<SUBMISSION>
<ACCESSION-NUMBER>0000891618-02-005142
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>3
<PERIOD>20020930
<FILING-DATE>20021113
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>IMMERSION CORP
<CIK>0001058811
<ASSIGNED-SIC>3577
<IRS-NUMBER>943180138
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>000-27969
<FILM-NUMBER>02820254
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>801 FOX LANE
<CITY>SAN JOSE
<STATE>CA
<ZIP>95131
<PHONE>4084671900
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>801 FOX LANE
<CITY>SAN JOSE
<STATE>CA
<ZIP>95131
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>IMMERSION HUMAN INTERFACE CORP
<DATE-CHANGED>19980602
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>f85502e10vq.htm
<DESCRIPTION>FORM 10-Q DATED 9/30/2002
<TEXT>
<HTML>
<HEAD>
<TITLE>Immersion Corporation Form 10-Q Dated 9/30/2002</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center"><FONT size="3"><B>UNITED STATES SECURITIES AND EXCHANGE COMMISSION<BR>
Washington, D.C. 20549</B></FONT>

<P align="center"><FONT size="3"><B>FORM 10-Q</B></FONT>

<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
        <TD width="14%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="81%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">(MARK ONE)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top" align="center"><FONT size="2">&#091;<B>X</B>&#093;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
EXCHANGE ACT OF 1934</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">For the quarterly period ended September&nbsp;30, 2002</FONT>

<P align="center"><FONT size="2">OR</FONT>

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<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
        <TD width="14%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="81%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD valign="top" align="center"><FONT size="2">&#091;&nbsp;&nbsp;&nbsp;&#093;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
EXCHANGE ACT OF 1934</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">For the transition period from ____________ to ____________</FONT>

<P align="center"><FONT size="2">Commission file number 000-27969</FONT>

<P>
<HR width="16%" align="center" size="1" noshade>
<P>


<P align="center"><FONT size="2"><B>IMMERSION CORPORATION</B></FONT>
<HR width="46%" align="center" size="1" noshade>

<DIV align="center"><FONT size="2">(Exact Name of Registrant as Specified in its Charter)</FONT></DIV>

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        <TD width="45%">&nbsp;</TD>
        <TD width="10%">&nbsp;</TD>
        <TD width="45%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD align="center" valign="top"><FONT size="2"><B>Delaware</B></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">
<B>94-3180138</B></FONT></TD>
</TR>
<TR>
        <TD align="center" valign="top"><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">
<HR size="1" noshade></FONT></TD>
</TR>
<TR valign="bottom">
        <TD align="center" valign="top"><FONT size="2"><I>(State or other jurisdiction of incorporation or organization)</I></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">
<I>(I.R.S. employer Identification No.)</I></FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2"><B>801 Fox Lane, San Jose, California 95131</B></FONT>

<HR width="46%" align="center" size="1" noshade>

<DIV align="center"><FONT size="2"><I>(Address of principal executive offices)(Zip Code)</I></FONT></DIV>

<P align="center"><FONT size="2"><B>(408)&nbsp;467-1900</B></FONT>

<HR width="16%" align="center" size="1" noshade>

<DIV align="center"><FONT size="2"><I>(Registrant&#146;s Telephone Number, including Area Code)</I></FONT></DIV>
<DIV>&nbsp;</DIV>
<DIV>&nbsp;</DIV>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Indicate by check mark whether the Registrant (1)&nbsp;has filed all reports
required to be filed by Section&nbsp;13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12&nbsp;months (or for such shorter period that the
registrant was required to file such reports), and (2)&nbsp;has been subject to such
filing requirements for the past 90&nbsp;days.&nbsp;&nbsp;&nbsp; Yes &nbsp; &#091;X&#093; &nbsp;&nbsp; No&nbsp; &#091;&nbsp;&nbsp;&nbsp;&#093;
</FONT>
<DIV>&nbsp;</DIV>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Number of shares of Common Stock outstanding at November&nbsp;6, 2002:
20,133,903.
</FONT>
<P align="center"><FONT size="2">&nbsp;
</FONT>

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<!-- TOC -->
<A name="toc"><DIV align="CENTER" style="page-break-before:always"><U><B>TABLE OF CONTENTS</B></U></DIV></A>

<P><CENTER>
<TABLE border="0" width="90%" cellpadding="0" cellspacing="0">
<TR>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
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	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="76%"></TD>
</TR>
<TR><TD colspan="9"><A HREF="#000">PART I FINANCIAL INFORMATION</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#001">ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#002">CONDENSED CONSOLIDATED BALANCE SHEETS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#003"> CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#004">CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS</A></TD></TR>
<TR><TD></TD><TD></TD><TD colspan="7"><A HREF="#005"> NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#006">ITEM 2. MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#007">ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#008">ITEM 4. CONTROLS AND PROCEDURES</A></TD></TR>
<TR><TD colspan="9"><A HREF="#009">PART II OTHER INFORMATION</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#010">ITEM 1. LEGAL PROCEEDINGS</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#011">ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K</A></TD></TR>
<TR><TD colspan="9"><A HREF="#012">SIGNATURES</A></TD></TR>
<TR><TD colspan="9"><A HREF="#013">CERTIFICATIONS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#014">EXHIBIT INDEX</A></TD></TR>
<TR><TD colspan="9"><A HREF="f85502exv99w1.txt">EXHIBIT 99.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f85502exv99w2.txt">EXHIBIT 99.2</A></TD></TR>
</TABLE>
</CENTER>
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>






<P align="center"><FONT size="2"><B>IMMERSION CORPORATION</B></FONT>

<P align="center"><FONT size="2"><B>INDEX</B></FONT>

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        <TD width="8%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="79%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1"><B>Page</B></FONT></TD>
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        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2"><B>PART&nbsp;I</B></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD align="left" valign="top" colspan="5"><FONT size="2"><B>FINANCIAL INFORMATION</B></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Item&nbsp;1.
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Financial Statements</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Condensed Consolidated Balance Sheets as of September&nbsp;30, 2002 (Unaudited)
and <BR>December&nbsp;31, 2001
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2"><BR>3</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Condensed Consolidated Statements of Operations (Unaudited) for the Three Months
and Nine <BR>months Ended September&nbsp;30, 2002 and 2001
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2"><BR>4</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended<BR> September&nbsp;30, 2002 and 2001
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2"><BR>5</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Notes to Condensed Consolidated Financial Statements (Unaudited)
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">6</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Item&nbsp;2.
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">13</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Item&nbsp;3.
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Quantitative and Qualitative Disclosures About Market Risk
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">32</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Item&nbsp;4.
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Controls and Procedures
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">33</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2"><B>PART&nbsp;II</B></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD align="left" valign="top" colspan="5"><FONT size="2"><B>OTHER INFORMATION</B></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Item&nbsp;1.
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Legal Proceedings
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">33</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Item&nbsp;6.
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Exhibits and Reports on Form&nbsp;8-K
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">34</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top" colspan="3"><FONT size="2">SIGNATURES
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">35</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top" colspan="3"><FONT size="2">CERTIFICATIONS
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">36</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">2
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<!-- link1 "PART I FINANCIAL INFORMATION" -->
<DIV align="left"><A NAME="000"></A></DIV>
<P align="center"><FONT size="2"><B>PART I<BR>
FINANCIAL INFORMATION</B></FONT>

<!-- link2 "ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS" -->
<DIV align="left"><A NAME="001"></A></DIV>
<P align="left"><FONT size="2"><B>ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS</B></FONT>

<!-- link3 "CONDENSED CONSOLIDATED BALANCE SHEETS" -->
<DIV align="left"><A NAME="002"></A></DIV>
<P align="center"><FONT size="2"><B>IMMERSION CORPORATION<BR>
CONDENSED CONSOLIDATED BALANCE SHEETS<BR>
(In thousands, except share and per share amounts)</B></FONT>

<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="66%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>September 30,</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>December 31,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001 (1)</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>(Unaudited)</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="13" align="center"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2"><B>ASSETS</B></FONT></DIV></TD>
</TR>

<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current assets:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and cash equivalents</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">8,686</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">10,381</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Short-term investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,545</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts receivable, (net of allowances for doubtful accounts
of: 2002, $239; and 2001, $356)</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,880</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,779</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Inventories</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,353</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,965</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Prepaid expenses and other current assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">435</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,179</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total current assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15,354</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">19,849</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Property and equipment, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,305</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,918</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Goodwill, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,758</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,676</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Purchased intangibles and other assets, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">6,836</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">8,382</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,000</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,200</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">29,253</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">37,025</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="13" align="center"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2"><B>LIABILITIES AND STOCKHOLDERS&#146; EQUITY</B></FONT></DIV></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current liabilities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts payable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">840</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">722</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accrued compensation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">773</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,158</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other current liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,353</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">587</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deferred revenue and customer advances</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,034</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">953</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current portion of long-term debt and warrant liability</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">599</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,519</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Current portion of capital lease obligation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">22</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">22</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total current liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,621</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,961</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Long-term debt, less current portion</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">28</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">83</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Capital lease obligation, less current portion</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">31</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">47</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrant liability</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">120</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Long-term deferred revenue, less current portion</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,542</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">9,222</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">8,211</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Contingencies (Note 8)</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Stockholders&#146; equity:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Common stock &#151; $0.001 par value; 100,000,000 shares authorized; shares
issued and outstanding: 2002, 20,133,903 and 2001, 18,973,108</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">89,450</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">89,294</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,974</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,990</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deferred stock compensation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,725</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,956</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated other comprehensive loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(16</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(19</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated deficit</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(69,652</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(59,495</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total stockholders&#146; equity</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">20,031</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">28,814</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total liabilities and stockholders&#146; equity</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">29,253</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">37,025</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">See accompanying Notes to Condensed Consolidated Financial Statements.</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
      <TD width="1%" align="left" nowrap><FONT size="2">(1)</FONT></TD>
        <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="98%"><FONT size="2">The balance sheet at December&nbsp;31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">3
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>



<!-- link3 " CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS" -->
<DIV align="left"><A NAME="003"></A></DIV>
<P align="center"><FONT size="2"><B>IMMERSION CORPORATION<BR>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS<BR>
(In thousands, except per share amounts)<BR>
(Unaudited)</B></FONT>

<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="50%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Three Months Ended</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Nine Months Ended</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Revenues:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Royalty revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">878</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,263</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">3,745</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">3,385</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Product sales</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,612</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,327</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,831</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">8,073</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Development contracts and other</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">987</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">881</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,167</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,610</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total revenues</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,477</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,471</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">14,743</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">14,068</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Costs and expenses:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cost of product sales</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,623</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,421</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,387</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,801</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Sales and marketing</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,607</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,303</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,533</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,929</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Research and development</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,557</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,791</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,848</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,920</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">General and administrative</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,062</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,116</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,853</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,917</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of intangibles and deferred stock compensation *</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">748</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,301</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,374</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,953</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other charges</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">100</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">397</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">225</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total costs and expenses</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,597</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">9,032</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">23,392</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">28,745</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Operating loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3,120</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(4,561</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(8,649</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(14,677</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Interest and other income</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">20</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">301</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">255</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,084</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Interest and other expense</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,332</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(4,778</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,763</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(5,185</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(4,432</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(9,038</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(10,157</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(18,778</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Basic and diluted net loss per share</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.22</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.48</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.51</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(1.01</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Shares used in calculating basic and diluted net loss per share</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">20,113</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18,785</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">19,825</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18,616</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">* Amortization of intangibles and deferred stock compensation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of intangibles</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">422</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">923</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,383</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,831</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deferred stock compensation &#151; sales and marketing</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">9</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deferred stock compensation &#151; research and development</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">321</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">334</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">965</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">898</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deferred stock compensation &#151; general and administrative</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">40</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">17</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">217</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">748</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,301</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,374</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">3,953</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">See accompanying Notes to Condensed Consolidated Financial Statements.</FONT>

<P align="center"><FONT size="2">4
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>


<!-- link3 "CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS" -->
<DIV align="left"><A NAME="004"></A></DIV>
<P align="center"><FONT size="2"><B>IMMERSION CORPORATION<BR>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS<BR>
(In thousands)<BR>
(Unaudited)</B></FONT>

<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="70%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>Nine Months Ended</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1"><B>September 30,</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2002</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>2001</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash flows from operating activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(10,157</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(18,778</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Adjustments to reconcile net loss to net cash provided by (used in) operating activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Depreciation and amortization</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">975</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">930</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of intangibles</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,383</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,831</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of deferred stock compensation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">991</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,122</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of discounts on notes payable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">275</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">338</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Fair value adjustment for warrant liability</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(89</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(245</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Loss on disposal of equipment</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">19</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">34</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Loss on writedown of investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,200</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,539</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Noncash compensation expense</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">14</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Noncash interest expense</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">212</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">234</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Changes in operating assets and liabilities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts receivable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(101</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,781</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Inventories</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(388</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(311</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Prepaid expenses and other assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">825</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(185</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accounts payable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">113</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(487</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accrued liabilities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">381</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(189</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Deferred revenue and customer advances</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,623</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(372</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net cash provided by (used in) operating activities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">276</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(12,320</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash flows from investing activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Purchases of short-term investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(5</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,020</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Sales and maturities of short-term investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,550</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,381</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Purchases of property and equipment</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(381</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(536</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net cash provided by investing activities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,164</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,825</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash flows from financing activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Issuance of common stock</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">95</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">295</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Exercise of warrants</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">50</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Exercise of stock options</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">222</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">248</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Payments on notes payable and capital leases</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(4,509</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(89</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Proceeds from shareholder note</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">17</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net cash provided by (used in) financing activities</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(4,142</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">471</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Effect of exchange rates on cash and cash equivalents</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(26</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net (decrease)&nbsp;in cash and cash equivalents</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,695</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(10,050</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and cash equivalents:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Beginning of the period</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">10,381</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">23,474</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">End of the period</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">8,686</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">13,424</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Supplemental disclosure of cash flow information :</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash paid for taxes</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash paid for interest</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">978</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">69</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Supplemental disclosure of noncash investing and financing activities:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="4"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Change in net unrealized gains from short-term investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="5"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">See accompanying Notes to Condensed
Consolidated Financial Statements.</FONT>

<P align="center"><FONT size="2">5
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>


<!-- link3 " NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS" -->
<DIV align="left"><A NAME="005"></A></DIV>
<P align="center"><FONT size="2"><B>IMMERSION CORPORATION<BR>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS<BR>
SEPTEMBER 30, 2002<BR>
(Unaudited)</B></FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2">1.</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2">SIGNIFICANT ACCOUNTING POLICIES</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Basis of Presentation </I>&#151; The accompanying unaudited condensed consolidated
financial statements reflect all the normal recurring adjustments which are, in
the opinion of management, necessary to present fairly the condensed
consolidated financial position, statements of operations and cash flows for
the interim periods presented.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions for Form&nbsp;10-Q and,
therefore, do not include all information and footnotes necessary for a
complete presentation of the financial position, results of operations, and
cash flows, in conformity with accounting principles generally accepted in the
United States of America. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company&#146;s audited
consolidated financial statements included in the Company&#146;s Annual Report on
Form&nbsp;10-K for the fiscal year ended December&nbsp;31, 2001.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The results of operations for the interim period ended September&nbsp;30, 2002
are not necessarily indicative of the results to be expected for the full year.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Reclassifications </I>&#151; Certain prior period amounts have been reclassified to
conform to the current period presentation. These reclassifications had no
material effect on net loss or stockholders&#146; equity.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Goodwill and
Purchased Intangible Assets&nbsp;</I>&#151; In June 2001, the Financial
Accounting Standards Board issued SFAS No.&nbsp;142, Goodwill and Other Intangible
Assets. SFAS No.&nbsp;142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
No.&nbsp;142 provides that intangible assets with finite useful lives will be
amortized and that goodwill and intangible assets with indefinite lives will
not be amortized, but rather will be tested at least annually for impairment.
The Company adopted SFAS No.&nbsp;142 effective January&nbsp;1, 2002 and discontinued the
amortization of goodwill.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under SFAS 142, material amounts of goodwill attributable to each of our
reporting units are required to be tested for impairment by comparing the fair
value of each reporting unit with its carrying value. These impairment tests
are required to be performed at adoption and at least annually thereafter.
Prior to June&nbsp;30, 2002, the Company performed the first of the required
impairment tests of goodwill. No impairment loss resulted from the initial
goodwill impairment test. On an ongoing basis (absent any impairment
indicators), we expect to perform our impairment tests during the fourth
quarter, in conjunction with our annual budgeting process. There can be no
assurance that future goodwill impairment tests will not result in a charge to
earnings.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following pro forma financial information reflects net income and
diluted earnings per share as if goodwill and certain intangibles were not
subject to amortization for the three and nine months ended September&nbsp;30, 2001
(in thousands, except per share amounts):
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
        <TD width="55%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Three Months Ended</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Nine Months Ended</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30, 2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30, 2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">Net (Loss)</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">(Loss) per share</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">Net (Loss)</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">(Loss) per share</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amounts as reported</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(9,038</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.48</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(18,778</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(1.01</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of goodwill and intangibles</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">419</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">0.02</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,257</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">0.07</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Pro forma amounts</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(8,619</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.46</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(17,521</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.94</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">6
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The carrying amount of goodwill is attributable to the Immersion
Computing, Entertainment and Industrial segment.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In connection with adopting SFAS 142, we also reassessed the useful lives
and the classification of our identifiable intangible assets and determined
that they continued to be appropriate except for acquired workforce of $82,000,
which was reclassified into goodwill. The components of our purchased
intangibles and other assets are as follows:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
        <TD width="80%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">December 31,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD align="center" colspan="7"><FONT size="1">(In thousands)</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Purchased patents and technology</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">6,757</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">6,418</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other intangibles</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,748</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,830</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">83</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">503</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Gross purchased intangibles and other assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">12,588</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">12,751</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated amortization of purchased patents and technology</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,382</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,907</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Accumulated amortization of other intangibles</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3,370</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,462</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net purchased intangibles and other assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">6,836</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">8,382</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amortization of intangibles during the three and nine months ended
September&nbsp;30, 2002 was $422,000 and $1.4&nbsp;million respectively. The estimated
annual amortization expense for intangible assets as of September&nbsp;30, 2002 was
$1.7&nbsp;million in 2002, $1.5&nbsp;million in 2003, $1.3&nbsp;million in 2004, $1.0
million in 2005, $579,000 in 2006, $498,000 in 2007, and $80,000 in 2008.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Recent Accounting Pronouncements </I>&#151; In June 2001, the FASB issued SFAS No.
143, &#147;Accounting for Asset Retirement Obligations&#148; which applies to contractual
obligations associated with the retirement of a tangible long-lived asset that
results from the acquisition, construction, or development and/or the normal
operation of a long-lived asset. Under this standard, guidance is provided on
measuring and recording the liability. We intend to adopt this statement
effective January&nbsp;1, 2003. We do not believe that adoption of this statement
will materially impact our financial position, results of operations or cash
flows.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effective January&nbsp;1, 2002, the Company adopted the provisions of SFAS No.
144, &#147;Accounting for the Impairment or Disposal of Long-Lived Assets.&#148; This
Statement establishes a single accounting model for the impairment or disposal
of long-lived assets. The adoption of SFAS No.&nbsp;144 did not have a material
impact on the Company&#146;s consolidated financial statements for the three and
nine months ended September&nbsp;30, 2002.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On April&nbsp;30, 2002, the FASB issued SFAS 145, &#147;Rescission of FASB
Statements No.&nbsp;4, 44, and 64, Amendment of FASB Statement No.&nbsp;13, and Technical
Corrections.&#148; The Statement updates, clarifies and simplifies existing
accounting pronouncements. Among other things, SFAS 145 rescinds SFAS 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Accounting Principles Board Opinion 30
will now be used to classify those gains and losses. The statement is
effective on various dates after May&nbsp;15, 2002. The adoption of SFAS No.&nbsp;145
did not have an impact on the Company&#146;s consolidated financial statements for
the three and nine months ended September&nbsp;30, 2002.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June 2002, the FASB issued SFAS 146, &#147;Accounting for Costs Associated
with Exit or Disposal Activities,&#148; which addresses accounting for restructuring
and similar costs. SFAS 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue No.&nbsp;94-3. The Company will adopt
the provisions of SFAS 146 for restructuring activities initiated after
December&nbsp;31, 2002. SFAS 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under issue 94-3, a liability for an exit cost would be recognized at the date
of the Company&#146;s commitment to an exit plan. SFAS 146 also establishes that the
liability should be measured and recorded at fair value. Accordingly, SFAS 146
may affect the timing of recognizing future restructuring costs as well as the
amounts recognized. We do not believe that adoption of SFAS 146 will
materially impact our financial position, results of operations or cash flows.
</FONT>
<P align="center"><FONT size="2">7
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2">2.</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2">INVENTORIES</FONT></TD>
</TR>
</TABLE>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
        <TD width="70%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">December 31,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD align="center" colspan="7"><FONT size="1">(In thousands)</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Raw materials and subassemblies</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,645</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,148</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Work in process</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">159</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">146</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Finished goods</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">549</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">671</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,353</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,965</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2">3.</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2">PROPERTY AND EQUIPMENT</FONT></TD>
</TR>
</TABLE>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
        <TD width="70%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">December 31,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD align="center" colspan="7"><FONT size="1">(In thousands)</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Computer equipment and purchased software</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,000</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,982</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Machinery and equipment</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,785</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,765</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Furniture and fixtures</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,329</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,417</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Leasehold improvements</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">692</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">698</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,806</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,862</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Less accumulated depreciation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3,501</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,944</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Property and equipment, net</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,305</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,918</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2">4.</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2">OTHER INVESTMENTS</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other investments are comprised of equity investments in privately-held
companies accounted for under the cost method. The Company intends to hold its
equity investments for the long term and monitors whether there have been
other-than-temporary declines in value of these investments based on
management&#146;s estimates of their net realizable value taking into account the
companies&#146; respective financial condition and ability to raise third-party
financing. At September&nbsp;30, 2002 the balance of other investments was $1.0
million, after a write down of $1.2&nbsp;million during the quarter ended September
30, 2002. At December&nbsp;31, 2001 the balance of other investments was $2.2
million, after a write down of $4.5&nbsp;million during the quarter ended September
30, 2001.
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2">5.</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2">NET LOSS PER SHARE</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands, except per
share amounts):
</FONT>


<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="51%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Three Months Ended</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Nine Months Ended</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Numerator:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(4,432</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(9,038</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(10,157</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(18,778</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Denominator:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Weighted average common shares outstanding</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">20,113</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18,785</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">19,825</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18,637</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Weighted average common shares held in escrow</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(21</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Shares used in computation, basic and diluted</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">20,113</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18,785</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">19,825</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">18,616</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss per share, basic and diluted</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.22</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.48</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(0.51</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(1.01</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">8
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the above-mentioned periods, the Company had securities outstanding
that could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented since their effect would have been anti-dilutive. These outstanding
securities consisted of the following:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
        <TD width="56%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="8%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="8%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="8%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="8%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Convertible note payable</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">226,450</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Outstanding stock options</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,037,041</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">8,085,578</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Warrants</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">511,999</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">523,972</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2">6.</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2">COMPREHENSIVE LOSS</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table sets forth the components of comprehensive loss:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="55%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Three Months Ended</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Nine Months Ended</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">(In thousands)</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">(In thousands)</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(4,432</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(9,038</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(10,157</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(18,778</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Foreign currency translation adjustment</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(10</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(51</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Change in unrealized gains on short-term investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total comprehensive loss</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(4,442</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(9,039</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(10,155</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(18,828</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2">7.</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2">SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company designs, develops, produces, markets and licenses products
based on touch-enabling technology. These devices are used in computer
entertainment, personal computing, medical and other professional computing
applications. The Company has two operating and reportable segments. A
description of the types of products and services provided by each operating
segment is as follows:
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Immersion Computing, Entertainment and Industrial develops and markets
TouchSense and force-feedback technology that enables software and hardware
developers to bring realism into their computing and entertainment experience
and industrial applications. Immersion Medical develops, manufactures, and
markets medical simulators that recreate realistic healthcare environments.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following tables display information about our reportable segments:
</FONT>
<P align="center"><FONT size="2">9
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="55%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Three Months Ended</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Nine Months Ended</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">(In thousands)</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">(In thousands)</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Revenues:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Immersion Computing, Entertainment and Industrial</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,496</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">3,334</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">9,193</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">10,316</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Immersion Medical</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,121</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,145</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,753</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,778</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Intersegment eliminations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(140</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(8</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(203</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(26</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,477</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,471</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">14,743</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">14,068</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Loss:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Immersion Computing, Entertainment and Industrial</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(4,240</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(7,323</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(8,439</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(14,373</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Immersion Medical</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(134</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,713</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,632</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(4,402</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Intersegment eliminations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(58</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(86</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(4,432</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(9,038</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(10,157</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(18,778</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="69%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">December 31,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD align="center" colspan="7"><FONT size="1">(In thousands)</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Assets:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Immersion Computing, Entertainment and Industrial</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">39,544</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">41,670</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Immersion Medical</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,457</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,990</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Intersegment eliminations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(13,748</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(7,635</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">29,253</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">37,025</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company operates primarily in the United States and in Canada where it
operates through its wholly owned subsidiary, Immersion Canada. Segment assets
and expenses relating to the Company&#146;s corporate operations are not allocated
but are included in Immersion Computing, Entertainment and Industrial as that
is how they are considered for management evaluation purposes. As a result,
the segment information may not be indicative of the financial position or
results of operations that would have been achieved had these segments operated
as unaffiliated entities. Management measures the performance of each segment
based on several metrics, including net loss. These results are used, in part,
to evaluate the performance of, and allocate resources, to each of the
segments.
</FONT>
<P align="left"><FONT size="2">REVENUE BY REGION</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues are broken out geographically by the ship-to location of the
customer. Geographic revenue as a percentage of total revenue was as follows:
</FONT>
<P align="center"><FONT size="2">10
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="43%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Three Months Ended</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Nine Months Ended</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">North America</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">76</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">71</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">67</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">71</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Europe</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">10</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">16</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">12</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Far East</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">9</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">17</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">16</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Rest of the world</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">0</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">100</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">100</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">100</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">100</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company derived 73% and 71% of its total revenues from the United
States for the three months ended September&nbsp;30, 2002 and 2001 respectively.
The Company derived 66% and 69% of its total revenues from the United States
for the nine months ended September&nbsp;30, 2002 and 2001 respectively. Revenues
from Japan accounted for 10% of the Company&#146;s total revenues for the nine
months ended September&nbsp;30, 2002. Revenues from other countries represented
less than 10% individually for the periods presented.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The majority of the Company&#146;s long-lived assets were located in the United
States. Long-lived assets included net property and equipment and long-term
investments and other assets. Long-lived assets that were outside the United
States constituted less than 10% of the total at September&nbsp;30, 2002 and
December&nbsp;31, 2001.
</FONT>
<P align="left"><FONT size="2">SIGNIFICANT CUSTOMERS</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Customers comprising 10% or greater of the Company&#146;s net revenues are
summarized as follows:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="85%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="39%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Three Months Ended</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Nine Months Ended</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Customer A</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">12</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Customer B</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">11</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Customer C</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">10</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">10</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">15</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">11</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">12</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P>
<CENTER>
<TABLE width="85%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
      <TD width="1%" align="left" nowrap><FONT size="2">*</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2">Revenue derived from customer represented less than 10% for the period.</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of September&nbsp;30, 2002, customer C accounted for 12% of the Company&#146;s
accounts receivables. As of September&nbsp;30, 2001, customer A accounted for 11%
of the Company&#146;s accounts receivables. No other customer accounted for more
than 10% of the Company&#146;s accounts receivable for the periods presented.
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" align="right" nowrap><FONT size="2">8.</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="98%"><FONT size="2">CONTINGENCIES</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>In re Immersion Corporation</I>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company is involved in legal proceedings relating to a class action
lawsuit filed on November&nbsp;9, 2001. The case is now designated as In re
Immersion Corporation Initial Public Offering Securities Litigation, No.&nbsp;Civ.
01-9975 (S.D.N.Y.), related to In re Initial Public Offering Securities
Litigation, No.&nbsp;21 MC 92 (S.D.N.Y.). The action was filed in the United States
District Court, Southern District of New York, against defendants Immersion
Corporation, Louis Rosenberg (former Chief Executive Officer, President and
Chairman of the Company), Victor Viegas (current President, Chief Executive
Officer and Chief Financial Officer), Bruce Schena (former Chief Technology
Officer and Director); and certain underwriters of Immersion&#146;s November&nbsp;12,
1999 initial public offering. Subsequently, two of the individual
</FONT>
<P align="center"><FONT size="2">11
</FONT>

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<P><FONT size="2">defendants stipulated to a dismissal without prejudice. The case is
purportedly brought on behalf of all persons who purchased the Company&#146;s common
stock from November&nbsp;12, 1999 through December&nbsp;6, 2000.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The lawsuit has been consolidated for pretrial purposes with similar
lawsuits relating to more than 300 other initial public offerings conducted in
1999 and 2000 before the Honorable Judge Shira A. Scheindlin. On May&nbsp;29, 2002,
plaintiffs electronically served an amended complaint. The amended complaint
alleges violations of Sections&nbsp;11 and 15 of the Securities Act of 1933 and
Sections&nbsp;10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds
that the prospectus incorporated in the registration statement for the
Company&#146;s initial public offering failed to disclose, among other things, that
(i)&nbsp;the underwriter had solicited and received excessive and undisclosed
commissions from certain investors in exchange for which the underwriter
allocated to those investors material portions of the shares of the Company&#146;s
stock sold in the offering; and (ii)&nbsp;the underwriter had entered into
agreements with customers whereby the underwriter agreed to allocate shares of
the Company&#146;s stock sold in the offering to those customers in exchange for
which the customers agreed to purchase additional shares of the Company&#146;s stock
in the aftermarket at pre-determined prices. The amended complaint appears to
allege that false or misleading analyst reports were issued. The amended
complaint does not claim any specific amount of damages.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On July&nbsp;15, 2002, the Company (as well as the other issuers and their
affiliated individual defendants) filed a motion to dismiss. The motions were
heard on November&nbsp;1, 2002 and are currently under consideration by the judge.
Settlement discussions with the Plaintiffs are being conducted under the
auspices of a mediator. The Company is considering a settlement proposal
presented by the mediator.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Immersion Corporation vs. Microsoft Corporation, Sony Computer
Entertainment Inc. and Sony Computer Entertainment of America, Inc.</I>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;11, 2002, we filed a complaint against Microsoft Corporation,
Sony Computer Entertainment, Inc., and Sony Computer Entertainment of America,
Inc. in the U.S. District Court for the Northern District Court of California
alleging infringement of U.S. Patent Nos. 5,889,672 and 6,275,213. The case
was assigned to United States District Judge Claudia Wilken. On April&nbsp;4, 2002,
Sony Computer Entertainment and Microsoft answered the complaint by denying the
material allegations and alleging counterclaims seeking a judicial declaration
that the asserted patents were invalid, unenforceable, or not infringed. The
process of discovery and exchanging information and documents on infringement,
invalidity, and claim construction, is underway. On October&nbsp;8, 2002, we filed
an amended complaint, withdrawing the claim under the &#145;672 patent and adding a
claim of infringement of a new patent, U.S. Patent No.&nbsp;6,424,333. On October
10, 2002, the Court entered an Amended Case Management Order that sets, among
other dates in the case, April&nbsp;18, 2003 for a hearing to construe the claims of
the asserted patents and April&nbsp;5, 2004 for the start of trial. On October&nbsp;28,
2002, Sony Computer Entertainment and Microsoft answered the amended complaint
and alleged similar counterclaims for declaratory relief that the asserted
patents are invalid, unenforceable, or not infringed. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of the litigation. We anticipate that the litigation will be costly, and there
can be no assurance that we will be able to recover the costs we incur in
connection with the litigation. The litigation has diverted, and is likely to
continue to divert, the efforts and attention of some of our key management and
personnel. As a result, until such time as it is resolved, the litigation
could adversely affect our business. Further, any unfavorable outcome could
adversely affect our business.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Other Contingencies</I>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company&#146;s 70% owned subsidiary, Sky Fitness, has had claims against
the Company relating to the Sky Fitness mark and ownership of the Sky Fitness
technology. The claims allege that the SkyCYCLE mark infringes a competitor&#146;s
mark and that a former employee of the Company violated a noncompete clause
within his employment agreement. The Company believes these claims are without
merit and would vigorously defend itself if these claims were to progress.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition, the Company has received claims from third parties asserting
that the Company&#146;s technologies, or those of its licensees, infringe on the
other parties&#146; intellectual property rights. Management believes that these
claims are without merit and, with respect to each, has obtained or is in the
process of obtaining written non-infringement and/or patent invalidity opinions
from outside patent counsel. The Company from time to time is involved in
routine legal matters and contractual disputes incidental to its normal
operations. In management&#146;s opinion, the resolution of such matters will not
have a material adverse effect on the Company&#146;s consolidated financial
condition, results of operations or liquidity.
</FONT>
<P align="center"><FONT size="2">12
</FONT>

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<!-- link2 "ITEM 2. MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" -->
<DIV align="left"><A NAME="006"></A></DIV>
<P align="left"><FONT size="2"><B>ITEM 2. MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;This Quarterly Report on Form&nbsp;10-Q includes forward-looking statements
within the meaning of Section&nbsp;27A of the Securities Act of 1933, as amended,
and Section&nbsp;21E of the Securities Exchange Act of 1934, as amended. The
forward-looking statements involve risks and uncertainties. Forward-looking
statements are identified by words such as &#147;anticipates&#148;, &#147;believes&#148;,
&#147;expects&#148;, &#147;intends&#148;, &#147;may&#148;, &#147;will&#148; and other similar expressions. However,
these words are not the only way we identify forward-looking statements. In
addition, any statements, which refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of factors, including those
set forth in this Management&#146;s Discussion and Analysis of Financial Condition
and Results of Operation and Factors That May Affect Future Results, those
described elsewhere in this report and those described in our other reports
filed with the SEC. We caution you not to place undue reliance on these
forward-looking statements, which speak only as of the date of this report, and
we undertake no obligation to release the results of any revisions to these
forward-looking statements which could occur after the filing of this report.
</FONT>
<P align="left"><FONT size="2">OVERVIEW</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We develop, manufacture, license and support a wide range of hardware and
software technologies that enable users to interact with a multitude of
computing and other devices using their sense of touch. We manage our business
under two operating and reportable segments: Immersion Computing, Entertainment
and Industrial, and Immersion Medical. We focus on four application areas &#151;
computing and entertainment, medical simulation, professional and industrial,
and three-dimensional capture and interaction. In high volume market areas
such as consumer computer peripherals and automotive interfaces, we primarily
license our touch-enabling technologies to third party manufacturers. We have
licensed our intellectual property to numerous manufacturers of mice,
joysticks, knobs, wheels and gamepads targeted at consumers. For lower-volume
markets like medical simulation systems and three-dimensional capture and
interaction products, our primary strategy is to manufacture and sell products
through direct sales, distributors and value added resellers. We sell medical
simulation devices used to train and allow health care providers to practice
and enhance their skills in a variety of procedures. These devices simulate
such procedures as intravenous catheterization, endovascular interventions, and
laparoscopic and endoscopic surgical procedures. We also sell
three-dimensional capture and interaction products. Our capture products
include the MicroScribe G2 desktop digitizer product line and associated
software and accessories. Our interaction product line is comprised of
specialized whole-hand sensing gloves, armatures and software, including the
CyberGlove, CyberGrasp, CyberForce, CyberTouch and VirtualHand software
products, that permit simulated interaction with three-dimensional
environments. In all market areas, we also engage in development projects for
third parties from time to time.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have entered into numerous contracts with government agencies and
corporations since 1993. Government contracts help fund advanced research and
development, are typically less than two years in duration, are usually for a
fixed price or for our costs plus a fixed fee, and allow the government agency
to license the resulting technology for government applications, specifically
excluding any commercial activity. Corporate contracts are typically for
product development consulting, are for a fixed fee and are also less than two
years in duration.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since inception, we have completed a number of acquisitions of patents and
technology. We capitalize the cost of patents and technology and license
agreements, except for amounts relating to acquired in-process research and
development for which there is no alternative future use. As of September&nbsp;30,
2002, we had capitalized patents and technology of $4.4&nbsp;million, net of
accumulated amortization of $2.4&nbsp;million. We are amortizing these patents and
technology over the estimated useful life of the technology of nine years.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We currently derive royalty revenue from sales of our licensees&#146; consumer
computer peripheral devices, such as touch-enabled mice and joysticks. We also
derive royalty revenue from the inclusion of touch-enabled controls
incorporating our technology in automobiles and medical simulators. Our basic
licensing model typically includes an up-front license fee and/or a royalty
paid by the peripheral or automobile manufacturer that is a percentage of the
wholesale selling price of the touch-enabled product. We derive product
revenue from a number of sources including sales of our medical simulation
hardware devices and from sales of the software modules that are used in
conjunction with such devices. Other sources of product revenue include sales
of our three-dimensional digitizing products, such as the MicroScribe G2
products, sales of hardware and software for our whole-hand sensing gloves,
such as the CyberGlove, and sales of our custom microprocessors, called the
Immersion Processors, which are designed for use by our licensees in
</FONT>
<P align="center"><FONT size="2">13
</FONT>

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<P><FONT size="2">their touch-enabled computer peripheral devices. With respect to development
projects, most such projects involve assisting our licensees in the development
of their touch-enabled products for which we receive fixed payments for
product-related deliverables.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We recognize revenues in accordance with applicable accounting standards
including the American Institute of Certified Public Accountants&#146; Statement of
Position 97-2, Software Revenue Recognition, as amended. Revenue is recognized
when persuasive evidence of an arrangement exists, delivery has occurred or
service has been rendered, the fee is fixed and determinable, and
collectibility is probable. This generally occurs at the time of shipment for
product sales. We recognize fixed-fee contract revenue under the cost-to-cost
percentage-of-completion accounting method based on the actual physical
completion of work performed and the ratio of costs incurred to total estimated
costs to complete the contract. We recognize allowable fees under
cost-reimbursement contracts as costs are incurred. Losses on contracts are
recognized when determined. Revisions in estimates are reflected in the period
in which the conditions become known. We recognize royalty revenue based on
royalty reports or related information received from our licensees and
time-based licenses of our intellectual property portfolio over the term of the
license.
</FONT>
<P><FONT size="2">RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30,
2002 AND 2001 ARE AS FOLLOWS:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
        <TD width="59%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">Change</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="left"><FONT size="1">REVENUES</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center">&nbsp;</TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD align="center" colspan="7"><FONT size="1">($ In thousands)</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Three months ended:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Royalty revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">878</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,263</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(30</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Product sales</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,612</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,327</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">12 </FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Development contracts and other</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">987</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">881</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">12 </FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,477</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,471</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">0 </FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Nine months ended:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Royalty revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">3,745</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">3,385</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">11 </FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Product sales</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,831</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">8,073</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Development contracts and other</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,167</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,610</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">21 </FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total Revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">14,743</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">14,068</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5 </FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Total Revenue. </I>Our total revenue for the third quarter of fiscal 2002 was
$4.5&nbsp;million, flat with the third quarter of fiscal 2001; a decrease in royalty
revenue was offset by increases in both product sales and development contract
revenues for the period. Royalty revenue for the three months ended September
30, 2002 decreased to $878,000 from $1.3&nbsp;million for the three months ended
September&nbsp;30, 2001, a decrease of 30%. Royalty revenue is comprised of
royalties earned on sales by our TouchSense licensees and license fees charged
for our intellectual property portfolio. This decrease is mainly due to
delayed new product introductions from some of our gaming licensees this year,
as well as an elevated level of new product introductions during the third
quarter of 2001. Product sales for the three months ended September&nbsp;30, 2002
increased by $285,000 or 12% as compared to the three months ended September&nbsp;30, 2001. The increase in product sales was mainly due
to an increase of $757,000 in our medical product sales, offset by a decrease
of $319,000 in our microprocessors sales and a decrease of $138,000 for our
custom location-based entertainment products as compared with the three months
ended September&nbsp;30, 2001. Medical product sales consist of sales of our
virtual reality medical simulators in the vascular, endoscopic, endovascular,
and laparoscopic product lines. The increase in medical product sales is
primarily the result of an increase in simulator sales in the vascular and
laparoscopic product lines during the third quarter of 2002 as compared to the
third quarter of 2001. The decline in our microprocessor sales is based on a
decision to decrease the sales effort related to this low margin product line
as well as reduced volume requirements from our licensees who use this
microprocessor solution. Development contract and other revenue is comprised
of revenue on commercial and government contracts, which increased by $106,000
during the third quarter of fiscal 2002, as compared to the third quarter of
fiscal 2001, due to an increase in
</FONT>
<P align="center"><FONT size="2">14
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P><FONT size="2">related development activity on existing contracts and on securing new
commercial and governmental development contracts.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our total revenue for the first nine months of fiscal 2002 increased by
$675,000 or 5% from the first nine months of fiscal 2001. The increase in
royalty revenue of $360,000 or 11% is mainly attributable to an increase in
royalties from our automotive and medical licensees and product offerings by
those licensees during the first nine months of fiscal 2002. The decrease in
product sales for the nine months ended September&nbsp;30, 2002 of $242,000 or 3% is
primarily attributable to a decrease of $713,000 in microprocessor sales, a
decrease of $424,000 in our 3D product sales, and a decrease of $306,000 in our
custom location-based entertainment products, offset by an increase in medical
product sales of $1.2&nbsp;million. The significant increase in medical product
sales is due to increased hardware and software platform offerings and
increased markets for this technology. The decline in our microprocessor sales
is based on a decision to decrease the sales effort related to this low margin
product line as well as reduced volume requirements from our licensees who use
this microprocessor solution. Products sold by our 3D group include the
MicroScribe G2 product line and products such as the CyberGlove and CyberForce
for use in research in computer-aided design, simulation, training and virtual
reality applications. The decline in our 3D product sales during the nine
months ended September&nbsp;30, 2002 as compared to the nine months ended September
30, 2001 is mainly the result of the current economic climate causing delayed
capital spending by industrial customers. The increase of $557,000 in
development contract and other revenue for the first nine months of fiscal 2002
compared to the first nine months of fiscal 2001 is due primarily to an
increase in related development activity on commercial and governmental
contracts in our medical business.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We categorize our geographic information into four major regions: North
America, Europe, Far East, and Rest of the World. In the third quarter of
fiscal 2002, revenue generated in North America, Europe, Far East and Rest of
the World represented 76%, 15%, 9%, and 0% respectively compared to 71%, 10%,
17%, and 2% respectively, for the third quarter of fiscal 2001. The shift in
revenues among regions is mainly due to an increase in medical product sales
and development efforts in North America and Europe and a decrease in sales of
our microprocessors to licensees in the Far East.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the first nine months of fiscal 2002, revenue generated in North
America, Europe, Far East, and Rest of the World represented 67%, 16%, 15%, and
2% respectively compared to 71%, 12%, 16%, and 1% respectively, for the first
nine months of fiscal 2001. The shift in revenues among regions is mainly due
to an increase in royalty revenue and medical product sales to Europe and a
decrease in location-based entertainment products in North America.
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
        <TD width="5%">&nbsp;</TD>
        <TD width="53%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">Change</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="left" colspan="2"><FONT size="1">COST OF PRODUCT SALES</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2">&nbsp;</TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD align="center" colspan="7"><FONT size="1">($ In thousands)</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Three months ended:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cost of product sales</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,623</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,421</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">14 </FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total product revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">62</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">61</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Nine months ended:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cost of product sales</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,387</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,801</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(9</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total product revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">56</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">59</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Cost of Product Sales</I>. Our cost of product sales consists primarily of
materials, labor and overhead. There is no cost of product sales associated
with royalty revenue or development contract revenue. Cost of product sales
increased by $202,000 or 14% for the three months ended September&nbsp;30, 2002 as
compared to the three months ended September&nbsp;30, 2001. The $202,000 increase
in cost of product sales for the third quarter of 2002 is primarily due to a
combination of increased product sales of 12% and an increase in overhead costs
of $107,000.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cost of product sales decreased by $414,000 or 9% for the nine months
ended September&nbsp;30, 2002 as compared to the nine months ended September&nbsp;30,
2001. The $414,000 decrease in cost of product sales is due to a combination
of decreased product sales, a favorable shift in the product mix and a decrease
in inventory write downs. For the nine months ended September&nbsp;30, 2002
compared to the nine months ended September&nbsp;30, 2001 product sales decreased by
</FONT>
<P align="center"><FONT size="2">15
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P><FONT size="2">3% and sales of our lower margin products such as our microprocessors decreased
contributing to favorable product mix. This favorable mix shift is primarily
the reason for the decrease in cost of product sales as a percentage of total
product sales to 56% for the nine months ended September&nbsp;30, 2002 compared to
59% for the nine months ended September&nbsp;30, 2001. Inventory write downs
decreased by $158,000 for the nine months ended September&nbsp;30, 2002 largely due
to the significant write down taken during the nine months ended September&nbsp;30,
2001 for our LightScribe product line.
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="63%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="8%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="8%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">Change</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="left" colspan="2"><FONT size="1">OPERATING EXPENSES AND OTHER</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2">&nbsp;</TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD align="center" colspan="7"><FONT size="1">($ In thousands)</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Three months ended:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Sales and marketing</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,607</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,303</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(30</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">36</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">52</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Research and development</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,557</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,791</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(13</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">35</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">40</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">General and administrative</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,062</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,116</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">46</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">47</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of intangibles and deferred stock compensation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">748</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,301</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(43</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">17</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">29</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other charges</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">100</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(100</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">0</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Nine months ended:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Sales and marketing</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">5,533</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">7,929</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(30</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">38</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">56</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Research and development</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,848</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">5,920</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(18</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">33</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">42</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">General and administrative</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">5,853</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">5,917</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">40</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">42</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Amortization of intangibles and deferred stock compensation</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,374</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">3,953</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(40</FONT></TD>
        <TD nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">16</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">28</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Other charges</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">397</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">225</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">76 </FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">% of total revenue</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2</FONT></TD>
        <TD nowrap><FONT size="2">%</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Sales and Marketing. </I>Our sales and marketing expenses are comprised
primarily of employee headcount and related compensation and benefits,
advertising, trade shows, brochures, market development funds, travel and an
allocation of facilities costs. Sales and marketing expenses decreased by
$696,000 or 30% in the third quarter of fiscal 2002 compared to the comparable
period in 2001. The decrease was mainly due to reduced headcount and related
compensation, benefits and overhead costs of $214,000, reduced expenses of
$241,000 for market development funds, application development, collateral
reproduction and advertising, reduced supplies and materials of $53,000,
reduced travel expenses of $50,000
</FONT>
<P align="center"><FONT size="2">16
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P><FONT size="2">and a decrease in bad debt expenses of $144,000. The reduction in marketing
expenses reflects our ability to leverage programs and marketing materials
initiated in prior periods and continued implementation of cost reductions
initiated during 2001 and continued in 2002.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Sales and marketing expenses decreased by $2.4&nbsp;million or 30% in the first
nine months of fiscal 2002 compared to the same period last year. The decrease
was mainly due to reduced expenses in market development funds, application
development, collateral reproduction, and advertising costs of $1.1&nbsp;million, a
decrease in personnel related costs of $794,000 primarily attributable to a
decrease in employee headcount, related compensation, benefits and overhead,
reduced travel expenses of $155,000, reduced supplies and materials of $36,000,
and a decrease in bad debt expenses of $268,000.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Research and Development. </I>Our research and development expenses are
comprised primarily of headcount and related compensation and benefits,
consulting fees, tooling and supplies and an allocation of facilities costs.
Research and development expenses decreased by $234,000 or 13% in the third
quarter of fiscal 2002 compared to the same period in 2001. The decrease was
mainly due to a decrease in personnel related costs of $142,000 primarily
attributable to a decrease in employee headcount, related compensation,
benefits and overhead, a decrease in outside consulting and engineering fees of
$48,000 and reduced travel costs of $16,000.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Research and development expenses decreased by $1.1&nbsp;million or 18% in the
first nine months of fiscal 2002 compared to the same period last year. The
decrease was mainly due to a decrease in personnel related costs of $665,000
attributable to a decrease in employee headcount, related compensation,
benefits and overhead and a decrease in outside consulting and engineering fees
of $404,000. We believe that continued investment in our research and
development is critical to our future success, as we strive to deliver new
products and technologies to the marketplace, and expect that these expenses
may increase in absolute dollars in future periods, but decrease as a
percentage of total revenues.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>General and Administrative. </I>Our general and administrative expenses are
comprised primarily of employee headcount and related compensation and
benefits, legal and professional fees, office supplies, travel and an
allocation of facilities costs. General and administrative expenses decreased
by $54,000 or 3% in the third quarter of fiscal 2002 compared to the same
period in 2001. The decrease is mainly due to a decrease in personnel related
costs of $385,000 attributable to a decrease in employee headcount, related
compensation, benefits and overhead, and reduced travel costs of $6,000, offset
by an increase in legal and professional fees of $283,000 mostly due to
increased litigation costs and an increase of $43,000 of public company
expenses. We expect that the dollar amount of general and administrative
expenses will increase in the future as we incur additional costs related to
the litigation against us and an increase in legal fees due to the litigation
against both Sony and Microsoft, as well as additional public company
compliance costs.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;General and administrative expenses decreased $64,000 or 1% in the first
nine months of fiscal 2002 compared to the same period last year. The decrease
is primarily attributable to a decrease in personnel related costs of $787,000
due to a decrease in employee headcount, related compensation, benefits and
overhead, a decrease in office related expenses of $58,000, and reduced travel
costs of $46,000, offset by an increase in legal and professional fees of
$758,000 mainly due to increased litigation costs and increased public company
expenses of $88,000.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Amortization of Intangibles and Deferred Stock Compensation. </I>Our
amortization of intangibles and deferred stock compensation is comprised
primarily of patent amortization, goodwill and other intangible amortizations
and deferred stock compensation. Amortization of intangibles and deferred
stock compensation decreased by $553,000 or 43% in the third quarter of fiscal
2002 compared to the same period in 2001. A decrease of $370,000 is the result
of the adoption of SFAS No.&nbsp;142, <I>Goodwill and Other Intangible Assets </I>beginning
January&nbsp;1, 2002. SFAS No.&nbsp;142 provides that intangible assets with finite
useful lives will be amortized and that goodwill and intangible assets with
indefinite lives will not be amortized, but rather will be tested at least
annually for impairment. During the second quarter of fiscal 2002 we performed
our initial impairment test and no impairment loss resulted from this initial
impairment test. Intangible amortization decreased by $131,000 as some
intangible assets have reached full amortization and deferred stock
compensation expense decreased by $52,000 due to the expiration of certain
option vesting periods.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Amortization of intangibles and deferred stock compensation decreased by
$1.6&nbsp;million or 40% in the first nine months of fiscal 2002 compared to the
same period last year. A decrease of $1.1&nbsp;million is the result of the
adoption of SFAS 142. Intangible amortization decreased by $350,000 and
deferred stock compensation decreased by $131,000 for the nine month period
ended September&nbsp;30, 2002 as compared to the nine month period ended September
30, 2001.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Other Charges. </I>Other charges decreased by $100,000 or 100% in the third
quarter of fiscal 2002 as compared to the third quarter of fiscal 2001. During
the quarter ended September&nbsp;30, 2001 we incurred $100,000 related to severance
</FONT>
<P align="center"><FONT size="2">17
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P><FONT size="2">costs. During the nine months ended September&nbsp;30, 2002, other charges
increased by $172,000 or 76% as compared to the same period in 2001. The
increase is due to severance costs incurred during the first quarter of fiscal
2002.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Interest and Other Income. </I>Interest and other income consist primarily of
interest income, dividend income and capital gains from cash and cash
equivalents and short-term investments. Interest and other income declined by
$281,000 in the third quarter of fiscal 2002 compared to the same period in
2001 as a result of reduced cash, cash equivalents and short-term investments
invested for the period due to cash used in operating activities, as well as
reduced yields on investments due to lower interest rates.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Interest and other income declined by $829,000 in the first nine months of
fiscal 2002 compared to the same period last year as a result of reduced cash,
cash equivalents and short-term investments invested for the period due to cash
used in operating activities as well as reduced yields on investments due to
lower interest rates.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Interest and Other Expense. </I>Interest and other expense consist primarily
of interest expense on our secured convertible promissory note and other notes
payable. Interest and other expense decreased by $3.4&nbsp;million for the three
months and nine months ended September&nbsp;30, 2002 compared to the three months
and nine months ended September&nbsp;30, 2001. During the quarter ended September
30, 2002 we incurred a non cash write down of $1.2&nbsp;million of an investment in
a privately-held company, conversely during the quarter ended September&nbsp;30,
2001 we incurred a $4.5&nbsp;million non cash write down of investments in two
privately-held companies.
</FONT>
<P><FONT size="2">SEGMENT RESULTS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001 ARE AS FOLLOWS:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="95%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="55%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Three Months Ended</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">Nine Months Ended</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">September 30,</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="7"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2002</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">2001</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">(In thousands)</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="7"><FONT size="1">(In thousands)</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Revenues:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Immersion Computing, Entertainment and Industrial</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,496</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">3,334</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">9,193</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">10,316</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Immersion Medical</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,121</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,145</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,753</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,778</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Intersegment eliminations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(140</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(8</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(203</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(26</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,477</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,471</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">14,743</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">14,068</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net Loss:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Immersion Computing, Entertainment and Industrial</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(4,240</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(7,323</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(8,439</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(14,373</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Immersion Medical</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(134</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,713</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(1,632</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(4,402</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Intersegment eliminations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(58</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(86</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(4,432</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(9,038</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(10,157</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">(18,778</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>
<TR>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Immersion Computing, Entertainment and Industrial segment. </I>Revenues from
the Immersion Computing, Entertainment and Industrial segment decreased by
$838,000, or 25% in the third quarter of fiscal year 2002 compared to the same
period in 2001. The decrease is mainly due to a decrease in royalty revenues
and a decrease in product sales of our microprocessors and custom
location-based entertainment products. Net loss for the quarter ended
September&nbsp;30, 2002 decreased by $3.1&nbsp;million or 42% compared to the same period
in 2001. The decrease is mainly due to a reduction of $3.3&nbsp;million in the
write down of certain investments in privately-held companies that occurred in
both the third quarter of 2002 and 2001, the cessation of goodwill
amortization, and a reduction in expenses for marketing partly offset by a
decrease in gross margin due to reduced sales and an increase in legal fees.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues for the first nine months of fiscal 2002 decreased by $1.1
million or 11% as compared to the same period last year for the Immersion
Computing, Entertainment and Industrial segment. The decrease in revenue is
primarily attributable to a decrease in our microprocessors and 3D product
sales, and a decrease in development contract revenue for the nine months ended
2002 compared to the nine months ended in 2001, partially offset by an increase
in royalty revenues for the same period. Net loss for the nine months ended
September&nbsp;30, 2002 decreased $5.9&nbsp;million or 41% compared to the same
</FONT>
<P align="center"><FONT size="2">18
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P><FONT size="2">period in 2001. The decrease is mainly due to a reduction of $3.3&nbsp;million in
the write down of certain investments in privately-held companies that occurred
in both the third quarter of 2002 and 2001, the cessation of goodwill
amortization of $1.8&nbsp;million, decreased compensation, benefits and overhead
costs related to reduced headcount and a reduction in expenses for marketing
partially offset by an increase in legal fees.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Immersion Medical segment. </I>Revenues from Immersion Medical increased by
$976,000 or 85% for the third quarter of fiscal 2002 compared to the same
period in 2001. The increase is primarily due to an increase of $571,000 in
product sales, an increase of $343,000 in development contract revenue related
to new development efforts secured during 2002, and an increase in licensing
revenue of $62,000. Net loss for the quarter ended September&nbsp;30, 2002
decreased by $1.6&nbsp;million or 92% compared to the same period in 2001. The
decrease is primarily attributable to an increase in gross margin of $613,000
related to the increased development contract revenue and product sales, and
reduced expenses for compensation, benefits and overhead costs of $618,000
related to reduced headcount, as well as reduced consulting service costs.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Revenues for the first nine months of fiscal 2002 for the Immersion
Medical segment increased by $2.0&nbsp;million or 52% as compared to the same period
last year. The increase in revenues is primarily due to an increase of
$912,000 in product sales, an increase of $792,000 in development contract
revenue related to development contracts entered into during 2002, and an
increase of $271,000 in licensing revenue. Net loss for the first nine months
of fiscal 2002 decreased by $2.8&nbsp;million or 63% primarily due to an increase in
gross margin of $1.4&nbsp;million resulting from the increase in all revenue
categories, and decreased compensation, benefits and overhead costs of $1.1
million related to reduced headcount, as well as reduced consulting service
costs.
</FONT>
<P align="left"><FONT size="2">LIQUIDITY AND CAPITAL RESOURCES</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our cash, cash equivalents, and short-term investments consist primarily
of money market funds and highly liquid debt instruments. All of our cash
equivalents and short-term investments are classified as available-for-sale
under the provisions of SFAS 115, &#147;Accounting for Certain Investments in Debt
and Equity Securities.&#148; The securities are stated at market value with
unrealized gains and losses reported as a component of accumulated other
comprehensive income (loss)&nbsp;within stockholders&#146; equity.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;At September&nbsp;30, 2002 our cash, cash equivalents and short-term
investments totaled $8.7&nbsp;million, down $4.2&nbsp;million from $12.9&nbsp;million at
December&nbsp;31, 2001.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided by operating activities during the first nine months of
fiscal 2002 was $276,000, an increase from the $12.3&nbsp;million of net cash used
in operating activities during the comparable period last year. Cash provided
by operations during the nine month period ended September&nbsp;30, 2002 comprised
primarily of our $10.2&nbsp;million net loss offset by noncash charges and credits
of $5.0&nbsp;million, including amortization of intangibles and deferred
compensation of $2.4&nbsp;million and the write down of one of our investments in a
privately-held company of $1.2&nbsp;million, an increase of $4.6&nbsp;million due to a
change in deferred revenue mostly due to prepayments under certain licensing
agreements entered into during the first quarter of fiscal 2002, an increase of
$825,000 due to a change in prepaid expenses and other assets, an increase of
$381,000 due to a change in accrued liabilities, an increase of $113,000 due to
a change in accounts payable, offset by a decrease of $388,000 due to a change
in inventories, and a decrease of $101,000 due to a change in accounts
receivable.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash provided by investing activities during the first nine months of
fiscal 2002 was $2.2&nbsp;million, as opposed to the $1.8&nbsp;million provided during
the same period last year. Net cash provided by investing activities during
the period consisted of $2.6&nbsp;million sale of short-term investments offset by
$381,000 used to purchase capital equipment. In order to improve our rate of
return on cash and still provide short-term liquidity, we periodically purchase
or sell short-term investments, which typically are interest-bearing,
investment-grade securities with a maturity of greater than 90&nbsp;days and less
than one year.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net cash used in financing activities during the first nine months of
fiscal 2002 was $4.1&nbsp;million as compared to the $471,000 provided during the
same period last year. Net cash used in financing activities included payments
of $4.5&nbsp;million on notes payable and capital lease including $4.4&nbsp;million on
our convertible note payable with Medtronic, offset by issuances of common
stock of $95,000, the exercise of stock options of $222,000, and the exercise
of stock warrants of $50,000.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that we
will need to raise approximately $5.0 to $10.0&nbsp;million in
additional capital over the next six months to meet our working capital needs
and capital expenditure requirements for the next twelve months. Our plans to
raise
</FONT>
<P align="center"><FONT size="2">19
</FONT>

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<P><FONT size="2">additional capital include possible customer prepayments of certain royalty
obligations in exchange for a royalty discount and/or other
negotiated concessions, entering into new license
agreements which require up-front license payments and potentially through debt
or equity financing. We have taken measures to control our costs and will
continue to monitor these efforts. We do, however, expect our legal costs to
increase during 2002 and 2003 as a result of our lawsuit against Sony and
Microsoft. We anticipate that capital expenditures for the year ended December
31, 2002 will total approximately $600,000 in connection with anticipated
upgrades to operations and infrastructure. Our convertible note payable with
Medtronic matured on August&nbsp;10, 2002, and we repaid Medtronic approximately
$4.4&nbsp;million in principal and interest on this note leaving $680,000 of debt on
our balance sheet of which approximately $500,000 is payable during the fourth
quarter of 2002. To the extent we raise additional capital through debt or equity financing for future operating needs,
this could result in substantial dilution for our stockholders. If we
acquire one or more businesses or products, our capital requirements could
increase substantially. In the event of such an acquisition or should any
unanticipated circumstances arise which significantly increase our capital
requirements, we may elect to raise additional capital through debt or equity
financing. Although we expect to raise additional capital, there is no
assurance that necessary additional capital will be available on terms
acceptable to us, if at all.
</FONT>
<P align="left"><FONT size="2">SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following table presents, at December&nbsp;31, 2001, our obligations and
commitments to make future payments for each of the years listed under various
contractual obligations. No material changes have occurred during the nine
months ended September&nbsp;30, 2002. The numbers presented do not include accrued
interest under certain debt obligations since December&nbsp;31, 2001 of $339,000
payable within 2002.
</FONT>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
        <TD width="51%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="4%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">Less than</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">1 - 3</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">4 -5</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">After 5</FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="left"><FONT size="1">Contractual Cash Obligations</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">Total</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">1 Year</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">Years</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">Years</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="3"><FONT size="1">Years</FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="3"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD align="center" colspan="19"><FONT size="1">(In thousands)</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Long-Term Debt</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,602</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,519</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">83</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Capital Lease Obligations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">81</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">30</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">51</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">&#151;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Operating Leases</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,528</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,195</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,409</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,108</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">816</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="1" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">

<TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;Total Contractual Cash Obligations</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">10,211</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">5,744</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">2,543</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,108</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">816</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">&nbsp;</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><HR size="4" noshade></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;During the third quarter of fiscal 2002, we repaid $4.4&nbsp;million of
long-term debt, including interest, owed to Medtronic. As a result of this
repayment our balance of long-term debt obligations is $627,000 as of September
30, 2002, that includes $599,000 payable prior to September&nbsp;30, 2003. Included
in this amount is a principal only balance of $500,000 payable during the
fourth quarter of 2002.
</FONT>
<P align="left"><FONT size="2">CRITICAL ACCOUNTING POLICIES AND ESTIMATES</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these condensed consolidated
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
we evaluate our estimates, including those related to revenue recognition, bad
debts, warranty obligations, patents and intangible assets, inventories,
contingencies, and litigation. We base our estimates on historical experience
and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We classify all of our cash equivalents and short-term investments that
are free of trading restrictions, or become free of trading restrictions within
one year, as &#147;available-for-sale.&#148; We carry these investments at fair value,
based on quoted market prices, and unrealized gains and losses, net of taxes,
are included in accumulated other comprehensive income (loss), which is
reflected as a separate component of stockholders&#146; equity. Realized gains and
losses are recognized when incurred on our consolidated statements of
operations. We have a policy in place to review our short-term investments on
</FONT>
<P align="center"><FONT size="2">20
</FONT>

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<P><FONT size="2">a regular basis to evaluate whether or not these investments have experienced
an other-than-temporary decline in fair value. During the three and nine
months ended September&nbsp;30, 2002, we did not record any impairment losses
related to any of our cash equivalents and our short-term investments.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We derive our revenues from three principal sources: royalties, product
sales, and development contracts. Royalty revenues are based on royalty
reports or related information received from our licensees as well as
time-based licenses of our intellectual property portfolio. If this
information is incorrect or inaccurate it could adversely affect revenue in
future periods. To date all information received from our licensees has caused
no material reduction in future period revenues. We recognize revenues from
product sales when the product is shipped provided collection is determined to
be probable and no significant obligation remains. Development contract
revenues are recognized under the cost-to-cost percentage of completion
accounting method based on physical completion of the work to be performed and
the ratio of costs incurred to total estimated costs to complete the contract.
Our revenue recognition policies are significant because revenue is a key
component of our results of operations. In addition, our revenue recognition
determines the timing of certain expenses, such as commissions and royalties.
Revenue results are difficult to predict, and any shortfall in revenue or delay
in recognizing revenue could cause our operating results to vary significantly
from quarter to quarter and could result in greater or future operating losses.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We maintain allowances for doubtful accounts for estimated losses
resulting from our review and assessment of our customers&#146; ability to make
required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances might be required. To date such estimated losses have
been within our expectations.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We provide for estimated costs of future anticipated product returns and
warranty obligations based on historical experience when related revenues are
recognized and defer warranty related revenue over the related warranty term.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have acquired patents and other intangibles. Our business acquisitions
have included goodwill and other intangible assets. We assess the
recoverability of our goodwill and other intangible assets and we must make
assumptions regarding estimated future cash flows and other factors to
determine the fair value of the respective assets that affect our consolidated
financial statements. If these estimates or related assumptions change in the
future, we may be required to record impairment charges for these assets, in
addition changes could affect the amount of future period amortization expense
that we will incur. In June 2001, the Financial Accounting Standards Board
issued SFAS No.&nbsp;141, Business Combinations and SFAS No.&nbsp;142, Goodwill and Other
Intangible Assets. SFAS No.&nbsp;141 requires that all business combinations
initiated after September&nbsp;30, 2001 be accounted for under the purchase method
and addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. Business combinations
originally accounted for under the pooling of interest method will not be
changed. SFAS No.&nbsp;142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
No.&nbsp;142 provides that intangible assets with finite useful lives will be
amortized and that goodwill and intangible assets with indefinite lives will
not be amortized, but rather will be tested at least annually for impairment.
We adopted SFAS No.&nbsp;142 effective January&nbsp;1, 2002 and discontinued the
amortization of goodwill. Prior to June&nbsp;30, 2002, we performed our first
required impairment test of goodwill. No impairment loss resulted from the
initial impairment test. On an ongoing basis, we expect to perform our
impairment tests during the fourth quarter of each fiscal year. There can be
no assurance that future goodwill impairment tests will not result in a charge
to earnings.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We write down the cost of inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assessments about current and future
demand and market conditions. If actual market conditions were to be less
favorable than those projected by management, additional inventory write-downs
could be required.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We hold equity investments in privately-held companies. We intend to hold
our equity investments for the long term and will monitor whether there has
been other-than-temporary declines in their values based on our estimates of
their net realizable value taking into account the companies respective
financial condition and ability to raise third-party financing. If the decline
in fair value is determined to be other-than-temporary, an impairment loss is
recorded and the individual security is written down to a new cost basis. As a
result of our review of the fair value of these investments, we recorded an
impairment loss of $1.2&nbsp;million during the third quarter of 2002, and an
impairment loss of $4.3&nbsp;million on these investments and a $239,000 impairment
loss on interest receivable on loans on these investments during the third
quarter of 2001. The remaining cost basis of these investments on our
Consolidated Balance Sheet is $1.0&nbsp;million. We will monitor the remaining value
of these investments, and may determine that there could be other impairment
losses in the future. As of September&nbsp;30, 2002, we determined that the
carrying value of these investments at $1.0&nbsp;million is
</FONT>
<P align="center"><FONT size="2">21
</FONT>

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<P><FONT size="2">appropriate.
</FONT>
<P align="left"><FONT size="2">RECENT ACCOUNTING PRONOUNCEMENTS</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June 2001, the FASB issued SFAS No.&nbsp;143, &#147;Accounting for Asset
Retirement Obligations&#148; which applies to legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction, or development and/or the normal operation of a long-lived asset.
Under this standard, guidance is provided on measuring and recording the
liability. We intend to adopt this statement effective January&nbsp;1, 2003. We do
not believe that adoption of this statement will materially impact our
financial position, results of operations or cash flows.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On April&nbsp;30, 2002, the FASB issued SFAS 145, &#147;Rescission of FASB
Statements No.&nbsp;4, 44, and 64, Amendment of FASB Statement No.&nbsp;13, and Technical
Corrections.&#148; The Statement updates, clarifies and simplifies existing
accounting pronouncements. Among other things, SFAS 145 rescinds SFAS 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in Accounting Principles Board Opinion 30
will now be used to classify those gains and losses. The statement is
effective on various dates after May&nbsp;15, 2002. The adoption of SFAS No.&nbsp;145
did not have an impact on the Company&#146;s consolidated financial statements for
the three and nine months ended September&nbsp;30, 2002.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In June 2002, the FASB issued SFAS 146, &#147;Accounting for Costs Associated
with Exit or Disposal Activities,&#148; which addresses accounting for restructuring
and similar costs. SFAS 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue No.&nbsp;94-3. The Company will adopt
the provisions of SFAS 146 for restructuring activities initiated after
December&nbsp;31, 2002. SFAS 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under issue 94-3, a liability for an exit cost would be recognized at the date
of the Company&#146;s commitment to an exit plan. SFAS 146 also establishes that the
liability should be measured and recorded at fair value. Accordingly, SFAS 146
may affect the timing of recognizing future restructuring costs as well as the
amounts recognized. We do not believe that adoption of SFAS 146 will
materially impact our financial position, results of operations or cash flows.
</FONT>
<P align="center"><FONT size="2"><B>FACTORS THAT MAY AFFECT FUTURE RESULTS</B></FONT>

<P><FONT size="2">WE WILL NEED ADDITIONAL CAPITAL TO FUND OUR BUSINESS OPERATIONS, AND WE CANNOT
BE SURE THAT ADDITIONAL FINANCING WILL BE AVAILABLE.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since 1997, our cash flow from operations has primarily been negative and
we expect to experience negative cash flow from operations at least until the
third quarter of 2003. We believe that we will need to raise approximately $5
to $10&nbsp;million in additional capital over the next six months to meet our
working capital needs and capital expenditure requirements for the next twelve
months. Our plans to raise additional capital include possible customer
prepayments of certain royalty obligations in exchange for a royalty
discount and/or other negotiated concessions,
entering into new license agreements which require up-front license payments
and potentially through debt or equity financing. We have taken measures to
control our costs and will continue to monitor these efforts. Prior to the
third quarter of 2003, we may experience quarterly periods where we achieve a
positive cash flow from operations, however we may not be able to sustain
consistent positive cash flow during such time. We cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all. Changes in equity markets over the past two years have adversely
affected the ability of companies to raise equity financing and have adversely
affected the markets for financing for companies with a history of losses such
as ours. Additional financing may require us to issue additional shares of our
common or preferred stock such that our existing stockholders may experience
substantial dilution.
</FONT>
<P><FONT size="2">THE MARKET FOR TOUCH-ENABLING TECHNOLOGIES AND TOUCH-ENABLED PRODUCTS IS AT AN
EARLY STAGE AND IF MARKET DEMAND DOES NOT DEVELOP, WE MAY NOT ACHIEVE OR
SUSTAIN REVENUE GROWTH.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The market for our touch-enabling technologies, and our licensees&#146;
touch-enabled products is at an early stage. If we and our licensees are
unable to develop demand for touch-enabling technologies and touch-enabled
products, we may not achieve or sustain revenue growth. We cannot accurately
predict the growth of the markets for these technologies and products, the
timing of product introductions or the timing of commercial acceptance of these
products. We are currently working to increase the demand for these
technologies and products in the following five principal application areas:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">cursor control peripherals, such as touch-enabled mice and trackballs, for use with personal computers;</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">22
</FONT>

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<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">touch-enabled medical simulators that can be used for training and skills assessment for procedures
such as catheterization, bronchoscopy, colonoscopy, sigmoidoscopy and laparoscopic procedures;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">touch-enabled peripherals for computer gaming on personal computers and dedicated gaming consoles,</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">touch-enabled automotive interfaces; and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">touch-enabled, whole-hand sensing gloves, such as our CyberForce product.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Even if our touch-enabling technologies and our licensees&#146; touch-enabled
products are ultimately widely adopted, widespread adoption may take a long
time to occur. The timing and amount of royalties and product sales that we
receive will depend on whether the products marketed achieve widespread
adoption and, if so, how rapidly that adoption occurs. We expect that we will
need to pursue extensive and expensive marketing and sales efforts to educate
prospective licensees and end users about the uses and benefits of our
technologies and to persuade software developers to create software that
utilizes our technologies.
</FONT>
<P><FONT size="2">WE HAD AN ACCUMULATED DEFICIT OF $70 MILLION AS OF SEPTEMBER 30, 2002, HAVE A
HISTORY OF LOSSES, WILL EXPERIENCE LOSSES IN THE FUTURE AND MAY NOT ACHIEVE OR
MAINTAIN PROFITABILITY.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since 1997, we have incurred losses in every fiscal quarter. We will need
to generate significant revenue to achieve and maintain profitability. We
anticipate that our expenses will increase in the foreseeable future as we:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">attempt to expand the market for touch-enabled products;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">increase our sales efforts;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">incur additional expenses related to the operation of businesses we have acquired or will acquire;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">continue to develop our technologies;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">pursue strategic relationships; and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">protect and enforce our intellectual property, including the costs of our litigation against Sony and Microsoft.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations, we may not achieve or maintain profitability.
</FONT>
<P align="left"><FONT size="2">OUR CURRENT LITIGATION AGAINST MICROSOFT AND SONY IS EXPENSIVE, DISRUPTIVE
AND TIME CONSUMING AND WILL CONTINUE TO BE, AND IF WE ARE NOT SUCCESSFUL, COULD ADVERSELY AFFECT OUR
BUSINESS.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;11, 2002, we filed a complaint against Microsoft Corporation,
Sony Computer Entertainment, Inc., and Sony Computer Entertainment of America,
Inc. in the U.S. District Court for the Northern District Court of California
alleging infringement of U.S. Patent Nos. 5,889,672 and 6,275,213. The case
was assigned to United States District Judge Claudia Wilken. On April&nbsp;4, 2002,
Sony Computer Entertainment and Microsoft answered the complaint by denying the
material allegations and alleging counterclaims seeking a judicial declaration
that the asserted patents were invalid, unenforceable, or not infringed. The
process of discovery and exchanging information and documents on infringement,
invalidity, and claim construction, is underway. On October&nbsp;8, 2002, we filed
an amended complaint, withdrawing the claim under the &#145;672 patent and adding a
claim of infringement of a new patent, U.S. Patent No.&nbsp;6,424,333. On October
10, 2002, the Court entered an Amended Case Management Order that sets, among
other dates in the case, April&nbsp;18, 2003 for a hearing to construe the claims of
the asserted patents and April&nbsp;5, 2004 for the start of trial. On October&nbsp;28,
2002, Sony Computer Entertainment and Microsoft answered the amended complaint
and alleged similar counterclaims for declaratory relief that the asserted
patents are invalid, unenforceable, or not infringed. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of the litigation. We anticipate that the litigation will be costly, and there
can be no assurance that we will be able to recover the costs we incur in
connection with the litigation. The litigation has diverted, and is likely to
continue to divert, the efforts and attention of some of our key management and
personnel. As a result, until such time as it is resolved, the litigation
could adversely affect our business. Further, any unfavorable outcome could
adversely affect our business.
</FONT>
<P align="left"><FONT size="2">IF WE ARE UNABLE TO ENTER INTO NEW LICENSING ARRANGEMENTS WITH OUR EXISTING
LICENSEES AND WITH ADDITIONAL THIRD-PARTY MANUFACTURERS FOR OUR TOUCH-ENABLING
TECHNOLOGY, OUR ROYALTY REVENUE MAY NOT GROW.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our revenue growth is significantly dependent on our ability to enter into
new licensing arrangements. Our failure to enter into new licensing
arrangements will cause our operating results to suffer. We face numerous
risks in obtaining new
</FONT>
<P align="center"><FONT size="2">23
</FONT>

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<P><FONT size="2">licenses on terms consistent with our business objectives and in maintaining,
expanding and supporting our relationships with our current licensees. These
risks include:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">the lengthy and expensive process of building a relationship with potential licensees;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">the fact that we may compete with the internal design teams of existing and potential licensees;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">difficulties in persuading consumer product manufacturers to work with us, to rely on us for
critical technology and to disclose to us proprietary product development and other strategies;
and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">difficulties in persuading existing and potential licensees to bear the development costs
necessary to incorporate our technologies into their products.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A substantial majority of our royalty revenue has been derived from the
licensing of our portfolio of touch-enabling technologies for personal computer
gaming peripherals, such as joysticks and steering wheels. The market for
joysticks and steering wheels for use with personal computers is a
substantially smaller market than either the mouse market or the dedicated
gaming console market and is characterized by declining average selling prices.
If we are unable to gain market acceptance beyond the personal computer gaming
peripherals market, we may not achieve royalty revenue growth.
</FONT>
<P><FONT size="2">LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS COULD BE EXPENSIVE,
DISRUPTIVE, AND TIME CONSUMING; COULD RESULT IN THE IMPAIRMENT OR LOSS OF
PORTIONS OF OUR INTELLECTUAL PROPERTY; AND COULD ADVERSELY AFFECT OUR BUSINESS.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Intellectual property litigation, whether brought by us or by others
against us, could result in the expenditure of significant financial resources
and the diversion of management&#146;s time and efforts. From time to time, we
initiate claims against third parties that we believe infringe our intellectual
property rights. We intend to enforce our intellectual property rights
vigorously and may initiate litigation against parties that we believe are
infringing our intellectual property if we are unable to resolve matters
satisfactorily through negotiation. Litigation brought to protect and enforce
our intellectual property rights could be costly, time-consuming and
distracting to management and could result in the impairment or loss of
portions of our intellectual property. In addition, any litigation in which we
are accused of infringement may cause product shipment delays, require us to
develop non-infringing technology or require us to enter into royalty or
license agreements even before the issue of infringement has been decided on
the merits. If any litigation were not resolved in our favor, we could become
subject to substantial damage claims from third parties and indemnification
claims from our licensees. We and our licensees could be enjoined from the
continued use of the technology at issue without a royalty or license
agreement. Royalty or license agreements, if required, might not be available
on acceptable terms, or at all. If a third party claiming infringement against
us prevailed and we could not develop non-infringing technology or license the
infringed or similar technology on a timely and cost-effective basis, our
expenses would increase and our revenues could decrease.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We attempt to avoid infringing known proprietary rights of third parties.
However, third parties may hold, or may in the future be issued, patents that
could be infringed by our products or technologies. Any of these third parties
might make a claim of infringement against us with respect to the products that
we manufacture and the technologies that we license. From time to time, we
have received letters from companies, several of which have significantly
greater financial resources than we do, asserting that some of our
technologies, or those of our licensees, infringe their intellectual property
rights. Certain of our licensees have received similar letters from these or
other companies. Such letters may influence our licensees&#146; decisions whether
to ship products incorporating our technologies. Although none of these
matters has resulted in litigation to date, any of these notices, or additional
notices that we could receive in the future from these or other companies,
could lead to litigation.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Intellectual property claims against us or our licensees, whether or not
they have merit, could be time-consuming to defend, cause product shipment
delays, require us to pay damages, harm existing license arrangements, or
require us or our licensees to cease utilizing the technology unless we can
enter into royalty or licensing agreements. Royalty or licensing agreements
might not be available on terms acceptable to us or at all. Furthermore,
claims could also result in claims from our licensees under the indemnification
provisions of their agreements with us.
</FONT>
<P><FONT size="2">IF WE FAIL TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY
TO LICENSE OUR TECHNOLOGIES AND TO GENERATE REVENUES WOULD BE IMPAIRED.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our business depends on generating revenues by licensing our intellectual
property rights and by selling products that incorporate our technologies. If
we are not able to protect and enforce those rights, our ability to obtain
future licenses and royalty revenue could be impaired. In addition, if a court
were to limit the scope of, declare unenforceable or
</FONT>
<P align="center"><FONT size="2">24
</FONT>

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<P><FONT size="2">invalidate any of our patents, current licensees may refuse to make royalty
payments or may themselves choose to challenge one or more of our patents.
Also it is possible that:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">our pending patent applications may not result in the issuance of patents;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">our patents may not be broad enough to protect our proprietary rights; and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">effective patent protection may not be available in every country in which our licensees do business.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We also rely on licenses, confidentiality agreements and copyright,
trademark and trade secret laws to establish and protect our proprietary
rights. It is possible that:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">laws and contractual restrictions may not be sufficient to prevent
misappropriation of our technologies or deter others from developing
similar technologies; and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">policing unauthorized use of our products and trademarks would be
difficult, expensive and time-consuming, particularly overseas.</FONT></TD>
</TR>
</TABLE>
<P align="left"><FONT size="2">WE COULD LOSE SOME OR ALL OF THE INVESTMENT THAT WE HAVE MADE IN SEVERAL EARLY
STAGE TECHNOLOGY COMPANIES SHOULD THOSE COMPANIES NOT BE SUCCESSFUL IN
DEVELOPING THEIR TECHNOLOGIES OR NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING IF
AND WHEN NEEDED.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;From time to time we have made strategic investments in early stage
technology companies that are developing technologies that we believe could
complement or enhance our own technologies, if successful. We have made these
investments to provide funding for the development of these companies
technologies primarily because of the anticipated benefits to Immersion of the
availability of these technologies. The prospect of realizing a substantial
return on these investments was a secondary, though important, consideration.
We wrote down $1.2&nbsp;million of these investments in the third quarter of 2002,
and in the third quarter of 2001 we wrote down $4.3&nbsp;million of these
investments and approximately $239,000 of interest receivable from these
companies, and do not expect to realize any return on these amounts. Our
remaining investment may not succeed in developing its technology, might be
unsuccessful in marketing its technology or products based on its technology or
might fail for any number of other reasons, including an inability to obtain
additional capital if required to fund operations, including the completion of
the development of its technology. In the event that this company in which we
have invested fails or does not achieve a level of success that permits us to
realize the value of this investment, we could experience a complete or partial
loss on some or all of this investment. If we experience additional losses and
related write-downs on the carrying value of our remaining investment, it would
decrease our assets and increase our losses.
</FONT>
<P align="left"><FONT size="2">OUR RELATIONSHIP WITH MEDTRONIC, INC., A LEADING MEDICAL DEVICE COMPANY, MAY
INTERFERE WITH OUR ABILITY TO ENTER INTO DEVELOPMENT AND LICENSING
RELATIONSHIPS WITH MEDTRONIC&#146;S COMPETITORS.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In August 1999, we entered into an agreement with Medtronic, Inc., a
leading medical device company, in which Medtronic was given a right of first
offer for additional development agreements. Under the terms of the right of
first offer, we must notify Medtronic if we have received a written offer, or
if we are seeking to find a third party to enter a development agreement to
develop a simulation system within a field in which Medtronic is active. If
Medtronic is interested in participating in a development agreement with
respect to such new simulation system then for a period of thirty days we will
negotiate exclusively with Medtronic. If an agreement is not reached within
this period, we may enter into an agreement with a third party, provided that
the terms of the agreement are more favorable to us than the offer presented by
Medtronic. Although the right of first offer has not impeded our ability to
interest other medical device companies in our technologies to date, our
relationship with Medtronic may impede our ability to enter into development or
license agreements with other large medical device companies that compete with
Medtronic.
</FONT>
<P align="left"><FONT size="2">OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE, AND IF OUR FUTURE
RESULTS ARE BELOW THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE
PRICE OF OUR COMMON STOCK IS LIKELY TO DECLINE.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our revenues and operating results are likely to vary significantly from
quarter to quarter due to a number of factors, many of which are outside of our
control and any of which could cause the price of our common stock to decline.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;These factors include:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">the establishment or loss of licensing relationships;</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">25
</FONT>

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<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">the timing of payments under fixed and/or up-front license agreements;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">the timing of our expenses, including costs related to litigation, acquisitions of technologies or businesses;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">the timing of introductions of new products and product enhancements by us, our licensees or their competitors;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">our ability to develop and improve our technologies;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">our ability to attract, integrate and retain qualified personnel; and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">seasonality in the demand for our licensees&#146; products.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accordingly, we believe that period-to-period comparisons of our operating
results should not be relied upon as an indicator of our future performance.
In addition, because a high percentage of our operating expenses are fixed, a
shortfall of revenues can cause significant variations in operating results
from period to period.
</FONT>
<P align="left"><FONT size="2">MEDTRONIC ACCOUNTS FOR A LARGE PORTION OF OUR REVENUES AND A REDUCTION IN SALES
TO MEDTRONIC, A REDUCTION IN DEVELOPMENT WORK, OR A DECISION NOT TO RENEW
EXISTING LICENSES FOR MEDTRONIC MAY REDUCE OUR TOTAL REVENUE.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the three and nine months ended September&nbsp;30, 2002 we derived 8% and
11%, respectively, of our total revenues from Medtronic. If our product sales
to Medtronic decline, and/or Medtronic reduces the development activities we
perform then our total revenues may decline.
</FONT>
<P><FONT size="2">LOGITECH ACCOUNTS FOR A LARGE PORTION OF OUR ROYALTY REVENUE AND THE FAILURE OF
LOGITECH TO ACHIEVE SALES VOLUMES FOR ITS GAMING AND CURSOR CONTROL PERIPHERAL
PRODUCTS THAT INCORPORATE OUR TOUCH-ENABLING TECHNOLOGIES MAY REDUCE OUR
ROYALTY REVENUE.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;For the quarter ended September&nbsp;30, 2002, we derived 4% of our total
revenues and 23% of our royalty revenue from Logitech, and for the quarter
ended September&nbsp;30, 2001, we derived 15% of our total revenues and 53% of our
royalty revenue from Logitech. For the nine months ended September&nbsp;30, 2002,
we derived 7% of our total revenues and 23% of our royalty revenue from
Logitech, and for the nine months ended September&nbsp;30, 2001, we derived 12% of
our total revenues and 51% of our royalty revenues from Logitech. We expect
that a significant portion of our total revenues will continue to be derived
from Logitech. If Logitech fails to achieve anticipated sales volumes for its
computer peripheral products that incorporate our technologies, our royalty
revenue would be reduced.
</FONT>
<P align="left"><FONT size="2">THE RECENT SLOWDOWN IN PERSONAL COMPUTER SALES MAY LEAD TO A REDUCTION IN SALES
OF OUR LICENSEES&#146; TOUCH-ENABLED PERIPHERAL PRODUCTS, SUCH AS TOUCH-ENABLED MICE
AND JOYSTICKS, WHICH MAY ADVERSELY AFFECT OUR ROYALTY REVENUE.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Over the past year, large personal computer manufacturers have announced
slower than anticipated sales of personal computers. This slowdown in personal
computer sales may adversely affect sales of our licensees&#146; royalty bearing,
touch-enabled peripheral products, such as touch-enabled mice and joysticks,
that are used with personal computers. The slowdown affecting personal
computer companies may also make it more difficult to persuade such
manufacturers to incorporate more costly touch-enabled mice products into their
product lines. The impact of this downturn on our royalty revenue may be more
pronounced if a significant cause of this trend is a reduction in the amount
that individuals and companies have budgeted for personal computer-related
devices, such as touch-enabled mice, rather than saturation of the market for
personal computers generally. As a result, our results of operations and
financial condition may be adversely affected.
</FONT>
<P align="left"><FONT size="2">WE MAY BE UNABLE TO INCREASE SALES OF OUR MEDICAL SIMULATION DEVICES IF, AS A
RESULT OF THE CURRENT ECONOMIC SLOWDOWN OR OTHER FACTORS, MEDICAL INSTITUTIONS
DO NOT BUDGET FOR SUCH DEVICES.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our medical simulation products, such as our AccuTouch Endoscopy
Simulator, the AccuTouch Endovascular Simulator and our Laparoscopic Surgical
Workstation, have only recently begun to be used by hospitals and medical
schools to train healthcare professionals. As a result, many of these medical
institutions do not budget for such simulation devices. To increase sales of
our simulation devices, we must, in addition to convincing medical institution
personnel of the utility of the devices, persuade them to include a significant
expenditure for the devices in their budgets. If these medical institutions
are unwilling to budget for simulation devices or reduce their budgets as a
result of the economic slowdown, cost-containment pressures or other factors,
we may not be able to increase sales of medical simulators at a satisfactory
rate. As a result of the terrorist attacks against the United States on
September&nbsp;11, 2001 and the future threat of terrorist acts, hospitals may have
assigned priority in their capital expenditure budgets to equipment
</FONT>
<P align="center"><FONT size="2">26
</FONT>

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<P><FONT size="2">that will enable them to respond more effectively to catastrophic emergencies,
and federal, state and local governments may have delayed certain fundings for
medical and educational institutions, in which case purchases of medical
simulators may have been deferred. If we are unable to increase sales of our
medical simulation products, our results of operations and financial condition
may be adversely affected. We believe that medical device companies may also
decrease their expenditures in corporate research and development budgets and
this may adversely affect our contract and development revenue generated by the
medical segment.
</FONT>
<P align="left"><FONT size="2">REDUCED SPENDING BY CORPORATE RESEARCH AND DEVELOPMENT DEPARTMENTS MAY
ADVERSELY AFFECT SALES OF OUR THREE-DIMENSIONAL CAPTURE AND INTERACTION
PRODUCTS.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We believe that the current economic downturn has led to a reduction in
corporations&#146; budgets for research and development in several sectors,
including the automotive and aerospace sectors, that use our three-dimensional
capture and interaction products. Sales of our three-dimensional capture and
interaction products, including our CyberGlove line of whole-hand sensing
gloves and our MicroScribe G2 line of three-dimensional digitizers may be
adversely affected by these cuts in corporate research and development budgets.
</FONT>
<P align="left"><FONT size="2">WE HAVE LIMITED DISTRIBUTION CHANNELS AND RESOURCES TO MARKET AND SELL OUR
MEDICAL SIMULATION AND THREE-DIMENSIONAL SIMULATION PRODUCTS, AND IF WE ARE
UNSUCCESSFUL IN MARKETING AND SELLING THESE PRODUCTS WE MAY NOT ACHIEVE OR
SUSTAIN PRODUCT REVENUE GROWTH.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have limited resources for marketing and selling medical simulation or
three-dimensional simulation products either directly or through distributors.
To achieve our business objectives we must build a balanced mixture of sales
through a direct sales channel and through qualified distribution channels.
The success of our efforts to sell medical simulation and three-dimensional
simulation products will depend upon our ability to retain and develop a
qualified sales force and effective distributor channels. We may not be
successful in attracting and retaining the personnel necessary to sell and
market our simulation products. A number of our distributors represent
small-specialized companies that may not have sufficient capital or human
resources to support the complexities of selling and supporting simulation
products. There is no assurance that our direct selling efforts will be
effective, distributors will market our products successfully or, if our
relationships with distributors terminate, we will be able to establish
relationships with other distributors on satisfactory terms, if at all. Any
disruption in the distribution, sales or marketing network for our simulation
products could have a material adverse effect on our product revenues.
</FONT>
<P align="left"><FONT size="2">VICTOR VIEGAS, OUR PRESIDENT, CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER
AND DIRECTOR, RECENTLY BECAME THE CHIEF EXECUTIVE OFFICER AND DIRECTOR OF THE COMPANY AND IF
THERE ARE DIFFICULTIES WITH THIS LEADERSHIP TRANSITION IT COULD IMPEDE THE
EXECUTION OF OUR BUSINESS STRATEGY</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Victor Viegas, our President, Chief Executive Officer, Chief Financial
Officer and Director, took over the duties of Chief Executive Officer and Director in
October 2002. Our success will depend to a significant extent on Mr.&nbsp;Viegas&#146;
ability to implement a successful strategy, to successfully lead and motivate
our employees, and to work effectively with our executive staff and board of
directors. If this leadership transition is not successful, our ability to
execute our business strategy would be impeded.
</FONT>
<P align="left"><FONT size="2">WE MAY ENGAGE IN ACQUISITIONS THAT COULD DILUTE STOCKHOLDERS&#146; INTERESTS, DIVERT
MANAGEMENT ATTENTION OR CAUSE INTEGRATION PROBLEMS.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As part of our business strategy, we have in the past acquired, and may in
the future acquire, businesses or intellectual property that we feel could
complement our business, enhance our technical capabilities or increase our
intellectual property portfolio. If we consummate acquisitions through an
exchange of our securities, our stockholders could suffer significant dilution.
Acquisitions could also create risks for us, including:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">unanticipated costs associated with the acquisitions;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">use of substantial portions of our available cash to consummate the acquisitions;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">diversion of management&#146;s attention from other business concerns;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">difficulties in assimilation of acquired personnel or operations; and</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">potential intellectual property infringement claims related to newly acquired product lines.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Any acquisitions, even if successfully completed, might not generate
significant additional revenue or provide any
</FONT>
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<P><FONT size="2">benefit to our business.
</FONT>
<P align="left"><FONT size="2">WE MIGHT BE UNABLE TO RETAIN OR RECRUIT NECESSARY PERSONNEL, WHICH COULD SLOW
THE DEVELOPMENT AND DEPLOYMENT OF OUR TECHNOLOGIES.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our ability to develop and deploy our technologies and to sustain our
revenue growth depends upon the continued service of our executive officers and
other key personnel and upon hiring additional key personnel. A number of
employees of our subsidiaries, including several members of these subsidiaries
senior management, have departed since the acquisitions were completed. It may
not be possible to retain enough key employees of our subsidiaries to operate
these businesses effectively.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We may hire additional sales, support, marketing and research and
development personnel. We may not be able to attract, assimilate or retain
additional highly qualified personnel in the future. Our executive officers
and key employees hold stock options with exercise prices considerably above
the current market price of our common stock. In addition, merit increases
have been suspended for fiscal 2002. Each of these factors may impair our
ability to retain the services of our executive officers and key employees.
Our technologies are complex and we rely upon the continued service of our
existing engineering personnel to support licensees, enhance existing
technology and develop new technologies.
</FONT>
<P align="left"><FONT size="2">WE DO NOT CONTROL OR INFLUENCE OUR LICENSEES&#146; MANUFACTURING, PROMOTION,
DISTRIBUTION OR PRICING OF THEIR PRODUCTS INCORPORATING OUR TOUCH-ENABLING
TECHNOLOGIES, UPON WHICH WE ARE DEPENDENT TO GENERATE ROYALTY REVENUE.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;A key part of our business strategy is to license our intellectual
property to companies that manufacture and sell products incorporating our
touch-enabling technologies. Sales of those products generate royalty revenue
for us. For the quarters ended September&nbsp;30, 2002 and 2001, 20% and 28%
respectively, of our total revenues were royalty revenues. For the nine months
ended September&nbsp;30, 2002 and 2001, 25% and 24% respectively, of our total
revenues were royalty revenues. However, we do not control or influence the
manufacture, quality control, promotion, distribution or pricing of products
that are manufactured and sold by our licensees. In addition, we generally do
not have commitments from our licensees that they will continue to use our
technology in future products. As a result, products incorporating our
technologies may not be brought to market, meet quality control standards,
achieve commercial acceptance or generate meaningful royalty revenue for us.
For us to generate royalty revenue, licensees that pay us per-unit royalties
must manufacture and distribute products incorporating our touch-enabling
technologies in a timely fashion and generate consumer demand through marketing
and other promotional activities. Products incorporating our touch-enabling
technologies are generally difficult to design and manufacture which may cause
product introduction delays or quality control problems. If our licensees fail
to stimulate and capitalize upon market demand for products that generate
royalties for us, or if products are recalled because of quality control
problems, our revenues will not grow and could decline.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Peak demand for products that incorporate our technologies, especially in
the computer gaming peripherals market, typically occurs in the third and
fourth calendar quarters as a result of increased demand during the year-end
holiday season. If our licensees do not ship licensed products in a timely
fashion or fail to achieve strong sales in the fourth quarter of the calendar
year, we may not receive related royalty revenue.
</FONT>
<P align="left"><FONT size="2">THE HIGHER COST OF PRODUCTS INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES MAY
INHIBIT OR PREVENT THE WIDESPREAD ADOPTION AND SALE OF PRODUCTS INCORPORATING
OUR TECHNOLOGIES.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Personal computer gaming peripherals, computer mice and automotive
controls incorporating our touch-enabling technologies are more expensive than
similar competitive products that are not touch-enabled. Although major
manufacturers, such as Logitech, Microsoft, ALPS Electric Co. and BMW, have
licensed our technology, the greater expense of products containing our
touch-enabling technologies as compared to non-touch-enabled products may be a
significant barrier to the widespread adoption and sale of touch-enabled
products.
</FONT>
<P align="left"><FONT size="2">COMPETITION WITH OUR PRODUCTS AND OUR LICENSEES&#146; PRODUCTS MAY REDUCE OUR
REVENUE.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Rapid technological change, short product life cycles, cyclical market
patterns, declining average selling prices and increasing foreign and domestic
competition characterize the markets in which we and our licensees&#146; compete.
We believe that competition in these markets will continue to be intense, and
that competitive pressures will drive the price of our products and our
licensees&#146; products downward. These price reductions, if not offset by
increases in unit sales or productivity, will cause our revenues to decline.
</FONT>
<P align="center"><FONT size="2">28
</FONT>

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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We face competition from unlicensed products as well. Our licensees or
other third parties may seek to develop products, which they believe do not
require a license under our intellectual property. These potential competitors
may have significantly greater financial, technical and marketing resources
than we do, and the costs associated with asserting our intellectual property
rights against such products and such potential competitors could be
significant. Moreover, if such alternative designs were determined by a court
not to require a license under our intellectual property rights, competition
from such unlicensed products could limit or reduce our revenues.
</FONT>
<P align="left"><FONT size="2">IF WE ARE UNABLE TO CONTINUALLY IMPROVE, AND REDUCE THE COST OF OUR
TECHNOLOGIES, COMPANIES MAY NOT INCORPORATE OUR TECHNOLOGIES INTO THEIR
PRODUCTS, WHICH COULD IMPAIR OUR REVENUE GROWTH.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our ability to achieve revenue growth depends on our continuing ability to
improve, and reduce the cost of, our technologies and to introduce these
technologies to the marketplace in a timely manner. If our development efforts
are not successful or are significantly delayed, companies may not incorporate
our technologies into their products and our revenue growth may be impaired.
</FONT>
<P align="left"><FONT size="2">IF WE FAIL TO DEVELOP NEW OR ENHANCED TECHNOLOGIES FOR NEW APPLICATIONS AND
PLATFORMS, WE MAY NOT BE ABLE TO CREATE A MARKET FOR OUR TECHNOLOGIES OR OUR
TECHNOLOGIES MAY BECOME OBSOLETE AND OUR ABILITY TO GROW AND OUR RESULTS OF
OPERATIONS MIGHT BE HARMED.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our initiatives to develop new and enhanced technologies and to
commercialize these technologies for new applications and new platforms may not
be successful. Any new or enhanced technologies may not be favorably received
by consumers and could damage our reputation or our brand. Expanding our
technology could also require significant additional expenses and strain our
management, financial and operational resources. Moreover, technology products
generally have relatively short product life cycles and our current products
may become obsolete in the future. Our ability to generate revenues will be
harmed if we:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">fail to develop new technologies;</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">our new technologies fail to gain market acceptance; or</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
   <TD width="1%" align="left"><FONT size="2">&#149;</FONT></TD>
   <TD width="1%" nowrap><FONT size="2">&nbsp;&nbsp;</FONT></TD>
   <TD width="97%"><FONT size="2">our current products become obsolete.</FONT></TD>
</TR>
</TABLE>
<P align="left"><FONT size="2">BECAUSE PERSONAL COMPUTER PERIPHERAL PRODUCTS THAT INCORPORATE OUR
TOUCH-ENABLING TECHNOLOGIES CURRENTLY MUST WORK WITH MICROSOFT&#146;S OPERATING
SYSTEM SOFTWARE, OUR COSTS COULD INCREASE AND OUR REVENUES COULD DECLINE IF
MICROSOFT MODIFIES ITS OPERATING SYSTEM SOFTWARE.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our hardware and software technology for personal computer peripheral
products that incorporate our touch-enabling technologies is currently
compatible with Microsoft&#146;s Windows 98, Windows 2000, Windows Me and Windows XP
operating systems software, including DirectX, Microsoft&#146;s entertainment
applications programming interface. If Microsoft modifies its operating
system, including DirectX, we may need to modify our technologies and this
could cause delays in the release of products by our licensees. If Microsoft
modifies its software products in ways that limit the use of our other
licensees&#146; products, our costs could be increased and our revenues could
decline.
</FONT>
<P align="left"><FONT size="2">OUR CURRENT CLASS ACTION LAWSUIT COULD BE EXPENSIVE, DISRUPTIVE AND TIME
CONSUMING TO DEFEND AGAINST, AND IF WE ARE NOT SUCCESSFUL, COULD ADVERSELY
AFFECT OUR BUSINESS.</FONT>

<P align="left"><FONT size="2"><I>In re Immersion Corporation</I></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are involved in legal proceedings relating to a class action lawsuit
filed on November&nbsp;9, 2001. The case is now designated as In re Immersion
Corporation Initial Public Offering Securities Litigation, No.&nbsp;Civ. 01-9975
(S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, No.
21 MC 92 (S.D.N.Y.). The action was filed in the United States District Court,
Southern District of New York, against defendants Immersion Corporation, Louis
Rosenberg (former Chief Executive Officer, President and Chairman of the
Company), Victor Viegas (current President, Chief Executive Officer and Chief
Financial Officer), Bruce Schena (former Chief Technology Officer and
Director); and certain underwriters of Immersion&#146;s November&nbsp;12, 1999 initial
public offering. Subsequently, two of the individual defendants stipulated to
a dismissal without prejudice. The case is purportedly brought on behalf of
all persons who purchased the Company&#146;s common stock from November&nbsp;12, 1999
through December&nbsp;6, 2000.
</FONT>
<P align="center"><FONT size="2">29
</FONT>

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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The lawsuit has been consolidated for pretrial purposes with similar
lawsuits relating to more than 300 other initial public offerings conducted in
1999 and 2000 before the Honorable Judge Shira A. Scheindlin. On May&nbsp;29, 2002,
plaintiffs electronically served an amended complaint. The amended complaint
alleges violations of Sections&nbsp;11 and 15 of the Securities Act of 1933 and
Sections&nbsp;10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds
that the prospectus incorporated in the registration statement for the
Company&#146;s initial public offering failed to disclose, among other things, that
(i)&nbsp;the underwriter had solicited and received excessive and undisclosed
commissions from certain investors in exchange for which the underwriter
allocated to those investors material portions of the shares of the Company&#146;s
stock sold in the offering; and (ii)&nbsp;the underwriter had entered into
agreements with customers whereby the underwriter agreed to allocate shares of
the Company&#146;s stock sold in the offering to those customers in exchange for
which the customers agreed to purchase additional shares of the Company&#146;s stock
in the aftermarket at pre-determined prices. The amended complaint appears to
allege that false or misleading analyst reports were issued. The amended
complaint does not claim any specific amount of damages.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On July&nbsp;15, 2002, the Company (as well as the other issuers and their
affiliated individual defendants) filed a motion to dismiss. The motions were
heard on November&nbsp;1, 2002 and are currently under consideration by the judge.
Settlement discussions with the Plaintiffs are being conducted under the
auspices of a mediator. The Company is considering a settlement proposal
presented by the mediator.
</FONT>
<P align="left"><FONT size="2">PRODUCT LIABILITY CLAIMS COULD BE TIME-CONSUMING AND COSTLY TO DEFEND, AND
COULD EXPOSE US TO LOSS.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Claims that our products or our licensees&#146; products have flaws or other
defects that lead to personal or other injury are common in the computer
peripherals industry and medical fields. If products that we or our licensees
sell cause personal injury, financial loss or other injury to our or our
licensees&#146; customers, the customers or our licensees may seek damages or other
recovery from us. Any claims against us would be time-consuming, expensive to
defend and distracting to management and could result in damages and injure our
reputation or the reputation of our licensees or their products. This damage
could limit the market for our and our licensees&#146; products and harm our results
of operations.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In the past, manufacturers of peripheral products, such as computer mice
and certain gaming products such as joysticks, wheels or gamepads, have been
subject to claims alleging that use of their products has caused or contributed
to various types of repetitive stress injuries, including carpal tunnel
syndrome. We have not experienced any product liability claims to date.
Although our license agreements typically contain provisions designed to limit
our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could limit or invalidate the provisions.
</FONT>
<P align="left"><FONT size="2">LEGISLATIVE ACTIONS, HIGHER INSURANCE COST AND POTENTIAL NEW ACCOUNTING
PRONOUNCEMENTS ARE LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS
OF OPERATIONS.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There have been regulatory changes, including the Sarbanes-Oxley Act of
2002, and there may be potential new accounting pronouncements or additional
regulatory rulings which will have an impact on our future financial position
and results of operations. The Sarbanes-Oxley Act of 2002 and other rule
changes as well as proposed legislative initiatives following the Enron
bankruptcy are likely to increase general and administrative costs. In
addition, insurers are likely to increase premiums as a result of high claims
rates over the past year, which we expect will increase our premiums for our
various insurance policies. Further, proposed initiatives are expected to
result in changes in certain accounting rules, including legislative and other
proposals to account for employee stock options as a compensation expense.
These and other potential changes could materially increase the expenses we
report under generally accepted accounting principles, and adversely affect our
operating results.
</FONT>
<P align="left"><FONT size="2">IF OUR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS, OUR OPERATIONS WOULD BE
SERIOUSLY HARMED.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our facilities could be subject to a catastrophic loss such as fire,
flood, earthquake, power outage or terrorist activity. California has
experienced problems with its power supply in recent years. As a result, we
have experienced utility cost increases and may experience unexpected
interruptions in our power supply that could have a material adverse effect on
our sales, results of operations and financial condition. In addition, a
substantial portion of our research and development activities, manufacturing,
our corporate headquarters and other critical business operations are located
near major earthquake faults in San Jose, California, an area with a history of
seismic events. Any such loss at our facilities could
</FONT>
<P align="center"><FONT size="2">30
</FONT>

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<P><FONT size="2">disrupt our operations, delay production, shipments and revenue and result in
large expenses to repair and replace the facility. While we believe that we
maintain insurance sufficient to cover most long-term potential losses at our
facilities, our existing insurance may not be adequate for all possible losses.
</FONT>
<P align="left"><FONT size="2">WE HAVE EXPERIENCED RAPID GROWTH AND CHANGE IN OUR BUSINESS, AND OUR FAILURE TO
MANAGE THIS AND ANY FUTURE GROWTH COULD HARM OUR BUSINESS.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Any future periods of rapid growth may place significant strains on our
managerial, financial, engineering and other resources. The rate of any future
expansion, in combination with our complex technologies, may demand an
unusually high level of managerial effectiveness in anticipating, planning,
coordinating and meeting our operational needs as well as the needs of our
licensees.
</FONT>
<P align="left"><FONT size="2">BECAUSE WE HAVE A FIXED PAYMENT LICENSE WITH MICROSOFT, OUR ROYALTY REVENUE
FROM LICENSING JOYSTICKS AND STEERING WHEELS IN THE GAMING MARKET MIGHT DECLINE
IF MICROSOFT INCREASES ITS VOLUME OF SALES OF TOUCH-ENABLED JOYSTICKS AND
STEERING WHEELS AT THE EXPENSE OF OUR OTHER LICENSEES.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Under the terms of our present agreement with Microsoft, Microsoft
receives a perpetual, worldwide, irrevocable, non-exclusive license under our
patents for Microsoft&#146;s SideWinder Force Feedback Pro Joystick and its
SideWinder Force Feedback Wheel, and for a future replacement version of these
specific SideWinder products having essentially similar functional features.
Instead of an ongoing royalty on Microsoft&#146;s sales of licensed products, the
agreement provided for a payment of $2.35&nbsp;million, which we recognized in equal
monthly increments over a one-year period that ended in mid-July 2000. We will
not receive any further revenues or royalties from Microsoft under our current
agreement with Microsoft. At the present time, we do not have a license
agreement with Microsoft for products other than the SideWinder joystick and
steering wheel. Microsoft has a significant share of the market for
touch-enabled joysticks and steering wheels for personal computers. Microsoft
has significantly greater financial, sales and marketing resources, as well as
greater name recognition and a larger customer base, than our other licensees.
In the event that Microsoft increases its share of this market, our royalty
revenue from other licensees in this market segment might decline.
</FONT>
<P align="left"><FONT size="2">WE DEPEND ON A SINGLE SUPPLIER TO PRODUCE OUR IMMERSION PROCESSORS AND A SINGLE
SUPPLIER TO PRODUCE OUR MEDICAL SIMULATORS AND MAY LOSE CUSTOMERS IF THESE
SUPPLIERS DO NOT MEET OUR REQUIREMENTS.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have one supplier for our custom Immersion Processors and one supplier
for our custom medical simulators. The custom Immersion Processors improve the
performance and help reduce the cost of computer peripheral products, such as
joysticks and mice, incorporating our touch-enabling technologies. We have
limited control over delivery schedules, quality assurance, manufacturing
capacity, yields, costs and misappropriation of our intellectual property.
Although our supplier warrants that microprocessors it supplies to us or to our
customers will conform to our specifications and be free from defects in
materials and workmanship for a period of one year from delivery, any delays in
delivery of the processor, quality problems or cost increases could cause us to
lose customers and could damage our relationships with our licensees.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Our custom Immersion Medical simulators improve the performance and
training of medical personnel. Any disruption in the manufacturing process
from our sole supplier could adversely affect the Company&#146;s ability to deliver
our products, ensure quality workmanship and could result in a reduction of the
Company&#146;s product sales.
</FONT>
<P align="left"><FONT size="2">MEDICAL LICENSING AND CERTIFICATION AUTHORITIES MAY NOT ENDORSE OR REQUIRE USE
OF OUR TECHNOLOGIES FOR TRAINING PURPOSES, SIGNIFICANTLY SLOWING OR INHIBITING
THE MARKET PENETRATION OF OUR MEDICAL SIMULATION TECHNOLOGIES.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Several key medical certification bodies, including the American Board of
Internal Medicine (&#147;ABIM&#148;) and the American College of Cardiology (&#147;ACC&#148;), have
great influence in endorsing particular medical methodologies, including
medical training methodologies, for use by medical professionals. In the event
that the ABIM and the ACC, as well as other, similar bodies, do not endorse our
medical simulation training products as a training vehicle, market penetration
for our products could be significantly and adversely affected.
</FONT>
<P align="left"><FONT size="2">AUTOMOBILES INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES ARE SUBJECT TO
LENGTHY PRODUCT DEVELOPMENT PERIODS, MAKING IT DIFFICULT TO PREDICT WHEN AND
WHETHER WE</FONT>

<P align="center"><FONT size="2">31
</FONT>

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<P align="left"><FONT size="2">WILL RECEIVE PER UNIT AUTOMOTIVE ROYALTIES.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The product development process for automobiles is very lengthy. We do
not earn per unit royalty revenue on our automotive technologies unless, and
until, automobiles featuring our technologies are shipped to customers, which
may not occur until several years after we enter into an agreement with an
automobile manufacturer. Throughout the product development process, we face
the risk that an automobile manufacturer or supplier may delay the
incorporation of, or choose not to incorporate, our technologies into its
automobiles, making it difficult for us to predict the per unit automotive
royalties we may receive, if any.
</FONT>
<P align="left"><FONT size="2">OUR STOCK MAY BE VOLATILE.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The stock market has experienced extreme volatility that often has been
unrelated or disproportionate to the performance of particular companies.
These market fluctuations may cause our stock price to decline regardless of
our performance. The market price of our common stock has been, and in the
future could be, significantly affected by factors such as: actual or
anticipated fluctuations in operating results; announcements of technical
innovations; announcements regarding litigation in which we are involved; new
products or new contracts; sales or the perception in the market of possible
sales of large number of shares of Immersion common stock by insiders or
others; changes in securities analysts&#146; recommendations; changing circumstances
regarding competitors or their customers; governmental regulatory action;
developments with respect to patents or proprietary rights; inclusion in or
exclusion from various stock indices; and general market conditions. In the
past, following periods of volatility in the market price of a company&#146;s
securities, securities class action litigation has been initiated against that
company, such as the suit currently filed against us.
</FONT>
<P align="left"><FONT size="2">OUR MAJOR STOCKHOLDERS RETAIN SIGNIFICANT CONTROL OVER US, WHICH MAY LEAD TO
CONFLICTS WITH OTHER STOCKHOLDERS OVER CORPORATE GOVERNANCE MATTERS AND COULD
ALSO AFFECT THE VOLATILITY OF OUR STOCK PRICE.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Certain stockholders hold a substantial amount of our outstanding common
stock. Acting together, these stockholders would be able to exercise
significant influence over matters that our stockholders vote upon, including
the election of directors and mergers or other business combinations, which
could have the effect of delaying or preventing a third party from acquiring
control over or merging with us. Further, if any individuals in this group
elect to sell a significant portion or all of their holdings of our common
stock, the trading price of our common stock could experience volatility.
</FONT>
<P align="left"><FONT size="2">PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL, WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our
management. In addition, certain provisions of Delaware law may discourage,
delay or prevent someone from acquiring or merging with us. These provisions
could limit the price that investors might be willing to pay in the future for
shares.
</FONT>
<!-- link2 "ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK" -->
<DIV align="left"><A NAME="007"></A></DIV>
<P align="left"><FONT size="2"><B>ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have limited exposure to financial market risks, including changes in
interest rates. The fair value of our portfolio or related income would not be
significantly impacted by a 100 basis point increase or decrease in interest
rates due mainly to the short-term nature of the major portion of our
investment portfolio. An increase or decrease in interest rates would not
significantly increase or decrease interest expense on debt obligations due to
the fixed nature of our debt obligations. Our foreign operations are limited
in scope and thus we are not materially exposed to foreign currency
fluctuations.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We have equity investments in several privately-held companies. We intend
to hold our equity investments for the long term and will monitor whether there
has been other-than-temporary declines in their values based on management&#146;s
estimates of their net realizable value taking into account the companies
respective financial condition and ability to raise third-party financing. If
the decline in fair value is determined to be other-than-temporary, an
impairment loss is recorded and the individual security is written down to a
new cost basis. As a result of our review, of the fair value of these
investments, we recorded an impairment loss of $1.2&nbsp;million in the third
quarter of 2002, and in the third quarter of 2001 we recorded an impairment
loss of $4.3&nbsp;million on these investments and a $239,000 impairment loss on
interest
</FONT>
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</FONT>

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<P><FONT size="2">receivable on loans on these investments. The remaining cost basis of these
investments on our Consolidated Balance Sheet is $1.0&nbsp;million. We will monitor
the remaining value of these investments, and may determine that there could be
other impairment losses in the future. As of September&nbsp;30, 2002, management
has determined that the carrying value of these investments at $1.0&nbsp;million is
appropriate.
</FONT>
<!-- link2 "ITEM 4. CONTROLS AND PROCEDURES" -->
<DIV align="left"><A NAME="008"></A></DIV>
<P align="left"><FONT size="2"><B>ITEM 4. CONTROLS AND PROCEDURES</B></FONT>

<P><FONT size="2">(a)&nbsp; Under the supervision and with the participation of our management,
including our chairman of the board and our principal executive officer and
principal financial officer, we conducted an evaluation of our disclosure
controls and procedures, as such term is defined under Rule&nbsp;13a-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the
&#147;Exchange Act&#148;), within 90&nbsp;days of the filing date of this report. Based on
their evaluation, our chairman of the board and our principal executive officer
and principal financial officer concluded that our disclosure controls and
procedures are effective.
</FONT>
<P><FONT size="2">(b)&nbsp; There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a)&nbsp;above.
</FONT>
<!-- link1 "PART II OTHER INFORMATION" -->
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<P align="center"><FONT size="2"><B>PART II<BR>
OTHER INFORMATION</B></FONT>

<!-- link2 "ITEM 1. LEGAL PROCEEDINGS" -->
<DIV align="left"><A NAME="010"></A></DIV>
<P align="left"><FONT size="2"><B>ITEM 1. LEGAL PROCEEDINGS</B></FONT>

<P align="left"><FONT size="2"><I>In re Immersion Corporation</I></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;We are involved in legal proceedings relating to a class action lawsuit
filed on November&nbsp;9, 2001. The case is now designated as In re Immersion
Corporation Initial Public Offering Securities Litigation, No.&nbsp;Civ. 01-9975
(S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, No.
21 MC 92 (S.D.N.Y.). The action was filed in the United States District Court,
Southern District of New York, against defendants Immersion Corporation, Louis
Rosenberg (former Chief Executive Officer, President and Chairman of the
Company), Victor Viegas (current President, Chief Executive Officer and Chief
Financial Officer), Bruce Schena (former Chief Technology Officer and
Director); and certain underwriters of Immersion&#146;s November&nbsp;12, 1999 initial
public offering. Subsequently, two of the individual defendants stipulated to
a dismissal without prejudice. The case is purportedly brought on behalf of
all persons who purchased the Company&#146;s common stock from November&nbsp;12, 1999
through December&nbsp;6, 2000.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The lawsuit has been consolidated for pretrial purposes with similar
lawsuits relating to more than 300 other initial public offerings conducted in
1999 and 2000 before the Honorable Judge Shira A. Scheindlin. On May&nbsp;29, 2002,
plaintiffs electronically served an amended complaint. The amended complaint
alleges violations of Sections&nbsp;11 and 15 of the Securities Act of 1933 and
Sections&nbsp;10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds
that the prospectus incorporated in the registration statement for the
Company&#146;s initial public offering failed to disclose, among other things, that
(i)&nbsp;the underwriter had solicited and received excessive and undisclosed
commissions from certain investors in exchange for which the underwriter
allocated to those investors material portions of the shares of the Company&#146;s
stock sold in the offering; and (ii)&nbsp;the underwriter had entered into
agreements with customers whereby the underwriter agreed to allocate shares of
the Company&#146;s stock sold in the offering to those customers in exchange for
which the customers agreed to purchase additional shares of the Company&#146;s stock
in the aftermarket at pre-determined prices. The amended complaint appears to
allege that false or misleading analyst reports were issued. The amended
complaint does not claim any specific amount of damages.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On July&nbsp;15, 2002, the Company (as well as the other issuers and their
affiliated individual defendants) filed a motion to dismiss. The motions were
heard on November&nbsp;1, 2002 and are currently under consideration by the judge.
Settlement discussions with the Plaintiffs are being conducted under the
auspices of a mediator. The Company is considering a settlement proposal
presented by the mediator.
</FONT>
<P align="left"><FONT size="2"><I>Immersion Corporation vs. Microsoft Corporation, Sony Computer Entertainment
Inc. and Sony Computer Entertainment of America, Inc.</I></FONT>

<P align="center"><FONT size="2">33
</FONT>

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<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On February&nbsp;11, 2002, we filed a complaint against Microsoft Corporation,
Sony Computer Entertainment, Inc., and Sony Computer Entertainment of America,
Inc. in the U.S. District Court for the Northern District Court of California
alleging infringement of U.S. Patent Nos. 5,889,672 and 6,275,213. The case
was assigned to United States District Judge Claudia Wilken. On April&nbsp;4, 2002,
Sony Computer Entertainment and Microsoft answered the complaint by denying the
material allegations and alleging counterclaims seeking a judicial declaration
that the asserted patents were invalid, unenforceable, or not infringed. The
process of discovery and exchanging information and documents on infringement,
invalidity, and claim construction, is underway. On October&nbsp;8, 2002, we filed
an amended complaint, withdrawing the claim under the &#145;672 patent and adding a
claim of infringement of a new patent, U.S. Patent No.&nbsp;6,424,333. On October
10, 2002, the Court entered an Amended Case Management Order that sets, among
other dates in the case, April&nbsp;18, 2003 for a hearing to construe the claims of
the asserted patents and April&nbsp;5, 2004 for the start of trial. On October&nbsp;28,
2002, Sony Computer Entertainment and Microsoft answered the amended complaint
and alleged similar counterclaims for declaratory relief that the asserted
patents are invalid, unenforceable, or not infringed. Due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome
of the litigation. We anticipate that the litigation will be costly, and there
can be no assurance that we will be able to recover the costs we incur in
connection with the litigation. The litigation has diverted, and is likely to
continue to divert, the efforts and attention of some of our key management and
personnel. As a result, until such time as it is resolved, the litigation
could adversely affect our business. Further, any unfavorable outcome could
adversely affect our business.
</FONT>
<!-- link2 "ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K" -->
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<P align="left"><FONT size="2"><B>ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K</B></FONT>

<P align="left"><FONT size="2">(a)&nbsp;<B>Exhibits.</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The following exhibits are filed herewith:
</FONT>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
        <TD width="8%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="87%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><FONT size="1">Exhibit</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><FONT size="1">Number</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1">Description</FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">99.1</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Certification of Robert O&#146;Malley, Chairman of the Board, Pursuant to
18 U.S.C. Section&nbsp;1350, as Adopted Pursuant to Section&nbsp;906 of the
Sarbanes-Oxley Act of 2002</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">99.2</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Certification of Victor Viegas, President, Chief Executive Officer,
Chief Financial Officer and Director, Pursuant to 18 U.S.C. Section&nbsp;1350, as
Adopted Pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002</FONT></TD>
</TR>
</TABLE>
<P align="left"><FONT size="2">(b)&nbsp;<B>Reports on Form&nbsp;8-K</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None
</FONT>
<P align="center"><FONT size="2">34
</FONT>

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<P align="left"><FONT size="2"><B>SIGNATURES</B></FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="50%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="50%"><FONT size="2">IMMERSION CORPORATION<BR>
Registrant</FONT></TD>
<TR><TD>&nbsp;</TD></TR>
<TR><TD>&nbsp;</TD></TR>

</TR>
</TABLE>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
        <TD width="45%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="50%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Date:&nbsp;&nbsp; November&nbsp;13, 2002</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
<I>/s</I>/&nbsp;Robert O&#146;Malley</FONT></TD>
</TR>
<TR>
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
<HR size="1" noshade></FONT></TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Robert O&#146;Malley<BR>
Chairman of the Board</FONT></TD>
</TR>
<TR><TD>&nbsp;</TD></TR>
<TR><TD>&nbsp;</TD></TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">Date:&nbsp;&nbsp;November&nbsp;13, 2002</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
<I>/s</I>/&nbsp;Victor Viegas</FONT></TD>
</TR>
<TR>
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
<HR size="1" noshade></FONT></TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Victor Viegas<BR>
President, Chief Executive Officer,<BR>
Chief Financial Officer and Director</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">35
</FONT>

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<!-- link1 "CERTIFICATIONS" -->
<DIV align="left"><A NAME="013"></A></DIV>
<P align="left"><FONT size="2"><B>CERTIFICATIONS</B></FONT>

<P><FONT size="2">I, Robert O&#146;Malley, certify that:
</FONT>
<P><FONT size="2">1.&nbsp;I have reviewed this quarterly report on Form&nbsp;10-Q of Immersion Corporation;
</FONT>
<P><FONT size="2">2.&nbsp;Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
</FONT>
<P><FONT size="2">3.&nbsp;Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
</FONT>
<P><FONT size="2">4.&nbsp;The registrant&#146;s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules&nbsp;13a-14 and 15d-14) for the registrant and we have:
</FONT>
<P><FONT size="2">a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
</FONT>
<P><FONT size="2">b) evaluated the effectiveness of the registrant&#146;s disclosure controls and
procedures as of a date within 90&nbsp;days prior to the filing date of this
quarterly report (the &#147;Evaluation Date&#148;); and
</FONT>
<P><FONT size="2">c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
</FONT>
<P><FONT size="2">5.&nbsp;The registrant&#146;s other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant&#146;s auditors and the audit
committee of registrant&#146;s board of directors (or persons performing the
equivalent function):
</FONT>
<P><FONT size="2">a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant&#146;s ability to record, process,
summarize and report financial data and have identified for the registrant&#146;s
auditors any material weaknesses in internal controls; and
</FONT>
<P><FONT size="2">b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant&#146;s internal controls;
and
</FONT>
<P><FONT size="2">6.&nbsp;The registrant&#146;s other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
</FONT>
<P align="left"><FONT size="2">Date: November&nbsp;13, 2002</FONT>

<DIV>&nbsp;</DIV>

<P><FONT size="2">/s/ Robert O&#146;Malley<BR>
<HR size="1" width="50%" align="left" noshade>
Robert O&#146;Malley<BR>
Chairman of the Board
</FONT>
<P align="center"><FONT size="2">36
</FONT>

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<P><FONT size="2">I, Victor Viegas, certify that:
</FONT>
<P><FONT size="2">1.&nbsp;I have reviewed this quarterly report on Form&nbsp;10-Q of Immersion Corporation;
</FONT>
<P><FONT size="2">2.&nbsp;Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
</FONT>
<P><FONT size="2">3.&nbsp;Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
</FONT>
<P><FONT size="2">4.&nbsp;The registrant&#146;s other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules&nbsp;13a-14 and 15d-14) for the registrant and we have:
</FONT>
<P><FONT size="2">a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
</FONT>
<P><FONT size="2">b) evaluated the effectiveness of the registrant&#146;s disclosure controls and
procedures as of a date within 90&nbsp;days prior to the filing date of this
quarterly report (the &#147;Evaluation Date&#148;); and
</FONT>
<P><FONT size="2">c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
</FONT>
<P><FONT size="2">5.&nbsp;The registrant&#146;s other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant&#146;s auditors and the audit
committee of registrant&#146;s board of directors (or persons performing the
equivalent function):
</FONT>
<P><FONT size="2">a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant&#146;s ability to record, process,
summarize and report financial data and have identified for the registrant&#146;s
auditors any material weaknesses in internal controls; and
</FONT>
<P><FONT size="2">b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant&#146;s internal controls;
and
</FONT>
<P><FONT size="2">6.&nbsp;The registrant&#146;s other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
</FONT>
<P align="left"><FONT size="2">Date: November&nbsp;13, 2002</FONT>
<DIV>&nbsp;</DIV>

<P><FONT size="2">/s/ Victor Viegas<BR>
<HR size="1" width="50%" align="left" noshade>
Victor Viegas<BR>
President, Chief Executive Officer,<BR>
Chief Financial Officer and Director
</FONT>
<P align="center"><FONT size="2">37
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<!-- link1 "EXHIBIT INDEX" -->
<DIV align="left"><A NAME="014"></A></DIV>
<P align="center"><FONT size="2"><B>EXHIBIT INDEX</B></FONT>

<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
        <TD width="8%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="87%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><FONT size="1"><B>Exhibit</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><FONT size="1"><B>Number</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1"><B>Description</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">99.1</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Certification of Robert O&#146;Malley, Chairman of the Board, Pursuant to 18
U.S.C. Section&nbsp;1350, as Adopted Pursuant to Section&nbsp;906 of the Sarbanes-Oxley
Act of 2002</FONT></TD>
</TR>
<TR><TD><TR><TD><TR><TD><TR><TD>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">99.2</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Certification of Victor Viegas, President, Chief Executive Officer, Chief
Financial Officer and Director, Pursuant to 18 U.S.C. Section&nbsp;1350, as Adopted
Pursuant to Section&nbsp;906 of the Sarbanes-Oxley Act of 2002</FONT></TD>
</TR>
</TABLE>

<P align="center"><FONT size="2">38</FONT>


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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>3
<FILENAME>f85502exv99w1.txt
<DESCRIPTION>EXHIBIT 99.1
<TEXT>
<PAGE>
                                                                    EXHIBIT 99.1



                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Quarterly Report of Immersion Corporation (the "Company")
on Form 10-Q for the period ending September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Robert
O'Malley, Chairman of the Board of Directors of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that based on my knowledge:

         (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.



/s/ Robert O'Malley


Robert O'Malley
Chairman of the Board

November 13, 2002

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>4
<FILENAME>f85502exv99w2.txt
<DESCRIPTION>EXHIBIT 99.2
<TEXT>
<PAGE>
                                                                    EXHIBIT 99.2



                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



In connection with the Quarterly Report of Immersion Corporation (the "Company")
on Form 10-Q for the period ending September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Victor
Viegas, President, Chief Executive Officer, Chief Financial Officer and Director
of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that based on my knowledge:

         (1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.



/s/ Victor Viegas

Victor Viegas
President, Chief Executive Officer,
Chief Financial Officer and Director

November 13, 2002

</TEXT>
</DOCUMENT>
</SUBMISSION>
