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                                                                     Exhibit 4.2


                           INVESTORS' RIGHTS AGREEMENT



                                 OCTOBER 5, 1999

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                                                                     Exhibit 4.2


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>

                                                                            Page
                                                                            ----

<S>                                                                          <C>
1.  Registration Rights.......................................................1
        1.1  Definitions......................................................1
        1.2  Request for Registration.........................................2
        1.3  Company Registration.............................................4
        1.4  Form S-3 Registration............................................5
        1.5  Obligations of the Company.......................................6
        1.6  Information from Holder..........................................7
        1.7  Expenses of Registration.........................................7
        1.8  Delay of Registration............................................8
        1.9  Indemnification..................................................8
        1.10  Reports Under Securities Exchange Act of 1934..................10
        1.11  Assignment of Registration Rights..............................10
        1.12  Limitations on Subsequent Registration Rights..................11
        1.13  "Market Stand-Off" Agreement...................................11
        1.14  Termination of Registration Rights.............................12

2.  Covenants of the Company.................................................12
        2.1  Delivery of Financial Statements................................12
        2.2  Inspection......................................................13
        2.3  Termination of Information and Inspection Covenants.............13
        2.4  Right of First Offer on Future Issuances of Shares..............13
        2.5  Right of First Offer on Future Issuance of Subordinated Debt....14
        2.6  Key-Man Insurance...............................................16
        2.7  Travel Expenses.................................................16
        2.8  Negative Covenants..............................................16
        2.9  Affirmative Covenants...........................................18
        2.10  Termination of Certain Covenants...............................19

3.  Miscellaneous............................................................19
        3.1  Successors and Assigns..........................................19
        3.2  Governing Law...................................................19
        3.3  Counterparts....................................................19
        3.4  Titles and Subtitles............................................19
        3.5  Notices.........................................................19
        3.6  Expenses........................................................20
        3.7  Entire Agreement; Amendments and Waivers........................20
        3.8  Severability....................................................20
        3.9  Aggregation of Stock............................................20
        3.10  Specific Enforcement...........................................20

SCHEDULE A    Schedule of Investors
</TABLE>

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                           INVESTORS' RIGHTS AGREEMENT


               THIS INVESTORS' RIGHTS AGREEMENT is made as of October 5, 1999,
by and among Stanford Microdevices, Inc., a Delaware corporation (the "Company")
and the investors listed on Schedule A hereto, each of which is herein referred
to as an "Investor."

                                    RECITALS

               WHEREAS, the Company and the Investors are parties to the Series
A Preferred Stock and Warrant Purchase Agreement of even date herewith (the
"Purchase Agreement") pursuant to which each Investor purchased Series A
Preferred Stock of the Company ("Series A Preferred Stock") and certain
Investors affiliated with Summit Partners purchased a Warrant to Purchase Common
Stock ("Warrant") exercisable to purchase Common Stock of the Company ("Common
Stock");

               WHEREAS, in order to induce the Investors to invest funds in the
Company pursuant to the Purchase Agreement, the Investors and the Company hereby
agree that this Agreement shall govern the rights of the Investors to cause the
Company to register shares of Common Stock issued or issuable to them and
certain other matters as set forth herein;

               NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

               1.     Registration Rights. The Company covenants and agrees as
                      follows:

                      1.1    Definitions.  For purposes of this Section 1:

                             (a) The term "Act" means the Securities Act of
1933, as amended.

                             (b) The term "Form S-3" means such form under the
Act as in effect on the date hereof or any registration form under the Act
subsequently adopted by the SEC that permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.

                             (c) The term "Holder" means any person owning or
having the right to acquire Registrable Securities or any assignee thereof in
accordance with Section 1.11 hereof.

                             (d) The term "Initial Offering" means the Company's
first firm commitment underwritten public offering of its Common Stock under the
Act.

                             (e) The term "1934 Act" means the Securities
Exchange Act of 1934, as amended.

                             (f) The term "register," "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement or similar document in

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compliance with the Act, and the declaration or ordering of effectiveness of
such registration statement or document.

                             (g) The term "Registrable Securities" means (i) the
Common Stock issuable or issued upon conversion of the Series A Preferred Stock
issued to the Investors pursuant to the Purchase Agreement and upon exercise of
the Warrants issued to the Investors pursuant to the Purchase Agreement, and
(ii) any Common Stock of the Company issued as (or issuable upon the conversion
or exercise of any warrant, right or other security that is issued as) a
dividend or other distribution with respect to, or in exchange for, or in
replacement of, the shares referenced in clause (i) of this Section 1.1(g),
excluding, in all cases, however, any Registrable Securities sold by a person in
a transaction in which a Holder's rights under this Section 1 are not assigned
in accordance with Section 1.11. As to any particular Registrable Securities,
such securities shall cease to be Registrable Securities when they have been
distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker dealer or market maker in
compliance with Rule 144 under the Act (or any similar rule then in force) or
repurchased or redeemed by the Company.

                             (h) The number of shares of "Registrable Securities
Outstanding" shall be determined by the number of shares of Common Stock
outstanding that are, and the number of shares of Common Stock issuable pursuant
to then exercisable or convertible securities that are, Registrable Securities.

                             (i) The term "SEC" shall mean the Securities and
Exchange Commission.

                      1.2    Request for Registration.

                             (a) Subject to the conditions of this Section 1.2,
if the Company shall receive at any time after the earlier of (i) three (3)
years after the date of this Agreement or (ii) six (6) months after the
effective date of the Initial Offering, a written request from the Holders of at
least a majority of the Registrable Securities then outstanding (the "Initiating
Holders") that the Company file a registration statement under the Act covering
the registration of Registrable Securities with an anticipated aggregate
offering price of at least $10,000,000, then the Company shall, within twenty
(20) days of the receipt thereof, give written notice of such request to all
Holders, and subject to the limitations of this Section 1.2, use all
commercially reasonable efforts to effect, as soon as practicable, the
registration under the Act of all Registrable Securities that the Holders
request to be registered in a written request received by the Company within
twenty (20) days of the mailing of the Company's notice pursuant to this Section
1.2(a). Each request for a Demand Registration shall specify the number of
Registrable Securities requested to be registered.

                             (b) If the Initiating Holders intend to distribute
the Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 1.2 and the Company shall include such information in the written
notice referred to in Section 1.2(a). In such event the right of any Holder to
include its Registrable Securities in such registration shall be conditioned
upon such Holder's participation in such underwriting and the inclusion of such
Holder's


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Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall enter into an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting by the
Company (which underwriter or underwriters shall be reasonably acceptable to a
majority in interest of the Initiating Holders). Notwithstanding any other
provision of this Section 1.2, if the underwriter advises the Company that
marketing factors require a limitation of the number of securities underwritten
(including Registrable Securities), then the Company shall so advise all Holders
of Registrable Securities that would otherwise be underwritten pursuant hereto,
and the number of shares that may be included in the underwriting shall be
allocated to the Holders of such Registrable Securities on a pro rata basis
based on the number of Registrable Securities held by all such Holders
(including the Initiating Holders). Any Registrable Securities excluded or
withdrawn from such underwriting shall be withdrawn from the registration.

                             (c) The Company shall not be required to effect a
registration pursuant to this Section 1.2:

                                 (i) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, unless the Company
is already subject to service in such jurisdiction and except as may be required
under the Act; or

                                 (ii) after the Company has effected two (2)
registrations pursuant to this Section 1.2, and such registrations have been
declared or ordered effective; or

                                 (iii) during the period starting with the date
sixty (60) days prior to the Company's good faith estimate of the date of the
filing of, and ending on a date one hundred twenty (120) days following the
effective date of, a Company-initiated registration subject to Section 1.3 below
or a previous demand registration under this Section 1.2 or thirty (30) days
following the effective date of a previous demand registration pursuant to
Section 1.4 below, provided that the Company is actively employing in good faith
all reasonable efforts to cause such registration statement to become effective;
or

                                 (iv) if the Initiating Holders propose to
dispose of Registrable Securities that may be registered on Form S-3 pursuant to
Section 1.4 hereof; or

                                 (v) if the Company shall furnish to Holders
requesting a registration statement pursuant to this Section 1.2, a certificate
signed by the Company's Chief Executive Officer or Chairman of the Board stating
that in the good faith judgment of the Board of Directors of the Company, it
would be seriously detrimental to the Company and its stockholders for such
registration statement to be effected at such time, in which event the Company
shall have the right to defer such filing for a period of not more than ninety
(90) days after receipt of the request of the Initiating Holders, provided that
such right to delay a request shall be exercised by the Company not more than
once in any twelve (12)-month period. For purposes of this Section 1.2(v) and
Section 1.4(b)(iii) below, a registration statement may be deemed to be
seriously detrimental to the Company and its stockholders if it would have a
material adverse effect on any proposal or plan by the Company to engage in any
acquisition of


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assets or any merger, consolidation, tender offer, reorganization or similar
transaction or a material adverse effect on the Company's business.

                      1.3    Company Registration.

                             (a) If (but without any obligation to do so) the
Company proposes to register (including for this purpose a registration effected
by the Company for stockholders other than the Holders) any of its stock or
other securities under the Act in connection with the public offering of such
securities (other than a registration relating solely to the sale of securities
to participants in a Company stock plan, a registration relating to a corporate
reorganization or other transaction under Rule 145 of the Act, a registration on
any form that does not include substantially the same information as would be
required to be included in a registration statement covering the sale of the
Registrable Securities, or a registration in which the only Common Stock being
registered is Common Stock issuable upon conversion of debt securities that are
also being registered), the Company shall, at such time, promptly give each
Holder written notice of such registration. Upon the written request of each
Holder given within twenty (20) days after mailing of such notice by the Company
in accordance with Section 3.5, the Company shall, subject to the provisions of
Section 1.3(c), use all reasonable efforts to cause to be registered under the
Act all of the Registrable Securities that each such Holder has requested to be
registered.

                             (b) Right to Terminate Registration. The Company
shall have the right to terminate or withdraw any registration initiated by it
under this Section 1.3 prior to the effectiveness of such registration whether
or not any Holder has elected to include securities in such registration. The
expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 1.7 hereof.

                             (c) Underwriting Requirements. In connection with
any offering involving an underwriting of shares of the Company's capital stock,
the Company shall not be required under this Section 1.3 to include any of the
Holders' securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
it (or by other persons entitled to select the underwriters) and enter into an
underwriting agreement in customary form with such underwriter or underwriters
selected by the Company, and then only in such quantity as the underwriters
determine in their sole discretion will not jeopardize the success of the
offering by the Company. If the total amount of securities, including
Registrable Securities, requested by stockholders to be included in such
offering exceeds the amount of securities sold other than by the Company that
the underwriters determine in their sole discretion is compatible with the
success of the offering, then the Company shall be required to include in the
offering only that number of such securities, including Registrable Securities,
that the underwriters determine in their sole discretion will not jeopardize the
success of the offering (the securities so included to be apportioned pro rata
among the selling Holders according to the total amount of securities entitled
to be included therein owned by each selling Holder or in such other proportions
as shall mutually be agreed to by such selling Holders), but in no event shall
the amount of securities of the selling Holders included in the offering be
reduced below twenty-five percent (25%) of the total amount of securities
included in such offering, unless such offering is the initial public offering
of the Company's securities, in which case the selling Holders may be one
hundred percent (100%)


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excluded if the underwriters make the determination described above and no other
stockholder's securities are included. For purposes of the preceding
parenthetical concerning apportionment, for any selling stockholder that is a
Holder of Registrable Securities and that is a partnership or corporation, the
partners, retired partners and stockholders of such Holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "selling
Holder," and any pro rata reduction with respect to such "selling Holder" shall
be based upon the aggregate amount of Registrable Securities owned by all such
related entities and individuals.

                      1.4   Form S-3 Registration. In case the Company shall
receive from the Holders of the Registrable Securities a written request or
requests that the Company effect a registration on Form S-3 and any related
qualification or compliance with respect to all or a part of the Registrable
Securities owned by such Holder or Holders, the Company shall:

                             (a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders;
and

                             (b) use all reasonable efforts to effect, as soon
as practicable, such registration and all such qualifications and compliances as
may be so requested and as would permit or facilitate the sale and distribution
of all or such portion of such Holders' Registrable Securities as are specified
in such request, together with all or such portion of the Registrable Securities
of any other Holders joining in such request as are specified in a written
request given within fifteen (15) days after receipt of such written notice from
the Company; provided, however, that the Company shall not be obligated to
effect any such registration, qualification or compliance, pursuant to this
section 1.4:

                                 (i) if Form S-3 is not available for such
offering by the Holders;

                                 (ii) if the Holders, together with the holders
of any other securities of the Company entitled to inclusion in such
registration, propose to sell Registrable Securities and such other securities
(if any) at an aggregate price to the public (net of any underwriters' discounts
or commissions) of less than $2,500,000;

                                 (iii) if the Company shall furnish to the
Holders a certificate signed by the Chief Executive Officer or Chairman of the
Board of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company and
its stockholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form S-3
registration statement for a period of not more than ninety (90) days after
receipt of the request of the Holder or Holders under this Section 1.4;
provided, however, that the Company shall not utilize this right more than once
in any twelve month period;

                                 (iv) if the Company has, within the twelve (12)
month period preceding the date of such request, already effected one
registration on Form S-3 for the Holders pursuant to this Section 1.4; or


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                                 (v) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.

                             (c) Subject to the foregoing, the Company shall
file a registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt of
the request or requests of the Holders. Registrations effected pursuant to this
Section 1.4 shall not be counted as requests for registration effected pursuant
to Sections 1.2.

                      1.5    Obligations of the Company. Whenever required under
this Section 1 to effect the registration of any Registrable Securities, the
Company shall, as expeditiously and as reasonably possible:

                             (a) prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use all reasonable
efforts to cause such registration statement to become effective, and, upon the
request of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for a period of up to one
hundred twenty (120) days or, if earlier, until the distribution contemplated in
the Registration Statement has been completed; provided, however, that if the
Company shall furnish to the Holders a certificate signed by the Chief Executive
Officer or Chairman of the Board of the Company stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such Registration Statement
to be kept effective at such time as a result of ongoing negotiations between
the Company and a third party, then the Company shall not be obligated to keep
such Registration Statement effective during the 30-day period from the date of
such certificate; provided, further, however, that the Company shall not utilize
this right more than once during any twelve month period;

                             (b) prepare and file with the SEC such amendments
and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Act with respect to the disposition of all securities
covered by such registration statement;

                             (c) furnish to the Holders such numbers of copies
of a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them;

                             (d) use all reasonable efforts to register and
qualify the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions within the United States as
shall be reasonably requested by the Holders; provided that the Company shall
not be required in connection therewith or as a condition thereto to qualify to
do business or to file a general consent to service of process in any such
states or jurisdictions, unless the Company is already subject to service in
such jurisdiction and except as may be required under the Act;


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                             (e) in the event of any underwritten public
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter of such
offering;

                             (f) notify each Holder of Registrable Securities
covered by such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Act or the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;

                             (g) cause all such Registrable Securities
registered hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed; and

                             (h) provide a transfer agent and registrar for all
Registrable Securities registered pursuant hereunder and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.

                      1.6    Information from Holder. It shall be a condition
precedent to the obligations of the Company to take any action pursuant to this
Section 1 with respect to the Registrable Securities of any selling Holder that
such Holder shall furnish to the Company such information regarding itself, the
Registrable Securities held by it and intended to be offered and sold, and the
intended method of disposition of such securities as shall be required to effect
the registration of such Holder's Registrable Securities.

                      1.7    Expenses of Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Sections 1.2, 1.3 and 1.4,
including (without limitation) all registration, filing and qualification fees,
printers' and accounting fees, fees and disbursements of counsel for the Company
and the fees and disbursements of one special counsel for the selling Holders
shall be borne by the Company. Notwithstanding the foregoing, the Company shall
not be required to pay for any expenses of any registration proceeding begun
pursuant to Section 1.2 or Section 1.4 if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered (in which case all participating Holders
shall bear such expenses pro rata based upon the number of Registrable
Securities that were to be requested in the withdrawn registration) unless, in
the case of a registration requested under Section 1.2, the Holders of a
majority of the Registrable Securities agree to forfeit their right to one
demand registration pursuant to Section 1.2; provided, however, that if at the
time of such withdrawal, the Holders have learned of a material adverse change
in the condition, business, or prospects of the Company from that known to the
Holders at the time of their request and have withdrawn the request with
reasonable promptness following disclosure by the Company of such material
adverse change, then the Holders shall not be required to pay any of such
expenses and shall retain their rights pursuant to Section 1.2 or 1.4. To the
extent registration expenses are not required to be paid by the Company, each
holder of securities included in any registration hereunder shall pay those
registration expenses allocable to the registration of such holder's securities
so included and any registration expenses not so allocable shall be borne by all
sellers


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of securities included in such registration in proportion to the aggregate
selling price of the securities to be so registered.

                      1.8    Delay of Registration. No Holder shall have any
right to obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 1.

                      1.9    Indemnification. In the event any Registrable
Securities are included in a registration statement under this Section 1:

                             (a) To the extent permitted by law, the Company
will indemnify and hold harmless each Holder, the partners or officers,
directors and stockholders of each Holder, legal counsel and accountants for
each Holder, any underwriter (as defined in the Act) for such Holder and each
person, if any, who controls such Holder or underwriter within the meaning of
the Act or the 1934 Act, against any losses, claims, damages or liabilities
(joint or several) to which they may become subject under the Act, the 1934 Act
or any state securities laws, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation by the
Company of the Act, the 1934 Act, any state securities laws or any rule or
regulation promulgated under the Act, the 1934 Act or any state securities laws;
and the Company will reimburse each such Holder, underwriter or controlling
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
subsection l.9(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the written consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such loss,
claim, damage, liability or action to the extent that it arises out of or is
based upon a Violation that occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person; provided
further, however, that the foregoing indemnity agreement with respect to any
preliminary prospectus shall not inure to the benefit of any Holder or
underwriter, or any person controlling such Holder or underwriter, from whom the
person asserting any such losses, claims, damages or liabilities purchased
shares in the offering, if a copy of the prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Holder or underwriter to
such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the shares to such person, and if the
prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage or liability.

                             (b) To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors,
officers, each person, if any,


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<PAGE>   11

who controls the Company within the meaning of the Act, legal counsel and
accountants for the Company, any underwriter, any other Holder selling
securities in such registration statement and any controlling person of any such
underwriter or other Holder, against any losses, claims, damages or liabilities
(joint or several) to which any of the foregoing persons may become subject,
under the Act, the 1934 Act or any state securities laws, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise out
of or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will reimburse any person intended
to be indemnified pursuant to this subsection l.9(b), for any legal or other
expenses reasonably incurred by such person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection l.9(b) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Holder (which
consent shall not be unreasonably withheld), provided that in no event shall any
indemnity under this subsection l.9(b) exceed the gross proceeds from the
offering received by such Holder.

                             (c) Promptly after receipt by an indemnified party
under this Section 1.9 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.9,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party; provided, however, that an indemnified
party (together with all other indemnified parties that may be represented
without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.9, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.9.

                             (d) If the indemnification provided for in this
Section 1.9 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage or expense
referred to herein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage or
expense in such proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and of the indemnified party on the other
in connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information


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<PAGE>   12

supplied by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information, and opportunity to correct or
prevent such statement or omission.

                             (e) Notwithstanding the foregoing, to the extent
that the provisions on indemnification and contribution contained in the
underwriting agreement entered into in connection with the underwritten public
offering are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.

                             (f) The obligations of the Company and Holders
under this Section 1.9 shall survive the completion of any offering of
Registrable Securities in a registration statement under this Section 1, and
otherwise.

                      1.10   Reports Under Securities Exchange Act of 1934. With
a view to making available to the Holders the benefits of Rule 144 promulgated
under the Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:

                             (a) make and keep public information available, as
those terms are understood and defined in SEC Rule 144, at all times after the
effective date of the Initial Offering;

                             (b) file with the SEC in a timely manner all
reports and other documents required of the Company under the Act and the 1934
Act; and

                             (c) furnish to any Holder, so long as the Holder
owns any Registrable Securities, forthwith upon request (i) a written statement
by the Company that it has complied with the reporting requirements of SEC Rule
144 (at any time after ninety (90) days after the effective date of the first
registration statement filed by the Company), the Act and the 1934 Act (at any
time after it has become subject to such reporting requirements), or that it
qualifies as a registrant whose securities may be resold pursuant to Form S-3
(at any time after it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC that permits the
selling of any such securities without registration or pursuant to such form.

                      1.11   Assignment of Registration Rights. The rights to
cause the Company to register Registrable Securities pursuant to this Section 1
may be assigned (but only with all related obligations) by a Holder to a
transferee or assignee of such securities that (i) is a subsidiary, parent,
partner, limited partner, member, retired partner or stockholder of a Holder,
(ii) is a Holder's family member or trust for the benefit of an individual
Holder, or (iii) after such assignment or transfer, holds at least 100,000
shares of Registrable Securities (subject to appropriate adjustment for stock
splits, stock dividends, combinations and other recapitalizations), provided:
(a) the Company is, within a reasonable time after such transfer, furnished with
written notice of the name and address of such transferee or assignee and the
securities with respect to which such registration rights are being assigned;
(b) such transferee or


                                      -10-
<PAGE>   13
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement, including without limitation the provisions of
Section 1.13 below; and (c) such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Act.

                      1.12   Limitations on Subsequent Registration Rights. From
and after the date of this Agreement, the Company shall not, without the prior
written consent of the Holders of a majority of the Registrable Securities,
enter into any agreement with any holder or prospective holder of any securities
of the Company that would allow such holder or prospective holder (a) to include
such securities in any registration filed under Section 1.3 hereof, unless under
the terms of such agreement, such holder or prospective holder may include such
securities in any such registration only to the extent that the inclusion of
such securities will not reduce the amount of the Registrable Securities of the
Holders that are included or (b) to demand registration of their securities.

                      1.13   "Market Stand-Off" Agreement. Each Holder hereby
agrees that it will not, without the prior written consent of the managing
underwriter, during the period commencing on the date of the final prospectus
relating to the Initial Offering and ending on the date specified by the Company
and the managing underwriter (such period not to exceed one hundred eighty (l80)
days) (i) lend, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock (whether such shares or any such
securities are then owned by the Holder or are thereafter acquired), or (ii)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Common Stock,
whether any such transaction described in clause (i) or (ii) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. As to each Holder, the foregoing provisions of this Section 1.13
shall apply only to the Company's Initial Offering, shall not apply to the sale
of any shares to an underwriter pursuant to an underwriting agreement, and shall
only be applicable to the Holders if all officers and directors and greater than
one percent (1%) stockholders of the Company enter into or are subject to
similar agreements. The underwriters in connection with the Company's Initial
Offering are intended third party beneficiaries of this Section 1.13 and shall
have the right, power and authority to enforce the provisions hereof as though
they were a party hereto.

               In order to enforce the foregoing covenant, the Company may
impose stop-transfer instructions with respect to the Registrable Securities of
each Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.

                      1.14   Termination of Registration Rights. No Holder shall
be entitled to exercise any right provided for in this Section 1 after five (5)
years following the consummation of the Initial Offering or, as to any Holder,
such earlier time at which all Registrable Securities held by such Holder (and
any affiliate of the Holder with whom such Holder must aggregate its sales under
Rule 144) can be sold in any three (3)-month period without registration in
compliance with Rule 144 of the Act.


                                      -11-
<PAGE>   14

               2.     Covenants of the Company.

                      2.1    Delivery of Financial Statements. The Company shall
deliver to each Investor:

                             (a) as soon as practicable, but in any event within
ninety (90) days after the end of each fiscal year of the Company, an income
statement for such fiscal year, a balance sheet of the Company and statement of
stockholders' equity as of the end of such year, and a statement of cash flows
for such year, such year-end financial reports to be in reasonable detail,
prepared in accordance with generally accepted accounting principles ("GAAP"),
and audited and certified by a Big Five accounting firm as selected by the Board
of Directors of the Company;

                             (b) as soon as practicable, but in any event within
forty-five (45) days after the end of each of the first three (3) quarters of
each fiscal year of the Company, an unaudited income statement, statement of
cash flows for such fiscal quarter and an unaudited balance sheet as of the end
of such fiscal quarter;

                             (c) within thirty (30) days of the end of each
month, an unaudited income statement and statement of cash flows and balance
sheet for and as of the end of such month, in reasonable detail;

                             (d) as soon as practicable, but in any event at
least thirty (30) days prior to the end of each fiscal year, an annual budget
and operating plan for the next fiscal year, prepared on a monthly basis,
including balance sheets, income statements and statements of cash flows for
such months and, as soon as prepared, any other budgets or revised budgets
prepared by the Company;

                             (e) with respect to the financial statements called
for in subsections (b) and (c) of this Section 2.1, an instrument executed by
the Chief Financial Officer or President of the Company certifying that such
financials were prepared in accordance with GAAP consistently applied with prior
practice for earlier periods (with the exception of footnotes that may be
required by GAAP) and fairly present the financial condition of the Company and
its results of operation for the period specified, subject to year-end audit
adjustment; and

                             (f) such other information relating to the
financial condition, business, prospects or corporate affairs of the Company as
the Investor or any assignee of the Investor may from time to time request;
provided, however, that the Company shall not be obligated under this subsection
(f) or any other subsection of Section 2.1 to provide information that it deems
in good faith to be a trade secret or similar confidential information.

                      2.2    Inspection.  The Company shall permit each
Investor, at such Investor's expense, to visit and inspect the Company's
properties, to examine its books of account and records and to discuss the
Company's affairs, finances and accounts with its officers, all at such
reasonable times as may be requested by the Investor; provided, however, that
the Company shall not be obligated pursuant to this Section 2.2 to provide
access to any information that it reasonably considers to be a trade secret or
similar confidential information.


                                      -12-
<PAGE>   15

                      2.3    Termination of Information and Inspection
Covenants. The covenants set forth in Sections 2.1 and 2.2 shall terminate as to
Investors and be of no further force or effect upon consummation of the Initial
Offering or when the Company first becomes subject to the periodic reporting
requirements of Sections 12(g) or 15(d) of the 1934 Act, whichever event shall
first occur.

                      2.4    Right of First Offer on Future Issuances of Shares.
Subject to the terms and conditions specified in this paragraph 2.4, the Company
hereby grants to each Investor a right of first offer with respect to future
sales by the Company of its Shares (as hereinafter defined). For purposes of
this Section 2.4, Investor includes any general partners and affiliates of an
Investor. An Investor shall be entitled to apportion the right of first offer
hereby granted it among itself and its partners and affiliates in such
proportions as it deems appropriate. Each time the Company proposes to offer any
shares of, or securities convertible into or exchangeable or exercisable for any
shares of, any class of its capital stock ("Shares"), the Company shall first
make an offering of such Shares to each Investor in accordance with the
following provisions.

                             (a) The Company shall deliver a notice in
accordance with Section 3.5 (for purposes of this Section 2.4, a "Notice") to
each Investor stating (i) its bona fide intention to offer such Shares, (ii) the
number of such Shares to be offered, and (iii) the price and terms upon which it
proposes to offer such Shares.

                             (b) By written notification received by the
Company, within twenty (20) calendar days after receipt of the Notice, each
Investor may elect to purchase or obtain, at the price and on the terms
specified in the Notice, up to that portion of such Shares that equals the
proportion that the number of shares of Common Stock issued and held, or
issuable upon conversion of the Preferred Stock which is then held by such
Investor, bears to the total number of shares of Common Stock of the Company
then outstanding (assuming full conversion of all then outstanding convertible
securities). The Company shall promptly, in writing, inform each Investor that
elects to purchase all the shares available to it (a "Fully-Exercising
Investor") of any other Investor's failure to do likewise. During the ten (10)
day period commencing after such information is given, each Fully-Exercising
Investor may elect to purchase that portion of the Shares for which Investors
were entitled to subscribe but which were not subscribed for by the Investors
that is equal to the proportion that the number of shares of Common Stock issued
and held, or issuable upon conversion of Preferred Stock then held, by such
Fully-Exercising Investor bears to the total number of shares of Common Stock
issued and held, or issuable upon conversion of the Preferred Stock then held,
by all Fully-Exercising Investors who wish to purchase some of the unsubscribed
shares.

                             (c) If all Shares that Investors are entitled to
obtain pursuant to subsection 2.4(b) are not elected to be obtained as provided
in subsection 2.4(b) hereof, the Company may, during the ninety (90) day period
following the expiration of the period provided in subsection 2.4(b) hereof,
offer the remaining unsubscribed portion of such Shares to any person or persons
at a price not less than, and upon terms no more favorable to the offeree than
those specified in the Notice. If the Company does not enter into an agreement
for the sale of the Shares within such period, or if such agreement is not
consummated within ninety (90) days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such Shares shall not be offered
unless first reoffered to the Investors in accordance herewith.


                                      -13-
<PAGE>   16

                             (d) The right of first offer in this paragraph 2.4
shall not be applicable to (i) shares of Common Stock issued pursuant to a
transaction described in subsection 4(d)(iii) of the Article IV of the Company's
Restated Certificate of Incorporation as in effect on the date hereof (the
"Restated Certificate"); (ii) up to 4,927,734 shares of Common Stock (including
any shares of Common Stock issuable upon the exercise of options to purchase
Common Stock outstanding on the date hereof but excluding shares repurchased by
the Company in connection with the termination of service) plus such additional
number of shares approved by the Board and the holders of a majority of the
Series A Preferred Stock, issued or issuable to employees, directors and
consultants for compensatory purposes pursuant to a stock option plan,
restricted stock plan, purchase plan or other employee or consultant incentive
plan or arrangement approved by the Board of Directors of the Company; (iii) the
issuance of securities pursuant to a bona fide, firmly underwritten public
offering of shares of Common Stock, registered under the Act, at an offering
price of at least $7.53 per share (as adjusted for any stock split, stock
dividends, combinations recapitalizations, reorganizations and the like) and
resulting in proceeds to the Company of at least $30 million in the aggregate
(net of underwriting discounts and commissions), (iv) the issuance of securities
pursuant to the conversion or exercise of convertible or exercisable securities,
(v) the issuance of securities in connection with a bona fide business
acquisition of or by the Company, whether by merger, consolidation, sale of
assets, sale or exchange of stock or otherwise, or (vi) the issuance of stock,
warrants or other securities or rights to suppliers, lessors or lenders to the
Company, or in connection with a corporate collaboration, joint venture,
partnership or marketing, distribution, development, licensing or other
arrangements to which the Company is a party, in each case to the extent such
transaction is not primarily for equity purposes and is approved by the Board of
Directors of this corporation (including the Series A Director (as defined in
the Restated Certificate)); and (vii) the issuance of stock, warrants, or other
securities or rights pursuant to any transaction approved by the holder or
holders of a majority of the outstanding Registrable Securities.

                      2.5    Right of First Offer on Future Issuance of
Subordinated Debt. Subject to the terms and conditions specified in this Section
2.5, the Company hereby grants to each Investor a right of first offer with
respect to future sales by the Company of its Subordinated Debt (as hereinafter
defined). For purposes of this Section 2.5, Investor includes any general
partners and affiliates of an Investor. An Investor shall be entitled to
apportion the right of first offer hereby granted it among itself and its
partners and affiliates in such proportions as it deems appropriate.

               Each time the Company proposes to offer any Subordinated Debt,
the Company shall first make an offering of such Subordinated Debt to each
Investor in accordance with the following provisions.

                             (a) The Company shall deliver a notice in
accordance with Section 3.5 (for purposes of this Section 2.5, a "Notice") to
each Investor stating (i) its bona fide intention to offer such Subordinated
Debt, (ii) the principal amount of such Subordinated Debt to be offered, and
(iii) the price and terms upon which it proposes to offer such Subordinated
Debt.

                             (b) By written notification received by the
Company, within twenty (20) calendar days after receipt of the Notice, Investor
may elect to purchase or obtain, at the price and on the terms specified in the
Notice, up to that portion of such Subordinated Debt


                                      -14-
<PAGE>   17

that equals the proportion that the number of shares of Common Stock issued and
held, or issuable upon conversion of the Preferred Stock then held, by such
Investor bears to the total number of shares of Common Stock of the Company then
issued and held, or issuable upon conversion of the Preferred Stock then held,
by all Investors. The Company shall promptly, in writing, inform each Investor
that elects to purchase all the Subordinated Debt available to it (a
"Fully-Exercising Investor") of any other Investor's failure to do likewise.
During the ten (10) day period commencing after such information is given, each
Fully-Exercising Investor may elect to purchase that portion of the Subordinated
Debt for which Investors were entitled to subscribe but which were not
subscribed for by the Investors that is equal to the proportion that the number
of shares of Common Stock issued and held, or issuable upon conversion of
Preferred Stock then held, by such Fully-Exercising Investor bears to the total
number of shares of Common Stock issued and held, or issuable upon conversion of
the Preferred Stock then held, by all Fully-Exercising Investors who wish to
purchase some of the unsubscribed shares.

                             (c) If all Subordinated Debt that Investors are
entitled to obtain pursuant to subsection 2.5(b) are not elected to be obtained
as provided in subsection 2.5(b) hereof, the Company may, during the ninety (90)
day period following the expiration of the period provided in subsection 2.5(b)
hereof, offer the remaining unsubscribed portion of such Subordinated Debt to
any person or persons at a price not less than, and upon terms no more favorable
to the offeree than those specified in the Notice. If the Company does not enter
into an agreement for the sale of the Subordinated Debt within such period, or
if such agreement is not consummated within ninety (90) days of the execution
thereof, the right provided hereunder shall be deemed to be revived and such
Subordinated Debt shall not be offered unless first reoffered to the Investors
in accordance herewith.

                             (d) The right of first offer in this paragraph 2.5
shall not be applicable to (i) the issuance or sale of any Debt (as defined
below) (other than Subordinated Debt) by the Company; or (ii) the issuance or
sale of Subordinated Debt after Investors have purchased a total of $5 million
principal amount of Subordinated Debt of the Company.

                             (e) The term "Subordinated Debt" means Debt (as
defined below) of the Company that is customarily characterized as subordinated
debt by an established credit rating agency, including all Debt that by its
terms is subordinated in right of payment to other Debt of the Company.
Notwithstanding the foregoing, Subordinated Debt does not include (i) Debt of
the Company to a commercial bank, an equipment lease lender or a strategic
partner of the Company as part of a transaction not entered into primarily for
financing purposes, (ii) Debt that is secured by a first priority lien on all or
a significant portion of the Company's assets or (iii) any Shares. The term
"Debt" means, with respect to a person, indebtedness of such person for money
borrowed or evidenced by bonds, notes, debentures or similar instruments or
leases for equipment or that are required to be capitalized pursuant to
generally accepted accounting principles. Any warrants or other rights to
acquire Shares issued by the Company in connection with the issuance of Debt
shall not be considered in determining whether the Debt is Subordinated Debt.

                      2.6    Key-Man Insurance.  The Company shall use its best
efforts to maintain from financially sound and reputable insurers term life
insurance on the life of John Ocampo, Robert Van Buskirk and Gerald Quinnell
each in the amount of $1,000,000. Such


                                      -15-
<PAGE>   18

policies shall name the Company as loss payee and shall not be cancelable by the
Company without prior approval of the Board of Directors.

                      2.7    Travel Expenses.  The Company shall reimburse each
member of the Company's Board of Directors for all reasonable out-of-pocket
expenses, including airfare at full economy rates, for attending meetings of
such Board of Directors (or committees thereof) or stockholders of the Company.
Such reimbursement shall be paid within thirty (30) days of submission of a
written request for reimbursement providing reasonable detail as to the expenses
for which reimbursement is sought.

                      2.8    Negative Covenants.  So long as at least twenty-
five percent (25%) of the shares of Series A Preferred Stock issued pursuant to
the Purchase Agreement remain outstanding, the Company shall not do any of the
following without the written consent of the holders of a majority of the then
outstanding shares of Series A Preferred Stock:

                             (a) except as otherwise agreed to by the
compensation committee of the Board of Directors or as set forth on the
Disclosure Schedule to the Purchase Agreement, increase the compensation payable
to the Company's Chief Executive Officer, President, Chief Technical Officer or
Chief Financial Officer, any other executive officer of the Company or to a
director of the Company;

                             (b) except as otherwise agreed to by the Series A
Director, issue any equity securities or securities convertible into or
exercisable for equity securities of the Company to any officers, directors or
employees of or consultants to the Company, other than up to 4,927,734 shares of
Common Stock or options or rights to acquire Common Stock (including any shares
of Common Stock subject to options outstanding on the date hereof) issued for
compensatory purposes directly or pursuant to a stock option plan, restricted
stock plan, purchase plan or other employee or consultant incentive plan or
arrangement approved by the Board of Directors of the Company;

                             (c) materially change the type of products sold or
services provided by the Company;

                             (d) become subject to any agreement or instrument
which by its terms would (under any circumstances) restrict the Company's right
to perform the provisions of this Agreement, the Warrants, the Ancillary
Agreements, the Restated Certificate or the Bylaws (including, without
limitation, provisions relating to the making of redemptions of the Series A
Preferred Stock), provided that any liabilities incurred in the ordinary course
of business shall not be deemed to restrict the Company's ability to redeem the
Series A Preferred Stock pursuant to the Restated Certificate;

                             (e) materially change the terms of the Stock Plan
or adopt any new stock option plan or employee stock ownership plan;

                             (f) enter into, amend, modify or supplement, any
agreement, transaction, commitment or arrangement with any of its officers,
directors, holders of 1% or more of its voting capital stock, or their
respective affiliates, except for employment and compensation arrangements and
benefit programs;


                                      -16-
<PAGE>   19

                             (g) except as expressly provided for in any budget
or operating plan approved by the Series A Director, create, incur, assume or
suffer to exist, additional indebtedness exceeding an aggregate principal amount
of $500,000 (excluding indebtedness outstanding on the date hereof) outstanding
at any time on a consolidated basis;

                             (h) except as expressly provided for in any budget
or operating plan approved by the Series A Director, create, incur, assume or
suffer to exist, any Liens other than Permitted Liens or Liens in existence on
the date hereof;

                             (i) except as expressly provided for in any budget
or operating plan approved by the Series A Director, make any capital
expenditures or investments (including, without limitation, payments with
respect to capitalized leases, as determined in accordance with generally
accepted accounting principles consistently applied) exceeding $250,000
individually or $500,000 in the aggregate on a consolidated basis during any
twelve-month period;

                             (j) except as expressly provided for in any budget
or operating plan approved by the Series A Director, enter into any real
property leases or rental agreements (excluding capitalized leases, as
determined in accordance with generally accepted accounting principles
consistently applied) under which the lease payments exceed $250,000
individually or $500,000 in the aggregate on a consolidated basis during any
twelve-month period; or

                             (k) except as expressly provided for in any budget
or operating plan approved by the Series A Director, make any investment or
acquire any interest in any company or business (other than contractual
arrangements in the ordinary course of business) exceeding $500,000 individually
or in the aggregate on a consolidated basis within any twelve-month period.

               The "Series A Director" means the director elected by holders of
Series A Preferred Stock pursuant to Section 5(b)(i) of Article IV.A of the
Company's Restated Certificate of Incorporation in effect on the date hereof, as
such may be amended from time to time.

                      2.9    Affirmative Covenants.  So long as at least twenty
five percent (25%) of the Series A Preferred Stock issued pursuant to the
Purchase Agreement remains outstanding, the Company shall:

                             (a) at all times cause to be done all things
necessary to maintain, preserve and renew its corporate existence and all
material licenses, authorizations and permits from governmental entities
necessary to the conduct of its business;

                             (b) pay and discharge when payable all material
taxes, assessments and governmental charges imposed upon its properties or upon
the income or profits therefrom (in each case before the same becomes delinquent
and before penalties accrue thereon) and all material claims for labor,
materials or supplies which if unpaid would by law become a Lien (except a
Permitted Lien) upon any of its property, unless and to the extent that the same
are being contested in good faith and by appropriate proceedings and adequate
reserves (as determined in accordance with generally accepted accounting
principles, consistently applied) have been established on its consolidated
financial statements with respect thereto;


                                      -17-
<PAGE>   20

                             (c) comply with all other material obligations
which it incurs pursuant to any contract or agreement, whether oral or written,
as such obligations become due, unless and to the extent that the same are being
contested in good faith and by appropriate proceedings and adequate reserves (as
determined in accordance with generally accepted accounting principles,
consistently applied) have been established on its books with respect thereto;

                             (d) comply with all applicable laws, rules and
regulations of all governmental authorities, the violation of which could
reasonably be expected to have a Material Adverse Effect upon the financial
condition, operating results, assets, operations or business prospects of the
Company;

                             (e) use commercially reasonable efforts to obtain,
possess and maintain all material Intellectual Property Rights necessary to the
conduct of its business and own all right, title and interest in and to, or have
a valid license for, all such Intellectual Property Rights;

                             (f) maintain proper books of record and account
which present fairly in all material respects its financial condition and
results of operations and make provisions on its consolidated financial
statements for all such proper reserves as in each case are required in
accordance with generally accepted accounting principles, consistently applied;

                             (g) enter into and maintain invention assignment
and nondisclosure agreements with each of its employees and consultants;

                             (h) require all option agreements issued under the
Company's 1998 Stock Plan after the date hereof to provide for a right of first
refusal on transfers for the benefit of the Company and the vesting of such
shares over a four (4) year period; provided, however, that no such shares shall
vest until one (1) year from date of grant or issuance, as the case may be, at
which time twenty-five percent (25%) of such shares shall vest, unless otherwise
approved by the compensation committee of the Board of Directors;

                             (i) prior to the first public offering of the
Company's securities under the Act, purchase directors' and officers' insurance
in a reasonable amount.

                      2.10   Termination of Certain Covenants. The covenants set
forth in Sections 2.4, 2.5, 2.6, 2.7, 2.8 and 2.9 shall terminate and be of no
further force or effect upon the consummation of the sale of securities pursuant
to a bona fide, firmly underwritten public offering of shares of common stock,
registered under the Act, at an offering price of at least $7.53 per share (as
adjusted for any stock split, dividend, combination, recapitalization,
reorganization and the like) and resulting in gross proceeds (net of
underwriting discounts and commission) to the Company of at least $30 million.

               3.     Miscellaneous.

                      3.1    Successors and Assigns.  Except as otherwise
provided herein (including Section 1.11 hereof), the terms and conditions of
this Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties (including


                                      -18-
<PAGE>   21

transferees of any shares of Registrable Securities). Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.

                      3.2    Governing Law.  This Agreement shall be governed by
and construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within the
state of California.

                      3.3    Counterparts.  This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

                      3.4    Titles and Subtitles.  The titles and subtitles
used in this Agreement are used for convenience only and are not to be
considered in construing or interpreting this Agreement.

                      3.5    Notices.  Unless otherwise provided, any notice
required or permitted under this Agreement shall be given in writing and shall
be deemed effectively given upon personal delivery to the party to be notified
or upon delivery by confirmed facsimile transmission, nationally recognized
overnight courier service, or upon deposit with the United States Post Office,
by registered or certified mail, postage prepaid and addressed to the party to
be notified at the address indicated for such party on the signature page or
Schedule A hereof, or at such other address as such party may designate by ten
(10) days' advance written notice to the other parties.

                      3.6    Expenses.  If any action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to reasonable attorneys' fees, costs and necessary
disbursements in addition to any other relief to which such party may be
entitled.

                      3.7    Entire Agreement; Amendments and Waivers.  This
Agreement (including the Exhibits hereto, if any) constitutes the full and
entire understanding and agreement among the parties with regard to the subjects
hereof and thereof. Any term of this Agreement may be amended and the observance
of any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the holders of a majority of the Registrable
Securities. Any amendment or waiver effected in accordance with this paragraph
shall be binding upon each holder of any Registrable Securities, each future
holder of all such Registrable Securities, and the Company.

                      3.8    Severability.  If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.


                                      -19-
<PAGE>   22

                      3.9    Aggregation of Stock.  All shares of Registrable
Securities held or acquired by affiliated entities or persons shall be
aggregated together for the purpose of determining the availability of any
rights under this Agreement.

                      3.10   Specific Enforcement.  It is agreed and understood
that monetary damages would not adequately compensate an injured Party for the
breach of Sections 2.9 and 2.10 of this Agreement by the Company, that this
Agreement shall be specifically enforceable, and that any breach or threatened
breach of this Agreement shall be the proper subject of a temporary or permanent
injunction or restraining order. Further, the Company hereto waives any claim or
defense that there is an adequate remedy at law for such breach or threatened
breach.


                                      -20-
<PAGE>   23

               IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.


                                    COMPANY:

                                    STANFORD MICRODEVICES, INC.




                                    By: /s/ Robert Van Buskirk
                                       ---------------------------------------
                                        Robert Van Buskirk
                                        President and Chief Executive Officer


                        Address:    522 Almanor Avenue
                                    Sunnyvale, California  94086



                        SIGNATURE PAGE TO STANFORD MICRODEVICES, INC.
                           INVESTORS' RIGHTS AGREEMENT

<PAGE>   24

                                   INVESTORS:

                                   SUMMIT VENTURES V, L.P.

                                   By:   Summit Partners V, L.P.,
                                         Its General Partner

                                   By:    Summit Partners, LLC,
                                          Its General Partner


                                   By: /s/ PETER CHUNG
                                      ---------------------------------
                                          Member


                                   SUMMIT V COMPANION FUND, L.P.

                                   By:    Summit Partners V, L.P.
                                          Its General Partner

                                   By:    Summit Partners, LLC
                                          Its General Partner


                                   By: /s/ PETER CHUNG
                                      ---------------------------------
                                          Member


                                   SUMMIT V ADVISORS FUND, L.P.

                                   By:    Summit Partners, LLC
                                          Its General Partner


                                   By: /s/ PETER CHUNG
                                      ---------------------------------
                                          Member

                                   SUMMIT V ADVISORS FUND (QP), L.P.

                                   By:    Summit Partners, LLC
                                          Its General Partner


                                   By: /s/ PETER CHUNG
                                      ---------------------------------
                                          Member



                                   SUMMIT INVESTORS III, L.P.

                                   By: /s/ PETER CHUNG
                                      ---------------------------------
                                           General Partner

<PAGE>   25

                                   INVESTORS:


                                   Needham Capital SBIC II, L.P.


                                   By: /s/ JOHN MICHAELSON
                                      ---------------------------------
                                      John C. Michaelson
                                      General Partner

                                   Needham Capital Partners II (Bermuda), L.P.


                                   By: /s/ JOHN MICHAELSON
                                      ---------------------------------
                                      John C. Michaelson
                                      General Partner

<PAGE>   26
                                   SCHEDULE A

                              SCHEDULE OF INVESTORS



SUMMIT VENTURES V, L.P.

SUMMIT V COMPANION FUND, L.P.

SUMMIT V ADVISORS FUND, L.P.

SUMMIT V ADVISORS FUND (QP), L.P.

SUMMIT INVESTORS III, L.P.

NEEDHAM CAPITAL SBIC II, L.P.

NEEDHAM CAPITAL PARTNERS II (BERMUDA), L.P.



                                       S-1