Table of Contents
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
TO
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	

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SUBJECT TO COMPLETION, DATED JANUARY 9, 2002

PROSPECTUS

5,000,000 Shares

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

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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,

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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

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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.

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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.

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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.”	

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 	 	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.

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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.	
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      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.

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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

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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.

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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.	
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      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.

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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

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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.	
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      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.

      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.

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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.

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      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.

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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.

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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

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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.

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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.

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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.

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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.

23

Table of Contents

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	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	

	 	

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Table of Contents

 	 	 	 	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.

      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.

      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.

25

Table of Contents

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

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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.

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      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

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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

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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

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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

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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

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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.

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 	 	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

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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

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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

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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.

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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.

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      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.

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      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.

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      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

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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.

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      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.

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      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

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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.

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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

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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

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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

      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.

      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.

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      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 payment of damages, which could have a material adverse effect on our business, financial condition, and results of operations.

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.

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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

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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.

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      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.

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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

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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

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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.

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      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.	
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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.	
 	 	
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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

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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

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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

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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

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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

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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.

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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.	
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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.

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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.	

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 	(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	
 	 	
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 	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.	
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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,

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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.

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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

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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.

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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.

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      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.

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      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.

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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.

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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

Table of Contents

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

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Table of Contents

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

Table of Contents

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) 	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.”	

See accompanying notes.

F-4

Table of Contents

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

Table of Contents

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

Table of Contents
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

Table of Contents

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.

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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.

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Table of Contents
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

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Table of Contents
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

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Table of Contents
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.

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Table of Contents
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

Table of Contents
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

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Table of Contents
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

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Table of Contents
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	 	

	 	 	 	

	 	 	 	

	 	

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Table of Contents
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.

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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.

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Table of Contents
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,

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Table of Contents
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	 	

	 	 	 	

	 	 	 	 	 	

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Table of Contents
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

Table of Contents
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

Table of Contents
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

Table of Contents
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

Table of Contents
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

Table of Contents
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

Table of Contents
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	 	

	 	 	 	

	 	 	 	

	 	

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Table of Contents
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

Table of Contents

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

Table of Contents

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

Table of Contents

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

Table of Contents

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	)	

	 	 	 	

	 	 	 	

	 	 	 	

	 	

Table of Contents

 	 	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

Table of Contents

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

Table of Contents

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

Table of Contents
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

Table of Contents
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

Table of Contents
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

Table of Contents
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	
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Table of Contents
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

Table of Contents
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

Table of Contents
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.

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Table of Contents
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.

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Table of Contents
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

Table of Contents
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.

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      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

Common Stock

PROSPECTUS

Bear, Stearns & Co. Inc.

SG Cowen

SoundView Technology Group

            , 2002

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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.

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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	

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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.

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      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.	
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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	

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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	 	
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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

(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 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 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

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

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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

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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.

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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;

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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