administrative expenses increased to $9.1 million, or 12.4% of revenue, for the year ended June 30, 2001 from $7.4 million, or 17.0% of revenue, for the year ended June 30, 2000. The $1.7 million increase in selling, general, and administrative expenses reflects non-cash stock compensation charges, increased staffing, and expenses related to our higher revenue and operating levels.

The year ended June 30, 2000 included an $855,000 charge for the write-off of in-process research and development associated with our October 1999 acquisition of ASL. In connection with the ASL acquisition, we acquired ASL’s primary technology, called Spiral. See “Purchased In-Process Research and Development.”

The amortization of goodwill and other acquired intangible assets related to the acquisition of ASL resulted in total amortization expense of $753,000 in the fiscal year ended June 30, 2001 compared to $502,000 for eight months included in the fiscal year ended June 30, 2000. In July 2001, the Financial Accounting Standards Board issued two new accounting standards that change the accounting for business combinations and goodwill and other intangible assets acquired in a business combination. We are required to adopt the new standards on July 1, 2001 after which date goodwill and certain other acquired intangible assets will not be amortized. However, we will be required to perform an impairment review on at least an annual basis to determine whether any charge should be booked to reduce the carrying value of goodwill and other acquired intangible assets to their respective recoverable values. See “Recent Accounting Pronouncements.”

The year ended June 30, 2001 included amortization of deferred stock compensation of $597,000. In connection with deferred compensation recorded for stock option grants through fiscal 2001, we expect to record amortization of $482,000 in fiscal 2002, $475,000 in fiscal 2003, and the balance of $692,000 in future years.

We generated operating income of $810,000 for the year ended June 30, 2001 compared to $460,000 for the year ended June 30, 2000. The increase in operating income primarily reflects the $5.1 million of additional gross margin resulting from the significant increase in revenue. This increase was partially offset by the lower gross margin percentage attributable to the high percentage of lower margin dual pointing products included in the revenue mix, incremental operating expenses associated with a larger operation, and higher materials and components costs resulting from general market supply-demand imbalances.

The provision for income taxes was $180,000 for the year ended June 30, 2001 compared to $120,000 for the year ended June 30, 2000. The income tax provision for both years represents the federal and state taxes and the foreign taxes associated with our operations in the United Kingdom and Taiwan. The effective tax rate was 18% for fiscal 2001 compared to 15% for fiscal 2000. The effective rate for both years is lower than the statutory rate of 35%, primarily due to the benefits of utilizing net operating loss carryforwards partially offset by nondeductible deferred compensation and goodwill amortization. Additionally, research and development tax credits were used to reduce the tax provision in fiscal 2001. The effective tax rate for fiscal 2001 is higher than the effective tax rate for fiscal 2000 because the net operating loss carryforwards were fully utilized during fiscal 2001.

Fiscal year ended June 30, 2000 compared to fiscal year ended June 30, 1999

Revenue was $43.4 million for the year ended June 30, 2000 compared to $29.8 million for the year ended June 30, 1999, an increase of 45.6%. This increase reflects an increase in unit volume shipments of

TouchPads, which was partially offset by a reduction in overall average selling prices. The reduction in overall average selling prices resulted from the combination of lower shipments of a specific higher-priced touch pad that was discontinued by its OEM during fiscal 2000 and general competitive pricing pressures.

Gross margin as a percentage of revenue was 41.0% for the year ended June 30, 2000 compared to 40.3% for the year ended June 30, 1999. The increase reflects the successful execution of cost improvement programs, partially offset by a decrease in average selling prices. The most significant cost reduction resulted from transitioning to our next-generation ASIC, which is used in all of our interface solutions.

Research and development expenses increased to $8.4 million, or 19.3% of revenue, for the year ended June 30, 2000 from $4.9 million, or 16.3% of revenue, for the year ended June 30, 1999. The primary contributor to both the increase in absolute spending and the increase as a percentage of revenue was the on-going development of the pen-sensing technology associated with the acquisition of ASL in October 1999. Other factors that contributed to this increase included additional staffing, product development, and related materials expense in our San Jose research and development organization.

Selling, general, and administrative expenses increased to $7.4 million, or 17.0% of revenue, for the year ended June 30, 2000 from $5.5 million, or 18.5% of revenue, for the year ended June 30, 1999. The $1.9 million increase in selling, general, and administrative expenses reflects higher sales commissions associated with higher revenue levels and additional sales and management personnel.

The fiscal year ended June 30, 2000 includes an $855,000 charge for the write-off of in-process research and development associated with our October 1999 acquisition of ASL. (See Note 3 of notes to consolidated financial statements.) In addition, the amortization of goodwill and other acquired intangibles related to the ASL transaction resulted in total amortization expense of $502,000 for the remaining eight months of fiscal 2000.

We generated operating income of $460,000 for the year ended June 30, 2000 compared to $1.6 million for the year ended June 30, 1999. The reduction in operating income primarily reflects the write-off of in-process research and development, amortization of goodwill and other acquired intangible assets, higher research and development expenses, and higher sales commissions associated with higher revenue levels. These expenses were partially offset by higher gross margins.

The provision for income taxes for the year ended June 30, 2000 was $120,000, which represents U.S. alternative minimum taxes and the foreign taxes associated with our operations in the United Kingdom and Taiwan. The effective tax rate for fiscal 2000 is 15%, which is lower than the statutory rate of 35% primarily due to the benefits of utilizing net operating loss carryforwards partially offset by nondeductible goodwill amortization. For the fiscal year ended June 30, 1999, the income tax provision was $40,000, which consisted primarily of U.S. alternative minimum taxes.

During fiscal 2000, we recorded equity losses of $2,712,000, representing our share of losses incurred by Foveon. The total amount of the equity losses recognized were determined on the basis of our ownership interest in Foveon’s convertible preferred shares and our proportionate share of new funds provided to Foveon in exchange for convertible promissory notes and have been limited to the maximum of our total investment. Accordingly, the carrying value of our investment in Foveon has been reduced to zero at the end of fiscal 2000.

Purchased In-Process Research and Development

Purchased in-process research and development, or IPRD, of $855,000 in fiscal 2000 represents the write-off of in-process inductive position sensing technology associated with our acquisition of ASL.

We used available information to calculate the amounts allocated to IPRD. In calculating IPRD, we used established valuation techniques accepted in the high-technology industry. These calculations gave

consideration to relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by us and our competitors, individual product sales cycles, and the estimated lives of each of the products’ underlying technology. The value of the IPRD reflects the relative value and contribution of the acquired research and development. We used a discount rate of 30% to compute the net present value of the future cash flows for the purpose of determining the value attributed to IPRD. We also gave consideration to the IPRD’s stage of completion, which was estimated to be approximately 75% complete at the time of the acquisition, the complexity of the work completed to date, the difficulty completing the remaining development, costs already incurred, and the projected cost to complete the project in determining the value assigned to IPRD. At the time of the acquisition, the Spiral technology had not reached technological feasibility and the IPRD did not have alternative future uses. At the time of acquisition of ASL, the estimated cost to complete the project was estimated to be $6.0 million.

The value assigned to developed technologies related to the acquisition was based upon discounted cash flows related to the future products’ projected income streams. Elements of the projected income stream included revenue, cost of sales, selling, general, and administrative expenses, and research and development expenses. The discount rates used in the present value calculations were generally derived from a weighted average cost of capital, adjusted upward to reflect the additional risks inherent in the development life cycle, including the useful life of the technology, profitability levels of the technology, and the uncertainty of technology advances that were known at the date of the acquisition.

The overall valuation methodology assumed a core technology leverage factor of 15%, a projection of three-year revenue stream beginning fiscal 2001, and a discount factor of 30% to determine the present value of future cash flows.

Given the uncertainties of the commercialization process, no assurance can be given that deviations from our estimates will not occur. At the time of the ASL acquisition, we believed there was a reasonable chance of realizing the economic return expected from the acquired in-process technology. Although we have experienced delays in completing the development of IPRD, our assumptions to compute the value of IPRD have generally been reasonable and consistent with our actual results. There can be no assurance, however, that any project will achieve commercial success because of the risk associated with the realization of benefits related to commercialization of an in-process project due to rapidly changing customer needs, the complexity of the technology, and growing competitive pressures. Failure to successfully commercialize an in-process project would result in the loss of the expected economic return inherent in the fair value allocation. Additionally, the value of our intangible assets acquired may become impaired.

We expect to continue the development of the Spiral technology and derivative commercial products and believe that there is a reasonable chance of successfully completing these development efforts. There is, however, risk associated with the completion of the in-process projects, and there can be no assurance that any project will achieve either technological or commercial success.

Quarterly Results of Operations

The following table sets forth our unaudited quarterly results of operations for the nine quarters in the period ended September 30, 2001. You should read the following table in conjunction with the financial statements and related notes contained elsewhere in this prospectus. We have prepared this unaudited information on the same basis as our audited financial statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. You should not draw any conclusions about our future results from the results of operations for any quarter.



			Three Months Ended

			September 30,		December 31,			March 31,			June 30,			September 30,			December 31,
			1999		1999			2000			2000			2000			2000


			(unaudited)
			(in thousands)




Net revenue			$	9,330	$	12,411		$	10,123		$	11,583		$	13,988		$	18,441




Cost of revenue(1)				5,368		7,285			6,024			6,975			8,959			13,178

Gross margin				3,962		5,126			4,099			4,608			5,029			5,263




Operating expenses:




	Research and development(1)			1,376		1,819			2,387			2,804			2,792			2,848




	Selling, general, and administrative(1)			1,728		2,017			1,735			1,927			1,961			2,276




	Acquired in-process research and development			—		855			—			—			—			—




	Amortization of goodwill and other acquired intangible assets			26		151			214			214			197			195




	Amortization of deferred stock compensation			—		—			—			82			154			158

		Total operating expenses		3,130		4,842			4,336			5,027			5,104			5,477

Operating income (loss)				832		284			(237	)		(419	)		(75	)		(214	)




Interest and other income (expense), net				89		105			112			59			102			35

Income (loss) before income taxes and equity losses				921		389			(125	)		(360	)		27			(179	)




Provision (benefit) for income taxes				51		89			42			(62	)		26			5




Equity in losses of an affiliated company				—		(720	)		(1,067	)		(925	)		—			—

Net income (loss)			$	870	$	(420	)	$	(1,234	)	$	(1,223	)	$	1		$	(184	)

[Additional columns below]

[Continued from above table, first column(s) repeated]



			Three Months Ended

			March 31,		June 30,		September 30,
			2001		2001		2001


			(unaudited)
			(in thousands)




Net revenue			$	19,638	$	21,631	$	23,569




Cost of revenue(1)				13,922		14,752		14,607

Gross margin				5,716		6,879		8,962




Operating expenses:




	Research and development(1)			2,665		3,285		3,691




	Selling, general, and administrative(1)			2,334		2,535		2,674




	Acquired in-process research and development			—		—		—




	Amortization of goodwill and other acquired intangible assets			188		204		13




	Amortization of deferred stock compensation			166		119		121

		Total operating expenses		5,353		6,143		6,499

Operating income (loss)				363		736		2,463




Interest and other income (expense), net				35		8		(31	)

Income (loss) before income taxes and equity losses				398		744		2,432




Provision (benefit) for income taxes				5		144		845




Equity in losses of an affiliated company				—		—		—

Net income (loss)			$	393	$	600	$	1,587


(1)	Excludes the amortization of deferred stock compensation as follows (unaudited) (in thousands):



	Three Months Ended

	September 30,		December 31,		March 31,		June 30,		September 30,		December 31,
	1999		1999		2000		2000		2000		2000

Cost of revenue	$	—	$	—	$	—	$	—	$	2	$	3




Research and development		—		—		—		—		10		50




Selling, general, and administrative		—		—		—		82		142		105

	$	—	$	—	$	—	$	82	$	154	$	158

[Additional columns below]

[Continued from above table, first column(s) repeated]



	Three Months Ended

	March 31,		June 30,		September 30,
	2001		2001		2001

Cost of revenue	$	11	$	7	$	7




Research and development		55		47		49




Selling, general, and administrative		100		65		65

	$	166	$	119	$	121

Revenue has increased in each of the last nine quarters, except for the quarter ended March 31, 2000. Revenue in our March quarters traditionally has been lower than in our December quarters, reflecting the seasonality of consumer spending in the second half of the year, resulting in part from back to school and holiday purchases. The quarter ended March 31, 2001 did not reflect our normal trend as a result of the higher average selling prices associated with revenue from our dual pointing solutions. In addition to this normal seasonality, we believe that revenue in the December 1999 quarter was higher as a result of customers building inventories in expectation of potential supply-chain problems associated with the widely publicized year 2000 computer issue. Beginning in April 2000, revenue growth also increased as a result of shipments of our dual pointing solutions, which have higher average selling prices because of the inclusion of two interface solutions rather than one. In the September 2000 quarter, we began shipping interface solutions for the iAppliance markets, which solutions represented approximately 2.5% of our total revenue for the year ended June 30, 2001. The initial applications included touch sensing interfaces for Internet appliances, which allow for Internet access and sending and receiving e-mail, and set-top-boxes used for

Internet access and home entertainment, which utilize the end user’s television as the monitor. Lower than expected adoption rates for certain of these devices have lowered our shipments in these areas.

Gross margin as a percentage of revenue declined over the six quarters ended December 31, 2000, as we continued to grow market share. This reflects the combination of generally lower prices, higher materials and components costs resulting from general market supply-demand imbalances, increasing production costs, and the introduction of our initial lower-margin dual pointing solutions, partially offset by our incremental cost-improvement programs. The significant decline in gross margin percentage in the December 2000 quarter was primarily a result of a much higher percentage of our sales being lower- margin dual pointing solutions. The increase in gross margin percentage in the last three quarters reflects the impact of our cost-improvement programs, particularly those related to our dual pointing solutions, a general price increase we announced in the December 2000 quarter, lower production costs, and lower materials and components costs resulting from an easing of the supply-demand pressures we experienced in the second half of calendar 2000. We began shipping our proprietary dual pointing solution in the September 2001 quarter, which also has a positive impact on gross margins. We are currently developing our next generation ASIC and planning additional cost improvement programs that we expect will reduce our overall product costs once fully developed, qualified by our OEM customers, and implemented in our manufacturing process, which we expect to begin phasing in during 2002.

Operating expenses, exclusive of the non-recurring charge for in-process research and development in the December 1999 quarter, amortization of goodwill and other acquired intangible assets, and deferred stock compensation, have generally increased over the nine quarters ended September 30, 2001, primarily reflecting the combination of the following four factors: (1) increased staffing in all departments to support our overall business growth; (2) increased spending on research and development to continue to improve our existing technologies and develop new technologies for new product applications, including ClearPad and Spiral; (3) increased selling costs related to the higher revenue levels; and (4) increased management and infrastructure spending to support our planned growth and penetration into new markets.

Liquidity and Capital Resources

Since our inception, we have financed our operations through cash flows from operations, private sales of securities, and to a lesser extent, capital equipment financing.

During the three months ended September 30, 2001, net cash generated from operating activities was $2.0 million, primarily reflecting our net income of $1.6 million plus non-cash adjustments for depreciation and amortization of acquired intangible assets and deferred stock compensation. Working capital for the September 2001 quarter was unchanged from the June 2001 quarter. We expect that accounts receivable and inventory will continue to increase if our revenue continues to grow and that we will continue to increase our investment in capital assets to expand our business.

During fiscal 2001, net cash used in operating activities totaled $2.3 million, primarily reflecting increased working capital, excluding cash and capital lease and equipment financing obligations, of $5.2 million related to our higher operating levels, partially offset by non-cash adjustments for depreciation, amortization, and stock compensation of $2.5 million. During fiscal 2000, we used $40,000 in cash from operating activities compared to generating $301,000 in fiscal 1999. In fiscal 2000, net cash used in operations of $40,000 reflects our net loss of $2.0 million, offset by the combination of the following items: (1) adjustments for non-cash charges, including our proportionate share of equity losses in an affiliated company, Foveon, which totaled $2.7 million, a write-off of $855,000 of in-process research and development, $1.2 million of amortization and depreciation, and $137,000 of stock based compensation; and (2) increases in accounts receivable, inventories, and accounts payable of $3.7 million, $1.5 million, and $2.5 million, respectively, relating to our increased business activities. In fiscal 1999, net cash generated from operations of $301,000 reflects our net income of $1.9 million, adjusted for non-cash depreciation and amortization of $535,000, partially offset by increased working capital, excluding cash and capital lease and equipment financing obligations, of $2.3 million, primarily reflecting increases in accounts

receivable of $1.9 million and reductions in accounts payable of $802,000 and inventory of approximately $297,000.

Investing activities typically relate to purchases of capital assets, which totaled $277,000 for the three months ended September 30, 2001, $982,000 for fiscal 2001, $1.1 million for fiscal 2000, and $315,000 for fiscal 1999. In addition, we advanced $2.7 million in fiscal 2000 in the form of convertible promissory notes to Foveon, an affiliated company, and invested $1.5 million in cash in the October 1999 acquisition of ASL, which together with the capital asset purchases referred to above resulted in total cash used in investing activities of $5.3 million in fiscal 2000. We also issued 652,025 shares of our common stock in connection with the acquisition of ASL. In connection with the acquisition of the sales representative workforce of our former outside sales agent in Taiwan, we issued 37,500 shares of our common stock and are obligated to issued an additional 37,500 shares if certain covenants are fulfilled.

Financing activities over the prior three years have generally been related to the proceeds obtained from the financing of capital assets, offset by the related repayments under those transactions, plus the proceeds from the exercise of vested stock options. Net cash provided by financing activities for fiscal 2001 was $536,000, reflecting net usage of cash from equipment financing of $71,000 offset by proceeds from stock option exercises totaling $607,000. Net cash provided by financing activities was approximately $99,000 for fiscal 2000 and $212,000 for fiscal 1999.

Our principal sources of liquidity as of September 30, 2001 consisted of $5.5 million in cash and cash equivalents, a $4.2 million working capital line of credit with Silicon Valley Bank, and a master equipment financing agreement, dated November 28, 2000, with KeyCorp Leasing, which has $251,000 available for additional capital asset financing. The Silicon Valley Bank revolving line of credit expires on August 29, 2002, has an interest rate equal to 50 basis points above the bank’s prime rate, and provides for a security interest in substantially all of our assets. We have not borrowed any amounts under the line of credit to date. The KeyCorp financing agreement is based on a 36-month term from the date KeyCorp funds capital asset purchases and an interest rate equal to approximately 250 basis points over the U.S. Treasury 18-month index at the time of funding, which is then fixed for the 36-month term. Capital assets currently financed under the KeyCorp master financing agreement total $499,000 and borrowings have an annual interest rate of 8.25%. The long- term note payable to National Semiconductor represents limited-recourse debt that is secured solely by a portion of our preferred stockholdings in Foveon, in which National Semiconductor is also an investor. We do not anticipate making any payments under the limited-recourse loan with National Semiconductor, either prior to or at maturity, unless Foveon is participating in a liquidity event, such as an initial public offering of its equity securities or a merger, through which we would be able to receive amounts in excess of the carrying amount of our $1.5 million investment.

We believe our existing cash balances, the working capital line of credit with Silicon Valley Bank, the available funds remaining under the KeyCorp master equipment lease agreement, and the net proceeds of this offering will be sufficient to meet our cash requirements at least through the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity, and the continuing market acceptance of our product solutions. We cannot assure you that additional equity or debt financing will be available to us on acceptable terms or at all. As of the date of this prospectus, our sources of liquidity beyond 12 months will be our then current cash balances, funds from operations, and any long-term credit facilities that we arrange. We have no other agreements or arrangements with third parties to provide us with sources of liquidity and capital resources beyond the next 12 months.

Disclosure of Market Risks

Interest rate risk

Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalents. Due to the conservative nature of our investment portfolio, which is predicated on capital

preservation and is mainly comprised of government-backed securities and investment-grade instruments, we would not expect our operating results or cash flows to be significantly affected by changes in market interest rates. We do not use our investment portfolio for trading or other speculative purposes.

The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio and debt obligations as of June 30, 2001 (in thousands):


																						Fair
			2002			2003			2004			2005		2006		Thereafter			Total			Value

Assets
	Cash equivalents




		Fixed rate amounts	$	180		$	—		$	—		$	—	$	—	$	—		$	180		$	180




		Average rate		4.6	%		—			—			—		—		—			4.6	%




		Variable rate amounts	$	3,404		$	—		$	—		$	—	$	—	$	—		$	3,404		$	3,404




		Average rate		7.3	%		—			—			—		—		—			7.3	%





Liabilities
	Capital leases and equipment financing obligations




		Fixed rate amounts	$	547		$	253		$	75		$	—	$	—	$	—		$	875		$	875




		Average rate		8.32	%		8.32	%		8.32	%		—		—		—			8.32	%
	Note payable to related party




		Fixed rate amounts	$	—		$	—		$	—		$	—	$	—	$	1,500		$	1,500		$	1,500




		Average rate		—			—			—			—		—		6.0	%		6.0	%

There have been no significant changes in the maturity dates and average interest rates for our investment portfolio and debt obligations subsequent to June 30, 2001.

Foreign currency exchange risk

All of our sales and our expenses, except those expenses related to our U.K. and Taiwan operations, are denominated in U.S. dollars. As a result, we have relatively little exposure to foreign currency exchange risks and foreign exchange losses have been minimal to date. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. In the future, if we feel that our foreign exchange exposure has increased, we may consider entering into hedging transactions to help mitigate that risk.

Recent Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Impairment of Long-Lived Assets. FAS 144 supercedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. FAS 144 retains the requirements of FAS 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and the fair value of the asset. FAS 144 specifically removes goodwill from the scope of FAS 121 and is applicable to financial statements issued for fiscal years beginning after December 15, 2001, which in our case is our fiscal year ending June 30, 2003. The adoption of FAS 144 is not expected to have any material adverse impact on our financial position or results of operations.

BUSINESS

Overview

We are the leading worldwide developer and supplier of custom-designed user interface solutions for notebook computers. In our fiscal year ended June 30, 2001, we supplied approximately 61% of the touch pads used in notebook computers throughout the world. Our new pointing stick is designed to address the portion of the notebook market that uses the pointing stick as an interface solution. We estimate that in fiscal 2001 approximately 55% of all notebook computers sold used solely a touch pad interface, 29% used solely a pointing stick interface, 10% used a dual pointing interface, which consists of both a touch pad and a pointing stick, and 6% used some other type of interface. Our new pointing stick can be used with our touch pad to take advantage of the growing trend toward dual pointing interface solutions. Our OEM customers include Acer, Apple, Compaq, Dell, Hewlett-Packard, and Samsung, as well as Fujitsu/Siemens, IBM, NEC, Sony, and Toshiba.

We believe our extensive intellectual property portfolio, our experience in providing interface solutions to major OEMs, and our proven track record of growth in our expanding core notebook computer interface business position us to be a key technological enabler for multiple applications in many fast-growing markets. Based on these strengths, we are addressing the opportunities created by the growth of a new class of mobile computing and communications devices, which we call iAppliances. These iAppliances include PDAs and smart phones, as well as a variety of mobile, handheld, wireless, and Internet devices. We believe our existing technologies, our new product solutions, and our emphasis on ease of use, small size, low power consumption, advanced functionality, durability, and reliability will enable us to penetrate the markets for iAppliances.

Industry Overview

The Notebook Computer Market

Trends toward mobile computing and communications, supported by technological advances in computer processing power, continued development of the Internet and network infrastructure, and improved remote connectivity, are driving significant growth of the notebook computer market. Notebook computers provide the functionality of a desktop PC, and their small form factor enables portable computing with remote access and connectivity to the Internet and other networks. Notebook computers can be used in conjunction with a full-size monitor, keyboard, and docking station to provide an experience comparable to a desktop PC. For these reasons, the corporate market continues to replace desktop PCs with notebook computers, enabling workers to be more productive away from the office. At the same time, the availability of notebook computers with increased processing power, longer battery life, larger displays, and thinner and lighter designs is prompting companies to upgrade their notebook computers to higher performance models. These trends are the primary drivers for the growth of notebook computer sales in the corporate market.

In the consumer market, notebook computers also are replacing desktop PCs as small-office, home-office, and other individual users demand the flexibility and benefits of mobile computing and connectivity. Other factors promoting this replacement trend include the smaller cost differential between notebook computers and desktop PCs and a shorter lag time for technology migration from desktop PCs to notebook computers. In addition, the continued development of wired dormitories, classrooms with Internet connections, and wireless local area networks in schools and universities are driving significant growth of notebook computer sales in the education market.

Another factor contributing to higher relative growth of notebook computers versus desktop PCs is the difference in product life cycles. Desktop PCs generally have product lifecycles of approximately three years, while product lifecycles are shorter for notebook computers, owing to technological advances, harsh usage patterns that often test durability and reliability, theft, and loss. As a result, individuals and corporations generally replace and upgrade notebook computers more frequently than desktop PCs.

As a result of these factors, notebook computers are experiencing rapid growth in both the corporate and consumer markets, resulting in market share gains at the expense of desktop PCs. According to IDC, worldwide shipments of notebook computers increased 31.0% for calendar year 2000 compared to 12.5% for desktop PCs during the same period. According to IDC estimates, worldwide shipments of notebook computers will increase 4.3% for calendar year 2001 compared to a decrease of 9.1% for desktop PCs during the same period. IDC forecasts that the market for notebook computers will grow from an estimated 27.3 million units in 2001 to 43.0 million units in 2005, a compound annual growth rate of 12.1%. This compound annual growth rate of notebook computers exceeds that of desktop PCs, which are estimated to grow at 8.1% annually during the same period.

The Emerging iAppliance Markets

Individuals increasingly desire the ability to access information, such as e-mail, corporate intranets, the Internet, calendars, and databases, when they are away from their homes or offices. This demand for universal access to information is being driven by the desire for increased productivity and convenience. These factors are prompting the development of a new generation of intelligent and connected devices that are intended to be easy to use, enhance productivity, and provide convenience at low cost. Technological advances, the convergence of mobile computing and communications, and the growth of the Internet have collectively served as a catalyst for the development of these devices, which we refer to as iAppliances. iAppliances exist in many form factors and have broad applications, including personal information management, consumer entertainment, home networking and automation, automotive controls and displays, and other Internet access terminals located away from the home or office. Examples of iAppliances include PDAs, mobile handheld computing devices, smart phones, consumer Web terminals, e-mail terminals, Internet gaming devices, and Internet screenphones. iAppliances allow users to more easily and intuitively access, manage, and store information anytime and anywhere. iAppliances are generally smaller, lighter weight, easier to use, and in the case of mobile iAppliances, consume less battery power than PCs. These benefits are driving significant growth of the iAppliance markets.

Today, the markets for iAppliances are in their infancy and still evolving. iAppliances, however, are expected to achieve widespread consumer acceptance. Industry experts believe that the proliferation of iAppliances that address disparate functions will cause these markets to grow rapidly. Unlike the market for PCs in which users typically operate a single PC, industry experts believe that the markets for iAppliances will be characterized by multiple devices for each person. Furthermore, iAppliances have begun to generate interest from people that do not actively use PCs.

In addition, a combination of technological advances and infrastructure development, such as the deployment of third-generation broadband wireless services, advances in device miniaturization, and the adoption of wireless protocols, such as Bluetooth and 802.11b, which increases the users’ ability to access information anytime and anyplace, will accelerate the demand for iAppliances. Consequently, the iAppliance markets are anticipated to grow significantly faster than the market for PCs. For example, IDC forecasts that the worldwide market for smart handheld devices will grow from an estimated 15.9 million units in 2001 to 49.5 million units in 2005, a compound annual growth rate of 32.8%.

Interface Solutions

In the desktop PC market, the keyboard and the mouse have been adopted as universal user interface devices. Notebook computers, however, require highly integrated interfaces that are compact and easy to use. As a result, the traditional PC mouse has largely been replaced by the touch pad and by the pointing stick in notebook computers. A touch pad allows the user to navigate the screen using a finger or stylus on a touch-sensitive pad. A pointing stick allows the user to navigate the screen by using a finger to apply pressure on a small stick device. Each of these interfaces provides a different user experience that appeals to a range of user preferences. We estimate that in fiscal 2001 approximately 55% of all notebook computers sold used solely a touch pad interface, 29% used solely a pointing stick interface, 10% used a dual pointing interface, which consists of both a touch pad and a pointing stick, and 6% used some other type of interface.

Recently, OEMs have developed and introduced notebook computers that incorporate dual pointing solutions, containing both a touch pad and a pointing stick. Dual pointing solutions provide users with enhanced flexibility and alternative means of interacting with a notebook computer. Dual pointing solutions are gaining popularity with corporate information technology departments because of their ability to satisfy most user preferences with a single notebook computer. In addition, by purchasing notebook computers with dual pointing solutions, corporate information technology departments can consolidate vendor relationships and technical support.

The vast array of functionality incorporated in iAppliances and their emphasis on universal access to information, including through an Internet or other network connection, has resulted in many different form factors, many of which are too small to accommodate either a keyboard or a mouse. As a result, iAppliances require innovative interface solutions to input, access, and manage information. A variety of interfaces have been developed and incorporated in iAppliances to facilitate user interaction with these devices. For example, many handheld PDAs utilize a touchscreen interface as the primary means to input, manage, and retrieve information, while mobile phones generally utilize a numeric keypad and a push-button option menu, or in some cases, a dial to scroll through option menus. Users are finding through experience that certain interfaces are more suitable for specific functions while severely limiting for other functions. As a result, as OEMs compete for market share and consumer acceptance, the interface solution represents one of the primary means to differentiate iAppliances among competing products. The optimum interface solution must operate intuitively and be easy to use; facilitate portability in terms of size, weight, and power usage; offer advanced features to enhance user experience; and satisfy consumer demand for reliability and durability.

The Synaptics Solution

We develop, acquire, and enhance interface technologies that improve the way people interact with mobile computing and communications devices. Our innovative and intuitive interfaces accommodate many diverse platforms. Our technologies include an extensive array of ASICs, firmware, software, and pattern recognition and touch sensing technologies.

Through our technologies, we seek to provide our customers with customized solutions that address their individual design issues and result in high-performance, feature-rich, and reliable interface solutions. Our new TouchStyk addresses the pointing stick and dual pointing portions of the notebook computer market; our new ClearPad addresses the notebook computer and iAppliance markets; and our new Spiral solution addresses the iAppliance markets. We believe our interface solutions offer the following characteristics:


	•	Ease of Use. Our interface solutions offer the ease of use and intuitive interaction that users demand.

	•	Small Size. The small, thin size of our interface solutions enables our customers to reduce the overall size and weight of their products in order to satisfy consumer demand for portability.


	•	Low Power Consumption. The low power consumption of our interface solutions enables our customers to offer products with longer battery life or smaller battery size.


	•	Advanced Functionality. Our interface solutions offer many advanced features to enhance user experience.

	•	Reliability. The reliability of our interface solutions satisfies consumer demand for dependability, which is a major component of consumer satisfaction.

	•	Durability. Our interface solutions withstand repeated use, severe physical treatment, and temperature fluctuations while providing a superior level of performance.

We believe these characteristics will enable us to maintain our leadership position in the notebook computer market and will enhance our position as a technological enabler of iAppliances and a differentiator for OEMs of these devices.

Our emphasis on technological leadership and customized-design capabilities positions us to provide unique interface solutions that address specific customer requirements. Our long-term working relationships with large, global OEMs provide us with experience in satisfying their demanding design specifications and other requirements. Our custom product solutions provide OEMs with numerous benefits, including the following:


	•	customized, modular integration;

	•	reduced product development costs;

	•	shorter product time to market;

	•	compact and efficient platforms;

	•	improved product functionality and utility; and

	•	product differentiation.

We work with our customers to customize our solutions in order to meet their design requirements. This collaborative effort reduces the duplication and overlap of investment and resources, enabling our OEM customers to devote more time and resources to the market development of their products.

We utilize capacitive and inductive technologies rather than traditional resistive technology in our product solutions. Unlike resistive technology, our capacitive and inductive technologies require no activation force, thereby permitting easy movement across the touch surface, and use no moving parts. Our capacitive technology also can be integrated with both curved and flat surfaces.

Capacitive and inductive technologies provide additional key benefits over resistive technology. Capacitive and inductive sensors can be fabricated without the air or liquid gap required by resistive technology, reducing undesirable internal reflections and the power requirements for the LCD backlight, thereby extending the battery life of small handheld devices. Capacitive and inductive technologies also allow much thinner sensors than resistive technology, allowing for slimmer, more compact, and unique industrial designs.

Our Strategy

Our objective is to continue to enhance our position as the world’s leading supplier of interface solutions for the notebook computer market and to become a leading supplier of interface solutions for the emerging high-growth iAppliance markets. Key aspects of our strategy to achieve this objective include the following:

Extend Our Technological Leadership

We plan to utilize our extensive intellectual property portfolio and technological expertise to provide competitive advantages, extend the functionality of our product solutions, and offer innovative product solutions to our customers across multiple market segments. We intend to continue to utilize our technological expertise to reduce the overall size, weight, cost, and power consumption of our interface solutions while increasing their applications, capabilities, and performance. We plan to expand our research and development efforts through strategic acquisitions and alliances, increased expenses, and the hiring of additional engineering personnel. We believe that these efforts will enable us to meet customer expectations and to achieve our goal of supplying on a timely and cost-effective basis the most advanced, easy-to-use, functional interface solutions integrating touch, handwriting, vision, and voice capabilities.

Enhance Our Leadership Position in the Notebook Computer Market

We intend to continue to introduce market-leading interface solutions in terms of performance, functionality, size, and ease of use. Our new TouchStyk enables us to address the pointing stick and the expanding dual pointing segments of the notebook interface market. Our new electronic signature, or e-signature, capabilities, pen-computing applications, multi-finger navigation, and scroll strip products are

designed to provide additional functionality that results in competitive advantages. Our hyper-thin TouchPad solution allows our customers to produce even thinner notebook computers.

Capitalize on Growth of the iAppliance Markets

We intend to capitalize on the growth of the iAppliance markets brought about by the convergence of computing and communications. We plan to offer innovative, easy-to-use interface solutions that address the evolving portability, connectivity, and functionality requirements of these new markets. We plan to offer these solutions to existing and potential OEM customers as a means to increase the functionality, reduce the size, lower the cost, and enhance the user experience of our customers’ products. We plan to utilize our existing technologies as well as aggressively pursue new technologies as these markets evolve and demand new solutions.

Emphasize and Expand Customer Relationships

We plan to emphasize and expand our strong and long-lasting customer relationships and to provide the most advanced interface solutions for our customers’ products. We recognize that our interface solutions enable our customers to deliver a positive user experience and to differentiate their products from those of their competitors. We continually attempt to enhance the competitive position of our customers by providing them with innovative, distinctive, and high-quality interface solutions on a timely and cost-effective basis. To do so, we work continually to improve our productivity, to reduce costs, and to speed the delivery of our interface solutions. We endeavor to streamline the entire design and delivery process by maintaining an ongoing design, engineering, and production improvement effort. We also devote considerable effort to support our customers after the purchase of our interface solutions.

Pursue Strategic Relationships and Acquisitions

We intend to develop and expand strategic relationships to enhance our ability to offer value-added customer solutions, address new markets, rapidly gain market share, and enhance the technological leadership of our product solutions. Our strategic relationship with Three-Five Systems, a leading supplier of custom designed display modules, provides for the joint development and marketing of touch screen LCD products and the integration of our Spiral and ClearPad product solutions with their LCD display drivers for use in cellular phones, PDAs, and other electronic devices. We established our relationship with AuthenTec, a leading developer of fingerprint sensing technology, to develop fingerprint recognition security capabilities for the notebook computer and iAppliance markets. Our strategic relationship with Zytronic, a developer of large touch screen products, provides for the development of a capacitive touch sensing controller module to be integrated by Zytronic into its products. We intend to enter into additional strategic relationships with other leading companies in our target markets. We also intend to acquire companies in order to expand our technological expertise and to establish or strengthen our presence in selected target markets.

Continue Virtual Manufacturing

We plan to expand and diversify our production capacity through third-party relationships, thereby strengthening our virtual manufacturing platform. This strategy results in a scalable business model; enables us to concentrate on our core competencies of research and development, technological advances and product design; and reduces our capital expenses. Our virtual manufacturing strategy allows us to maintain a variable cost model, in which we do not incur most of our manufacturing costs until our product solutions have been shipped and billed to our customers.

Products

We offer customers in the PC and iAppliance markets user interface solutions that provide competitive advantages. Our family of product solutions allows our customers to solve their interface needs and differentiate their products from those of their competitors.

The following table sets forth certain information relating to our proprietary products.




Product	Description	Status	Applications


TouchPad	Small, touch-sensitive pad that senses the position of a person’s finger on its surface through the measurement of capacitance	Commercially available	Notebooks, iAppliances

TouchStyk	Self-contained, easily integrated module that uses the same capacitive technology as our TouchPad	Commercially available	Notebooks, iAppliances

Dual Pointing Solution	Combined solution of TouchPad and TouchStyk	Commercially available		Notebooks

QuickStroke	Pattern recognition technology that combines our software with our TouchPad	Commercially available	Notebooks, iAppliances

ClearPad	Customizable touch screen solution with a clear thin sensor that can be placed over any viewable surface	Prototype completed and customer samples sent	Notebooks, iAppliances

Spiral	Thin, lightweight, low power, inductive pen-sensing solution	Prototype completed		iAppliances

TouchPad™

In fiscal 2001, we supplied approximately 61% of the touch pads used in notebook computers throughout the world. Our TouchPad, which takes the place of a mouse, is a small, touch-sensitive pad that senses the position of a person’s finger on its surface through the measurement of capacitance. Our TouchPad provides the most accurate, comfortable, and reliable method to provide screen navigation, cursor movement, and a platform for interactive input and allows customers to provide a stylish, simple, user-friendly, and intuitive terminal for both the consumer and professional markets. Our TouchPads offer various advanced features, including the following:


	•	Virtual scrolling. This feature enables the user to scroll through any document by swiping a finger along the side or bottom of the TouchPad.


	•	Customizable tap zones. These zones permit separate portions of the TouchPad to be used to simulate mouse clicks, launch applications, and perform other selected functions.


	•	Palm Check. Palm Check eliminates false activation when a person’s palm accidentally rests on the TouchPad.

	•	Edge Motion. This permits cursor movement to continue when a user’s finger reaches the edge of the TouchPad.

	•	Tapping and dropping of icons. This feature allows the user to simply tap on an icon in order to drag it, rather than being forced to hold a button down in order to drag an icon.

	•	Multi-finger gestures. This feature allows the user to designate specific actions when more than one finger is used on the TouchPad.

Our TouchPads are available in a variety of sizes and can be designed to meet the specifications of our customers. Customized driver software ensures the availability of specialized features.

We also can provide e-signature capabilities for our TouchPads utilizing third-party software. This allows users to sign their names directly on the TouchPad itself, providing a reliable and binding e-signature solution without additional hardware costs.

Utilizing our TouchPad technology, we recently introduced our scroll strip, a touch-sensitive device similar to a TouchPad. Our initial applications will be to mount the scroll strip within keyboards, external mice, and portable communication devices. Users can take advantage of the scroll strip to easily scroll up and down Web pages or word processing documents. Future applications for the scroll strip may include cellular phones and other communications and computing devices.

A new generation of our TouchPad responds to both finger touch and stylus-pointing devices. This solution adds stylus capabilities to our TouchPad so notebook computers and other devices that use finger touch input can now take advantage of pen-computing applications, such as drawing, signature capture, and handwriting recognition, without sacrificing the accurate, comfortable finger input capability of the TouchPad.

TouchStyk™

TouchStyk, our pointing stick interface solution, is a self-contained, easily integrated module that uses the same capacitive technology as our TouchPad. TouchStyk is enabled with press-to-select and tap-to-click capabilities and can be easily integrated into multiple computing and communications devices. We have reduced the number of components needed to control the pointing device, allowing the electronics for TouchStyk to be mounted directly on the printed circuit board, or PCB, of the unit. In addition, restricting analog signals to the module greatly reduces exposure to electromagnetic interference, which provides for greater pointing accuracy and prevents the pointer from drifting when not in use.

Our TouchStyk can operate either with our proprietary algorithms or algorithms licensed from IBM. This allows OEMs to select the algorithms of their choice while still gaining the advantages of our pointing stick solution. Our modular approach allows OEMs to include our TouchPad, our TouchStyk, or a combination of both interfaces in their notebook computers.

We recently began shipping our TouchStyk in connection with our dual pointing solutions. With respect to the portion of the notebook computer market that uses a pointing stick as the sole interface, we have one design win for our TouchStyk with one OEM customer and are in qualification with two other OEM customers.

Dual Pointing Solution

Our dual pointing solution offers both a touch pad and a pointing stick in a single notebook computer, enabling users to select their interface of choice. Our dual pointing solution also provides the end user the ability to use both interfaces simultaneously. Our dual pointing solution provides the following advantages:


	•	cost-effective and simplified OEM integration;

	•	simplified OEM product line since one device contains both solutions;

	•	single-source supplier, which eliminates compatibility issues; and

	•	end user flexibility since one notebook can address both user preferences.

We have developed two solutions for use in the dual pointing market. Our first solution integrates all the electronics for controlling a third-party resistive strain gauge pointing stick onto our TouchPad PCB. This solution simplifies OEM integration by eliminating the need to procure the pointing stick electronics from another party and physically integrate them into the notebook. Our second dual pointing solution uses our TouchStyk rather than a third-party pointing stick, and offers the same simplified OEM integration. The second solution is a completely modular design, allowing OEMs to offer TouchPad-only, TouchStyk-only, or dual pointing on a build-to-order basis.

ClearPad™

ClearPad, our innovative and customizable touch screen solution, consists of a clear thin sensor that can be placed over any viewable surface, including display devices, such as LCDs. ClearPad is controlled

by a small electronics module, which can be located remotely from the sensor. Similar to our traditional TouchPad, our ClearPad has various distinct advantages, including light weight; low profile form factor; high reliability, durability, and accuracy; and low power consumption. In addition, ClearPad enables visual information display in conjunction with touch commands.

The size and shape of both the sensor surface and electronics module can be customized for many applications. ClearPad can be mounted on any curved surface, resulting in new opportunities for industrial design. In applications with extreme space constraints, the electronic module can be integrated into an existing PCB. ClearPad also can emulate physical buttons or slider switches displayed on an active display device or printed on an underlying surface.

ClearPad is an extension of our capacitive TouchPad technologies. Standard resistive touch screens include an air gap, causing significant internal reflections that degrade the quality of the display. When used as a touch screen, ClearPad eliminates the internal air gap present in resistive touch screens, significantly decreasing internal reflections and their associated impact on display quality. This makes ClearPad an excellent solution for use outdoors and for devices with color displays.

ClearPad is well suited for widespread application in the iAppliance markets. These applications include the following:


•	PDAs
•	smart phones
•	smart handheld devices
•	Web terminals
•	Internet devices
•	e-mail terminals
•	automotive controls and displays
•	interactive games and toys

We have used our ClearPad technology to develop a product solution that replaces the touch pad in notebook computers. Our solution consists of a ClearPad mounted over an LCD display. This solution provides all of the features of a standard touch pad while providing information content and significant additional features. We have developed this solution with a USB interface for significant and rapid data transfer and easy integration into notebook computer designs.

Spiral™

Spiral is a thin, lightweight, low power, inductive pen-sensing solution. The Spiral sensor lies behind an LCD screen, effectively permitting 100% light transmissivity and lower overall power consumption resulting from reduced backlighting requirements. Spiral uses a patented inductive coupling technology that offers the unique feature of proximity sensing to measure the precise position of the tip of the pen to be measured relative to a pen-based device. Spiral also has a high tolerance to user abuse. Spiral combines 100% light transmissivity, high accuracy, high-noise immunity, and a passive stylus into a solution that provides alternatives for richer user interfaces.

We anticipate that Spiral will be used in new markets that require high-quality pen-based solutions. The applications in the iAppliance markets are expected to be similar to those of ClearPad.

QuickStroke®

QuickStroke provides a fast, easy, and accurate way to input Chinese characters. Using our recognition technology that combines our patented software with our TouchPad, QuickStroke can recognize handwritten, partially finished Chinese characters, thereby saving considerable time and effort. Our QuickStroke operates with our TouchPad or our stand-alone touch pad and can be integrated into notebook computers, keyboards, and a host of stand-alone devices that use either a pen or a finger.

Our patented Incremental Recognition Technology™ allows users to simply enter the first few strokes of a Chinese character and QuickStroke accurately interprets the intended character. Since the typical Chinese character consists of an average of 13 strokes, QuickStroke technology saves considerable time and effort. QuickStroke provides a solution to enhance Chinese communication for business and personal use.

Technologies

We have developed and own an extensive array of ASICs, firmware, software, and pattern recognition and touch sensing technologies. With 58 patents issued and 25 patents pending, we continue to develop technology in those areas. We believe these technologies and the related intellectual property create significant barriers for competitors and allow us to provide interface solutions in a variety of high-growth market segments.

Our broad line of interface solutions currently is based upon the following key technologies:


	•	capacitive position sensing technology;

	•	capacitive force sensing technology;

	•	transparent capacitive position sensing technology;

	•	inductive position sensing technology;

	•	pattern recognition technology;

	•	mixed signal very large scale integrated circuit, or VLSI, technology; and

	•	proprietary microcontroller technology.

In addition to these technologies, we have the core competency of developing software that provides unique features, such as virtual scrolling, customizable tap zones, Palm Check, Edge Motion, tapping and dragging of icons, and multi-finger gestures. In addition, our ability to integrate all of our products to interface with major operating systems, including Windows 98, Windows 2000, Windows NT, Windows CE, Windows XP, Windows ME, Mac OS, Pocket PC, Palm OS, Symbian, UNIX, and LINUX, provides us with a key competitive advantage.

Capacitive Position Sensing Technology. This technology provides a method for sensing the presence, position, and contact area of one or more fingers or a conductive stylus on a flat or curved surface, such as our TouchPad. Our technology works with very light touch and provides highly responsive cursor motion and scrolling. It uses no moving parts, can be embedded in a tough plastic coating, and is extremely durable.

Capacitive Force Sensing Technology. This technology senses the direction and magnitude of a force applied to an object. The object can either move when force is applied, like a typical joystick used for gaming applications, or it can be isometric, with no perceptible motion during use, like our TouchStyk. The primary competition for this technology is resistive strain gauge technology. Resistive strain gauge technology requires electronics that can sense very small changes in resistance, presenting significant challenges to the design of that circuitry, including sensitivity to electrical noise and interference. Our electronic circuitry determines the magnitude and direction of an applied force, permits very accurate sensing of tiny changes in capacitance, and minimizes interference from electrical noise.

Transparent Capacitive Position Sensing Technology. This technology allows us to build transparent sensors for use with our capacitive position sensing technology, such as in our ClearPad. It has all the advantages of our capacitive position sensing technology and allows for visual feedback when incorporated with a display device like an LCD. Our technology never requires calibration, does not produce undesirable internal reflections, and has reduced power requirements, allowing for longer battery life.

Inductive Position Sensing Technology. This technology provides a method for sensing the presence and position, in three dimensions, of a pen on surfaces like the touch screen used in smart handheld devices. The sensor board can be placed behind the display screen, such as an LCD, thus eliminating any undesirable reflections or transmissivity losses and the need for backlighting, which enhances battery life. This technology could be used in the future for other position sensing applications.

Pattern Recognition Technology. This technology is a set of software algorithms for converting real-world data, such as handwriting, into a digital form that can be manipulated within a computer, such as

our QuickStroke product and gesture decoding for our TouchPad and TouchStyk products. Our technology provides reliable handwriting recognition and facilitates signature verification.

Mixed Signal VLSI Technology. This is hybrid analog-digital integrated circuit technology that combines the power of digital computation with the ability to interface with non-digital real-world signals like the positioning of a finger or stylus on a surface. Our patented design techniques permit us to utilize this technology in the optimization of our core ASIC engine for all our products, which provides cost and performance advantages over our competitors.

Proprietary Microcontroller Technology. This technology consists of proprietary 16-bit microcontroller cores embedded in the digital portion of our mixed signal ASIC and optimized for position sensing tasks. Our embedded microcontroller provides great flexibility in customizing product solutions, which eliminates the need to design new circuitry for each new application.

Competing Technology

Many interface solutions currently utilize resistive sensing technology. Resistive sensing technology consists of a flexible membrane stretched above a flat, rigid, electrically conductive surface. When finger or stylus pressure is applied to the membrane, it deforms until it makes contact with the rigid layer below, at which point attached electronics can determine the position of the finger or stylus. Since the flexible membrane is a moving part, it is susceptible to mechanical wear and will eventually suffer degraded performance. Due to the way that resistive position sensors work, it is not possible for them to detect more than a single finger or stylus at any given time. The positional accuracy of a resistive sensor is limited by the uniformity of the resistive coating as well as by the mechanics of the flexible membrane. Finally, due to reduced transmissivity, or the amount of light that can pass through the display, resistive technology requires the use of a backlight, thereby reducing the battery life of the device.

Research and Development

We conduct active and ongoing research and development programs that focus on advancing our technologies, developing new products, improving design processes, and enhancing the quality and performance of our product solutions. Our goal is to provide our customers with innovative solutions that address their needs and improve their competitive positions. Our research and development concentrates on our market-leading interface technologies, especially on improving the performance of our current product solutions and expanding our technologies to serve new markets. Our vision is to develop solutions that integrate touch, handwriting, voice, and vision capabilities that can be readily incorporated into varied electronic devices.

Our research and development programs focus on the development of accurate, easy to use, feature rich, reliable, and intuitive user interface devices for the notebook market. We believe our innovative interface technologies can be applied to many diverse platforms. As a result, we are currently focusing considerable research and development efforts on interface solutions for the rapidly developing iAppliance markets. We believe the interface will be a key factor in the differentiation of iAppliance products. We anticipate that our interface technologies will enable us to provide customers with product solutions for iAppliances that have significant advantages over alternative technologies in terms of functionality, size, power consumption, durability, and reliability. We also pursue strategic acquisitions and enter into strategic relationships to enhance our research and development capabilities, leverage our technology, and shorten our time to market with new technological applications.

Our research, design, and engineering teams frequently work directly with our customers to design custom solutions for specific applications. We focus on enabling our customers to overcome technological barriers and enhance the performance of their products. We believe our efforts provide significant benefits to customers by enabling them to concentrate on their core competencies of production and marketing.

As of December 31, 2001, we employed 101 people in our technology, engineering, and product design functions in the United States, the United Kingdom, and Taiwan. Our research and development

expenses were approximately $4.9 million in fiscal 1999, $8.4 million in fiscal 2000, $11.6 million in fiscal 2001, and $3.7 million in the three months ended September 30, 2001.

Intellectual Property Rights

As of December 31, 2001, we held 58 patents and had 25 pending patent applications. These patents and patent applications cover various aspects of our key technologies, including touch sensing, pen sensing, handwriting recognition, edge motion, and virtual scrolling technologies. Our proprietary software is protected by copyright laws. The source code for our proprietary software is also protected under applicable trade secret laws.

Patents may not issue from the patent applications that we have filed or may file. Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage. We have not applied for, and do not have, any copyright registration on our technologies or products. We have applied to register certain of our trademarks in the United States and other countries. There can be no assurances that we will obtain registrations of principle or other trademarks in key markets. Failure to obtain registrations could compromise our ability to protect fully our trademarks and brands and could increase the risk of challenge from third parties to our use of our trademarks and brands. In addition, our failure to enforce and protect our intellectual property rights or obtain from third parties the right to use necessary technology could have a material adverse effect on our business, financial condition, and results of operations.

Our technologies include an extensive array of ASICs, firmware, software, and pattern recognition and touch sensing technologies. Any one of our products rely on a combination of these technologies, making it difficult to use any single technology as the basis for replicating our products. Furthermore, the length and customization of the customer design cycle serve to protect our intellectual property rights. Our research, design, and engineering teams frequently work directly with our customers to design custom solutions for specific applications.

We do not consistently rely on written agreements with our customers, suppliers, manufacturers, and other recipients of our technologies and products, and therefore some trade secret protection may be lost and our ability to enforce our intellectual property rights may be limited. Furthermore, our customers, suppliers, manufacturers, and other recipients of our technologies and products may seek to use our technologies and products without appropriate limitations. In the past, we did not consistently require our employees and consultants to enter into confidentiality agreements, employment agreements, or proprietary information and invention agreements. Therefore, our former employees and consultants may try to claim some ownership interest in our technologies and products and may use our technologies and products competitively and without appropriate limitations.

Other companies, including our competitors, may develop technologies that are similar or superior to our technologies, duplicate our technologies, or design around our patents and may have or obtain patents or other proprietary rights that would prevent, limit, or interfere with our ability to make, use, or sell our products. Effective intellectual property protection may be unavailable or limited in some foreign countries, such as China and Taiwan, in which we operate. Unauthorized parties may attempt to copy or otherwise use aspects of our technologies and products that we regard as proprietary. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop similar technologies. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the market for our technologies and products.

Customers

We currently serve the world’s ten largest PC OEMs, based on unit shipments, as well as a variety of consumer electronics manufacturers. Our demonstrated track record of technological leadership, design innovation, product performance, and on-time delivery have resulted in our serving as the sole source of notebook interfaces for many of our customers. We believe our strong relationship with our OEM customers, many of which are currently developing iAppliance products, will position us as a primary source of supply for their iAppliance offerings.

Our OEM customers include the following:


•	Acer
•	Apple

•	Asustek

•	Compaq
•	Dell

•	Fujitsu/Siemens


•	Gericom

•	Hewlett-Packard

•	IBM


•	Legend


•	NEC

•	Samsung

•	Sony


•	Toshiba

The above list includes each of our largest current OEM customers in terms of unit volume as well as Fujitsu/ Siemens, IBM, Sony, and Toshiba, which recently became our OEM customers. We supply our OEM customers through their contract manufacturers. These contract manufacturers include Arima, Compal, Inventec, Mitac, Nypro, Quanta, and Wistron. During fiscal 2001, sales to Quanta and Nypro accounted for 32% and 11%, respectively, of our revenue. No other customer accounted for more than 10% of our revenue during this period.

We consider both the OEMs and the contract manufacturers to be our customers. The OEMs typically determine the design and pricing requirements and make the overall decision regarding the use of our interface solutions in their products. The contract manufacturers place orders with us for the purchase of our products, take title to the products purchased upon shipment by us, and pay us directly for those purchases. These customers have no return privileges, except for warranty provisions.

Strategic Relationships

We have established key strategic relationships to enhance our ability to offer value-added customer solutions and rapidly gain market share. We intend to enter into additional strategic relationships with other leading companies in our target markets.

Three-Five Systems

Our strategic relationship with Three-Five Systems, a leading supplier of custom designed display modules, provides for the joint development and marketing of touch screen LCD products. We plan to expand our product solutions by integrating our ClearPad and Spiral touch screen solutions with the LCD display modules developed by Three-Five Systems. We believe that LCD screens that incorporate our ClearPad technology result in superior LCD touch screens for use in a variety of OEM products, especially cellular phones and PDAs.

AuthenTec

We established our relationship with AuthenTec, a leading developer of fingerprint sensing technology, to develop fingerprint recognition security capabilities. We plan to incorporate fingerprint recognition capabilities into our TouchPad products, allowing us to offer our customers enhanced security for their notebook computers and iAppliances. Users will be required to authenticate their identity by placing a finger on our TouchPad before gaining access to the computer.

Zytronic

We established a relationship with Zytronic, a developer of large touch screen products, to develop a capacitive touch sensing module to be integrated with Zytronic’s glass sensor. Our goal is to develop a capacitive touch sensing controller module to be used in conjunction with touch screen products to be integrated, marketed, and sold by Zytronic. These products are devices that utilize large screen interface displays. Zytronic has agreed to develop the glass sensor, and we have agreed to provide the electronic controls that allow the sensor to interact with the device that incorporates the sensor.

Sales and Marketing

We sell our product solutions for incorporation into the products of OEMs. We generate sales through direct sales employees and sales representatives. Our sales personnel receive substantial technical assistance and support because of the highly technical nature of our product solutions. Sales frequently result from multi-level sales efforts that involve senior management, design engineers, and our sales personnel interacting with our customers’ decision makers throughout the product development and order process.

We currently employ 24 sales professionals, including nine field application engineers, and 10 marketing professionals. We maintain five sales offices domestically and internationally, which are in the United States, the United Kingdom, Taiwan, China, and Japan. In addition, we maintain sales representatives in eight offices in the United States as well as offices in Singapore, Korea, Japan, and Europe.

International sales, primarily in the Asian and European markets, constituted approximately 97%, 95%, and 86% of our revenue in fiscal 1999, 2000, and 2001, respectively. Substantially all of these sales were made to companies that provide manufacturing services for major notebook computer OEMs. All of these sales were denominated in U.S. dollars, and we believe most of the notebooks were ultimately shipped to the United States.

Manufacturing

We employ a virtual manufacturing platform through third-party relationships. We currently utilize a single semiconductor manufacturer to supply us with our requirements of ASICs based on our proprietary designs.

After production and testing, the ASICs are shipped to our subcontractors for assembly. During the assembly process, our ASIC is combined with other components to complete our product solution. The finished assembly is then shipped by our subcontractors directly to our customers for integration into their products.

We believe our virtual manufacturing strategy provides a scalable business model; enables us to concentrate on our core competencies of research and development, technological advances, and product solution design; and reduces our capital expenditures. In addition, this strategy significantly reduces our inventory costs because we do not incur most of our manufacturing costs until we have actually shipped our product solutions to our customers and billed those customers for those products.

Our third-party manufacturers are large, world-class, cost-effective, Asian-based organizations. We provide our manufacturing subcontractors with six-month rolling forecasts of our production requirements. We do not, however, have long-term agreements with any of our manufacturing subcontractors that

guarantee production capacity, prices, lead times, or delivery schedules. The strategy of relying on those parties exposes us to vulnerability owing to our dependence on few sources of supply. We believe that other sources of supply are available. In addition, we may establish relationships with other manufacturing subcontractors in order to reduce our dependence on any one source of supply.

Backlog

As of December 31, 2001, we had a backlog of orders of approximately $10.9 million. The backlog of orders as of December 31, 2000 was approximately $12.9 million. Our backlog consists of product orders for which purchase orders have been received and which are scheduled for shipment within six months. Most orders are subject to rescheduling or cancellation with limited penalties. Because of the possibility of customer changes in product shipments, our backlog as of a particular date may not be indicative of net sales for any succeeding period.

Competition

Our principal competitor in the sale of notebook touch pads is Alps Electric, a Japanese conglomerate. Our principal competitors in the sale of notebook pointing sticks are Alps Electric, Brother, and CTS. In the iAppliance interface markets, our potential competitors include Alps Electric, Panasonic, Gunze, and various other companies involved in user interface solutions. In certain cases, large OEMs may develop alternative interface solutions for their own products.

In the notebook interface markets, we plan to continue to compete primarily on the basis of our technological expertise, design innovation, customer service, and the long track record of performance of our interface solutions, including their ease of use, reliability, and cost-effectiveness as well as their timely design, production, and delivery schedules. Our new TouchStyk now enables us to address the approximate 29% of the notebook computer market that uses solely a pointing stick rather than a touch pad as the user interface as well as to address the growing trend toward dual pointing interfaces. Our ability to supply OEMs with both TouchPads and TouchStyks will also enhance our competitive position since we can provide OEMs with the following advantages:


	•	single source supplier that eliminates compatibility issues;

	•	cost-effective and simplified OEM integration;

	•	simplified product line to address both markets;

	•	end user flexibility since one notebook can address both user preferences; and

	•	modular approach allowing OEMs to utilize our TouchPad, our TouchStyk, or a combination of both interfaces.

In the iAppliance interface markets, we intend to compete primarily based on the advantages of our capacitive, inductive, and neural pattern recognition technologies. We believe our technologies offer significant benefits in terms of size, power consumption, durability, light transmissivity, resolution, ease of use, and reliability when compared to other technologies. While these markets are just beginning to emerge, and we cannot know what the competitive factors will ultimately be, we intend to compete aggressively for this business. In addition, we believe our proven track record, our marquee global customer base, and our reputation for design innovation in the notebook market will provide competitive advantages in the iAppliance markets. However, some of our competitors, particularly in the iAppliance markets, have greater market recognition, large customer bases, and substantially greater financial, technical, marketing, distribution, and other resources than we possess and that afford them competitive advantages. As a result, they may be able to introduce new product solutions and respond to customer requirements more quickly than we can. In addition, new competitors, alliances among competitors, or alliances among competitors and OEMs may emerge and allow competitors to rapidly acquire significant market share. Furthermore, our competitors may in the future develop technologies that more effectively address the interface needs of the notebook computer and iAppliance markets.

Our sales, profitability, and success depend on our ability to compete with other suppliers of interface solutions. Our competitive position could be adversely affected if one or more of our current OEMs reduce their orders or if we are unable to develop customers for our new iAppliance interface solutions.

Employees

As of December 31, 2001, we employed a total of 160 persons, including 25 in finance, administration, and operations, 34 in sales and marketing, and 101 in research and development. Of these employees, 118 were located in the United States, 24 in the United Kingdom, and 18 in Taiwan. We consider our relationship with our employees to be good, and none of our employees are represented by a union in collective bargaining with us.

Competition for qualified personnel in our industry is extremely intense, particularly for engineering and other technical personnel. Our success depends in part on our continued ability to attract, hire, and retain qualified personnel.

Facilities

Our principal executive officers as well as our principal research, development, sales, marketing, and administrative functions are located in a 34,000 square foot leased facility in San Jose, California. The lease extends through January 2005 and provides for an average monthly rental payment of $58,292. We believe this facility will be adequate to meet our needs for at least the next 18 months. Our European headquarters are located in Cambridge, United Kingdom, where we lease approximately 4,000 square feet. We also maintain a 5,000 square foot office in Taiwan. In addition, we maintain a satellite sales and support office in China.

Legal Proceedings

We currently are not involved in any legal proceeding that we believe would have a material adverse effect on our business or financial condition.

MANAGEMENT

Directors and Executive Officers

The following table sets forth certain information regarding our directors and executive officers.


Name	Age		Position

Federico Faggin		60	Chairman of the Board




Francis F. Lee		49	President, Chief Executive Officer, and Director




Donald E. Kirby		53	Senior Vice President and General Manager PC Products




Russell J. Knittel		51	Senior Vice President, Chief Financial Officer, Chief Administrative Officer, Secretary, and Treasurer




Shawn P. Day, Ph.D.		36	Vice President of Research and Development




Richard C. McCaskill		54	Vice President of Marketing and Business Development




David T. McKinnon		54	Vice President of System Silicon




Thomas D. Spade		35	Vice President of Worldwide Sales




William T. Stacy, Ph.D.		59	Vice President of Operations




Keith B. Geeslin		48	Director




Richard L. Sanquini		67	Director




Joshua C. Goldman		35	Director

Federico Faggin co-founded our company and has served as the Chairman of the Board of our company since January 1999. He served as a director and the President and Chief Executive Officer from March 1987 to December 1998. Mr. Faggin also co-founded Cygnet Technologies, Inc. in 1982 and Zilog, Inc. in 1974. Mr. Faggin served as Department Manager in Research and Development at Intel Corporation from 1970 to 1974 and led the design and development of the world’s first microprocessor and more than 25 integrated circuits. In 1968, Mr. Faggin was employed by Fairchild Semiconductor and led the development of the original MOS Silicon Gate Technology and designed the world’s first commercial integrated circuit to use such technology. Mr. Faggin is also chairman of Integrated Device Technology, Inc., a producer of integrated circuits; and a director of Avanex Corp., a producer of fiber optic-based products, known as photonic processors; each of which is a public company. He is the recipient of many honors and awards including the 1988 International Marconi Fellowship Award, the 1994 IEEE W. Wallace McDowell Award, and the 1997 Kyoto Prize. In addition, in 1996, Mr. Faggin was inducted in the National Inventor’s Hall of Fame for the co-invention of the microprocessor. Mr. Faggin holds a Dottore in Fisica degree in physics, summa cum laude, from the University of Padua, Italy. He also holds an honorary doctorate degree in computer science from the University of Milan, Italy.

Francis F. Lee has served as a director and the President and Chief Executive Officer of our company since December 1998. He was a consultant from August 1998 to November 1998. From May 1995 until July 1998, Mr. Lee served as General Manager of NSM, a Hong Kong-based joint venture between National Semiconductor Corporation and S. Megga. Mr. Lee held a variety of executive positions for National Semiconductor from 1988 until August 1995. These positions included Vice President of Communication and Computing Group, Vice President of Quality and Reliability, Director of Standard Logic Business Unit, and various other operations and engineering management positions. Mr. Lee holds a Bachelor of Science degree, with honors, in electrical engineering from the University of California at Davis.

Donald E. Kirby has been Senior Vice President and General Manager PC Products of our company since November 2001. He served as the General Manager PC Products and Vice President of Operations of our company from August 1999 until October 2001. From September 1997 to July 1999, Mr. Kirby served as Vice President of Technology Infrastructure and Core Technology Group of National Semiconductor; from January 1997 to August 1997, he served as Director of Strategic Technology Group

of National Semiconductor; and from October 1995 to December 1996, he served as Director of Operations/ Co-GM, LAN Division of National Semiconductor. Mr. Kirby holds a patent for a Micro-controller ROM Emulator.

Russell J. Knittel has been Senior Vice President, Chief Financial Officer, Chief Administrative Officer, Secretary, and Treasurer of our company since November 2001. He served as the Vice President of Administration and Finance, Chief Financial Officer, and Secretary of our company from April 2000 until October 2001. Mr. Knittel served as Vice President and Chief Financial Officer of Probe Technology Corporation from May 1999 to March 2000. He was a consultant from January 1999 until April 1999. Mr. Knittel held Vice President and Chief Financial Officer positions at Starlight Networks from November 1994 to December 1998. Mr. Knittel holds a Bachelor of Arts degree in accounting from California State University at Fullerton and a Masters of Business Administration from San Jose State University.

Shawn P. Day, Ph.D. has been the Vice President of Research and Development of our company since June 1998. He served as the Director of Software Development of our company from November 1996 until May 1998 and as principal software engineer from August 1995 until October 1996. Mr. Day holds a Bachelor of Science degree and a Doctorate, both in electrical engineering, from the University of British Columbia in Vancouver, Canada.

Richard C. McCaskill has been the Vice President of Marketing and Business Development of our company since May 2000. Mr. McCaskill served as the Executive Vice President and General Manager for ART Inc., a speech and handwriting recognition company, from December 1996 to April 2000. Mr. McCaskill served as a consultant for ART Inc. and Micropolis from June 1996 to December 1996. From April 1993 to May 1996, Mr. McCaskill held the position of Vice President of Technology at Reveal Computer Products, a sister company to Packard Bell Computers. Mr. McCaskill holds a Bachelor of Science degree in electrical engineering from California State University at Los Angeles.

David T. McKinnon has been the Vice President of System Silicon of our company since September 2001. From May 2000 until September 2001, Mr. McKinnon served as a consultant to start-up companies in the networking IC sector. From April 1998 until April 2000, Mr. McKinnon served as Vice President of Networking Business for Level One Communications. From December 1995 until April 1998, Mr. McKinnon served as the Chief Operating Officer/ Chief Technical Officer of the Japan Business Group of National Semiconductor. Mr. McKinnon holds a Bachelor of Science degree with Honors in Electrical and Electronic Engineering and a Masters in Science, Digital Techniques in Communications & Control from Heriot-Watt University in Edinburgh, Scotland.

Thomas D. Spade has been the Vice President of Worldwide Sales of our company since July 1999. From May 1998 until June 1999, he served as our Director of Sales. From May 1996 until April 1998, Mr. Spade was the Director of International Sales for Alliance Semiconductor. Mr. Spade previously has held additional sales and management positions at Alliance Semiconductor, Anthem Electronics, Arrow Electronics, and Andersen Consulting. Mr. Spade holds a Bachelor of Arts degree in economics and management from Albion College.

William T. Stacy, Ph.D. has been the Vice President of Operations of our company since October 2001. From August 1992 to June 2001, Mr. Stacy held a number of business management positions in the Data Management and Analog Groups of National Semiconductor. Most recently, from April 1999 until June 2001, he was Vice President of the Wireless Division. Prior to joining National, he held a series of operational and business management positions at Philips Semiconductors. He started his career in Philips Research Laboratories in Eindhoven, where he worked on magnetic and semiconducting device structures. Mr. Stacy holds a Bachelor of Science degree in physics and mathematics from Oregon State University and a Masters and Ph.D. degree in physics from the University of Illinois.

Keith B. Geeslin has been a director of our company since 1986. Mr. Geeslin serves as Managing General Partner of Sprout Group, a venture capital firm. He joined Sprout Group in 1984 and became a general partner in 1988. In addition, he is a general or limited partner in a series of investment funds

associated with Sprout Group, a division of DLJ Capital Corporation, which is a subsidiary of Credit Suisse First Boston (USA), Inc. Mr. Geeslin is currently a director of GlobeSpan, Inc., a producer of DSL integrated circuits; RHYTHMS NetConnections Inc., a provider of broadband local access communications services; Innoveda, Inc.; and Paradyne Networks Inc., a producer of communication products for network service providers and business customers; each of which is a public company. Mr. Geeslin is also a director of several privately held companies. He has also served as a director of the Western Association of Venture Capitalists. Mr. Geeslin holds a Bachelor of Science degree in electrical engineering and a Masters of Science degree in engineering and economic systems from Stanford University and a Masters of Arts degree in philosophy, politics, and economics from Oxford University.

Richard L. Sanquini has been a director of our company since 1994. Mr. Sanquini is currently a consultant for our company, Foveon, Inc., National Semiconductor, and several privately held companies. From January 1999 to November 1999, Mr. Sanquini served as Senior Vice President and General Manager of the Consumer and Commercial Group of National Semiconductor; from April 1998 to December 1998, he served as Senior Vice President and General Manager of the Cyrix Group of National Semiconductor; from November 1997 to March 1998, he served as Senior Vice President and General Manager of the Personal Systems Group of National Semiconductor; from April 1996 to October 1997, he served as Senior Vice President and Chief Technology Officer of the Corporate Strategy, Business Development, and Intellectual Property Protection Group of National Semiconductor; and from December 1995 to March 1996, he served as Senior Vice President of the Business Development and Intellectual Property Protection Group of National Semiconductor. Prior to National Semiconductor, he was with RCA where he directed its memory and microprocessor businesses. Mr. Sanquini also has been a director of Foveon, Inc. since August 1997. Mr. Sanquini holds a Bachelor of Science degree in electrical engineering from the Milwaukee School of Engineering, Wisconsin.

Joshua C. Goldman has been a director of our company since January 2001. Mr. Goldman became an entrepreneur in residence at Sprout Group in April 2001. Mr. Goldman was employed by mySimon, an online comparison shopping site, as President and Chief Executive Officer from January 1999 to March 2001 and as Vice President of Marketing from November 1998 to January 1999. From October 2000 to March 2001, Mr. Goldman also served as President of the Consumer Division of CNet Networks, which acquired mySimon in February 2000. He served as Vice President of Marketing at 4th Networks, Inc. from June 1998 until October 1998. From April 1996 until May 1998, Mr. Goldman was with USWeb, where he last served as Vice President of Business Solutions. Mr. Goldman has also served in management roles at Apple Computer, Phoenix Technologies, and Softbank Content Services. He earned a Bachelor of Science degree in computer science with an emphasis in artificial intelligence, with honors, from Tufts University and a Masters of Business Administration from Harvard Business School.

There are no family relationships among any of our directors, officers, or key employees.

Board Committees

Our board of directors established an audit committee in February 2001, consisting of independent directors. The members are Messrs. Geeslin, Sanquini, and Goldman.

The functions of the audit committee are as follows:


	•	review our internal accounting principles and auditing practices and procedures;

	•	consult with and review the services provided by our independent accountants; and

	•	make recommendations to the board of directors about selecting independent accountants.

We established a compensation committee in September 2000. The compensation committee consists of Messrs. Geeslin and Sanquini. The compensation committee reviews and recommends to the board of directors the salaries, incentive compensation, and benefits of our officers and employees, including stock compensation and loans, and administers our stock plans and employee benefit plans.

Prior to the establishment of the audit and compensation committees, these functions were performed by our board of directors.

Compensation Committee Interlocks and Insider Participation

None of the members of the compensation committee is, or ever has been, an officer or employee of our company, or an officer or employee of any of our subsidiaries. No interlocking relationship exists between any member of our board of directors or our compensation committee and any member of the board of directors or compensation committee of any other company.

Director Compensation

All non-employee directors will be reimbursed for their expenses for attending board and committee meetings. The company intends to pay a fee of $1,500 to non-employee directors for attendance at board meetings and $500 for attendance at committee meetings. In addition, directors are eligible to receive grants of stock options under our 1996 stock option plan. During fiscal 2001, we granted options to purchase shares of common stock to the following non-employee directors: options to purchase 25,000 shares at an exercise price of $3.00 per share were granted to Mr. Geeslin; options to purchase 100,000 shares at an exercise price of $3.00 were granted to Mr. Faggin; and options to purchase 50,000 shares at an exercise price of $5.50 were granted to Mr. Goldman. Options to purchase 25% of such shares vest and become exercisable on the first anniversary of the date of grant, and options to purchase 1/48th of the total shares vest and become exercisable on the first of each month thereafter.

Mr. Sanquini and Mr. T.W. Kang, a former director, from time to time have provided consulting services to us. We have issued options for our common stock as compensation for these services. We issued options for 12,500 shares at an exercise price of $2.50 to Mr. Sanquini and options for 4,531 shares at an exercise price of $2.50 to Mr. Kang during fiscal 2000. We also issued options for 12,500 shares at an exercise price of $2.50 to Mr. Sanquini during fiscal 2001. The options were fully vested upon completion of the consulting arrangements. In addition, Mr. Kang received 14,501 shares of our common stock valued at an aggregate of $19,335 during fiscal 2000.

Executive Compensation

The table below summarizes the compensation earned for services provided to us in all capacities for the fiscal year ended June 30, 2001 by our chief executive officer and our four next most highly compensated executive officers whose compensation exceeded $100,000, whom we refer to as the named executive officers.

Summary Compensation Table


								Long-Term
								Compensation

								Awards

		Annual Compensation						Securities
								Underlying
Name and Principal Position		Year	Salary($)			Bonus($)		Options(#)

Francis F. Lee		2001		220,000			175,000		250,000
	President, Chief Executive Officer, and Director




Russell J. Knittel		2001		190,000			67,000		45,000
	Vice President of Administration and Finance, Chief Financial Officer, and Secretary




Shawn P. Day, Ph.D.		2001		170,000			45,000		60,000
	Vice President of Research and Development




Donald E. Kirby		2001		195,000			90,000		40,000
	General Manager PC Products and Vice President of Operations




Thomas D. Spade		2001		199,883	(1)		—		50,000
	Vice President of Worldwide Sales


(1)	Mr. Spade also received certain perquisites, the value of which did not exceed the lesser of $50,000 or 10% of his salary and bonus during fiscal 2001.

Option Grants in Last Fiscal Year

The table below provides information about the stock options granted to the named executive officers during the fiscal year ended June 30, 2001. These options were granted under our 1996 stock option plan and 2000 nonstatutory stock option plan and have a term of 10 years. The options may terminate earlier if the optionholder stops providing services to us.

We granted options to purchase 1,651,272 shares of our common stock in fiscal 2001. The percentage of total options in the table below was calculated based on options to purchase an aggregate of 1,446,240 shares of our common stock granted to our employees in fiscal 2001.

Options were granted at an exercise price that we believed represented the fair value of our common stock, as determined in good faith by our board of directors.



	Individual Grants
										Potential Realizable Value
	Number of		Percent of							at Assumed Annual Rates
	Securities		Total Options							of Stock Price Appreciation
	Underlying		Granted to							for Option Term(2)
	Options		Employees in			Exercise		Expiration
Name	Granted(#)(1)		Fiscal Year			Price($/Sh)		Date		5%		10%

Francis F. Lee		250,000		17.3	%	$	3.00		9/19/10	$	3,322,237	$	5,734,356




Russell J. Knittel		45,000		3.1			8.50		3/06/11		350,503		784,684




Shawn P. Day, Ph.D.		60,000		4.1			3.00		9/19/10		797,337		1,376,245




Donald E. Kirby		40,000		2.8			3.00		9/19/10		531,558		917,497




Thomas D. Spade		50,000		3.5			3.00		9/19/10		664,447		1,146,871


(1)	Of Mr. Lee’s options, 50,000 vest and become exercisable 1/12 on the 18th day of each month, commencing on February 18, 2003, and 200,000 vest and become exercisable 1/12 on the 18th day of each month, commencing on February 18, 2004. Mr Knittel’s options vest and become exercisable 1/12 on the first day of each month, commencing on April 1, 2004. Mr. Day’s and Mr. Spade’s options vest and become exercisable 1/24 on the 12th day of each month, commencing on February 12, 2003. Mr. Kirby’s options vest and become exercisable 1/12 on the last day of each month, commencing on September 30, 2003.


(2)	Potential gains are net of the exercise price, but before taxes associated with the exercise. Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The potential realizable value assumes that the stock price appreciates from the assumed public offering price of $10.00 per share. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with the rules of the SEC and do not represent our estimate or projection of the future price of our company’s common stock. Actual gains, if any, on stock option exercises will depend upon the future market prices of our common stock.

Aggregate Option Exercises During Fiscal 2001 and Fiscal 2001 Option Values

The following table describes, for the named executive officers, the number of shares acquired and the value realized upon exercise of stock options during fiscal 2001 and the exercisable and unexercisable options held by them as of June 30, 2001. The “Value Realized” and “Value of Unexercised In-the-Money Options at June 30, 2001” shown in the table represents an amount equal to the difference between the assumed public offering price of $10.00 per share and the option exercise price multiplied by the number of shares acquired on exercise and the number of unexercised in-the-money options.



						Number Of Securities					Value Of Unexercised
						Underlying Unexercised					In-The-Money Options at
	Shares					Options at June 30, 2001					June 30, 2001
	Acquired on			Value
	Exercise			Realized		Exercisable		Unexercisable			Exercisable		Unexercisable

Francis F. Lee		—		$	—		—		690,625	(1)	$	—	$	5,490,625




Russell J. Knittel		80,000	(2)		600,000		—		225,000			—		1,417,500




Shawn P. Day, Ph.D.		30,000			270,000		27,747		102,253			227,719		762,281




Donald E. Kirby		—			—		114,583		175,417			916,617		1,363,333




Thomas D. Spade		40,000			360,000		52,584		97,416			451,250		738,750


(1)	Includes 65,625 shares acquired by Mr. Lee pursuant to the early exercise of options in a prior year that are subject to a repurchase option until vesting requirements are met.

(2)	The options were exercised early and 556 of the shares are subject to a repurchase option until vesting requirements are met.

Employment Arrangements

We anticipate entering into employment arrangements with persons who are believed to make significant contributions to our company, and will implement compensation packages for certain members of management as well as for other personnel. The terms of such agreements may include payment of salary for the period of tenure with the company. Other key employees will be offered incentive compensation payable in our common stock. Issuance of these shares will dilute existing stockholders. These arrangements will not be the result of arms’ length negotiation. However, management anticipates the terms thereof will be reasonable when compared to similar arrangements within the industry.

Change of Control Agreements

Mr. Knittel, our chief financial officer who was hired in April 2000, is entitled to six months severance pay in the event of a change of control or a constructive termination as a result of reduced responsibilities or stature within our company. Options granted at the time of joining the company include accelerated vesting for Mr. Lee for 50% of his unvested options and for Mr. Knittel for 100% of his unvested options upon a change of control or a constructive termination as a result of reduced responsibilities or stature within our company. Mr. Faggin holds options for 415,000 shares that provide for immediate vesting of 50% of the unvested options in the event of a change of control.

1986 Incentive Stock Option Plan and 1986 Supplemental Stock Option Plan

The 1986 incentive stock option plan provided for the grant of incentive stock options to our key employees, including employee directors. The 1986 supplemental stock option plan provided for the grant of nonstatutory stock options to employees, directors, and consultants. As of September 30, 2001, there were outstanding options to acquire 20,000 shares of our common stock under the two 1986 plans. The 1986 incentive stock option plan and the 1986 supplemental stock option plan expired November 1996, and no additional options will be issued under those plans. The expiration date, maximum number of shares purchasable, and the other provisions of the options, including vesting provisions, were established at the time of grant. Options were granted for terms of up to 10 years and become exercisable in whole or in

one or more installments at such time as was determined by the administrator upon the grant of the options.

Under the 1986 incentive stock option plan, exercise prices of options are equal to not less than 100% of the fair market value of our common stock at the time of the grant. Under the 1986 supplemental stock option plan, exercise prices of options are equal to not less than 85% of the fair market value of our common stock at the time of the grant. The exercise price for any options granted under the 1986 incentive stock option plan and the 1986 supplemental stock option plan may be paid in cash, in shares of our common stock valued at fair market value on the exercise date, or in any other form of legal consideration that may be acceptable to the board of directors or administrator in their discretion. In addition, the administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options by allowing any such individual to deliver an interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with the exercise or purchase. In the event of a change of control of our company, we would expect that options outstanding under the 1986 incentive stock option plan and the 1986 supplemental stock option plan at the time of the transaction would be assumed or replaced with substitute options by the acquiror. If our acquiror did not agree to assume or replace outstanding awards, either the exercise period of all options will accelerate and terminate if not exercised upon consummation of the acquisition, or such options will remain in effect. Outstanding awards under the 1986 incentive stock option plan and the 1986 supplemental stock option plan will be adjusted in the event of a stock split, stock dividend, or other similar change in our capital stock without the receipt of consideration by us.

1996 Stock Option Plan

Our 1996 stock option plan provides for the grant of incentive stock options to employees, including employee directors, and of nonstatutory stock options to employees, directors, and consultants. The purposes of the 1996 stock option plan are to attract and retain the best available personnel, to provide additional incentives to our employees and consultants, and to promote the success of our business. The 1996 stock option plan was originally adopted by our board of directors in December 1996 and approved by our stockholders in November 1996. The 1996 stock option plan provides for the issuance of options and rights to purchase up to 5,380,918 shares of our common stock. Unless terminated earlier by the board of directors, the 1996 stock option plan will terminate in December 2006.

As of September 30, 2001, 3,991,995 options to purchase shares of common stock were outstanding under the 1996 stock option plan and 1,333,234 shares had been issued upon exercise of outstanding options.

The 1996 stock option plan may be administered by the board of directors or a committee of the board, each known as the administrator. The administrator determines the terms of options granted under the 1996 stock option plan, including the number of shares subject to the award, the exercise or purchase price, the vesting and exercisability of the award, and any other conditions to which the award is subject. Incentive stock options granted under the 1996 stock option plan must have an exercise price of at least 100% of the fair market value of the common stock on the date of grant (110% if the option is granted to a stockholder who, at the time the option is granted, owns stock representing more than 10% of the total combined voting power of all classes of our stock). Nonstatutory stock options granted under the 1996 stock option plan must have an exercise price of at least 85% of the fair market value of the common stock on the date of grant (110% if the option is granted to a stockholder who, at the time the option is granted, owns stock representing more than 10% of the total combined voting power of all classes of our stock). The exercise price for any options granted under the 1996 stock option plan may be paid in cash, in shares of our common stock valued at fair market value on the exercise date, or in any other form of legal consideration that may be acceptable to the board of directors or administrator in their discretion. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options by allowing any such individual to deliver an interest-bearing

promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with the exercise or purchase.

With respect to options granted under the 1996 stock option plan, the administrator determines the term of options, which may not exceed 10 years, or five years in the case of an incentive stock option granted to a holder of more than 10% of the total voting power of all classes of our stock. An option is nontransferable other than by will or the laws of descent and distribution and may be exercised during the lifetime of the optionee only by the optionee. Stock options are generally subject to vesting, meaning that the optionee earns the right to exercise the option over a specified period of time only if he or she continues to provide services to our company over that period.

If our company or its business is acquired by another corporation, we would expect that options outstanding under the 1996 stock option plan at the time of the transaction would be assumed or replaced with substitute options by our acquiror. If our acquiror did not agree to assume or replace outstanding awards, all options will terminate upon consummation of the acquisition. Outstanding awards and the number of shares remaining available for issuance under the 1996 stock option plan will adjust in the event of a stock split, stock dividend, or other similar change in our capital stock without the receipt of consideration by us. The administrator has the authority to amend or terminate the 1996 stock option plan, but no action may be taken that impairs the rights of any holder of an outstanding option without the holder’s consent. In addition, we must obtain stockholder approval of amendments to the plan as required by applicable law.

2000 Nonstatutory Stock Option Plan

Our 2000 nonstatutory stock option plan provides for the grant of nonstatutory stock options to employees and consultants. The purposes of the 2000 nonstatutory stock option plan are to attract and retain the best available personnel, to provide additional incentives to our employees and consultants, and to promote the success of our business. The 2000 nonstatutory stock option plan was adopted by our board of directors in September 2000. The 2000 nonstatutory stock option plan provides for the issuance of options to purchase up to 200,000 shares of our common stock. As of September 30, 2001, there were outstanding options to acquire 194,000 shares of our common stock. Unless terminated earlier by the board of directors, the 2000 nonstatutory stock option plan will terminate in September 2010.

The 2000 nonstatutory stock option plan may be administered by the board of directors or a committee of the board, each known as the administrator. The administrator determines the terms of options granted under the 2000 nonstatutory stock option plan, including the number of shares subject to the award, the exercise or purchase price, the vesting and/or exercisability of the award, and any other conditions to which the award is subject. The exercise price for any options granted under the 2000 nonstatutory stock option plan may be paid in cash, in shares of our common stock valued at fair market value on the exercise date, or in any other form of legal consideration that may be acceptable to the board of directors or administrator in their discretion. The option may also be exercised through a same-day sale program without any cash outlay by the optionee. In addition, the administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options by allowing such individuals to deliver an interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise or purchase. The term of options granted under the 2000 nonstatutory stock option plan may not exceed 10 years.

If our company or its business is acquired by another corporation, we would expect that options outstanding under the 2000 nonstatutory stock option plan at the time of the transaction would be assumed or replaced with substitute options by our acquiror. If our acquiror did not agree to assume or replace outstanding awards, all options will terminate upon consummation of the acquisition. Outstanding awards and the number of shares remaining available for issuance under the 2000 nonstatutory stock option plan will be adjusted in the event of a stock split, stock dividend, or other similar change in our capital stock. The administrator has the authority to amend or terminate the 2000 nonstatutory stock option plan, but no

action may be taken that impairs the rights of any holder of an outstanding option without the holder’s consent.

2001 Incentive Compensation Plan

Our 2001 incentive compensation plan is designed to attract, motivate, retain, and reward our executives, employees, officers, directors, and independent contractors, by providing such persons with annual and long-term performance incentives to expend their maximum efforts in the creation of stockholder value. The 2001 incentive compensation plan was adopted by our board of directors in March 2001 and approved by our stockholders in November 2001. Under the 2001 incentive compensation plan, an aggregate of 1,000,000 shares of common stock may be issued pursuant to the granting of options to acquire common stock, the direct granting of restricted common stock and deferred stock, the granting of stock appreciation rights, or the granting of dividend equivalents. On the effective date of the registration statement of which this prospectus forms a part, an additional number of shares equal to 6% of the total number of shares then outstanding will be added and thereafter on the first day of each succeeding calendar quarter an additional number of shares equal to 1 1/2% of the total number of shares then outstanding will be added to the number of shares that may be subject to the granting of awards. As of September 30, 2001, there were no outstanding options to acquire shares of our common stock under the 2001 incentive compensation plan.

The 2001 incentive compensation plan may be administered by the board of directors or a committee of the board. The committee or the board of directors determines the persons to receive awards, the type and number of awards to be granted, the vesting and exercisability of the award, and any other conditions to which the award is subject. Awards may be settled in the form of cash, shares of common stock, other awards, or other property in the discretion of the committee or the board of directors.

The committee or the board of directors may, in its discretion, accelerate the exercisability, the lapsing of restrictions, or the expiration of deferral or vesting periods of any award, and such accelerated exercisability, lapse, expiration and, if so provided in the award agreement, vesting will occur automatically in the case of a “change in control” of our company. In addition, the committee or the board or directors may provide in an award agreement that the performance goals relating to any performance based award will be deemed to have been met upon the occurrence of any “change in control.” Upon the occurrence of a change in control, if so provided in the award agreement, stock options and certain stock appreciation rights may be cashed out based on a “change in control price,” which will be the higher of (1) the cash and fair market value of property that is the highest price per share paid in any reorganization, merger, consolidation, liquidation, dissolution, or sale of substantially all assets of our company, or (2) the highest fair market value per share at any time during the 60 days before and 60 days after a change in control.

The board of directors may amend, alter, suspend, discontinue, or terminate the 2001 incentive compensation plan or the committee’s authority to grant awards without further stockholder approval, except stockholder approval must be obtained for any amendment or alteration if such approval is required by law or regulation or under the rules of any stock exchange or quotation system on which shares of common stock are then listed or quoted. Unless terminated earlier by the board of directors, the 2001 incentive compensation plan will terminate at such time as no shares of common stock remain available for issuance under the plan and the company has no further rights or obligations with respect to outstanding awards under the plan.

2001 Employee Stock Purchase Plan

Our 2001 employee stock purchase plan is designed to encourage stock ownership in our company by our employees, thereby enhancing employee interest in our continued success. The plan was adopted by our board of directors in February 2001 and approved by our stockholders in November 2001. The plan will become effective on the effective date of the registration statement of which this prospectus forms a part. One million shares of our common stock will initially be reserved for issuance under the plan. An annual increase will be made of the lesser of 500,000 shares, 1% of all shares of common stock

outstanding, or a lesser amount determined by the board of directors. The plan is currently administered by our board of directors. Under the plan’s terms, however, the board may appoint a committee to administer the plan. The plan gives broad powers to the board or the committee to administer and interpret the plan.

The plan permits employees to purchase our common stock at a favorable price and possibly with favorable tax consequences to the participants. All employees of our company or of those subsidiaries designated by the board who are regularly scheduled to work at least 20 hours per week for more than five months per year are eligible to participate in any of the purchase periods of the plan after completing 90 days of continuous employment. However, any participant who would own (as determined under the Internal Revenue Code), immediately after the grant of an option, stock possessing 5% or more of the total combined voting power or value of all classes of the stock of our company will not be granted an option under the plan.

The plan will be implemented in a series of successive offering periods, each with a maximum duration of 24 months. The initial offering period, however, will begin on the effective date of the registration statement of which this prospectus forms a part and will end on December 31, 2003. If the fair market value per share of our common stock on any purchase date is less than the fair market value per share on the start date of a 24-month offering period, then that offering period will automatically terminate, and a new 24-month offering period will begin on the next business day. All participants in the terminated offering will be transferred to the new offering period.

All eligible employees will automatically become participants on the effective date of the registration statement of which this prospectus forms a part. Eligible employees may elect to participate in the plan on January 1 or July 1 of each year. Subject to certain limitations determined in accordance with calculations set forth in the plan, a participating employee is granted the right to purchase shares of common stock on the last business day on or before each June 30 and December 31 during which the employee is a participant in the plan. Upon enrollment in the plan, the participant authorizes a payroll deduction, on an after-tax basis, in an amount of not less than 1% and not more than 15% of the participant’s compensation on each payroll date. Payment on the initial purchase date in the first offering period will be a lump-sum payment unless the participant elects otherwise. Unless the participant withdraws from the plan, the participant’s option for the purchase of shares will be exercised automatically on each exercise date, and the maximum number of full shares subject to the option will be purchased for the participant at the applicable exercise price with the accumulated plan contributions then credited to the participant’s account under the plan. The option exercise price per share may not be less than 85% of the lower of the market price on the first day of the offering period or the market price on the exercise date, unless the participant’s entry date is not the first day of the offering period, in which case the exercise price may not be lower than 85% of the greater of the market price on the first day of the offering period or the market price of the common stock on the entry date.

As required by tax law, no participant may receive an option under the plan for shares that have a fair market value in excess of $25,000 for any calendar year, determined at the time the option is granted. Any funds not used to purchase shares will remain credited to the participant’s bookkeeping account and applied to the purchase of shares of common stock in the next succeeding purchase period. No interest is paid on funds withheld, and those funds are used by our company for general operating purposes.

No plan contributions or options granted under the plan are assignable or transferable, other than by will or by the laws of descent and distribution or as provided under the plan. During the lifetime of a participant, an option is exercisable only by that participant. The expiration date of the plan will be determined by the board and may be made any time following the close of any six-month exercise period, but may not be longer than 10 years from the date of the grant. If our company dissolves or liquidates, the offering period will terminate immediately prior to the consummation of that action, unless otherwise provided by the board. In the event of a merger or a sale of all or substantially all of our company’s assets, each option under the plan will be assumed or an equivalent option substituted by the successor corporation, unless the board, in its sole discretion, accelerates the date on which the options may be

exercised. The unexercised portion of any option granted to an employee under the plan will be automatically terminated immediately upon the termination for any reason, including retirement or death, of the employee’s employment.

The plan provides for adjustment of the number of shares for which options may be granted, the number of shares subject to outstanding options, and the exercise price of outstanding options in the event of any increase or decrease in the number of issued and outstanding shares as a result of one or more reorganizations, restructurings, recapitalizations, reclassifications, stock splits, reverse stock splits, or stock dividends.

The board or the committee may amend, suspend, or terminate the plan at any time, provided that such amendment may not adversely affect the rights of the holder of an option and the plan may not be amended if such amendment would in any way cause rights issued under the plan to fail to meet the requirements for employee stock purchase plans as defined in Section 423 of the Internal Revenue Code, or would cause the plan to fail to comply with Rule 16b-3 under the Exchange Act.

The company’s stockholders will not have any preemptive rights to purchase or subscribe for the shares reserved for issuance under the plan. If any option granted under the plan expires or terminates for any reason other than having been exercised in full, the unpurchased shares subject to that option will again be available for purposes of the plan.

401(k) Profit Sharing Plan

In July 1991, we adopted a 401(k) profit sharing plan for which our employees generally are eligible. The plan is intended to qualify under Section 401(k) of the Internal Revenue Code, so that contributions to the plan by employees or by us and the investment earnings on the contributions are not taxable to the employees until withdrawn. Our contributions are deductible by us when made. Our employees may elect to reduce their current compensation by an amount equal to the maximum of 25% of total annual compensation or the annual limit permitted by law ($11,000 in 2002) and to have those funds contributed to the plan. Although we may make matching contributions to the plan on behalf of all participants, we have not made any contributions since the plan’s adoption.

Indemnification Under our Certificate of Incorporation and Bylaws

The certificate of incorporation of our company provides that no director will be personally liable to the company or its stockholders for monetary damages for breach of a fiduciary duty as a director, except to the extent such exemption or limitation of liability is not permitted under the Delaware General Corporation Law (the “Delaware GCL”). The effect of this provision in the certificate of incorporation is to eliminate the rights of the company and its stockholders, either directly or through stockholders’ derivative suits brought on behalf of the company, to recover monetary damages from a director for breach of the fiduciary duty of care as a director except in those instances described under the Delaware GCL. In addition, we have adopted provisions in our bylaws and entered into indemnification agreements that require the company to indemnify its directors, officers, and certain other representatives of the company against expenses and certain other liabilities arising out of their conduct on behalf of the company to the maximum extent and under all circumstances permitted by law. Indemnification may not apply in certain circumstances to actions arising under the federal securities laws.

CERTAIN RELATIONSHIPS AND TRANSACTIONS

Financing Activities

The following table summarizes the shares of preferred stock purchased by executive officers, directors, and 5% stockholders and persons and entities associated with them in private placement transactions. Each share of Series A preferred stock converts into 3.3391594 shares (rounded down to the nearest whole number) of common stock automatically upon the closing of this offering. Each share of Series B preferred stock converts into 3.0000171 shares (rounded down to the nearest whole number) of common stock automatically upon the closing of this offering. Each share of Series C preferred stock, Series D preferred stock, Series E preferred stock, and Series F preferred stock converts into one share of common stock automatically upon the closing of this offering. The shares of Series A preferred stock were sold at $1.28 per share; the shares of Series B preferred stock were sold at $1.75 per share; the shares of Series C preferred stock were sold at $1.10 per share; the shares of Series D preferred stock were sold at $1.75 per share; the shares of Series E preferred stock were sold at $2.50 per share; and the shares of Series F preferred stock were sold at $4.50 per share. See “Principal and Selling Stockholders.”


	Series A		Series B		Series C		Series D		Series E		Series F
Name	Preferred		Preferred		Preferred		Preferred		Preferred		Preferred

National Semiconductor Corporation(1)		—		—		—		—		2,000,000		666,667




Technology Venture Investors-3		231,101		280,333		—		—		—		—




TVI Management-3		3,274		5,381		—		—		—		—




Technology Venture Investors-IV		—		—		—		325,714		56,800		55,064




Sprout Capital V(2)		210,469		256,571		—		—		42,554		40,110




Sprout Technology Fund(2)		12,422		15,143		—		—		2,512		2,368




Sprout Capital VI, L.P.(2)		—		—		—		314,918		9,100		8,577




DLJ Venture Capital Fund(2)		11,484		14,000		—		—		2,322		2,189




DLJ Venture Capital Fund II(2)		—		—		—		10,796		312		294




Oak Investment Partners IV, Limited Partnership		—		—		—		1,093,028		382,560		106,267




Oak IV Affiliates Fund, Limited Partnership		—		—		—		49,828		17,440		4,844




Kleiner, Perkins, Caufield & Byers IV		—		268,572		—		205,714		56,800		29,084




Delphi BioInvestments, L.P.		—		—		1,927		1,010		247		12




Delphi BioInvestments II, L.P.		—		—		—		—		832		40




Delphi Ventures, L.P.		—		—		543,528		284,704		69,741		3,321




Delphi Ventures II, L.P.		—		—		—		—		162,472		7,738


(1)	Mr. Sanquini is a consultant to, and is a former officer of, National Semiconductor Corporation.

(2)	Mr. Geeslin is a general partner of the general partner of these entities.

Indebtedness of Management

The individuals listed below elected to pay the exercise price for some of their outstanding options with full recourse promissory notes secured by the common stock underlying the options. The notes bear interest at rates ranging from 4.5% to 6.1% per year. The notes become due over the period from April 2003 to October 2009 or upon termination of employment, whichever is earlier. At June 30, 2001, the unpaid principal balance of these notes totaled $832,500. The original total principal amounts and the maturity dates for the promissory notes executed by each executive officer or former executive officer are as follows:


	Total
	Original
Executive Officer	Note Amount		Maturity Date

Francis F. Lee	$	225,000		December 22, 2007




Francis F. Lee	$	200,000		December 30, 2008




Francis F. Lee	$	100,000		January 7, 2009




Russell J. Knittel	$	200,000		October 13, 2009




James L. Lau	$	107,500		April 30, 2003




Sid Agrawal	$	160,000		July 21, 2003	*


*	Upon termination, Mr. Agrawal paid for the vested portion of his shares in the amount of $62,220 plus interest and the balance of the note was cancelled.

Transactions regarding Foveon

In August 1997, we entered into an agreement with National Semiconductor in connection with a new development stage company, Foveonics, Inc., now known as Foveon, Inc., which produces digital cameras and digital imaging components. We contributed imaging patents and other technology in exchange for 1,728,571 shares of Foveon’s Series A preferred stock. Under the agreement, we had the right to acquire additional shares of Series A preferred stock at a specified price using funds provided under a limited-recourse loan arrangement with National. National loaned our company $1.5 million, which we contributed to Foveon in exchange for 1,371,429 additional Series A preferred shares. The limited-recourse loan is secured only by a portion of these Series A preferred shares. National’s sole remedy under the loan, if we do not repay the loan, is to require us to return those shares to National. Under the same agreement, National purchased 3,200,000 shares of Series A preferred stock and a warrant to purchase 1,700,000 shares of Foveon’s Series B preferred stock.

In August 1998, National purchased 514,047 shares of Foveon’s Series B preferred stock.

During the year ended June 30, 2000, we loaned Foveon a total of approximately $2.7 million in return for convertible promissory notes. The notes are convertible into shares of preferred stock in accordance with the defined terms, mature in 10 years, and bear interest at rates ranging from 6.5% to 6.85%, payable at maturity.

In August 2000, a new venture capital firm bought a 20% interest in Foveon for $21.0 million. In connection with the August 2000 financing, we received from Foveon 329,375 shares of Series B preferred stock and 114,590 shares of Series C preferred stock upon the automatic conversion of the promissory notes we held. Also in August 2000, National received from Foveon 520,625 shares of Series B preferred stock and 476,844 shares of Series C preferred stock upon the conversion of similar notes. National also purchased 1,185,953 shares of Series B preferred stock upon exercise of a warrant. National cancelled a promissory note issued by Foveon as payment for the exercise price of the warrant.

In August 1997, Carver Mead, a founder and director of Foveon, purchased 350,000 shares of common stock of Foveon. In a December 2000 additional closing of the Series C preferred financing, Francis F. Lee, Federico Faggin, and Richard L. Sanquini purchased an aggregate of 113,715 shares of Foveon’s Series C preferred stock out of a total of 3,979,418 shares of Series C preferred stock issued to date.

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial ownership of our common stock on December 31, 2001 by


	•	each of our directors and executive officers;

	•	all of our directors and executive officers as a group; and

	•	each person or entity known by us to own more than 5% of our common stock, assuming the conversion of preferred stock into shares of common stock. See “Certain Relationships and Transactions — Financing Activities.”

Except as otherwise indicated, each person named in the table has sole voting and investment power with respect to all common stock beneficially owned, subject to applicable community property laws. Except as otherwise indicated, each person may be reached at 2381 Bering Drive, San Jose, California 95131.

The percentages shown are calculated based on 18,078,918 shares of common stock outstanding on December 31, 2001. The numbers and percentages shown include the shares of common stock actually owned as of December 31, 2001 and the shares of common stock that the identified person or group had the right to acquire within 60 days of such date. In calculating the percentage of ownership, all shares of common stock that the identified person or group had the right to acquire within 60 days of December 31, 2001 upon the exercise of options are deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by that person or group, but are not deemed to be outstanding for the purpose of computing the percentage of the shares of common stock owned by any other person or group.



			Percent Beneficially Owned
	Number of Shares
Name of Beneficial Owner	Beneficially Owned		Before Offering			After Offering

Directors and Executive Officers:




Federico Faggin(1)		1,372,980		7.5	%		5.9	%




Francis F. Lee(2)		582,813		3.2	%		2.5	%




Donald E. Kirby(3)		155,729		*			*




Shawn P. Day, Ph.D.(4)		133,382		*			*




Russell J. Knittel(5)		122,236		*			*




Thomas D. Spade(6)		115,625		*			*




Richard C. McCaskill(7)		64,854		*			*




William T. Stacy, Ph.D.		—		*			*




David T. McKinnon		—		*			*




Keith B. Geeslin(8)		2,153,922		11.9	%		9.3	%




Richard L. Sanquini(9)		53,403		*			*




Joshua C. Goldman(10)		13,681		*			*




All directors and executive officers as a group (twelve persons)		4,768,625		25.3	%		20.0	%




5% Stockholders:




National Semiconductor Corporation(11)		2,666,667		14.8	%		11.6	%




Entities affiliated with Technology Venture Investors(12)		2,077,339		11.5	%		9.0	%




Entities affiliated with Sprout Group(13)		2,131,665		11.8	%		9.2	%




Entities affiliated with Oak Investment Partners(14)		1,653,967		9.2	%		7.2	%




Kleiner, Perkins, Caufield & Byers IV(15)		1,097,318		6.1	%		4.8	%




Entities affiliated with Delphi Ventures(16)		1,075,572		6.0	%		4.7	%




Carver Mead(17)		990,000		5.5	%		4.3	%


	*	Less than one percent.


	(1)	Includes 100,000 shares held by 1999 Faggin Trust fbo Marc Faggin, 100,000 shares held by 1999 Faggin Trust fbo Eric Faggin, and 100,000 shares held by 1999 Faggin Trust fbo Marzia Faggin. Includes 272,980 shares issuable upon exercise of vested stock options.



	(2)	Includes 4,000 shares held by Francis Lee as custodian for Grace Evelyn Lee and 4,000 shares held by Francis Lee as custodian for Christopher Thomas Lee. Includes 517,000 shares held by Francis F. Lee and Evelyn C. Lee as Co-Trustees of the Lee 1999 Living Trust. Includes 57,813 shares issuable upon exercise of vested stock options.



	(3)	Represents 155,729 shares issuable upon exercise of vested stock options.



	(4)	Includes 43,382 shares issuable upon exercise of vested stock options.



	(5)	Includes 42,236 shares issuable upon exercise of vested stock options.



	(6)	Includes 75,625 shares issuable upon exercise of vested stock options.



	(7)	Represents 64,854 shares issuable upon exercise of vested stock options.



	(8)	Includes 22,257 shares issuable upon exercise of vested stock options. Also includes 2,131,665 shares held by entities affiliated with Sprout Group as set forth in footnote 13 below. Mr. Geeslin is a general partner of the general partner of each of those entities. He disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein.



	(9)	Includes 28,403 shares issuable upon exercise of vested stock options.



(10)	Includes 13,681 shares issuable upon exercise of vested stock options.



(11)	The address for National Semiconductor Corporation is 1090 Kifer Road, Sunnyvale, California 94086. Mr. Brian L. Halla, Mr. Louis Chew, and Mr. John M. Clark III exercise shared voting and dispositive power over these shares.



(12)	Includes 1,612,686 shares held by Technology Venture Investors-3; 27,075 shares held by TVI Management-3; and 437,578 shares held by Technology Venture Investors-IV. The address for these entities is 2480 Sand Hill Road, Suite 101, Menlo Park, California 94025. Mr. Mark G. Wilson, Mr. Burton McMurtry, Mr. David F. Marquardt, Mr. Robert C. Kagle, and Mr. John Johnston exercise shared voting and dispositive power over these shares.



(13)	Includes 1,555,170 shares held by Sprout Capital V; 129,515 shares held by Sprout Technology Fund; and 332,595 shares held by Sprout Capital VI, L.P.; 102,983 shares held by DLJ Venture Capital Fund; and 11,402 shares held by DLJ Venture Capital Fund II, L.P. The address for these entities is 3000 Sand Hill Road, Building 3, Suite 170, Menlo Park, California 94025. Mr. Keith B. Geeslin and Ms. Janet A. Hickey exercise shared voting and dispositive power over the shares held by Sprout Capital V; Mr. Keith B. Geeslin, Ms. Janet A. Hickey, Mr. Robert Finzi, Ms. Kathleen D. La. Porte, and Mr. Arthur S. Zuckerman exercise shared voting and dispositive power over the shares held by Sprout Capital VI, L.P.; Mr. Keith B. Geeslin exercises voting and dispositive power over the shares held by Sprout Technology Fund; Mr. Keith B. Geeslin and Ms. Janet A. Hickey exercise shared voting and dispositive power over the shares held by DLJ Venture Capital Fund; and Mr. Keith B. Geeslin, Ms. Janet A. Hickey, and Mr. Robert Finzi exercise shared voting and dispositive power over the shares held by DLJ Venture Capital Fund II, L.P.



(14)	Includes 1,581,855 shares held by Oak Investment Partners IV, Limited Partnership, and 72,112 shares held by Oak IV Affiliates Fund, Limited Partnership. The address for these entities is 525 University Ave., Palo Alto, California 94301. Mr. Bandel L. Carano, Ms. Ann H. Lamont, Mr. Edward F. Glassmeyer, and Mr. Gerald R. Gallagher exercise shared voting and dispositive power over these shares. Mr. Carano, Ms. Lamont, Mr. Glassmeyer, and Mr. Gallagher disclaim beneficial ownership of these shares except to the extent of their pecuniary interest therein.



(15)	The address for Kleiner, Perkins, Caufield & Byers IV is 2750 Sand Hill Road, Menlo Park, California 94025. Mr. Vinod Khosla exercises sole voting and dispositive power over these shares.



(16)	Includes 3,196 shares held by Delphi BioInvestments, L.P.; 872 shares held by Delphi BioInvestments II, L.P.; 901,294 shares held by Delphi Ventures, L.P.; and 170,210 shares held by Delphi Ventures II, L.P. The address for these entities is 3000 Sand Hill Road, Building 1, Suite 135, Menlo Park, California 94025. Mr. James J. Bochnowski and Mr. David L. Douglass exercise shared voting and dispositive power over the shares held by Delphi BioInvestments, L.P. and



	Delphi Ventures, L.P. Mr. James J. Bochnowski, Mr. David L. Douglass, and Mr. Donald J. Lothrop exercise shared voting and dispositive power over the shares held by Delphi BioInvestments II, L.P. and Delphi Ventures II, L.P.



(17)	The address for Carver Mead is c/o Foveon, Inc., 3565 Monroe Street, Santa Clara, California 95051.

If the underwriters exercise their over-allotment option in full from the selling stockholders, the number of shares offered and the beneficial ownership of the selling stockholders will be as follows:



			Beneficial Ownership
			After Offering

	Number of		Number
Selling Stockholders	Shares Offered		of Shares		Percent

National Semiconductor Corporation		197,905		2,468,762		10.8	%




Entities affiliated with Technology Venture Investors		154,169		1,923,170		8.4	%




Entities affiliated with Sprout Group		158,200		1,973,465		8.7	%




Entities affiliated with Oak Investment Partners		122,749		1,531,218		6.7	%




Entities affiliated with Delphi Ventures		79,823		995,749		4.4	%




The Generics Group AG(1)		37,154		463,477		2.0	%


(1)	The Generics Group AG acquired its shares in connection with our acquisition of Absolute Sensors Limited in October 1999. The address for this entity is Harston Mill, Harston, Cambridge CB2 5NH, United Kingdom.

DESCRIPTION OF CAPITAL STOCK

Upon the completion of this offering, we will be authorized to issue 60,000,000 shares of common stock, $.001 par value, and 10,000,000 shares of undesignated preferred stock, $.001 par value. The following description of our capital stock is intended to be a summary and does not describe all provisions of our certificate of incorporation or bylaws or Delaware law applicable to us. For a more thorough understanding of the terms of our capital stock, you should refer to our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus is a part.

Common Stock

As of September 30, 2001, there were 17,782,052 shares of common stock outstanding held by approximately 234 stockholders, which reflects the conversion into common stock of all outstanding shares of preferred stock, including the shares of Series A preferred stock issued in June 1986; the shares of Series B preferred stock issued in June 1987; the shares of Series C preferred stock issued in September 1989; the shares of Series D preferred stock issued in September 1990; the shares of Series E preferred stock issued in November 1994 and February 1995 and to be issued in connection with the warrant dated June 1995; and the shares of Series F preferred stock issued in November 1995 and February 1996. In addition, as of September 30, 2001, there were options outstanding to purchase 4,205,995 shares of common stock. Upon completion of this offering, there will be 22,782,052 shares of common stock outstanding, assuming no exercise of outstanding options under our stock plans.

The holders of common stock are entitled to one vote per share on all matters to be voted upon by stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, holders of common stock are entitled to receive ratably dividends as may be declared by the board of directors out of funds legally available for that purpose. In the event of our liquidation, dissolution, or winding up, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding preferred stock. The common stock has no preemptive or conversion rights, other subscription rights, or redemption or sinking fund provisions. All outstanding shares of common stock are fully paid and non-assessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and non-assessable.

Preferred Stock

Upon the closing of this offering, the following series of preferred stock will be converted:


	•	496,095 outstanding shares of Series A preferred stock issued in June 1986 will be converted on a 3.3391594-for-1 basis into 1,656,537 shares of common stock;

	•	871,428 outstanding shares of Series B preferred stock issued in June 1987 will be converted on a 3.0000171-for-1 basis into 2,614,296 shares of common stock;

	•	545,455 outstanding shares of Series C preferred stock issued in September 1989 will be converted on a 1-for-1 basis into 545,455 shares of common stock;

	•	2,314,284 outstanding shares of Series D preferred stock issued in September 1990 will be converted on a 1-for-1 basis into 2,314,284 shares of common stock;

	•	2,887,703 outstanding shares of Series E preferred stock issued in November 1994 and February 1995 and 32,000 shares of Series E preferred stock issuable in connection with a warrant dated June 1995 will be converted on a 1-for-1 basis into 2,887,703 and 32,000 shares of common stock, respectively; and

	•	1,055,242 shares of Series F preferred stock issued in November 1995 and February 1996 will be converted on a 1-for-1 basis into 1,055,242 shares of common stock.

Thereafter, the board of directors will have the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock in one or more series and to designate the rights,

preferences, privileges, and restrictions of each series. The issuance of preferred stock could have the effect of restricting dividends on the common stock, diluting the voting power of the common stock, impairing the liquidation rights of the common stock, or delaying or preventing a change in control of our company, all without further action by the stockholders. Upon the closing of this offering, no shares of preferred stock will be outstanding and we have no present plans to issue any shares of preferred stock.

Registration Rights

Pursuant to an amended and restated investors rights agreement entered into between us and holders of 11,105,517 shares of common stock issuable upon conversion of our preferred stock, we are obligated, under limited circumstances and subject to specified conditions and limitations, to use our best efforts to register the registrable shares.

We must use our best efforts to register the registrable shares


	•	if we receive written notice from holders of 42.5% or more of the registrable shares requesting that we effect a registration with respect to not less than 750,000 of the registrable shares (or a lesser number of registrable shares if the anticipated aggregate offering price would exceed $5.0 million, prior to underwriting discounts and commissions);

	•	if we decide to register our own securities (except in connection with this offering or certain offerings for employee benefit plans or acquisitions); or

	•	if (1) we are eligible to use Form S-3 (a shortened form of registration statement) and (2) we receive written notice from any holder of registrable shares requesting that we effect a registration on Form S-3 with respect to the registrable shares, the reasonable anticipated price to the public of which is not less than $500,000 (net of underwriting discounts or commissions).

However, in addition to certain other conditions and limitations, if requested to register registrable shares, we can delay registration for not more than 120 days. In any case where we decide to register our own securities pursuant to an underwritten offering, the managing underwriter may limit the registrable shares to be included in the registration.

We will bear all registration expenses other than underwriting discounts and commissions, except in the case of registrations on Form S-3 subsequent to the first two registrations on Form S-3. These registration rights terminate upon the holder being able to transfer all of his or her registrable shares pursuant to Rule 144.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for our common stock. Sales of substantial amounts of our common stock in the public market could adversely affect the prevailing market price and impair our ability to raise equity capital in the future.

Upon completion of this offering, we will have 22,782,052 outstanding shares of common stock, based on 17,782,052 shares of common stock outstanding as of September 30, 2001 on an as converted basis. Of these shares, the shares sold in this offering, plus any shares sold upon exercise of the underwriters’ over-allotment option, will be freely tradable without restriction under the Securities Act, unless purchased by our “affiliates” as that term is defined in Rule 144 under the Securities Act. In general, affiliates include executive officers, directors, and 10% stockholders. Shares purchased by affiliates will remain subject to the resale limitations of Rule 144.

The remaining shares outstanding prior to this offering are restricted securities within the meaning of Rule 144. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k), or 701 promulgated under the Securities Act, which are summarized below.

Our directors, executive officers, and certain stockholders have entered into lock-up agreements in connection with this offering, generally providing that they will not offer, sell, contract to sell, or grant any option to purchase or otherwise dispose of our common stock or any securities exercisable for or convertible into our common stock owned by them for a period of 180 days after the date of this prospectus without the prior written consent of Bear, Stearns & Co. Inc. Despite possible earlier eligibility for sale under the provisions of Rules 144, 144(k), and 701, shares subject to lock-up agreements will not be salable until these agreements expire or are waived by Bear, Stearns & Co. Inc. These agreements are more fully described in “Underwriting.” Taking into account the lock-up agreements, and assuming Bear, Stearns & Co. Inc. does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times:



	•	beginning on the effective date of the registration statement of which this prospectus forms a part, the shares sold in this offering will be immediately available for sale in the public market and approximately 214,201 shares will be eligible for sale pursuant to Rule 144(k), none of which are held by affiliates;



	•	beginning 90 days after the effective date of the registration statement of which this prospectus forms a part, approximately 49,597 additional shares will be eligible for sale pursuant to Rule 701 that are not subject to lock-up agreements; and



	•	beginning 180 days after the effective date of the registration statement of which this prospectus forms a part, approximately 6,658,332 additional shares held by affiliates will be eligible for sale subject to volume, manner of sale, and other limitations under Rule 144; 510,115 additional shares held by nonaffiliates will be eligible for sale pursuant to Rule 701; and 10,349,807 additional shares will be eligible for sale pursuant to Rule 144(k).

In general, under Rule 144 as currently in effect, after the expiration of the lock-up agreements, a person who has beneficially owned restricted securities for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of the following:



	•	one percent of the number of shares of common stock then outstanding, which will equal about 227,800 shares immediately after this offering; or


	•	the average weekly trading volume of the common stock during the four calendar weeks preceding the sale.

Sales under Rule 144 are also subject to requirements with respect to manner of sale, notice, and the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been our affiliate at any time during the three months preceding a sale, and who has beneficially

owned the shares proposed to be sold for at least two years, is entitled to sell his or her shares without complying with the manner of sale, public information, volume limitation, or notice provisions of Rule 144.

Rule 701, as currently in effect, permits our employees, officers, directors, and consultants who purchased shares pursuant to a written compensatory plan or contract to resell these shares in reliance upon Rule 144, but without compliance with specific restrictions. Rule 701 provides that affiliates may sell their Rule 701 shares under Rule 144 without complying with the holding period requirement and that non-affiliates may sell their shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation, or notice provisions of Rule 144.

In addition, we intend to file registration statements under the Securities Act as promptly as possible after the completion of this offering to register shares issued upon the exercise of options and shares to be issued under our employee benefit plans. As a result, any options or rights exercised under the 1986 stock option plan and supplemental plan, 1996 stock option plan, the 2000 nonstatutory stock option plan, the 2001 incentive compensation plan, or any other benefit plan after the effectiveness of the registration statements will also be freely tradable in the public market. However, such shares held by affiliates will still be subject to the volume limitation, manner of sale, notice, and public information requirements of Rule 144 unless otherwise resalable under Rule 701. As of September 30, 2001, there were outstanding options for the purchase of 4,205,995 shares of common stock, of which options to purchase 1,064,132 shares were exercisable, and 3,460,898 shares of common stock had been previously issued upon exercise of options.

Also, beginning six months after the completion of this offering, holders of 11,105,517 restricted shares will be entitled to registration rights on these shares for sale in the public market. See “Description of Capital Stock — Registration Rights.” Registration of these shares under the Securities Act would result in their becoming freely tradable without restriction under the Securities Act immediately upon effectiveness of the registration.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company. The transfer agent’s address is 40 Wall Street, 46th Floor, New York, New York 10005 and its telephone number is (718) 921-8259.

UNDERWRITING

Subject to the terms and conditions set forth in an underwriting agreement dated , 2002, each of the underwriters named below, through their representatives Bear, Stearns & Co. Inc., SG Cowen Securities Corporation, and SoundView Technology Corporation, has severally agreed to purchase from us the aggregate number of shares of common stock set forth opposite its name below at the public offering price less the underwriting discount set forth on the cover page of this prospectus.


		Number of
Underwriter		Shares

Bear, Stearns & Co. Inc.




SG Cowen Securities Corporation




SoundView Technology Corporation

	Total		5,000,000

The underwriting agreement provides that the obligations of the several underwriters thereunder are subject to approval of certain legal matters by their counsel and to various other conditions. Under the underwriting agreement, the underwriters are obligated to purchase and pay for all of the above shares of common stock, other than those covered by the over-allotment option described below, if they purchase any of the shares.

The underwriters propose to initially offer some of the shares directly to the public at the offering price set forth on the cover page of this prospectus and some of the shares to dealers at this price less a concession not in excess of $ per share. The underwriters may allow, and dealers may re-allow, concessions not in excess of $ per share on sales to other dealers. After the initial offering of the shares to the public, the underwriters may change the offering price, concessions and other selling terms. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority.

The selling stockholders have granted the underwriters an option exercisable for 30 days from the date of the underwriting agreement to purchase up to 750,000 additional shares, at the offering price less the underwriting discount. The underwriters may exercise this option solely to cover over-allotments, if any, made in connection with this offering. To the extent underwriters exercise this option in whole or in part then each of the underwriters will become obligated, subject to conditions, to purchase a number of additional shares approximately proportionate to each underwriter’s initial purchase commitment as indicated in the preceding table.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.

Our directors, executive officers, and certain stockholders, who collectively hold a total of 17,518,254 shares of common stock, have agreed, subject to limited exceptions, not to sell or offer to sell or otherwise dispose of any shares of common stock or securities convertible into or exercisable or exchangeable for our common stock, for a period of 180 days after the date of this prospectus, without the prior written consent of Bear, Stearns & Co. Inc., on behalf of the underwriters.

In addition, we have agreed that for a period of 180 days after the date of this prospectus we will not offer, sell, or otherwise dispose of any shares of common stock, except for the shares offered in this offering and any shares offered in connection with employee benefit plans, without the consent of Bear, Stearns & Co. Inc., on behalf of the underwriters.

Prior to this offering, there has been no public market for our common stock. Consequently, the initial offering price for the common stock will be determined by negotiations between us and the representatives of the underwriters. Among the factors to be considered in these negotiations will be the following:


	•	our results of operations in recent periods;

	•	estimates of our business potential;

	•	an assessment of our management;

	•	prevailing market conditions; and

	•	the prices of similar securities of generally comparable companies.

We have applied to have our common stock approved for quotation on the Nasdaq National Market under the symbol “SYNA.” We cannot assure you, however, that an active or orderly trading market will develop for our common stock or that our common stock will trade in the public markets subsequent to the offering at or above the initial offering price.

In order to facilitate this offering, the underwriters may engage in transactions that stabilize, maintain, or otherwise affect the price of the common stock during and after this offering. Specifically, the underwriters may over-allot or otherwise create a short position in the common stock for their own account by selling more shares of common stock than we have actually sold to them. The underwriters may elect to cover any short position by purchasing shares of common stock in the open market or by exercising the over-allotment option granted to the underwriters. In addition, the underwriters may stabilize or maintain the price of the common stock by bidding for or purchasing shares of common stock in the open market and may impose penalty bids, under which selling concessions allowed to syndicate members or other broker-dealers participating in this offering are reclaimed if shares of common stock previously distributed in this offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price at a level above that which might otherwise prevail in the open market and these transactions may be discontinued at any time. The imposition of a penalty bid may also affect the price of the common stock to the extent that it discourages resales. No representation is made as to the magnitude or effect of these activities.

A prospectus in electronic format may be made available on Web sites maintained by one or more of the underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters that will make Internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these Web sites is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved or endorsed by us or any underwriter in its capacity as underwriter, and should not be relied upon by investors.

In addition, a prospectus in electronic format is being made available on an Internet website maintained by E*TRADE Securities, Inc. SoundView Technology Corporation, pursuant to a Relationship Agreement with E*TRADE, may offer shares that it underwrites to customers of E*TRADE. The underwriters may allocate a number of shares to SoundView Technology Corporation for sale to online brokerage account holders of E*TRADE Securities, Inc. These online brokerage account holders will have the opportunity to purchase shares using the Internet in accordance with procedures established by E*TRADE Securities, Inc.

The underwriters have reserved for sale, at the initial public offering price, up to 250,000 shares of common stock for employees, directors, and other persons associated with us who express an interest in purchasing these shares of common stock in this offering. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not purchased by these persons will be offered by the underwriters to the general public on the same terms as the other shares offered in this offering.

The underwriters may, from time to time, engage in transactions with, and perform services for, us in the ordinary course of their business.

The following table shows the underwriting discount to be paid to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of common stock.



			Total

			Without		With
			Over-Allotment		Over-Allotment
	Per Share		Option		Option

Assumed initial public offering price	$	10.00	$	50,000,000	$	57,500,000




Underwriting discounts and commissions payable by us		0.70		3,500,000		3,500,000




Underwriting discounts and commissions payable by the selling stockholders		0.70		—		525,000




Proceeds, before expenses, to us		9.30		46,500,000		46,500,000




Proceeds to selling stockholders		9.30		—		6,975,000

Other expenses of this offering, including the registration fees and the fees of financial printers, legal counsel, and accountants, payable by us are expected to be approximately $1,600,000.

LEGAL MATTERS

The validity of the common stock in this offering will be passed upon for us by Greenberg Traurig, LLP, Phoenix, Arizona. Certain legal matters in connection with this offering will be passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California.

EXPERTS

The consolidated financial statements of Synaptics Incorporated as of June 30, 2000 and 2001, and for each of the three years in the period ended June 30, 2001, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein which, as to the year ended June 30, 2000, is based in part on the report of KPMG LLP, independent auditors. The financial statements referred to above are included in reliance upon such reports given on the authority of such firms as experts in accounting and auditing.

The financial statements of Foveon, Inc. (a development stage enterprise) as of July 1, 2000 and for each of the years in the two year period ended July 1, 2000 have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent auditors, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed a registration statement on Form S-1 with the Securities and Exchange Commission relating to the common stock offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance we refer you to the copy of the contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. For further information with respect to Synaptics and the common stock offered by this prospectus, we refer you to the registration statement, exhibits, and schedules.

Anyone may inspect a copy of the registration statement without charge at the public reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549; the Chicago Regional Office, Suite 1400, 500 West Madison Street, Chicago, Illinois 60611; and the New York Regional Office, 233 Broadway, New York, New York 10279. Copies of all or any part of the registration statement may be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fees. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC.

INDEX TO FINANCIAL STATEMENTS






SYNAPTICS INCORPORATED




	Report of Ernst & Young LLP, Independent Auditors	F-2




	Consolidated Balance Sheets	F-3




	Consolidated Statements of Operations	F-4




	Consolidated Statements of Stockholders’ Equity	F-5




	Consolidated Statements of Cash Flows	F-6




	Notes to Consolidated Financial Statements	F-8





FOVEON, INC. (A Development Stage Enterprise)




	Report of KPMG LLP, Independent Auditors	F-29




	Balance Sheets	F-30




	Statements of Operations	F-31




	Statements of Redeemable Convertible Preferred Stock and Shareholders’ Deficit	F-32




	Statements of Cash Flows	F-33




	Notes to Financial Statements	F-34

F-1

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Synaptics Incorporated

We have audited the accompanying consolidated balance sheets of Synaptics Incorporated as of June 30, 2000 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Foveon, Inc., which statements reflect total assets of $2,982,000 as of July 1, 2000 and net losses of $13,807,000 for the year ended July 1, 2000. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the losses from the affiliated company under the equity method and other data included for Foveon, Inc., is based solely on the report of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Synaptics Incorporated at June 30, 2000 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States.

As discussed more fully in the fourth and fifth paragraphs of Note 1, Organization and Summary of Significant Accounting Policies, Synaptics Incorporated has reassessed its accounting for its ownership interest in an affiliated company and related note payable and, accordingly, has restated the financial statements for the fiscal years ended June 30, 1999 and 2000 to reflect this change.


	/S/ ERNST & YOUNG LLP

San Jose, California

July 25, 2001

F-2

SYNAPTICS INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except for share and per share data)


												Pro Forma
												Stockholders’
			June 30,									Equity at
									September 30,			September 30,
			2000			2001			2001			2001

									(unaudited)			(unaudited)




Assets




Current assets:




	Cash and cash equivalents		$	6,507		$	3,766		$	5,475




	Accounts receivable, net of allowances of $120, $125 and $125 at June 30, 2000 and 2001 and September 30, 2001, respectively			7,100			12,245			12,421




	Inventories			3,592			7,290			5,421




	Prepaid expenses and other current assets			351			651			624

Total current assets				17,550			23,952			23,941




Property and equipment, net				1,266			1,795			1,781




Other acquired intangible assets, net				323			174			161




Goodwill, net				1,400			765			765




Other assets				122			471			856

Total assets			$	20,661		$	27,157		$	27,504

Liabilities and stockholders’ equity




Current liabilities:




	Accounts payable		$	4,498		$	7,289		$	5,643




	Accrued compensation			1,160			1,563			1,466




	Accrued warranty			479			509			509




	Other accrued liabilities			395			1,071			1,468




	Capital leases and equipment financing obligations			323			546			521

Total current liabilities				6,855			10,978			9,607




Capital leases and equipment financing obligations, net of current portion				200			329			208




Note payable to a related party				1,500			1,500			1,500




Other liabilities				568			596			617
Commitments and contingencies




Stockholders’ equity:




	Convertible preferred stock, no par value (aggregate liquidation preference — $18,778):
		Authorized shares — 12,000,000




		Issued and outstanding shares — 8,170,207 ($.001 par value; 10,000,000 shares authorized; no shares issued and outstanding, pro forma)		18,650			18,650			18,650		$	—




	Common stock, no par value:
		Authorized shares — 25,000,000




		Issued and outstanding shares — 5,948,288 and 6,601,849 at June 30, 2000 and 2001 and 6,676,535 at September 30, 2001 ($.001 par value; 60,000,000 shares authorized; 17,782,052 shares issued and outstanding, pro forma)		3,004			6,194			6,304			18




	Additional paid-in capital			—			—			—			25,016




	Deferred stock compensation			(138	)		(1,649	)		(1,528	)		(1,528	)




	Notes receivable from stockholders			(633	)		(906	)		(906	)		(906	)




	Accumulated deficit			(9,345	)		(8,535	)		(6,948	)		(6,948	)

Total stockholders’ equity				11,538			13,754			15,572		$	15,652

Total liabilities and stockholders’ equity			$	20,661		$	27,157		$	27,504

See accompanying notes.

F-3

SYNAPTICS INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except for share and per share data)



											Three Months Ended
		Years Ended June 30,									September 30,

		1999			2000			2001			2000			2001


											(unaudited)




Net revenue		$	29,842		$	43,447		$	73,698		$	13,988		$	23,569




Cost of revenue(1)			17,824			25,652			50,811			8,959			14,607

Gross margin			12,018			17,795			22,887			5,029			8,962
Operating expenses




	Research and development(1)		4,851			8,386			11,590			2,792			3,691




	Selling, general, and administrative(1)		5,534			7,407			9,106			1,961			2,674




	Acquired in-process research and development		—			855			—			—			—




	Amortization of goodwill and other acquired intangible assets		—			605			784			197			13




	Amortization of deferred stock compensation		—			82			597			154			121

Total operating expenses			10,385			17,335			22,077			5,104			6,499

Operating income (loss)			1,633			460			810			(75	)		2,463




Interest income			483			524			363			140			33




Interest expense			(149	)		(159	)		(183	)		(38	)		(64	)

Income before income taxes and equity losses			1,967			825			990			27			2,432




Provision for income taxes			40			120			180			26			845




Equity in losses of an affiliated company			—			(2,712	)		—			—			—

Net income (loss)		$	1,927		$	(2,007	)	$	810		$	1		$	1,587

Net income (loss) per share:




	Basic	$	0.46		$	(0.38	)	$	0.13		$	*		$	0.24

	Diluted	$	0.12		$	(0.38	)	$	0.04		$	*		$	0.08

Shares used in computing net income (loss) per share:




	Basic		4,147,159			5,222,738			6,133,866			5,769,262			6,623,353

	Diluted		15,897,146			5,222,738			19,879,491			18,654,042			20,362,095

Pro forma net income per share:




	Basic							$	0.05					$	0.09

	Diluted							$	0.04					$	0.08

Shares used in computing pro forma net income per share: Basic									17,207,403						17,696,870

	Diluted								19,879,491						20,362,095


*	Less than $0.01 per share.

(1)

See accompanying notes.

F-4

SYNAPTICS INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except for share data)



		Convertible													Notes
		Preferred Stock				Common Stock						Deferred			Receivable
												Stock			From			Accumulated
		Shares		Amount		Shares			Amount			Compensation			Stockholders			Deficit

Balance at June 30, 1998 (as restated)			8,170,207	$	18,650		4,018,867		$	344		$	—		$	—		$	(9,265	)




	Issuance of common stock for option exercises		—		—		763,741			594			—			(493	)		—




	Net income and comprehensive income		—		—		—			—			—			—			1,927

Balance at June 30, 1999			8,170,207		18,650		4,782,608			938			—			(493	)		(7,338	)




	Issuance of common stock for option exercises				—		542,100			512			—			(300	)		—




	Issuance of common stock for acquisition of Absolute Sensors Limited		—		—		652,025			1,302			—			—			—




	Issuance of common stock for acquisition of sales representative workforce		—		—		37,500			75			—			—			—




	Issuance of common stock to consultants for services rendered		—		—		31,835			55			—			—			—




	Repayment of notes receivable from stockholders		—		—		—			—			—			62			—




	Repurchase of common stock from employee upon retirement of notes receivable		—		—		(97,780	)		(98	)		—			98			—




	Deferred stock compensation		—		—		—			220			(220	)		—			—




	Amortization of deferred stock compensation		—		—		—			—			82			—			—




	Net loss and comprehensive loss		—		—		—			—			—			—			(2,007	)

Balance at June 30, 2000			8,170,207		18,650		5,948,288			3,004			(138	)		(633	)		(9,345	)




	Issuance of common stock for option exercises		—		—		653,561			880			—			(273	)		—




	Deferred stock compensation		—		—		—			2,108			(2,108	)		—			—




	Amortization of deferred stock compensation		—		—		—			—			597			—			—




	Stock compensation in connection with modification of terms of stock options		—		—		—			202			—			—			—




	Net income and comprehensive income		—		—		—			—						—			810

Balance at June 30, 2001			8,170,207		18,650		6,601,849			6,194			(1,649	)		(906	)		(8,535	)




Issuance of common stock for option exercises (unaudited)			—		—		74,686			110			—			—			—




Amortization of deferred stock compensation (unaudited)			—		—		—			—			121			—			—




Net income and comprehensive income (unaudited)			—		—		—			—			—			—			1,587

Balance at September 30, 2001 (unaudited)			8,170,207	$	18,650		6,676,535		$	6,304		$	(1,528	)	$	(906	)	$	(6,948	)

[Additional columns below]

[Continued from above table, first column(s) repeated]


		Total
		Stockholders’
		Equity

Balance at June 30, 1998 (as restated)		$	9,729




	Issuance of common stock for option exercises		101




	Net income and comprehensive income		1,927

Balance at June 30, 1999			11,757




	Issuance of common stock for option exercises		212




	Issuance of common stock for acquisition of Absolute Sensors Limited		1,302




	Issuance of common stock for acquisition of sales representative workforce		75




	Issuance of common stock to consultants for services rendered		55




	Repayment of notes receivable from stockholders		62




	Repurchase of common stock from employee upon retirement of notes receivable		—




	Deferred stock compensation		—




	Amortization of deferred stock compensation		82




	Net loss and comprehensive loss		(2,007	)

Balance at June 30, 2000			11,538




	Issuance of common stock for option exercises		607




	Deferred stock compensation		—




	Amortization of deferred stock compensation		597




	Stock compensation in connection with modification of terms of stock options		202




	Net income and comprehensive income		810

Balance at June 30, 2001			13,754




Issuance of common stock for option exercises (unaudited)			110




Amortization of deferred stock compensation (unaudited)			121




Net income and comprehensive income (unaudited)			1,587

Balance at September 30, 2001 (unaudited)		$	15,572

See accompanying notes.

F-5

SYNAPTICS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



												Three Months Ended
			Years Ended June 30,									September 30,

			1999			2000			2001			2000			2001


												(unaudited)




Operating activities




Net income (loss)			$	1,927		$	(2,007	)	$	810		$	1		$	1,587




Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:




	Acquired in-process research and development			—			855			—			—			—




	Equity in losses of an affiliated company			—			2,712			—			—			—




	Depreciation and amortization of property and equipment			535			642			876			162			291




	Amortization of goodwill and other acquired intangible assets			—			605			784			197			13




	Amortization of deferred stock compensation			—			82			597			154			121




	Stock compensation in connection with modification of terms of stock options			—			—			202			—			—




	Fair value of common stock issued to consultants for services rendered			—			55			—			—			—




	Changes in operating assets and liabilities:




		Accounts receivable		(1,907	)		(3,671	)		(5,145	)		(1,546	)		(176	)




		Inventories		297			(1,549	)		(3,698	)		743			1,869




		Prepaid expenses and other current assets		81			(114	)		(300	)		8			27




		Other assets		18			(59	)		(349	)		20			(385	)




		Accounts payable		(802	)		2,508			2,791			187			(1,646	)




		Accrued compensation		522			4			403			(256	)		(97	)




		Accrued warranty		(34	)		(121	)		30			—			—




		Other accrued liabilities		(431	)		(292	)		676			(26	)		397




		Other liabilities		95			310			28			26			21

Net cash provided by (used in) operating activities				301			(40	)		(2,295	)		(330	)		2,022




Investing activities




Purchase of property and equipment				(315	)		(1,101	)		(982	)		(137	)		(277	)




Cash paid in connection with the acquisition of Absolute Sensors Limited				—			(1,450	)		—			—			—




Advances to an affiliated company				—			(2,712	)		—			—			—

Net cash used in investing activities				(315	)		(5,263	)		(982	)		(137	)		(277	)

See accompanying notes.

F-6

SYNAPTICS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)

(in thousands)



											Three Months Ended
		Years Ended June 30,									September 30,

		1999			2000			2001			2000			2001


											(unaudited)




Financing activities




Payments on capital leases and equipment financing obligations		$	(285	)	$	(397	)	$	(570	)	$	(93	)	$	(146	)




Proceeds from equipment financing			396			222			499			—			—




Proceeds from issuance of common stock upon exercise of options, net of notes receivable			101			212			607			173			110




Repayment of notes receivable from stockholders			—			62			—			—			—

Net cash provided by financing activities			212			99			536			80			(36	)

Increase (decrease) in cash and cash equivalents			198			(5,204	)		(2,741	)		(387	)		1,709




Cash and cash equivalents at beginning of period			11,513			11,711			6,507			6,507			3,766

Cash and cash equivalents at end of period		$	11,711		$	6,507		$	3,766		$	6,120		$	5,475

Supplemental disclosures of cash flow information




Retirement of equipment and related accumulated depreciation for property and equipment no longer in service		$	1,143		$	—		$	1,655		$	—		$	—




Cash paid for interest			54			59			76			11			35




Cash paid for taxes			—			160			—			—			375




Issuance of common stock to employees for notes receivable			493			300			273			—			—




Cancellation of note receivable from stockholders			—			98			—			—			—




Equipment acquired under a capital lease			—			—			423			—			—




Acquisition of sales representative work force through the issuance of common stock			—			150			—			—			—




Acquisition of Absolute Sensors Limited:




	Issuance of common stock		—			1,302			—			—			—




	Equipment and furniture acquired		—			138			—			—			—




	Accounts receivable acquired		—			100




	Liabilities assumed		—			520			—			—			—

See accompanying notes.

F-7

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

1. Organization and Summary of Significant Accounting Policies

Organization and Basis of Presentation

Synaptics Incorporated (“Synaptics” or the “Company”) was founded in March 1986. The Company develops intuitive user interface solutions for intelligent electronic devices and products. The Company started shipping its current core product, the TouchPad, in 1995. The TouchPad is incorporated into a number of notebook computer product lines by original equipment manufacturers (OEMs) and contract manufacturers and sold throughout the world.

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated upon consolidation.

The Company’s fiscal year ends on the last Saturday in June. For ease of presentation, the accompanying financial statements have been shown as ending on June 30 and calendar quarter ends for all annual, interim, and quarterly financial statement captions. The years ended June 30, 1999 and 2000 consisted of 52 weeks, and the year ended June 30, 2001 consisted of 53 weeks.

Reassessment of Accounting for Ownership Interest in Affiliated Company

As described in more detail under Note 2, Ownership Interest in Affiliated Company and Note Payable to Related Party, during the year ended June 30, 1998, the Company acquired convertible preferred stock of Foveon, Inc. (“Foveon”) in exchange for the contribution of technology and proceeds from a limited-recourse loan from National Semiconductor Corporation (“National”). Additionally, during the year ended June 30, 2000, the Company advanced to Foveon a total of $2,712,000 in return for convertible promissory notes. The Company had previously determined to account for the investment in Foveon on the cost basis. During the year ended June 30, 2000, the Company had written down the advances to Foveon due to an other-than-temporary decline in the fair value of convertible promissory notes.

Upon further review and based on discussions with the Securities and Exchange Commission (“SEC”), the Company has reassessed its accounting of the investment in Foveon and has determined that this investment should be accounted for on the basis of equity accounting pursuant to the guidance under Accounting Principles Board Opinion (“APB”) No. 18 “The Equity Method of Accounting for Investments in Common Stock.” As a result, the Company has recorded $1,500,000 as equity in losses of an affiliated company and interest expense of $82,000 on the related note payable for the year ended June 30, 1998 and has revised its total assets and accumulated deficit as of July 1, 1999. The Company has also recorded $2,712,000 as equity in losses of an affiliated company for the year ended June 30, 2000, which losses had previously been reflected as an investment write-down, and additional interest expense of $95,000 and $100,000 during 1999 and 2000 (per share impact of $0.02 and nil per share, basic and diluted, respectively, during 1999, and $0.02 per share, basic and diluted, in 2000).

Unaudited Interim Financial Statements

The financial information at September 30, 2001 and for the three months ended September 30, 2000 and 2001 is unaudited but includes all adjustments (consisting of only normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at such date and the operating results and cash flows for those interim periods. Results for the three months ended September 2001 are not necessarily indicative of results that may be expected for the year ending June 30, 2002 or any other future period.

F-8

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash Equivalents

The Company considers highly liquid investments that mature within ninety days of the original purchase date to be cash equivalents. Cash and cash equivalents as of the balance sheet dates consisted primarily of money market accounts with financial institutions of good credit standing and governmental cash funds. Fair values of cash and cash equivalents approximated cost due to the short period of time to maturity. The Company has no material unrealized gains or losses on cash equivalents at any of the balance sheet dates presented.

Concentration of Credit Risk

The Company sells its products primarily to contract manufacturers that provide manufacturing services to notebook computer OEMs. Credit is extended based on an evaluation of a customer’s financial condition, and the Company generally does not require collateral. To date, credit losses have been within management’s expectations, and the Company believes that an adequate allowance for doubtful accounts has been provided. One of the contract manufacturers for OEMs comprised 24%, 37% and 19% of the Company’s accounts receivable balance at June 30, 2000 and 2001, and September 30, 2001, respectively. One other individual contract manufacturer for OEMs comprised 13%, 13% and 32% of the Company’s accounts receivable balance at June 30, 2000 and 2001 and September 30, 2001, respectively. These contract manufacturers are located in Taiwan.

Other Concentrations

The Company’s products include certain components that are currently single sourced. The Company believes other vendors would be able to provide similar components; however, the qualification of such vendors may require start-up time. In order to mitigate any adverse impacts from a disruption of supply, the Company attempts to maintain an approximate three-month supply of critical single-sourced components.

Revenue Recognition

Revenue from product sales is recognized upon shipment and transfer of title. The Company accrues for estimated sales returns, warranty costs, and other allowances at the time of shipment based on historical experience.

F-9

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market and consisted of the following (in thousands):



	June 30,
					September 30,
	2000		2001		2001

Raw materials and work-in-process	$	2,970	$	6,938	$	5,226




Finished goods		622		352		195

	$	3,592	$	7,290	$	5,421

Equipment and Furniture

Equipment and furniture are stated at cost. Depreciation is computed using the straight-line method over the shorter of the estimated useful lives of the assets of three years or the lease term. During the years ended June 30, 1999 and June 30, 2001, the Company retired fully depreciated equipment and furniture at an original cost of $1,143,000 and $1,655,000, respectively. No such equipment and furniture was retired during the year ended June 30, 2000, or the three month periods ended September 30, 2000 and 2001.

Foreign Currency Translation

The functional and reporting currency of the Company and its subsidiaries is the U.S. dollar in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation.” Monetary assets and liabilities of the Company and its subsidiaries not denominated in the functional currency are translated into U.S. dollar equivalents at the rate of exchange in effect on the balance sheet date. Non-monetary balance sheet accounts are measured and recorded at the rate in effect at the date of the translation. Revenue and expenses are translated at the weighted average exchange rate in the month that the transaction occurred. Remeasurement of monetary assets and liabilities that are not denominated in the functional currency are included currently in operating results. Translation gains (losses) included in operating results for the years ended June 30, 2000 and 2001, and for the three months ended September 30, 2000, and 2001 totaled ($94,000), $29,000, ($10,000) and $18,300, respectively. The Company did not incur translation gains (losses) during fiscal year 1999. To date, the Company has not undertaken hedging transactions related to foreign currency exposure.

Goodwill and Other Acquired Intangible Assets

Goodwill represents the excess purchase price of net tangible and intangible assets acquired in business combinations over their estimated fair value. Other acquired intangible assets primarily represent core technology and patent rights. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets (“FAS 141” and “FAS 142”, respectively). FAS 141 supercedes APB Opinion No. 16, Business Combinations, and eliminates the pooling-of-interest method of accounting for business combinations. FAS 141 also changes the criteria for recognizing intangible assets apart from goodwill and states the following criteria should be considered in determining the recognition of intangible assets: (1) the intangible asset arises from contractual or other rights, or (2) the intangible asset is separable or divisible from the acquired entity and capable of being sold, transferred, licensed, returned or exchanged. The Company has adopted the provisions of FAS 141 effective July 1, 2001, the results of which are reflected in the accompanying consolidated financial statements effective for the three month period ended

F-10

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

September 30, 2001. Adoption of FAS 141 did not have any impact on the Company’s financial position or historical results of operations. However, certain intangible assets that did not meet the new criteria for recognition as a separate class of intangible assets have been reclassified as part of goodwill for all periods presented.

FAS 142 supercedes APB Opinion No. 17, Intangible Assets, and requires goodwill and other intangible assets that have an indefinite useful life to no longer be amortized; however, these assets must be reviewed at least annually for impairment. The Company had previously amortized goodwill over its estimated useful life of three years; however, pursuant to the adoption of FAS 142 on July 1, 2001, the goodwill is no longer amortized. The Company continues to amortize separately identifiable intangible assets with finite useful lives over periods ranging from two to three years and the adoption of FAS 142 had no impact on such identifiable intangible assets. In management’s opinion, no material impairment existed at June 30, 2001 or September 30, 2001.

Impairment of Long-Lived Assets

The Company evaluates long-lived assets, including goodwill and acquired intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.

Ownership Interest in Affiliated Company

Investment consists of an ownership interest in the form of convertible preferred stock in a privately held development stage company. The Company accounts for the investment under the equity method in accordance with APB 18 and the Emerging Issues Task Force (“EITF”) topic D-68 and issues No. 98-13 and No. 99-10. The Company considers its ownership of preferred stock and advances made to the affiliated company in determining the amount of equity losses to be recognized (see Note 2).

Segment Information

Synaptics has adopted the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standards No. 131, “Disclosure About Segments of an Enterprise and Related Information” (“FAS 131”). Synaptics operates in one segment, the development, marketing, and sale of intuitive user interface solutions for intelligent electronic devices and products.

Stock-Based Compensation

As permitted by FAS 123, “Accounting for Stock-Based Compensation,” the Company applies APB25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option plans and, accordingly, recognizes no compensation expense for stock option grants with an exercise price equal to the fair market value of the shares at the date of grant. The Company provides additional pro forma disclosures as required under FAS 123.

Options granted to consultants and other nonemployees are accounted for at fair value determined by using the Black-Scholes method in accordance with EITF Consensus No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or In Conjunction with Selling, Goods or Services.” These options are subject to periodic revaluation over their vesting term, if any. The assumptions used to value stock-based awards to consultants and non-employees are similar to those used

F-11

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

for employees, except that a volatility of 0.8 was used. (See Note 6 for pro forma disclosure of stock-based compensation pursuant to FAS 123).

Warranty

The Company, upon product shipment, provides for estimated warranty costs to repair or replace products for a period of twelve months from the date of sale. To date, warranty costs have been within management’s expectations and have not been material.

Advertising Expense

All advertising costs are expensed as incurred. The advertising costs for the year ended June 30, 2001, and for the three months ended September 30, 2000 and 2001 amounted to $322,000, $80,000, and $59,000, respectively. Advertising costs for the years ended June 30, 1999 and 2000 were insignificant.

Comprehensive Income (Loss)

Comprehensive income includes all changes in stockholders’ equity during a period, except those resulting from investments by owners and distributions to owners. Other comprehensive income (loss) comprises unrealized gains and losses, on available-for-sale securities, which have been immaterial to date. As a result, comprehensive income (loss) approximates net income (loss) for all periods presented.

Income Taxes

The Company accounts for income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are measured based on differences between the financial reporting and tax basis of assets and liabilities using enacted tax rates and laws that will be in effect when differences are expected to reverse.

Research and Development

Costs to develop Synaptics’ products, which include the costs incurred to design interface solutions for customers prior to the customers incorporating those solutions into their products, are expensed as incurred in accordance with FAS 2 “Accounting for Research and Development Costs,” which establishes accounting and reporting standards for research and development costs.

The Company accounts for software development costs in accordance with the FAS 86 “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” which requires capitalization of certain software development costs once technological feasibility for the software component is established, and research and development activities for the hardware component are completed. Based on Synaptics’ development process, the time period between the establishment of technological feasibility and completion of the hardware component and the release of the product is short and capitalization of internal development costs has not been material to date.

Fair Values of Financial Instruments

The fair values of the Company’s cash equivalents, accounts receivable, prepaid expenses and other current assets, and accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of those instruments.

F-12

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

Net Income (Loss) Per Share

Basic and diluted net income (loss) per share amounts are presented in conformity with the FAS 128, “Earnings Per Share,” for all periods presented. In accordance with FAS 128, basic and diluted net loss per share amounts and basic net income per share amounts have been computed using the weighted-average number of shares of common stock outstanding during each period, less shares subject to repurchase. Diluted net income per share amounts also include the effect of potentially dilutive securities, including stock options, warrants and convertible preferred stock, when dilutive. Pro forma basic and diluted net income per share amounts, as presented in the statements of operations, have been computed as described above and also give effect, under SEC guidance, to the conversion of the convertible preferred stock (using the as if converted method) from the original date of issuance.

Recent Accounting Pronouncements

In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Impairment of Long-Lived Assets (“FAS 144”). FAS 144 supercedes Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (“FAS 121”). FAS 144 retains the requirements of FAS 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and the fair value of the asset. FAS 144 removes goodwill from its scope. FAS 144 is applicable to financial statements issued for fiscal years beginning after December 15, 2001, which in the Company’s case is its fiscal year ending June 30, 2003. The adoption of FAS 144 is not expected to have any material adverse impact on the Company’s financial position or results of its operations.

Reclassification of Prior Year Balances

Certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation.

2. Ownership Interest in Affiliated Company and Note Payable to Related Party

During the year ended June 30, 1998, the Company entered into agreements with National Semiconductor Corporation (“National”), a related party, with respect to the formation of a development stage company, Foveonics, Inc. (now known as Foveon, Inc.), which was formed to develop and produce digital imaging products. The Company contributed technology for which it had no accounting basis for a 30% interest in Foveon, Inc. (“Foveon”) in the form of voting convertible preferred stock. Under the agreements, the Company had the right to acquire additional shares of convertible preferred stock at a specified price in exchange for a limited-recourse loan from National. National loaned Synaptics $1,500,000 under the limited-recourse note, which Synaptics utilized to purchase additional preferred shares of Foveon which increased the Company’s ownership interest in Foveon to 43%. The note matures in 2007 and bears interest at 6.0%. If the note and related accrued interest is not repaid, National’s sole remedy under the loan is to require Synaptics to return to National a portion of Foveon shares purchased with the proceeds of the loan and held by Synaptics.

During the year ended June 30, 1998, the Company recorded its share of losses incurred by Foveon under the equity accounting method (see Note 1) on the basis of its proportionate ownership of voting convertible preferred stock and reduced the carrying value of this equity investment to nil as the Company’s share of losses incurred by Foveon exceeded the carrying value of the investment. No equity

F-13

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

losses were recorded during the year ended June 30, 1999 as the Company did not have any carrying value associated with the investment.

During the year ended June 30, 2000, the Company advanced to Foveon a total of $2,712,000 in return for convertible promissory notes. The notes were convertible into shares of Foveon preferred stock in accordance with the defined terms, had a term of ten years, and bore interest at rates ranging from 6.5% to 6.85%, payable at maturity. During the year, the Company recorded its share of losses incurred by Foveon on the basis of its proportionate share of funding provided to Foveon by the Company and National and accordingly recorded additional equity losses limited to the then maximum carrying value of the Company’s total investment, which was $2,712,000 including the ownership of convertible debt securities issued by Foveon (see Note 1). Accordingly, as of June 30, 2000 and 2001, the carrying value of the Company’s investment in Foveon had been reduced to nil as the Company’s share of losses incurred by Foveon exceeded the carrying value of the investment. The Company is not obligated to provide additional funding to Foveon.

The following is a summary of Foveon’s financial information as of June 30, 2000 and 2001 and for the years ended June 30, 1999, 2000, and 2001 (in thousands):



	June 30,

	1999			2000			2001

							(unaudited)




Current assets				$	1,879		$	10,132




Total assets					2,982			11,074




Current liabilities					1,808			1,769




Total liabilities					17,560			1,769




Net loss	($	7,927	)		(13,807	)		(13,606	)

In August 2000, the promissory notes held by the Company and related accrued interest were automatically converted into 443,965 shares of Foveon preferred stock in connection with an equity financing completed by Foveon.

In connection with the issuance of the convertible promissory notes, the Company also received warrants to purchase 106,718 shares of Foveon Series B preferred stock and warrants to purchase 22,918 shares of Foveon Series C preferred stock at exercise prices of $5.88 and $6.76 per share, respectively, with expiration dates ranging from November 2004 to March 2005. As of June 30, 2001, none of these warrants had been exercised by the Company. The holders of Series A, B, and C of Foveon preferred stock have liquidation preferences of up to $1.09, $5.88, and $6.76 per share, respectively. The preferred shares are convertible into common stock at any time at the option of the stockholders and these shares will automatically convert into common shares upon a firm underwritten public offering of Foveon common stock for proceeds of at least $20 million and a pre-offering market capitalization of at least $225 million. The voting rights of preferred stock were restricted as to the election of board of directors and certain protective provisions with respect to the sale of Foveon or substantially all the assets of Foveon. The preferred stockholders also have the right of first refusal in connection with the purchase of new securities to be offered by Foveon.

3. Acquisitions

Acquisition of Sales Representative Workforce

In May 1999, the Company’s Board of Directors approved the establishment of a branch in Taiwan. On June 1, 1999, the Company entered into an employee transfer agreement with an outside sales agent

F-14

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

(the “agent”) to transfer certain of the agent’s employees to the Company’s subsidiary. In consideration for the transfer of the assembled workforce, the Company entered into a restricted stock purchase agreement (the “Agreement”) with the agent.

The Agreement required the Company to issue 37,500 fully paid shares of common stock to the agent on the closing date of the agreement and also required the Company to place an additional 37,500 shares in escrow. The escrow shares are to be released to the agent in December 2001, provided that the agent fulfills the covenant not to solicit any employee or consultant for two years from the transfer of the agent’s employee to the Company. The Company recorded the acquisition of assembled sales representative workforce as an intangible asset in the amount of $150,000, representing the fair value of the total stock-based consideration, which is being amortized on a straight–line basis over thirty months.

The Company was also obligated to pay the agent royalties on net sales in Taiwan between July 1, 1999 and December 31, 1999 and certain administrative services expenses for a period of three months after the closing of the Agreement. Royalties paid to the agent for the period from July 1, 1999 through December 31, 1999 totaled $202,000 and were expensed in the period in which such cost was incurred. Administrative expenses paid to the agent for the required three-month period were not material.

Acquisition of Absolute Sensors Limited

On October 26, 1999, the Company completed the acquisition of Absolute Sensors Limited (ASL), now known as Synaptics (UK) Limited. ASL, a United Kingdom-based company, is a developer of inductive sensing technology. The Company acquired all of the outstanding shares and certain assets of ASL in exchange for approximately $1,450,000 in cash and 652,025 shares of the Company’s common stock. The total purchase price of ASL, including acquisition-related costs of approximately $232,000, was $3,103,000. The total purchase price was allocated by the Company based on available information with respect to the fair value of assets acquired and liabilities assumed as follows (in thousands):






Acquired core technology	$	201




Acquired in-process research and development		855




Acquired workforce		160




Purchased patents		154




Goodwill		1,663




Net book value of acquired assets and liabilities, which approximates fair value		70

Total purchase price	$	3,103

(See Note 1 and the table below for the impact of the adoption of FAS 141 and FAS 142.)

The purchase price allocation performed by the management resulted in a $855,000 in-process research and development charge related to the value of ASL’s 3D position-sensing technology. The value of acquired in-process research and development represents the appraised value of technology in the development stage that had not yet reached economic and technological feasibility. In reaching this determination, the Company used a present value income approach and considered, among other factors, the stage of development of each product, the time and resources needed to complete each product, and expected income and associated risks. The stage of completion was determined by estimating the costs and time incurred and the milestones completed to date relative to the time and costs incurred to develop the in-process technology into a commercially viable technology or product. The estimated net present value of cash flows was based on incremental future cash flows from revenue expected to be generated by the technology or product being developed. The core technology, goodwill, and other intangibles are being

F-15

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

amortized on a straight-line basis over periods from two to three years, the estimated useful lives of these acquired assets. Pursuant to the adoption of FAS 142, goodwill and other intangible assets with an indefinite useful life are no longer amortized (see Note 1). Had the Company been accounting for goodwill and other intangible assets under FAS 142 since the date of acquisition, the unaudited pro forma income (loss) for the years ended June 30, 2000 and 2001 and for the three months ended September 30, 2000 would have been ($1,584,000), $1,445,000, and $160,000, respectively. As the Company acquired ASL during fiscal 2000, the adoption of FAS 142 did not have any impact on the results for the year ended June 30, 1999.

Under the agreement, the Company is obligated to issue an aggregate of up to an additional 200,000 shares of its common stock to ASL shareholders as additional purchase consideration if the sale of the Company’s products incorporating ASL technology reach a certain defined volume within a period of twenty-four months after the acquisition. As of September 30, 2001, no additional shares have been issued because ASL’s technology has not been fully developed and the Company has not sold any products that incorporate ASL’s technology. In management’s opinion, the Company is not likely to issue additional shares as the Company does not expect to sell any products incorporating ASL technology through the expiration of the twenty-four month period in October 2001.

This acquisition was accounted for as a purchase, and accordingly, the results of operations of ASL subsequent to October 26, 1999 are included in the Company’s consolidated statements of operations. Unaudited pro forma net loss of $242,000 ($0.05 per share) and $2,140,000 ($0.39 per share) for the years ended June 30, 1999 and 2000, respectively, represent the combined net loss as if the acquisition had occurred at the beginning of these years and includes the amortization of goodwill and other acquired intangible assets but excludes the charge for acquired in-process research and development as it is nonrecurring. ASL did not generate any revenue from external customers during these periods, and accordingly, pro forma revenue has not been disclosed separately.

Goodwill and other acquired intangible assets consisted of the following (in thousands):



	June 30,
							September 30,
	2000			2001			2001

Goodwill	$	1,823		$	1,823		$	1,823




Accumulated amortization		(423	)		(1,058	)		(1,058	)

		1,400			765			765

Other Acquired Intangible Assets:




Acquired core technology		201			201			201




Acquired sales representatives		150			150			150




Purchased patents		154			154			154

		505			505			505




Accumulated amortization		(182	)		(331	)		(344	)

		323			174			161

	$	1,723		$	939		$	926

F-16

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

4. Property and Equipment

Property and equipment consisted of the following (in thousands):



	June 30,
							September 30,
	2000			2001			2001

Equipment	$	3,267		$	3,029		$	3,286




Furniture		402			390			410

		3,669			3,419			3,696




Accumulated depreciation and amortization		(2,403	)		(1,624	)		(1,915	)

Property and equipment, net	$	1,266		$	1,795		$	1,781

5. Leases, Equipment Financing Obligations and Line of Credit

Operating Leases

The Company leases its domestic facility under an operating lease that expires on May 31, 2005. Total rent expense, recognized on a straight-line basis, was approximately $389,000, $583,000 and $708,000 for the years ended June 30, 1999, 2000, and 2001, and $187,000 and $171,000 for the three months ended September 30, 2000, and 2001, respectively.

Equipment Financing Obligations

Through June 30, 2001 the Company purchased a total of $618,000 of equipment under an equipment financing line. At June 30, 2000 and 2001, the outstanding balance under this line was approximately $392,0000 and $184,000, respectively. At September 30, 2001, the outstanding balance was approximately $129,000. Obligations under this facility bear interest at rates ranging between 7.79% and 8.89% per year and are payable monthly through September 2003 and are subject to certain financial covenants. Assets acquired under this arrangement secure the related obligations.

The Company entered into a $750,000 equipment financing line agreement during the year ended June 30, 2001. At June 30, 2001, the outstanding balance under this line approximated $411,000. At September 30, 2001, the outstanding balance approximated $372,000. This obligation bears interest at 8.25% per year and is payable monthly through November 2003 and is subject to certain financial covenants. Assets acquired under this arrangement secure the related obligations.

Capital Leases

The Company also leases certain equipment under noncancelable lease agreements that are accounted for as capital leases. Equipment acquired under capital leases aggregated approximately $1,000,000 and $549,000 at June 30, 2000 and 2001, respectively. Amortization expense related to assets under capital leases is included in depreciation expense. At June 30, 2000 and 2001, the outstanding balance under these capital leases approximated $131,000 and $280,000, respectively. At September 30, 2001, the outstanding balance approximated $228,000.

F-17

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

The aggregate future minimum rental commitments as of June 30, 2001 for noncancelable operating leases and capital and equipment financing obligations with initial or remaining terms in excess of one year are as follows (in thousands):


			Capital Leases
			and Equipment
	Operating		Financing
	Leases		Obligations

2002 (remaining period)	$	718	$	596




2003		692		267




2004		709		78




2005		667		—




2006		—		—

Total minimum lease payments	$	2,786		941

Less amounts representing interest				66

Present value of net minimum lease payments				875




Less portion due within one year				546

			$	329

In August 2001, the Company entered into a $4.2 million revolving line of credit (“line of credit”) with a bank. Borrowings under this line of credit bear interest at the rate of 0.5% over the bank’s prime rate, are subject to certain financial and non-financial covenants, and are limited to 75% of qualifying account receivables as defined in the agreement with the bank. The line of credit expires on August 29, 2002 and as of September 30, 2001, the Company had not borrowed any amounts under this facility.

6. Stockholders’ Equity

Convertible Preferred Stock

The Company has six classes of convertible preferred stock outstanding that are designated as Series A, B, C, D, E, and F. The Series A, B, C, D, E, and F convertible preferred stock are entitled to annual noncumulative cash dividends, when and if declared by the Board of Directors, of $0.10, $0.14, $0.088, $0.14, $0.25, and $0.45 per share, respectively, prior to the payment of any dividends on common stock. There were no dividends declared or payable at September 30, 2001.

Each share of Series A, B, C, D, E, and F convertible preferred stock may be converted into common stock at the option of the holder. Series A, B, C, D, E, and F convertible preferred stock are convertible into 3.34, 3.00, 1.00, 1.00, 1.00, and 1.00 shares of common stock, respectively. Each share of Series A, B, C, D, E, and F convertible preferred stock will be automatically converted into shares of common stock upon the closing of a public offering of the Company’s common stock at a price per share of at least $4.50 and an aggregate offering price of at least $7,500,000. As of September 30, 2001, 11,105,517 shares of common stock are reserved for issuance upon the conversion of the Series A, B, C, D, E, and F convertible preferred stock and warrants.

Each preferred share has voting rights equal to the number of common shares into which it is convertible. Upon liquidation, the holders of the Series A, B, C, D, E, and F convertible preferred stock are entitled to receive $1.28, $1.75, $1.10, $1.75, $2.50, and $4.50 per share, respectively, plus any declared but unpaid dividends, before any distribution may be made to the holders of common shares. The aggregate liquidation preference at June 30, 2001 and September 30, 2001 was $18,778,000.

F-18

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

Information with respect to convertible preferred stock at June 30, 2001 is as follows:


	Issued and
	Designated		Outstanding		Liquidation
	Shares		Shares		Preference

					(in thousands)




Series A		496,095		496,095	$	635




Series B		871,428		871,428		1,525




Series C		545,455		545,455		600




Series D		2,314,284		2,314,284		4,050




Series E		2,887,703		2,887,703		7,219




Series F		1,055,556		1,055,242		4,749

		8,170,521		8,170,207	$	18,778

Stock-Based Compensation

During 1986, 1996, 2000, and 2001, the Company adopted stock option plans (the “Plans”) under which employees and directors may be granted incentive stock options or nonqualified stock options to purchase up to a total of 7,050,000 shares of the Company’s common stock at not less than 100% or 85% of the fair value, respectively, on the date of grant as determined by the Board of Directors.

Options issued under the Plans generally vest 25% at the end of twelve months from the vesting commencement date and approximately 2% each month thereafter or 100% at the end of forty-eight months from the vesting commencement date. Options not exercised ten years after the date of grant are canceled.

The 1986 Stock Option Plan expired by its terms with respect to any future option grants effective November 1996. At September 30, 2001, all shares available for issuance are pursuant to the 1996 Stock Option Plan and 2000 Nonstatutory Stock Option Plan.

In May 1998, the Board of Directors authorized the Company to reprice options granted to all employees (except certain executive officers with grants that contained accelerated vesting provisions) having an exercise price greater than $1.00 for options with an exercise price of $1.00 (the fair value of the Company’s stock on June 30, 1998 when the exchange was effected). The repricing was effective June 30, 1998 through July 10, 1998. Under the terms of this stock option repricing, no portion of any repriced option was exercisable until December 31, 1998, but normal vesting schedules were not impacted. Options representing the right to purchase 455,000 shares of common stock were repriced.

During the year ended June 30, 2000, the Company issued 31,835 shares of common stock to vendors and consultants in exchange for services rendered to the Company. The fair value of $55,000 assigned to the shares was based on the Company’s estimate of the fair value of the common stock. The fair value of such shares was amortized over the period in which the services were rendered to the Company. No shares of common stock were issued to vendors or consultants during the year ended June 30, 2001.

During the years ended June 30, 2000 and 2001, the Company granted options for the purchase of 52,500 and 17,000 shares of common stock, respectively, to consultants and advisors of the Company, in consideration for services, at an exercise price of $2.50 per share. These options became vested and exercisable upon achievement of predetermined milestones and accordingly were subject to periodic re-measurement over the vesting period of six months. The Company recorded deferred stock compensation of approximately $135,000 and $168,000 for the years ended June 30, 2000 and 2001, respectively,

F-19

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

representing the fair value of stock options on the respective grant dates, which was computed on the basis of Black-Scholes methodology using the valuation inputs similar to those used for employees except for the use of contractual life of the options instead of the expected life. The Company recorded compensation expense of approximately $80,000, $223,000 and $137,000 for the years ended June 30, 2000 and 2001 and the three months ended September 30, 2000, respectively, related to the amortization of deferred compensation for these options. These options became fully vested during the year ended June 30, 2001.

The Company also recorded compensation charges of $202,000 for the year ended June 30, 2001, in connection with the modification of terms of stock options granted to certain employees, which modification related to the acceleration of vesting upon termination of employment and exercisability of the option for the aggregate number of 73,750 shares. The compensation expense was computed on the basis of intrinsic value representing the difference between the option exercise price and the deemed fair value of underlying common stock on the respective date of modification of terms. The underlying options had exercise prices ranging from $2.00 to $2.50 per share. As of June 30, 2001, all of the options were fully vested and had been exercised.

The following table summarizes option activity for the years ended June 30, 1999, 2000, and 2001 and for the three months ended September 30, 2001:



					Options Outstanding

								Weighted
								Average
		Shares			Number			Exercise
		Available			of Shares			Price

Balance at June 30, 1998			271,795			2,579,838		$	1.48




	Additional shares authorized		750,000			—




	Options granted		(1,767,000	)		1,767,000		$	1.18




	Options exercised		—			(763,741	)	$	0.78




	Options canceled		1,009,500			(1,267,806	)	$	1.56

Balance at June 30, 1999			264,295			2,315,291		$	1.13




	Additional shares authorized		1,750,000			—




	Options granted		(1,951,410	)		1,951,410		$	2.27




	Options exercised		—			(542,100	)	$	1.06




	Options canceled		224,581			(224,581	)	$	1.27

Balance at June 30, 2000			287,466			3,500,020		$	1.77




	Additional shares authorized		1,600,000			—




	Options granted		(1,651,272	)		1,651,272		$	4.24




	Options exercised		—			(653,561	)	$	1.35




	Options cancelled		506,490			(526,490	)	$	2.04

Balance at June 30, 2001			742,684			3,971,241		$	2.81

	Additional shares authorized		600,000			—




	Options granted		(354,440	)		354,440		$	8.50




	Options exercised		—			(74,686	)	$	1.47




	Options cancelled		45,000			(45,000	)	$	3.39

Balance at September 30, 2001			1,033,244			4,205,995		$	3.30

F-20

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

The weighted average grant date fair value of options was $0.26, $0.61, and $2.25 for the years ended June 30, 1999, 2000, and 2001, respectively.

The following table summarizes stock options outstanding at June 30, 2001:



		Options Outstanding						Options Exercisable

				Weighted
				Average		Weighted				Weighted
				Remaining		Average				Average
Range of		Number		Contractual		Exercise		Number		Exercise
Exercise Prices		Outstanding		Life		Price		Exercisable		Price

	$0.20		32,000		0.16	$	0.20		32,000	$	0.20
	$0.60		20,000		3.95	$	0.60		20,000	$	0.60
	$1.00		730,748		7.12	$	1.00		349,337	$	1.00
	$2.00		809,526		8.11	$	2.00		366,437	$	2.00
	$2.50		882,227		9.27	$	2.50		156,372	$	2.50
	$2.90 – $3.00		793,250		9.07	$	2.99		16,436	$	3.00
	$3.50 – $4.50		235,000		9.14	$	3.60		15,556	$	3.50
	$5.50 – $6.50		242,500		9.52	$	5.91		—		—
	$8.50		225,990		9.75	$	8.50		—		—

	0.20 – $8.50		3,971,241		8.53	$	2.81		956,138	$	1.66

At June 30, 2000, 811,989 shares were exercisable at a weighted average exercise price of $1.05.

The Company has elected to follow APB Opinion No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FAS 123 requires use of option valuation models that were not developed for use in valuing employee stock options. When the exercise price of the Company’s employee stock options equals the fair value of the underlying stock on the date of grant, no compensation expense is recognized.

Pro forma information regarding net income (loss) has been determined as if the Company had accounted for its employee stock options under the fair value method of FAS 123 during the years ended June 30, 1999, 2000, and 2001. The fair value for these options was estimated at the date of grant using the minimum value method with the following weighted average assumptions:



	Years Ended June 30,

	1999			2000			2001

Expected volatility		N/A			N/A			N/A




Expected life of options in years		5			5			5




Risk-free interest rate		4.78	%		6.29	%		5.65	%




Expected dividend yield		0			0			0

The option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the option. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options.

F-21

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FAS 123, pro forma income (loss) would be as follows:



		Years Ended June 30,

		1999		2000			2001


		(in thousands, except for
		per share data)
Net income (loss)




	As reported	$	1,927	$	(2,007	)	$	810




	Pro forma	$	1,580	$	2,432		$	453
Net income (loss) per share — Basic




	As reported	$	0.46	$	(0.38	)	$	0.13




	Pro forma	$	0.38	$	(0.47	)	$	0.07
Net income (loss) per share — Diluted




	As reported	$	0.12	$	(0.38	)	$	0.04




	Pro forma	$	0.10	$	(0.47	)	$	0.02

Deferred Compensation

Synaptics recorded deferred stock compensation of $85,000 and $1,940,000 during the years ended June 30, 2000 and 2001, respectively, representing the aggregate difference between the exercise prices of options granted to employees and the deemed fair values for common stock subject to the options as of the respective measurement dates. These amounts are being amortized by charges to operations, on a straight-line basis, over the vesting periods of the individual stock options. During the years ended June 30, 2000 and 2001, the Company recorded $2,000 and $374,000, respectively, of amortization expense related to deferred stock compensation. During the three months ended September 30, 2000 and 2001, the Company recorded amortization expense of $17,000, and $121,000, respectively.

Warrants

In connection with certain financing transactions during 1995 the Board of Directors authorized the issuance of warrants to purchase 32,000 shares of the Company’s Series E preferred stock at an exercise price of $2.50 per share. The warrants expire on May 31, 2002. The grant date fair value of the warrants for financial reporting purposes was determined to be immaterial.

Shares Reserved for Future Issuance

Synaptics has reserved shares of common stock for future issuance as follows:


	June 30,		September 30,
	2001		2001

Convertible preferred stock, including effect of preferred stock warrants		11,105,517		11,105,517




Stock options outstanding		3,971,241		4,205,995




Stock options, available for grant		742,684		1,033,244




Shares issuable under acquisition agreements subject to future performance		237,500		237,500

Total		16,056,942		16,582,256

F-22

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

Subsequent to September 30, 2001, the Company has issued 296,866 shares of common stock pursuant to the exercise of options outstanding under the Company’s stock option plans.

7. Notes Receivable from Stockholders

During the years ended June 30, 1999 and 2000, the Company received $493,000 and $300,000, respectively, of full-recourse notes receivable from certain employees, which notes bear interest at rates ranging from 4.5% to 6.12%, in consideration for stock issued upon the exercise of stock options. During the year ended June 30, 2001, the Company received $200,000 of full-recourse and $73,000 of non-recourse notes receivable from certain employees in consideration for stock issued upon the exercise of stock options. These notes bear interest at rates ranging from 6.1% to 6.25%. The notes and accrued interest, which are compounded semiannually, become due over the period from December 2002 to October 2009 or upon termination of employment, whichever is earlier. As of June 30, 2000 and 2001 and September 30, 2001, the principal amounts outstanding amounted to $633,000, $906,000, and $906,000, respectively. The non-recourse notes receivable were issued in connection with fully vested and exercisable stock options. The Company recorded compensation expense of approximately $109,000 computed on the basis of the intrinsic value of the options on the date of the exercise of the stock options and issuance of the notes (see Note 6).

8. Employee benefit plans

401(k) Plan

The Company has a 401(k) Retirement Savings Plan for full-time employees (the “Plan”). Under the Plan, eligible employees may contribute a maximum of 25% of their net compensation or the annual limit of $10,500 permitted by law. The Company does not provide any matching funds.

2001 Employee Stock Purchase Plan

The Company adopted the 2001 Employee Stock Purchase Plan (the “Purchase Plan”) in February 2001. The Purchase Plan becomes effective on the effective date of the registration statement for an initial public offering (“IPO”) of the Company’s common stock. The Purchase Plan allows employees to designate up to 15% of their total compensation to purchase shares of common stock at 85% of fair market value. The Company has reserved 1,000,000 shares of common stock for issuance under the Purchase Plan.

F-23

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

9. Income Taxes

The provision for income taxes consists of the following (in thousands):



		Years Ended June 30,

		1999		2000		2001

Current:




	Federal	$	40	$	58	$	475




	State		—		1		1




	Foreign		—		61		104

Total current			40		120		580

Deferred:




	Federal		—		—		(400	)




	State		—		—		—




	Foreign		—		—		—

Total deferred			—		—		(400	)

Total provision		$	40	$	120	$	180

Income (loss) before provision for income taxes and equity losses consisted of the following (in thousands):



	Years Ended June 30,

	1999		2000			2001

U.S.	$	1,967	$	2,033		$	1,371




Foreign		—		(1,208	)		(381	)

Total	$	1,967	$	825		$	990

The provision (benefit) for income taxes differs from the federal statutory rate as follows (in thousands):



	Years Ended June 30,

	1999			2000			2001

Provision (benefit) at U.S. federal statutory rate	$	688		$	289		$	347




Unbenefited losses (utilization of net operating losses)		(746	)		(794	)		(236	)




Acquired in-process research and development		—			299			—




Goodwill amortization		—			176			263




Research and development credit		—			—			(536	)




Alternative minimum tax		40			59			—




Other		58			91			342

	$	40		$	120		$	180

F-24

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

Significant components of the Company’s deferred tax assets are as follows (in thousands):



			June 30,

			2000			2001

Net operating loss carryforwards			$	280		$	—




Research and development credit carryforwards				1,575			1,025




Equity in losses of an affiliated company				1,085			1,085




Other				1,316			1,739




Valuation allowance				(4,256	)		(3,434	)

		Total deferred assets		—			415

Deferred Tax Liabilities:




	Foreign income repatriation			—			(15	)

		Total deferred tax liabilities		—			(15	)

Net Deferred Tax Asset			$	—		$	400

Realization of deferred tax assets is dependent on the Company generating sufficient taxable income in future years to obtain benefit from the reversal of temporary differences and from tax credit carryforwards. At June 30, 2001, the Company had provided a valuation allowance of $3,434,000 against most of its tax assets due to uncertainty surrounding their realization. The valuation allowance decreased by approximately $800,000 during the fiscal year ended June 30, 2001 and increased by approximately $700,000 during the fiscal year ended June 30, 2000 and decreased by approximately $700,000 during the fiscal year ended June 30, 1999.

As of June 30, 2001, the Company also had federal research and development tax credit carryforwards of approximately $700,000. The credit carryforwards will expire at various dates from 2012 through 2021 if not utilized.

The income tax provision for the three months ended September 30, 2000 and September 30, 2001 reflects income tax on expected pre-tax income for the year partially offset by a research and development tax credit, and for fiscal 2000 also reflects the benefit of utilizing net operating loss carryforwards.

F-25

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

10. Net Income (Loss) Per Share

The following table presents the computation of basic and diluted and pro forma basic and diluted net income (loss) per share:



											Three Months Ended
		Years Ended June 30,									September 30,

		1999			2000			2001			2000			2001


		(in thousands, except for share									(unaudited)
		and per share data)




Numerator for basic and diluted net income (loss) per share:




	Net income (loss)	$	1,927		$	(2,007	)	$	810		$	1		$	1,587

Denominator for basic net income (loss) per share:




	Weighted average common shares outstanding		4,436,352			5,498,218			6,329,832			5,975,212			6,647,729




	Less: Weighted average shares subject to repurchase		(289,193	)		(275,480	)		(195,946	)		(205,950	)		(24,376	)

Denominator for basic net income (loss) per share			4,147,159			5,222,738			6,133,886			5,769,262			6,623,353

Denominator for diluted net income (loss) per share:




	Shares used above, basic		4,147,159			5,222,738			6,133,886			5,769,262			6,623,353




	Dilutive stock options		644,470			—			2,614,663			1,762,633			2,605,137




	Dilutive warrants		32,000			—			19,925			11,130			22,588




	Dilutive preferred stock		11,073,517			—			11,073,517			11,073,517			11,073,517




	Dilutive contingent shares		—			—			37,500			37,500			37,500

Denominator for diluted net income (loss) per share			15,897,146			5,222,738			19,879,491			18,654,042			20,362,095

Net income (loss) per share:




	Basic	$	0.46		$	(0.38	)	$	0.13		$	*		$	0.24

	Diluted	$	0.12		$	(0.38	)	$	0.04		$	*		$	0.08

Pro forma basic:




	Shares used above, basic								6,133,886						6,623,353




	Pro forma adjustment to reflect weighted average effect of the assumed conversion of convertible preferred stock								11,073,517						11,073,517

	Shares used in computing pro forma net income per share — basic								17,207,403						17,696,870

Pro forma diluted:




	Shares used above, diluted								19,879,491						20,362,095

Pro forma net income per share:




	Basic							$	0.05					$	0.09

	Diluted							$	0.04					$	0.08


	*	Less than $0.01 per share.

F-26

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

The computation of pro forma basic and diluted net income per share includes the assumed conversion of the outstanding preferred shares (using the as if converted method) from the original date of issuance.

11. Registration Statement

On February 9, 2001, the Board of Directors authorized the Company to file a registration statement with the Securities and Exchange Commission for an initial public offering of its common stock. In connection with the offering, the Company will be reincorporated as a Delaware corporation prior to the completion of the offering.

If the offering is consummated under the terms presently anticipated, all of the shares of convertible preferred stock outstanding as of June 30, 2001 will automatically convert into 11,105,517 shares of common stock, including shares from the assumed exercise of a warrant for the purchase of 32,000 shares of Series E preferred stock. The effect of this exercise and conversion, and the reincorporation in Delaware, has been reflected in the unaudited pro forma stockholders’ equity in the accompanying consolidated balance sheet at September 30, 2001.

12. Segment, Customers and Geographic Information

Summary information about geographic areas

Synaptics operates in one segment and generated its revenue from two broad product categories, the Personal Computer (“PC”) market and Information Appliances (“iAppliances”) market. The PC market account for 96.7% of the revenue in fiscal year 2001. All revenue in the prior periods related to the PC market.

The following is a summary of operations within geographic areas based on customer’s location:



								Three Months Ended
		Year Ended June 30,						September 30,

		1999		2000		2001		2000		2001


		(in thousands)




Revenue from sales to unaffiliated customers:




	Taiwan	$	24,041	$	38,125	$	58,902	$	12,010	$	18,142




	United States		837		1,967		10,351		652		908




	Korea		500		1,335		2,012		620		592




	Other		4,464		2,020		2,433		706		3,927

		$	29,842	$	43,447	$	73,698	$	13,988	$	23,569



		June 30,
						September 30,
		2000		2001		2001

Long-lived assets within geographic areas consisted of the following (in thousands):




	Taiwan	$	98	$	39	$	40




	United Kingdom		348		415		488




	United States		820		1,341		1,253

		$	1,266	$	1,795	$	1,781

F-27

SYNAPTICS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information as of September 30, 2001 and for the three months ended

September 30, 2000 and 2001 is unaudited

Major customer data as a percentage of total revenue



							Three Months
							Ended
	Year Ended June 30,						September 30,

	1999		2000		2001		2000		2001

Customer A		24%		24%		32%		17%		17%




Customer B		12%		13%		5%		13%		2%




Customer C		15%		13%		6%		11%		4%




Customer D		12%		12%		6%		9%		4%




Customer E		1%		2%		11%		2%		26%

F-28

INDEPENDENT AUDITORS’ REPORT

The Board of Directors

Foveon, Inc.:

We have audited the accompanying balance sheet of Foveon, Inc. (a development stage enterprise) as of July 1, 2000, and the related statements of operations, redeemable convertible preferred stock and shareholders’ deficit, and cash flows for each of the years in the two year period ended July 1, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Foveon, Inc. (a development stage enterprise) as of July 1, 2000, and the results of its operations and its cash flows for each of the years in the two year period ended July 1, 2000, in conformity with accounting principles generally accepted in the United States of America.

Mountain View, California

August 31, 2000

F-29

FOVEON, INC.

(A Development Stage Enterprise)

BALANCE SHEETS


			June 30,			July 1,
			2001			2000

			(Unaudited)




ASSETS




Current assets:




	Cash and cash equivalents		$	9,765,055			852,306




	Accounts receivable			72,965			—




	Inventories			51,899			825,036




	Prepaid expenses			94,511			182,106




	Other current assets			147,635			19,382

		Total current assets		10,132,065			1,878,830




Property and equipment, net				941,454			1,049,565




Other assets				—			53,626

		Total assets	$	11,073,519			2,982,021

LIABILITIES AND SHAREHOLDERS’ DEFICIT




Current liabilities:




	Accounts payable		$	725,627			689,230




	Accrued liabilities			630,706			633,090




	Current portion of capital lease obligations			255,599			236,162




	Deferred revenue			156,727			249,273

		Total current liabilities		1,768,659			1,807,755




Capital lease obligations, excluding current portion				—			256,410




Long-term notes payable, net of warrants discount				—			15,495,629

		Total liabilities		1,768,659			17,559,794

Commitments




Redeemable convertible preferred stock:




	Series A, $0.001 par value; 6,300,000 shares authorized, issued, and outstanding (aggregate liquidation preference of $6,890,625)			6,890,625			6,890,625




	Series B, $0.001 par value; 2,915,000 shares authorized; 2,580,000 and 544,047 shares issued and outstanding (aggregate liquidation preference of $15,176,466 and $3,200,275) as of June 30, 2001 and July 1, 2000, respectively			14,160,708			3,200,275




	Series C, $0.001 par value; 4,100,000 shares authorized; 3,979,418 issued and outstanding (aggregate liquidation preference of $26,913,682) as of June 30, 2001			26,391,732			—




Shareholders’ deficit:




	Common stock, $0.001 par value; 18,000,000 shares authorized; 1,337,797 and 1,190,207 shares issued and outstanding as of June 30, 2001 and July 1, 2000, respectively			1,338			1,190




	Additional paid-in capital			1,995,094			1,859,072




	Shareholder receivable			(675	)		(675	)




	Deficit accumulated during the development stage			(40,133,962	)		(26,528,260	)

		Total shareholders’ deficit		(38,138,205	)		(24,668,673	)

		Total liabilities and shareholders’ deficit	$	11,073,519			2,982,021

See accompanying notes to financial statements.

F-30

FOVEON, INC.

(A Development Stage Enterprise)

STATEMENTS OF OPERATIONS


												Period from
			Years Ended									July 9, 1997
												(inception) to
			June 30, 2001			July 1, 2000			July 2, 1999			June 30, 2001

			(Unaudited)									(Unaudited)




Net revenue			$	1,275,512			311,043			—			1,586,555

Costs and expenses:




	Cost of revenue			1,679,914			720,726			—			2,400,640




	Research and development			7,636,946			6,105,766			4,506,543			22,262,627




	General and administrative			1,604,044			1,544,549			1,535,845			5,243,524




	Sales and marketing			4,367,109			4,993,297			1,825,774			11,591,375

		Total costs and expenses		15,288,013			13,364,338			7,868,162			41,498,166

		Operating loss		(14,012,501	)		(13,053,295	)		(7,868,162	)		(39,911,611	)




Interest expense				(263,022	)		(850,046	)		(414,448	)		(1,527,516	)




Interest income				669,821			96,806			355,320			1,305,165

		Net loss	$	(13,605,702	)		(13,806,535	)		(7,927,290	)		(40,133,962	)

See accompanying notes to financial statements.

F-31

FOVEON, INC.

(A Development Stage Enterprise)

STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ DEFICIT

Period from July 9, 1997 (inception) to June 30, 2001



	Redeemable Convertible Preferred Stock


	Series A				Series B				Series C				Common Stock

	Shares		Amount		Shares		Amount		Shares		Amount		Shares			Amount





Issuance of Series A preferred stock in exchange for intellectual property rights in August 1997 (unaudited)		1,728,571	$	1,890,625		—	$	—		—	$	—		—		$	—




Issuance of Series A preferred stock for cash in August 1997 (unaudited)		4,571,429		5,000,000		—		—		—		—		—			—




Issuance of warrant to purchase Series B preferred stock in August 1997 (unaudited)		—		—		—		—		—		—		—			—




Issuance of restricted common stock in August 1997 (unaudited)		—		—		—		—		—		—		350,000			350




Issuance of restricted common stock in March 1998 (unaudited)		—		—		—		—		—		—		370,000			370




Issuance of restricted common stock in July 1998 (unaudited)		—		—		—		—		—		—		200,000			200




Net loss (unaudited)		—		—		—		—		—		—		—			—

Balances as of July 3, 1998 (unaudited)		6,300,000		6,890,625		—		—		—		—		920,000			920




Issuance of restricted common stock in July 1998		—		—		—		—		—		—		85,000			85




Issuance of Series B preferred stock from exercise of warrant in August 1998		—		—		514,047		3,023,804		—		—		—			—




Exercise of common stock options in September 1998		—		—		—		—		—		—		6,250			6




Issuance of restricted common stock in January 1999		—		—		—		—		—		—		10,000			10




Issuance of restricted common stock in June 1999		—		—		—		—		—		—		150,000			150




Net loss		—		—		—		—		—		—		—			—

Balances as of July 2, 1999		6,300,000		6,890,625		514,047		3,023,804		—		—		1,171,250			1,171




Repurchase of restricted common stock in October 1999		—		—		—		—		—		—		(35,000	)		(35	)




Issuance of warrants in November 1999 in connection with notes payable		—		—		—		—		—		—		—			—




Issuance of warrants in December 1999 in connection with notes payable		—		—		—		—		—		—		—			—




Exercise of common stock options in January 2000		—		—		—		—		—		—		14,063			14




Exercise of common stock options in March 2000		—		—		—		—		—		—		1,562			2




Issuance of common stock in March 2000		—		—		—		—		—		—		30,000			30




Issuance of Series B preferred stock for cash in March 2000		—		—		30,000		176,471		—		—		—			—




Issuance of warrants in March 2000 in connection with notes payable		—		—		—		—		—		—		—			—




Exercise of common stock options in April 2000		—		—		—		—		—		—		2,916			3




Issuance of common stock in April 2000		—		—		—		—		—		—		5,000			5




Common stock repurchase in May 2000		—		—		—		—		—		—		(6,667	)		(7	)




Issuance of warrants in May 2000 in connection with notes payable		—		—		—		—		—		—		—			—




Exercise of common stock options in June 2000		—		—		—		—		—		—		7,083			7




Stock-based compensation		—		—		—		—		—		—		—			—




Net loss		—		—		—		—		—		—		—			—

[Additional columns below]

[Continued from above table, first column(s) repeated]


							Deficit
							Accumulated
	Additional						during the			Total
	Paid-in			Shareholder			Development			Shareholders’
	Capital			Receivable			Stage			Deficit





Issuance of Series A preferred stock in exchange for intellectual property rights in August 1997 (unaudited)		—			—			—			—




Issuance of Series A preferred stock for cash in August 1997 (unaudited)		—			—			—			—




Issuance of warrant to purchase Series B preferred stock in August 1997 (unaudited)		1,700			—			—			1,700




Issuance of restricted common stock in August 1997 (unaudited)		34,650			—			—			35,000




Issuance of restricted common stock in March 1998 (unaudited)		36,630			—			—			37,000




Issuance of restricted common stock in July 1998 (unaudited)		19,800			—			—			20,000




Net loss (unaudited)		—			—			(4,794,435	)		(4,794,435	)

Balances as of July 3, 1998 (unaudited)		92,780			—			(4,794,435	)		(4,700,735	)




Issuance of restricted common stock in July 1998		8,415			—			—			8,500




Issuance of Series B preferred stock from exercise of warrant in August 1998		—			—			—			—




Exercise of common stock options in September 1998		619			—			—			625




Issuance of restricted common stock in January 1999		4,990			—			—			5,000




Issuance of restricted common stock in June 1999		74,850			—			—			75,000




Net loss		—			—			(7,927,290	)		(7,927,290	)

Balances as of July 2, 1999		181,654			—			(12,721,725	)		(12,538,900	)




Repurchase of restricted common stock in October 1999		(3,465	)		—			—			(3,500	)




Issuance of warrants in November 1999 in connection with notes payable		327,215			(82	)		—			327,133




Issuance of warrants in December 1999 in connection with notes payable		779,274			(193	)		—			779,081




Exercise of common stock options in January 2000		1,392			—			—			1,406




Exercise of common stock options in March 2000		779			—			—			781




Issuance of common stock in March 2000		14,970			—			—			15,000




Issuance of Series B preferred stock for cash in March 2000		—			—			—			—




Issuance of warrants in March 2000 in connection with notes payable		273,714			(200	)		—			273,514




Exercise of common stock options in April 2000		1,455			—			—			1,458




Issuance of common stock in April 2000		2,495			—			—			2,500




Common stock repurchase in May 2000		(660	)		—			—			(667	)




Issuance of warrants in May 2000 in connection with notes payable		273,714			(200	)		—			273,514




Exercise of common stock options in June 2000		3,535			—			—			3,542




Stock-based compensation		3,000			—			—			3,000




Net loss		—			—			(13,806,535	)		(13,806,535	)



	Redeemable Convertible Preferred Stock


	Series A				Series B				Series C				Common Stock

	Shares		Amount		Shares		Amount		Shares		Amount		Shares			Amount





Balances as of July 1, 2000		6,300,000		6,890,625		544,047		3,200,275		—		—		1,190,207			1,190




Exercise of common stock options in July 2000 (unaudited)		—		—		—		—		—		—		25,000			25




Issuance of Series C preferred stock for cash in August 2000 (unaudited)		—		—		—		—		2,809,321		19,000,002		—			—




Issuance of Series B preferred stock upon exercise of a warrant in August 2000 (unaudited)		—		—		1,185,953		6,976,191		—		—		—			—




Issuance of Series B preferred stock upon conversion of note payable in August 2000 (unaudited)		—		—		850,000		3,984,242		—		—		—			—




Issuance of Series C preferred stock upon conversion of notes in August 2000 (unaudited)		—		—		—		—		887,143		5,478,050		—			—




Exercise of common stock options in September 2000 (unaudited)		—		—		—		—		—		—		8,375			8




Repurchase of restricted common stock in September 2000 (unaudited)		—		—		—		—		—		—		(13,542	)		(13	)




Exercise of common stock options in October 2000 (unaudited)		—		—		—		—		—		—		312			—




Exercise of common stock options in November 2000 (unaudited)		—		—		—		—		—		—		25,000			25




Exercise of common stock options in December 2000 (unaudited)		—		—		—		—		—		—		9,457			10




Issuance of Series C preferred stock for cash in December 2000 (unaudited)		—		—		—		—		282,954		1,913,680		—			—




Exercise of common stock options in January 2001 (unaudited)		—		—		—		—		—		—		1,385			1




Repurchase of restricted common stock in March 2001 (unaudited)		—		—		—		—		—		—		(67,397	)		(67	)




Exercise of common stock options in April 2001 (unaudited)		—		—		—		—		—		—		9,000			9




Issuance of restricted common stock in June 2001 (unaudited)		—		—		—		—		—		—		150,000			150




Net loss (unaudited)		—		—		—		—		—		—		—			—

Balances as of June 30, 2001 (unaudited)		6,300,000	$	6,890,625		2,580,000	$	14,160,708		3,979,418	$	26,391,732		1,337,797		$	1,338

[Additional columns below]

[Continued from above table, first column(s) repeated]


							Deficit
							Accumulated
	Additional						during the			Total
	Paid-in			Shareholder			Development			Shareholders’
	Capital			Receivable			Stage			Deficit





Balances as of July 1, 2000		1,859,072			(675	)		(26,528,260	)		(24,668,673	)




Exercise of common stock options in July 2000 (unaudited)		12,475			—			—			12,500




Issuance of Series C preferred stock for cash in August 2000 (unaudited)		—			—			—			—




Issuance of Series B preferred stock upon exercise of a warrant in August 2000 (unaudited)		—			—			—			—




Issuance of Series B preferred stock upon conversion of note payable in August 2000 (unaudited)		—			—			—			—




Issuance of Series C preferred stock upon conversion of notes in August 2000 (unaudited)		—			—			—			—




Exercise of common stock options in September 2000 (unaudited)		4,180			—			—			4,188




Repurchase of restricted common stock in September 2000 (unaudited)		(1,341	)		—			—			(1,354	)




Exercise of common stock options in October 2000 (unaudited)		156			—			—			156




Exercise of common stock options in November 2000 (unaudited)		12,475			—			—			12,500




Exercise of common stock options in December 2000 (unaudited)		4,718			—			—			4,728




Issuance of Series C preferred stock for cash in December 2000 (unaudited)		—			—			—			—




Exercise of common stock options in January 2001 (unaudited)		691			—			—			692




Repurchase of restricted common stock in March 2001 (unaudited)		(6,673	)		—			—			(6,740	)




Exercise of common stock options in April 2001 (unaudited)		4,491			—			—			4,500




Issuance of restricted common stock in June 2001 (unaudited)		104,850			—			—			105,000




Net loss (unaudited)		—			—			(13,605,702	)		(13,605,702	)

Balances as of June 30, 2001 (unaudited)		1,995,094			(675	)		(40,133,962	)		(38,138,205	)

See accompanying notes to financial statements.

F-32

FOVEON, INC.

(A Development Stage Enterprise)

STATEMENTS OF CASH FLOWS


														Period from
					Years Ended									July 9, 1997
														(inception) to
					June 30, 2001			July 1, 2000			July 2, 1999			June 30, 2001

					(Unaudited)									(Unaudited)




Cash flows from operating activities:




	Net loss				$	(13,605,702	)		(13,806,535	)		(7,927,290	)		(40,133,962	)




	Adjustments to reconcile net loss to net cash used in operating activities:




		Depreciation and amortization				561,113			522,517			252,633			1,401,692




		Interest accrued and amortization of discount on notes payable				36,882			771,549			401,131			1,209,562




		Loss on disposal of equipment				127,255			20,731			3,982			151,968




		Stock-based compensation				—			3,000			—			3,000




		Impairment of intellectual property rights				—			—			—			1,890,625




		Charge for obsolete inventory				1,005,462			—			—			1,005,462




		Changes in operating assets and liabilities:




			Accounts receivable			(72,965	)		—			—			(72,965	)




			Inventories			(232,325	)		(444,731	)		(380,305	)		(1,057,361	)




			Prepaid expenses, other current assets, and other assets			12,968			(89,729	)		(146,156	)		(242,146	)




			Accounts payable and accrued liabilities			34,013			703,593			359,956			1,356,333




			Deferred revenue			(92,546	)		249,273			—			156,727

				Net cash used in operating activities		(12,225,845	)		(12,070,332	)		(7,436,049	)		(34,331,065	)

Cash flows used in investing activities — purchases of property and equipment						(580,257	)		(423,114	)		(433,603	)		(1,720,430	)

Cash flows from financing activities:




	Proceeds from issuance of common stock					144,264			24,687			89,125			350,076




	Repurchase of common stock					(8,094	)		(4,167	)		—			(12,261	)




	Proceeds from issuance of long-term notes payable					—			9,000,000			6,976,191			15,976,191




	Proceeds from issuance of bridge loan					1,000,000			—			—			1,000,000




	Proceeds from issuance of preferred stock and warrants					20,913,682			176,471			3,023,804			29,115,657




	Repayments of notes payable and capital lease obligations					(331,001	)		(207,855	)		(74,257	)		(613,113	)

				Net cash provided by financing activities		21,718,851			8,989,136			10,014,863			45,816,550

Net (decrease) increase in cash and cash equivalents						8,912,749			(3,504,310	)		2,145,211			9,765,055




Cash and cash equivalents at beginning of year/period						852,306			4,356,616			2,211,405			—

Cash and cash equivalents at end of year/period					$	9,765,055			852,306			4,356,616			9,765,055

Supplemental disclosures of cash flow information:




	Cash paid during the year/period for interest				$	1,320,169			78,497			—			1,411,983

	Noncash investing and financing activities:




		Issuance of preferred stock for intellectual property rights			$	—			—			—			1,890,625

		Debt discount recorded for issuance of preferred stock warrants			$	—			1,653,242			—			1,653,242

		Shareholders’ receivables recorded on issuance of warrants			$	—			675			—			675

		Property and equipment acquired through capital leases			$	—			—			774,684			774,684

		Conversion of notes to preferred stock			$	9,462,292			—			—			9,462,292

		Cancellation of long-term notes payable as consideration for the exercise of a warrant to purchase preferred stock			$	6,976,191			—			—			6,976,191

See accompanying notes to financial statements.

F-33

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)

(1) Description of Business

Foveon, Inc. (the Company) was incorporated in California on July 9, 1997 and reported its financial results for fiscal years ending on the first Friday in July through its fiscal year ended July 1, 2000. During fiscal 2001, the Company changed their fiscal year end to the last Saturday in June. The Company’s business consists of developing and manufacturing digital camera systems. As of June 30, 2001, the Company is in the development stage with primary activities to date including customer demonstrations and limited sales, raising capital, performing research and development activities, producing prototypes, developing strategic alliances, and identifying markets. In late fiscal 2001, the Company changed its development focus from producing digital camera systems to marketing the underlying technology to customers through license or other arrangements.

(2) Liquidity

The Company is in the development stage, has incurred significant losses since inception, and continued to incur losses in its fiscal year ended June 30, 2001. As of June 30, 2001, the Company had cash and cash equivalents of $9,765,055 and current liabilities of $1,768,659. The Company believes it may raise additional working capital through equity or debt financing to fund its planned activities of fiscal 2002. If the Company is unable to obtain additional debt or equity financing and ultimately attain profitability, it may not be able to fund its planned activities. If it is unable to fund it planned activities, it may not be able to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of reported asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company is currently in discussions with third parties to obtain additional funding; however, to date, no formal agreements have been executed.

(3) Summary of Significant Accounting Policies

(a) Revenue Recognition

To date, revenue has been derived from sale of digital camera systems. Contracts from the sale of digital camera systems are multiple element arrangements with a combination of camera hardware, computer hardware and software, and software support services. As a result, revenue is recognized in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Software Revenue Recognition, with Respect to Certain Arrangements.

SOP 97-2 generally requires revenue earned on arrangements involving software products and services to be allocated to each element based on the relative fair values of the elements. The fair value of the elements must be based on vendor-specific objective evidence of the relative fair values of the elements. Revenue for each element is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable.

Due to the early stage of the product, the sale of digital camera systems in fiscal 2000 involved installation and demonstration obligations performed by the Company subsequent to the delivery of the systems to the customer. After customer acceptance of the delivered hardware and software products has been received, the only remaining obligation to the customer is post-contract customer support.

Vendor-specific objective evidence of the relative fair value of the individual elements of our agreement does not exist. Since essentially all the costs of the arrangement were incurred upon delivery of

F-34

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS — (Continued)

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)

the hardware and software products, the costs of sales related to those items were recorded upon the later of payment or acceptance by the customer, and an equal amount of revenue was recognized at that time. The entire gross margin was deferred and is being recognized ratably over the term of the support arrangement (one to three years).

During fiscal 2001, the Company developed sufficient experience in marketing its systems such that the installation and demonstration obligations became incidental and collectibility is assured upon shipment. In addition, the Company discontinued offering post-contract customer support. As a result, the Company began recognizing all revenue upon shipment during fiscal 2001.

(b) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

(c) Cash and Cash Equivalents

The Company considers all highly liquid investments with remaining maturities at the date of purchase of 90 days or less to be cash equivalents. As of June 30, 2001 and July 1, 2000, cash equivalents consisted of money market funds in the amounts of $9,713,092 and $67,212, respectively.

(d) Inventories

Inventories are stated at the lower of weighted average cost or market.

(e) Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three years. Leasehold improvements are amortized straight line over the shorter of the lease term or estimated useful life of the asset. Amortization of assets recorded under capital lease agreements is computed using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets.

(f) Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded against deferred tax assets if it is more likely than not that all or a portion of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

F-35

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS — (Continued)

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)

(g) Concentration of Credit Risk

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintained 99% and 64% as of June 30, 2001 and July 1, 2000, respectively, of its cash and cash equivalents with one financial institution. Management believes the financial risks associated with these financial instruments are minimal.

(h) Research and Development Costs

Development costs incurred in the research and development of new software products are expensed as incurred until technological feasibility in the form of a working model has been established. Under this policy, no software development costs have been capitalized to date.

(i) Stock-Based Compensation

The Company accounts for its stock-based employee compensation plans using the intrinsic-value method. Deferred stock-based compensation expense is recorded if, on the date of grant, the current market value of the underlying stock exceeds the exercise price. Options granted to nonemployees are considered compensatory and are accounted for at fair value pursuant to Statement of Financial Accounting Standards (SFAS) No. 123, Accounting or Stock-Based Compensation. The Company discloses the pro forma effect of using the fair-value method of accounting for all stock-based compensation arrangements in accordance with SFAS No. 123.

(j) Impairment of Long-Lived Assets

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(k) Comprehensive Income

To date, the Company has not experienced any material elements of other comprehensive income. As a result, net loss is equal to comprehensive loss for all periods presented.

(l) Advertising Costs

The Company expenses advertising costs as incurred. These amounts are included in sales and marketing expenses in the accompanying financial statements. Advertising expense was $86,607, $60,801, $23,351, and $170,759 for the years ended June 30, 2001, July 1, 2000, July 2, 1999, and the period from July 9, 1997 (inception) to June 30, 2001, respectively.

F-36

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS — (Continued)

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)

(4) Inventories

Inventories as of June 30, 2001 and July 1, 2000, consisted of the following:


	2001		2000

Raw materials	$	—		471,155




Work in process		—		61,883




Finished goods		51,899		66,090




Inventory on consignment		—		225,908

	$	51,899		825,036

Near the end of fiscal 2001, the Company changed its business model from selling digital camera systems to marketing the underlying technology through licensing or other arrangements. As a result, the Company recorded a charge for inventory obsolescence totaling $1,005,462 to cost of revenue during the year ended June 30, 2001.

(5) Property and Equipment

Property and equipment as of June 30, 2001 and July 1, 2000, consisted of the following:


	2001		2000

Computer and other equipment	$	928,003		855,170




Manufacturing and research and development equipment		334,371		293,787




Purchased software		107,340		107,340




Office furniture and equipment		298,266		526,035




Leasehold improvements		17,332		99,240




Construction in process		385,890		—

		2,071,202		1,881,572




Less accumulated depreciation and amortization		1,129,748		832,007

	$	941,454		1,049,565

(6) Accrued Liabilities

Accrued liabilities as of June 30, 2001 and July 1, 2000, consisted of the following:


	2001		2000

Accrued compensation and benefits	$	206,528		300,916




Payroll and other taxes payable		75,073		35,631




Other		349,105		296,543

	$	630,706		633,090

F-37

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS — (Continued)

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)

(7) Long-Term Notes Payable

Long-term notes payable as of July 1, 2000, consisted of the following:






6% subordinated full recourse note; $6,976,191 principal and accrued interest due and payable to National Semiconductor Corporation in August 2007	$	7,819,961




6.5% convertible subordinated note; $735,000 principal and accrued interest due and payable to National Semiconductor Corporation in November 2009		766,186




6.5% convertible subordinated note; $465,000 principal and accrued interest due and payable to Synaptics, Inc in November 2009		484,730




6.5% convertible subordinated note; $2,327,000 principal and accrued interest due and payable to National Semiconductor Corporation in December 2009		2,414,531




6.5% convertible subordinated note; $1,472,000 principal and accrued interest due and payable to Synaptics, Inc in December 2009		1,527,560




6.85% convertible subordinated note; $1,225,000 principal and accrued interest due and payable to National Semiconductor Corporation in March 2010		1,247,796




6.85% convertible subordinated note; $775,000 principal and accrued interest due and payable to Synaptics, Inc in March 2010		790,264




6.49% convertible subordinated note; $2,000,000 principal and accrued interest due and payable to National Semiconductor Corporation in May 2010		2,019,191

		17,070,219




Unamortized discounts		(1,574,590	)

	$	15,495,629

In August 2000, the subordinated full recourse note payable to National Semiconductor Corporation (National) was canceled as consideration for the exercise of a warrant to purchase 1,185,953 shares of Series B preferred stock (Note 8(b)). All accrued interest was paid in full.

In August 2000, the convertible subordinated notes held by National and Synaptics were converted into shares of Series B and C preferred stock. All accrued interest was paid in full upon conversion. At the time of conversion, the carrying values of the loans were reclassified to redeemable convertible preferred stock.

(8) Redeemable Convertible Preferred Stock and Shareholders’ Deficit

(a) Preferred Stock

Rights, preferences, and privileges of the holders of Series A, B, and C preferred stock are as follows:


	•	Dividends — The holders of the Series A, B, and C preferred stock are entitled to receive noncumulative dividends at the rate of $0.11, $0.59, and $0.54 per share per annum, respectively. Dividends are payable when and as declared by the Board of Directors in preference and priority to any payment of dividends to holders of common stock.

	•	Liquidation Preference — In the event of any liquidation or winding up of the Company, the holders of the Series A, B, and C preferred stock are entitled to receive a liquidation preference of $1.09375, $5.88235, and $6.763219 per share, respectively, plus all declared but unpaid dividends over holders of common stock. After payment has been made to the holders of all preferred stock

F-38

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS — (Continued)

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)


		of the full preferential amounts to which they shall be entitled, the remaining assets of the Company available for distribution to shareholders shall be distributed among the holders of Series A, B, and C preferred stock and the common stock pro rata based on the number of shares of common stock held by each assuming conversion of all Series A, B, and C preferred shares until the holders of Series A, B, and C preferred stock have received an aggregate of $3.28125, $17.64705, and $20.289 per share, respectively.

	•	Redemption — Holders of Series A, B, and C preferred stock have the option to redeem their shares at defined redemption dates beginning in August 2005 at $1.09375, $5.88235, and $6.763219 per share, respectively, plus all declared, but unpaid dividends.

	•	Conversion — The holders of the Series A, B, and C preferred stock have the right to convert the Series A, B and C preferred stock, at any time, into shares of common stock. The initial conversion rate shall be 1:1 subject to adjustment for common stock dividends, combinations or splits, and adjustment as provided by the automatic conversion clause noted below.

	•	Automatic Conversion — The Series A, B, and C preferred stock shall be automatically converted into common stock at the then effective conversion price (i) in the event that the holders of at least 66 2/3% of the outstanding Series A, B, and C preferred stock, voting together as a class, consent to such conversion; or (ii) upon the closing of an underwritten public offering of shares of common stock of the Company at an aggregate offering price of not less than $20,000,000 and an aggregate pre-offering market capitalization of at least $225,000,000.

	•	Voting Rights — The holders of Series A, B, and C preferred stock vote equally with shares of common stock on an “as if converted” basis.

No dividends have been declared or paid on preferred stock or common stock since inception of the Company.

(b) Warrants

In conjunction with the issuance of Series A preferred stock, the Company issued for $1,700 in cash a warrant to purchase 1,700,000 shares of Series B preferred stock at an exercise price of $5.88 a share, expiring 10 years from the date of issuance. In July 1998, the warrant holder exercised a portion of the warrant to purchase 514,047 shares of Series B preferred stock. In August 2000, the warrant holder exercised the remainder of the warrant to purchase 1,185,953 shares of Series B preferred stock.

In connection with equipment financing in April 1999, the Company issued a warrant to purchase 10,000 shares of common stock at a price of $6.00 per share, exercisable at any time prior to April 2009. The fair value of the warrant was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free rate of 5%; contractual life of 10 years; no dividends; and 80% expected volatility. The proceeds assigned to the warrant were insignificant, and consequently, no debt discount was recorded. As of June 30, 2001, all of these warrants remained outstanding.

In conjunction with the issuance of an aggregate of $6,287,500 of convertible subordinated notes payable to National Semiconductor Corporation (National) in fiscal 2000, the Company issued warrants to purchase 168,683 shares of Series B preferred stock at $5.88 per share and warrants to purchase 95,368 shares of Series C preferred stock at $6.76 per share. These warrants are exercisable at any time prior to the end of their five year contractual life. The proceeds from the issuances of the convertible subordinated notes and warrants were assigned to the warrants and notes payable based on their relative fair values. The

F-39

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS — (Continued)

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)

fair values of the warrants were estimated using the Black-Scholes option-pricing model with the following assumptions; risk-free rates ranging from 5.97% to 6.19%; contractual lives of five years; no dividends; and 80% expected volatility. Using these assumptions the proceeds assigned to the warrants were $1,119,088 with a corresponding amount recorded as a debt discount to be amortized to interest expense on a straight-line basis over the term of the loan. As of June 30, 2001, all of these warrants remained outstanding.

In August 2000, the convertible subordinated notes held by National were converted into shares of Series B and C preferred stock. At the time of conversion, the carrying value of the loans were reclassified to redeemable convertible preferred stock.

Restrictions on the exercise apply such that National can only exercise these warrants to the extent that the number of shares of Series B and C preferred stock to be obtained, when added to all other shares of the Company’s common and preferred stock held by National, do not represent more than 47.5% of the outstanding voting stock of the Company on the date of exercise.

Notwithstanding the provisions above, National may exercise all of its outstanding warrants upon any reclassification of the capital stock of the Company, any consolidation, or merger of the Company in which the shareholders immediately prior to such merger or consolidation do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the surviving entity, or transfer all of the assets of the Company.

In conjunction with the issuance of an aggregate $2,712,500 of convertible subordinated notes payable to Synaptics, Inc. (Synaptics) in fiscal 2000, the Company issued warrants to purchase 106,718 shares of Series B preferred stock at $5.88 per share and warrants to purchase 22,918 shares of Series C preferred stock at $6.76 per share. These warrants are exercisable at any time prior to end of their five year contractual life. The proceeds from the issuances of the convertible subordinated notes and warrants were assigned to the warrants and notes payable based on their relative fair values. The fair value of the warrants were estimated using the Black-Scholes option-pricing model with the following assumptions; risk-free rates ranging from 5.97% to 6.19%; contractual lives of five years; no dividends; and 80% expected volatility. Using these assumptions the proceeds assigned to the warrants were $534,830 with a corresponding amount recorded as a debt discount to be amortized to interest expense on a straight-line basis over the life of the loan. In August 2000, the convertible subordinated notes held by Synaptics were converted into shares of Series B and C preferred stock. At the time of conversion, the carrying value of the loans were reclassified to redeemable convertible preferred stock. As of June 30, 2001, all these warrants remained outstanding.

(9) 1997 Stock Plan

The Company adopted a stock plan in July 1997 (the 1997 Plan) that provides for the issuance of incentive and nonstatutory options to purchase shares of common stock and rights to purchase restricted common stock. As of June 30, 2001 and July 1, 2000, 3,200,000 and 2,500,000 shares, respectively, of common stock had been reserved for issuance under the 1997 Plan. Nonstatutory stock options may be granted to employees and consultants and incentive stock options to employees. Options have a term no greater than 10 years and generally vest 25% at the end of the first year with a rate of 1/48 per month thereafter.

Nonstatutory options are exercisable at a price not less than 85% of the fair market value of the stock at the date of grant, as determined by the Company’s Board of Directors, unless they are granted to an individual who owns greater than 10% of the voting rights of all classes of stock, in which case the exercise

F-40

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS — (Continued)

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)

price shall be no less than 110% of the fair market value. Incentive stock options are exercisable at a price no less than 100% of fair market value of the stock at the date of grant, as determined by the Company’s Board of Directors, except when they are granted to an employee who owns greater than 10% of the voting power of all classes of stock, in which case they are exercisable at a price not less than 110% of fair market value.

Under the terms of the 1997 Plan, employees may be granted rights to purchase restricted common stock and exercise unvested options. The Company’s repurchase rights with respect to restricted common stock lapse in accordance with the option-vesting schedule described above. Upon termination of service, an employee’s or nonemployee’s unvested shares may be repurchased by the Company at the original purchase price. As of June 30, 2001 and July 1, 2000, 262,294 and 751,416 shares, respectively, were subject to repurchase by the Company.

Under Accounting Principles Board (APB) Opinion No. 25, the Company has recorded no compensation costs related to its stock-based awards to employees for the period from July 9, 1997 (inception) to June 30, 2001, because the exercise price of each option equals or exceeds the fair value of the underlying common stock as of the grant date for each stock option. Had compensation cost for the Company’s plans been determined consistent with the fair value approach described in SFAS No. 123, the Company’s pro forma net loss for the years ended June 30, 2001, July 1, 2000, and July 2, 1999, would have been $13,632,038, $13,819,462, and $7,929,109, respectively, and for the period from July 9, 1997 (inception) to June 30, 2001, would have been $40,175,122.

The fair value of employee stock options granted was estimated on the date of grant using the Black-Scholes option pricing model. The following weighted-average assumptions were used in this calculation: risk-free interest rate of 4.99%; expected life of 4.5 years; no dividends; and expected volatility of 0%.

The weighted-average fair value of employee options granted for the years ended June 30, 2001, July 1, 2000, and July 2, 1999, were $0.14, $0.10, $0.09, respectively.

The following table summarizes information about stock options outstanding under the 1997 Plan:



June 30, 2001

				Weighted-Average
				Remaining		Number
Exercise		Number		Contractual		of Shares
Prices		Outstanding		Life (years)		Vested

$	0.10		15,000		6.83		11,875




	0.50		748,208		8.31		323,786




	0.70		503,750		9.66		17,707

			1,266,958		8.83		353,368

The weighted-average exercise price of shares vested as of June 30, 2001, was $0.50.

F-41

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS — (Continued)

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)

Option activity for the 1997 Plan is summarized as follows:


								Weighted-Average
		Options/Shares			Stock			Exercise/
		Available			Options			Purchase
		for Grant			Outstanding			Price

Balances as of July 9, 1997 (unaudited)			2,000,000			—		$	—




	Restricted stock issued (unaudited)		(920,000	)		—			0.10

Balances as of July 3, 1998 (unaudited)			1,080,000			—			0.10




	Restricted stock issued		(245,000	)		—			0.36




	Options granted		(440,500	)		440,500			0.50




	Options canceled		20,000			(20,000	)		0.10




	Options exercised		—			(6,250	)		0.10

Balances as of July 2, 1999			414,500			414,250			0.47




	Increase in options available for grant		500,000			—			—




	Restricted stock repurchased		41,667			—			0.10




	Options granted		(651,500	)		651,500			0.50




	Options canceled		136,626			(136,626	)		0.49




	Options exercised		—			(30,624	)		0.32

Balances as of July 1, 2000			441,293			898,500			0.48




	Increase in options available for grant		700,000			—			—




	Restricted stock issued		(150,000	)		—			0.70




	Restricted stock repurchased		80,939			—			0.10




	Options granted		(521,250	)		521,250			0.70




	Options canceled		74,263			(74,263	)		0.51




	Options exercised		—			(78,529	)		0.50

Balances as of June 30, 2001			625,245			1,266,958			0.58

(10) Related Party Transactions

In fiscal 2001 and 2000, the Company purchased raw materials from National totaling $1,667,909 and $880,631, respectively, to be used in manufacturing and research and development.

In fiscal 1999, the Company purchased certain equipment and office furniture from National totaling $595,000. In addition, the Company also leased an office facility from National and paid rent and related security deposit in fiscal 2001, 2000, and 1999 of $581,410, $643,512, and $342,030, respectively.

As of June 30, 2001 and July 1, 2000, amounts payable to National (included in accounts payable) were $68,701 and $367,501, respectively. As of June 30, 2001, amounts due from National (included in other current assets) was $102,568.

F-42

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS — (Continued)

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)

(11) Income Taxes

Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax loss as a result of the following:


											Period from
		Years ended									July 9, 1997
											(inception) to
		June 30, 2001			July 1, 2000			July 2, 1999			June 30, 2001

Expected tax benefit at U.S. federal statutory rate of 34%		$	(4,625,939	)		(4,694,222	)		(2,695,279	)		(13,634,250	)




Net operating loss and temporary differences for which no tax benefit was realized			4,534,245			4,601,747			2,616,799			12,722,339




Nondeductible expenses			91,694			92,475			78,480			911,911

	Total tax expense	$	—			—			—			—

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of June 30, 2001 and July 1, 2000, are presented below:


			2001		2000

Deferred tax assets:




	Research and other tax credit carryforwards		$	1,080,000		675,000




	Start-up expenditures			1,063,000		1,651,000




	Net operating loss carryforwards			12,712,000		7,376,000




	Others			611,000		353,000

		Gross deferred tax assets before valuation allowance		15,466,000		10,055,000




Less valuation allowance				15,466,000		10,055,000

		Net deferred taxes	$	—		—

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Due to the uncertainty surrounding the Company’s ability to realize such deferred tax assets, a full valuation allowance has been established.

As of June 30, 2001, the Company has net operating loss carryforwards of approximately $31,962,000 and $24,218,000 for federal and California income tax purposes, respectively. The federal and California net operating loss carryforwards expire in the year 2021 and 2011, respectively. As of June 30, 2001, the Company has research and experimental tax credit carryforwards for federal and California of approximately $714,000 and $469,000, respectively. The federal research and experimental credit carryforwards expire in the year 2021. The California research and experimental credit can be carried forward indefinitely.

Federal and state tax laws impose significant restrictions on the utilization of net operating loss carryforwards in the event of a change in ownership of the Company which constitutes an “ownership change,” as defined by the Internal Revenue Code, Section 382. The Company has not determined

F-43

FOVEON, INC.

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS — (Continued)

June 30, 2001 and July 1, 2000

(All information as of and for the periods ended June 30, 2001 is unaudited)

whether such an “ownership change” has occurred which could limit the availability of the net operating losses and tax credits.

(12) Lease Commitments

(a) Operating Leases

The Company leases its facilities and certain office equipment under operating leases. These leases expire at various dates through 2005.

Future minimum lease payments under noncancelable operating leases as June 30, 2001, are as follows:


Fiscal
Year
Ending

2002	$	512,032




2003		1,177,864




2004		1,237,366




2005		926,487

Total	$	3,853,749

The Company’s rent expense was $570,844, $696,636, and $438,335 for the years ended June 30, 2001, July 1, 2000, and July 2, 1999, respectively, and $1,816,679 for the period from July 9, 1997 (inception) to June 30, 2001.

(b) Capital Lease Obligations

The following is a schedule by fiscal year of future minimum lease payments under capital lease obligations for certain equipment, together with the present value of the net minimum lease payments:


Fiscal
Year
Ending

2002	$	273,863




Less amounts representing interest		18,264

Present value of net minimum lease payments	$	255,599

Equipment under capital lease was $774,684 as of June 30, 2001, with accumulated amortization of $598,797.

(13) Employee Savings Plan

In January 1998, the Company implemented a retirement savings and investment plan that is intended to qualify under Section 401(k) of the Internal Revenue Code (the 401(k) Plan) covering all of the Company’s employees. An employee may elect the Company to defer, in the form of contributions to the 401(k) Plan on his or her behalf, up to 12% of the total compensation that would otherwise be paid to the employee, not to exceed the amount allowed by applicable Internal Revenue Service guidelines. The Company does not match employee contributions to the 401(k) Plan.

F-44

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

TABLE OF CONTENTS


	Page

Prospectus Summary		1




Risk Factors		7




Use of Proceeds		21




Dividend Policy		21




Capitalization		22




Dilution		23




Selected Consolidated Financial Data		24




Management’s Discussion and Analysis of Financial Condition and Results of Operations		26




Business		38




Management		53




Certain Relationships and Transactions		64




Principal and Selling Stockholders		66




Description of Capital Stock		69




Shares Eligible for Future Sale		71




Underwriting		73




Legal Matters		75




Experts		75




Where You Can Find Additional Information		76




Index to Financial Statements		F-1

Until , 2002, all dealers effecting transactions in the common stock offered hereby, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligations of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

5,000,000 Shares

synaptics logo

Common Stock

PROSPECTUS

Bear, Stearns & Co. Inc.

SG Cowen

SoundView Technology Group

, 2002

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the expenses in connection with the offering described in the Registration Statement. All such expenses are estimates except for the SEC registration fee and NASD and Nasdaq National Market filing fees.






SEC registration fee		$	17,250




NASD filing fee			6,500




Blue Sky fees and expenses			10,000




Nasdaq National Market filing fee			95,000




Transfer agent and registrar fees			4,000




Accountants’ fees and expenses			450,000




Legal fees and expenses			600,000




Printing and engraving expenses			250,000




Miscellaneous fees			167,250

	Total	$	1,600,000

Item 14. Indemnification of Directors and Officers.

The Certificate of Incorporation and Bylaws of the Registrant provide that the Registrant will indemnify and advance expenses, to the fullest extent permitted by the Delaware General Corporation Law, to each person who is or was a director or officer of the Registrant, or who serves or served any other enterprise or organization at the request of the Registrant (an “Indemnitee”).

Under Delaware law, to the extent that an Indemnitee is successful on the merits in defense of a suit or proceeding brought against him or her by reason of the fact that he or she is or was a director, officer, or agent of the Registrant, or serves or served any other enterprise or organization at the request of the Registrant, the Registrant shall indemnify him or her against expenses (including attorneys’ fees) actually and reasonably incurred in connection with such action.

If unsuccessful in defense of a third-party civil suit or a criminal suit, or if such a suit is settled, an Indemnitee may be indemnified under Delaware law against both (i) expenses, including attorney’s fees, and (ii) judgments, fines, and amounts paid in settlement if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Registrant, and, with respect to any criminal action, had no reasonable cause to believe his or her conduct was unlawful.

If unsuccessful in defense of a suit brought by or in the right of the Registrant, where the suit is settled, an Indemnitee may be indemnified under Delaware law only against expenses (including attorneys’ fees) actually and reasonably incurred in the defense or settlement of the suit if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Registrant except that if the Indemnitee is adjudged to be liable for negligence or misconduct in the performance of his or her duty to the Registrant, he or she cannot be made whole even for expenses unless a court determines that he or she is fully and reasonably entitled to indemnification for such expenses.

Also under Delaware law, expenses incurred by an officer or director in defending a civil or criminal action, suit, or proceeding may be paid by the Registrant in advance of the final disposition of the suit, action, or proceeding upon receipt of an undertaking by or on behalf of the officer or director to repay such amount if it is ultimately determined that he or she is not entitled to be indemnified by the Registrant.

II-1

The Registrant may also advance expenses incurred by other employees and agents of the Registrant upon such terms and conditions, if any, that the Board of Directors of the Registrant deems appropriate.

Item 15. Recent Sales of Unregistered Securities.

Since January 1, 1999, we have sold and issued the following securities:



	1. From January 1, 1999 to December 31, 2001, we issued options to purchase an aggregate of 5,566,622 shares of our common stock at prices ranging from $1.00 to $8.50 per share to employees, directors and consultants pursuant to the 1996 Stock Option Plan and the 2000 Nonstatutory Stock Option Plan.



	2. From January 1, 1999 to December 31, 2001, we issued and sold an aggregate of 1,988,878 shares of our common stock to employees, directors, and consultants for aggregate consideration of $2,352,873 consisting of a mix of cash and promissory notes, pursuant to the exercise of options granted under our 1986 and 1996 stock option plans.


	3. During fiscal 2000, we issued 9,667 shares of our common stock at a value of $9,667 and 4,834 shares of our common stock at a value of $9,668 to Mr. T.W. Kang in payment for consulting services. We also issued 17,334 shares of our common stock at a value of $35,665 to Mr. Eugene Ko for consulting services.

	4. In June 1999, we issued an aggregate of 37,500 shares of our common stock to PCT Taiwan in connection with the formation of our branch in Taiwan at a value of $75,000. An additional 37,500 shares of our common stock are issuable if certain covenants are fulfilled.


	5. In October 1999, we issued 652,025 shares of our common stock to 60 residents of the United Kingdom and four residents of the United States, all of whom were executive officers or employees of Absolute Sensors Limited, and to two institutional investors in Belgium and Switzerland at a value of $1,304,044 in connection with the acquisition of Absolute Sensors Limited, our British subsidiary.

The sales and issuances of the securities in the transactions listed in paragraphs 1, 2, and 3 above were deemed to be exempt from registration under the Securities Act pursuant to the exemption provided by Rule 701 for securities issued in compensatory circumstances.

The sales and issuances of the securities in the transactions listed in paragraphs 4 and 5 above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2). In addition, the offering to the 60 United Kingdom residents and the two institutional investors in Belgium and Switzerland was made in reliance on Regulation S and the Form of Acceptance executed by such persons required such persons to confirm that they were not U.S. persons. Appropriate legends have been placed on the documents evidencing the securities and investment representations were obtained from the purchasers. All purchasers of securities either received adequate information about our company or had access, through employment or other relationships, to such information. All such securities issued pursuant to such exemptions are restricted securities as defined in Rule 144(a)(3) promulgated under the Securities Act.

Item 16. Exhibits.

(a) Exhibits


Exhibit
Number		Exhibits

	1	Form of Underwriting Agreement
*	3.1	Form of Certificate of Incorporation of the Registrant to be filed in Delaware
*	3.2	Form of Bylaws of the Registrant

II-2


Exhibit
Number		Exhibits

*	4	Form of Common Stock Certificate
	5	Opinion of Greenberg Traurig, LLP
*	10.1	1986 Incentive Stock Option Plan and form of grant agreement
*	10.2	1986 Supplemental Stock Option Plan and form of grant agreement
*	10.3	1996 Stock Option Plan and form of grant agreement
*	10.4	2000 UK Approved Sub-Plan to the 1996 Stock Option Plan and form of grant agreement
*	10.5	2000 Nonstatutory Stock Option Plan and form of grant agreement
	10.6	Amended and Restated 2001 Incentive Compensation Plan and form of grant agreement
	10.7	Amended and Restated 2001 Employee Stock Purchase Plan
*	10.8	401(k) Profit Sharing Plan
*	10.9	Agreement dated as of October 13, 1999 by and among the Registrant and the Principal Shareholders of Absolute Sensors Limited
*	10.10	Lease dated as of September 17, 1999 by and between Silicon Valley Properties, LLC as Landlord and the Registrant as Tenant
*	10.11	Master Equipment Lease Agreement dated as of November 28, 2000 by and between KeyCorp Leasing, a Division of Key Corporate Capital Inc., and the Registrant
*	10.12	Subordinated Secured Non-Recourse Promissory Note dated August 12, 1997 executed by the Registrant in favor of National Semiconductor Corporation
*	10.13	Form of Stock Option Grant and Stock Option Agreement between the Registrant and Federico Faggin
*	10.14	Form of Stock Option Grant and Stock Option Agreement between the Registrant and Francis F. Lee
*	10.15	Form of Stock Option Grant and Stock Option Agreement between the Registrant and Russell J. Knittel
	10.16	Loan and Security Agreement dated as of August 30, 2001 between Silicon Valley Bank and the Registrant
*	21	List of Subsidiaries
	23.1	Consent of Greenberg Traurig, LLP (included in Exhibit 5)
	23.2	Consent of Ernst & Young LLP, independent auditors
	23.3	Consent of KPMG LLP, independent auditors
*	24	Power of Attorney of Directors and Executive Officers (included on the Signature Page of the Registration Statement)


*	Previously filed.

(b) Financial Statement Schedules

Schedule II — Valuation and Qualifying Accounts

See Schedule II at page S-1.

Item 17. Undertakings.

The undersigned registrant hereby undertakes to provide to the underwriter, at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

II-3

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:


	(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1), or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

	(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

II-4

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this amendment no. 2 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on January 9, 2002.


	SYNAPTICS INCORPORATED


	By:	/s/ FRANCIS F. LEE



	Francis F. Lee
	Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this amendment no. 2 to the registration statement has been signed by the following persons in the capacities and on the dates indicated.


Signature	Title	Date

/s/ FRANCIS F. LEE Francis F. Lee	President, Chief Executive Officer, and Director (Principal Executive Officer)	January 9, 2002

/s/ RUSSELL J. KNITTEL Russell J. Knittel	Senior Vice President, Chief Financial Officer, Chief Administrative Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer)	January 9, 2002

/s/ FEDERICO FAGGIN* Federico Faggin	Chairman of the Board	January 9, 2002

/s/ KEITH B. GEESLIN* Keith B. Geeslin	Director	January 9, 2002

/s/ RICHARD L. SANQUINI* Richard L. Sanquini	Director	January 9, 2002

/s/ JOSHUA C. GOLDMAN* Joshua C. Goldman	Director	January 9, 2002

*By: /s/ RUSSELL J. KNITTEL Russell J. Knittel Attorney-in-Fact		January 9, 2002

II-5

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

SYNAPTICS INCORPORATED


			Balance		Additions
			as of		Charged to				Balance as
			Beginning		Costs and				of End
Description			of Year		Expenses		Write-offs		of Year

Year ended June 30, 1999




	Deducted from asset accounts:




		Allowance for doubtful accounts	$	99,000	$	—	$	—	$	99,000
Year ended June 30, 2000




	Deducted from asset accounts:




		Allowance for doubtful accounts	$	99,000	$	23,000	$	2,000	$	120,000
Year ended June 30, 2001




	Deducted from asset accounts:




		Allowance for doubtful accounts	$	120,000	$	6,000	$	1,000	$	125,000

S-1

EXHIBIT INDEX


Exhibit
Number		Exhibits

	1	Form of Underwriting Agreement
*	3.1	Form of Certificate of Incorporation of the Registrant to be filed in Delaware
*	3.2	Form of Bylaws of the Registrant
*	4	Form of Common Stock Certificate
	5	Opinion of Greenberg Traurig, LLP
*	10.1	1986 Incentive Stock Option Plan and form of grant agreement
*	10.2	1986 Supplemental Stock Option Plan and form of grant agreement
*	10.3	1996 Stock Option Plan and form of grant agreement
*	10.4	2000 UK Approved Sub-Plan to the 1996 Stock Option Plan and form of grant agreement
*	10.5	2000 Nonstatutory Stock Option Plan and form of grant agreement
	10.6	Amended and Restated 2001 Incentive Compensation Plan and form of grant agreement
	10.7	Amended and Restated 2001 Employee Stock Purchase Plan
*	10.8	401(k) Profit Sharing Plan
*	10.9	Agreement dated as of October 13, 1999 by and among the Registrant and the Principal Shareholders of Absolute Sensors Limited
*	10.10	Lease dated as of September 17, 1999 by and between Silicon Valley Properties, LLC as Landlord and the Registrant as Tenant
*	10.11	Master Equipment Lease Agreement dated as of November 28, 2000 by and between KeyCorp Leasing, a Division of Key Corporate Capital Inc., and the Registrant
*	10.12	Subordinated Secured Non-Recourse Promissory Note dated August 12, 1997 executed by the Registrant in favor of National Semiconductor Corporation
*	10.13	Form of Stock Option Grant and Stock Option Agreement between the Registrant and Federico Faggin
*	10.14	Form of Stock Option Grant and Stock Option Agreement between the Registrant and Francis F. Lee
*	10.15	Form of Stock Option Grant and Stock Option Agreement between the Registrant and Russell J. Knittel
	10.16	Loan and Security Agreement dated as of August 30, 2001 between Silicon Valley Bank and the Registrant
*	21	List of Subsidiaries
	23.1	Consent of Greenberg Traurig, LLP (included in Exhibit 5)
	23.2	Consent of Ernst & Young LLP, independent auditors
	23.3	Consent of KPMG LLP, independent auditors
*	24	Power of Attorney of Directors and Executive Officers (included on the Signature Page of the Registration Statement)


*	Previously filed.

EXHIBIT 1 5,750,000 Shares of Common Stock SYNAPTICS INCORPORATED UNDERWRITING AGREEMENT ___________, 2002 BEAR, STEARNS & CO. INC. SG COWEN SECURITIES CORPORATION SOUNDVIEW TECHNOLOGY GROUP as Representatives of the several Underwriters named in Schedule I attached hereto c/o Bear, Stearns & Co. Inc. 245 Park Avenue New York, New York 10167 Ladies/Gentlemen: Synaptics Incorporated, a corporation organized and existing under the laws of the State of Delaware (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 5,000,000 shares (the "Firm Shares") of its common stock, par value $0.001 per share (the "Common Stock"). The stockholders of the Company named in Schedule II (collectively, the "Selling Stockholders") severally propose, subject to the terms and conditions stated herein, to issue and sell to the Underwriters, for the sole purpose of covering over-allotments in connection with the sale of the Firm Shares, at the option of the Underwriters, up to an additional 750,000 shares (the "Additional Shares") of Common Stock, each Selling Stockholder selling the amount of Common Stock set forth next to such Selling Stockholder's name on Schedule II. The Firm Shares and any Additional Shares purchased by the Underwriters are referred to herein as the "Shares". The Shares are more fully described in the Registration Statement referred to below. 1. Representations and Warranties. (a) The Company represents and warrants to, and agrees with, each of the Underwriters that: (i) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-56026), and amendments thereto, and related preliminary prospectuses for the registration under the Securities Act of 1933, as amended (the "Securities Act"), of shares of Common Stock, which

registration statement, as so amended, has been declared effective by the Commission and copies of which have heretofore been delivered to the Underwriters. The registration statement, as amended at the time it became effective, including the exhibits and information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act, is hereinafter referred to as the "Registration Statement." If the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Securities Act registering additional shares of Common Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. Other than a Rule 462(b) Registration Statement, which became effective upon filing, no other document with respect to the Registration Statement has heretofore been filed with the Commission. No stop order suspending the effectiveness of either the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or, to the Company's knowledge, threatened by the Commission. The Company, if required by the rules and regulations of the Commission (the "Rules and Regulations"), proposes to file the Prospectus with the Commission pursuant to Rule 424(b) of the Rules and Regulations. The Prospectus, in the form in which it is to be filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations, or, if the Prospectus is not to be filed with the Commission pursuant to Rule 424(b), the Prospectus in the form included as part of the Registration Statement at the time the Registration Statement became effective, is hereinafter referred to as the "Prospectus," except that if any revised prospectus or prospectus supplement shall be provided to the Underwriters by the Company for use in connection with the offering and sale of the Shares (the "Offering") which differs from the Prospectus (whether or not such revised prospectus or prospectus supplement is required to be filed by the Company pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus or prospectus supplement, as the case may be, from and after the time it is first provided to the Underwriters for such use; and, provided, further, that the term "Prospectus" shall be deemed to include any wrapper or supplement thereto prepared in connection with the distribution of any Directed Shares (as defined in Section 3(b) below). Any preliminary prospectus or prospectus subject to completion included in the Registration Statement or filed with the Commission pursuant to Rule 424 under the Securities Act is hereafter called a "Preliminary Prospectus." All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a Preliminary Prospectus and the Prospectus, or any amendments or supplements to any of the foregoing, shall be deemed to include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). (ii) At the time of the effectiveness of the Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any supplement to or amendment of the Prospectus is filed with the Commission and at the Closing Date and the Additional Closing Date, if any (as hereinafter respectively defined), the Registration Statement and the Prospectus and any amendments thereof and supplements thereto complied or will comply in all material respects with the applicable provisions of the Securities Act and the Rules and Regulations and did not and will not contain an untrue statement of a material fact and did not and will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein (i) 2

in the case of the Registration Statement, not misleading and (ii) in the case of the Prospectus or any related Preliminary Prospectus in light of the circumstances under which they were made, not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the registration statement for the registration of the Shares or any amendment thereto or pursuant to Rule 424(a) of the Rules and Regulations) and when any amendment thereof or supplement thereto was first filed with the Commission, such Preliminary Prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Securities Act and the Rules and Regulations and did not contain an untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. No representation and warranty is made in this subsection (ii), however, with respect to any information contained in or omitted from the Registration Statement or the Prospectus or any related Preliminary Prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through you specifically for use therein ("Underwriters' Information"). The parties acknowledge and agree that the Underwriters' Information consists solely of the material included in the first and third paragraphs under the caption "Underwriting" in the Prospectus. If Rule 434 is used, the Company will comply with the requirements of Rule 434. (iii) Ernst & Young LLP, who have audited the consolidated financial statements and supporting schedules of the Company included in the Registration Statement, are independent public accountants as required by the Securities Act and the Rules and Regulations. (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as set forth in the Registration Statement and the Prospectus, there has been no material adverse change or any development involving a prospective material adverse change in the business, prospects, properties (including all intellectual property), operations, condition (financial or other) or results of operations of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, and since the date of the latest balance sheet presented in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has incurred or undertaken any liabilities or obligations, direct or contingent, which are material to the Company and its subsidiaries taken as a whole, except for liabilities or obligations which are reflected in the Registration Statement and the Prospectus. (v) This Agreement and the transactions contemplated herein have been duly and validly authorized by the Company and this Agreement has been duly and validly executed and delivered by the Company. (vi) The execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby do not and will not (A) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any indenture, mortgage, 3

deed of trust, loan agreement or other agreement, instrument, franchise, license or permit to which the Company or any of its subsidiaries is a party or by which the Company or any of it subsidiaries or their respective properties or assets may be bound or (B) violate or conflict with any provision of the certificate of incorporation or by-laws of the Company or any of its subsidiaries or any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their respective properties or assets is required for the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby or by the Registration Statement and the Prospectus, including the issuance, sale and delivery of the Shares to be issued, sold and delivered by the Company hereunder, except the registration under the Securities Act of the offering and sale of the Shares and such consents, approvals, authorizations, orders, registrations, filings, qualifications, licenses and permits as may be required under state securities or Blue Sky laws or the by-laws and rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution of the Shares by the Underwriters. (vii) The Company has the authorized capitalization set forth in the Prospectus and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and were not issued in violation of any preemptive or similar rights that entitle or will entitle any person to acquire any Shares from the Company upon issuance thereof by the Company, except for such rights as may have been fully satisfied or waived prior to the effectiveness of the Registration Statement; the Shares to be delivered on the Closing Date and the Additional Closing Date, if any, (as hereinafter respectively defined) have been duly and validly authorized and, when delivered by the Company in accordance with this Agreement, will be duly and validly issued, fully paid and non-assessable and will not have been issued in violation of any preemptive or similar rights that entitle or will entitle any person to acquire any Shares from the Company upon issuance thereof by the Company; and all of the issued shares of capital stock of each subsidiary of the Company have been duly and validly authorized and issued and are fully paid and non-assessable and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims; the Common Stock conforms to the description thereof contained in the Registration Statement and the Prospectus. (viii) Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and its subsidiaries is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which would not in the aggregate have a material adverse effect on the condition (financial or otherwise), results of operations, business, properties (including all intellectual property) or prospects of the Company and its subsidiaries taken as a whole (a "Material Adverse Effect"). Each of the Company and its subsidiaries has the requisite power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and 4

permits of and from all public, regulatory or governmental agencies and bodies, to own, lease and operate its properties and conduct its business as it is now being conducted and as described in the Registration Statement and the Prospectus, and no such consent, approval, authorization, order, registration, qualification, license or permit contains a materially burdensome restriction not adequately disclosed in the Registration Statement and the Prospectus. (ix) Except as described in the Prospectus, there is no legal or governmental proceeding to which the Company or any of its subsidiaries is a party, or of which any property of the Company or any of its subsidiaries is the subject which, singularly or in the aggregate, if determined adversely to the Company or any of its subsidiaries, are reasonably likely to have a Material Adverse Effect, and to the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened or contemplated by others. (x) Neither the Company nor any of its affiliates have taken or will take, directly or indirectly, any action designed to cause or result in, or which constitutes or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. (xi) The financial statements, including the notes thereto, and supporting schedules of the Company included in the Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated subsidiaries as of the dates indicated and condition and results of operations for the periods specified; except as otherwise stated in the Registration Statement, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. (xii) Except as disclosed in the Prospectus, no holder of securities of the Company has any rights to the registration of securities of the Company because of the filing of the Registration Statement or otherwise in connection with the sale of the Shares contemplated hereby. Any such rights so disclosed have either been fully complied with by the Company or effectively waived by the holders thereof. (xiii) The Company is not, and upon consummation of the transactions contemplated hereby will not be, subject to registration as an "investment company" under the Investment Company Act of 1940. (xiv) The Company and its subsidiaries have good and marketable title to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all liens, encumbrances and defects except such as are described in the Registration statement and the Prospectus or such as do not materially affect the value of such property owned by the Company and its subsidiaries; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as do not have a Material Adverse Effect and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. 5

(xv) The Company and each of its subsidiaries have accurately prepared and filed all federal, state and other tax returns that are required to be filed by it and has paid or made provision for the payment of all taxes, assessments, governmental or other similar charges, including without limitation, all sales and use taxes and all taxes which the Company and each of its subsidiaries is obligated to withhold from amounts owning to employees, creditors and third parties, with respect to the periods covered by such tax returns (whether or not such amounts are shown as due on any tax return) where the failure to file or pay could have a Material Adverse Effect. No deficiency assessment with respect to a proposed adjustment of the Company's or any of it's subsidiaries' Federal, state, or other taxes is pending or, to the Company's knowledge, threatened which would have a Material Adverse Effect. There is no tax lien, whether imposed by any federal, state, or other taxing authority, outstanding against the assets, properties or business of the Company or any of its subsidiaries. (xvi) The Shares are registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Shares are approved for quotation on The Nasdaq Stock Market's National Market (the "Nasdaq National Market") , subject only to official notice of issuance, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Shares under the Exchange Act or de-listing the Shares from the Nasdaq National Market, nor has the Company received any notification that the SEC or the Nasdaq National Market is contemplating terminating such registration or listing. (xvii) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations and which have not been so described or filed. (xviii) Neither the Company nor any of its subsidiaries (A) is in violation of its charter or by-laws or any similar organizational document, (B) is in default (and no event has occurred which, with notice or lapse of time or both, would constitute such a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject or (C) is in violation in any respect of any statute or any judgment, decree, order, rule or regulation of any court or governmental or regulatory agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties or assets, all except as such would not have a Material Adverse Effect. (xix) The Company and each of its subsidiaries own or possess adequate right to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, formulae, customer lists, and know-how and other intellectual property (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) necessary for the conduct of their respective businesses as being conducted and as described in the Registration Statement and Prospectus and have no reason to believe that the conduct of their respective businesses will conflict with, and have not received any notice of any claim of conflict with, any such right of others. To the best of the Company's knowledge, all material technical information 6

developed by and belonging to the Company which has not been patented has been kept confidential. Except as the Company's outsourcing practices are described in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has granted or assigned to any other person or entity any right to manufacture, have manufactured, assemble or sell the current products and services of the Company or those products and services described in the Registration Statement and Prospectus. (xx) No labor disturbance by the employees of the Company or any of its subsidiaries exists or, to the best of the Company's knowledge, is imminent which might be expected to have a Material Adverse Effect. (xxi) No "prohibited transaction" (as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), or "accumulated funding deficiency" (as defined in Section 302 of ERISA) or any of the events set forth in Section 4043(b) of ERISA (other than events with respect to which the 30-day notice requirement under Section 4043 of ERISA has been waived) has occurred with respect to any employee benefit plan which could have a Material Adverse Effect; each employee benefit plan is in compliance in all material respects with applicable law, including ERISA and the Code; the Company has not incurred and does not expect to incur liability under Title IV of ERISA with respect to the termination of, or withdrawal from, any "pension plan"; and each "pension plan" (as defined in ERISA) for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which could cause the loss of such qualification. (xxii) There has been no storage, generation, transportation, handling, treatment, disposal, discharge, emission, or other release of any kind of toxic or other wastes or other hazardous substances by, due to, or caused by the Company (or, to the Company's knowledge, any other entity for whose acts or omissions the Company is or may be liable) upon any property now or previously owned or leased by the Company or any of its subsidiaries, or upon any other property, in violation of any statute or any ordinance, rule, regulation, order, judgement, decree or permit or which would, under any statute or any ordinance, rule (including rule of common law), regulation, order, judgement, decree or permit, give rise to any liability, except for any violation or liability which would not have, singularly or in the aggregate with all such violations and liabilities, a Material Adverse Effect; there has been no disposal, discharge, emission or other release of any kind onto such property or into the environment surrounding such property of any toxic or other wastes or other hazardous substances with respect to which the Company or any of its subsidiaries has knowledge, except for any such disposal, discharge, emission, or other release of any kind which would not have, singularly or in the aggregate with all such discharges and other releases, a Material Adverse Effect. (xxiii) The statistical and market-related data included in the Prospectus are based on or derived from sources which the Company believes to be reliable and accurate. 7

(b) Each of the Selling Stockholders severally and not jointly represents and warrants to, and agrees with, each of the Underwriters that: (i) This Agreement and the transactions contemplated herein have been duly and validly authorized by the Selling Stockholders, and this Agreement has been duly and validly executed and delivered by the Selling Stockholders. (ii) Each of the (A) Custody Agreement signed by such Selling Stockholder and American Stock Transfer & Trust Company, as custodian (the "Custodian"), relating to the deposit of the Additional Shares to be sold by such Selling Stockholder (the "Custody Agreement") and (B) Irrevocable Power of Attorney appointing certain individuals named therein as such Selling Stockholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth therein relating to the transactions contemplated hereby and by the Prospectus (the "Power of Attorney"), of such Selling Stockholder has been duly authorized, executed and delivered by such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors generally or by general equitable principles. Each Selling Stockholder agrees that the Additional Shares to be sold by such Selling Stockholder on deposit with the Custodian are subject to the interests of the Underwriters, that the arrangements made for such custody are to that extent irrevocable, and that the obligations of such Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or in the Custody Agreement, by any act of the Selling Stockholder, by operation of law, by death or incapacity of such Selling Stockholder or by the occurrence of any other event. If such Selling Stockholder should die or become incapacitated, or if any other event should occur, before the delivery of the Additional Shares to be sold by such Selling Stockholder hereunder, the documents evidencing the Additional Shares to be sold by such Selling Stockholder then on deposit with the Custodian shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether or not the Custodian shall have received notice thereof. (iii) Such Selling Stockholder is the lawful owner of the Additional Shares to be sold by such Selling Stockholder hereunder and upon sale and delivery of, and payment for, such Additional Shares, as provided herein, such Selling Stockholder will convey good and marketable title to such Additional Shares, free and clear of all liens, encumbrances, equities and claims whatsoever. (iv) Such Selling Stockholder has, and on the Closing Date and the Additional Closing Date (as defined below) will have, good and valid title to all of the Additional Shares which may be sold by such Selling Stockholder pursuant to this Agreement on such date and the legal right and power, and all authorizations and approvals required by law and, as applicable, under its charter or by-laws, partnership agreement or other organizational documents to enter into this Agreement and its Custody Agreement and Power of Attorney, to sell, transfer and deliver all of the Additional Shares which may be sold by such Selling Stockholder pursuant to this Agreement and to comply with its other obligations hereunder and thereunder. 8

(v) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by such Selling Stockholder of the transactions contemplated herein, except such as have been obtained under the Securities Act or the Rules and Regulations or as may be required under state securities or Blue Sky laws or the by-laws and rules of the NASD in connection with the purchase and distribution of the Additional Shares by the Underwriters. (vi) Neither the sale of the Additional Shares being sold by such Selling Stockholder nor the consummation of any other of the transactions herein contemplated by such Selling Stockholder or the fulfillment of the terms hereof by such Selling Stockholder will conflict with, result in a breach or violation of, or constitute a default under any law or the terms of any contract, agreement or instrument to which such Selling Stockholder is party or bound, any judgment, order or decree applicable to such Selling Stockholder or any court or regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder. (vii) Such Selling Stockholder does not have any registration or other similar rights to have any equity or debt securities registered for sale by the Company under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as are described in the Prospectus or except as have been validly waived. (viii) Such Selling Stockholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the Additional Shares that are to be sold by any of the Selling Stockholders to the Underwriters pursuant to this Agreement; and such Selling Stockholder does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, right, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus. (ix) All information furnished by or on behalf of such Selling Stockholder in writing expressly for use in the Registration Statement and Prospectus is, and on the Closing Date and the Additional Closing Date (as defined below) will be, true, correct, and complete in all material respects, and does not, and on the Closing Date and the Additional Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information, in light of the circumstances under which they were made, not misleading. Such Selling Stockholder confirms as accurate the number of shares of Common Stock set forth opposite such Selling Stockholder's name in the Prospectus under the caption "Principal and Selling Stockholders" (both prior to and after giving effect to the sale of the Shares). (x) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Additional Shares. 9

(xi) There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the sale by the Selling Stockholders of the Additional Shares. (xii) The Selling Stockholders have not distributed and will not distribute, prior to the later of the Additional Closing Date (as defined below) and the completion of the Underwriters' distribution of the Additional Shares, any offering material in connection with the offering and sale of the Additional Shares by such Selling Stockholder other than preliminary prospectuses, the Prospectus or the Registration Statement. (xiii) Such Selling Stockholder has no reason to believe that the representations and warranties of the Company contained in Section 1(a) hereof are not true and correct, is familiar with the Registration Statement and the Prospectus and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement or the Prospectus which has had or may result in a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business of the Company and its subsidiaries, considered as one entity, and is not prompted to sell the Additional Shares to be sold by such Selling Stockholder by any information concerning the Company which is not set forth in the Registration Statement and the Prospectus. (xiv) Any certificate signed by or on behalf of any Selling Stockholder and delivered to the Underwriters or to counsel for the Underwriters shall be deemed to be a representation and warranty by such Selling Stockholder to each Underwriter as to the matters covered thereby. 2. Purchase, Sale and Delivery of the Shares. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters and the Underwriters, severally and not jointly, agree to purchase from the Company, at a purchase price per share of $_______, the number of Firm Shares set forth opposite the respective names of the Underwriters on Schedule I hereto plus any additional number of Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 9 hereof. (b) Payment of the purchase price for, and delivery of certificates for, the Firm Shares shall be made at the office of Brobeck, Phleger & Harrison LLP, 2200 Geng Road, Palo Alto, CA 94303 ("Underwriters' Counsel"), or at such other place as shall be agreed upon by you and the Company, at 10:00 A.M., New York City time, on the third or fourth business day (as permitted under Rule 15c6-1 under the Exchange Act) (unless postponed in accordance with the provisions of Section 9 hereof) following the date of the effectiveness of the Registration Statement, (or, if the Company has elected to rely upon Rule 430A of the Regulations, the third or fourth business day (as permitted under Rule 15c6-1 under the Exchange Act) or such other time not later than ten business days after such date as shall be agreed upon by you and the Company)(such time and date of payment and delivery being herein called the "Closing Date"). 10

Payment for the Firm Shares shall be made to or upon the order of the Company of the purchase price by wire transfer in Federal (same day) funds to the Company upon delivery of certificates for the Firm Shares to you for the respective accounts of the several Underwriters against receipt therefor signed by you. Certificates for the Firm Shares to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least one business day before the Closing Date. The Company will permit you to examine and package such certificates for delivery at least one full business day prior to the Closing Date. (c) In addition, on the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Selling Stockholders hereby grant to the Underwriters the option to purchase up to 750,000 Additional Shares at the same purchase price per share to be paid by the Underwriters to the Company for the Firm Shares as set forth in this Section 2, for the sole purpose of covering over-allotments in the sale of Firm Shares by the Underwriters. This option may be exercised at any time and from time to time, in whole or in part, on or before the thirtieth day following the date of the Prospectus, by written notice by you to the Selling Stockholders. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised and the date and time, as reasonably determined by you, when the Additional Shares are to be delivered (such date and time being herein sometimes referred to as the "Additional Closing Date"); provided, however, that the Additional Closing Date shall not be earlier than the Closing Date or earlier than the second full business day after the date on which the option shall have been exercised nor later than the eighth full business day after the date on which the option shall have been exercised (unless such time and date are postponed in accordance with the provisions of Section 9 hereof). Certificates for the Additional Shares shall be registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the Additional Closing Date. The Selling Stockholders will permit you to examine and package such certificates for delivery at least one full business day prior to the Additional Closing Date. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same ratio to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number increased as set forth in Section 9 hereof) bears to the total number of Firm Shares being purchased from the Company, subject, however, to such adjustments to eliminate any fractional shares as Bear Stearns & Co. Inc. in its sole discretion shall make. Payment for the Additional Shares shall be made to or upon the order of the Custodian of the purchase price by wire transfer in Federal (same day) funds to the Custodian at the offices of Underwriters' Counsel, or such other location as may be mutually acceptable, upon delivery of the certificates for the Additional Shares to you for the respective accounts of the Underwriters. Each Selling Stockholder hereby agrees that (i) it will pay all stock transfer taxes, stamp duties and other similar taxes, if any, payable upon the sale or delivery of the Additional Shares to be sold by such Selling Stockholder to the several Underwriters, or otherwise in connection with the performance of such Selling Stockholder's obligations hereunder; and 11

(ii) the Custodian is authorized to deduct for such payment any such amounts from the proceeds to such Selling Stockholder hereunder and to hold such amounts for the account of such Selling Stockholder with the Custodian under the Custody Agreement. 3. Offering. (a) Upon the Underwriters' authorization of the release of the Firm Shares, the Underwriters propose to offer the Shares for sale to the public upon the terms and conditions set forth in the Prospectus. (b) The Company and the Underwriters hereby agree that up to 5% of the Firm Shares to be purchased by the Underwriters (the "Directed Shares") shall be reserved for sale by the Underwriters to certain eligible employees, directors and certain persons designated by the Company (the "Directed Shares Purchasers"), as part of the distribution of the Shares by the Underwriters subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc., and all other applicable laws, rules and regulations. To the extent that such Directed Shares are not orally confirmed for purchase by such persons by the end of the first day after the date of this Agreement, such Directed Shares will be offered to the public as part of the offering contemplated hereby. Under no circumstances will Bear, Stearns & Co. Inc. or any other Underwriter be liable to the Company or to any of the Directed Shares Purchasers for any action taken or omitted to be taken other than any such action or inaction resulting from the bad faith or willful misconduct of any Underwriter in connection with the transactions effected with regard to the Directed Shares Purchasers. 4. Covenants of the Company and the Selling Stockholders. (a) The Company covenants and agrees with the Underwriters that: (i) If the Registration Statement has not yet been declared effective the Company will use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as possible, and if Rule 430A is used or the filing of the Prospectus is otherwise required under Rule 424(b) or Rule 434, the Company will file the Prospectus (properly completed if Rule 430A has been used) pursuant to Rule 424(b) within the prescribed time period and will provide evidence satisfactory to you of such timely filing. If the Company elects to rely on Rule 434, the Company will prepare and file a term sheet that complies with the requirements of Rule 434. The Company will notify you (and, if requested by you, will confirm such notice in writing) (A) when the Registration Statement and any amendments thereto become effective, (B) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (C) of the mailing or the delivery to the Commission for filing of any amendment of or supplement to the Registration Statement or the Prospectus, (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of the initiation, or the threatening, of any proceedings therefor, (E) of the receipt of any comments from the Commission, and (F) of the receipt by the Company of any 12

notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for that purpose. If the Commission shall propose or enter a stop order at any time, the Company will make every reasonable effort to prevent the issuance of any such stop order and, if issued, to obtain the lifting of such order as soon as possible. The Company will not file any amendment to the Registration Statement or any amendment of or supplement to the Prospectus (including the prospectus required to be filed pursuant to Rule 424(b) or Rule 434) that differs from the prospectus on file at the time of the effectiveness of the Registration Statement before or after the effective date of the Registration Statement to which you shall reasonably object in writing after being timely furnished in advance a copy thereof. (ii) If at any time when a prospectus relating to the Shares is required to be delivered under the Securities Act any event shall have occurred as a result of which the Prospectus as then amended or supplemented would, in the judgment of the Underwriters or the Company, include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it shall be necessary at any time to amend or supplement the Prospectus or Registration Statement to comply with the Securities Act or the Rules and Regulations, the Company will notify you promptly and prepare and file with the Commission an appropriate amendment or supplement (in form and substance satisfactory to you) which will correct such statement or omission and will use its best efforts to have any amendment to the Registration Statement declared effective as soon as possible. (iii) The Company will promptly deliver to each of the Underwriters and Underwriters' Counsel a signed copy of the Registration Statement, including all consents and exhibits filed therewith and all amendments thereto, and the Company will promptly deliver to each of the Underwriters such number of copies of any preliminary prospectus, the Prospectus, the Registration Statement, and all amendments of and supplements to such documents, if any, as you may reasonably request. Prior to 10:00 A.M., New York time, on the business day next succeeding the date of this Agreement and from time to time thereafter the Company will furnish the Underwriters with copies of the Prospectus in New York City in such quantities as you may reasonably request. (iv) The Company will endeavor in good faith, in cooperation with you, at or prior to the time of effectiveness of the Registration Statement, to qualify the Shares for offering and sale under the securities laws relating to the offering or sale of the Shares of such jurisdictions as you may designate and to maintain such qualification in effect for so long as required for the distribution thereof; except that in no event shall the Company be obligated in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process. (v) The Company will make generally available to its security holders and to the Underwriters as soon as practicable, but in any event not later than eighteen months after the effective date of the Registration Statement (as defined in Rule 158(c) under the Securities Act), an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158). 13

(vi) During the period of 180 days from the date of the Prospectus, the Company will not, directly or indirectly, without your prior written consent, issue, sell, offer or agree to sell, grant any option for the sale of, pledge, make any short sale or maintain any short position, establish or maintain a "put equivalent position" (within the meaning of Rule 16-a-1(h) under the Exchange Act), enter into any swap, derivative transaction or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock (whether any such transaction is to be settled by delivery of Common Stock, other securities, cash or other consideration) or otherwise dispose of, any Common Stock (or any securities convertible into, exercisable for or exchangeable for Common Stock) or interest therein of the Company or of any of its subsidiaries, and the Company will obtain the undertaking of each of its officers and directors and such of its shareholders as have been heretofore designated by you and listed on Schedule III attached hereto not to engage in any of the aforementioned transactions on their own behalf, other than the Company's sale of Shares hereunder and the Company's issuance of Common Stock upon (A) the conversion or exchange of outstanding convertible or exchangeable securities; (B) the exercise of presently outstanding options; (C) the exercise of currently outstanding warrants; and (D) the grant and exercise of options under, or the issuance and sale of shares pursuant to, employee stock option plans or stock purchase plans in effect on the Closing Date and described in the Prospectus. The Company further represents and warrants that it will not release any of its officers, directors and shareholders listed on Schedule III from the aforementioned undertaking without the prior written consent of the Underwriters. (vii) During the period of five years from the effective date of the Registration Statement, to furnish to you copies of all reports or other communications (financial or other) furnished to security holders, and to deliver to you (A) as soon as they are available, copies of any reports and financial statements furnished to or filed with the Commission or any national securities exchange on which any class of securities of the Company listed; and (B) such additional information concerning the business and financial condition of the Company as you may from time to time reasonably request (such financial statements to be on a consolidated basis to the extent the accounts of the Company and its subsidiaries are consolidated in reports furnished to its security holders generally or to the Commission). (viii) The Company will apply the proceeds from the sale of the Firm Shares as set forth under "Use of Proceeds" in the Prospectus. (ix) The Company will use its best efforts to list for quotation the Shares on the Nasdaq National Market. (b) Each of the Selling Stockholders covenants and agrees with the Underwriters that: (i) Such Selling Stockholder will not, during the Lock-Up Period (as defined in the Lock-Up Agreement attached hereto as Annex IV), make a disposition of shares now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition. The foregoing restriction has been expressly agreed to preclude the holder of the Additional Shares from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a 14

disposition of Securities during the Lock-Up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security that includes, relates to or derives any significant part of its value from Securities. (ii) To deliver to the Underwriters prior to the Closing Date a properly completed and executed United States Treasury Department Form W-8 (if the Selling Stockholder is a non-United States person) or Form W-9 (if the Selling Stockholder is a United States Person). (iii) If, at any time prior to the date on which the distribution of the Shares as contemplated herein and in the Prospectus has been completed, as determined by the Underwriters, such Selling Stockholder has knowledge of the occurrence of any event as a result of which the Prospectus or the Registration Statement, in each case as then amended or supplemented, would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, such Selling Stockholder will promptly notify the Company and the Underwriters. 5. Payment of Expenses. (a) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company agrees to pay all costs and expenses incident to the performance of its obligations hereunder, including the following: (i) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Shares under the Securities Act and all other expenses in connection with the preparation, printing and filing of the Registration Statement, any Preliminary Prospectus and the Prospectus and amendments and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and dealers; (ii) the cost of producing any Agreement among Underwriters, this Agreement, the Blue Sky Memoranda, closing documents (including any compilations thereof) and any other documents in connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in connection with the qualification of the Shares for offering and sale under state securities laws as provided in Section 4(a)(iv) hereof, including the fees and disbursements of counsel for the Underwriters in connection with such qualification and in connection with the Blue Sky survey; (iv) all fees and expenses in connection with listing the Shares on the Nasdaq National Market; (v) all travel expenses of the Company's officers and employees and any other expense of the Company incurred in connection with attending or hosting meetings with prospective purchasers of the Shares; (vi) the filing fees incident to, and the fees and disbursements of counsel for the Underwriters in connection with, securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Shares; and (vii) any amount that any Selling Stockholder fails to timely pay pursuant to Section 5(b). The Company also will pay or cause to be paid: (i) the cost of preparing stock certificates; (ii) the cost and charges of any transfer agent or registrar; and (iii) all other costs and expenses incident to the performance of its obligations hereunder which are not otherwise specifically provided for in this Section 5. It is understood, however, that except as provided in this Section, and Sections 7 and 11 hereof, the Underwriters will pay all of their own costs and 15

expenses, including the fees of their counsel, stock transfer taxes on resale of any of the Shares by them, and any advertising expenses connected with any offers they may make. (b) Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, each Selling Stockholder, severally and not jointly, agrees to pay its pro rata share (based on the percentage which the number of Additional Shares sold by such Selling Stockholder bears to the total number of Additional Shares sold) of the costs and expenses incident to the performance of its obligations hereunder, including the following: (i) the fees, disbursements and expenses of counsel and other advisors for the Selling Stockholders; (ii) the fees and expenses of the Custodian; (iii) the expenses and taxes incident to the sale and delivery of the Additional Shares to be sold by the Selling Stockholders to the Underwriters hereunder (which taxes, if any, may be deducted by the Custodian pursuant to Section 2(c) of this Agreement); and (iv) all underwriting discounts and commissions applicable to the Additional Shares. 6. Conditions of Underwriters' Obligations. The obligations of the Underwriters to purchase and pay for the Firm Shares and the Additional Shares, as provided herein, shall be subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein contained, as of the date hereof and as of the Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the Closing Date for the Firm Shares and any Additional Closing Date, if different, for the Additional Shares), to the absence from any certificates, opinions, written statements or letters furnished to you or to Underwriters' Counsel pursuant to this Section 6 of any misstatement or omission, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder, and to each of the following additional terms and conditions: (a) The Registration Statement shall have become effective not later than 5:30 P.M., New York time, on the date of this Agreement, or at such later time and date as shall have been consented to by you; if the Company shall have elected to rely upon Rule 430A or Rule 434 of the Rules and Regulations, the Prospectus shall have been filed with the Commission in a timely fashion in accordance with Section 4(a)(i) hereof; and, at or prior to the Closing Date no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof shall have been issued and no proceedings therefor shall have been initiated or threatened by the Commission. (b) At the Closing Date, you shall have received the written opinion of Greenberg Traurig, LLP, counsel for the Company, dated the Closing Date addressed to the Underwriters in the form attached hereto as Annex I. (c) As of the Closing Date, you shall have received the opinions of Beresford and Co. and Sierra Law Group, intellectual property counsel for the Company, dated as of the Closing Date addressed to the Underwriters in the form attached hereto as Annex II. (d) As of the Closing Date, you shall have received the opinion of __________, counsel for Synaptics (UK) Limited, dated as of the Closing Date addressed to the Underwriters in the form attached hereto as Annex V. 16

(e) All proceedings taken in connection with the sale of the Firm Shares and the Additional Shares as herein contemplated shall be satisfactory in form and substance to you and to Underwriters' Counsel, and the Underwriters shall have received from Underwriters' Counsel a favorable opinion, dated as of the Closing Date, with respect to the issuance and sale of the Shares, the Registration Statement and the Prospectus and such other related matters as you may reasonably require, and the Company shall have furnished to Underwriters' Counsel such documents as they request for the purpose of enabling them to pass upon such matters. (f) At the Closing Date, you shall have received a certificate of the Chief Executive Officer and Chief Financial Officer of the Company, dated the Closing Date to the effect that (i) the condition set forth in subsection (a) of this Section 6 has been satisfied, (ii) as of the date hereof and as of the Closing Date, the representations and warranties of the Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date, the obligations of the Company to be performed hereunder on or prior thereto have been duly performed and (iv) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company and its subsidiaries have not sustained any material loss or interference with their respective businesses or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any material adverse change, or any development involving a material adverse change, in the business prospects, properties, operations, condition (financial or otherwise), or results of operations of the Company and its subsidiaries taken as a whole, except in each case as described in or contemplated by the Prospectus. (g) At the Closing Date, you shall have received a certificate of the Selling Stockholders or officers of the Selling Stockholders (if the Selling Stockholder is not a natural person) to the effect that (i) as of the date hereof and as of the Closing Date, the representations and warranties of the Selling Stockholders set forth in Section 1 hereof are accurate, and (ii) as of the Closing Date, the obligations of the Selling Stockholders to be performed hereunder on or prior thereto have been duly performed. (h) At the Closing Date, you shall have received an opinion of ______________________, counsel for the Selling Stockholders in the form attached hereto as Annex III. In rendering such opinion, such counsel may rely as to questions of law not involving the laws of the United States or State of California and State of Delaware upon opinions of local counsel and as to questions of fact upon representations or certificates of the Selling Stockholders or officers of the Selling Stockholders (when the Selling Stockholder is not a natural person), and of governmental officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy of any material misstatement or inaccuracy in any such opinion, representation or certificate so relied upon shall be delivered to you and to Underwriters' Counsel. (i) At least three business days prior to the date hereof, the Selling Stockholders shall have furnished for review by the Underwriters copies of the Powers of Attorney and Custody Agreements executed by each of the Selling Stockholders and such further information, certificates and documents as the Underwriters may reasonably request. 17

(j) At the time this Agreement is executed and at the Closing Date, you shall have received a comfort letter, from Ernst & Young LLP, independent auditors for the Company, dated, respectively, as of the date of this Agreement and as of the Closing Date addressed to the Underwriters and in form and substance satisfactory to the Underwriters and Underwriters' Counsel. (k) You shall have also received from the Company a letter from Ernst & Young LLP addressed to the Company, dated July 25, 2001, stating that the Company's internal controls taken as a whole is sufficient to meet the broad objectives of internal control insofar as those objectives pertain to the prevention or detection of material fraud or errors in amounts that would be material in relation to the financial statements of the Company and its subsidiaries, which letter shall not have been withdrawn, modified, or contradicted or the correctness or the validly of which shall not have been called into question. (l) Subsequent to the execution and delivery of this Agreement or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), results of operations, business, properties (including all intellectual property) or prospects of the Company and its subsidiaries taken as a whole, the effect of which, in any such case described above, is, in the judgment of the Underwriters, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Shares on the terms and in the manner contemplated in the Prospectus (exclusive of any supplement). (m) You shall have also received a lock-up agreement (the "Lock-Up Agreement") from each person who is a director or officer of the Company, each Selling Stockholder and each shareholder listed on Schedule III hereto substantially in the form attached hereto as Annex IV. (n) At the Closing Date, the Shares shall have been approved for quotation on the Nasdaq National Market. (o) The Company shall have complied with the provisions of Section 4(a)(iii) hereof with respect to the furnishing of prospectuses on the next business day succeeding the date of this Agreement. (p) The Company shall have furnished the Underwriters and Underwriters' Counsel with such other certificates, opinions or other documents as they may have reasonably requested. If any of the conditions specified in this Section 6 shall not have been fulfilled when and as required by this Agreement, or if any of the certificates, opinions, written statements or letters furnished to you or to Underwriters' Counsel pursuant to this Section 6 shall not be in all material respects reasonably satisfactory in form and substance to you and to Underwriters' Counsel, all obligations of the Underwriters hereunder may be cancelled by you at, or at any time 18

prior to, the Closing Date and the obligations of the Underwriters to purchase the Additional Shares may be cancelled by you at, or at any time prior to, the Additional Closing Date. Notice of such cancellation shall be given to the Company in writing, or by telephone. Any such telephone notice shall be confirmed promptly thereafter in writing. 7. Indemnification . (a) The Company shall indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading or (ii) any untrue statement or alleged untrue statement of a material fact included in the supplement or prospectus wrapper material distributed in connection with the reservation and sale of the Directed Shares to eligible employees and certain persons designated by the Company or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectus or preliminary prospectus, not misleading; provided, however, that the Company will not be liable in any such case to the extent but only to the extent that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through you expressly for use therein. This indemnity agreement will be in addition to any liability which the Company may otherwise have including under this Agreement. (b) The Selling Stockholders shall indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any 19

supplement thereto or amendment thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading or (ii) any untrue statement or alleged untrue statement of a material fact included in the supplement or prospectus wrapper material distributed in connection with the reservation and sale of the Directed Shares to eligible employees and certain persons designated by the Company or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectus or preliminary prospectus, not misleading; provided, however, that the Selling Stockholders will only be liable in any such case to the extent that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Selling Stockholders expressly for use therein. This indemnity agreement will be in addition to any liability which the Selling Stockholders may otherwise have including under this Agreement. (c) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, each other person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, and each Selling Stockholder against any losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through you expressly for use therein. This indemnity will be in addition to any liability which any Underwriter may otherwise have including under this Agreement. (d) In connection with the offer and sale of Directed Shares, the Company agrees, promptly upon written notice, to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of any Directed Shares Purchaser, who makes an oral agreement, properly confirmed by the Underwriters, to purchase Directed Shares within twenty-four hours of establishing the public offer price, to pay for and accept delivery of the Directed Shares. 20

(e) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of notice of any claims or the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the claim or the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 7). In case any such claim or action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by one of the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying parties. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or reasonably could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or reasonably could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. 8. Contribution. In order to provide for contribution in circumstances in which the indemnification provided for in Section 7 hereof is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Company, the Selling Stockholders and the Underwriters shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Company any contribution received by the Company from persons, other than the Underwriters, who may also be liable for contribution, including persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company) as incurred to which the Company and one or more of the Underwriters may be subject, in such proportions as is appropriate to reflect the relative benefits received by the Company, the Selling Stockholders and the Underwriters from the offering of the Shares or, if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits 21

referred to above but also the relative fault of the Company, the Selling Stockholders and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Stockholders and the Underwriters shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the Selling Stockholders bears to (y) the underwriting discount received by the Underwriters, respectively, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company, of the Selling Stockholders and of the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the shares are underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within in the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, each person, if any, who controls a Selling Stockholder within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Selling Stockholder and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to clauses (i) and (ii) of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties, notify each party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 8 or otherwise. The obligations of the Underwriters to contribute pursuant to this Section 8 are several in proportion to the respective number of Shares purchased by each of the Underwriters hereunder and not joint. 9. Default by an Underwriter. (a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares or Additional Shares hereunder, and if the Firm Shares or Additional Shares with respect to which such default relates do not (after giving effect to 22

arrangements, if any, made by you pursuant to subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares or Additional Shares, the Firm Shares or Additional Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to the respective proportions which the numbers of Firm Shares set forth opposite their respective names in Schedule I hereto bear to the aggregate number of Firm Shares set forth opposite the names of the non-defaulting Underwriters. (b) In the event that such default relates to more than 10% of the Firm Shares or Additional Shares, as the case may be, you may in your discretion arrange for yourself or for another party or parties (including any non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm Shares or Additional Shares, as the case may be, to which such default relates on the terms contained herein. In the event that within 5 calendar days after such a default you do not arrange for the purchase of the Firm Shares or Additional Shares, as the case may be, to which such default relates as provided in this Section 9, this Agreement or, in the case of a default with respect to the Additional Shares, the obligations of the Underwriters to purchase and of the Selling Stockholders to sell the Additional Shares shall thereupon terminate, without liability on the part of the Company and the Selling Stockholders with respect thereto (except in each case as provided in Section 5, 7(a), 7(b) and 8 hereof) or the Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other Underwriters and the Company for damages occasioned by its or their default hereunder. (c) In the event that the Firm Shares or Additional Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, you or the Company shall have the right to postpone the Closing Date and you or the Selling Stockholders shall have the right to postpone the Additional Closing Date, as the case may be, for a period, not exceeding five business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may thereby be made necessary or advisable. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 9 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares and Additional Shares. 23

10. Survival of Representations and Agreements. All representations and warranties, covenants and agreements of the Underwriters, the Company and the Selling Stockholders contained in this Agreement, including the agreements contained in Section 5, the indemnity agreements contained in Section 7 and the contribution agreements contained in Section 8, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person thereof, by or on behalf of the Company, any of its officers and directors or any controlling person thereof or by or on behalf of the Selling Stockholders, and shall survive delivery of and payment for the Shares to and by the Underwriters. The representations contained in Section 1 and the agreements contained in Sections 5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement, including termination pursuant to Section 9 or 11 hereof. 11. Effective Date of Agreement; Termination. (a) This Agreement shall become effective, upon the later of (i) when you and the Company shall have received notification of the effectiveness of the Registration Statement or (ii) the execution of this Agreement. If either the initial public offering price or the purchase price per Share has not been agreed upon prior to 5:00 P.M., New York City time, on the fifth full business day after the Registration Statement shall have become effective, this Agreement shall thereupon terminate without liability to the Company, the Selling Stockholders or the Underwriters except as herein expressly provided. Until this Agreement becomes effective as aforesaid, it may be terminated by the Company by notifying you or by you notifying the Company. Notwithstanding the foregoing, the provisions of this Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in full force and effect. (b) You shall have the right to terminate this Agreement at any time prior to the Closing Date or the obligations of the Underwriters to purchase the Additional Shares at any time prior to the Additional Closing Date, as the case may be, if (A) any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, the market for the Company's securities or securities in general; or (B) trading on the Nasdaq National Market shall have been suspended or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the Nasdaq National Market, by the Nasdaq National Market or by order of the Commission or by any other governmental authority having jurisdiction; or (C) a banking moratorium has been declared by any state or federal authority or any material disruption in commercial banking or securities settlement or clearance services shall have occurred; or (D)(i) there has occurred any outbreak or escalation of hostilities or acts of terrorism involving the United States or there is a declaration of a national emergency or war by the United States or (ii) there shall have been any other calamity or crisis or any change in political, financial or economic conditions, if the effect of any such event in (i) or (ii) as determined in your judgment makes it impracticable or inadvisable to proceed with the offering, sale and delivery of the Firm Shares or the Additional Shares, as the case may be, on the terms and in the manner contemplated by the Prospectus. (c) Any notice of termination pursuant to this Section 11 shall be in writing. 24

(d) If this Agreement shall be terminated pursuant to any of the provisions hereof (otherwise than pursuant to (i) notification by you as provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company or the Selling Stockholders to perform any agreement herein or comply with any provision hereof, the Company and the Selling Stockholders will, subject to demand by you, reimburse the Underwriters for all out-of-pocket expenses (including the fees and expenses of their counsel), incurred by the Underwriters in connection herewith. 12. Notices. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing, and: (a) if sent to any Underwriter, shall be mailed, delivered, or faxed and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, Attention: Equity Capital Markets, with a copy to Brobeck, Phleger & Harrison LLP, 2200 Geng Road, Palo Alto, CA 94303, Attention: Curtis L. Mo, Esq.; (b) if sent to the Company, shall be mailed, delivered, or faxed and confirmed in writing to the Company and its counsel at the addresses set forth in the Registration Statement, Attention: Robert S. Kant, Esq.; (c) if sent to the Selling Stockholders, shall be mailed, delivered, or faxed and confirmed in writing to the Selling Stockholders at the addresses set forth in the Registration Statement; provided, however, that any notice to an Underwriter pursuant to Section 7 shall be delivered or sent by mail or facsimile transmission to such Underwriter at its address set forth in its acceptance facsimile to you, which address will be supplied to any other party hereto by you upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. 13. Parties. This Agreement shall insure solely to the benefit of, and shall be binding upon, the Underwriters, the Company, and the Selling Stockholders and the controlling persons, directors, officers, employees and agents referred to in Section 7 and 8, and their respective successors and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. The term "successors and assigns" shall not include a purchaser, in its capacity as such, of Shares from any of the Underwriters. 14. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, BUT WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 15. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. 25

16. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. 17. Time is of the Essence. Time shall be of the essence of this Agreement. As used herein, the term "business day" shall mean any day when the Commission's office in Washington, D.C. is open for business. [signature page follows] 26

If the foregoing correctly sets forth the understanding between you, the Company and the Selling Stockholders, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in a form of Agreement among Underwriters, the form of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signers thereof. Very truly yours, SYNAPTICS INCORPORATED By:_______________________________________________ Name: Francis Lee Title: President and Chief Executive Officer [SELLING STOCKHOLDERS] By:_______________________________________________ Name: Title: Attorney-in-fact for the Selling Stockholder named in Schedule II hereto Accepted as of the date first above written BEAR, STEARNS & CO. INC. SG COWEN SECURITIES CORPORATION SOUNDVIEW TECHNOLOGY GROUP By: BEAR, STEARNS & CO. INC. By:_______________________________________ Name: Title: On behalf of themselves and the other Underwriters named in Schedule I hereto. 27

EXHIBIT 5 [Letterhead of Greenberg Traurig, LLP] January 9, 2002 Synaptics Incorporated 2381 Bering Drive San Jose, California 95131 RE: REGISTRATION STATEMENT ON FORM S-1 Ladies and Gentlemen: As legal counsel to Synaptics Incorporated (the "Company"), we have assisted in the preparation of the Company's Registration Statement on Form S-1, Registration No. 333-56026, filed with the Securities and Exchange Commission (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended (the "Securities Act"), of the shares of common stock of the Company covered by the Registration Statement (the "Shares"). The facts, as we understand them, are set forth in the Registration Statement. With respect to the opinion set forth below, we have examined originals, certified copies, or copies otherwise identified to our satisfaction as being true copies, only of the following: A. The Certificate of Incorporation of Synaptics Incorporated, a Delaware corporation, as filed with the Secretary of State of the State of Delaware January 7, 2002; B. The Bylaws as adopted by Synaptics Incorporated, a Delaware corporation; C. The Certificate of Merger to be filed with the Secretary of State of the State of Delaware merging Synaptics Incorporated, a California corporation, into Synaptics Incorporated, a Delaware corporation ; D. The Registration Statement; and E. The Resolution of the Board of Directors of the Company dated February 9, 2001 relating to the approval of the filing of the Registration Statement and the transactions in connection therewith. Subject to the assumptions that (i) the documents and signatures examined by us are genuine and authentic and (ii) the persons executing the documents examined by us have the legal capacity to execute such documents, and subject to the further limitations and qualifications

Synaptics Incorporated January 8, 2002 Page 2 set forth below, based solely upon our review of items A through E above, it is our opinion that the Shares will be validly issued, fully paid, and nonassessable when (a) the Certificate of Merger is filed with the Secretary of State of the State of Delaware merging Synaptics Incorporated, a California corporation, into Synaptics Incorporated, a Delaware corporation, in the form provided, (b) the Registration Statement as then amended shall have been declared effective by the Securities and Exchange Commission, (c) the Underwriting Agreement shall have been duly executed and delivered, and (d) the Shares have been duly issued, executed, authenticated, delivered, paid for and sold by the Company and the Selling Shareholders as described in the Registration Statement and in accordance with the provisions of the Underwriting Agreement. We hereby expressly consent to any reference to our firm in the Registration Statement and in any registration statement filed pursuant to Rule 462(b) under the Securities Act for this same offering, inclusion of this Opinion as an exhibit to the Registration Statement and the incorporation by reference into any such additional registration statement, and to the filing of this Opinion with any other appropriate governmental agency. Very truly yours, /s/ Greenberg Traurig, LLP

EXHIBIT 10.6 SYNAPTICS INCORPORATED ------------------- AMENDED AND RESTATED 2001 INCENTIVE COMPENSATION PLAN (AS AMENDED THROUGH SEPTEMBER 19, 2001)

SYNAPTICS INCORPORATED ------------------- AMENDED AND RESTATED 2001 INCENTIVE COMPENSATION PLAN (AS AMENDED THROUGH SEPTEMBER 19, 2001) 1. Purpose..................................................................................................1 2. Definitions..............................................................................................1 3. Administration...........................................................................................5 (a) Authority of the Committee......................................................................5 (b) Manner of Exercise of Committee Authority.......................................................6 (c) Limitation of Liability.........................................................................6 4. Stock Subject to Plan....................................................................................6 (a) Limitation on Overall Number of Shares Subject to Awards........................................6 (b) Limitation on Number of Incentive Stock Option Shares...........................................7 (c) Application of Limitations......................................................................7 5. Eligibility; Per-Person Award Limitations................................................................7 6. Specific Terms of Awards.................................................................................7 (a) General.........................................................................................7 (b) Options.........................................................................................8 (c) Stock Appreciation Rights......................................................................10 (d) Restricted Stock...............................................................................11 (e) Deferred Stock.................................................................................12 (f) Bonus Stock and Awards in Lieu of Obligations..................................................13 (g) Dividend Equivalents...........................................................................13 (h) Other Stock-Based Awards.......................................................................13 7. Performance and Annual Incentive Awards.................................................................14 (a) Performance Conditions.........................................................................14 (b) Performance Awards Granted to Designated Covered Employees.....................................14 (c) Annual Incentive Awards Granted to Designated Covered Employees................................15 (d) Written Determinations.........................................................................16 (e) Status of Section 7(b) and Section 7(c) Awards Under Code Section 162(m).................................................................................17 8. Certain Provisions Applicable to Awards or Sales........................................................17 (a) Stand-Alone, Additional, Tandem, and Substitute Awards.........................................17 (b) Term of Awards.................................................................................17 (c) Purchase Prices................................................................................18 (d) Form and Timing of Payment Under Awards; Deferrals.............................................18 (e) Exemptions from Section 16(b) Liability........................................................18 9. Change in Control.......................................................................................19 (a) Effect of "Change in Control.".................................................................19 (b) Definition of "Change in Control...............................................................19 (c) Definition of "Change in Control Price.".......................................................20

10. General Provisions......................................................................................20 (a) Compliance With Legal and Other Requirements...................................................20 (b) Limits on Transferability; Beneficiaries.......................................................21 (c) Adjustments....................................................................................22 (d) Taxes..........................................................................................23 (e) Changes to the Plan and Awards.................................................................23 (f) Reporting of Financial Information.............................................................24 (g) Limitation on Rights Conferred Under Plan......................................................24 (h) Unfunded Status of Awards; Creation of Trusts..................................................24 (i) Nonexclusivity of the Plan.....................................................................24 (j) Payments in the Event of Forfeitures; Fractional Shares........................................25 (k) Governing Law..................................................................................25 (l) Plan Effective Date and Stockholder Approval; Termination of Plan..............................25

SYNAPTICS INCORPORATED AMENDED AND RESTATED 2001 INCENTIVE COMPENSATION PLAN (AS AMENDED THROUGH SEPTEMBER 19, 2001) 1. Purpose. The purpose of this AMENDED AND RESTATED 2001 INCENTIVE COMPENSATION PLAN (the "Plan") is to assist SYNAPTICS INCORPORATED, a California corporation (the "Company") and its Related Entities in attracting, motivating, retaining and rewarding high-quality executives and other Employees, officers, Directors and independent Contractors by enabling such persons to acquire or increase a proprietary interest in the Company in order to strengthen the mutuality of interests between such persons and the Company's shareholders, and providing such persons with annual and long term performance incentives to expend their maximum efforts in the creation of shareholder value. In the event that the Company is or becomes a Publicly Held Corporation (as hereinafter defined), the Plan is intended to qualify certain compensation awarded under the Plan for tax deductibility under Section 162(m) of the Code (as hereafter defined) to the extent deemed appropriate by the Committee (or any successor committee) of the Board of Directors of the Company. 2. Definitions. For purposes of the Plan, the following terms shall be defined as set forth below, in addition to such terms defined in Section 1 hereof. (a) "Annual Incentive Award" means a conditional right granted to a Participant under Section 8(c) hereof to receive a cash payment, Stock or other Award, unless otherwise determined by the Committee, after the end of a specified fiscal year. (b) "Award" means any Option, Stock Appreciation Right (including Limited Stock Appreciation Right), Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of another award, Dividend Equivalent, Other Stock-Based Award, Performance Award or Annual Incentive Award, together with any other right or interest, granted to a Participant under the Plan. (c) "Beneficiary" means the person, persons, trust or trusts which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Committee to receive the benefits specified under the Plan upon such Participant's death or to which Awards or other rights are transferred if and to the extent permitted under Section 10(b) hereof. If, upon a Participant's death, there is no designated Beneficiary or surviving designated Beneficiary, then the term Beneficiary means the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits. (d) "Beneficial Owner", "Beneficially Owning" and "Beneficial Ownership" shall have the meanings ascribed to such terms in Rule 13d3 under the Exchange Act and any successor to such Rule. (e) "Board" means the Company's Board of Directors.

(f) "Cause" shall, with respect to any Participant, have the equivalent meaning (or the same meaning as "cause" or "for cause") set forth in any employment agreement between the Participant and the Company or a Related Entity or, in the absence of any such agreement, such term shall mean (i) the failure by the Participant to perform his or her duties as assigned by the Company (or a Related Entity) in a reasonable manner, (ii) any violation or breach by the Participant of his or her employment agreement with the Company (or a Related Entity), if any, (iii) any violation or breach by the Participant of his or her non-competition and/or non-disclosure agreement with the Company (or a Related Entity), if any, (iv) any act by the Participant of dishonesty or bad faith with respect to the Company (or a Related Entity), (v) chronic addiction to alcohol, drugs or other similar substances affecting the Participant's work performance, or (vi) the commission by the Participant of any act, misdemeanor, or crime reflecting unfavorably upon the Participant or the Company. The good faith determination by the Committee of whether the Participant's Continuous Service was terminated by the Company for "Cause" shall be final and binding for all purposes hereunder. (g) "Change in Control" means a Change in Control as defined with related terms in Section 9 of the Plan. (h) "Change in Control Price" means the amount calculated in accordance with Section 9(c) of the Plan. (i) "Code" means the Internal Revenue Code of 1986, as amended from time to time, including regulations thereunder and successor provisions and regulations thereto. (j) "Committee" means a committee designated by the Board to administer the Plan; provided, however, that the Committee shall consist of at least two directors, and, in the event the Company is or becomes a Publicly Held Corporation (as hereinafter defined), each member of which shall be (i) a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act, unless administration of the Plan by "non-employee directors" is not then required in order for exemptions under Rule 16b-3 to apply to transactions under the Plan, and (ii) an "outside director" within the meaning of Section 162(m) of the Code, unless administration of the Plan by "outside directors" is not then required in order to qualify for tax deductibility under Section 162(m) of the Code. (k) "Consultant" means any person (other than an Employee or a Director, solely with respect to rendering services in such person's capacity as a director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity. (l) "Continuous Service" means uninterrupted provision of services to the Company in any capacity of Employee, Director, or Consultant. Continuous Service shall not be considered to be interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entities, or any successor entities, in any capacity of Employee Director, or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director, or Consultant 2

(except as otherwise provided in the Option Agreement). An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave. (m) "Corporate Transaction" means a Corporate Transaction as defined in Section 9(b)(i) of the Plan. (n) "Covered Employee" means an Eligible Person who is a Covered Employee as specified in Section 7(e) of the Plan. (o) "Deferred Stock" means a right, granted to a Participant under Section 6(e) hereof, to receive Stock, cash or a combination thereof at the end of a specified deferral period. (p) "Director" means a member of the Board or the board of directors of any Related Entity. (q) "Disability" means a permanent and total disability (within the meaning of Section 22(e) of the Code), as determined by a medical doctor satisfactory to the Committee. (r) "Dividend Equivalent" means a right, granted to a Participant under Section 6(g) hereof, to receive cash, Stock, other Awards or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments. (s) "Effective Date" means the effective date of the Plan, which shall be March 7, 2001. (t) "Eligible Person" means each Executive Officer of the Company (as defined under the Exchange Act) and other officers, Directors and Employees of the Company or of any Related Entity, and independent contractors with the Company or any Related Entity. The foregoing notwithstanding, only employees of the Company, the Parent, or any Subsidiary shall be Eligible Persons for purposes of receiving any Incentive Stock Options. An Employee on leave of absence may be considered as still in the employ of the Company or a Related Entity for purposes of eligibility for participation in the Plan. (u) "Employee" means any person, including an officer or Director, who is an employee of the Company or any Related Entity. The Payment of a director's fee by the Company or a Related Entity shall not be sufficient to constitute "employment" by the Company. (v) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, including rules thereunder and successor provisions and rules thereto. (w) "Executive Officer" means an executive officer of the Company as defined under the Exchange Act. (x) "Fair Market Value" means the fair market value of Stock, Awards or other property as determined by the Committee or the Board, or under procedures established by the Committee or the Board. Unless otherwise determined by the Committee or the Board, the Fair Market Value of Stock as of any given date after which the Company is a Publicly Held 3

Corporation shall be the closing sale price per share reported on a consolidated basis for stock listed on the principal stock exchange or market on which Stock is traded on the date as of which such value is being determined or, if there is no sale on that date, then on the last previous day on which a sale was reported. (y) "Good Reason" shall, with respect to any Participant, have the equivalent meaning (or the same meaning as "good reason" or "for good reason") set forth in any employment agreement between the Participant and the Company or a Related Entity or, in the absence of any such agreement, such term shall mean (i) the assignment to the Participant of any duties inconsistent in any respect with the Participant's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as assigned by the Company (or a Related Entity), or any other action by the Company (or a Related Entity) which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company (or a Related Entity) promptly after receipt of notice thereof given by the Participant; (ii) any failure by the Company (or a Related Entity) to comply with its obligations to the Participant as agreed upon, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company (or a Related Entity) promptly after receipt of notice thereof given by the Participant; (iii) the Company's (or Related Entity's) requiring the Participant to be based at any office or location outside of fifty miles from the location of employment as of the date of Award, except for travel reasonably required in the performance of the Participant's responsibilities; (iv) any purported termination by the Company (or a Related Entity) of the Participant's Continuous Service otherwise than for Cause as defined in Section 2(f), or by reason of the Participant's Disability as defined in Section 2(o), prior to the Expiration Date. For purposes of this Section 2(v), any good faith determination of "Good Reason" made by the Company shall be conclusive. (z) "Incentive Stock Option" means any Option intended to be designated as an incentive stock option within the meaning of Section 422 of the Code or any successor provision thereto. (aa) "Incumbent Board" means the Incumbent Board as defined in Section 9(b)(ii) of the Plan. (bb) "Limited Stock Appreciation Right" means a right granted to a Participant under Section 6(c) hereof. (cc) "Option" means a right granted to a Participant under Section 6(b) hereof, to purchase Stock or other Awards at a specified price during specified time periods. (dd) "Optionee" means a person to whom an Option or Incentive Stock Option is granted under this Plan or any person who succeeds to the rights of such person under this Plan. (ee) "Other Stock-Based Awards" means Awards granted to a Participant under Section 6(h) hereof. 4

(ff) "Parent" means a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code. (gg) "Participant" means a person who has been granted an Award under the Plan which remains outstanding, including a person who is no longer an Eligible Person. (hh) "Performance Award" means a right, granted to an Eligible Person under Section 8 hereof, to receive Awards based upon performance criteria specified by the Committee or the Board. (ii) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, and shall include a "group" as defined in Section 13(d) thereof. (jj) "Publicly Held Corporation" shall mean a publicly held corporation as that term is used under Section 162(m)(2) of the Code. (kk) "Restricted Stock" means Stock granted to a Participant under Section 6(d) hereof, that is subject to certain restrictions and to a risk of forfeiture. (ll) "Rule 16b-3" and "Rule 16a-1(c)(3)" means Rule 16b-3 and Rule 16a-1(c)(3), as from time to time in effect and applicable to the Plan and Participants, promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act. (mm) "Stock" means the Company's Common Stock, and such other securities as may be substituted (or resubstituted) for Stock pursuant to Section 10(c) hereof. (nn) "Stock Appreciation Right" means a right granted to a Participant under Section 6(c) hereof. (oo) "Subsidiary" means a "subsidiary corporation" whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Administration. (a) Authority of the Committee. The Plan shall be administered by the Committee; provided, however, that except as otherwise expressly provided in this Plan or, during the period that the Company is a Publicly Held Corporation, in order to comply with Code Section 162(m) or Rule 16b-3 under the Exchange Act, the Board may exercise any power or authority granted to the Committee under this Plan. The Committee or the Board shall have full and final authority, in each case subject to and consistent with the provisions of the Plan, to select Eligible Persons to become Participants, grant Awards, determine the type, number and other terms and conditions of, and all other matters relating to, Awards, prescribe Award agreements (which need not be identical for each Participant) and rules and regulations for the administration of the Plan, construe and interpret the Plan and Award agreements and correct defects, supply omissions or reconcile inconsistencies therein, and to make all other decisions and determinations as the Committee or the Board may deem necessary or advisable for the 5

administration of the Plan. In exercising any discretion granted to the Committee or the Board under the Plan or pursuant to any Award, the Committee or the Board shall not be required to follow past practices, act in a manner consistent with past practices, or treat any Eligible Person in a manner consistent with the treatment of other Eligible Persons. (b) Manner of Exercise of Committee Authority. In the event that the Company is or becomes a Publicly Held Corporation, the Committee, and not the Board, shall exercise sole and exclusive discretion on any matter relating to a Participant then subject to Section 16 of the Exchange Act with respect to the Company to the extent necessary in order that transactions by such Participant shall be exempt under Rule 16b-3 under the Exchange Act. Any action of the Committee or the Board shall be final, conclusive and binding on all persons, including the Company, its Related Entities, Participants, Beneficiaries, transferees under Section 10(b) hereof or other persons claiming rights from or through a Participant, and shareholders. The express grant of any specific power to the Committee or the Board, and the taking of any action by the Committee or the Board, shall not be construed as limiting any power or authority of the Committee or the Board. The Committee or the Board may delegate to officers or managers of the Company or any Related Entity, or committees thereof, the authority, subject to such terms as the Committee or the Board shall determine, (i) to perform administrative functions, (ii) with respect to Participants not subject to Section 16 of the Exchange Act, to perform such other functions as the Committee or the Board may determine, and (iii) with respect to Participants subject to Section 16, to perform such other functions of the Committee or the Board as the Committee or the Board may determine to the extent performance of such functions will not result in the loss of an exemption under Rule 16b-3 otherwise available for transactions by such persons, in each case to the extent permitted under applicable law and subject to the requirements set forth in Section 7(d). The Committee or the Board may appoint agents to assist it in administering the Plan. (c) Limitation of Liability. The Committee and the Board, and each member thereof, shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any Executive Officer, other officer or Employee, the Company's independent auditors, Consultants or any other agents assisting in the administration of the Plan. Members of the Committee and the Board, and any officer or Employee acting at the direction or on behalf of the Committee or the Board, shall not be personally liable for any action or determination taken or made in good faith with respect to the Plan, and shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action or determination. 4. Stock Subject to Plan. (a) Limitation on Overall Number of Shares Subject to Awards. Subject to adjustment as provided in Section 10(c) hereof, the total number of shares of Stock reserved and available for delivery in connection with Awards under the Plan shall be the sum of (i) 1,000,000, plus (ii) the number of shares with respect to Awards previously granted under the Plan that terminate without being exercised, expire, are forfeited or canceled, and the number of shares of Stock that are surrendered in payment of any Awards or any tax withholding with regard thereto. In the event an Initial Public Offering ("IPO") of the shares of the Company's 6

Stock occurs, the overall number of shares of the Company's Stock subject to Awards shall be further increased by 6% of the total number of shares of the Company's Stock outstanding immediately following the IPO, plus, on the first day of each subsequent calendar quarter, an additional 1.5% of the total number of shares of the Company's Stock outstanding on that day, provided, however, that at no time shall the number of shares of the Company's Stock subject to Awards exceed 30% of the then outstanding shares of the Company's Stock (counting convertible preferred and convertible senior common shares as if converted), unless a greater percentage is approved by a vote of at least two-thirds of the securities entitled to vote, or a determination is made by counsel for the Company that such restriction is not required by applicable federal or state securities laws under the circumstances. Any shares of Stock delivered under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares. (b) Limitation on Number of Incentive Stock Option Shares. Subject to adjustment as provided in Section 10(c) hereof, the number of shares of Stock which may be issued pursuant to Incentive Stock Options shall be the lesser of (i) the number of Shares that may be subject to Awards under Section 4(a), or (ii) 15,000,000. (c) Application of Limitations. The limitation contained in this Section 4 shall apply not only to Awards that are settleable by the delivery of shares of Stock but also to Awards relating to shares of Stock but settleable only in cash (such as cash-only Stock Appreciation Rights). The Committee or the Board may adopt reasonable counting procedures to ensure appropriate counting, avoid double counting (as, for example, in the case of tandem or substitute awards) and make adjustments if the number of shares of Stock actually delivered differs from the number of shares previously counted in connection with an Award. 5. Eligibility; Per-Person Award Limitations. Awards may be granted under the Plan only to Eligible Persons. In each fiscal year during any part of which the Plan is in effect, an Eligible Person may not be granted Awards relating to more than 1,000,000 shares of Stock, subject to adjustment as provided in Section 10(c), under each of Sections 6(b), 6(c), 6(d), 6(e), 6(f), 6(g), 6(h), 7(b) and 7(c). In addition, the maximum amount that may be earned as an Annual Incentive Award or other cash Award in any fiscal year by any one Participant shall be $2,000,000, and the maximum amount that may be earned as a Performance Award or other cash Award in respect of a performance period by any one Participant shall be $5,000,000. 6. Specific Terms of Awards. (a) General. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee or the Board may impose on any Award or the exercise thereof, at the date of grant or thereafter (subject to Section 10(e)), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee or the Board shall determine, including terms requiring forfeiture of Awards in the event of termination of Continuous Service by the Participant and terms permitting a Participant to make elections relating to his or her Award. The Committee or the Board shall retain full power and discretion to accelerate, waive or modify, at any time, any term or condition of an Award that is not mandatory under the Plan. Except in cases in which the Committee or the Board is authorized to 7

require other forms of consideration under the Plan, or to the extent other forms of consideration must be paid to satisfy the requirements of California law, no consideration other than services may be required for the grant (but not the exercise) of any Award. (b) Options. The Committee and the Board each is authorized to grant Options to Participants on the following terms and conditions: (i) Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement. Such Stock Option Agreement shall be subject to all applicable terms and conditions of the Plan and may be subject to any other terms and conditions which are not inconsistent with the Plan and which the Committee or the Board deems appropriate for inclusion in a Stock Option Agreement. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. (ii) Number of Shares. Each Stock Option Agreement shall specify the number of shares of Stock that are subject to the Option and shall provide for the adjustment of such number in accordance with Section 10(c) hereof. The Stock Option Agreement shall also specify whether the Stock Option is an Incentive Stock Option or a Non-Qualified Stock Option. (iii) Exercise Price. (A) In General. Each Stock Option Agreement shall state the price at which shares of Stock subject to the Option may be purchased (the "Exercise Price"), which shall be, with respect to Incentive Stock Options, not less than 100% of the Fair Market Value of the Stock on the date of grant. In the case of Non-Qualified Stock Options, the Exercise Price shall be determined in the sole discretion of the Committee or the Board; provided, however, that the Exercise Price shall be no less than 85% of the Fair Market Value of the shares of Stock on the date of grant of the Non-Qualified Stock Option. (B) Ten Percent Shareholder. If an individual owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Related Entity, any Option granted to such individual must comply with the following: (1) the Exercise Price of a Non-Qualified Stock Option must be at least 110% of the Fair Market Value of a share of Stock on the date of grant, or (2) in the case of an Incentive Stock Option, the Exercise Price must be at least 110% of the Fair Market Value of a share of Stock on the date of grant and such Incentive Stock Option by its terms is not exercisable after the expiration of five years from the date of grant. (C) Non-Applicability. The Exercise Price restriction applicable to Non-Qualified Stock Options required by Sections 6(b)(iii)(A) and 6(b)(iii)(B) shall be inoperative if (1) the offer and sale of the shares of Stock to be issued upon payment of the Exercise Price have been registered under a then 8

currently effective registration statement under applicable federal or state securities laws, or (2) a determination is made by counsel for the Company that such Exercise Price restrictions are not required in the circumstances under applicable federal or state securities laws. (iv) Time and Method of Exercise. The Committee or the Board shall determine the time or times at which or the circumstances under which an Option may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), provided that in the case of an Optionee who is not an officer, Director, or Consultant of the Company or a Related Entity, his or her Options shall become exercisable at least as rapidly as 20% per year, over a 5 year period commencing on the date of the grant, unless a determination is made by counsel for the Company that such vesting requirements are not required in the circumstances under applicable federal or state securities laws. The Board or the Committee may also determine the time or times at which Options shall cease to be or become exercisable following termination of Continuous Service or upon other conditions; provided, however, if the Optionee's Continuous Service is terminated for any reason other than Cause, that portion of the Option that is exercisable as of the date of termination shall remain exercisable for at least 6 months from the date of termination if by reason of death or Disability, and for at least 30 days from the date of termination if by reason other than the Optionee's death or Disability. The Board or the Committee may determine the methods by which such exercise price may be paid or deemed to be paid (including in the discretion of the Committee or the Board a cashless exercise procedure), the form of such payment, including, without limitation, cash, Stock, other Awards or awards granted under other plans of the Company or a Related Entity, or other property (including notes or other contractual obligations of Participants to make payment on a deferred basis), and the methods by or forms in which Stock will be delivered or deemed to be delivered to Participants. (v) Incentive Stock Options. The terms of any Incentive Stock Option granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to Incentive Stock Options (including any Stock Appreciation Rights in tandem therewith) shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code, unless the Participant has first requested the change that will result in such disqualification. Thus, if and to the extent required to comply with Section 422 of the Code, Options granted as Incentive Stock Options shall be subject to the following special terms and conditions: (A) the Option shall not be exercisable more than ten years after the date such Incentive Stock Option is granted; provided, however, that if a Participant owns or is deemed to own (by reason of the attribution rules of Section 9

424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation and the Incentive Stock Option is granted to such Participant, the term of the Incentive Stock Option shall be (to the extent required by the Code at the time of the grant) for no more than five years from the date of grant; and (B) The aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of the shares of stock with respect to which Incentive Stock Options granted under the Plan and all other option plans of the Company or its Parent Corporation during any calendar year exercisable for the first time by the Participant during any calendar year shall not (to the extent required by the Code at the time of the grant) exceed $100,000. (vi) Repurchase Rights. The Committee and the Board shall have the discretion to grant Options which are exercisable for unvested shares of Common Stock. Should the Optionee's Continuous Service cease while holding such unvested shares, the Company shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Committee or the Board and set forth in the document evidencing such repurchase right. (c) Stock Appreciation Rights. The Committee and the Board each is authorized to grant Stock Appreciation Rights to Participants on the following terms and conditions: (i) Right to Payment. A Stock Appreciation Right shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of stock on the date of exercise (or, in the case of a "Limited Stock Appreciation Right" that may be exercised only in the event of a Change in Control, the Fair Market Value determined by reference to the Change in Control Price, as defined under Section 9(c) hereof), over (B) the grant price of the Stock Appreciation Right as determined by the Committee or the Board. The grant price of a Stock Appreciation Right shall not be less than the Fair Market Value of a share of Stock on the date of grant except as provided under Section 8(a) hereof. (ii) Other Terms. The Committee or the Board shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which a Stock Appreciation Right may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the time or times at which Stock Appreciation Rights shall cease to be or become exercisable following termination of Continuous Service or upon other conditions, the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be 10

delivered to Participants, whether or not a Stock Appreciation Right shall be in tandem or in combination with any other Award, and any other terms and conditions of any Stock Appreciation Right. Limited Stock Appreciation Rights that may only be exercised in connection with a Change in Control or other event as specified by the Committee or the Board, may be granted on such terms, not inconsistent with this Section 6(c), as the Committee or the Board may determine. Stock Appreciation Rights and Limited Stock Appreciation Rights may be either freestanding or in tandem with other Awards. (d) Restricted Stock. The Committee and the Board each is authorized to grant Restricted Stock to Participants on the following terms and conditions: (i) Grant and Restrictions. Restricted Stock shall be subject to such restrictions on transferability, risk of forfeiture and other restrictions, if any, as the Committee or the Board may impose, or as otherwise provided in this Plan. The restrictions may lapse separately or in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service requirements), in such installments or otherwise, as the Committee or the Board may determine at the date of grant or thereafter. Except to the extent restricted under the terms of the Plan and any Award agreement relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends thereon (subject to any mandatory reinvestment or other requirement imposed by the Committee or the Board). During the restricted period applicable to the Restricted Stock, subject to Section 10(b) below, the Restricted Stock may not be sold, transferred, pledged, hypothecated, margined or otherwise encumbered by the Participant. (ii) Forfeiture. Except as otherwise determined by the Committee or the Board at the time of the Award, upon termination of a Participant's Continuous Service during the applicable restriction period, the Participant's Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; provided that the Committee or the Board may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee or the Board may in other cases waive in whole or in part the forfeiture of Restricted Stock. (iii) Certificates for Stock. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee or the Board shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, the Committee or the Board may require that such certificates bear an appropriate legend referring to the terms, conditions and restrictions applicable to such Restricted Stock, that the Company retain physical possession of the 11

certificates, and that the Participant deliver a stock power to the Company, endorsed in blank, relating to the Restricted Stock. (iv) Dividends and Splits. As a condition to the grant of an Award of Restricted Stock, the Committee or the Board may require that any cash dividends paid on a share of Restricted Stock be automatically reinvested in additional shares of Restricted Stock or applied to the purchase of additional Awards under the Plan. Unless otherwise determined by the Committee or the Board, Stock distributed in connection with a Stock split or Stock dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Stock or other property has been distributed. (e) Deferred Stock. The Committee and the Board each is authorized to grant Deferred Stock to Participants, which are rights to receive Stock, cash, or a combination thereof at the end of a specified deferral period, subject to the following terms and conditions: (i) Award and Restrictions. Satisfaction of an Award of Deferred Stock shall occur upon expiration of the deferral period specified for such Deferred Stock by the Committee or the Board (or, if permitted by the Committee or the Board, as elected by the Participant). In addition, Deferred Stock shall be subject to such restrictions (which may include a risk of forfeiture) as the Committee or the Board may impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier specified times (including based on achievement of performance goals and/or future service requirements), separately or in combination, in installments or otherwise, as the Committee or the Board may determine. Deferred Stock may be satisfied by delivery of Stock, cash equal to the Fair Market Value of the specified number of shares of Stock covered by the Deferred Stock, or a combination thereof, as determined by the Committee or the Board at the date of grant or thereafter. Prior to satisfaction of an Award of Deferred Stock, an Award of Deferred Stock carries no voting or dividend or other rights associated with share ownership. (ii) Forfeiture. Except as otherwise determined by the Committee or the Board, upon termination of a Participant's Continuous Service during the applicable deferral period thereof to which forfeiture conditions apply (as provided in the Award agreement evidencing the Deferred Stock), the Participant's Deferred Stock that is at that time subject to deferral (other than a deferral at the election of the Participant) shall be forfeited; provided that the Committee or the Board may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock shall be waived in whole or in part in the event of terminations resulting from specified causes, and the Committee or the Board may in other cases waive in whole or in part the forfeiture of Deferred Stock. 12

(iii) Dividend Equivalents. Unless otherwise determined by the Committee or the Board at date of grant, any Dividend Equivalents that are granted with respect to any Award of Deferred Stock shall be either (A) paid with respect to such Deferred Stock at the dividend payment date in cash or in shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or (B) deferred with respect to such Deferred Stock and the amount or value thereof automatically deemed reinvested in additional Deferred Stock, other Awards or other investment vehicles, as the Committee or the Board shall determine or permit the Participant to elect. (f) Bonus Stock and Awards in Lieu of Obligations. The Committee and the Board each is authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu of Company obligations to pay cash or deliver other property under the Plan or under other plans or compensatory arrangements, provided that, in the case of Participants subject to Section 16 of the Exchange Act, the amount of such grants remains within the discretion of the Committee to the extent necessary to ensure that acquisitions of Stock or other Awards are exempt from liability under Section 16(b) of the Exchange Act. Stock or Awards granted hereunder shall be subject to such other terms as shall be determined by the Committee or the Board. (g) Dividend Equivalents. The Committee and the Board each is authorized to grant Dividend Equivalents to a Participant entitling the Participant to receive cash, Stock, other Awards, or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments. Dividend Equivalents may be awarded on a free-standing basis or in connection with another Award. The Committee or the Board may provide that Dividend Equivalents shall be paid or distributed when accrued or shall be deemed to have been reinvested in additional Stock, Awards, or other investment vehicles, and subject to such restrictions on transferability and risks of forfeiture, as the Committee or the Board may specify. (h) Other Stock-Based Awards. The Committee and the Board each is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock, as deemed by the Committee or the Board to be consistent with the purposes of the Plan, including, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into Stock, purchase rights for Stock, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee or the Board, and Awards valued by reference to the book value of Stock or the value of securities of or the performance of specified Related Entities or business units. The Committee or the Board shall determine the terms and conditions of such Awards. Stock delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(h) shall be purchased for such consideration (including without limitation loans from the Company or a Related Entity), paid for at such times, by such methods, and in such forms, including, without limitation, cash, Stock, other Awards or other property, as the Committee or the Board shall determine. The Committee and the Board shall have the discretion to grant such other Awards which are exercisable for unvested shares of Common Stock. Should the Optionee's Continuous Service cease while holding such unvested shares, the Company shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested 13

shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Committee or the Board and set forth in the document evidencing such repurchase right. Cash awards, as an element of or supplement to any other Award under the Plan, may also be granted pursuant to this Section 6(h). 7. Performance and Annual Incentive Awards. (a) Performance Conditions. The right of a Participant to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Committee or the Board. The Committee or the Board may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce the amounts payable under any Award subject to performance conditions, except as limited under Sections 7(b) and 7(c) hereof in the case of a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m). At such times as the Company is a Publicly Held Corporation, if and to the extent required under Code Section 162(m), any power or authority relating to a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m), shall be exercised by the Committee and not the Board. (b) Performance Awards Granted to Designated Covered Employees. If and to the extent that the Committee determines that a Performance Award to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of pre-established performance goals and other terms set forth in this Section 7(b). (i) Performance Goals Generally. The performance goals for such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 7(b). Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being "substantially uncertain." The Committee may determine that such Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants. (ii) Business Criteria. One or more of the following business criteria for the Company, on a consolidated basis, and/or specified Related Entities or business units of the Company (except with respect to the total shareholder return and earnings per share criteria), shall be used exclusively by the Committee in establishing performance goals for such Performance Awards: (1) total 14

shareholder return; (2) such total shareholder return as compared to total return (on a comparable basis) of a publicly available index such as, but not limited to, the Standard & Poor's 500 Stock Index or the S&P Specialty Retailer Index; (3) net income; (4) pretax earnings; (5) earnings before interest expense, taxes, depreciation and amortization; (6) pretax operating earnings after interest expense and before bonuses, service fees, and extraordinary or special items; (7) operating margin; (8) earnings per share; (9) return on equity; (10) return on capital; (11) return on investment; (12) operating earnings; (13) working capital or inventory; and (14) ratio of debt to shareholders' equity. One or more of the foregoing business criteria shall also be exclusively used in establishing performance goals for Annual Incentive Awards granted to a Covered Employee under Section 7(c) hereof that are intended to qualify as "performance-based compensation under Code Section 162(m). (iii) Performance Period; Timing For Establishing Performance Goals. Achievement of performance goals in respect of such Performance Awards shall be measured over a performance period of up to ten years, as specified by the Committee. Performance goals shall be established not later than 90 days after the beginning of any performance period applicable to such Performance Awards, or at such other date as may be required or permitted for "performance-based compensation" under Code Section 162(m). (iv) Performance Award Pool. The Committee may establish a Performance Award pool, which shall be an unfunded pool, for purposes of measuring Company performance in connection with Performance Awards. The amount of such Performance Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) hereof during the given performance period, as specified by the Committee in accordance with Section 7(b)(iii) hereof. The Committee may specify the amount of the Performance Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria. (v) Settlement of Performance Awards; Other Terms. Settlement of such Performance Awards shall be in cash, Stock, other Awards or other property, in the discretion of the Committee. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Performance Awards. The Committee shall specify the circumstances in which such Performance Awards shall be paid or forfeited in the event of termination of Continuous Service by the Participant prior to the end of a performance period or settlement of Performance Awards. (c) Annual Incentive Awards Granted to Designated Covered Employees. The Committee may, within its discretion, grant one or more Annual Incentive Awards to any Eligible Person, subject to the terms and conditions set forth in this Section 7(c). 15

(vi) Annual Incentive Award Pool. The Committee may establish an Annual Incentive Award pool, which shall be an unfunded pool, for purposes of measuring Company performance in connection with Annual Incentive Awards. In the case of Annual Incentive Awards intended to qualify as "performance-based compensation" for purposes of Code Section 162(m), the amount of such Annual Incentive Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) hereof during the given performance period, as specified by the Committee in accordance with Section 7(b)(iii) hereof. The Committee may specify the amount of the Annual Incentive Award pool as a percentage of any such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria. (vii) Potential Annual Incentive Awards. Not later than the end of the 90th day of each fiscal year, or at such other date as may be required or permitted in the case of Awards intended to be "performance-based compensation" under Code Section 162(m), the Committee shall determine the Eligible Persons who will potentially receive Annual Incentive Awards, and the amounts potentially payable thereunder, for that fiscal year, either out of an Annual Incentive Award pool established by such date under Section 7(c)(i) hereof or as individual Annual Incentive Awards. In the case of individual Annual Incentive Awards intended to qualify under Code Section 162(m), the amount potentially payable shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 7(b)(ii) hereof in the given performance year, as specified by the Committee; in other cases, such amount shall be based on such criteria as shall be established by the Committee. In all cases, the maximum Annual Incentive Award of any Participant shall be subject to the limitation set forth in Section 5 hereof. (viii) Payout of Annual Incentive Awards. After the end of each fiscal year, the Committee shall determine the amount, if any, of (A) the Annual Incentive Award pool, and the maximum amount of potential Annual Incentive Award payable to each Participant in the Annual Incentive Award pool, or (B) the amount of potential Annual Incentive Award otherwise payable to each Participant. The Committee may, in its discretion, determine that the amount payable to any Participant as an Annual Incentive Award shall be reduced from the amount of his or her potential Annual Incentive Award, including a determination to make no Award whatsoever. The Committee shall specify the circumstances in which an Annual Incentive Award shall be paid or forfeited in the event of termination of Continuous Service by the Participant prior to the end of a fiscal year or settlement of such Annual Incentive Award. (d) Written Determinations. All determinations by the Committee as to the establishment of performance goals, the amount of any Performance Award pool or potential individual Performance Awards and as to the achievement of performance goals relating to 16

Performance Awards under Section 7(b), and the amount of any Annual Incentive Award pool or potential individual Annual Incentive Awards and the amount of final Annual Incentive Awards under Section 7(c), shall be made in writing in the case of any Award intended to qualify under Code Section 162(m). The Committee may not delegate any responsibility relating to such Performance Awards or Annual Incentive Awards if and to the extent required to comply with Code Section 162(m). (e) Status of Section 7(b) and Section 7(c) Awards Under Code Section 162(m). It is the intent of the Company that Performance Awards and Annual Incentive Awards under Section 7(b) and 7(c) hereof granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Code Section 162(m) and regulations thereunder shall, if so designated by the Committee, constitute "qualified performance-based compensation" within the meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Sections 7(b), (c), (d) and (e), including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of Performance Awards or an Annual Incentive Award, as likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan or any agreement relating to such Performance Awards or Annual Incentive Awards does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements. 8. Certain Provisions Applicable to Awards or Sales. (a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted under the Plan may, in the discretion of the Committee or the Board, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any Related Entity, or any business entity to be acquired by the Company or a Related Entity, or any other right of a Participant to receive payment from the Company or any Related Entity. Such additional, tandem, and substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award or award, the Committee or the Board shall require the surrender of such other Award or award in consideration for the grant of the new Award. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any Related Entity, in which the value of Stock subject to the Award is equivalent in value to the cash compensation (for example, Deferred Stock or Restricted Stock), or in which the exercise price, grant price or purchase price of the Award in the nature of a right that may be exercised is equal to the Fair Market Value of the underlying Stock minus the value of the cash compensation surrendered (for example, Options granted with an exercise price "discounted" by the amount of the cash compensation surrendered). (b) Term of Awards. The term of each Award shall be for such period as may be determined by the Committee or the Board; provided that in no event shall the term of any 17

Option or Stock Appreciation Right exceed a period of ten years (or such shorter term as may be required in respect of an Incentive Stock Option under Section 422 of the Code). (c) Purchase Prices. (i) In General. In the case of an Award under this Plan, other than an Option, which grants an Employee, Director, or Consultant of the Company the right to purchase Stock, the Board or the Committee shall have discretion to set the purchase price, provided that in no event shall the purchase price per share of Stock be less than 85% of the Fair Market Value of such share on the date of the Award or the date of the purchase, and in the case of an Award made to an Employee who owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of Stock of the Company, the Parent Corporation or a Subsidiary, the purchase price of such Stock shall be no less than 100% of the Fair Market Value of the Stock on the date of such award or the date of the purchase. (ii) Non-Applicability of Restrictions. The Purchase Price restrictions contained in Section 8(c)(i) applicable to Awards under this Plan, other than Options, which grant an Employee, Director, or Consultant of the Company the right to purchase Stock, shall be inoperative if (A) the offer and sale of the shares of Stock to be issued upon payment of the Exercise Price have been registered under a then currently effective registration statement under applicable federal or state securities laws, or (B) a determination is made by counsel for the Company that such Exercise Price restrictions are not required in the circumstances under applicable federal or state securities laws. (d) Form and Timing of Payment Under Awards; Deferrals. Subject to the terms of the Plan and any applicable Award agreement, payments to be made by the Company or a Related Entity upon the exercise of an Option or other Award or settlement of an Award may be made in such forms as the Committee or the Board shall determine, including, without limitation, cash, other Awards or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated, and cash paid in lieu of Stock in connection with such settlement, in the discretion of the Committee or the Board or upon occurrence of one or more specified events (in addition to a Change in Control). Installment or deferred payments may be required by the Committee or the Board (subject to Section 10(e) of the Plan) or permitted at the election of the Participant on terms and conditions established by the Committee or the Board. Payments may include, without limitation, provisions for the payment or crediting of a reasonable interest rate on installment or deferred payments or the grant or crediting of Dividend Equivalents or other amounts in respect of installment or deferred payments denominated in Stock. (e) Exemptions from Section 16(b) Liability. If and to the extent that the Company is or becomes a Publicly Held Corporation, it is the intent of the Company that this Plan comply in all respects with applicable provisions of Rule 16b-3 or Rule 16a-1(c)(3) to the 18

extent necessary to ensure that neither the grant of any Awards to nor other transaction by a Participant who is subject to Section 16 of the Exchange Act is subject to liability under Section 16(b) thereof (except for transactions acknowledged in writing to be non-exempt by such Participant). Accordingly, if any provision of this Plan or any Award agreement does not comply with the requirements of Rule 16b-3 or Rule 16a-1(c)(3) as then applicable to any such transaction, such provision will be construed or deemed amended to the extent necessary to conform to the applicable requirements of Rule 16b-3 or Rule 16a-1(c)(3) so that such Participant shall avoid liability under Section 16(b). In addition, the purchase price of any Award conferring a right to purchase Stock shall be not less than any specified percentage of the Fair Market Value of Stock at the date of grant of the Award then required in order to comply with Rule 16b-3. 9. Change in Control. (a) Effect of "Change in Control." If and to the extent provided in the Award, in the event of a "Change in Control," as defined in Section 9(b): (i) The Committee may, within its discretion, accelerate the vesting and exercisability of any Award carrying a right to exercise that was not previously vested and exercisable as of the time of the Change in Control, subject to applicable restrictions set forth in Section 10(a) hereof; (ii) The Committee may, within its discretion, accelerate the exercisability of any limited Stock Appreciation Rights (and other Stock Appreciation Rights if so provided by their terms) and provide for the settlement of such Stock Appreciation Rights for amounts, in cash, determined by reference to the Change in Control Price; (iii) The Committee may, within its discretion, lapse the restrictions, deferral of settlement, and forfeiture conditions applicable to any other Award granted under the Plan and such Awards may be deemed fully vested as of the time of the Change in Control, except to the extent of any waiver by the Participant and subject to applicable restrictions set forth in Section 10(a) hereof; and (iv) With respect to any such outstanding Award subject to achievement of performance goals and conditions under the Plan, the Committee may, within its discretion, deem such performance goals and other conditions as having been met as of the date of the Change in Control. (b) Definition of "Change in Control." A "Change in Control" shall be deemed to have occurred upon: (i) Approval by the shareholders of the Company of a reorganization, merger, consolidation or other form of corporate transaction or series of transactions, in each case, with respect to which persons who were the shareholders of the Company immediately prior to such reorganization, merger or 19

consolidation or other transaction do not, immediately thereafter, own more than 50% of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated company's then outstanding voting securities, or a liquidation or dissolution of the Company or the sale of all or substantially all of the assets of the Company (unless such reorganization, merger, consolidation or other corporate transaction, liquidation, dissolution or sale (any such event being referred to as a "Corporate Transaction") is subsequently abandoned); (ii) Individuals who, as of the date on which the Award is granted, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date on which the Award was granted whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Directors of the Company) shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (iii) the acquisition (other than from the Company) by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act, of more than 50% of either the then outstanding shares of the Company's Common Stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally in the election of directors (hereinafter referred to as the ownership of a "Controlling Interest") excluding, for this purpose, any acquisitions by (1) the Company or a Related Entity, (2) any person, entity or "group" that as of the date on which the Award is granted owns beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act) of a Controlling Interest or (3) any employee benefit plan of the Company or a Related Entity. (c) Definition of "Change in Control Price." The "Change in Control Price" means an amount in cash equal to the higher of (i) the amount of cash and fair market value of property that is the highest price per share paid (including extraordinary dividends) in any Corporate Transaction triggering the Change in Control under Section 9(b)(i) hereof or any liquidation of shares following a sale of substantially all of the assets of the Company, or (ii) the highest Fair Market Value per share at any time during the 60-day period preceding and the 60-day period following the Change in Control. 10. General Provisions. (a) Compliance With Legal and Other Requirements. The Company may, to the extent deemed necessary or advisable by the Committee or the Board, postpone the issuance or delivery of Stock or payment of other benefits under any Award until completion of such 20

registration or qualification of such Stock or other required action under any federal or state law, rule or regulation, listing or other required action with respect to any stock exchange or automated quotation system upon which the Stock or other Company securities are listed or quoted, or compliance with any other obligation of the Company, as the Committee or the Board, may consider appropriate, and may require any Participant to make such representations, furnish such information and comply with or be subject to such other conditions as it may consider appropriate in connection with the issuance or delivery of Stock or payment of other benefits in compliance with applicable laws, rules, and regulations, listing requirements, or other obligations. The foregoing notwithstanding, in connection with a Change in Control, the Company shall take or cause to be taken no action, and shall undertake or permit to arise no legal or contractual obligation, that results or would result in any postponement of the issuance or delivery of Stock or payment of benefits under any Award or the imposition of any other conditions on such issuance, delivery or payment, to the extent that such postponement or other condition would represent a greater burden on a Participant than existed on the 90th day preceding the Change in Control. (b) Limits on Transferability; Beneficiaries. (i) General. Except as provided herein, a Participant may not assign, sell, transfer, or otherwise encumber or subject to any lien any Award or other right or interest granted under this Plan, in whole or in part, including any Award or right which constitutes a derivative security as generally defined in Rule 16a1(c) under the Exchange Act, other than by will or by operation of the laws of descent and distribution, and such Awards or rights that may be exercisable shall be exercised during the lifetime of the Participant only by the Participant or his or her guardian or legal representative. (ii) Permitted Transfer of Option. The Committee or Board, in its sole discretion, may permit the transfer of an Option (but not an Incentive Stock Option, or any other right to purchase Stock other than an Option) as follows: (A) by gift to a member of the Participant's Immediate Family or (B) by transfer by instrument to a trust providing that the Option is to be passed to beneficiaries upon death of the Optionee. For purposes of this Section 10(b)(ii), "Immediate Family" shall mean the Optionee's spouse (including a former spouse subject to terms of a domestic relations order); child, stepchild, grandchild, child-in-law; parent, stepparent, grandparent, parent-in-law; sibling and sibling-in-law, and shall include adoptive relationships. If a determination is made by counsel for the Company that the restrictions contained in this Section 10(b)(ii) are not required by applicable federal or state securities laws under the circumstances, then the Committee or Board, in its sole discretion, may permit the transfer of Awards (other than Incentive Stock Options and Stock Appreciation Rights in tandem therewith) to one or more Beneficiaries or other transferees during the lifetime of the Participant, which may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent permitted by the Committee or the Board pursuant to the express terms of an Award agreement (subject to any terms and conditions which the Committee or the Board may impose thereon, and 21

further subject to any prohibitions and restrictions on such transfers pursuant to Rule 16b-3). A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award agreement applicable to such Participant, except as otherwise determined by the Committee or the Board, and to any additional terms and conditions deemed necessary or appropriate by the Committee or the Board. (c) Adjustments. (i) Adjustments to Awards. In the event that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the Stock and/or such other securities of the Company or any other issuer such that a substitution, exchange, or adjustment is determined by the Committee or the Board to be appropriate, then the Committee or the Board shall, in such manner as it may deem equitable, substitute, exchange, or adjust any or all of (A) the number and kind of shares of Stock which may be delivered in connection with Awards granted thereafter, (B) the number and kind of shares of Stock by which annual per-person Award limitations are measured under Section 5 hereof, (C) the number and kind of shares of Stock subject to or deliverable in respect of outstanding Awards, (E) the exercise price, grant price or purchase price relating to any Award and/or make provision for payment of cash or other property in respect of any outstanding Award, and (F) any other aspect of any Award that the Committee or the Board determines to be appropriate. (ii) Adjustments in Case of Certain Corporate Transactions. In the event of a proposed sale of all or substantially all of the Company's assets or any reorganization, merger, consolidation, or other form of corporate transaction in which the Company does not survive, or in which the shares of Stock are exchanged for or converted into securities issued by another entity, then the successor or acquiring entity or an affiliate thereof may, with the consent of the Committee or the Board, assume each outstanding Option or substitute an equivalent option or right. If the successor or acquiring entity or an affiliate thereof, does not cause such an assumption or substitution, then each Option shall terminate upon the consummation of sale, merger, consolidation, or other corporate transaction. The Committee or the Board shall give written notice of any proposed transaction referred to in this Section 10(c)(ii) a reasonable period of time prior to the closing date for such transaction (which notice may be given either before or after the approval of such transaction), in order that Optionees may have a reasonable period of time prior to the closing date of such transaction within which to exercise any Options that are then exercisable (including any Options that may become exercisable upon the closing date of such transaction). 22

An Optionee may condition his exercise of any Option upon the consummation of the transaction. (iii) Other Adjustments. In addition, the Committee (and the Board if and only to the extent such authority is not required to be exercised by the Committee to comply with Code Section 162(m)) is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including Performance Awards and performance goals, and Annual Incentive Awards and any Annual Incentive Award pool or performance goals relating thereto) in recognition of unusual or nonrecurring events (including, without limitation, acquisitions and dispositions of businesses and assets) affecting the Company, any Related Entity or any business unit, or the financial statements of the Company or any Related Entity, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee's assessment of the business strategy of the Company, any Related Entity or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that such authority or the making of such adjustment would cause Options, Stock Appreciation Rights, Performance Awards granted under Section 8(b) hereof or Annual Incentive Awards granted under Section 8(c) hereof to Participants designated by the Committee as Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m) and the regulations thereunder to otherwise fail to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder. (d) Taxes. The Company and any Related Entity are authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any payroll or other payment to a Participant, amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee or the Board may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations, either on a mandatory or elective basis in the discretion of the Committee. (e) Changes to the Plan and Awards. The Board may amend, alter, suspend, discontinue or terminate the Plan, or the Committee's authority to grant Awards under the Plan, without the consent of shareholders or Participants, except that any amendment or alteration to the Plan shall be subject to the approval of the Company's shareholders not later than the annual meeting next following such Board action if such shareholder approval is required by any federal or state law or regulation (including, without limitation, Rule 16b-3 or Code Section 162(m)) or the rules of any stock exchange or automated quotation system on which the Stock may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such 23

changes to the Plan to shareholders for approval; provided that, without the consent of an affected Participant, no such Board action may materially and adversely affect the rights of such Participant under any previously granted and outstanding Award. The Committee or the Board may waive any conditions or rights under, or amend, alter, suspend, discontinue or terminate any Award theretofore granted and any Award agreement relating thereto, except as otherwise provided in the Plan; provided that, without the consent of an affected Participant, no such Committee or the Board action may materially and adversely affect the rights of such Participant under such Award. Notwithstanding anything in the Plan to the contrary, if any right under this Plan would cause a transaction to be ineligible for pooling of interest accounting that would, but for the right hereunder, be eligible for such accounting treatment, the Committee or the Board may modify or adjust the right so that pooling of interest accounting shall be available, including the substitution of Stock having a Fair Market Value equal to the cash otherwise payable hereunder for the right which caused the transaction to be ineligible for pooling of interest accounting. (f) Reporting of Financial Information. The Company shall provide to the recipient of any Award under this Plan, no less frequently than annually, the financial statements of the Company, until such time as a determination is made by counsel for the Company that such reports are not required by applicable federal or state securities laws under the circumstances. (g) Limitation on Rights Conferred Under Plan. Neither the Plan nor any action taken hereunder shall be construed as (i) giving any Eligible Person or Participant the right to continue as an Eligible Person or Participant or in the employ of the Company or a Related Entity; (ii) interfering in any way with the right of the Company or a Related Entity to terminate any Eligible Person's or Participant's Continuous Service at any time, (iii) giving an Eligible Person or Participant any claim to be granted any Award under the Plan or to be treated uniformly with other Participants and Employees, or (iv) conferring on a Participant any of the rights of a shareholder of the Company unless and until the Participant is duly issued or transferred shares of Stock in accordance with the terms of an Award. (h) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant or obligation to deliver Stock pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; provided that the Committee may authorize the creation of trusts and deposit therein cash, Stock, other Awards or other property, or make other arrangements to meet the Company's obligations under the Plan. Such trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. The trustee of such trusts may be authorized to dispose of trust assets and reinvest the proceeds in alternative investments, subject to such terms and conditions as the Committee or the Board may specify and in accordance with applicable law. (i) Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board nor its submission to the shareholders of the Company for approval shall be construed as creating 24

any limitations on the power of the Board or a committee thereof to adopt such other incentive arrangements as it may deem desirable including incentive arrangements and awards which do not qualify under Code Section 162(m). (j) Payments in the Event of Forfeitures; Fractional Shares. Unless otherwise determined by the Committee or the Board, in the event of a forfeiture of an Award with respect to which a Participant paid cash or other consideration, the Participant shall be repaid the amount of such cash or other consideration. No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee or the Board shall determine whether cash, other Awards or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated. (k) Governing Law. The validity, construction and effect of the Plan, any rules and regulations under the Plan, and any Award agreement shall be determined in accordance with the laws of the State of California without giving effect to principles of conflicts of laws, and applicable federal law. (l) Plan Effective Date and Shareholder Approval; Termination of Plan. The Plan shall become effective on the Effective Date, subject to subsequent approval within 12 months of its adoption by the Board by shareholders of the Company eligible to vote in the election of directors, by a vote sufficient to meet the requirements of Code Sections 162(m) (if applicable) and 422, Rule 16b-3 under the Exchange Act (if applicable), applicable NASDAQ requirements, and other laws, regulations, and obligations of the Company applicable to the Plan. Awards may be granted subject to shareholder approval, but may not be exercised or otherwise settled in the event shareholder approval is not obtained. The Plan shall terminate no later than 10 years from the date the Plan is adopted by the Board or 10 years from the date the Plan is approved by the Shareholders, whichever is earlier. 25

2001 Incentive Compensation Plan SYNAPTICS INCORPORATED INCENTIVE STOCK OPTION AGREEMENT 1. Grant of Option. SYNAPTICS INCORPORATED (the "Company") hereby grants, as of _________________________, 20___ (the "Date of Grant"), to ____________________________________ (the "Optionee") an option (the "Option") to purchase up to ________ shares of the Company's Common Stock, $_________ par value per share (the "Shares"), at an exercise price per share equal to $_________ . The Option shall be subject to the terms and conditions set forth herein. The Option was issued pursuant to the Company's 2001 Incentive Compensation Plan (the "Plan"), which is incorporated herein for all purposes. The Option is an Incentive Stock Option, and not a nonqualified stock option. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all of the terms and conditions hereof and thereof and all applicable laws and regulations. 2. Definitions. Unless otherwise provided herein, terms used herein that are defined in the Plan and not defined herein shall have the meanings attributed thereto in the Plan. 3. Exercise Schedule. Except as otherwise provided in Sections 6 or 12 of this Agreement, or in the Plan, the Option is exercisable in installments as provided below, which shall be cumulative. To the extent that the Option has become exercisable with respect to a percentage of Shares as provided below, the Option may thereafter be exercised by the Optionee, in whole or in part, at any time or from time to time prior to the expiration of the Option as provided herein. The following table indicates each date (the "Vesting Date") upon which the Optionee shall be entitled to exercise the Option with respect to the percentage of Shares granted as indicated beside the date, provided that the Continuous Service of the Optionee continues through and on the applicable Vesting Date: Percentage of Shares Vesting Date Except as otherwise specifically provided herein, there shall be no proportionate or partial vesting in the periods prior to each Vesting Date, and all vesting shall occur only on the appropriate Vesting Date. Upon the termination of the Optionee's Continuous Service with the Company and its Subsidiaries, any unvested portion of the Option shall terminate and be null and void. 4. Method of Exercise. The vested portion of this Option shall be exercisable in whole or in part in accordance with the exercise schedule set forth in Section 3 hereof by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such Shares as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and

shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price. This Option shall be deemed to be exercised after both (a) receipt by the Company of such written notice accompanied by the exercise price and (b) arrangements that are satisfactory to the Committee or the Board in its sole discretion have been made for Optionee's payment to the Company of the amount, if any, that is necessary to be withheld in accordance with applicable Federal or state withholding requirements. No Shares will be issued pursuant to the Option unless and until such issuance and such exercise shall comply with all relevant provisions of applicable law, including the requirements of any stock exchange upon which the Shares then may be traded. 5. Method of Payment. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; or (c) such other consideration or in such other manner as may be determined by the Board or the Committee in its absolute discretion. 6. Termination of Option. (a) Any unexercised portion of the Option shall automatically and without notice terminate and become null and void at the time of the earliest to occur of the following: (i) three months after the date on which the Optionee's Continuous Service is terminated other than by reason of (A) Cause, which, solely for purposes of this Agreement, shall mean the termination of the Optionee's Continuous Service by reason of the Optionee's willful misconduct or gross negligence, (B) a mental or physical disability (within the meaning of Internal Revenue Code Section 22(e)) of the Optionee as determined by a medical doctor satisfactory to the Committee or the Board, or (C) the death of the Optionee; (ii) immediately upon the termination of the Optionee's Continuous Service for Cause; (iii) twelve months after the date on which the Optionee's Continuous Service is terminated by reason of a mental or physical disability (within the meaning of Section 22(e) of the Code) as determined by a medical doctor satisfactory to the Committee or the Board; (iv) (A) twelve months after the date of termination of the Optionee's Continuous Service by reason of the death of the Optionee, or, if later, (B) three months after the date on which the Optionee shall die if such death shall occur during the one year period specified in Subsection 6(a)(iii) hereof; or (v) the tenth anniversary of the date as of which the Option is granted. (b) To the extent not previously exercised, (i) the Option shall terminate immediately in the event of (1) the liquidation or dissolution of the Company, or (2) any reorganization, merger, consolidation or other form of corporate transaction in which the Company does not survive or the shares of Stock are converted into or exchanged for securities issued by another entity, unless the successor or acquiring entity, or an affiliate of such successor or acquiring entity, assumes the Option or substitutes an equivalent option or right pursuant to 2

Section 10(c) of the Plan, and (ii) the Committee or the Board in its sole discretion may by written notice ("cancellation notice") cancel, effective upon the consummation of any corporate transaction described in Subsection 9(b)(i) of the Plan in which the Company does survive, the Option (or portion thereof) that remains unexercised on such date. The Committee or the Board shall give written notice of any proposed transaction referred to in this Section 6(b) a reasonable period of time prior to the closing date for such transaction (which notice may be given either before or after approval of such transaction), in order that the Optionee may have a reasonable period of time prior to the closing date of such transaction within which to exercise the Option if and to the extent that it then is exercisable (including any portion of the Option that may become exercisable upon the closing date of such transaction). The Optionee may condition his exercise of the Option upon the consummation of a transaction referred to in this Section 6(b). 7. Restrictions While Stock is Not Registered. (a) Restricted Shares. Any shares of Stock acquired upon exercise of the Option specified in Section 1 and (i) all shares of the Company's capital stock received as a dividend or other distribution upon such shares, and (ii) all shares of capital stock or other securities of the Company into which such shares may be changed or for which such shares shall be exchanged, whether through reorganization, recapitalization, stock split-ups or the like, shall be subject to the provisions of this Section 7 at all times, and only at those times, that shares of the Company's Common Stock are not registered under the Securities Exchange Act of 1934, as amended (such times during which the Stock is not so registered sometimes hereinafter being referred to as the "Restricted Period") and are during the Restricted Period hereinafter referred to as "Restricted Shares." (b) No Sale or Pledge of Restricted Shares. Except as otherwise provided herein, Optionee agrees and covenants that during the Restricted Period he or she will not sell, pledge, encumber or otherwise transfer or dispose of, and will not permit to be sold, encumbered, attached or otherwise disposed of or transferred in any manner, either voluntarily or by operation of law (all hereinafter collectively referred to as "transfers"), all or any portion of the Restricted Shares or any interest therein except in accordance with and subject to the terms of this Section 7. 3

(c) Voluntary Transfer Repurchase Option. If Optionee desires to effect a voluntary transfer of any of the Restricted Shares during the Restricted Period, Optionee shall first give written notice to the Company of such intent to transfer (the "Offer Notice") specifying (i) the number of the Restricted Shares (the "Offered Shares") and the date of the proposed transfer (which shall not be less than thirty (30) days after the giving of the Offer Notice), (ii) the name, address, and principal business of the proposed transferee (the "Transferee"), and (iii) the price and other terms and conditions of the proposed transfer of the Offered Shares to the Transferee. The Offer Notice by Optionee shall constitute an offer to sell all, but not less than all, of the Offered Shares, at the price and on the terms specified in such Offer Notice, to the Company and/or its designated purchaser. If the Company desires to accept Optionee's offer to sell, either for itself or on behalf of its designated purchaser, the Company shall signify such acceptance by written notice to Optionee within thirty (30) days following the giving of the Option Notice. Failing such acceptance, Optionee's offer shall lapse on the thirty-first day following the giving of the Option Notice. With such written acceptance, the Company shall designate a day not later than ten days following the date of giving its notice of acceptance on which the Company or its designated purchaser shall deliver the purchase price of the Offered Shares (in the same form as provided in the Offer Notice) and Optionee shall deliver to the Company or its designated Purchaser, as applicable, all certificates evidencing the Offered Shares endorsed in blank for transfer or with separate stock powers endorsed in blank for transfer. Payment of the purchase price may, at the discretion of the Company, include cancellation of all or a part of any outstanding indebtedness of Optionee to the Company. Upon the lapse without acceptance by the Company of Optionee's offer to sell the Offered Shares, Optionee shall be free to transfer the Offered Shares not purchased by the Company or the designated purchaser to the Transferee (and no one else), for a price and on terms and conditions which are no more favorable to the Transferee than those set forth in the Offer Notice, for a period of thirty days thereafter, but after such period the restrictions of this Section 7 shall again apply to the Restricted Shares. The Offered Shares so transferred by Optionee to the Transferee shall continue to be subject to all of the terms and conditions of this Section 7 and the Company shall have the right to require, as a condition of such transfer, that the Transferee execute an agreement substantially in the form and content of the provisions of this Section 7, as well as any shareholders agreement required by the Company. (d) Involuntary Transfer Repurchase Option. Whenever, during the Restricted Period, Optionee has any notice or knowledge of any attempted, pending, or consummated involuntary transfer or lien or charge upon any of the Restricted Shares, whether by operation of law or otherwise (including divorce), Optionee shall give immediate written notice thereof to the Company. Whenever the Company has any other notice or knowledge of any such attempted, impending, or consummated involuntary transfer, lien, or charge, it shall give written notice thereof to the Optionee. In either case, Optionee agrees to disclose forthwith to the Company all pertinent information in his possession relating thereto. If during the Restricted Period any of the 4

Restricted Shares are subjected to any such involuntary transfer, lien, or charge, the Company and its designated purchaser shall at all times have the immediate and continuing option to purchase such of the Restricted Shares upon notice by the Company to Optionee or other record holder at a price and on terms determined according to Section 7(f) below, and any of the Restricted Shares so purchased by the Company or its designated purchaser shall in every case be free and clear of such transfer, lien, or charge. (e) Excepted Transfers. The provisions of Sections 7(b) and (c) shall not apply to transfers by Optionee to his or her spouse, lineal descendants or trustee of trusts for their benefit, provided, however, that during the Restricted Period Optionee shall continue to be subject to all of the terms and provisions of this Section 7 with respect to any remaining present or future interest whatsoever he or she may have in the transferred Restricted Shares, and, further provided that during the Restricted Period any shares transferred pursuant to this subsection (e) shall continue to be treated as Restricted Shares and the transferee of any such Restricted Shares shall likewise be subject to all such terms and conditions of this Section 7 as though such transferee were a party hereto. (f) Repurchase Price. For purposes of Section 7(d) hereof, the per share purchase price of Restricted Shares shall be an amount equal to the fair market value of such share, determined by the Board as of any date determined by the Board that is not more than one year prior to the date of the event giving rise to the Company's right to purchase such Restricted Shares. The Company shall notify Optionee or his or her executor of the price so determined within 30 days after receipt of notice of the involuntary transfer, lien or charge. Any determination of fair market value made by the Board shall be binding and conclusive on all parties unless shown to have been made in an arbitrary and capricious manner. The purchase price shall, at the option of the 5

Company, be payable in cash or in the form of the Company's promissory note payable in up to two equal annual installments commencing on the date of the acquisition by the Company (the "Restricted Share Acquisition Date") of the Restricted Shares, together with interest on the unpaid balance thereof at the rate equal to the prime rate of interest as quoted in the Wall Street Journal on the Restricted Share Acquisition Date. (g) Legends. The certificate or certificates representing any Shares acquired pursuant to the exercise of an Option prior to the last day of the Restricted Period shall bear the following legends (as well as any legends required by applicable state and federal corporate and securities laws): (A) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH." (B) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL AND REPURCHASE OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN AN INCENTIVE STOCK OPTION AGREEMENT DATED ______________________, AS MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS, RIGHT OF FIRST REFUSAL AND REPURCHASE RIGHTS ARE BINDING ON TRANSFEREES OF THESE SHARES." 8. Transferability. The Option is not transferable otherwise than by will or the laws of descent and distribution, and during the lifetime of the Optionee the Option shall be exercisable only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 9. No Rights of Stockholders. Neither the Optionee nor any personal representative (or beneficiary) shall be, or shall have any of the rights and privileges of, a stockholder of the 6

Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 10. Market Stand-Off Agreement. In the event of an initial public offering of the Company's securities and upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, the Optionee agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any shares of Stock (other than those included in the registration) acquired pursuant to the exercise of the Option, without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters. 11. Optionee's Representations. In the event the Company's issuance of the shares of Stock purchasable pursuant to the exercise of this Option has not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his Investment Representation Statement in the form attached to this Agreement as Exhibit A or in such other form as the Company may request. 12. Acceleration of Exercisability of Option. This Option [shall] [shall not] become immediately fully exercisable in the event that, prior to the termination of the Option pursuant to Section 6 hereof, (a) there is a "Change in Control", as defined in Section 9(b) of the Plan, that occurs while the Optionee is employed by the Company or any of its subsidiaries, (b) the Committee or the Board exercises its discretion to provide a cancellation notice with respect to the Option pursuant to Section 6(b)(ii) hereof, or (c) the Option is terminated pursuant to Section 6(b)(i) hereof. 13. No Right to Continued Employment. Neither the Option nor this Agreement shall confer upon the Optionee any right to continued employment or service with the Company. 14. Law Governing. This Agreement shall be governed in accordance with and governed by the internal laws of the State of California. 15. Incentive Stock Option Treatment. The terms of this Option shall be interpreted in a manner consistent with the intent of the Company and the Optionee that the Option qualify as an Incentive Stock Option under Section 422 of the Code. If any provision of the Plan or this Agreement shall be impermissible in order for the Option to qualify as an Incentive Stock Option, then the Option shall be construed and enforced as if such provision had never been included in the Plan or the Option. If and to the extent that the number of Options granted pursuant to this Agreement exceeds the limitations contained in Section 4(b) of the Plan or the value of Shares with respect to which this Option may qualify as an Incentive Stock Option, this Option shall be a Non-Qualified Stock Option. 16. Interpretation / Provisions of Plan Control. This Agreement is subject to all the terms, conditions and provisions of the Plan, including, without limitation, the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan adopted by the Committee or the Board as may be in effect from time to time. If and to the extent that this 7

Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly. The Optionee accepts the Option subject to all the terms and provisions of the Plan and this Agreement. The undersigned Optionee hereby accepts as binding, conclusive and final all decisions or interpretations of the Committee or the Board upon any questions arising under the Plan and this Agreement. 17. Notices. Any notice under this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or when deposited in the United States mail, registered, postage prepaid, and addressed, in the case of the Company, to the Company's Secretary at: Synaptics Incorporated 2381 Bering Drive San Jose, California 95131 or if the Company should move its principal office, to such principal office, and, in the case of the Optionee, to the Optionee's last permanent address as shown on the Company's records, subject to the right of either party to designate some other address at any time hereafter in a notice satisfying the requirements of this Section. 18. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercise of Option. There will be no regular federal income tax liability upon the exercise of the Option, although the excess, if any, of the fair market value of the Shares on the date of exercise over the exercise price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. (b) Disposition of Shares. If Shares transferred pursuant to the Option are held for at least one year after exercise and are disposed of at least two years after the date of grant, any gain realized on disposition of the Shares will also be treated as long-term capital gain for federal income tax purposes. If Shares purchased under an Option are disposed of within such one-year period or within two years after the Date of Grant, any gain realized on such disposition will be treated as compensation income (taxable at ordinary income rates) to the extent of the difference between the exercise price and the lesser of (1) the fair market value of the Shares on the date of exercise, or (2) the sale price of the Shares. (c) Notice of Disqualifying Disposition of Option Shares. If Optionee sells or otherwise disposes of any of the Shares acquired pursuant to the Option on or before the later of (1) the date two years after the date of grant, (2) the date one year after the date of exercise, the Optionee shall immediately notify the Company in writing of such disposition. Optionee agrees 8

that Optionee may be subject to the income tax withholding by the Company on the compensation income recognized by the Optionee from the early disposition by payment in cash or out of the current earnings paid to the Optionee. If and to the extent that the number of Options granted hereunder exceeds the limitations contained in Section 4(b) of the Plan or the value of Shares with respect to which this Option may qualify as an Incentive Stock Option, this Option shall be a Non-Qualified Stock Option. The holder of a Non-Qualified Stock Option will be treated as having received compensation income (taxable at ordinary income tax rates) at the time the Option is exercised equal to the excess, if any, of the fair market value of the shares of Stock on the date of exercise over the exercise price. If the shares of Stock transferred pursuant to the Non-Qualified Stock Option are held for at least one year after the Option is exercised, any gain realized on disposition of the shares of Stock will be treated as long-term capital gain for federal income tax purposes. The foregoing discussion assumes that, and only is applicable if, the fair market value of the Shares as of the date on which the Option is granted is not less than the exercise price. The Company believes that it has made a good faith effort to determine the fair market value of the Shares and does not believe that the exercise price is less than the fair market value of the Shares on the Date of Grant. No assurances can be given, however, that the Internal Revenue Service would not take a contrary position, or that the Internal Revenue Service would not treat the Option as an Incentive Stock Option for some other reason. If the exercise price is determined to be less than the fair market value of a Share on the Date of Grant, then the Option may be taxable as a Non-Qualified Stock Option. It is also possible that if the fair market value is determined to be significantly greater than the exercise price, the Internal Revenue Service may take the position that the Option is not in effect a stock option but should be treated as a restricted stock for tax purposes. The Optionee should consult with his or her own tax advisors as to whether any action should be taken to minimize these risks. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the ________ day of ______________, 20____. COMPANY: SYNAPTICS INCORPORATED, A CALIFORNIA CORPORATION By: ------------------------------------ Name: Title: Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option, and fully understands all provisions of the Option. 9

Dated: OPTIONEE: ------------------------------- By: -------------------------------- Name: 10

EXHIBIT A INVESTMENT REPRESENTATION STATEMENT PURCHASER : COMPANY : SECURITY : COMMON STOCK AMOUNT : DATE : In connection with the purchase of the above-listed Securities, I, the Purchaser, represent to the Company the following: (a) I am aware of the Company's business affairs and financial condition, and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. I am purchasing these Securities for my own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"). (b) I understand that the Company's issuance of the Securities has not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if my representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) I further understand that the Securities must be held indefinitely unless the transfer is subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, I understand that the Company is under no obligation to register any transfer of the Securities. In addition, I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless registered or such registration is not required in the opinion of counsel for the Company. (d) I am familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of issuance of the Securities, such issuance will be exempt from 11

registration under the Securities Act. In the event the Company later becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable. Notwithstanding this paragraph (d), I acknowledge and agree to the restrictions set forth in paragraph (e) hereof. In the event that the Company does not qualify under Rule 701 at the time of issuance of the Securities, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the availability of certain public information about the Company, (2) the resale occurring not less than one year after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than two years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. (e) I further understand that in the event all of the applicable requirements of Rule 144 or Rule 701 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 and Rule 701 are not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 or Rule 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Signature of Purchaser: ------------------------------------- Date: ------------------------- 12

2001 Incentive Compensation Plan SYNAPTICS INCORPORATED NON-QUALIFIED STOCK OPTION AGREEMENT 1. Grant of Option. SYNAPTICS INCORPORATED (the "Company") hereby grants, as of the _________ day of _________________, 20____ ("Date of Grant"), to ________________________________________ (the "Optionee") an option (the "Option") to purchase up to _________ shares of the Company's Common Stock, $_______ par value per share (the "Shares"), at an exercise price per share equal to $_______. The Option shall be subject to the terms and conditions set forth herein. The Option was issued pursuant to the Company's 2001 Incentive Compensation Plan (the "Plan"), which is incorporated herein for all purposes. The Option is a nonqualified stock option, and not an Incentive Stock Option. The Optionee hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all of the terms and conditions hereof and thereof and all applicable laws and regulations. 2. Definitions. Unless otherwise provided herein, terms used herein that are defined in the Plan and not defined herein shall have the meanings attributed thereto in the Plan. 3. Exercise Schedule. Except as otherwise provided in Sections 6 or 9 of this Agreement, or in the Plan, the Option is exercisable in installments as provided below, which shall be cumulative. To the extent that the Option has become exercisable with respect to a percentage of Shares as provided below, the Option may thereafter be exercised by the Optionee, in whole or in part, at any time or from time to time prior to the expiration of the Option as provided herein. The following table indicates each date (the "Vesting Date") upon which the Optionee shall be entitled to exercise the Option with respect to the percentage of Shares granted as indicated beside the date, provided that the Continuous Service of the Optionee continues through and on the applicable Vesting Date: Percentage of Shares Vesting Date -------------------- ------------ Except as otherwise specifically provided herein, there shall be no proportionate or partial vesting in the periods prior to each Vesting Date, and all vesting shall occur only on the appropriate Vesting Date. Upon the termination of an Optionee's Continuous Service, any unvested portion of the Option shall terminate and be null and void. 4. Method of Exercise. The vested portion of this Option shall be exercisable in whole or in part in accordance with the exercise schedule set forth in Section 3 hereof by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such Shares as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written

notice shall be accompanied by payment of the exercise price. This Option shall be deemed to be exercised after both (a) receipt by the Company of such written notice accompanied by the exercise price and (b) arrangements that are satisfactory to the Committee or the Board in its sole discretion have been made for Optionee's payment to the Company of the amount that is necessary to be withheld in accordance with applicable Federal or state withholding requirements. No Shares will be issued pursuant to the Option unless and until such issuance and such exercise shall comply with all relevant provisions of applicable law, including the requirements of any stock exchange upon which the Shares then may be traded. 5. Method of Payment. Payment of the exercise price shall be by any of the following, or a combination thereof, at the election of the Optionee: (a) cash; (b) check; or (c) such other consideration or in such other manner as may be determined by the Board or the Committee in its absolute discretion. 6. Termination of Option. (a) Any unexercised portion of the Option shall automatically and without notice terminate and become null and void at the time of the earliest to occur of: (i) three months after the date on which the Optionee's Continuous Service is terminated other than by reason of (A) Cause, which, solely for purposes of this Plan, shall mean the termination of the Optionee's Continuous Service by reason of the Optionee's willful misconduct or gross negligence, (B) a mental or physical disability (within the meaning of Internal Revenue Code Section 22(e)) of the Optionee as determined by a medical doctor satisfactory to the Committee or the Board, or (C) the death of the Optionee; (ii) immediately upon the termination of the Optionee's Continuous Service for Cause; (iii) twelve months after the date on which the Optionee's Continuous Service is terminated by reason of a mental or physical disability (within the meaning of Section 22(e) of the Code) as determined by a medical doctor satisfactory to the Committee or the Board; (iv) (A) twelve months after the date of termination of the Optionee's Continuous Service by reason of the death of the Optionee, or , if later, (B) three months after the date on which the Optionee shall die if such death shall occur during the one year period specified in Subsection 6(a)(iii) hereof; or (v) the tenth anniversary of the date as of which the Option is granted. (b) To the extent not previously exercised, (i) the Option shall terminate immediately in the event of (1) the liquidation or dissolution of the Company, or (2) any reorganization, merger, consolidation or other form of corporate transaction in which the Company does not survive or the shares of Stock are converted into or exchanged for securities issued by another entity, unless the successor or acquiring entity, or an affiliate of such successor or acquiring entity, assumes the Option or substitutes an equivalent option or right pursuant to Section 10(c) of the Plan, and (ii) the Committee or the Board in its sole discretion may by 2

written notice ("cancellation notice") cancel, effective upon the consummation of any corporate transaction described in Subsection 9(b)(i) of the Plan in which the Company does survive, the Option (or portion thereof) that remains unexercised on such date. The Committee or the Board shall give written notice of any proposed transaction referred to in this Section 6(b) a reasonable period of time prior to the closing date for such transaction (which notice may be given either before or after approval of such transaction), in order that the Optionee may have a reasonable period of time prior to the closing date of such transaction within which to exercise the Option if and to the extent that it then is exercisable (including any portion of the Option that may become exercisable upon the closing date of such transaction). The Optionee may condition his exercise of the Option upon the consummation of a transaction referred to in this Section 6(b). 7. Restrictions While Stock is Not Registered. (a) Restricted Shares. Any shares of Stock acquired upon exercise of the Option specified in Section 1 and (i) all shares of the Company's capital stock received as a dividend or other distribution upon such shares, and (ii) all shares of capital stock or other securities of the Company into which such shares may be changed or for which such shares shall be exchanged, whether through reorganization, recapitalization, stock split-ups or the like, shall be subject to the provisions of this Section 7 at all times, and only at those times, that shares of the Company's Common Stock are not registered under the Securities Exchange Act of 1934, as amended (such times during which the Stock is not so registered sometimes hereinafter being referred to as the "Restricted Period") and are during the Restricted Period hereinafter referred to as "Restricted Shares." (b) No Sale or Pledge of Restricted Shares. Except as otherwise provided herein, Optionee agrees and covenants that during the Restricted Period he or she will not sell, pledge, encumber or otherwise transfer or dispose of, and will not permit to be sold, encumbered, attached or otherwise disposed of or transferred in any manner, either voluntarily or by operation of law (all hereinafter collectively referred to as "transfers"), all or any portion of the Restricted Shares or any interest therein except in accordance with and subject to the terms of this Section 7. 3

Company, be payable in cash or in the form of the Company's promissory note payable in up to two equal annual installments commencing on the date of the acquisition by the Company (the "Restricted Share Acquisition Date") of the Restricted Shares, together with interest on the unpaid balance thereof at the rate equal to the prime rate of interest as quoted in the Wall Street Journal on the Restricted Share Acquisition Date. (g) Legends. The certificate or certificates representing any Shares acquired pursuant to the exercise of an Option prior to the last day of the Restricted Period shall bear the following legends (as well as any legends required by applicable state and federal corporate and securities laws): (A) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH." (B) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL AND REPURCHASE OPTIONS HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN A STOCK OPTION AGREEMENT DATED __________________, AS MAY BE AMENDED FROM TIME TO TIME, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS, RIGHT OF FIRST REFUSAL AND REPURCHASE RIGHTS ARE BINDING ON TRANSFEREES OF THESE SHARES." 8. Transferability (a) General. Except as provided herein, a Participant may not assign, sell, transfer, or otherwise encumber or subject to any lien any Award or other right or interest granted under this Plan, in whole or in part, including any Award or right which constitutes a derivative security as generally defined in Rule 16a-1(c) under the Exchange Act, other than by will or by operation of the laws of descent and distribution, and such Awards or rights that may 6

be exercisable shall be exercised during the lifetime of the Participant only by the Participant or his or her guardian or legal representative. (b) Permitted Transfer of Option. The Committee or Board, in its sole discretion, may permit the transfer of an Option granted under this Agreement as follows: (A) by gift to a member of the Participant's Immediate Family or (B) by transfer by instrument to a trust providing that the Option is to be passed to beneficiaries upon death of the Optionee. For purposes of this Section 8(b), "Immediate Family" shall mean the Optionee's spouse (including a former spouse subject to terms of a domestic relations order); child, stepchild, grandchild, child-in-law; parent, stepparent, grandparent, parent-in-law; sibling and sibling-in-law, and shall include adoptive relationships. If a determination is made by counsel for the Company that the restrictions contained in this Section 8(b) are not required by applicable federal or state securities laws under the circumstances, then the Committee or Board, in its sole discretion, may permit the transfer of Options granted under this Agreement to one or more Beneficiaries or other transferees during the lifetime of the Participant, which may be exercised by such transferees in accordance with the terms of this Agreement, but only if and to the extent permitted by the Committee or the Board pursuant to the express terms of this Agreement (subject to any terms and conditions which the Committee or the Board may impose thereon, and further subject to any prohibitions and restrictions on such transfers pursuant to Rule 16b-3). A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award agreement applicable to such Participant, except as otherwise determined by the Committee or the Board, and to any additional terms and conditions deemed necessary or appropriate by the Committee or the Board. 9. Acceleration of Exercisability of Option. This Option [shall] [shall not] become immediately fully exercisable in the event that, prior to the termination of the Option pursuant to Section 6 hereof, (a) there is a "Change in Control", as defined in Section 9(b) of the Plan, that occurs while the Optionee is employed by the Company or any of its subsidiaries, (b) the Committee or the Board exercises its discretion to provide a cancellation notice with respect to the Option pursuant to Section 6(b)(ii) hereof, or (c) the Option is terminated pursuant to Section 6(b)(i) hereof. 10. No Rights of Stockholders. Neither the Optionee nor any personal representative (or beneficiary) shall be, or shall have any of the rights and privileges of, a stockholder of the Company with respect to any shares of Stock purchasable or issuable upon the exercise of the Option, in whole or in part, prior to the date of exercise of the Option. 11. Market Stand-Off Agreement. In the event of an initial public offering of the Company's securities and upon request of the Company or the underwriters managing any underwritten offering of the Company's securities, the Optionee agrees not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of any shares of Stock (other than those included in the registration) acquired pursuant to the exercise of the Option, without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of such registration as may be requested by the Company or such managing underwriters. 7

12. Optionee's Representations. In the event the Company's issuance of the shares of Stock purchasable pursuant to the exercise of this Option has not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company his Investment Representation Statement in the form attached to this Agreement as Exhibit A or in such other form as the Company may request. 13. No Right to Continued Employment. Neither the Option nor this Agreement shall confer upon the Optionee any right to continued employment or service with the Company. 14. Law Governing. This Agreement shall be governed in accordance with and governed by the internal laws of the State of California. 15. Interpretation / Provisions of Plan Control. This Agreement is subject to all the terms, conditions and provisions of the Plan, including, without limitation, the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan adopted by the Committee or the Board as may be in effect from time to time. If and to the extent that this Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly. The Optionee accepts the Option subject to all the terms and provisions of the Plan and this Agreement. The undersigned Optionee hereby accepts as binding, conclusive and final all decisions or interpretations of the Committee or the Board upon any questions arising under the Plan and this Agreement. 16. Notices. Any notice under this Agreement shall be in writing and shall be deemed to have been duly given when delivered personally or when deposited in the United States mail, registered, postage prepaid, and addressed, in the case of the Company, to the Company's Secretary at: Synaptics Incorporated 2381 Bering Drive San Jose, California 95131 or if the Company should move its principal office, to such principal office, and, in the case of the Optionee, to the Optionee's last permanent address as shown on the Company's records, subject to the right of either party to designate some other address at any time hereafter in a notice satisfying the requirements of this Section. 17. Tax Consequences. Set forth below is a brief summary as of the date of this Option of some of the federal tax consequences of exercise of this Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES. (a) Exercise of Option. There may be a regular federal income tax liability upon the exercise of the Option. The Optionee will be treated as having received compensation 8

income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the exercise price. If Optionee is an employee, the Company will be required to withhold from Optionee's compensation or collect from Optionee and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. (b) Disposition of Shares. If Shares are held for at least one year, any gain realized on disposition of the Shares will be treated as long-term capital gain for federal income tax purposes. The foregoing discussion assumes that, and only is applicable if, the fair market value of the Shares as of the date on which the Option is granted is not significantly less than the exercise price. The Company believes that it has made a good faith effort to determine the fair market value of the Shares and does not believe that the exercise price is significantly less than the fair market value of the Shares on the Date of Grant. No assurances can be given, however, that the Internal Revenue Service would not take a contrary position. It is possible that if the fair market value is determined to be significantly greater than the exercise price, the Internal Revenue Service may take the position that the Option is not in effect a stock option but should be treated as a restricted stock for tax purposes. The Optionee should consult with his or her own tax advisors as to whether any action should be taken to minimize these risks. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the _______ day of ________________, 20_____. COMPANY: SYNAPTICS INCORPORATED, A CALIFORNIA CORPORATION By: ------------------------------------ Name: Title: Optionee acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option, and fully understands all provisions of the Option. 9

Dated: OPTIONEE: ----------------------------- By: ----------------------------------- Name: 10

EXHIBIT 10.7 SYNAPTICS INCORPORATED ----------------------------------- AMENDED AND RESTATED 2001 EMPLOYEE STOCK PURCHASE PLAN (AS AMENDED THROUGH JANUARY 8, 2002)

SYNAPTICS INCORPORATED ----------------------------------- AMENDED AND RESTATED 2001 EMPLOYEE STOCK PURCHASE PLAN 1. Purpose ............................................................. 1 2. Definitions ......................................................... 1 3. Eligibility ......................................................... 3 4. Offering Periods .................................................... 3 5. Election to Participate ............................................. 4 6. Participant Contributions ........................................... 5 7. Grant of Option ..................................................... 6 8. Exercise Price ...................................................... 7 9. Exercise of Options ................................................. 7 10. Delivery ............................................................ 7 11. Withdrawal; Termination of Employment ............................... 8 12. Stock ............................................................... 8 13. Administration ...................................................... 9 14. Designation of Beneficiary .......................................... 9 15. Transferability ..................................................... 9 16. Participant Accounts ................................................ 9 17. Adjustments Upon Changes in Capitalization; Corporate Transactions .. 9 18. Amendment of the Plan ............................................... 10 19. Termination of the Plan ............................................. 11 20. Notices ............................................................. 11 21. Effective Date ...................................................... 11 22. Conditions Upon Issuance of Shares .................................. 11 23. Expenses of the Plan ................................................ 11 24. No Employment Rights ................................................ 11 25. Applicable Law ...................................................... 12 26. Additional Restrictions of Rule 16b-3 ............................... 12

SYNAPTICS INCORPORATED ----------------------------- AMENDED AND RESTATED 2001 EMPLOYEE STOCK PURCHASE PLAN 1. Purpose. The purpose of the Plan is to provide incentive for present and future employees of the Company and any Designated Subsidiary to acquire a proprietary interest (or increase an existing proprietary interest) in the Company through the purchase of Common Stock. It is the Company's intention that the Plan qualify as an "employee stock purchase plan" under Section 423 of the Code. Accordingly, the provisions of the Plan shall be administered, interpreted and construed in a manner consistent with the requirements of that section of the Code. 2. Definitions. (a) "Applicable Percentage" means the percentage specified in Section 8, subject to adjustment by the Committee as provided in Section 8. (b) "Board" means the Board of Directors of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended, and any successor thereto. (d) "Committee" means the committee appointed by the Board to administer the Plan as described in Section 13 of the Plan or, if no such Committee is appointed, the Board. (e) "Common Stock" means the Company's common stock, par value $.001 per share. (f) "Company" means Synaptics Incorporated, a California corporation. (g) "Compensation" means, with respect to each Participant for each pay period, the full base salary and overtime paid to such Participant by the Company or a Designated Subsidiary. Except as otherwise determined by the Committee, "Compensation" does not include: (i) bonuses or commissions; (ii) any amounts contributed by the Company or a Designated Subsidiary to any pension plan; (iii) any automobile or relocation allowances (or reimbursement for any such expenses); (iv) any amounts paid as a starting bonus or finder's fee; (v) any amounts realized from the exercise of any stock options or incentive awards; (vi) any amounts paid by the Company or a Designated Subsidiary for other fringe benefits, such as health and welfare, hospitalization and group life insurance benefits, or perquisites, or paid in lieu of such benefits, or; (vii) other similar forms of extraordinary compensation. (h) "Continuous Status as an Employee" means the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of a leave of absence agreed to in writing by the Company or the Designated Subsidiary that employs the Employee, provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute.

(i) "Designated Subsidiaries" means the Subsidiaries that have been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (j) "Employee" means any person, including an Officer, whose customary employment with the Company or one of its Designated Subsidiaries is at least twenty (20) hours per week and more than five (5) months in any calendar year. (k) "Entry Date" means the first day of each Exercise Period. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Exercise Date" means the last Trading Day ending on or before each June 30 and December 31. (n) "Exercise Period" means, for any Offering Period, each period commencing on the Offering Date and on the day after each Exercise Date, and terminating on the immediately following Exercise Date. (o) "Exercise Price" means the price per share of Common Stock offered in a given Offering Period determined as provided in Section 8. (p) "Fair Market Value" means, with respect to a share of Common Stock, the Fair Market Value as determined under Section 7(b). (q) "First Offering Date" means the commencement date of the initial public offering contemplated by the Registration Statement on Form S-1 filed by the Company with the Securities and Exchange Commission. (r) "Offering Date" means the first Trading Day of each Offering Period; provided, that in the case of an individual who becomes eligible to become a Participant under Section 3 after the first Trading Day of an Offering Period, the term "Offering Date" shall mean the first Trading Day of the Exercise Period coinciding with or next succeeding the day on which that individual becomes eligible to become a Participant. Options granted after the first day of an Offering Period will be subject to the same terms as the options granted on the first Trading Day of such Offering Period except that they will have a different grant date (thus, potentially, a different exercise price) and, because they expire at the same time as the options granted on the first Trading Day of such Offering Period, a shorter term. (s) "Offering Period" means, subject to adjustment as provided in Section 4, (i) with respect to the first Offering Period, the period beginning on the First Offering Date and ending on December 31, 2003, and (ii) with respect to each Offering Period thereafter, the period beginning on the January 1 immediately following the end of the previous Offering Period and ending on the December 31 which is 24 months thereafter. (t) "Officer" means a person who is an officer of the Company within the meaning of Section 16 under the Exchange Act and the rules and regulations promulgated thereunder. 2

(u) "Participant" means an Employee automatically enrolled in the Plan pursuant to Section 5(a) hereof, or an Employee who has elected to participate in the Plan by filing an enrollment agreement with the Company as provided in Section 5(b) hereof. (v) "Plan" shall mean this Amended and Restated Synaptics Incorporated 2001 Employee Stock Purchase Plan. (w) "Plan Contributions" means, with respect to each Participant, the lump sum cash transfers, if any, made by the Participant to the Plan pursuant to Section 5(a) hereof, plus the after-tax payroll deductions, if any, withheld from the Compensation of the Participant and contributed to the Plan for the Participant as provided in Section 6 hereof, and any other amounts contributed to the Plan for the Participant in accordance with the terms of the Plan. (x) "Subsidiary" shall mean any corporation, domestic or foreign, of which the Company owns, directly or indirectly, 50% or more of the total combined voting power of all classes of stock, and that otherwise qualifies as a "subsidiary corporation" within the meaning of Section 424(f) of the Code. (y) "Trading Day" shall mean a day on which the national stock exchanges and the Nasdaq system are open for trading. 3. Eligibility. (a) Any Employee who has completed at least three (3) months of employment with the Company or any Subsidiary and who is an Employee as of the Offering Date of a given Offering Period shall be eligible to become a Participant as of any Entry Date within that Offering Period under the Plan, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code; provided, however, that any Employee who is an Employee as of the First Offering Date shall be eligible to become a Participant as of such First Offering Date. (b) Notwithstanding any provision of the Plan to the contrary, no Participant shall be granted an option under the Plan (i) to the extent that if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing 5% or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary of the Company, or (ii) to the extent that his or her rights to purchase stock under all employee stock purchase plans of the Company and its Subsidiaries intended to qualify under Section 423 of the Code to accrue at a rate which exceeds $25,000 of fair market value of stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall generally be implemented by a series of Offering Periods. The first Offering Period shall commence on the First Offering Date and end on December 31, 2003, and succeeding Offering Periods shall commence on the January 1 immediately following the end of the previous Offering Period and end on the December 31 which is 24 months thereafter. If, however, the Fair Market Value of a share of Common Stock on any Exercise Date (except the final scheduled Exercise Date of any Offering Period) is lower than the Fair Market Value of a share 3

of Common Stock on the Offering Date, then the Offering Period in progress shall end immediately following the close of trading on such Exercise Date, and a new Offering Period shall begin on the next subsequent January 1 or July 1, as applicable, and shall extend for a 24 month period ending on December 31 or June 30, as applicable. Subsequent Offering Periods shall commence on the January 1 or July 1, as applicable, immediately following the end of the previous Offering Period and shall extend for a 24 month period ending on December 31 or June 30, as applicable. The Committee shall have the power to make other changes to the duration and/or the frequency of Offering Periods with respect to future offerings if such change is announced at least five (5) days prior to the scheduled beginning of the first Offering Period to be affected. 5. Participation. (a) All Employees who are eligible Employees as of the First Offering Date shall automatically become Participants in the Plan as of the First Offering Date, and shall be eligible to purchase shares of the Common Stock on the Exercise Date of the first Exercise Period of the initial Offering Period in an amount equal to the lesser of (i) the aggregate purchase price for one thousand five hundred (1,500) shares of Common Stock or (ii) fifteen (15%) percent of the Compensation that the Participant receives during the first Exercise Period of the initial Offering Period (subject to the restrictions contained in Section 3(b) hereof), unless the Participant elects a lower level of participation as provided under Section 5(c) hereof. Such purchase shall be made by a direct lump sum cash transfer by the Participant to the Plan, unless the Participant files a payroll deduction election in accordance with Section 5(c), or withdraws from the Plan pursuant to Section 11 hereof. No enrollment agreement or payroll deduction election need be filed by a Participant with the Company in order to participate in the initial Offering Period. (b) Employees meeting the eligibility requirements of Section 3 hereof after the First Offering Date may elect to participate in the Plan commencing on any Entry Date by completing an enrollment agreement on the form provided by the Company and filing the enrollment agreement with the Company on or prior to such Entry Date, unless a later time for filing the enrollment agreement is set by the Committee for all eligible Employees with respect to a given offering. The enrollment agreement shall contain a payroll deduction election setting forth the percentage of the Participant's Compensation that is to be withheld by payroll deduction pursuant to the Plan. (c) No payroll deductions shall be made (and no payroll deduction elections shall be accepted) by the Company for Participants during the first Exercise Period of the initial Offering Period prior to the time that a registration statement with respect to the shares of Common Stock being offered under the Plan has been filed with the Securities Exchange Commission on Form S-8, and is effective. Once the Form S-8 is effective, a Participant may, but need not, make a payroll deduction election with respect to the first Exercise Period of the initial Offering Period by filing an enrollment agreement containing the payroll deduction election with the Company. A Participant may elect a lower level of participation than that provided in Section 5(a) hereof with respect to the first Exercise Period of the initial Offering Period at that time. If a payroll deduction is elected under this Section 5(c), payroll deductions may commence as early as with the first pay period beginning after the First Offering Date. Subject to the participation level specified in Section 5(a), the rate of payroll deduction during the first Exercise Period of the initial Offering Period may exceed the 4

maximum permitted rate under Section 6(a) hereof to make up for the payroll deductions, if any, which would otherwise have been made prior to the effectiveness of the Form S-8 with respect to the Plan. If a payroll deduction election is made under this Section 5(c), payroll deductions shall continue at the rate elected by the Participant under Section 6(a) for subsequent Exercise Periods, unless the Participant makes a change permitted under Section 6(b), or withdraws from the Plan under Section 11. (d) For all Exercise Periods subsequent to the first Exercise Period of the initial Offering Period, purchases generally must be made via payroll deduction. Participants in the first Exercise Period of the initial Offering Period who do not make a payroll deduction election pursuant to Section 5(c) must file an enrollment form containing a payroll deduction election with respect to subsequent Exercise Periods with the Company prior to the commencement of a subsequent Exercise Period (unless a later time for filing is set by the Administrator for all Participants) in order to make further purchases under the Plan. Payroll deductions for Participants required to file a payroll deduction election under this Section 5(d) shall commence on the first payroll of the subsequent Exercise Period and shall end on the last payroll in the Offering Period, unless sooner terminated by the Participant as provided in Section 11. (e) Except as otherwise determined by the Committee under rules applicable to all Participants, payroll deductions for Participants enrolling in the Plan after the First Offering Date under Section 5(b) shall commence on the first payroll following the Entry Date on which the Participant files an enrollment agreement in accordance with Section 5(b) and shall end on the last payroll in the Offering Period, unless sooner terminated by the Participant as provided in Section 11. (f) Unless a Participant elects otherwise prior to the last Exercise Date of an Offering Period, including the last Exercise Date prior to termination in the case of an Offering Period terminated by operation of the rule contained in Section 4 hereof, such Participant shall be deemed (i) to have elected to participate in the immediately succeeding Offering Period (and, for purposes of such Offering Period such Participant's "Entry Date" shall be deemed to be the first day of such Offering Period) and (ii) to have authorized the same payroll deduction for such immediately succeeding Offering Period as was in effect for such Participant immediately prior to the commencement of such succeeding Offering Period. 6. Plan Contributions. (a) Except with respect to the first Exercise Period of the initial Offering Period, and except as otherwise authorized by the Committee pursuant to Section 6(d) below, all contributions to the Plan shall be made only by payroll deductions. At the time a Participant files the enrollment agreement with respect to an Offering Period, the Participant may authorize payroll deductions to be made on each payroll date during the portion of the Offering Period that he or she is a Participant in an amount not less than 1% and not more than 15% of the Participant's Compensation on each payroll date during the portion of the Offering Period that he or she is a Participant (or subsequent Offering Periods as provided in Section 5(f)). The amount of payroll deductions shall be a whole percentage (i.e., 1%, 2%, 3%, etc.) of the Participant's Compensation. 5

(b) A Participant may discontinue his or her participation in the Plan as provided in Section 11, or may decrease or increase the rate or amount of his or her payroll deductions during such Offering Period (within the limitations of Section 5(c) and 6(a) above) by completing and filing with the Company a new enrollment agreement authorizing a change in the rate or amount of payroll deductions; provided, that a Participant may not change the rate or amount of his or her payroll deductions more than once in any Exercise Period. The change in rate or amount shall be effective with the first full payroll period following ten (10) business days after the Company's receipt of the new enrollment agreement. (c) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a Participant's payroll deductions may be decreased to 0% at such time during any Exercise Period which is scheduled to end during the current calendar year that the aggregate of all payroll deductions accumulated with respect to such Exercise Period and any other Exercise Period ending within the same calendar year are equal to the product of $25,000 multiplied by the Applicable Percentage for the calendar year. Payroll deductions shall recommence at the rate provided in the Participant's enrollment agreement at the beginning of the following Exercise Period which is scheduled to end in the following calendar year, unless terminated by the Participant as provided in Section 11. (d) Notwithstanding anything to the contrary in the foregoing, but subject to the limitations set forth in Section 3(b), the Committee may permit Participants to make after-tax contributions to the Plan at such times and subject to such terms and conditions as the Committee may in its discretion determine. All such additional contributions shall be made in a manner consistent with the provisions of Section 423 of the Code or any successor thereto, and shall be held in Participants' accounts and applied to the purchase of shares of Common Stock pursuant to options granted under this Plan in the same manner as payroll deductions contributed to the Plan as provided above. (e) All Plan Contributions made for a Participant shall be deposited in the Company's general corporate account and shall be credited to the Participant's account under the Plan. No interest shall accrue or be credited with respect to a Participant's Plan Contributions. All Plan Contributions received or held by the Company may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate or otherwise set apart such Plan Contributions from any other corporate funds. 7. Grant of Option. (a) On a Participant's Entry Date, subject to the limitations set forth in Sections 3(b) and 12(a), the Participant shall be granted an option to purchase on each subsequent Exercise Date during the Offering Period in which such Entry Date occurs (at the Exercise Price determined as provided in Section 8 below) up to a number of shares of Common Stock determined by dividing such Participant's Plan Contributions accumulated prior to such Exercise Date and retained in the Participant's account as of such Exercise Date by the Exercise Price; provided, that the maximum number of shares a Participant may purchase during any Exercise Period shall be One Thousand Five Hundred (1,500) shares. The Fair Market Value of a share of Common Stock shall be determined as provided in Section 7(b). 6

(b) The Fair Market Value of a share of Common Stock on a given date shall be determined by the Committee in its discretion; provided, that if there is a public market for the Common Stock, the Fair Market Value per share shall be either (i) the closing price of the Common Stock on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market System, (ii) if such price is not reported, the average of the bid and asked prices for the Common Stock on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by Nasdaq, (iii) in the event the Common Stock is listed on a stock exchange, the closing price of the Common Stock on such exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal, or (iv) if no such quotations are available for a date within a reasonable time prior to the valuation date, the value of the Common Stock as determined by the Committee using any reasonable means. For purposes of the First Offering Date, the Fair Market Value of a share of Common Stock shall be the Price to Public as set forth in the final prospectus filed by the Company with the Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended. 8. Exercise Price. The Exercise Price per share of Common Stock offered to each Participant in a given Offering Period shall be the lower of: (i) the Applicable Percentage of the greater of (A) the Fair Market Value of a share of Common Stock on the Offering Date or (B) the Fair Market Value of a share of Common Stock on the Entry Date on which the Employee elects to become a Participant within the Offering Period or (ii) the Applicable Percentage of the Fair Market Value of a share of Common Stock on the Exercise Date. The Applicable Percentage with respect to each Offering Period shall be 85%, unless and until such Applicable Percentage is increased by the Committee, in its sole discretion, provided that any such increase in the Applicable Percentage with respect to a given Offering Period must be established not less than fifteen (15) days prior to the Offering Date thereof. 9. Exercise of Options. Unless the Participant withdraws from the Plan as provided in Section 11, the Participant's option for the purchase of shares will be exercised automatically on each Exercise Date, and the maximum number of full shares subject to such option shall be purchased for the Participant at the applicable Exercise Price with the accumulated Plan Contributions then credited the Participant's account under the Plan. During a Participant's lifetime, a Participant's option to purchase shares hereunder is exercisable only by the Participant. 10. Delivery. As promptly as practicable after each Exercise Date, the Company shall arrange for the delivery to each Participant (or the Participant's beneficiary), as appropriate, or to a custodial account for the benefit of each Participant (or the Participant's beneficiary) as appropriate, of a certificate representing the shares purchased upon exercise of such Participant's option. Any amount remaining to the credit of a Participant's account after the purchase of shares by such Participant on an Exercise Date, or which is insufficient to purchase a full share of Common Stock, shall be carried over to the next Exercise Period if the Participant continues to participate in the Plan or, if the Participant does not continue to participate, shall be returned to the Participant. 7

11. Withdrawal; Termination of Employment. (a) A Participant may withdraw from the Plan at any time after the Company's registration statement on Form S-8 with respect to the Plan is effective by giving written notice to the Company. All of the Plan Contributions credited to the Participant's account, if any, and not yet invested in Common Stock will be paid to the Participant as soon as administratively practicable after receipt of the Participant's notice of withdrawal, the Participant's option to purchase shares pursuant to the Plan automatically will be terminated, and no further payroll deductions, if any have been authorized, for the purchase of shares will be made for the Participant's account. Payroll deductions will not resume on behalf of a Participant who has withdrawn from the Plan (a "Former Participant") unless the Former Participant enrolls in a subsequent Offering Period in accordance with Section 5(b). (b) Upon termination of the Participant's Continuous Status as an Employee prior to any Exercise Date for any reason, including retirement or death, the Plan Contributions credited to the Participant's account and not yet invested in Common Stock will be returned to the Participant or, in the case of death, to the Participant's beneficiary as determined pursuant to Section 14, and the Participant's option to purchase shares under the Plan will automatically terminate. (c) A Participant's withdrawal from an Offering Period will not have any effect upon the Participant's eligibility to participate in succeeding Offering Periods or in any similar plan which may hereafter be adopted by the Company. 12. Stock. (a) Subject to adjustment as provided in Section 17, the maximum number of shares of the Company's Common Stock that shall be made available for sale under the Plan shall be One Million (1,0000,000) shares, plus an automatic annual increase on the first day of each of the Company's fiscal years beginning in 2002 and ending in 2011 equal to the lesser of (i) Five Hundred Thousand (500,000) shares, (ii) 1% of all shares of Common Stock outstanding on the last day of the immediately preceding fiscal year, or (iii) a lesser amount determined by the Board. Shares of Common Stock subject to the Plan may be newly issued shares or shares reacquired in private transactions or open market purchases. If and to the extent that any right to purchase reserved shares shall not be exercised by any Participant for any reason or if such right to purchase shall terminate as provided herein, shares that have not been so purchased hereunder shall again become available for the purpose of the Plan unless the Plan shall have been terminated, but all shares sold under the Plan, regardless of source, shall be counted against the limitation set forth above. (b) A Participant will have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a Participant under the Plan will be registered in the name of the Participant or in the name of the Participant and his or her spouse, as requested by the Participant. 8

13. Administration. (a) The Plan shall be administered by the Committee. The Committee shall have the authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The administration, interpretation, or application of the Plan by the Committee shall be final, conclusive and binding upon all persons. (b) Notwithstanding the provisions of Subsection (a) of this Section 13, in the event that Rule 16b-3 promulgated under the Exchange Act or any successor provision thereto ("Rule 16b-3") provides specific requirements for the administrators of plans of this type, the Plan shall only be administered by such body and in such a manner as shall comply with the applicable requirements of Rule 16b-3. Unless permitted by Rule 16b-3, no discretion concerning decisions regarding the Plan shall be afforded to any person that is not "disinterested" as that term is used in Rule 16b-3. 14. Designation of Beneficiary. (a) A Participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the Participant's account under the Plan in the event of the Participant's death subsequent to an Exercise Date on which the Participant's option hereunder is exercised but prior to delivery to the Participant of such shares and cash. In addition, a Participant may file a written designation of a beneficiary who is to receive any cash from the Participant's account under the Plan in the event of the Participant's death prior to the exercise of the option. (b) A Participant's beneficiary designation may be changed by the Participant at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither Plan Contributions credited to a Participant's account nor any rights to exercise any option or receive shares of Common Stock under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will or the laws of descent and distribution, or as provided in Section 14). Any attempted assignment, transfer, pledge or other distribution shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 11. 16. Participant Accounts. Individual accounts will be maintained for each Participant in the Plan to account for the balance of his Plan Contributions and options issued and shares purchased under the Plan. Statements of account will be given to Participants semi-annually in due course following each Exercise Date, which statements will set forth the amounts of payroll deductions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 17. Adjustments Upon Changes in Capitalization; Corporate Transactions. 9

(a) If the outstanding shares of Common Stock are increased or decreased, or are changed into or are exchanged for a different number or kind of shares, as a result of one or more reorganizations, restructurings, recapitalizations, reclassifications, stock splits, reverse stock splits, stock dividends or the like, upon authorization of the Committee, appropriate adjustments shall be made in the number and/or kind of shares, and the per-share option price thereof, which may be issued in the aggregate and to any Participant upon exercise of options granted under the Plan. (b) In the event of the proposed dissolution or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. In the event of a proposed sale of all or substantially all of the Company's assets, or the merger of the Company with or into another corporation (each, a "Sale Transaction"), each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Committee determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, to shorten the Exercise Period then in progress by setting a new Exercise Date (the "New Exercise Date"). If the Committee shortens the Exercise Period then in progress in lieu of assumption or substitution in the event of a Sale Transaction, the Committee shall notify each Participant in writing, at least ten (10) days prior to the New Exercise Date, that the exercise date for such Participant's option has been changed to the New Exercise Date and that such Participant's option will be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Plan as provided in Section 11. For purposes of this Section 17(b), an option granted under the Plan shall be deemed to have been assumed if, following the Sale Transaction, the option confers the right to purchase, for each share of option stock subject to the option immediately prior to the Sale Transaction, the consideration (whether stock, cash or other securities or property) received in the Sale Transaction by holders of Common Stock for each share of Common Stock held on the effective date of the Sale Transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, that if the consideration received in the Sale Transaction was not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Committee may, with the consent of the successor corporation and the Participant, provide for the consideration to be received upon exercise of the option to be solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by the holders of Common Stock in the Sale Transaction. (c) In all cases, the Committee shall have sole discretion to exercise any of the powers and authority provided under this Section 17, and the Committee's actions hereunder shall be final and binding on all Participants. No fractional shares of stock shall be issued under the Plan pursuant to any adjustment authorized under the provisions of this Section 17. 18. Amendment of the Plan. The Board or the Committee may at any time, or from time to time, amend the Plan in any respect; provided, that (i) no such amendment may make any change in any option theretofore granted which adversely affects the rights of any Participant and (ii) the Plan may not be amended in any way that will cause rights issued under the Plan to fail to meet the requirements for employee stock purchase plans as defined in Section 423 of the Code or any successor thereto. To the extent necessary to comply with Rule 16b-3 under the Exchange Act, 10

Section 423 of the Code, or any other applicable law or regulation), the Company shall obtain shareholder approval of any such amendment. 19. Termination of the Plan. The Plan and all rights of Employees hereunder shall terminate on the earliest of: (a) the Exercise Date that Participants become entitled to purchase a number of shares greater than the number of reserved shares remaining available for purchase under the Plan; (b) such date as is determined by the Board in its discretion; or (c) the last Exercise Date immediately preceding the tenth (10th) anniversary of the Plan's effective date. In the event that the Plan terminates under circumstances described in Section 19(a) above, reserved shares remaining as of the termination date shall be sold to Participants on a pro rata basis. 20. Notices. All notices or other communications by a Participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Effective Date. Subject to adoption of the Plan by the Board, the Plan shall become effective on the First Offering Date. The Board shall submit the Plan to the shareholders of the Company for approval within twelve months after the date the Plan is adopted by the Board. 22. Conditions Upon Issuance of Shares. (a) The Plan, the grant and exercise of options to purchase shares under the Plan, and the Company's obligation to sell and deliver shares upon the exercise of options to purchase shares shall be subject to compliance with all applicable federal, state and foreign laws, rules and regulations and the requirements of any stock exchange on which the shares may then be listed. (b) The Company may make such provisions as it deems appropriate for withholding by the Company pursuant to federal or state tax laws of such amounts as the Company determines it is required to withhold in connection with the purchase or sale by a Participant of any Common Stock acquired pursuant to the Plan. The Company may require a Participant to satisfy any relevant tax requirements before authorizing any issuance of Common Stock to such Participant. 23. Expenses of the Plan. All costs and expenses incurred in administering the Plan shall be paid by the Company, except that any stamp duties or transfer taxes applicable to participation in the Plan may be charged to the account of such Participant by the Company. 24. No Employment Rights. The Plan does not, directly or indirectly, create any right for the benefit of any employee or class of employees to purchase any shares under the Plan, or create in any employee or class of employees any right with respect to continuation of employment by the 11

Company, and it shall not be deemed to interfere in any way with the Company's right to terminate, or otherwise modify, an employee's employment at any time. 25. Applicable Law. The laws of the State of California shall govern all matter relating to this Plan except to the extent (if any) superseded by the laws of the United States. 26. Additional Restrictions of Rule 16b-3. The terms and conditions of options granted hereunder to, and the purchase of shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 12

EXHIBIT 10.16 ================================================================================ LOAN AND SECURITY AGREEMENT SYNAPTICS INCORPORATED ================================================================================

TABLE OF CONTENTS Page ---- 1 ACCOUNTING AND OTHER TERMS...............................................4 2 LOAN AND TERMS OF PAYMENT................................................4 2.1 Promise to Pay.....................................................4 2.2 Overadvances.......................................................5 2.3 Interest Rate, Payments............................................5 2.4 Fees...............................................................5 3 CONDITIONS OF LOANS......................................................5 3.1 Conditions Precedent to Initial Credit Extension...................5 3.2 Conditions Precedent to all Credit Extensions......................6 4 CREATION OF SECURITY INTEREST............................................6 4.1 Grant of Security Interest.........................................6 4.2 Authorization of File..............................................6 5 REPRESENTATIONS AND WARRANTIES...........................................6 5.1 Due Organization and Authorization.................................7 5.2 Collateral.........................................................7 5.3 Litigation.........................................................7 5.4 No Material Adverse Change in Financial Statements.................7 5.5 Solvency...........................................................7 5.6 Regulatory Compliance..............................................8 5.7 Subsidiaries.......................................................8 5.8 Full Disclosure....................................................8 6 AFFIRMATIVE COVENANTS....................................................8 6.1 Government Compliance..............................................8 6.2 Financial Statements, Reports, Certificates........................8 6.3 Inventory; Returns.................................................9 6.4 Taxes..............................................................9 6.5 Insurance..........................................................9 6.6 Primary Accounts...................................................9 6.7 Financial Covenants...............................................10 6.8 Registration of Intellectual Property Rights......................10 6.9 Further Assurances................................................10 7 NEGATIVE COVENANTS......................................................10 7.1 Dispositions......................................................10 7.2 Changes in Business, Ownership, Management or Locations of Collateral........................................................10 7.3 Mergers or Acquisitions...........................................11 7.4 Indebtedness......................................................11 7.5 Encumbrance.......................................................11 7.6 Distributions; Investments........................................11 7.7 Transactions with Affiliates......................................11 7.8 Subordinated Debt.................................................11 7.9 Compliance........................................................11 8 EVENTS OF DEFAULT.......................................................12 2

8.1 Payment Default...................................................12 8.2 Covenant Default..................................................12 8.3 Material Adverse Change...........................................12 8.4 Attachment........................................................12 8.5 Insolvency........................................................12 8.6 Other Agreements..................................................12 8.7 Judgments.........................................................13 8.8 Misrepresentations................................................13 9 BANK'S RIGHTS AND REMEDIES..............................................13 9.1 Rights and Remedies...............................................13 9.2 Power of Attorney.................................................13 9.3 Accounts Collection...............................................14 9.4 Bank Expenses.....................................................14 9.5 Bank's Liability for Collateral...................................14 9.6 Remedies Cumulative...............................................14 9.7 Demand Waiver.....................................................14 10 NOTICES.................................................................14 11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER.............................15 12 GENERAL PROVISIONS......................................................15 12.1 Successors and Assigns............................................15 12.2 Indemnification...................................................15 12.3 Time of Essence...................................................15 12.4 Severability of Provision.........................................15 12.5 Amendments in Writing, Integration................................15 12.6 Counterparts......................................................16 12.7 Survival..........................................................16 12.8 Confidentiality...................................................16 12.9 Attorneys' Fees, Costs and Expenses...............................16 13 DEFINITIONS.............................................................16 13.1 Definitions.......................................................16 3

THIS LOAN AND SECURITY AGREEMENT dated August 30, 2001, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara, California 95054 and SYNAPTICS INCORPORATED ("Borrower"), whose address is 2381 Bering Drive, San Jose, California 95131 provides the terms on which Bank will lend to Borrower and Borrower will repay Bank. The parties agree as follows: 1 ACCOUNTING AND OTHER TERMS Accounting terms not defined in this Agreement will be construed following GAAP. Calculations and determinations must be made following GAAP. The term "financial statements" includes the notes and schedules. The terms "including" and "includes" always mean "including (or includes) without limitation," in this or any Loan Document. 2 LOAN AND TERMS OF PAYMENT 2.1 PROMISE TO PAY. Borrower promises to pay Bank the unpaid principal amount of all Credit Extensions and interest on the unpaid principal amount of the Credit Extensions. 2.1.1 REVOLVING ADVANCES. (a) Bank will make Advances not exceeding (i) the lesser of (A) the Committed Revolving Line or (B) the Borrowing Base, minus (ii) the amount of all outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit), minus (iii) the FX Reserve, and minus (iv) all amounts for services utilized under the Cash Management Services Sublimit. Amounts borrowed under this Section may be repaid and reborrowed during the term of this Agreement. (b) To obtain an Advance, Borrower must notify Bank by facsimile or telephone by 12:00 p.m. Pacific time on the Business Day the Advance is to be made. Borrower must promptly confirm the notification by delivering to Bank the Payment/Advance Form attached as Exhibit B. Bank will credit Advances to Borrower's deposit account. Bank may make Advances under this Agreement based on instructions from a Responsible Officer or his or her designee or without instructions if the Advances are necessary to meet Obligations which have become due. Bank may rely on any telephone notice given by a person whom Bank reasonably believes is a Responsible Officer or designee. Borrower will indemnify Bank for any loss Bank suffers due to such reliance. (c) The Committed Revolving Line terminates on the Revolving Maturity Date, when all Advances are immediately payable. 2.1.2 LETTERS OF CREDIT SUBLIMIT. Bank will issue or have issued Letters of Credit for Borrower's account not exceeding (i) the lesser of the Committed Revolving Line or the Borrowing Base minus (ii) the outstanding principal balance of the Advances minus all amounts for services utilized under the Cash Management Services Sublimit, minus the FX Reserve; however, the face amount of outstanding Letters of Credit (including drawn but unreimbursed Letters of Credit) may not exceed $4,200,000. Each Letter of Credit will have an expiry date of no later than 180 days after the Revolving Maturity Date, but Borrower's reimbursement obligation will be secured by cash on terms acceptable to Bank at any time after the Revolving Maturity Date if the term of this Agreement is not extended by Bank. Borrower agrees to execute any further documentation in connection with the Letters of Credit as Bank may reasonably request. 4

2.1.3 FOREIGN EXCHANGE SUBLIMIT. If there is availability under the Committed Revolving Line and the Borrowing Base, then Borrower may enter in foreign exchange forward contracts with the Bank under which Borrower commits to purchase from or sell to Bank a set amount of foreign currency more than one business day after the contract date (the "FX Forward Contract"). Bank will subtract 10% of each outstanding FX Forward Contract from the foreign exchange sublimit which is a maximum of $4,200,000 (the "FX Reserve"). The total FX Forward Contracts at any one time may not exceed 10 times the amount of the FX Reserve. Bank may terminate the FX Forward Contracts if an Event of Default occurs and is continuing. 2.1.4 CASH MANAGEMENT SERVICES SUBLIMIT. Borrower may use up to $4,200,000 for Bank's business credit card services identified in various cash management services agreements related to such services (the "Cash Management Services"). All amounts Bank pays for any Cash Management Services will be treated as Advances under the Committed Revolving Line. 2.2 OVERADVANCES. If Borrower's Obligations under Section 2.1.1, 2.1.2, 2.1.3 and 2.1.4 exceed the lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base, Borrower must immediately pay Bank the excess. 2.3 INTEREST RATE, PAYMENTS. (a) Interest Rate. Advances accrue interest on the outstanding principal balance at a per annum rate of 0.5 percentage points above the Prime Rate. After an Event of Default and during the continuance of an Event of Default, Obligations accrue interest at 5 percent above the rate effective immediately before the Event of Default. The interest rate increases or decreases when the Prime Rate changes. Interest is computed on a 360 day year for the actual number of days elapsed. (b) Payments. Interest due on the Committed Revolving Line is payable on the 14th of each month. Bank may debit any of Borrower's deposit accounts including Account Number 1601512-70 for principal and interest payments owing or any amounts Borrower owes Bank. Bank will promptly notify Borrower when it debits Borrower's accounts. These debits are not a set-off. Payments received after 12:00 noon Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest accrue. 2.4 FEES. Borrower will pay: (a) Facility Fee. A fully earned, non-refundable Facility Fee of $20,000 due on the Closing Date; and (b) Bank Expenses. All Bank Expenses (including reasonable attorneys' fees and reasonable expenses) incurred through and after the date of this Agreement, are payable when due. 3 CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. Bank's obligation to make the initial Credit Extension is subject to the condition precedent that: 5

(a) It receive the agreements, documents and fees it requires; and (b) Bank completes a Collateral audit with results satisfactory to Bank. 3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. Bank's obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following: (a) timely receipt of any Payment/Advance Form; and (b) the representations and warranties in Section 5 must be materially true on the date of the Payment/Advance Form and on the effective date of each Credit Extension and no Event of Default may have occurred and be continuing, or result from the Credit Extension. Each Credit Extension is Borrower's representation and warranty on that date that the representations and warranties of Section 5 remain materially true. 4 CREATION OF SECURITY INTEREST 4.1 GRANT OF SECURITY INTEREST. Borrower grants Bank a continuing security interest in all presently existing and later acquired Collateral to secure all Obligations and performance of each of Borrower's duties under the Loan Documents. Except for Permitted Liens, any security interest will be a first priority security interest in the Collateral. After an Event of Default and continuance of an Event of Default, Bank may place a "hold" on any deposit account pledged as Collateral. Notwithstanding the foregoing, the security interest granted herein does not extend to and the term "Collateral" does not include any license or contract rights to the extent (i) the granting of a security interest in it would be contrary to applicable law, or (ii) that such rights are nonassignable by their terms (but only to the extent such prohibition is enforceable under applicable law, including, without limitation, Section 9318(4) of the Code) without the consent of the licensor or other party (but only to the extent such consent has not been obtained). Except as disclosed on the Schedule, Borrower is not a party to, nor is bound by, any license or other agreement that prohibits or otherwise restricts Borrower from granting a security interest in Borrower's interest in such license or agreement or any other property. Without prior notice to Bank, Borrower shall not enter into, or become bound by, any such license or agreement which is reasonably likely to have a material impact on Borrower's business or financial condition. Borrower shall take such steps as Bank reasonably requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for such licenses or contract rights to be deemed "Collateral" and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such license or agreement, whether now existing or entered into in the future. If this Agreement is terminated, Bank's lien and security interest in the Collateral will continue until Borrower fully satisfies its Obligations. 4.2 AUTHORIZATION OF FILE. Borrower authorizes Bank to file financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in order to perfect or protect Bank's interest in the Collateral. 5 REPRESENTATIONS AND WARRANTIES Borrower represents and warrants as follows: 6

5.1 DUE ORGANIZATION AND AUTHORIZATION. Borrower and each Subsidiary is duly existing and in good standing in its state of formation and qualified and licensed to do business in, and in good standing in, any state in which the conduct of its business or its ownership of property requires that it be qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. Borrower has not changed its state of formation or its organizational structure or type or any organizational number (if any) assigned by its jurisdiction of formation. The execution, delivery and performance of the Loan Documents have been duly authorized, and do not conflict with Borrower's formation documents, nor constitute an event of default under any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which or by which it is bound in which the default could reasonably be expected to cause a Material Adverse Change. 5.2 COLLATERAL. Borrower has good title to the Collateral, free of Liens except Permitted Liens. Borrower has no other deposit account, other than the deposit accounts described in the Schedule. The Accounts are bona fide, existing obligations, and the service or property has been performed or delivered to the account debtor or its agent for immediate shipment to and unconditional acceptance by the account debtor. The Collateral is not in the possession of any third party bailee (such as at a warehouse). In the event that Borrower, after the date hereof, intends to store or otherwise deliver the Collateral to such a bailee, then Borrower will provide notice to the Bank. Borrower has no notice of any actual or imminent Insolvency Proceeding of any account debtor whose accounts are an Eligible Account in any Borrowing Base Certificate. All Inventory is in all material respects of good and marketable quality, free from material defects. Borrower is the sole owner of the Intellectual Property, except for licenses granted to its customers in the ordinary course of business. Each Patent is valid and enforceable and no part of the Intellectual Property has been judged invalid or unenforceable, in whole or in part, and to the Borrower's knowledge no claim has been made that any part of the Intellectual Property violates the rights of any third party, except to the extent such claim could not reasonably be expected to cause a Material Adverse Change. 5.3 LITIGATION. Except as shown in the Schedule, there are no actions or proceedings pending or, to the knowledge of Borrower's Responsible Officers and legal counsel, threatened by or against Borrower or any Subsidiary in which a likely adverse decision could reasonably be expected to cause a Material Adverse Change. 5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All consolidated financial statements for Borrower, and any Subsidiary, delivered to Bank fairly present in all material respects Borrower's consolidated financial condition and Borrower's consolidated results of operations. There has not been any material deterioration in Borrower's consolidated financial condition since the date of the most recent financial statements submitted to Bank. 5.5 SOLVENCY. The fair salable value of Borrower's assets (including goodwill minus disposition costs) exceeds the fair value of its liabilities; the Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature. 7

5.6 REGULATORY COMPLIANCE. Borrower is not an "investment company" or a company "controlled" by an "investment company" under the Investment Company Act. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations T and U of the Federal Reserve Board of Governors). Borrower has complied in all material respects with the Federal Fair Labor Standards Act. Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably be expected to cause a Material Adverse Change. None of Borrower's or any Subsidiary's properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each Subsidiary has timely filed all required tax returns and paid, or made adequate provision to pay, all material taxes, except those being contested in good faith with adequate reserves under GAAP. Borrower and each Subsidiary has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all government authorities that are necessary to continue its business as currently conducted, except where the failure to do so could not reasonably be expected to cause a Material Adverse Change. 5.7 SUBSIDIARIES. Borrower does not own any stock, partnership interest or other equity securities except for Permitted Investments. 5.8 FULL DISCLOSURE. No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank (taken together with all such written certificates and written statements to Bank) contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading. It being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected and forecasted results. 6 AFFIRMATIVE COVENANTS Borrower will do all of the following for so long as Bank has an obligations to lend, or there are outstanding Obligations: 6.1 GOVERNMENT COMPLIANCE. Borrower will maintain its and all Subsidiaries' legal existence and good standing in its jurisdiction of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to cause a material adverse effect on Borrower's business or operations. Borrower will comply, and have each Subsidiary comply, with all laws, ordinances and regulations to which it is subject, noncompliance with which could have a material adverse effect on Borrower's business or operations or would reasonably be expected to cause a Material Adverse Change. 6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. (a) Borrower will deliver to Bank: (i) as soon as available, but no later than 30 days after the last day of each month, a company prepared consolidated balance sheet and income statement covering Borrower's consolidated operations during the period certified by a Responsible Officer and in a form acceptable to Bank; (ii) as soon as available, but no later than 120 days after the last day of Borrower's fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an opinion which is unqualified or otherwise consented to by Bank on the financial 8

statements from an independent certified public accounting firm reasonably acceptable to Bank; (iii) a prompt report of any legal actions pending or threatened against Borrower or any Subsidiary that could result in damages or costs to Borrower or any Subsidiary of $250,000 or more; (iv) budgets, sales projections, operating plans or other financial information Bank reasonably requests; and (v) prompt notice of any material change in the composition of the Intellectual Property, including any subsequent ownership right of Borrower in or to any Copyright, Patent or Trademark not shown in any intellectual property security agreement between Borrower and Bank or knowledge of an event that materially adversely affects the value of the Intellectual Property. (b) Within 30 days after the last day of each month, Borrower will deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in the form of Exhibit C, with aged listings of accounts receivable by due date, including payment terms, and accounts payable by due date, including payment terms. (c) Within 30 days after the last day of each month, Borrower will deliver to Bank with the monthly financial statements a Compliance Certificate signed by a Responsible Officer in the form of Exhibit D. (d) Allow Bank to audit Borrower's Collateral at Borrower's expense, provided each audit shall not exceed $1,500. Such audits will be conducted no more often than every year unless an Event of Default has occurred and is continuing. 6.3 INVENTORY; RETURNS. Borrower will keep all Inventory in good and marketable condition, free from material defects. Returns and allowances between Borrower and its account debtors will follow Borrower's customary practices. Borrower must promptly notify Bank of all returns, recoveries, disputes and claims, that involve more than $250,000. 6.4 TAXES. Borrower will make, and cause each Subsidiary to make, timely payment of all material federal, state, and local taxes or assessments and will deliver to Bank, on demand, appropriate certificates attesting to the payment except those being contested in good faith with adequate reserves under GAAP. 6.5 INSURANCE. Borrower will keep its business and the Collateral insured for risks and in amounts, as Bank may reasonably request. Insurance policies will be in a form, with companies, and in amounts that are satisfactory to Bank in Bank's reasonable discretion. All property policies will have a lender's loss payable endorsement showing Bank as an additional loss payee and all liability policies will show the Bank as an additional insured and provide that the insurer must give Bank at least 20 days notice before canceling its policy. At Bank's request, Borrower will deliver certified copies of policies and evidence of all premium payments. If no Event of Default has occurred and is continuing, proceeds payable under any casualty policy will, at Borrower's option, be payable to Borrower to replace the property subject to the claim, provided that any such replacement property shall be deemed Collateral in which Bank has been granted a first priority security interest. If an Event of Default has occurred and is continuing, then, at Bank's option, proceeds payable under any policy will be payable to Bank on account of the Obligations. 6.6 PRIMARY ACCOUNTS. Borrower will maintain its primary banking relationship with Bank, which relationship shall include Borrower maintaining account balances in any accounts at or through Bank representing at least 50% of all account balances of Borrower at any financial institution. 9

6.7 FINANCIAL COVENANTS. Borrower will maintain as of the last day of each month: (i) QUICK RATIO. A ratio of Quick Assets to Current Liabilities of at least 1.25 to 1.00. (ii) PROFITABILITY. Borrower will have a minimum net profit on a three month rolling average of $1 for each month. 6.8 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS. Borrower will register with the United States Patent and Trademark Office or the United States Copyright Office its Intellectual Property which the Board of Directors of Borrower deems, in good faith, appropriate for the development of Borrower's business and additional Intellectual Property rights developed or acquired including revisions or additions with any product before the sale or licensing of the product to any third party. Borrower will (i) protect, defend and maintain the validity and enforceability of the Intellectual Property and promptly advise Bank in writing of material infringements and (ii) allow any Intellectual Property to be abandoned, forfeited or dedicated to the public with notification to Bank. 6.9 FURTHER ASSURANCES. Borrower will execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank's security interest in the Collateral or to effect the purposes of this Agreement. 7 NEGATIVE COVENANTS Borrower will not do any of the following without Bank's prior written consent, which will not be unreasonably withheld, for so long as Bank has an obligation to lend and there are any outstanding Obligations: 7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of (collectively "Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (i) of Inventory in the ordinary course of business; (ii) of licenses and similar arrangements for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; or (iii) of worn-out or obsolete Equipment; and (iv) other Transfers which in the aggregate do not exceed $250,000 in any fiscal year. 7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR LOCATIONS OF COLLATERAL. Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower or reasonably related thereto or have a material change in its ownership or management of greater than 25% of Borrower's Board of Directors (other than by the sale of Borrower's equity securities in a public offering or to venture capital investors so long as Borrower identifies the venture capital investors prior to the closing of the investment). Borrower will not, without at least 30 days prior written notice, relocate its chief executive office, change its state of formation (including reincorporation), change its organizational number or name or add any new offices or business locations (such as warehouses) in which Borrower maintains or stores over $5,000 in Collateral. 10

7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock or property of another Person, except where (i) no Event of Default has occurred and is continuing or would result from such action during the term of this Agreement; (ii) such transactions do not in the aggregate exceed $ 10,000,000; or (iii) such transaction would not result in a decrease of more than 25% of Tangible Net Worth. A Subsidiary may merge or consolidate into another Subsidiary or into Borrower. 7.4 INDEBTEDNESS. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness. 7.5 ENCUMBRANCE. Create, incur, or allow any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted here, subject to Permitted Liens. 7.6 DISTRIBUTIONS; INVESTMENTS. Directly or indirectly acquire or own any Person, or make any Investment in any Person, other than Permitted Investments, or permit any of its Subsidiaries to do so. Pay any dividends or make any distribution or payment or redeem, retire or purchase any capital stock except for repurchases of stock from former employees or directors of Borrower under the terms of applicable repurchase agreements in an aggregate amount not to exceed $250,000 in the aggregate in any fiscal year, provided that no Event of Default has occurred, is continuing or would exist after giving effect to the repurchases. 7.7 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm's length transaction with a nonaffiliated Person. 7.8 SUBORDINATED DEBT. Make or permit any payment on any Subordinated Debt, except under the terms of the Subordinated Debt, or amend any provision in any document relating to the Subordinated Debt without Bank's prior written consent. 7.9 COMPLIANCE. Become an "investment company" or a company controlled by an "investment company," under the Investment Company Act of 1940 or undertake as one of its important activities extending credit to purchase or carry margin stock, or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower's business or operations or would reasonably be expected to cause a Material Adverse Change, or permit any of its Subsidiaries to do so. 11

8 EVENTS OF DEFAULT Any one of the following is an Event of Default: 8.1 PAYMENT DEFAULT. If Borrower fails to pay any of the Obligations within 5 days after their due date. During the additional period the failure to cure the default is not an Event of Default (but no Credit Extension will be made during the cure period); 8.2 COVENANT DEFAULT. If Borrower does not perform any obligation in Section 6 or violates any covenant in Section 7 or does not perform or observe any other material term, condition or covenant in this Agreement, any Loan Documents, or in any agreement between Borrower and Bank and as to any default under a term, condition or covenant that can be cured, has not cured the default within 20 days after it occurs, or if the default cannot be cured within 20 days or cannot be cured after Borrower's attempts within 20 day period, and the default may be cured within a reasonable time, then Borrower has an additional period (of not more than 45 days) to attempt to cure the default. During the additional time, the failure to cure the default is not an Event of Default (but no Credit Extensions will be made during the cure period); 8.3 MATERIAL ADVERSE CHANGE. If there (i) occurs a material adverse change in the business, operations, or condition (financial or otherwise) of the Borrower, or (ii) is a material impairment of the prospect of repayment of any portion of the Obligations; or (iii) is a material impairment of the value or priority of Bank's security interests in the Collateral. 8.4 ATTACHMENT. If any material portion of Borrower's assets is attached, seized, levied on, or comes into possession of a trustee or receiver and the attachment, seizure or levy is not removed in 10 days, or if Borrower is enjoined, restrained, or prevented by court order from conducting a material part of its business or if a judgment or other claim becomes a Lien on a material portion of Borrower's assets, or if a notice of lien, levy, or assessment is filed against any of Borrower's assets by any government agency and not paid within 10 days after Borrower receives notice. These are not Events of Default if stayed or if a bond is posted pending contest by Borrower (but no Credit Extensions will be made during the cure period); 8.5 INSOLVENCY. If Borrower becomes insolvent or if Borrower begins an Insolvency Proceeding or an Insolvency Proceeding is begun against Borrower and not dismissed or stayed within 45 days (but no Credit Extensions will be made before any Insolvency Proceeding is dismissed); 8.6 OTHER AGREEMENTS. If there is a default in any agreement between Borrower and a third party that gives the third party the right to accelerate any Indebtedness exceeding $250,000 or that could cause a Material Adverse Change; 12

8.7 JUDGMENTS. If a money judgment(s) in the aggregate of at least $250,000 is rendered against Borrower and is unsatisfied and unstayed for 30 days (but no Credit Extensions will be made before the judgment is stayed or satisfied); or 8.8 MISREPRESENTATIONS. In the Bank's reasonable judgement, if Borrower or any Person acting for Borrower makes any material misrepresentation or material misstatement now or later in any warranty or representation in this Agreement or in any communication delivered to Bank or to induce Bank to enter this Agreement or any Loan Document. 9 BANK'S RIGHTS AND REMEDIES 9.1 RIGHTS AND REMEDIES. When an Event of Default occurs and continues Bank may, without notice or demand, do any or all of the following: (a) Declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank); (b) Stop advancing money or extending credit for Borrower's benefit under this Agreement or under any other agreement between Borrower and Bank; (c) Settle or adjust disputes and claims directly with account debtors for amounts, on terms and in any order that Bank considers advisable; (d) Make any payments and do any acts it considers necessary or reasonable to protect its security interest in the Collateral. Borrower will assemble the Collateral if Bank requires and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank's rights or remedies; (e) Apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) any amount held by Bank owing to or for the credit or the account of Borrower; (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Bank is granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower's labels, Patents, Copyrights, Mask Works, rights of use of any name, trade secrets, trade names, Trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank's exercise of its rights under this Section, Borrower's rights under all licenses and all franchise agreements inure to Bank's benefit; and (g) Dispose of the Collateral according to the Code. 9.2 POWER OF ATTORNEY. Effective only when an Event of Default occurs and continues, Borrower irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name on any checks or other forms of payment or 13

security; (ii) sign Borrower's name on any invoice or bill of lading for any Account or drafts against account debtors, (iii) make, settle, and adjust all claims under Borrower's insurance policies; (iv) settle and adjust disputes and claims about the Accounts directly with account debtors, for amounts and on terms Bank determines reasonable; and (v) transfer the Collateral into the name of Bank or a third party as the Code permits. Bank may exercise the power of attorney to sign Borrower's name on any documents necessary to perfect or continue the perfection of any security interest regardless of whether an Event of Default has occurred. Bank's appointment as Borrower's attorney in fact, and all of Bank's rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and Bank's obligation to provide Credit Extensions terminates. 9.3 ACCOUNTS COLLECTION. When an Event of Default occurs and continues, Bank may notify any Person owing Borrower money of Bank's security interest in the funds and verify the amount of the Account. Borrower must collect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the account debtor, with proper endorsements for deposit. 9.4 BANK EXPENSES. If Borrower fails to pay any amount or furnish any required proof of payment to third persons, Bank may make all or part of the payment or obtain insurance policies required in Section 6.5, and take any action under the policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then applicable rate and secured by the Collateral. No payments by Bank are deemed an agreement to make similar payments in the future or Bank's waiver of any Event of Default. 9.5 BANK'S LIABILITY FOR COLLATERAL. If Bank complies with reasonable banking practices and Section 9-207 of the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other person. Borrower bears all risk of loss, damage or destruction of the Collateral. 9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement, the Loan Documents, and all other agreements are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank's exercise of one right or remedy is not an election, and Bank's waiver of any Event of Default is not a continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is effective unless signed by Bank and then is only effective for the specific instance and purpose for which it was given. 9.7 DEMAND WAIVER. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable. 10 NOTICES All notices or demands by any party about this Agreement or any other related agreement must be in writing and be personally delivered or sent by an overnight delivery service, by certified mail, postage prepaid, return receipt requested, or by telefacsimile to the addresses set forth at the beginning of this Agreement. Bank will use its good faith efforts to make sure notices are directed to the attention of 14

the Chief Executive Officer and Chief Financial Officer. A party may change its notice address by giving the other party written notice. 11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER California law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California. BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL. 12 GENERAL PROVISIONS 12.1 SUCCESSORS AND ASSIGNS. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights under it without Bank's prior written consent which may be granted or withheld in Bank's discretion. Bank has the right, without the consent of or notice to Borrower, to sell, transfer, negotiate, or grant participation in all or any part of, or any interest in, Bank's obligations, rights and benefits under this Agreement. 12.2 INDEMNIFICATION. Borrower will indemnify, defend and hold harmless Bank and its officers, employees, and agents against: (a) all obligations, demands, claims, and liabilities asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (b) all losses or Bank Expenses incurred, or paid by Bank from, following, or consequential to transactions between Bank and Borrower (including reasonable attorneys fees and expenses), except for losses caused by Bank's gross negligence or willful misconduct. 12.3 TIME OF ESSENCE. Time is of the essence for the performance of all obligations in this Agreement. 12.4 SEVERABILITY OF PROVISION. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision. 12.5 AMENDMENTS IN WRITING, INTEGRATION. All amendments to this Agreement must be in writing and signed by Borrower and Bank. This Agreement represents the entire agreement about this subject matter, and supersedes prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement merge into this Agreement and the Loan Documents. 15

12.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, are an original, and all taken together, constitute one Agreement. 12.7 SURVIVAL. All covenants, representations and warranties made in this Agreement continue in full force while any Obligations remain outstanding. The obligations of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of limitations for actions that may be brought against Bank have run. 12.8 CONFIDENTIALITY. In handling any confidential information, Bank will exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made (i) to Bank's subsidiaries or affiliates in connection with their present or prospective business relations with Borrower, (ii) to prospective transferees or purchasers of any interest in the loans (provided, however, Bank shall use commercially reasonable efforts in obtaining such prospective transferee or purchasers written agreement of the terms of this provision), (iii) as required by law, regulation, subpoena, or other order, (iv) as required in connection with Bank's examination or audit and (v) as Bank considers appropriate in exercising remedies under this Agreement. Confidential information does not include information that either: (a) is in the public domain or in Bank's possession when disclosed to Bank, or becomes part of the public domain after disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, if Bank does reasonably not know that the third party is prohibited from disclosing the information. 12.9 ATTORNEYS' FEES, COSTS AND EXPENSES. In any action or proceeding between Borrower and Bank arising out of the Loan Documents, the prevailing party will be entitled to recover its reasonable attorneys' fees and other reasonable costs and expenses incurred, in addition to any other relief to which it may be entitled. 13 DEFINITIONS 13.1 DEFINITIONS. In this Agreement: "ACCOUNTS" are all existing and later arising accounts, contract rights, and other obligations owed Borrower in connection with its sale or lease of goods (including licensing software and other technology) or provision of services, all credit insurance, guaranties, other security and all merchandise returned or reclaimed by Borrower and Borrower's Books relating to any of the foregoing, as such definition may be amended from time to time according to the Code. "ADVANCE" or "ADVANCES" is a loan advance (or advances) under the Committed Revolving Line. "AFFILIATE" of a Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person's senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person's managers and members. 16

"BANK EXPENSES" are all audit fees and expenses and reasonable costs and expenses (including reasonable attorneys' fees and expenses) for preparing, negotiating, administering, defending and enforcing the Loan Documents (including appeals or Insolvency Proceedings). "BORROWER'S BOOKS" are all Borrower's books and records including ledgers, records regarding Borrower's assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information. "BORROWING BASE" is 75% of Eligible Accounts as determined by Bank from Borrower's most recent Borrowing Base Certificate; provided, however, that Bank may lower the percentage of the Borrowing Base after performing an audit of Borrower's Collateral. "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on which the Bank is closed. "CASH MANAGEMENT SERVICES" are defined in Section 2.1.4. "CLOSING DATE" is the date of this Agreement. "CODE" is the Uniform Commercial Code, as applicable. "COLLATERAL" is the property described on Exhibit A. "COMMITTED REVOLVING LINE" is $4,200,000 outstanding at any one time. "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect liability, contingent or not, of that Person for (i) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (ii) any obligations for undrawn letters of credit for the account of that Person; and (iii) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but "Contingent Obligation" does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under the guarantee or other support arrangement. "COPYRIGHTS" are all copyright rights, applications or registrations and like protections in each work or authorship or derivative work, whether published or not (whether or not it is a trade secret) now or later existing, created, acquired or held. "CREDIT EXTENSION" is each Advance, Letter of Credit, Exchange Contract, or any other extension of credit by Bank for Borrower's benefit. "CURRENT LIABILITIES" are the aggregate amount of Borrower's Total Liabilities which mature within one (1) year. "ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's business that meet all Borrower's representations and warranties in Section 5; but Bank may reasonably change eligibility standards by giving Borrower 30 days prior written notice. Unless Bank agrees otherwise in writing, Eligible Accounts will not include: (a) Accounts that the account debtor has not paid within 90 days (105 days for Accounts from Quanta) of invoice date; 17

(b) Accounts for an account debtor, 50% or more of whose Accounts have not been paid within 90 days of invoice date; (c) Credit balances over 90 days from invoice date; (d) Accounts for an account debtor, including Affiliates, whose total obligations to Borrower exceed 25% of all Accounts, except for Quanta for which the percentage may be 45% for the amounts that exceed that percentage, unless the Bank approves in writing. (e) Accounts for which the account debtor does not have its principal place of business in the United States; except Accounts owing from Samsung, LG Electronics, Compal, Acer, Quanta, Inventec, Panasonic, Arima and Foxconn and those pre-approved by Bank on a case by case basis (f) Accounts for which the account debtor is a federal, state or local government entity or any department, agency, or instrumentality; (g) Accounts for which Borrower owes the account debtor, but only up to the amount owed (sometimes called "contra" accounts, accounts payable, customer deposits or credit accounts); (h) Accounts for demonstration or promotional equipment, or in which goods are consigned, sales guaranteed, sale or return, sale on approval, bill and hold, or other terms if account debtor's payment may be conditional; (i) Accounts for which the account debtor is Borrower's Affiliate, officer, employee, or agent; (j) Accounts in which the account debtor disputes liability or makes any claim and Bank believes there may be a basis for dispute (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business; (k) Accounts for which Bank reasonably determines after inquiry and consultation with Borrower collection to be doubtful. "EQUIPMENT" is all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which Borrower has any interest. "ERISA" is the Employment Retirement Income Security Act of 1974, and its regulations. "FX FORWARD CONTRACT" is defined in Section 2.1.3. "FX RESERVE " is defined in Section 2.1.3. "GAAP" is generally accepted accounting principles. "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations and (d) Contingent Obligations. "INSOLVENCY PROCEEDING" are proceedings by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief. 18

"INTELLECTUAL PROPERTY" is all of Borrower's: (a) Copyrights, Trademarks, Patents, and Mask Works including amendments, renewals, extensions, and all licenses or other rights to use and all license fees and royalties from the use; (b) Any trade secrets and any intellectual property rights in computer software and computer software products now or later existing, created, acquired or held; (c) All design rights which may be available to Borrower now or later created, acquired or held; (d) Any claims for damages (past, present or future) for infringement of any of the rights above, with the right, but not the obligation, to sue and collect damages for use or infringement of the intellectual property rights above; All proceeds and products of the foregoing, including all insurance, indemnity or warranty payments. "INVENTORY" is present and future inventory in which Borrower has any interest, including merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products intended for sale or lease or to be furnished under a contract of service, of every kind and description now or later owned by or in the custody or possession, actual or constructive, of Borrower, including inventory temporarily out of its custody or possession or in transit and including returns on any accounts or other proceeds (including insurance proceeds) from the sale or disposition of any of the foregoing and any documents of title. "INVESTMENT" is any beneficial ownership of (including stock, partnership interest or other securities) any Person, or any loan, advance or capital contribution to any Person. "LETTER OF CREDIT" is defined in Section 2.1.2. "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance. "LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or guaranties executed by Borrower or Guarantor, and any other present or future agreement between Borrower and/or for the benefit of Bank in connection with this Agreement, all as amended, extended or restated. "MASK WORKS" are all mask works or similar rights available for the protection of semiconductor chips, now owned or later acquired. "MATERIAL ADVERSE CHANGE" is defined in Section 8.3. "OBLIGATIONS" are debts, principal, interest, Bank Expenses and other amounts Borrower owes Bank now or later, including cash management services, letters of credit and foreign exchange contracts, if any and including interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank. "PATENTS" are patents, patent applications and like protections, including improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same. "PERMITTED INDEBTEDNESS" is: (a) Borrower's indebtedness to Bank under this Agreement or any other Loan Document; 19

(b) Indebtedness existing on the Closing Date and shown on the Schedule; (c) Subordinated Debt; (d) Indebtedness to trade creditors incurred in the ordinary course of business; (e) Indebtedness secured by Permitted Liens; (f) Indebtedness of Borrower to any Subsidiary and Contingent Obligations of any Subsidiary with respect to obligations of Borrower (provided that the primary obligations are not prohibited hereby), and Indebtedness of any Subsidiary to any other Subsidiary and Contingent Obligations of any Subsidiary with respect to obligations of any other Subsidiary (provided that the primary obligations are not prohibited hereby); (g) Other Indebtedness not otherwise permitted by Section 7.4 not exceeding Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate outstanding at any time; and (h) Extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (f) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be. "PERMITTED INVESTMENTS" are: (a) Investments shown on the Schedule and existing on the Closing Date; and (b) (i) marketable direct obligations issued or unconditionally guaranteed by the United States or its agency or any State maturing within 1 year from its acquisition, (ii) commercial paper maturing no more than 1 year after its creation and having the highest rating from either Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of deposit issued maturing no more than 1 year after issue, and (iv) any Investments permitted by Borrower's investment policy, as amended from time to time, provided that such investment policy (and any such amendment thereto) has been approved by Bank; (c) Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrower; (d) Investments accepted in connection with Transfers permitted by Section 7.1; (e) Investments of Subsidiaries in or to other Subsidiaries or Borrower and Investments by Borrower in Subsidiaries not to exceed $250,000 in the aggregate in any fiscal year (f) Investments consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower's Board of Directors (g) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business; (h) Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (h) shall not apply to Investments of Borrower in any Subsidiary; and 20

(i) Joint ventures or strategic alliances in the ordinary course of Borrower's business consisting of the licensing of technology, the development of technology or the providing of technical support, provided that any cash investments by Borrower do not exceed $250,000 in the aggregate in any fiscal year; "PERMITTED LIENS" are: (a) Liens existing on the Closing Date and shown on the Schedule or arising under this Agreement or other Loan Documents; (b) Liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its Books, if they have no priority over any of Bank's security interests; (c) Purchase money Liens (i) on Equipment acquired or held by Borrower or its Subsidiaries incurred for financing the acquisition of the Equipment, or (ii) existing on equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the equipment; (d) Licenses or sublicenses granted in the ordinary course of Borrower's business and any interest or title of a licensor or under any license or sublicense; (e) Leases or subleases granted in the ordinary course of Borrower's business, including in connection with Borrower's leased premises or leased property; (f) Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase. (g) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 8.4 or 8.7; (h) Liens in favor of other financial institutions arising in connection with Borrower's deposit accounts held at such institutions, provided that Bank has a perfected security interest in the amounts held in such deposit accounts; and (i) Other Liens not described above arising in the ordinary course of business and not having or not reasonably likely to have a material adverse effect on Borrower and its Subsidiaries taken as a whole. "PERSON" is any individual, sole proprietorship, partnership, limited liability company, joint venture, company association, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency. "PRIME RATE" is Bank's most recently announced "prime rate," even if it is not Bank's lowest rate. "QUICK ASSETS" is, on any date, the Borrower's consolidated, unrestricted cash, cash equivalents, net billed accounts receivable and investments with maturities of fewer than 12 months determined according to GAAP. "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the President, the Chief Financial Officer and the Controller of Borrower. "REVOLVING MATURITY DATE" is August 29, 2002. "SCHEDULE" is any attached schedule of exceptions. 21

"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's indebtedness owed to Bank and which is reflected in a written agreement in a manner and form acceptable to Bank and approved by Bank in writing. "SUBSIDIARY" is for any Person, or any other business entity of which more than 50% of the voting stock or other equity interests is owned or controlled, directly or indirectly, by the Person or one or more Affiliates of the Person. "TANGIBLE NET WORTH" is, on any date, the consolidated total assets of Borrower and its Subsidiaries minus, (i) any amounts attributable to (a) goodwill, (b) intangible items such as unamortized debt discount and expense, Patents, trade and service marks and names, Copyrights and research and development expenses except prepaid expenses, and (c) reserves not already deducted from assets, and (ii) Total Liabilities. "TOTAL LIABILITIES" is on any day, obligations that should, under GAAP, be classified as liabilities on Borrower's consolidated balance sheet, including all Indebtedness, and current portion Subordinated Debt allowed to be paid, but excluding all other Subordinated Debt. "TRADEMARKS" are trademark and servicemark rights, registered or not, applications to register and registrations and like protections, and the entire goodwill of the business of Assignor connected with the trademarks. BORROWER: SYNAPTICS INCORPORATED By: /s/ R. J. Knittel ------------------------------------------------- Title: VP & CFO ---------------------------------------------- BANK: SILICON VALLEY BANK By: /s/ Amy L. Drake ------------------------------------------------- Title: VP ---------------------------------------------- 22

EXHIBIT A The Collateral consists of all of Borrower's right, title and interest in and to the following: All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Borrower's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; All contract rights and general intangibles (as such definitions may be amended from time to time according to the Code), now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance and rights to payment of any kind,; All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Borrower arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Borrower (as such definitions may be amended from time to time according to the Code) whether or not earned by performance, and any and all credit insurance, insurance (including refund) claims and proceeds, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Borrower; All documents, cash, deposit accounts, securities, securities entitlements, securities accounts, investment property, financial assets, letters of credit, letter of credit rights, certificates of deposit, instruments and chattel paper and electronic chattel paper now owned or hereafter acquired and Borrower's Books relating to the foregoing; All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and All Borrower's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof. 23

EXHIBIT B LOAN PAYMENT/ADVANCE REQUEST FORM DEADLINE FOR SAME DAY PROCESSING IS 12:00 P.S.T. FAX TO: DATE: _____________________________ ____________________________________________________________________________________________________________________________________ [ ] LOAN PAYMENT: SYNAPTICS INCORPORATED From Account #__________________________________ To Account #_________________________________________ (Deposit Account #) (Loan Account #) Principal $_____________________________ and/or Interest $_____________________________________________________ All Borrower's representation and warranties in the Loan and Security Agreement are true, correct and complete in all material respects to on the date of the telephone transfer request for and advance, but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of the date: AUTHORIZED SIGNATURE: ______________________________________________________ Phone Number: _____________________________________ ____________________________________________________________________________________________________________________________________ ___________________________________________________________________________________________________________________________________ [ ] LOAN ADVANCE: COMPLETE OUTGOING WIRE REQUEST SECTION BELOW IF ALL OR A PORTION OF THE FUNDS FROM THIS LOAN ADVANCE ARE FOR AN OUTGOING WIRE. From Account #__________________________________ To Account #_________________________________________ (Loan Account #) (Deposit Account #) Amount of Advance $______________________________ All Borrower's representation and warranties in the Loan and Security Agreement are true, correct and complete in all material respects to on the date of the telephone transfer request for and advance, but those representations and warranties expressly referring to another date shall be true, correct and complete in all material respects as of the date: AUTHORIZED SIGNATURE: ______________________________________________________ Phone Number: _____________________________________ ____________________________________________________________________________________________________________________________________ ____________________________________________________________________________________________________________________________________ OUTGOING WIRE REQUEST COMPLETE ONLY IF ALL OR A PORTION OF FUNDS FROM THE LOAN ADVANCE ABOVE ARE TO BE WIRED. Deadline for same day processing is 12:00 pm, P.S.T. Beneficiary Name: ____________________________________ Amount of Wire: $________________________________ Beneficiary Bank: ____________________________________ Account Number: ________________________________ City and Sate: ________________________________________________ Beneficiary Bank Transit (ABA) #: __ __ __ __ __ __ __ __ Beneficiary Bank Code (Swift, Sort, Chip, etc.): _____________________ (FOR INTERNATIONAL WIRE ONLY) Intermediary Bank: ___________________________________ Transit (ABA) #: ____________________________________________ For Further Credit to: _________________________________________________________________________________________ Special Instruction: ___________________________________________________________________________________________ By signing below, I (we) acknowledge and agree that my (our) funds transfer request shall be processed in accordance with and subject to the terms and conditions set forth in the agreements(s) covering funds transfer service(s), which agreements(s) were previously received and executed by me (us).

Authorized Signature: _____________________________________ 2nd Signature (If Required): ________________________________ Print Name/Title:__________________________________________ Print Name/Title:____________________________________________ Telephone # _______________________________________________ Telephone # _________________________________________________ 2

Schedule to Loan and Security Agreement The exact correct corporate name of Borrower is (attach a copy of the formation documents, e.g., articles, partnership agreement): _____________________________ Borrower's State of formation: _________________________________ Borrower has operated under only the following other names (if none, so state): ________________________________________________________________________ All other address at which the Borrower does business are as follows (attach additional sheets if necessary and include all warehouse addresses): _____________________________________________________________________________ Borrower has deposit accounts and/or investment accounts located only at the following institutions: _____________________________________________________________________________ List Acct. Numbers:__________________________________________________________ Liens existing on the Closing Date and disclosed to and accepted by Bank in writing: _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ Investments existing on the Closing Date and disclosed to and accepted by Bank in writing: _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ SUBORDINATED DEBT: Indebtedness on the Closing Date and disclosed to and consented to by Bank in writing: _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ The following is a list of the Borrower's copyrights (including copyrights of software) which are registered with the United States Copyright Office. (Please include name of the copyright and registration number ): _____________________________________________________________________________ _____________________________________________________________________________ The following is a list of all software which the Borrower sells, distributes or licenses to others, which is not registered with the United States Copyright Office. (Please include versions which are not registered: _____________________________________________________________________________ The following is a list of all of the Borrower's patents which are registered with the United States Patent Office. (Please include name of the patent and registration number .): _____________________________________________________________________________ _____________________________________________________________________________ The following is a list of all of the Borrower's patents which are pending with the United States Patent Office. (Please include name of the patent .): ______________________________________________________________ 3

The following is a list of all of the Borrower's registered trademarks. (Please include name of the trademark and a copy of the registration.): _____________________________________________________________________________ Borrower is not currently aware of any litigation which would have a material adverse effect on the Borrower's financial condition, except the following (attach additional comments, if needed): _____________________________________________________________________________ _____________________________________________________________________________ Tax ID Number ______________________________________________ Organizational Number, if any:______________________________ 4

EXHIBIT C BORROWING BASE CERTIFICATE ________________________________________________________________________________ Borrower: SYNAPTICS INCORPORATED Bank: Silicon Valley Bank 3003 Tasman Drive Santa Clara, CA 95054 Commitment Amount: $4,200,000 ________________________________________________________________________________ ACCOUNTS RECEIVABLE 1. Accounts Receivable Book Value as of _________________ $_______________ 2. Additions (please explain on reverse) $_______________ 3. TOTAL ACCOUNTS RECEIVABLE $_______________ ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication) 4. Amounts over 90 days due** $_______________ 5. Balance of 50% over 90 day accounts $_______________ 6. Credit balances over 90 days $_______________ 7. Concentration Limits*** $_______________ 8. Foreign Accounts* $_______________ 9. Governmental Accounts $_______________ 10. Contra Accounts $ 11. Promotion or Demo Accounts $_______________ 12. Intercompany/Employee Accounts $_______________ 13. Other (please explain on reverse) $_______________ 14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $_______________ 15. Eligible Accounts (#3 minus #14) $_______________ 16. LOAN VALUE OF ACCOUNTS (75% of #15) $_______________ * The borrowing base includes Accounts owing from Samsung, LG Electronics, Compal, Acer, Quanta, Inventec, Panasonic, Arima, Foxconn and those pre-approved by Bank on a case by case basis. ** 105 days for Quanta *** 45% for Quanta BALANCES 17. Maximum Loan Amount $_______________ 18. Total Funds Available [Lesser of #17 or #16] $_______________ 19. Present balance owing on Line of Credit $_______________ 20. Outstanding under Sublimits (LC or FX or CM) $_______________ 21. RESERVE POSITION (#18 minus #19 and #20) $_______________ The undersigned represents and warrants that this is true, complete and correct, and that the information in this Borrowing Base Certificate complies with the representations and warranties in the Loan and Security Agreement between the undersigned and Silicon Valley Bank. COMMENTS: _________________________ BANK USE ONLY Rec'd By: ___________ Auth. Signer Date: ______________ Verified: ___________ Auth. Signer Date: ______________ ____________________ 5

SYNAPTICS INCORPORATED By: _________________________________________________ Authorized Signer 6

EXHIBIT D COMPLIANCE CERTIFICATE TO: SILICON VALLEY BANK 3003 Tasman Drive Santa Clara, CA 95054 FROM: SYNAPTICS INCORPORATED The undersigned authorized officer on behalf of SYNAPTICS INCORPORATED ("Borrower") certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below and (ii) all representations and warranties in the Agreement are true and correct in all material respects on this date. Attached are the required documents supporting the certification. The Officer certifies that these are prepared in accordance with Generally Accepted Accounting Principles (GAAP) consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The Officer acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN. REPORTING COVENANT REQUIRED COMPLIES - ------------------ -------- -------- Monthly financial statements Monthly within 30 days Yes No and Compliance Certificate Annual (Audited) FYE within 120 days Yes No A/R & A/P Agings (by invoice date) Monthly within 30 days Yes No Borrowing Base Certificate Monthly within 30 days Yes No FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES - ------------------ -------- ------ -------- Maintain on a Monthly Basis: Minimum Quick Ratio 1.25:1.00 _____:1.00 Yes No Profitability: *$1.00 $__________ Yes No *on a three month rolling average Have there been updates to Borrower's intellectual property, if appropriate? Yes / No

______________________________________________ COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY Received by: _________________________________ Sincerely, AUTHORIZED SIGNER Date: ________________________________________ SYNAPTICS INCORPORATED Verified: ____________________________________ _____________________________________________ AUTHORIZED SIGNER SIGNATURE Date: ________________________________________ _____________________________________________ TITLE Compliance Status: Yes No ______________________________________________ _____________________________________________ DATE 2

[SILICON VALLEY BANK LOGO] SILICON VALLEY BANK PRO FORMA INVOICE FOR LOAN CHARGES BORROWER: SYNAPTICS INCORPORATED LOAN OFFICER: DIANE THOMPSON DATE: AUGUST 15, 2001 REVOLVING LOAN FEE $20,000.00 CREDIT REPORT 35.00 UCC SEARCH FEE 200.00 UCC FILING FEE 75.00 INTELLECTUAL PROPERTY FILING FEES 550.00 DOCUMENTATION FEE 1,500.00 TOTAL FEE DUE $22,360.00 ========== PLEASE INDICATE THE METHOD OF PAYMENT: [ ] A CHECK FOR THE TOTAL AMOUNT IS ATTACHED. [ ] DEBIT DDA # __________________ FOR THE TOTAL AMOUNT. [X] LOAN PROCEEDS BORROWER: BY:/S/ R. J. KNITTEL, VP & CFO ----------------------------------------- (AUTHORIZED SIGNER) /S/ AMY L. DRAKE, 9/4/01 - -------------------------------------------- SILICON VALLEY BANK (DATE) ACCOUNT OFFICER'S SIGNATURE

INTELLECTUAL PROPERTY SECURITY AGREEMENT This Intellectual Property Security Agreement is entered into as of August 30, 2001 by and between SILICON VALLEY BANK ("Bank") and SYNAPTICS INCORPORATED ("Grantor"). RECITALS A. Bank has agreed to make certain advances of money and to extend certain financial accommodation to Grantor (the "Loans") in the amounts and manner set forth in that certain Loan and Security Agreement by and between Bank and Grantor dated August 30, 2001 (as the same may be amended, modified or supplemented from time to time, the "Loan Agreement"; capitalized terms used herein are used as defined in the Loan Agreement). Bank is willing to make the Loans to Grantor, but only upon the condition, among others, that Grantor shall grant to Bank a security interest in certain Copyrights, Trademarks, Patents, and Mask Works to secure the obligations of Grantor under the Loan Agreement. B. Pursuant to the terms of the Loan Agreement, Grantor has granted to Bank a security interest in all of Grantor's right, title and interest, whether presently existing or hereafter acquired, in, to and under all of the Collateral. NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, and intending to be legally bound, as collateral security for the prompt and complete payment when due of its obligations under the Loan Agreement, Grantor hereby represents, warrants, covenants and agrees as follows: AGREEMENT To secure its obligations under the Loan Agreement, Grantor grants and pledges to Bank a security interest in all of Grantor's right, title and interest in, to and under its Intellectual Property Collateral (including without limitation those Copyrights, Patents, Trademarks and Mask Works listed on Schedules A, B, C, and D hereto), and including without limitation all proceeds thereof (such as, by way of example but not by way of limitation, license royalties and proceeds of infringement suits), the right to sue for past, present and future infringements, all rights corresponding thereto throughout the world and all re-issues, divisions continuations, renewals, extensions and continuations-in-part thereof. This security interest is granted in conjunction with the security interest granted to Bank under the Loan Agreement. The rights and remedies of Bank with respect to the security interest granted hereby are in addition to those set forth in the Loan Agreement and the other Loan Documents, and those which are now or hereafter available to Bank as a matter of law or equity. Each right, power and remedy of Bank provided for herein or in the Loan Agreement or any of the Loan Documents, or now or hereafter existing at law or in equity shall be cumulative and concurrent and shall be in addition to every right, power or remedy provided for herein and the exercise by Bank of any one or more of the rights, powers or remedies provided for in this Intellectual Property Security Agreement, the Loan Agreement or any of the other Loan Documents, or now or hereafter existing at law or in equity, shall not preclude the simultaneous or later exercise by any Bank designee, including Bank, of any or all other rights, powers or remedies. IN WITNESS WHEREOF, the parties have cause this Intellectual Property Security Agreement to be duly executed by its officers thereunto duly authorized as of the first date written above.

GRANTOR: Address of Grantor: SYNAPTICS INCORPORATED 2381 Bering Drive By: R. J. Knittel - ----------------------------------- ----------------------------------- San Jose, CA 95131 - ----------------------------------- Title: VP & CFO -------------------------------- Attn: CFO ----------------------------- BANK: Address of Bank: SILICON VALLEY BANK 3003 Tasman Drive By: /s/ Amy L. Drake ----------------------------------- Santa Clara, CA 95054-1191 Title: VP -------------------------------- Attn: ----------------------------- 2

EXHIBIT A Copyrights Description Registration/ Registration/ - ----------- Application Application Number Date ------ ----

EXHIBIT B Patents Description Registration/ Registration/ - ----------- Application Application Number Date ------ ----

EXHIBIT C Trademarks Description Registration/ Registration/ - ----------- Application Application Number Date ------ ----

EXHIBIT D Mask Works Description Registration/ Registration/ - ----------- Application Application Number Date ------ ----

CORPORATE BORROWING RESOLUTION BORROWER: SYNAPTICS INCORPORATED BANK: SILICON VALLEY BANK 2381 BERING DRIVE 3003 TASMAN DRIVE SAN JOSE, CA 95131 SANTA CLARA, CA 95054-1191 I, THE SECRETARY OR ASSISTANT SECRETARY OF SYNAPTICS INCORPORATED ("BORROWER"), CERTIFY that Borrower is a corporation existing under the laws of the State of California. I certify that at a meeting of Borrower's Directors (or by other authorized corporate action) duly held the following resolutions were adopted. It is resolved that ANY ONE of the following officers of Borrower, whose name, title and signature is below: NAMES POSITIONS ACTUAL SIGNATURES ----- --------- ----------------- Francis Lee President & CEO /s/ Francis Lee - -------------------------------------- ------------------------------------- ------------------------------ Russell J. Knittel VP & CFO /s/ R. J. Knittel - -------------------------------------- ------------------------------------- ------------------------------ - -------------------------------------- ------------------------------------- ------------------------------ - -------------------------------------- ------------------------------------- ------------------------------ may act for Borrower and: BORROW MONEY. Borrow money from Silicon Valley Bank ("Bank"). EXECUTE LOAN DOCUMENTS. Execute any loan documents Bank requires. GRANT SECURITY. Grant Bank a security interest in any of Borrower's assets. NEGOTIATE ITEMS. Negotiate or discount all drafts, trade acceptances, promissory notes, or other indebtedness in which Borrower has an interest and receive cash or otherwise use the proceeds. LETTERS OF CREDIT. Apply for letters of credit from Bank. FOREIGN EXCHANGE CONTRACTS. Execute spot or forward foreign exchange contracts. FURTHER ACTS. Designate other individuals to request advances, pay fees and costs and execute other documents or agreements (including documents or agreement that waive Borrowers right to a jury trial) they think necessary to effectuate these Resolutions. Further resolved that all acts authorized by these Resolutions and performed before they were adopted are ratified. These Resolutions remain in effect and Bank may rely on them until Bank receives written notice of their revocation. I certify that the persons listed above are Borrower's officers with the titles and signatures shown following their names and that these resolutions have not been modified are currently effective.

CERTIFIED TO AND ATTESTED BY: X /s/ R. J. Knittel ------------------------------------------------------ *Secretary or Assistant Secretary X /s/ Federico Faggin, Chairman of the Board ------------------------------------------------------ *NOTE: In case the Secretary or other certifying officer is designated by the foregoing resolutions as one of the signing officers, this resolution should also be signed by a second Officer or Director of Borrower. 2

EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated July 25, 2001, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-56026) and related Prospectus of Synaptics Incorporated for the registration of 5,750,000 shares of its common stock. Our audits also included the financial statement schedule of Synaptics Incorporated listed in Item 16(b). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP San Jose, California January 8, 2002

EXHIBIT 23.3 Consent of KPMG LLP, Independent Auditors The Board of Directors Foveon, Inc.: We consent to the use of our report dated August 31, 2000 on the balance sheet of Foveon Inc. (a development stage enterprise) as of July 1, 2000, and the related statements of operations, redeemable convertible preferred stock and shareholders' deficit, and cash flows for each of the years in the two year period ended July 1, 2000, in Amendment No. 2 to the registration statement on Form S-1 of Synaptics Incorporated filed on or about January 9, 2002, and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP Mountain View, California January 7, 2002

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This website contains forward-looking statements that are subject to the safe harbors created under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business, and can be identified by the fact that they do not relate strictly to historical or current facts. Such forward-looking statements may include words such as "expect," "anticipate," "intend," "believe," "estimate," "plan," "target," "strategy," "continue," "may," "will," "should," variations of such words, or other words and terms of similar meaning. All forward-looking statements reflect our best judgment and are based on several factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Such factors include, but are not limited to, the risks as identified in the "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" sections of our Annual Report on Form 10-K for our most recent fiscal year, and other risks as identified from time to time in our Securities and Exchange Commission reports. Forward-looking statements are based on information available to us on the date hereof, and we do not have, and expressly disclaim, any obligation to publicly release any updates or any changes in our expectations, or any change in events, conditions, or circumstances on which any forward-looking statement is based. Our actual results and the timing of certain events could differ materially from the forward-looking statements. These forward-looking statements do not reflect the potential impact of any mergers, acquisitions, or other business combinations that had not been completed as of the date of this filing.