INTERLINK ELECTRONICS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

(Mark One)

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from________ to________
Commission File Number 0-21858
INTERLINK ELECTRONICS, INC.

(Exact name of registrant as specified in its charter)

Delaware 77-0056625
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

546 Flynn Road
Camarillo, California 93012
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (805) 484-8855

-----------
Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of each class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

As of March 20, 2002 the aggregate market value of the registrant's Common
Stock held by non-affiliates of the registrant was $50,803,741. Solely for
purposes of this calculation, the registrant has treated its Board of Directors
and executive officers as the only affiliates.

As of March 20, 2002, the number of shares of the registrant's Common
Stock outstanding was 9,758,872.

Documents incorporated by reference:

Portions of Registrant's Proxy Statement for its 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report.

INTERLINK ELECTRONICS, INC.
TABLE OF CONTENTS

Item Page
No. No.
--- ---

Part I

1. Business.............................................................. 3
2. Properties............................................................ 14
3. Legal Proceedings..................................................... 14
4. Submission of Matters to a Vote of Security Holders................... 15
4(A). Executive Officers of the Registrant.................................. 15

Part II

5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................... 17
6. Selected Financial Data............................................... 18
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 19
7(A). Quantitative and Qualitative Disclosures About Market Risk........... 25
8. Financial Statements and Supplemental Data............................ 26
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................. 26

Part III

10. Directors and Executive Officers of the Registrant.................... 26
11. Executive Compensation................................................ 26
12. Security Ownership of Certain Beneficial Owners and Management........ 26
13. Certain Relationships and Related Transactions........................ 26

Part IV

14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...... 27

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains statements that constitute
"forward-looking statements" within the meaning of section 27A of the Securities
Act of 1933 and section 21E of the Securities Exchange Act of 1934. These
statements can be identified by the fact that they do not relate strictly to
historical information and include the words "expects", "believes",
"anticipates", "plans", "may", "will", "intend", "estimate", "continue" or other
similar expressions. These forward-looking statements are subject to various
risks and uncertainties that could cause actual results to differ materially
from those currently anticipated. These risks and uncertainties include, but are
not limited to, items discussed below in this section and elsewhere in this Form
10-K. Forward-looking statements speak only as of the date made. We undertake no
obligation to publicly release or update forward-looking statements, whether as
a result of new information, future events or otherwise. You are, however,
advised to consult any further disclosures we make on related subjects in our
quarterly reports on Form 10-Q and any reports made on Form 8-K to the
Securities and Exchange Commission. These forward-looking statements may be
adversely affected by a number of factors, which may include the following:

. We may incorrectly predict the amount or timing of growth in markets
where we expect our future revenue growth to occur.

. Our sales may fluctuate materially if they are concentrated with one
or more customers or in limited market or geographic areas that
experience a business downturn.

. We may not successfully implement our business strategies of
developing products for the home entertainment and e-transactions
markets.

. International sales and manufacturing risks may affect our results
in unpredictable ways.

. Fluctuations in the value of foreign currencies can affect the
dollar value of our sales or our product costs.

. We may be unable to develop and introduce new products to respond to
evolving industry requirements in a timely manner.

. The home entertainment and e-transactions markets may not adopt our
technology.

. Our competitors may develop products, technologies or relationships
that afford them a competitive advantage.

. We may be unable to attract and retain qualified individuals for
critical positions.

. We may fail to manage our growth effectively.

. Our customers may not perceive a meaningful competitive
advantage to them in purchasing our products as an alternative to
low-cost, traditional remote products.

. Changing standards or regulations could increase our costs, affect
our competitive position or make our products less desirable.

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or make our products less desirable.

. Our contract or in-house manufacturing arrangements, including
arrangements for products that we make only at a single facility,
could be disrupted by economic, political or natural events.

. We may experience interruptions in the supply of Force Sensing
Resistor sensors or other components, causing us to miss shipment
deadlines.

. We may experience performance, reliability or quality problems with
our products.

. Federal, state and international legislation and regulations
affecting e-commerce may adversely impact our competitiveness or
increase our costs.

. We may be unable effectively to protect our intellectual property.

. Proprietary technologies of our competitors may create barriers to
entry.

. Third party vendors on whom we rely for significant aspects of our
technology development may fail to perform on schedule or to the
required standard.

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PART I

ITEM 1. BUSINESS

Overview

We are a leader in the development of intuitive interface devices for a
variety of home and business applications. Our products enable a user to control
and communicate with various audio-visual products such as business presentation
projectors, digital televisions (directly or through set-top boxes) and other
information display systems by providing an intuitive device on which the user
can remotely input a variety of commands. Our patented touchpad technologies
capture electronic signature and character input for digital recognition for
e-commerce and other digital communication applications. Our products
incorporate patented sensor and wireless communication technologies, proprietary
applications and ergonomic designs. Our traditional business has been in the
business presentation market where we are the leading supplier of intuitive
interface devices to most of the manufacturers of business presentation systems.
Based on our suite of intuitive interface technologies, we have recently entered
two new markets: home entertainment and electronic transactions. By building
partnerships with providers of complementary software and hardware technologies,
we market our products for use with information display systems as digital
interface technology is incorporated into them. We also manufacture and sell a
variety of electronic components, such as touchpads, specialty mice and rugged
input devices for computer, automotive and medical applications.

We are the leading supplier of intuitive interface devices and components
for the business presentation market, where we sell both to original equipment
manufacturers (OEMs) and directly to consumers through reseller channels. Our
OEM customers include presentation system manufacturers, such as InFocus, NEC,
Sony, Compaq, IBM and Toshiba. We also design, manufacture, license and sell a
broad variety of specialty components incorporating our technologies, such as
pointing devices and industrial sensor products for the computer, automotive and
medical device markets.

In 1999, we entered the electronic document management and
business-to-business electronic commerce markets, which we refer to collectively
as the e-transactions market, by introducing our ePad electronic signature
capture device. The ePad captures signatures electronically and permits these
signatures to be bound to an electronic document, allowing a recipient to verify
that an electronic document has not been tampered with since the signature was
recorded.

In 2000, we began marketing IntuiTouch technology that enables users to
easily control the various applications emerging in the home entertainment
market, such as interactive television.

2001 was a challenging year for Interlink Electronics, as it was for many
technology companies. During the year we experienced our first decline in sales
on an annual basis in over a decade as our customers and potential customers
adjusted inventory levels, adopted conservative growth strategies, strictly
limited purchasing and delayed or abandoned new product introductions. Despite
these challenges, we have continued to pursue our strategic business plan, while
at the same time moving aggressively to control costs not directly required to
implement the plan. We have continued to invest in new technologies and new
markets, have maintained and, in some cases, strengthened our relationships with
our key customers and have worked to strengthen our existing business
partnerships and develop new ones. While we cannot predict with any certainty
what level of demand will exist in our markets, we

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believe that we are well positioned, based on technology, relationships and
financial condition, to take advantage of the market opportunities that are
presented to us.

Market Background

BUSINESS COMMUNICATIONS MARKET. We are the dominant supplier of remote
input devices to the business communications market, supplying the majority of
all remote input devices used to control presentation projectors. This market
consists of electronic presentation devices that enable mixed-media
presentations using PowerPoint or other commonly available presentation
software, including both locally contained presentations and video-conferencing
presentations distributed to multiple locations. As computer technology has
replaced traditional presentation devices such as slide and overhead projectors,
the mechanisms to control the presentation process have undergone a similar
evolution. Similarly, the advent of broadband communication technologies has
enabled developments in video-conferencing that permit sophisticated,
interactive presentations to be made at multiple locations and to be controlled
from a single location. Today, it is possible for a presenter to control various
characteristics of a sophisticated audio-visual presentation using a small,
remote device. Unlike slide presentations, which cannot be edited, or overhead
presentations that can be edited only by standing over the projector and writing
with a pen or grease pencil, the modern, computer-driven presentation can be
controlled, edited, amplified, distributed and otherwise manipulated
electronically. This demands a wireless device that can easily transmit a wide
variety of commands and support complex control functions in an intuitive
manner. For the presenter and audiences benefit, it is important that the
control process not detract from the presenter.

According to Pacific Media Associates, the business communications market
is growing at an average annual rate of 25% with unit volumes expected to
increase from 540,000 units in 1998 to more than 2 million units in 2004. Our
OEM customers have recently introduced business communications hardware that
will significantly reduce the size and weight and increase the resolution and
brightness of presentation devices such as projectors and the processing power
of computers that support them. Increased portability will enable many users to
travel with a complete presentation system capable of fitting in a standard
briefcase.

HOME ENTERTAINMENT MARKET. The use of remote devices to control household
entertainment systems has been growing for at least the last quarter century.
Two recent developments, however, have dramatically increased the complexity of
the processes that these devices must control. These developments are the advent
of digital cable and satellite delivery systems and the introduction and
widespread use of the Internet. Early remotes used to control broadcast, and
later analog cable, television were relatively simple devices that permitted the
viewer to turn the set on or off, change channels and adjust volume. Today's
television viewer may wish to control a variety of information or entertainment
systems, including cable or satellite input, VCR's, DVD players and audio
systems or to participate in the increasing number of interactive options being
presented by content providers. The recent advent of digital cable and satellite
networks creates substantial new opportunities for interaction for the viewer.
Digital cable and satellite networks offer or can offer consumers electronic
program guides, voice telephony, e-mail, e-commerce and other services through
the television. For example, a television viewer may, after viewing a movie,
wish to order a copy on DVD, or the viewer of a news program or television
commercial may wish to obtain additional information by visiting a related
website. These new applications are creating a need for interactive capability
in the home entertainment markets.

The Internet has grown rapidly over the past several years and is now used
by tens of millions of people for entertainment, education and e-commerce. The
increasing popularity of the Internet and the

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established popularity of television have led a growing number of home computer
users to simultaneously access Internet content while they watch television.
This convergence of television and computer technologies has enabled a wide
range of new communication and entertainment applications.

We believe that the home entertainment market offers a new, large market
opportunity for multi-functional, intuitive interface devices. The advent of
digital cable, satellite TV and similar broadband delivery systems is increasing
programming choices. It is widely anticipated that computer and television
technologies will continue to converge and that the consumer will be able,
through a single electronic system, to view television programming, control
other entertainment components, access the Internet, participate in on-line
commerce, send and receive e-mail and participate in audio and video telephone
calls.

We believe the market for intuitive interface devices will develop as
cable and satellite subscribers have increased access to digital set-top boxes.
Forrester Research, Inc. estimated that 15.3% of U.S. households had digital
set-top boxes by year-end 2001, growing to 60% in 2005. We believe that, as
digital set-top boxes are deployed and broadband services such as Internet
access become available, consumers will seek new control devices that are more
sophisticated, flexible, and intuitive than traditional television remotes or
the combination of a remote and wireless keyboard.

E-TRANSACTIONS MARKET. The rapid growth of the electronic document
management and business-to-business e-commerce markets has created a need for
electronic document and approval authentication methods that can serve as an
electronic substitute for the signature on paper documents. For the recipient of
an electronic document to have confidence that the document was approved in the
form in which it appears on his or her computer screen, it is necessary to have
a reliable mechanism that captures a signature, binds the signature to the
document, and verifies the identity of the approving person and the integrity of
the document in the form in which it was approved.

We believe there will be a sizeable market for an electronic signature
capture product in electronic document management applications, especially in
consumer "turnstile" environments such as retail point-of-sale, financial and
insurance services. We expect that e-transactions products will be deployed in
this market as the dollar value of business-to-business e-commerce grows from
$406 billion in 2000 to $2.7 trillion in 2004, as forecast by Forrester.

SPECIALTY PRODUCTS MARKET. Using our original FSR technology, we sell
sensors that permit control of various processes based on the amount of force
applied to an input device. We continue to market these devices, both as
stand-alone products and as components sold to OEMs for use in their products.
We believe that this market is stable and do not expect significant change in
the scope of our specialty products business.

The Need for Intuitive Interface Devices

We believe traditional remote control devices are not well suited for
evolving user requirements. In the home environment, entertainment systems are
increasing in complexity, more applications and content can be accessed on each
system, and multiple components of a system are often used simultaneously.
Business presentation devices are also offering more sophisticated control
options. However, the remote control devices that are typically used to control
applications and systems in the home and business environment are not intuitive
and are often difficult to use. They contain many buttons, which require users
to memorize or look up each function of each button. Users often need

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several control devices, such as a remote and a wireless keyboard, to access
multiple applications, such as digital TV content, Internet-based communication
and commerce, and the telephone. The multiplicity of individual devices or
buttons or sequences of buttons on a single device required to control the
related system also requires the user to look directly at the interface device
in order to select the correct button or button sequence. This is distracting in
the case of business presentations and may be undesirable in the home
entertainment environment if the user is in a darkened room or does not want to
miss something in the visual presentation.

The typical remote control device operates on infrared, or IR, technology,
which does not work well over long distances or if there are intervening
objects, such as furniture. Although, some remote communication functions are
best addressed using IR technology and the majority of current systems are set
to up receive IR signals, by itself IR technology has significant limitations.
IR signals also interfere with each other, which prevents the use of multiple IR
signals in a single room, significantly limiting interactivity between the
remote and the multiple devices it controls and making bi-directional
communication impossible. Finally, traditional IR technology is slow and narrows
bandwidth, limiting the complexity of data that can be transmitted.

In the e-transactions market, businesses seeking to automate workflow or
conduct e-commerce transactions need a hardware and software solution that can
be used to capture signatures, bind them to documents, and authenticate and
verify them. There are few cost-effective turnkey solutions commercially
available that can be deployed, requiring businesses to develop proprietary
software and hardware solutions.

The Interlink Solution

We use our suite of proprietary intuitive interface technologies to create
devices that enable users to operate and control computers, televisions,
projectors and other complex electronic systems. By enabling interactivity
between interface devices and the systems they control, we allow users to
interact directly with menu-driven application programs resident in the
controlled system through an on-screen display. Our devices enable the use of
high bandwidth applications such as telephony and provide an intuitive interface
for applications encompassing the functions typically associated with computers,
such as browsing the Internet and sending and receiving e-mail. For instance,
our new interface device for next generation digital set-top boxes will
integrate cursorless navigation, text entry, freehand writing and drawing and
voice transmission capabilities within a single lightweight, hand-held platform.
The device will enable total control of various home entertainment options
available yet retain a highly intuitive user interface and a sleek ergonomic
design.

Our interface devices offer a number of benefits not available using
traditional technologies:

EASY-TO-USE SENSOR TECHNOLOGY. The vast majority of our products include
our patented FSR technology. The FSR, or Force Sensing Resistor, combined with
other Interlink Technologies, creates a pointing device that responds to
pressure and can accept input from a finger or a pen. It also consumes minimal
power, making it ideal for use in a battery powered interface device. In
conjunction with patent-pending pad-to-screen mapping and gestures technology,
our FSR touchpads provide an intuitive means of communicating with a wide array
of applications and systems. The FSR is also ideally suited for capturing high
resolution electronic signatures.

INNOVATIVE SOFTWARE APPLICATIONS. Our pad-to-screen, or PTS mapping
technology, for which we

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have a patent pending, allows a user to touch a point on a FSR touchpad to
activate a button or menu item in a corresponding on-screen location. This
capability eliminates the need to click or cursor through various intervening
menu items. Using PTS mapping, a user can easily and quickly perform a number of
complex functions without looking at the remote device, including the operation
of a virtual keyboard activated through the touchpad but appearing on the
monitor.

Our "gesture" technology, for which we have a patent pending, allows the
user to input or write commands on a screen by touching and moving a finger or
pen on a touchpad. For example, a channel can be changed by tracing the channel
number on the touchpad or, if a higher or lower channel is desired, by swiping
to the right or left, as applicable, and continuing to touch the touchpad to
scroll through the channel numbers. Other commands, such as play, record or
pause are accomplished by making gestures that mimic the standard symbols for
those functions appearing on VCRs, DVD players and other playback and recording
devices.

ENHANCED WIRELESS COMMUNICATIONS TECHNOLOGY. In addition to our patented
wireless protocol, RemoteLink, we have developed expertise in industry wireless
protocol standards, such as IR, radio frequency and Bluetooth. Our patented
RemoteLink wireless communications technology retains the IR technology
necessary to communicate with most of today's information and entertainment
systems and combines it with RF technology to overcome most of the shortcomings
of traditional IR technology. RemoteLink permits our intuitive interface devices
to:

o send signals having sufficient speed and bandwidth to support
applications such as handwriting input, stereo quality streaming
audio and telephony;

o support bi-directional and multiple signals, thereby enabling true
interactive communication and/or the simultaneous use of multiple
remote devices in a single room; and

o send sufficiently robust signals to eliminate the need to point the
remote device at the receiver for the controlled device.

WIDELY ACCEPTED FUNCTIONAL AND ERGONOMIC DESIGN. Our intuitive interface
devices reflect our strong focus on functionality and ergonomics. We maintain an
active product design effort and devote considerable attention to issues related
to ease of use of our products. An example of the results of these efforts is
our patented ClickTrigger button incorporated in a number of our products, which
enables the user to click on an icon on a monitor by squeezing a button with his
or her index finger in a motion similar to pulling a trigger on a gun.

The Interlink Strategy

We intend to use our suite of technologies to become the leading provider
of intuitive interface devices for the home and business markets through the
implementation of the following strategies:

WE WILL WORK WITH HOME ENTERTAINMENT INDUSTRY INNOVATORS TO DEVELOP
INTUITIVE INTERFACE DEVICES FOR INTERACTIVE APPLICATIONS. We will introduce
intuitive interface devices for the home entertainment market that will enable
users to take full advantage of the many interactive applications that are
starting to become widely available. We are building technology partnerships
with a variety of other technology providers, such as multiple service
operators, manufacturers of digital set-top boxes and

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front and rear projectors and plasma displays and developers of software
applications, to promote the compatibility of our devices with as many different
interactive home entertainment systems and systems as possible. In order to
support this compatibility, we will develop or partner with others to develop
communication protocols that enable our interface devices to function with the
various applications available to consumers in the home entertainment market and
the systems on which these applications will run. Because many of our OEM
customers in the business communications market are also participants in the
market for home entertainment systems, we expect to use our relationships with
them to facilitate the widespread adoption of our intuitive interface devices in
this market.

WE WILL AGGRESSIVELY MARKET OUR EPAD PRODUCT LINE TO THE E-TRANSACTIONS
MARKET. We will foster adoption of our ePad product line in the e-transactions
market by expanding distribution channels and building strategic relationships
with key software and systems integrators to develop turnkey solutions for
deployment in large corporate settings. To foster adoption of the ePad in the
electronic document management market, we are working with electronic signature
software companies like Silanis Technology, Inc. and Communication Intelligence
Corporation. We also are working with OEMs like VeriFone that are interested in
promoting the widespread use of electronic documents.

WE WILL MAINTAIN OUR LEADERSHIP POSITION IN THE BUSINESS COMMUNICATIONS
MARKET. We will seek to maintain our leadership position in the business
communications market by continuing to provide our OEM and reseller customers
with innovative products that are responsive to consumer needs. We also expect
to introduce products for related ancillary markets, such as conference room and
video conferencing controllers and conferencing automation products.

WE WILL DEVELOP PROPRIETARY APPLICATIONS TO EXPAND OUR PENETRATION INTO
NEW MARKETS. We will develop either for ourselves or in partnership with other
companies, software applications that enhance the functionality of our intuitive
interface devices and will seek to license such applications where possible. We
intend to work with our customers and development partners to identify and
develop applications that will meet customer needs and, where appropriate, to
license these applications.

WE WILL ENHANCE OUR CURRENT TECHNOLOGY AND DEVELOP OR ACQUIRE NEW
TECHNOLOGY AND APPLICATIONS. We will maintain an active technology development
program that will enable us to enhance our current touchpad and wireless
communication technologies and develop new technologies and applications for
them. We believe this continuing development will allow us to increase our
market share in the markets in which we compete and identify new markets where
our technologies can provide us with a competitive advantage. Where appropriate,
we may acquire technologies from others or acquire companies that own or are
developing technologies that we believe would allow us to enhance our product
offerings.

Products

We have four principal product lines targeted at the business
communications, home entertainment, e-transactions and specialty components
markets.

BUSINESS COMMUNICATION PRODUCTS. Our remote interface devices are used by
the business communications market to control presentation systems such as
projectors. Our traditional interface devices incorporate a pointing button to
control the cursor and one or more function selection buttons. These products
range from a simple interface device with only a pointing device and a single
click button to devices with 30 function keys. Most of these products
incorporate our patented ClickTrigger button.

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Additionally, we have introduced interface devices based on our RemoteLink
technology which incorporate a touchpad and permit the user, in addition to the
normal presentation control functions, to write over or highlight material
appearing in the formal presentation.

We sell interface devices in the business communication market principally
to OEMs and, to a lesser extent, as branded products through a variety of
distributors and value added resellers. Our current OEM customers include some
of the largest presentation system manufacturers, including; InFocus, NEC, Sony
and Toshiba. Although most business presentation devices are made by Japanese
companies, the United States represents the largest market for these products.
Accordingly, our OEM sales are concentrated in Japan and managed by our Japanese
subsidiary while our branded sales are primarily U.S.-based.

In 2001, our business communication products accounted for 64% of our
sales. Our dominant market share of the OEM market causes our sales of business
communication products to mirror trends in the presentation industry. This was
the case in 2001, when inventory adjustments and generally poor economic
conditions resulted in reduced demand for new business presentation systems.
However, our relationships with our principal customers in these markets remains
strong and, in some cases, is strengthening. For example, in February 2002, we
announced an enhanced relationship with InFocus Corporation, which, together
with its subsidiaries, enjoys an approximate 24% share of the business
presentation system market. We expect this area of our business to continue to
reflect trends in the business presentation system market

HOME ENTERTAINMENT PRODUCTS. The IntuiTouch product, our prototype
intuitive interface device for home entertainment systems such as digital
set-top boxes, is based on a technological platform similar to our most advanced
business communications devices. The pad-centric remote device integrates mouse
pointing, text entry, freehand writing and drawing and voice transmission
capabilities. The device enables total control of the variety of home
entertainment options available yet retains a highly intuitive user interface
and an ergonomic design.

Economic conditions in 2001 resulted in substantial reductions in the rate
of deployment of new broadband systems. Accordingly, our home entertainment
development efforts have been focused on the design of interface devices that
will be needed to support the advanced viewing devices that will be offered to
consumers over the next few years, such as front and rear projectors, HDTV and
plasma displays. We are working both directly with the manufacturers of these
devices and, at the chip level, with innovators of new projection and television
technologies in an effort to integrate our interactive communication devices
with their products and technologies. A number of the companies expected to have
significant offerings in the digital home entertainment market are our customers
in our business communications segment. We believe that our strong relationship
with these customers affords us an opportunity to work with them as they expand
into this new market and we are actively pursuing these opportunities.

We also make an important component of Microsoft's Xbox game controller.
This sensor is based on our patented FSR technology and is included in our home
entertainment segment because of its application. In 2001, the majority of our
revenue from home entertainment came from sales of the Xbox component.

E-TRANSACTIONS PRODUCTS. Our ePad product consists of a FSR
touchpad mounted in a plastic case and connected by a serial or U.S.B cable to
a computer. Like all of our touchpads, it is actuated using a

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finger, electronic pen or any other device capable of exerting pressure at a
given point on the sensor. The ePad captures and binds signatures to electronic
documents. We work with major electronic signature software application
developers to provide turnkey solutions to end-users. Depending on the software
used with it, the ePad device can perform a variety of document authentication
functions, such as alerting a reader if any change has been made to a document
since it was transmitted by the sender or verifying the authenticity of the
signature.

Since our introduction of the ePad product, we have devoted considerable
resources to marketing to the financial services and insurance industries, where
we believe there is an obvious opportunity based on cost savings and efficiency.
At the beginning of 2001, several entities in these industry segments had
commenced trials to determine the reliability and effectiveness of our ePad
product. However, worsening economic conditions in 2001 and, especially in the
case of the insurance industry, the events of September 11 caused a number of
these trials to be delayed or suspended. Nevertheless, we have completed
substantial sales to two companies in the insurance industry and two in the
financial services industry and are continuing to build volume of smaller sales.
We are pursuing opportunities in the retail sector and have received several
indications of interest in our Point of Sale ePad. Other opportunities appear to
be available in connection with cash transactions in casinos, electronic
receipts and other applications and we are partnering with others to pursue
these opportunities. We believe that sales of our ePad product may gain momentum
based on technological validation and customer acceptance represented by sales
to date and that any such momentum will be enhanced by any general business
recovery in 2002.

Despite the initial sales described above, electronic signature capture
and verification is a new process and we expect to make significant sales to
each new customer only following a trial and evaluation period.

SPECIALTY COMPONENTS. Our specialty components business consists primarily
of two product lines. We sell integrated pointing solutions to manufacturers of
notebook computers and industrial computers. We also sell a diverse assortment
of custom-designed sensors for non-computer applications, such as for use in
medical devices as safety switches and automotive components, such as car seats.
This business has been relatively stable for several years, varying only with
general economic conditions. In 2000 and the first three quarters of 2001, we
received significant royalty revenue from the license of some of our technology
to a former affiliate. The payments ended in the third quarter of 2001 and we do
not anticipate significant licensing revenue in the near future.

Technologies

FORCE SENSING RESISTORS. All of our products incorporate one or more FSRs.
A basic FSR sensor can detect and accurately measure a force applied to it,
thereby enabling precise control of the process applying the force. A more
complex sensor, known as a "four zone" sensor, has four sensors arranged in a
two-by-two square with an actuator placed directly where the four sensors touch.
By toggling the actuator in any direction, an operator can control the direction
and speed of a cursor on a computer screen. An FSR sensor can also serve as a
touchpad by incorporating a two-dimensional grid capable of measuring the
location and intensity of pressure applied at any set of coordinates on the
grid. In contrast to most standard touchpads, FSR touchpads can also measure the
amount of pressure applied at any point on the grid, thereby creating a
three-dimensional matrix that can characterize an input along X, Y and Z axes.
This type of device is useful for functions such as handwriting input, where not
only the outline of the signature but the pressure applied in writing it can be
measured, or computer cursor control, where variable cursor speed is desirable.

10

Our FSR sensors can be as thin as one-hundredth of an inch, making them
particularly well suited for use where space is a critical issue, as in notebook
and sub-notebook keyboards. In touchpad applications, they consume significantly
less power than do capacitive touchpads, the principal competing technology.
FSRs are therefore an appropriate choice for wireless applications. Also, unlike
capacitive touchpads which react to the electrical capacitance in a human
finger, FSRs react to pressure from any object and therefore support pen input.
FSR sensors have no moving parts and can be packaged in a sealed environment.
They are therefore highly reliable, retaining their performance through tens of
millions of actuations, even in adverse environments involving heat, moisture,
and chemical contamination.

FSR sensors are manufactured using screen printing techniques. All
proprietary aspects of the manufacturing process are conducted in-house at
Interlink to maintain quality and protect the force sensing technology. While
electronic screen printing is a common process in various technology industries,
the quality and precision of printing required to make high-quality FSR sensors
greatly exceeds the standards applicable in most other industries. We have
developed significant expertise in the manufacture of FSR sensors, and believe
this experience would be difficult to replicate over the short term. In the FSR
manufacturing process, printed sheets of FSR semiconductor material and the
corresponding conductor patterns are laminated to form the FSR sandwich
structure using inexpensive sheet adhesives. The assembled sheets are die cut
and suitable connectors are attached.

REMOTELINK. Our RemoteLink technology uses a proprietary optical carrier
design to provide a relatively high speed, multi-channel, digital or analog,
optical communications link that does not interfere with, or become contaminated
by, signals from IR remote controls. RemoteLink can be configured to support
multiple users and simultaneous channels operating over a number of carrier
frequency spectrums, including the 1 to 6 megahertz range. RemoteLink's
bandwidth supports wireless data transmissions of up to 100 kilobits per second
and a 6 kilohertz bandwidth analog transmission at distances of up to 10 meters.
RemoteLink technology can simultaneously transmit data, voice and legacy IR
codes. RemoteLink technology's ability to transmit legacy IR codes makes it
compatible with existing remote controls.

APPLICATIONS. We have created a number of applications that allow our
hardware technologies to support specific functions. These applications, for
example, enable our FSR-based touchpads to support PTS mapping and gesture
control. We expect to develop, or work with others to develop, new applications
that will allow our intuitive interface devices to control an ever increasing
number of interactive functions.

Sales and Marketing

We employ a direct sales team of six people in the U.S. and three in
Japan. Each sales team is supported by inside sales personnel, product managers
and application engineers. For our branded products, we also use value-added
resellers, system integrators and distributors throughout the U.S. and Europe.

For OEM sales, we use public relations activity, direct advertising and
trade show participation to generate product awareness. Promising sales leads
and known industry targets are followed up with sales visits. Depending on
forecast volume and required lead times, we may sell component solutions,
ready-to-integrate modules, complete solutions or totally custom products. As
necessary, application engineers

11

support and visit customers to promote ease of integration. A successful OEM
sale will generally take from 6 to 18 months from the initial visit to the first
shipment. However, once obtained, an OEM customer usually offers us a more
predictable revenue stream.

For branded products, we use public relations, third-party product
reviews, trade shows and direct advertising to generate customer awareness.
Direct sales calls are made to potential distributors and specialty resellers.
Once a customer relationship is established, we support these customers with
co-op advertising, sales "spiffs," end-user rebates and other promotions.

Current distribution channels for our branded products consist of
distributors such as Ingram Micro, catalogs and specialty resellers targeting
corporate accounts. We market to these channels with direct sales through our
employees. In Europe we use distributors and specialty resellers. We use these
distribution channels not only to increase branded product sales but also to
establish customer demand for new products that generate OEM sales.

We anticipate using our relationships with our existing business
communication OEM customers to facilitate the introduction of our products in
the home entertainment market. We also are forming relationships with software
developers, digital set-top box manufacturers and cable and satellite television
providers to enhance that market's acceptance of our products and technologies.
We anticipate using similar sales and marketing techniques as those described
above once we become established in this market.

For e-transactions sales, we use public relations activity, direct
advertising and trade show participation to generate product awareness.
Promising sales leads and known industry targets are followed up with sales
visits. To a lesser extent, we leverage the sales and marketing resources of our
software partners.

Manufacturing

We manufacture all FSR sensors at our facility in Camarillo, California.
This facility is capable of operating on a single, double, or triple shift
basis, as volume dictates. We acquire raw materials and components from a number
of sources, mostly within the United States. We have worked closely with a small
group of manufacturers to create new materials optimized for FSR usage; most of
which are supplied to us on an exclusive basis. The raw materials are processed
into their final form using proprietary material and methods. We contract with
several manufacturers in China to conduct most of our high volume, non-FSR
manufacturing operations.

In late 2001, we formed Interlink Electronics Asia Pacific (IEAP), to
coordinate our non-US manufacturing activities. Based in Hong Kong, this wholly
owned subsidiary purchases components, assembles them into kits and distributes
the kits to various contract manufacturers for assembly. IEAP began shipping its
first products in February 2002. We expect to transition the bulk of our non-US
manufacturing coordination to IEAP over the next year.

Competition

We face competition from larger, more established companies that can
produce lower cost products using more mature technologies. Many of these
companies have greater financial, engineering and manufacturing resources than
we do and have long-standing customer relationships with key potential

12

customers. While we believe our technologies are superior, these competitors may
develop or acquire enhanced technologies sufficient to maintain or improve their
market share. Moreover, competitive pricing pressures on our OEM customers'
products may force them to choose lower cost, less sophisticated solutions from
our competitors.

In the business communications market, our competitors include Hoshiden
and SMK Corporation. In the home entertainment and e-transactions markets, we
will face competition from Koninklijke Philips Electronics N.V., Wacom
Technology Co. and other smaller companies.

We believe we can continue to compete effectively by continuing to develop
patented technologies that increase the functionality of the products of our OEM
customers. To maintain our patented technology advantage, we will continue to
invest heavily in product and advanced technology development. By manufacturing
most of our non-FSR components in countries with lower labor costs, we can
continue to offer high volume, low cost solutions.

Research and Development

The business communications, home entertainment and e-transactions markets
are characterized by rapid and continuous technological development of the
systems with which our products interface. For example, in the business
communications market, the computerized projector has rapidly become a powerful,
lightweight machine that is easily portable by its user. To maintain our
competitive position, we believe we must develop, in a timely manner, new
interface technologies and products and enhance our existing technologies and
products. Accordingly, we allocate a significant amount of our financial
resources to engineering, product and advanced technology development. We also
maintain close relationships with our customers, which helps us anticipate their
product needs.

We employ 33 people in our product design, engineering support and
advanced technology departments in the US and in Japan. As appropriate, we
engage outside software development firms to facilitate the integration of our
products into our customers' products.

Most of our current research and development efforts are focused on
further development of our intellectual property surrounding pad-centric input
devices and technologies and the wireless communication protocols. Ongoing
efforts are directed at enhancing the ergonomics of our interface designs, such
as touchpad input and our ClickTrigger control.

Patents and Intellectual Property

We regularly file patent applications and continuations to cover both new
and improved methods of manufacturing FSR sensors and non-FSR based
technologies.

Aspects of our technology are protected by more than 65 patents issued or
pending in the United States and abroad, as well as by trade secrets and
proprietary knowledge. Products incorporating our force sensing technologies are
sold under trademarks issued or pending in the United States and various other
countries. U.S. patents covering various materials and processes used in our
current generation of products, as well as new devices for angle and
displacement sensing, were granted during 1995 and our ClickTrigger design was
afforded patent protection in 1997. We have also filed U.S. and foreign patent
applications regarding the design, and several key operating features, of our
RemoteLink technology.

13

The first of the our patents for FSR, which cover certain aspects of the
use of an uneven surface to produce variable resistance, expired on September
24, 1999. We have continued our efforts to improve the design, formulation, and
manufacture of our sensors. Some of these improvements are maintained as trade
secrets, while U.S. and foreign patents have been applied for with respect to
others. The other U.S. and foreign patents we hold at this time, covering
various apparatus, processes and methods related to force sensing technology,
began expiring last year and the remainder will expire between now and 2015.

We have also developed certain manufacturing processes and other methods
of applying our patented technology that we protect as trade secrets. We believe
these trade secrets are important for the effective and efficient use of the
patented technology and that a competitor with a right to use the patented
technology would be required to develop comparable manufacturing and other
processes to compete effectively. We require our employees to sign nondisclosure
agreements and seek to limit access to sensitive information to the greatest
practical extent.

We actively enforce our patents. When a potential infringing company is
identified, we first seek to notify the company of our patent rights.
Historically, we have been successful in negotiating license arrangements. If an
agreement cannot be reached, we will pursue legal remedies.

While we believe our patents afford some competitive advantage, such
protection is limited by the resources available to us to identify potential
infringements and to defend our rights against infringement. The extent of the
protection offered by any patent is subject to determinations as to its scope
and validity that would be made only in litigation. We cannot be sure that our
patents will afford meaningful protection from competition.

Employees

We had 107 full-time employees in the United States as of December 31,
2001; 101 at our corporate offices and manufacturing facilities in California,
and six at our regional sales offices. Our Japanese subsidiary had 24 employees
and five employees were located in Hong Kong at our Chinese subsidiary on that
date.

ITEM 2. PROPERTIES

Our corporate offices and principal manufacturing facilities are located
in a 35,333 square foot leased facility in Camarillo, California. The lease on
the Camarillo premises runs until August 2003 and provides for an average
monthly rent payment of $20,681. We believe that this facility will be adequate
to meet our requirements for at least the next 12 months. Our two regional sales
offices operate out of leased facilities. Our Japanese subsidiary, Interlink
Electronics, K.K., leases office space in Tokyo. Our Hong Kong subsidiary leases
office and warehouse space in Hong Kong and mainland China.

ITEM 3. LEGAL PROCEEDINGS

We are not engaged in any litigation that we expect will have a material
adverse effect on our business, financial condition or results of operation.
From time to time, we are involved in various legal actions which arise in the
ordinary course of business. We do not believe that losses incurred, if any,
will

14

have a significant impact on the Company's financial position or results of
operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At a Special Meeting of Stockholders of the Company on December 20, 2001,
the holders of our outstanding common stock took actions described below. At
November 13, 2001, the record date, 9,758,772 shares of common stock were
outstanding and eligible to vote at the Special Meeting of Stockholders.

By the vote indicated below, the stockholders approved the proposed
amendments to the Company's 1996 Stock Incentive Plan:

3,654,855 Shares in favor
975,633 Shares against
499,838 Shares withheld

ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT

The following table contains information as of March 9, 2002 with respect
to each person who is an executive officer of Interlink:

Name Age Position
- ---- --- --------

E. Michael Thoben, III............ 48 President, Chief Executive Officer and
Chairman of the Board
Paul D. Meyer..................... 42 Chief Financial Officer and Secretary
Tamio Mori........................ 55 President and General Manager,
Interlink Electronics K.K.
Michael W. Ambrose................ 42 Sr. Vice President--Engineering

E. Michael Thoben, III has served as Interlink's president, chief
executive officer and chairman of the board of directors since 1994. From 1990
to 1994, he served as Interlink's president and a director. Prior to joining
Interlink in 1990, Mr. Thoben was employed by Polaroid Corporation for 11 years,
as the manager of one of Polaroid's seven strategic business units on a
worldwide basis. Mr. Thoben holds a B.S. degree from St. Xavier University and
has taken graduate management courses at the Harvard Business School and The
Wharton School of Business.

Paul D. Meyer has served as Interlink's chief financial officer since
December 1996. From 1994 to 1996, he served as vice president--finance, and from
1989 to 1994 he served as controller. From May 1988 to December 1989, Mr. Meyer
served as controller for Dix-See Sales Company. From September 1985 to May 1988,
he served as corporate accounting manager for Bell Industries. Mr. Meyer was
employed at Price Waterhouse from 1983 to 1985. Mr. Meyer is a Certified Public
Accountant and holds a B.A. degree in economics from the University of
California, Los Angeles.

Tamio Mori has served as the president and general manager of Interlink
Electronics K.K., Interlink's 80% owned Japanese subsidiary, since 1993. Prior
to Interlink, Mr. Mori served in increasingly senior positions for 22 years with
Mitsubishi Petrochemical Corporation, most recently as Assistant General Manager
of New Business Development. He has a M.S. in Chemical Engineering and a B.S. in
Organic Chemistry from Waseda University.

Michael W. Ambrose has served as Interlink's vice president--engineering
since June 1999. Between March 1998 and June 1999, he was director of
engineering. From August 1995 to February 1998, he served as the director of
marketing of Communication Intelligence Corp., a computer software company
specializing in software for mobile computing, e-signatures and computer
security. Prior to August 1995, he was employed by Logitech Inc., a computer
peripherals company, as the general manager of its Gazelle Business Unit and as
vice president of product marketing for Gazelle Graphic

15

Systems. Mr. Ambrose holds a B.S. degree in electrical engineering from
Washington State University.

16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock trades on the Nasdaq National Market System under the
symbol "LINK." The following table sets forth the high and low closing prices
for the common stock as reported on the Nasdaq National Market for the quarters
indicated. These prices do not include retail markups, markdowns or commissions.
The prices reflect a three-for-two stock split effected as a stock dividend on
shares of our common stock outstanding on March 20, 2000.

Low High
Year ending December 31, 2000
First Quarter........................................... $25.33 $69.17
Second Quarter.......................................... 17.31 62.67
Third Quarter........................................... 15.00 50.00
Fourth Quarter.......................................... 8.50 31.73
Year ended December 31, 2001
First Quarter........................................... $3.00 $16.00
Second Quarter.......................................... 2.91 11.38
Third Quarter........................................... 2.05 8.45
Fourth Quarter.......................................... 2.13 4.93
Year ending December 31, 2002
First Quarter (through March 26, 2002).................. $2.75 $6.35

On March 20, 2002, the closing price of the common stock on the Nasdaq
National Market was $5.41. As of March 20, 2002 there were approximately 1,500
shareholders of record of our common stock. We believe the number of beneficial
owners is substantially greater than the number of record holders because a
large portion of Interlink's outstanding common stock is held of record in
broker "street names" for the benefit of individual investors. As of March 20,
2002 there were 9,758,872 shares outstanding.

We have never declared or paid cash dividends on our common stock. Payment
of any cash dividends will depend on the results of our operations, our
financial condition and our capital expenditure plans, as well as other factors
our board of directors may consider relevant. We presently intend to retain any
earnings for use in our business and, therefore, do not anticipate paying any
cash dividends in the foreseeable future.

17

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read 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 Form 10-K. The consolidated statements of
operations data for the years ended December 31, 1999, 2000 and 2001 and the
consolidated balance sheet data at December 31, 2000 and 2001 are derived from
our consolidated financial statements which have been audited by Arthur Andersen
LLP, our independent public accountants, and are included elsewhere in this Form
10-K. The statements of operations data for the years ended December 31, 1997
and 1998 and the consolidated balance sheets dated as of December 31, 1997, 1998
and 1999 are derived from our consolidated financial statements which have been
audited by Arthur Andersen LLP and are not included in this Form 10-K.

Year Ended December 31,
-----------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(in thousands, except per-share data)

Statement of Operations Data:
Revenues $19,153 $22,095 $28,106 $33,870 $25,265
Cost of revenues 11,829 13,954 17,640 19,453 16,454
------- ------- ------- ------- -------
Gross profit 7,324 8,141 10,466 14,417 8,811

Operating expenses:
Product development and research 1,600 1,416 2,225 3,222 3,518
Selling, general and administrative 5,555 5,837 5,799 7,612 8,278
------- ------- ------- ------- -------
Total operating expenses 7,155 7,253 8,024 10,834 11,796
------- ------- ------- ------- -------
Operating income (loss) 169 888 2,442 3,583 (2,985)
------- ------- ------- ------- -------

Other income (expense):
Minority interest -- -- (31) (25) (12)
Interest income (expense) (152) (127) 35 94 174
Cost of cancelled equity offering -- -- -- (769) --
Other 13 (359) (86) (49) 45
------- ------- ------- ------- -------
Total other income (expense) (139) (486) (82) (749) 207
------- ------- ------- ------- -------

Income (loss) before provision
for income tax expense 30 402 2,360 2,834 (2,778)

Provision for income tax expense (benefit) -- -- 252 (274) (764)
------- ------- ------- ------- -------
Net income (loss) $ 30 $ 402 $ 2,108 $ 3,108 $(2,014)
------- ------- ------- ------- -------

Earnings (loss) per share--basic(1) $ 0.00 $ 0.05 $ 0.26 $ 0.35 $ (0.21)
Earnings (loss) per share--diluted(1) $ 0.00 $ 0.05 $ 0.21 $ 0.28 $ (0.21)

December 31,
------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(in thousands)
Balance Sheet Data:
Working capital $12,461 $14,139 $17,644 $22,528 $19,333
Total assets 17,555 19,577 24,707 31,774 26,641
Short term debt 1,090 630 518 2,079 1,923
Long term debt 724 1,423 1,424 2,598 1,855
Stockholders' equity 13,453 14,665 18,247 22,433 20,305

- -----------
(1) As adjusted for the three-for-two stock split effected as a stock dividend
to stockholders of record on March 20, 2000.

18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Historical Factors Affecting Financial Performance

We were incorporated in California in February 1985 and reincorporated in
Delaware in July 1996. From 1985 to 1992, we developed and refined our Force
Sensing Resistor, or FSR, technology and sold it to customers for electronic,
musical, medical and other applications, which we now refer to as the specialty
components market. In 1992, we introduced our first Interlink-branded
computer-pointing device, PortaPoint, and in 1994, we introduced our first
wireless pointing device. The device, called RemotePoint, established Interlink
as a leading supplier of branded and OEM remote controls and other products for
the computerized presentation system market. In 1999, we introduced the
electronic signature capture product, ePad, for our e-transactions market. In
2000, we first demonstrated IntuiTouch technology for the home entertainment
market.

In accordance with recent Securities and Exchange Commission guidance,
those material accounting policies that we believe are the most critical to an
investor's understanding of our financial results and condition and require
complex management judgment are discussed below. Information regarding our other
accounting policies is included on page F-7 of this report.

The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as
amended by SAB 101A and 101B. SAB 101 requires that four basic criteria must be
met before revenue can be recognized: (1) persuasive evidence of an arrangement
exsists; (2) delivery has occurred or services rendered; (3) the fee is fixed
and determinable; and (4) collectibility is reasonably assured. Determination of
criteria (3) and (4) could require management's judgements regarding the fixed
nature of the fee charged for services rendered and products delivered and the
collectibility of those fees. Should changes in conditions cause management to
determine these criteria are not met for certain future transactions, revenue
recognized for any reporting period could be adversely affected.

The Company's accounts receivables are unsecured, and the Company is at
risk to the extent such amounts become uncollectible. The Company continually
monitors account receivable balances, and provides for an allowance of doubtful
account at the time collection may become questionable based on payment history
or age of the receivable and other factors related to the customers ability to
pay.

We first achieved profitable operations in 1995. Because of net operating
loss carryforwards available both for our U.S.-based and Japan-based operations,
we did not accrue income tax expense until 1999. In that year, due to the
expiration or full utilization of NOL carryforwards in California and Japan, we
began to record a provision for income tax expense in those jurisdictions. By
the end of 2000, we also began to accrue an income tax benefit related to our
federal NOL carryforwards to be used in future periods. However, in mid-2001, we
began to record quarterly tax losses and suspended any further recognition of
NOL carryforward tax benefits. Management believes we will be able to utilize
the net deferred tax asset; however, if we do not return to quarterly
profitability in 2002, it is likely that we will eliminate this asset ($1.3
million) by recording a tax expense.

Other income (expense) was significant in 1998 and 2000 as the result of a
non-recurring legal settlement expense in 1998 and an expense associated with a
public offering of our securities that was cancelled in 2000.

Prior to 1999, operations was a net user of cash that we funded through
existing cash balances, private placements of equity and to a lesser extent,
bank and lease financing. In 1999, operations was a net provider of cash,
generating $2.9 million. In 2000 and 2001, operations was essentially cash flow
break-even to marginally positive.

In response to the economic slowdown in mid-2001, we restructured our
operations and adjusted our inventory and bad debt reserves by $2 million and
$300,000 respectively. We believe these estimates of potential losses are
adequate at December 31, 2001. However, a further deterioration of the financial
health of our customers either in the U.S. or Japan may prove those estimates to
be inadequate.

We have established relationships with most of the major OEMs in the
business communications market. Many of these OEMs are based in Japan and
approximately 40% of our 2001 revenues came from

19

Japanese customers. The primary end-user market for the business communications
market is the U.S., however our Japanese customers are affected by the on-going
recession in Japan. Revenues from these customers are denominated in Japanese
yen and as a result we are subject to foreign currency exchange rate
fluctuations in the yen/dollar exchange rate. We use foreign currency forward
contracts to hedge this exposure. The gain or loss from these contracts is
recorded in business communications revenue ($750,000 gain in 2001). These
contracts typically have a six-month duration; thus, yen/dollar fluctuations
lasting more than six months will have an impact on our revenues. In addition,
as our Japan subsidiary's functional currency is the yen, the translation of the
net assets of that subsidiary into the consolidated results will fluctuate with
the yen/dollar exchange rate.

We licensed certain technology related to the production of FSR sensors to
International Electronics and Engineering (IEE), a former affiliate based in
Luxembourg, for use in connection with sales of sensors to the automotive
industry. We received significant payments under this license agreement
commencing in 2000 ($2.5 million) and continuing through the third quarter of
2001 ($1.5 million). No further payments are due under this agreement. We have
occasionally licensed other aspects of our technology in connection with the
settlement of intellectual property disputes and expect to continue to do so in
the future. However, there are no current contingencies under which we would
earn significant licensing revenue.

2001 Overview

2001 revenue by market segment is shown in the following table:

- --------------------------------------------------------------------------------
Percent of
Market Segment 2001 Revenue Total Sales
- --------------------------------------------------------------------------------
Business Communications $16.3 million 64%
- --------------------------------------------------------------------------------
Specialty Components 6.1 million 24
- --------------------------------------------------------------------------------
Home Entertainment 2.0 million 8
- --------------------------------------------------------------------------------
E-Transactions 1.0 million 4
- --------------------------------------------------------------------------------

Our principal source of revenue continues to be our business
communications market. Sales in that market declined as a result of general
economic conditions and resulting adjustments to purchasing and inventory levels
by our customers. However, our market position continues to be very strong and
we should be in a position to benefit from any upturn in sales of presentation
systems.

Specialty components, our original market, continues to be a strong
contributor to revenue. In 2000 and the first three quarters of 2001, revenue in
this market segment was positively affected by licensing revenue from IEE, which
will not recur in 2002. We expect specialty components to continue to be a
significant contributor to our revenue but do not anticipate significant growth
in this market.

As noted elsewhere in this report, our e-transactions business was
adversely affected during the period by a general slowdown in new equipment
purchasing; nonetheless, we have consummated significant transactions with two
insurance companies and two companies in the financial services industry and
continue to build our volume of sales in smaller orders. At both large and small
volumes, sales of E-transaction devices tend to result in "one-time" revenue and
therefore sales levels in this segment can be more volatile than in other
markets in which we operate. However, we believe that the increasing installed
base of our e-transactions devices can have a positive effect on future sales by

20

providing evidence of technological soundness and customer acceptance.

Revenue in the home entertainment sector results primarily from sales of
an FSR based component for use in the Microsoft Xbox game controller. We expect
that these sales will continue in 2002 but that revenue from our IntuiTouch
products will develop slowly as new technologies are introduced by our customers
and development partners. At the date of this report, we do not expect
meaningful revenues from IntuiTouch products until 2003.

In 2001, we recorded our first annual decline in revenue in more than a
decade and our first annual loss since 1994. We believe that these results were
significantly affected by general economic conditions that affected purchasing
levels in our established business communications and specialty components
markets and slowed penetration in our new e-transactions and home entertainment
markets. In the case of particular industries, such as the insurance industry
that we have targeted for our e-transactions products, the events of September
11 further impacted our ability to achieve penetration levels that we had
originally anticipated. While these factors may continue to affect our results
in 2002, we believe that our basic market positioning is sound. We continue to
enjoy a dominant share of the OEM business presentations controller market and
are having some success in developing sales channels for branded aftermarket
products. Our FSR based products and components continue to sell well in both
our specialty components and our home entertainment markets, our e-transactions
business appears to be gaining traction and we believe that our technology,
products and commercial relationships addressing interactive digital remote
communication put us in a position to capitalize on any growth in this market
sector.

Despite the downturn in revenues in 2001, we chose to maintain our
commitment to research and development, spending slightly more in 2001 than in
the prior year and also increased selling, general and administrative expense.
During the second quarter of fiscal 2001, as a result of a continued decline in
revenues and customer demand, the Company provided additional reserves of $2
million for excess and obsolete inventories. The continued industry-wide
reduction in spending and the resulting decrease in demand for the Company's
products led to significant reductions in the Company's sales forecast. The
Company's regular and ongoing reserve analysis and methodology includes a
comparison of sales forecasts and inventory levels. As a result of the analysis
based on second quarter sales forecast revisions, the company recorded a charge,
which was included in the cost of revenues. Increases to the inventory reserve
during the remainder of fiscal 2001 were not significant. In addition, we
recorded a $300,000 increase in bad debt reserves in the third quarter of 2001
due to changes in certain customers' ability to pay arising after the original
sales had been made.

The loss in 2001 resulted in modest reductions in working capital and
stockholders' equity. However, liquidity remains relatively strong and we
foresee no immediate need for additional capital or immediate risk of capital
inadequacy.

Results of Operations

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

Years Ended December 31,
------------------------
1999 2000 2001
---- ---- ----

Revenues 100% 100% 100%
---- ---- ----
Gross profit 37 42 35
Operating expenses:
Product development and research 8 10 14
Selling, general and administrative 20 22 33
---- ----- ----
Total operating expenses 28 32 47
---- ----- ----
Operating income (loss) 9 10 (12)
Other income (expense) -- (2) 1
Income tax expense (benefit) 1 (1) (3)
---- ----- ----
Net income (loss) 8% 9% (8)%
==== ===== ====

Fiscal Year Ended December 31, 2001 Compared with Fiscal Year Ended December 31,
2000

Revenues decreased 25% from $33.9 million in 2000 to $25.3 million in
2001. This revenue decline is a result primarily of the worldwide slowdown in
sales to the business communications and specialty components markets. In
addition, the expiration of the IEE license agreement yielded $1.0 million lower
royalty revenues in 2001.

Gross profit as a percentage of sales declined to 35% in 2001 from 42% in
2000 due primarily to the $2 million excess inventory reserve adjustment in the
second quarter of 2001.

Product development and research expense increased 9% from $3.2 million in
2000 to $3.5 million in 2001 while increasing to 14% as a percentage of sales
from 10%. The increase reflects our continuing commitment to develop products
that will support our leadership position in our existing and targeted markets.

Selling, general and administrative expense increased 9% from $7.6 million
in 2000 to $8.3 million in 2001 and increased as a percentage of sales from 22%
in 2000 to 33% in 2001. The higher dollar amount in 2001 reflects a full year
expense for individuals hired in 2000 for the e-transactions and home
entertainment segments, coupled with the $300,000 adjustment to bad debt
reserves in the third quarter of 2001. We implemented a "cost-reduction" plan in
the second quarter of 2001 that resulted in a reduction of quarterly SG&A
expenses to $1.9 million by the fourth quarter. Thus extrapolating fourth
quarter SG&A, the current annual "run-rate" of SG&A is at a lower level than the
$7.6 million SG&A for 2000.

In 2001, we recorded an additional deferred tax asset of $701,000 related
to our federal net operating loss carryforwards. Due to a lack of quarterly
profitability, we suspended further additions to the deferred tax asset in the
fourth quarter of 2001. However, management believes the net deferred tax asset
($1.3 million) will be realized.

For the year 2001, our operating loss was $3.0 million and the net loss
was $2.0 million due primarily to the lower revenues and the inventory reserve
adjustment in the second quarter.

Fiscal Year Ended December 31, 2000 Compared with Fiscal Year Ended December 31,
1999

Revenues increased 21% from $28.1 million in 1999 to $33.9 million in
2000. This revenue growth was a result primarily of growth in sales to the
business communications market and, to a lesser extent, from a twofold increase
in home entertainment sales to $2.9 million reflecting our initial penetration
of that market.

Gross profit as a percent of sales improved to 42% in 2000 from 37% in
1999 due to growth in home entertainment and $2.6 million in licensing revenues.

22

Product development and research expense increased 45% from $2.2 million
in 1999 to $3.2 million in 2000 while increasing marginally as a percentage of
sales. The increase reflects our continuing commitment to develop products that
will support our leadership position in our existing and targeted markets.

Selling, general and administrative expense increased 31% from $5.8
million in 1999 to $7.6 million in 2000 and increased as a percentage of sales
from 20% in 1999 to 22% in 2000 . The percentage increase reflects the creation
of sales and marketing teams for the home entertainment and e-transaction
markets.

In 2000, we recorded a nonrecurring expense of $769,000 related to a
cancelled public stock offering.

In 2000, we recorded a deferred tax asset of $600,000 related to our $12.8
million in federal net operating loss carryforwards.

Operating income was $3.6 million and net income was $3.1 million in 2000,
the increases over 1999 were primarily attributable to increased sales.

23

Quarterly Results of Operations

The following table presents unaudited consolidated statement of
operations data for each of the eight quarters ended December 31, 2001, as well
as such data expressed as a percentage of revenue. We believe that all necessary
adjustments have been included to fairly present the quarterly information when
read in conjunction with the consolidated financial statements. The operating
results for any quarter are not necessarily indicative of the results for any
subsequent quarter.

Quarter Ended (unaudited)
-------------------------
(in thousands)
March 31, June 30, Sept 30, Dec 31, March 31, June 30, Sept 30, Dec 31,
2000 2000 2000 2000 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ---- ----

Revenues $7,685 $8,257 $8,625 $9,303 $7,389 $6,539 $6,036 $ 5,301

Cost of revenues 4,771 4,661 4,833 5,188 4,117 5,685 3,572 3,080
------ ------ ------ ------ ------ ------ ------ -------

Gross profit 2,914 3,596 3,792 4,115 3,272 854 2,464 2,221
Operating expenses:
Product development
and research 619 955 725 923 844 1,001 839 834
Selling, general
and administrative 1,511 1,790 2,207 2,104 1,999 2,183 2,218 1,878
------ ------ ------ ------ ------ ------ ------ -------
Total operating expenses 2,130 2,745 2,932 3,027 2,843 3,184 3,057 2,712
Operating income (loss) 784 851 860 1,088 429 (2,330) (593) (491)
Other income (expense) 72 (783) 43 (81) 110 57 16 24
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before income tax 856 68 903 1,007 539 (2,273) (577) (467)
Income tax expense (benefit) 144 -- 106 (524) (194) (455) (115) --
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss) $ 712 $ 68 797 $1,531 $ 733 $(1,818) $ (462) $ (467)
====== ====== ====== ====== ====== ====== ====== =======

March 31, June 30, Sept 30, Dec 31, March 31, June 30, Sept 30, Dec 31,
2000 2000 2000 2000 2001 2001 2001 2001
---- ---- ---- ---- ---- ---- ---- ----
Revenues 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues 62.1 56.5 56.0 55.8 55.7 86.9 59.2 58.1
------ ------ ------ ------ ------ ------ ------ -------
Gross profit 37.9 43.5 44.0 44.2 44.3 13.1 40.8 41.9
Operating expenses:
Product development
and research 8.0 11.5 8.4 9.9 11.4 15.3 13.9 15.7
Selling, general
and administrative 19.7 21.7 25.6 22.6 27.1 33.4 36.7 35.4
------ ------ ------ ------ ------ ------ ------ -------
Total operating expenses 27.7 33.2 34.0 32.5 38.5 48.7 50.6 51.1
------ ------ ------ ------ ------ ------ ------ -------
Operating income (loss) 10.2 10.3 10.0 11.7 5.8 (35.6) (9.8) (9.2)
Other income (expense) 0.9 (9.5) 0.5 (0.9) 1.5 .8 .2 .4
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before income tax 11.1 0.8 10.5 10.8 7.3 (34.8) (9.6) (8.8)
Income tax expense (benefit) 1.9 -- 1.3 (5.6) (2.6) (7.0) (1.9) --
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss) 9.2% 0.8% 9.2% 16.4% 9.9% (27.8)% (7.7)% (8.8)%
====== ====== ====== ====== ====== ====== ====== =======

24

Revenue declined on a quarter-to-quarter basis during the year, primarily
as a result of worsening conditions in the business communications market in
Japan. The principal factor affecting the decline from the third to the fourth
quarter was the loss of licensing revenue from IEE; thus the decline in revenue
from other sources between the two last quarters of the year was actually less
severe than declines earlier in the year. Early indications are that revenue in
the first quarter of 2002 will be at or slightly above fourth quarter levels,
indicating a bottoming out in the current adverse business cycle. Our current
business plan calls for profitable operations in the second half of 2002, based
on numerous assumptions which include a reversal of the decline in sales of
computerized presentation systems and increasing penetration of the
e-transactions market.

Liquidity and Capital Resources

Working capital at December 31, 2001 was $19.3 million versus $22.5
million at the end of 2000. The decrease is a result primarily of the operating
loss for the year

Operations generated a positive cash flow of $245,000 in 2001 as compared
to an $85,000 negative cash flow in 2000. The improvement is due primarily to
lower accounts receivable balances partially offset by a decrease in accounts
payable.

We spent $413,000 in 2001 and $640,000 in 2000 to purchase additional
manufacturing equipment and computer equipment related to our internal computer
network.

Primarily from Japanese banks, we received proceeds from unsecured
long-term bank loans of $4 million and $1.2 million in 2000 and 2001
respectively. We made payments on long-term debt of $1.0 million and $2.0
million in 2000 and 2001 respectively. Net proceeds for the exercise of stock
options were $1.4 million and $1 million in 2000 and 2001 respectively.

We believe we can fund operations for at least the next twelve months from
our current cash and marketable security balances ($9.3 million). Secondly, we
have a maximum amount available under our Japanese bank line of credit of $1.1
million, none of which was used as of December 31, 2001. Our U.S. line of credit
was unused at December 31, 2001 and had $5 million of availability as of that
date. We have a $1 million equipment lease line, $354,000 was used at December
31, 2001. At December 31, 2001 we were in violation of certain financial
covenants related to our U.S. lines of credit; we received a waiver of those
covenants from the bank. We anticipate we will be out of compliance with these
covenants in early 2002 and as a result we are currently re-negotiating the
agreements to remove these covenants. It is likely that the new agreements will
require the lines of credit to be fully secured by cash deposited at that bank.
The exercise of outstanding stock options is also a potential source of equity
capital that may be available to us.

Recent Accounting Pronouncements--In June 2001, the FASB issued two
statements: SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets," which provided guidance on the accounting for
business combinations, require all future business combinations to be accounted
for using the purchase method, discontinue amoritization of goodwill, define
when and how intangible assets are amortized, and require an annual impairment
test for goodwill. We will adopt these statements in 2002 and are currently
reviewing these statements to determine their impact; however, we do not expect
the adoption of these statements to have a material impact on our financial
position or results of operations. The Financial Accounting Standards Board
(FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", applicable to financial statements issued for fiscal years
beginning after December 15, 2001. The FASB's new rules on asset impairment
supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and portions of Accounting Principles
Bulletin Opinion 30, "Reporting the Results of Operations". This Standard
provides a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. The provisions of this Standard are not expected to have a
material impact on the Company's financial position or operating results.

Item 7(A). Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Risk

Our Japanese subsidiary, Interlink Electronics K.K., generally makes sales
and collects its accounts receivable in Japanese yen. To hedge these revenues
against future movements in exchange rates, we purchase foreign exchange forward
contracts. Gains or losses on the forward contracts are then offset by gains or
losses on the underlying revenue exposure and consequently a sudden or
significant change of foreign exchange rates would not have a material impact on
net income or cash flows to the extent future revenues are protected by forward
currency contracts.

These contracts, however, typically have a six-month duration. Thus, yen/dollar
fluctuations lasting more than six months will have an impact on our revenues.
During 2001, we entered into foreign currency

25

exchange contracts in the normal course of business to manage our exposure
against foreign currency fluctuations on revenues denominated in foreign
currencies. The principal objective of such contracts is to minimize the risks
and costs associated with financial and global operating activities. We do not
utilize financial instruments for trading or other speculative purposes. The
fair value of foreign currency exchange contracts is estimated by obtaining
quotes from bankers. At December 31, 2001, the Company had foreign currency
exchange contracts outstanding with a notional value of $3.8 million. During
fiscal 2001, we recognized $750,000 of gains on foreign currency exchange
contracts which is reflected in revenue in the accompanying consolidated
statements of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The information required by this item is included at pages F-1 to F-14 and
as listed in Item 14 of Part IV.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to our directors will be included in our
definitive proxy statement for our 2002 Annual Meeting of Stockholders (the
"2002 Proxy Statement") is incorporated herein by reference. Information with
respect to our executive officers is included under Item 4(A) of Part I of this
Report. Information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 will be included in the 2002 Proxy Statement and
is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to executive compensation will be included in the
2002 Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to security ownership of certain beneficial
owners and management will be included in the 2002 Proxy Statement and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to certain relationships and related transactions
with management and affiliates will be included in the 2002 Proxy Statement and
is incorporated herein by reference.

26

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

Page in this
------------
Report.
-------
Index to Consolidated Financial Statements............................. F-1
Report of Independent Public Accountants............................... F-2
Consolidated Balance Sheets as of December 31, 2000 and
December 31, 2001.................................................... F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2001.......................... F-4
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 2001................ F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2001.......................... F-6
Notes to Consolidated Financial Statements............................. F-7

2. Exhibits

The exhibits listed below are filed as part of this report.

Exhibit
Number
------

3.1 Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000).

3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000). 1993
Stock Incentive Plan (incorporated by reference to Exhibit 10.1a of the
Registrant's Amendment No. 8 to

10.1 Registrant's Registration Statement on Form S-1 (Registration No.
333-60380) (the "Form S-1 Registration Statement")).

10.2 1996 Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 10.1 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000).

10.3 Description of Registrant's Management Compensation Program
(incorporated by reference to Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996).

10.4 Lease Agreement, dated August 15, 1998 (incorporated by reference to the
Registrant's Annual Report on Form 10- K for the year ended December 31,
1998).

10.5 License Agreement between the Registrant and Toshiba Silicone Co., Ltd.
dated March 10, 1989 (incorporated by reference to Exhibit 10.14 of the
Form S-1 Registration Statement).

10.6 Restructuring Agreement, entered into and effective as of September 7,
1994, by and between InvestAR S.a.r.l., Interlink Electronics Europe,
S.a.r.l., and IEE Finance, S.a.r.l. (incorporated by reference to
Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999).

27

10.7 Exclusive License and Distributor Agreement between the Registrant and
Interlink Electronics Europe S.a.r.l., Amended and Restated as of
September 7, 1994 (incorporated by reference to Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1999).

10.8 Agreement between the Government of Luxembourg, Interlink Electronics
Europe S.a.r.l., IEE Finance S.a.r.l., the Registrant and InvestAR
S.a.r.l. dated December 18, 1989 (incorporated by reference to Exhibit
10.19 of the Form S-1 Registration Statement).

10.9 Agreement with InvestAR S.a.r.l. and ARBED S.A. (undated) (incorporated
by reference to Exhibit 10.20 of the Form S-1 Registration Statement).

10.10 Ink Technology Transfer Agreement between the Registrant and InvestAR
S.a. r.l. dated December 11, 1992 (incorporated by reference to Exhibit
10.23 of the Form S-1 Registration Statement). Financing Agreement
between the Registrant and InvestAR S.a. r.l. in relation with the Ink
Technology Transfer

10.11 Agreement dated December 11, 1992 (incorporated by reference to Exhibit
10.24 of the Form S-1 Registration Statement).

10.12 Form of Confidentiality and Nondisclosure Agreement in relation with the
Ink Technology Transfer Agreement (undated) (incorporated by reference
to Exhibit 10.25 of the Form S-1 Registration Statement).

10.13 Form of Escrow Agreement for Technology in relation with the Ink
Technology Transfer Agreement dated December 11, 1992 (incorporated by
reference to Exhibit 10.26 of the Form S-1 Registration Statement).

10.14 Credit Agreement between Wells Fargo Bank, National Association, and the
Registrant dated September 1, 2000 (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000). +

21.1 Subsidiaries of the Registrant.

23.1 Consent of Arthur Andersen LLP.

24.1 Power of Attorney (see signature page).

99.1 Letter of Arthur Andersen LLP

- ----------

+ Exhibits for which Registrant has received confidential treatment for
certain portions. The confidential material in such exhibits has been
redacted and separately filed with the Securities and Exchange Commission
as part of Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the quarter ended December 31,
2001.

28

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Camarillo, State of California on April 1, 2002.

INTERLINK ELECTRONICS, INC.
By:
/s/ E. MICHAEL THOBEN, III
------------------------------------------
E. Michael Thoben, III
Chairman, Chief Executive Officer and President

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints E. Michael Thoben, III and Paul D. Meyer,
and each of them, his or her attorneys-in-fact and agents, each with full power
of substitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments to this Report, and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection with this
Report, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that any of said attorneys-in-fact
and agents, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on April 1, 2002 on
behalf of the Registrant and in the capacities indicated:

Signatures Title

/s/ E. MICHAEL THOBEN, III President, Chief Executive Officer and
- ---------------------------- Chairman of the Board of Directors
E. Michael Thoben, III (Principal Executive Officer)

/s/ PAUL D. MEYER Chief Financial Officer and Secretary
- ---------------------------- (Principal Financial Officer and
Paul D. Meyer Principal Accounting Officer)

/s/ GEORGE GU Director
- ----------------------------
George Gu

/s/ EUGENE F. HOVANEC Director
- ----------------------------
Eugene F. Hovanec

/s/ MERRITT M. LUTZ Director
- ----------------------------
Merritt M. Lutz

/s/ JOHN A. BUCKETT, II Director
- ----------------------------
John A. Buckett, II

29

INTERLINK ELECTRONICS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Index to Consolidated Financial Statements................................ F-1
Report of Independent Public Accountants.................................. 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-7

F-1

Report of Independent Public Accountants

To Interlink Electronics, Inc.:

We have audited the accompanying consolidated balance sheets of Interlink
Electronics, Inc. (a Delaware corporation) and its subsidiaries as of December
31, 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 December 31, 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 conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits 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 Interlink Electronics, Inc.
and its subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.

ARTHUR ANDERSEN LLP

Los Angeles, California
February 13, 2002

F-2

INTERLINK ELECTRONICS, INC.
CONSOLIDATED BALANCE SHEETS (In thousands, except par value)
- ------------------------------------------------------------

Assets December 31,

Current assets: 2000 2001
---- ----
Cash and cash equivalents $10,506 $ 6,868
Marketable securities -- 2,457
Accounts receivable, less allowance for
doubtful accounts of $722 and $914
in 2000 and 2001, respectively 8,613 5,493
Inventories 9,435 8,502
Prepaid expenses and other current assets 661 426
------- -------
Total current assets 29,215 23,746
------- -------
Property and equipment, net 1,632 1,393
Deferred tax asset 600 1,301
Patents and trademarks, less accumulated
amortization of $860 and $981
in 2000 and 2001, respectively 235 114
Other assets 92 87
------- -------
Total Assets $31,774 $26,641
======= =======

Liabilities And Stockholders' Equity
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ 2,079 $ 1,923
Accounts payable 3,305 1,679
Accrued payroll and related expenses 936 609
Other accrued expenses 367 202
------- -------
Total current liabilities 6,687 4,413
------- -------
Minority interest 56 68
Long-term debt, net of current portion 2,547 1,855
Capital lease obligations, net of current portion 51 --
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $5.00 par value
(100 shares authorized, none issued and outstanding) -- --
Common stock $0.00001 par value
(50,000 shares authorized, 9,249
and 9,759 issued and outstanding
at December 31, 2000 and 2001, respectively) 27,630 29,029
Due from stockholders -- (838)
Accumulated other comprehensive income (loss) (168) (843)
Accumulated deficit (5,029) (7,043)
------- -------
Total stockholders' equity 22,433 20,305
------- -------
Total Liabilities and Stockholders' Equity $31,774 $26,641
======= =======

The accompanying notes are an integral part of these consolidated balance
sheets.

F-3

INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)

Years Ended December 31,
------------------------
1999 2000 2001
---- ---- ----

Revenues $28,106 $33,870 $25,265
Cost of revenues 17,640 19,453 16,454
------- ------- -------
Gross profit 10,466 14,417 8,811
Operating expenses:
Product development and research 2,225 3,222 3,518
Selling, general and administrative 5,799 7,612 8,278
------- ------- -------
Total operating expenses 8,024 10,834 11,796
------- ------- -------
Operating income (loss) 2,442 3,583 (2,985)
------- ------- -------
Other income (expense):
Minority interest (31) (25) (12)
Interest income, net 35 94 174
Cost of cancelled equity offering -- (769) --
Other income (expense) (86) (49) 45
------- ------- -------
Total other income (expense) (82) (749) 207
------- ------- -------
Income (loss) before provision for income tax expense 2,360 2,834 (2,778)
Provision for income tax expense (benefit) 252 (274) (764)
------- ------- -------
Net income (loss) $ 2,108 $ 3,108 $(2,014)
------- ------- -------

Earnings (loss) per share--basic $ 0.26 $ 0.35 $ (0.21)
Earnings (loss) per share--diluted $ 0.21 $ 0.28 $ (0.21)

Weighted average shares--basic 8,016 8,892 9,645
Weighted average shares--diluted 10,014 11,130 9,645

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)

Accumulated
Common Stock Other Total
------------------ Due From Comprehensive Accumulated Stockholder's
Shares Amount Stockholders Income (Loss) Deficit Equity
------ ------ ------------- ------------- ------- ------

Balance, December 31, 1998 7,824 $24,694 $-- $ 216 $(10,245) $14,665
Comprehensive income:
Net income 2,108 2,108
Foreign currency translation adjustment (29) (29)
-------
Comprehensive income 2,079
Exercise of options 729 1,503 1,503
----- ------- ---- ------- ------- -------
Balance, December 31, 1999 8,553 26,197 -- 187 (8,137) 18,247
Comprehensive income:
Net income 3,108 3,108
Foreign currency translation adjustment (355) (355)
-------
Comprehensive income 2,753
Exercise of options 696 1,433 1,433
----- ------- ---- ------- ------- -------
Balance, December 31, 2000 9,249 27,630 -- (168) (5,029) 22,433
Comprehensive income (loss):
Net loss (2,014) (2,014)
Foreign currency translation adjustment (675) (675)
-------
Comprehensive income (loss) (2,689)
Amounts due under rule 16(b) 369 (369) --
Loans to stockholders (469) (469)
Exercise of employee stock options 510 1,030 1,030
----- ------- ----- ------- ------- -------
Balance, December 31, 2001 9,759 $29,029 $(838) $ (843) $(7,043) $20,305
===== ======= ===== ======= ======= =======

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

INTERLINK ELECTRONICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)

Years Ended December 31,
------------------------
1999 2000 2001
---- ---- ----

Cash flows from operating activities:
Net income (loss) $ 2,108 $ 3,108 $(2,014)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Provision for bad debts 183 133 320
Depreciation and amortization 630 688 773
Minority interest 31 25 12
Deferred tax asset -- (600) (701)
Changes in operating assets and liabilities:
Accounts receivable (481) (1,764) 2,800
Inventories (1,132) (1,507) 933
Prepaid expenses and other current assets 1 (488) 235
Other assets (106) 125 5
Accounts payable 821 264 (1,626)
Accrued payroll and related expenses 807 (69) (492)
------- ------- -------
Net cash provided by (used in)
operating activities 2,862 (85) 245
------- ------- -------
Cash flows from investing activities:
Purchase of marketable securities -- -- (2,457)
Purchases of property and equipment (529) (640) (413)
Costs of patents and trademarks (104) (74) --
------- ------- -------
Net cash used in investing activities (633) (714) (2,870)
------- ------- -------
Cash flows from financing activities:
Payments on credit line (132) -- --
Borrowings on long term debt 583 3,967 1,194
Principal payments on long term debt (231) (1,049) (1,981)
Principal payments on capital lease obligations (331) (183) (112)
Loans to stockholders -- -- (469)
Proceeds from exercise of options 1,503 1,433 1,030
------- ------- -------
Net cash provided by (used in)
financing activities 1,392 4,168 (338)
------- ------- -------
Effect of exchange rate changes on cash
and cash equivalents (29) (355) (675)
------- ------- -------
Increase (decrease) in cash and cash equivalents 3,592 3,014 (3,638)
Cash and cash equivalents:
Beginning of year 3,900 7,492 10,506
------- ------- -------
End of year $ 7,492 $10,506 $ 6,868
======= ======= =======

Supplemental disclosure of cash flow information:
Interest paid $ 93 $ 128 $ 120
Income taxes paid 2 -- 33
Non-cash transactions:
Capital contribution through issuance of notes -- -- $ 369

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

INTERLINK ELECTRONICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER
31, 2001

1. Description of Business and Summary of Significant Accounting Policies

Interlink Electronics, Inc. and its subsidiaries (the "Company", "We",
"Our") is engaged in the development of intuitive interface technologies and
solutions for a variety of business and home applications. Our products enable a
user to control and communicate with various products such as computers, digital
projection systems, digital televisions and other electronic products,by
providing an intuitive device on which the user can remotely input a variety of
commands. Our products incorporate patented sensor and wireless communication
technologies and proprietary applications and ergonomic designs. Products
include interactive remote controls, pen input pads, wireless keyboards and
integrated mouse pointing devices. Force Sensing Resistors are a key component
of the Company's products.

Consolidation Policy--The consolidated financial statements include the
accounts of the Company, its 80 percent owned Japanese subsidiary, and its 100
percent owned Hong Kong subsidiary. All material intercompany accounts and
transactions have been eliminated.

Revenue Recognition--The Company recognizes product revenue, net of
allowances for returns and warranty, when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is reasonably assured. The Company generally warrants its
products against defects in materials and workmanship for one year. The
estimated cost of warranty obligations is recognized at the time of revenue
recognition. Royalty revenue is recorded when earned.

Shipping and Handling--The Company accounts for shipping and handling
costs in accordance with EITF 00-10, "Accounting for Shipping and Handling Fees
and Costs" which requires fees billed to customers to be included in revenue.
During 1999, 2000 and 2001, related shipping and handling expenses of $97,000,
$112,000 and $124,000, respectively, are included in selling, general and
administrative expenses in the accompanying consolidated statements of
operations.

401K Savings Plan--In 1995 the Company implemented a savings plan for all
eligible employees, which qualifies under Section 401(k) of the Internal Revenue
Code. Participating employees may contribute up to 25% of their pretax salary,
but not more than statutory limits. The Company matches 50% of the first $1,000
a participant contributes. The Company expensed $10,000, $10,000 and $35,000 in
1999, 2000 and 2001, respectively, related to this plan.

Recent Accounting Pronouncements--In June 2001, the FASB issued two
statements: SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets," which provide guidance on the accounting for
business combinations, require all future business combinations to be accounted
for using the purchase method, discontinue amoritization of goodwill, define
when and how intangible assets are amortized, and require an annual impairment
test for goodwill. We will adopt these statements in 2002 and are currently
reviewing these statements to determine their impact; however, we do not expect
the adoption of these statements to have a material impact on our financial
position or results of operations. The Financial Accounting Standards Board
(FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", applicable to financial statements issued for fiscal years
beginning after December 15, 2001. The FASB's new rules on asset impairment
supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", and portions of Accounting Principles
Bulletin Opinion 30, "Reporting the Results of Operations". This Standard
provides a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This Standard also requires

F-7

expected future operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as of the
measurement date as presently required. The provisions of this Standard are not
expected to have a material impact on the Company's financial position or
operating results.

Foreign Currency Translation/Transactions--The accounts of the Company's
Japanese subsidiary has been translated according to the provisions of Statement
of Financial Accounting Standards, or SFAS, No. 52, "Foreign Currency
Translation."The books and records of the Hong Kong subsidary are maintained in
the U.S. dollar. Management has determined that the functional currency of its
Japan subsidiary is the Japanese yen and is the U.S. dollar for the Hong Kong
subsidiary. Translation gains or losses for the Japanese subsidary are reflected
as other comprehensive income in the consolidated statement of stockholders'
equity. The Japanese subsidiary's balance sheets are translated into U.S.
dollars using the period-end exchange rate except for stockholders' equity
accounts, which are translated at rates in effect when these balances were
originally recorded. Revenues and expenses are translated at average rates
during the year. Any gain or loss resulting from foreign currency transactions
are reflected in the consolidated statements of operations for the period in
which they occur.

Cash Equivalents and Marketable Securities--The Company invests excess
cash in highly liquid commercial paper. Investments of original maturities less
than 90 days are classified as cash equivalents; those in excess of 90 days are
classified as marketable securities. Maturities typically do not exceed six
months. The Company's marketable securities are comprised of public corporate
debt and are classified as held to maturity and are recorded at cost which
approximates market. At December 31, 2001, the Company had $7.1 million at
financial institutions in excess of federally insured limits.

Financial Instruments--The carrying amounts of the Company's short-term
trade receivables and payables, line of credit, long-term debt and capital lease
obligations approximate their fair value as interest rates approximate market
rates for similar instruments. During 2000 and 2001, the Company entered into
foreign currency exchange contracts in the normal course of business to manage
its exposure against foreign currency fluctuations on revenues denominated in
foreign currencies. The principle objective of such contracts is to minimize the
risks and costs associated with financial and global operating activities. The
Company does not utilize financial instruments for trading or other speculative
purposes. The fair value of foreign currency contracts is estimated by obtaining
quotes from bankers. At December 31, 2001, the Company had foreign currency
contracts outstanding with a notional value of $3.8 million. During fiscal 2000
and 2001, the Company recognized $601,000 of gains and $750,000 of gains,
respectively, on foreign exchange contracts which are included in business
communication revenue in the accompanying consolidated statements of operations.

Inventories--Inventories are stated at the lower of cost or market and
includes material, labor, and factory overhead. Cost is determined using the
average cost method.

Property and Equipment--Property and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation is recorded on the
straight-line basis over the estimated useful lives of the assets which range
from three to ten years. Amortization of leasehold improvements is based upon
the estimated useful lives of the assets or the term of the lease, whichever is
shorter. Maintenance and repairs are charged to operations as incurred, while
significant improvements are capitalized. Upon retirement or disposition of
property, the asset and related accumulated depreciation or amortization are
removed from the accounts and any resulting gain or loss is charged to
operations. The carrying value of property and equipment is assessed quarterly
and/or when factors indicating an impairment are present. The Company recognizes
impairment losses when the expected future cash flows are less than the asset's
carrying value, in which case the asset is written down to its estimated
recoverable value.

Patents and Trademarks--The costs of acquiring patents and trademarks are
amortized on a straight-line basis over their estimated useful lives, ranging
from seven to seventeen years. Amortization expense for the years ended December
31, 1999, 2000 and 2001 was $99,000, $121,000 and $121,000,

F-8

respectively.

Income Taxes--The Company accounts for taxes under SFAS No. 109,
"Accounting for Income Taxes". Under this statement, deferred tax assets and
liabilities represent the tax effects, of future deductible taxable amounts
attributable to events that have been recognized on a cumulative basis in the
financial statements.

Earnings Per Share--Earnings per share-basic is based upon the weighted
average number of shares outstanding. Earnings per share-diluted is based on the
weighted average shares outstanding including the dilutive effect of common
stock equivalents. (See Note 9)

Accounts Receivable--Increases to the allowance for doubtful accounts
totaled $183,000, $133,000 and $320,000 for the years ended December 31, 1999,
2000 and 2001, respectively. Write-offs against the allowance for doubtful
accounts totaled $25,000, $31,000 and $128,000 for the years ended December 31,
1999, 2000 and 2001, respectively. Additional provision was recorded in 2001 due
to changes in certain customers' ability to pay arising after the original sales
had been made.

Use of Estimates--The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United Sales
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 reported period. Actual results could differ
from those estimates.

Reclassifications--Certain prior year balances have been reclassified to
conform to the current year presentation.

2. Inventories

Inventories consisted of the following (in thousands):

December 31,
------------
2000 2001
---- ----
Raw material............................................. $3,345 $3,218
Work in process.......................................... 582 351
Finished goods........................................... 5,508 4,933
------ ------
Total inventories........................................ $9,435 $8,502
====== =====-

During the second quarter of fiscal 2001, as a result of a continued decline
in revenue and customer demand, the Company provided additional reserves of $2
million for excess and obsolete inventory. The continued industry-wide reduction
in spending and the resulting decrease in demand for the Company's products led
to significant reductions in the Company's sales forecast. The Company's regular
and ongoing reserve analysis and methodology includes a comparison of sales
forecasts and inventory levels. As a result of the analysis based on second
quarter sales forecast revisions, the company recorded a charge, which was
included in the cost of revenues. Increases to the inventory reserve during the
remainder of fiscal 2001 were not significant.

F-9

3. Property and Equipment

Property and equipment consisted of the following (in thousands):

December 31,
------------
2000 2001
---- ----
Furniture, machinery and equipment...................... $ 5,090 $ 5,267
Leasehold improvements.................................. 212 448
------- -------
5,302 5,715
Less accumulated depreciation and amortization.......... (3,670) (4,322)
------- -------
Property and equipment, net............................. $ 1,632 $ 1,393
======= =======

Depreciation and amortization expense charged to operations amounted to
$531,000, $567,000 and $652,000 for the years ended 1999, 2000, and 2001,
respectively. Included in property and equipment are assets financed under
capital leases with a net book value of $267,000 and $172,000 at December 31,
2000 and 2001 respectively.

4. Due From Stockholders

During 2001, the Company loaned certain directors, officers and members of
senior management a combined total of $469,000 for open market purchases of
Company Common Stock. The loans have an interest rate of 5%, are due and payable
on October 1, 2003 and are secured by the stock purchased. In April 2001,
certain officers were required to remit to the Company $369,000 as required
under section 16(b) of the Securities and Exchange Act of 1934 and in settlement
of that obligation, the Company accepted promissory notes that accrue interest
at 5% per year and are due and payable in three equal annual installments,
starting in June 2002. These are included in stockholders' equity in the
accompanying balance sheet.

5. Lines of Credit

The Company maintains a $5,000,000 domestic revolving line of credit with
Wells Fargo Bank (unused at December 31, 2001), at a fluctuating rate per annum
equal to the prime rate in effect from time to time (4.75% at December 31,
2001) or at a fixed rate per annum determined by the bank to be 2.0% above LIBOR
in effect on the first day of the applicable fixed rate term. This commitment
will expire on June 1, 2003.

The Company also has a $1 million non-revolving commitment from Wells Fargo
Bank to be used to finance the Company's purchases of equipment. This line
carries a fluctuating interest rate per annum equal to the prime rate in effect
from time to time (4.75% at Decembet 31, 2001) or at a fixed rate per annum or
at a fixed rate per annum determined by Wells Fargo to be 2.25% above LIBOR in
effect on the first day of the applicable fixed rate term. This commitment will
expire on June 1, 2002. At December 31, 2001 the Company had drawn $354,000
against this line. Interest only payments to be made through June 1, 2002 and
principal and interest payments to be made in 48 monthly installments beginning
July 1, 2002. The amount outstanding is secured by certain fixed assets of the
Company.

In addition, our Japanese subsidiary has a $1.1 million line of credit,
none of which was outstanding at December 31, 2001.

At December 31, 2001, the Company was in violation of certain financial
covenants related to the above U.S. agreements but has obtained a waiver of
those covenants from the bank. We anticipate we will be out of compliance with
these covenants in early 2002 and as a result we are currently renegotiating
the agreements to remove the covenants. It is likely that the new agreements
will require the lines of credit to be fully secured by cash deposited at the
bank.

F-10

6. Long-Term Debt and Capital Leases

Bank Loans--The Company's Japanese subsidiary, Interlink Electronics, KK,
maintains unsecured loans with four banks. The loans have interest rates ranging
from 1.75% to 3.4% and are payable in Japanese yen in monthly installments
through the year 2007. The combined balance outstanding as of December 31, 2000
and 2001 was $4,515,000 and $3,373,000, respectively.

Capital Lease Obligations--The Company has a lease financing agreement for
the purchase of equipment which expires in 2002.

At December 31, 2001, scheduled maturities of long-term debt and capital
lease obligations for the next five years and thereafter are as follows (in
thousands):

Debt Leases
---- ------
2002...................................................... $1,976 $ 53
2003...................................................... 682 --
2004...................................................... 547 --
2005...................................................... 410 --
2006...................................................... 169 --
Thereafter................................................ 138 --
------ ----

3,922 53
Less amount representing interest......................... (195) (2)
------ ----
Present value of minimum payments......................... 3,727 51
------ ----
Less current portion...................................... (1,872) (51)
------ ----
Long term portion......................................... $1,855 $ --
====== ====

During 1999, 2000 and 2001, the Company incurred $126,000, $106,00 and
$110,000, respectively, in interest expense.

7. Stockholders' Equity

Preferred Stock--The Company is authorized to issue up to 100,000 shares
of Preferred Stock. As of December 31, 2000 and 2001, none were issued or
outstanding. In the future, the Preferred Stock may be issued in one or more
series with such rights and preferences as may be fixed and determined by the
Board of Directors.

Common Stock--The Company is authorized to issue 50,000,000 shares of
Common Stock. On March 20, 2000, the Company effected a three-for-two stock
split by means of a stock dividend to its stockholders. All share information in
these financial statements give retroactive effect to the stock split.

In second quarter 2001, certain officers were required to remit to the
Company $369,000 under rule 16(b) of Securities and Exchange Act of 1934. These
amounts were recorded to stockholders equity on the accompanying balance sheet.

8. Stock Options

Under the terms of the Company's Option Plans, officers and key employees
may be granted non-qualified or incentive stock options and outside directors
and independent contractors of the Company

F-11

may be granted non-qualified stock options. The aggregate number of shares which
may be issued under the plans is 8,026,225. Options are granted at fair market
value on the date of grant and generally vest ratably over 36 months and expire
in five years. At December 31, 2001 there were 587,000 options available for
grant.

Information concerning stock options under the plans is summarized as
follows (in thousands, except per share information):

1999 2000 2001
---------------- ----------------- -----------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----

Outstanding beginning of year......... 3,082 $1.83 2,881 $2.19 2,994 $8.81
Granted............................... 583 3.71 960 24.50 2,210 4.98
Exercised............................. (729) 2.06 (696) 2.06 (510) 2.02
Forfeited and expired................. (55) 2.21 (151) 14.98 (382) 14.99
----- ----- ----- ----- ----- -----
Outstanding end of year............... 2,881 $2.19 2,994 $8.81 4,312 $7.10
----- ----- ----- ----- ----- -----
Exercisable end of year 1,817 $2.03 2,132 $4.52 2,293 $7.09
===== ===== ===== ===== ===== =====

The following table summarizes information about stock options outstanding
at December 31, 2001 (in thousands, except per share information):

Options Outstanding Options Exercisable
------------------- -------------------
Wtd. Avg.
Remaining Wtd. Avg. Wtd. Avg.
Contractual Exercise Exercise
Range of Exercise Prices Number Life Price Number Price
------------------------ ------ ---- ----- ------ -----

$1.83................................. 1,191 1.8 $ 1.83 1,191 $ 1.83
2.40 - 3.67........................... 967 4.0 2.62 311 3.05
4.42 - 6.88........................... 1,482 4.3 6.09 380 6.49
15.75 - 20.00......................... 211 3.7 16.63 103 16.89
29.00................................. 461 3.1 29.00 308 29.00
----- --- ------ ----- ------
4,312 3.4 $ 7.10 2,293 $ 7.09
----- --- ------ ----- ------

The weighted average fair value at the date of grant for stock options
granted during 1999, 2000 and 2001 was $1.91, $17.88 and $2.19 per option,
respectively. The fair value of options at the date of grant was estimated using
the Black-Scholes model with the following weighted average assumptions:

1999 2000 2001
---- ---- ----
Expected life (years)............................ 4 4 4
Interest rate.................................... 5.8% 6.2% 3.9%
Volatility....................................... 60% 95% 50%
Dividend yield................................... 0% 0% 0%

The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized for these plans. Had compensation cost for the Company's plans
been determined based on the fair value at the grant dates for awards under the
plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company would have

F-12

recorded stock-based compensation expense as follows (in thousands except per
share information):

1999 2000 2001
---- ---- ----

Net income (loss) - as reported......................... $2,108 $ 3,108 $ (2,014)
- pro forma......................... 294 (3,180) (10,191)
Basic earnings (loss) per share - as reported........... $ 0.26 $ 0.35 $ (0.21)
- pro forma........... 0.04 (0.36) $ (1.06)
Diluted earnings (loss) per share - as reported......... $ 0.21 $ 0.28 $ (0.21)
- pro forma......... 0.03 (0.36) (1.06)

9. Earnings Per Share

For all periods presented, per share information was computed pursuant to
provisions of SFAS No. 128 "Earnings Per Share." The computation of earnings per
share--basic is based upon the weighted average number of common shares
outstanding during the periods presented. Earnings per share--diluted also
includes the effect of common shares contingently issuable from options and
warrants (in periods which they have a dilutive effect).

Common stock equivalents are calculated using the treasury stock method.
Under the treasury stock method, the proceeds from the assumed conversion of
options and warrants are used to repurchase outstanding shares, using a yearly
average market price.

The following table contains information necessary to calculate earnings
per share (in thousands):

Year Ended December 31,
-----------------------
1999 2000 2001
---- ---- ----

Weighted average shares outstanding........................ 8,016 8,892 9,645
Effect of diluted securities; options and warrants......... 1,998 2,238 --(1)
------ ------ -----
Weighted average shares--diluted........................... 10,014 11,130 9,645

- -----------

(1) Due to the net loss, the diluted share calculation result was
anti-dilutive. Thus, the basic weighted average shares were used.

During 1999 and 2000 no options were excluded in the calculation of
weighted average shares-diluted as their exercise prices were below the average
stock price for the year.

10. Commitments and Contingencies

Operating Leases--The Company leases its facilities and certain equipment
under operating leases expiring through 2004. Rent payments totaled
approximately $357,000, $470,000 and $462,000 for 1999, 2000 and 2001,
respectively. Minimum lease commitments at December 31, 2001 are summarized as
follows (in thousands):

2002..................................................................... $418
2003..................................................................... 289
2004..................................................................... 68
----
$775
====

Legal Matters--From time to time, the Company is involved in various legal
actions which arise in the ordinary course of business. The Company does not
believe that losses incurred, if any, will have a significant impact on the
Company's financial position or results of operations.

F-13

11. Income Taxes

As of December 31, 2001, the Company had federal and state income tax net
operating loss carryforwards of approximately $10.3 million expiring through
2021.

The Company has total net deferred tax assets as follows (in thousands):

2000 2001
---- ----
Deferred tax assets:
Net operating loss carryforward $ 10,064 $ 10,327
Credits 168 269
Accruals 39 124
Reserves 581 1,780
Other 373 (414)
------- -------
Total deferred tax assets 11,225 12,086
Valuation allowance (10,625) (10,785)
------- -------
Net deferred tax assets $ 600 $ 1,301
======= =======

A valuation allowance is recorded if the weight of available evidence
suggests it is more likely than not that some portion or all of the deferred tax
asset will not be recognized.

The provision (benefit) for income taxes for the years ended December 31,
1999, 2000 and 2001 are as follows (in thousands):

1999 2000 2001
---- ---- ----
Current taxes:
Federal.......................................... $ -- $ 48 $ --
State............................................ -- 89 --
Foreign.......................................... 252 189 --
---- ----- -----
Sub Total................................. 252 326 --
Deferred taxes:
Federal.......................................... -- (408) (580)
State............................................ -- (192) (134)
Foreign.......................................... -- -- (50)
---- ----- -----
Provision (benefit) for income taxes............. $252 $(274) $(764)
==== ===== =====

Differences between the provision (benefit)for income taxes and income
taxes at statutory federal income tax rate for the years ended December 31,
1999, 2000 and 2001 are as follows (in thousands):

1999 2000 2001
---- ---- ----

Income taxes at the statutory federal rate.................. $ 802 $ 964 $(945)
State income taxes, net of federal income tax effect........ 142 170 (167)
Foreign taxes at rates different than U.S. taxes............ 12 14 (50)
Utilization of net operating losses......................... (704) (1,422) --
Valuation Allowance......................................... -- -- 160
Other....................................................... -- -- 238
----- ------- -----
Total provision (benefit) for income taxes........ $ 252 $ (274) $(764)
===== ======= =====

F-14

12. Revenue Information

Export Sales--The following table shows the breakdown of the Company's
export sales as a percentage of consolidated revenues.

Year Ended December 31,
-------------------------
1999 2000 2001
---- ---- ----
Japan.......................................... 52% 49% 40%
Asia (other than Japan)........................ 10% 8% 10%
Europe and other............................... 7% 15% 14%

Major Customers-- In 1999, three customers constituted approximately 14%,
12% and 11%, of total revenues. In 2000 and 2001, no single customer exceeded
10% of total revenues. One customer accounted for 14% of the accounts receivable
at December 31, 2001.

13. Segment Information

The Company has four business segments: (i) business communications (ii)
home entertainment, (iii) E-Transactions and (iv) specialty components. The
accounting policies of the segments are the same as those described in the
significant accounting policies; however, the Company evaluates performance
based on revenue and gross profit. The Company does not allocate any other
income, expenses or assets to these segments. Reportable segment information for
the years ended December 31, 1999, 2000 and 2001 is as follows (in thousands):

Specialty
Business Home Components
Communications Entertainment E-Transactions and Other Total
-------------- ------------- -------------- --------- -----

1999
Revenue........................... $17,693 $1,451 $118 $ 8,844 $28,106
Gross profit...................... 6,139 725 59 3,543 10,466
2000
Revenue........................... $20,540 $2,866 $891 $ 9,573 $33,870
Gross profit...................... 6,171 1,433 445 6,368 14,417
2001
Revenue........................... $16,253 $1,964 $963 $ 6,085 $25,265
Gross profit...................... 4,961 982 482 2,386 8,811

F-15

EXHIBIT INDEX

Exhibit
Number
- ------

3.1 Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000).

3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000).

10.1 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.1a of
the Registrant's Amendment No. 8 to Registrant's Registration Statement
on Form S-1 (Registration No. 333-60380 (the "Form S-1 Registration
Statement").

10.2 1996 Stock Incentive Plan, as amended (incorporated by reference to
Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000).

10.3 Description of Registrant's Management Compensation Program
(incorporated by reference to Exhibit 10.4 to the Registrant's Annual
Report on Form 10-K for the year ended December 31 1996).

10.4 Lease Agreement dated August 15, 1998 (incorporated by reference to the
Registrant's Annual Report on Form 10- K for the year ended December 31,
1998).

10.5 License Agreement between the Registrant and Toshiba Silicone Co., Ltd.
dated March 10, 1989 (incorporated by reference to Exhibit 10.14 of the
Form S-1 Registration Statement).

10.6 Restructuring Agreement, entered into and effective as of September 7,
1994, by and between InvestAR S.a.r.l., Interlink Electronics Europe,
S.a.r.l., and IEE Finance, S.a.r.l. (incorporated by reference to
Exhibit 10.6 of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999).

10.7 Exclusive License and Distributor Agreement between the Registrant and
Interlink Electronics Europe S.a.r.l., Amended and Restated as of
September 7, 1994 (incorporated by reference to Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1999).

10.8 Agreement between the Government of Luxembourg, Interlink Electronics
Europe S.a.r.l., IEE Finance S.a.r.l., the Registrant and InvestAR
S.a.r.l. dated December 18, 1989 (incorporated by reference to Exhibit
10.19 of the Form S-1 Registration Statement).

10.9 Agreement with InvestAR S.a.r.l. and ARBED S.A. (undated) (incorporated
by reference to Exhibit 10.20 of the Form S-1 Registration Statement).

10.10 Ink Technology Transfer Agreement between the Registrant and InvestAR
S.a. r.l. dated December 11, 1992 (incorporated by reference to Exhibit
10.23 of the Form S-1 Registration Statement).

10.11 Financing Agreement between the Registrant and InvestAR S.a. r.l. in
relation with the Ink Technology Transfer Agreement dated December 11,
1992 (incorporated by reference to Exhibit 10.24 of the Form S-1
Registration Statement).

10.12 Form of Confidentiality and Nondisclosure Agreement in relation with the
Ink Technology Transfer Agreement (undated) (incorporated by reference
to Exhibit 10.25 of the Form S-1 Registration Statement).

10.13 Form of Escrow Agreement for Technology in relation with the Ink
Technology Transfer Agreement dated December 11, 1992 (incorporated by
reference to Exhibit 10.26 of the Form S-1 Registration Statement).

10.14 Credit Agreement between Wells Fargo Bank, National Association, and the
Registrant dated September 1, 2000 (incorporated by reference to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2000). +

21.1 Subsidiaries of the Registrant.

23.1 Consent of Arthur Andersen LLP.

24.1 Power of Attorney (see signature page).

99.1 Letter of Arthur Andersen LLP

- -----------
+ Exhibits for which Registrant has received confidential treatment for
certain portions. The confidential material in such exhibits has been
redacted and separately filed with the Securities and Exchange
Commission as part of Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000.