<SUBMISSION>
<ACCESSION-NUMBER>0000891618-04-000795
<TYPE>8-K
<PUBLIC-DOCUMENT-COUNT>5
<PERIOD>20040324
<ITEMS>5
<ITEMS>7
<FILING-DATE>20040325
<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>8-K
<ACT>34
<FILE-NUMBER>000-27969
<FILM-NUMBER>04688276
</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>8-K
<SEQUENCE>1
<FILENAME>f97550e8vk.htm
<DESCRIPTION>FORM 8-K
<TEXT>
<HTML>
<HEAD>
<TITLE>e8vk</TITLE>
</HEAD>
<BODY bgcolor="#FFFFFF">
<!-- PAGEBREAK -->
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<DIV style="font-family: 'Times New Roman',Times,serif">

<P align="center" style="font-size: 14pt">UNITED STATES<BR>
SECURITIES AND EXCHANGE COMMISSION

<DIV align="center" style="font-size: 12pt">Washington, D.C. 20549
</DIV>


<P align="center" style="font-size: 10pt"><HR size="1" noshade width="15%" align="center">


<P align="center" style="font-size: 18pt"><B>FORM 8-K</B>


<P align="center" style="font-size: 12pt"><B>CURRENT REPORT</B>



<P align="center" style="font-size: 12pt"><B>Pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934</B>



<P align="center" style="font-size: 10pt">Date of Report (Date of earliest event reported): March&nbsp;24, 2004


<P align="center" style="font-size: 24pt"><B>IMMERSION CORPORATION</B>

<DIV align="center" style="font-size: 10pt">(Exact name of registrant as specified in its charter)</DIV>



<P align="center" style="font-size: 10pt"><HR size="1" noshade width="15%" align="center">


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="85%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="31%">&nbsp;</TD>
    <TD width="3%">&nbsp;</TD>
    <TD width="31%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD align="center" valign="top">Delaware
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">000-27969
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">94-3180138</TD>
</TR>

<TR style="font-size: 1px">
    <TD align="center" valign="top"><HR size="1" noshade>&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><HR size="1" noshade>&nbsp;
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top"><HR size="1" noshade>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD align="center" valign="top">(State or other jurisdiction of<BR>
incorporation)
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">(Commission File Number)
</TD>
    <TD>&nbsp;</TD>
    <TD align="center" valign="top">(IRS Employer Identification No.)</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt"><HR size="1" noshade width="15%" align="center">



<P align="center" style="font-size: 10pt">801 Fox Lane<BR>
San Jose, California 95131<BR>
(Address of principal executive offices) (Zip Code)



<P align="center" style="font-size: 10pt"><HR size="1" noshade width="15%" align="center">



<P align="center" style="font-size: 10pt">Registrant&#146;s telephone number, including area code: (408)&nbsp;467-1900



<P align="center" style="font-size: 10pt">Not Applicable<BR>
(Former name or former address, if changed since last report)



<P align="center" style="font-size: 10pt">&nbsp;
</DIV>

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<P><HR noshade><P>

<DIV style="font-family: 'Times New Roman',Times,serif">




<!-- 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="76%"></TD>
</TR>
<TR><TD></TD><TD colspan="8"><A HREF="#000">Item&nbsp;5. Other Events and Regulation&nbsp;FD Disclosure</A></TD></TR>
<TR><TD></TD><TD colspan="8"><A HREF="#001">Item&nbsp;7. Financial Statements and Exhibits</A></TD></TR>
<TR><TD colspan="9"><A HREF="#002">EXHIBIT INDEX</A></TD></TR>
<TR><TD colspan="9"><A HREF="f97550exv23w1.txt">EXHIBIT 23.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f97550exv99w1.txt">EXHIBIT 99.1</A></TD></TR>
<TR><TD colspan="9"><A HREF="f97550exv99w2.txt">EXHIBIT 99.2</A></TD></TR>
<TR><TD colspan="9"><A HREF="f97550exv99w3.txt">EXHIBIT 99.3</A></TD></TR>
</TABLE>
</CENTER>
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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>




<!-- link2 "Item&nbsp;5. Other Events and Regulation&nbsp;FD Disclosure" -->
<DIV align="left"><A NAME="000"></A></DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;5. Other Events and Regulation&nbsp;FD Disclosure</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;On March&nbsp;24, 2004, Immersion Corporation filed a Current Report on Form
8-K in order to release its audited annual consolidated financial statements
for the year ending December&nbsp;31, 2003 so that a stockholder could effect
secondary market transactions during the pendency of Immersion&#146;s filing of its
annual report on Form 10-K. Attached as Exhibits 99.1, 99.2 and 99.3,
respectively, are the Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations, Immersion&#146;s Consolidated Financial
Statements and Notes thereto for the fiscal years ended December&nbsp;31, 2003 and
December&nbsp;31, 2002 and Immersion&#146;s Financial Statement
Schedules. Also attached is Exhibit&nbsp;23.1, the Consent of
Immersion&#146;s Independent Auditors, Deloitte &#38; Touche LLP.

<!-- link2 "Item&nbsp;7. Financial Statements and Exhibits" -->
<DIV align="left"><A NAME="001"></A></DIV>

<P align="left" style="font-size: 10pt"><B>Item&nbsp;7. Financial Statements and Exhibits.</B>



<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(c)&nbsp;Exhibits.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="85%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Exhibit No.</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Description</B><HR size="1" noshade></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">23.1</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of Deloitte &#38; Touche LLP, Independent Auditors
</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">99.1</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">99.2</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consolidated Financial Statements and Notes thereto</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">99.3</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Financial Statement Schedules: Schedule&nbsp;II &#150; Valuation and Qualifying Accounts</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">2
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">


<P align="left" style="font-size: 10pt">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.

<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="50%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="44%">&nbsp;</TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD colspan="3" valign="bottom" align="left"><B>IMMERSION CORPORATION</B></TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">Date: March&nbsp;24, 2004
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">By:
</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">/s/ Victor Viegas</TD>
</TR>

<TR style="font-size: 1px">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom"><HR size="1" noshade>&nbsp;</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">Victor Viegas</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD align="right" valign="bottom">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="bottom">President, Chief Executive Officer, Chief Operating
Officer, Chief Financial Officer and Director</TD>
</TR>

<!-- End Table Body -->
</TABLE>
</DIV>



<P align="center" style="font-size: 10pt">3
</DIV>

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

<DIV style="font-family: 'Times New Roman',Times,serif">

<!-- link1 "EXHIBIT INDEX" -->
<DIV align="left"><A NAME="002"></A></DIV>

<P align="center" style="font-size: 10pt">EXHIBIT INDEX


<DIV align="center">
<TABLE style="font-size: 10pt" cellspacing="0" border="0" cellpadding="0" width="100%">
<!-- Begin Table Head -->
<TR valign="bottom">
    <TD width="1%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="4%">&nbsp;</TD>
    <TD width="1%">&nbsp;</TD>
    <TD width="5%">&nbsp;</TD>
    <TD width="2%">&nbsp;</TD>
    <TD width="85%">&nbsp;</TD>
</TR>
<TR style="font-size: 8pt" valign="bottom">
    <TD>&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center" colspan="3"><B>Exhibit No.</B><HR size="1" noshade></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="center"><B>Description</B><HR size="1" noshade></TD>
</TR>

<!-- End Table Head -->
<!-- Begin Table Body -->
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">23.1</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consent of Deloitte &#38; Touche LLP, Independent Auditors</TD>
</TR>
<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">99.1</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Management&#146;s Discussion and Analysis of Financial Condition and Results of Operations</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">99.2</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Consolidated Financial Statements and Notes thereto</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">&nbsp;</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">&nbsp;</TD>
    <TD valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">&nbsp;</TD>
</TR>

<TR valign="bottom">
    <TD valign="top"><DIV style="margin-left:0px; text-indent:-0px">
</DIV></TD>
    <TD>&nbsp;</TD>
    <TD nowrap align="right" valign="top">&nbsp;</TD>
    <TD align="right" valign="top">99.3</TD>
    <TD nowrap valign="top">&nbsp;</TD>
    <TD>&nbsp;</TD>
    <TD align="left" valign="top">Financial Statement Schedules: Schedule&nbsp;II &#150; Valuation and Qualifying Accounts</TD>
</TR>
<!-- End Table Body -->
</TABLE>
</DIV>




<P align="center" style="font-size: 10pt">&nbsp;
</DIV>


</BODY>
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>3
<FILENAME>f97550exv23w1.txt
<DESCRIPTION>EXHIBIT 23.1
<TEXT>
<PAGE>
                                                                    EXHIBIT 23.1


INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement Nos.
333-94997 and 333-52604 of Immersion Corporation on Forms S-8 of our report on
the consolidated financial statements and related financial statement schedule
as of December 31, 2003 and 2002, and for each of the three years in the period
ended December 31, 2003, which expresses an unqualified opinion and includes an
explanatory paragraph regarding the adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangibles" in 2002, dated
March 23, 2004, appearing in this Current Report on Form 8-K of Immersion
Corporation dated March 24, 2004.

Deloitte & Touche LLP

San Jose, California
March 23, 2004

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>4
<FILENAME>f97550exv99w1.txt
<DESCRIPTION>EXHIBIT 99.1
<TEXT>
<PAGE>

                                                                    EXHIBIT 99.1

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

         The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.

         This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 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 "anticipates," "believes," "expects," "intends," "may," "will" 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 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP"). The preparation of these 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 we believe 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.

         We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:

         We recognize revenues in accordance with applicable accounting
standards including Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition," Emerging Issues Task Force ("EITF") Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables" and the American Institute
of Certified Public Accountants' (the "AICPA") Statement of Position ("SOP")
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. We derive our revenues from three principle sources: royalty and
license fees, product sales, and development contracts. We recognize royalty and
license revenue based on royalty reports or related information received from
the licensee as well as time-based licenses of our intellectual property
portfolio. Up-front payments under license agreements are deferred and
recognized as revenue based on either the royalty reports received or amortized
over the license period depending on the nature of the agreement. Advance
payments under license agreements that also require us to provide future
services to the licensee are deferred and recognized over the service period
when vendor specific objective evidence related to the value of the services
does not exist. Examples of our typical license models are as follows:

<TABLE>
<CAPTION>
          LICENSE REVENUE MODEL                                  REVENUE RECOGNITION
          ---------------------                                  -------------------
<S>                                                   <C>
Perpetual license of intellectual property            Based on royalty reports received from
portfolio based on per unit royalties, no             licensees.  No further obligations to
services contracted                                   licensee exist.
</TABLE>

                                       5
<PAGE>

<TABLE>
<S>                                                   <C>
Time-based license of intellectual property           Based on straight-line amortization of an
portfolio with up-front payments and/or annual        annual minimum/up-front payments recognized
minimum royalty requirements, no services             over contract period or annual minimum
contracted                                            period.  No further obligations to licensee
                                                      exist.

Perpetual license of intellectual property            Based on cost-to-cost percentage-of-completion
portfolio or technology license along with            accounting method over the service period.
contract for development work                         Obligation to licensee exists until development
                                                      work is complete.

License of software or technology, no                 Up-front revenue recognition based on SOP
modification necessary                                97-2 criteria or EITF 00-21, as applicable.
</TABLE>

         We generally license and recognize revenue from our licensees under the
above license models or a combination thereof. Individual contracts may have
characteristics that do not fall within a specific license model or may have
characteristics of a combination of license models. Under those circumstances,
we recognize revenue in accordance with SAB No. 104, EITF No. 00-21 and SOP
97-2, as amended, to guide the accounting treatment for each individual
contract. If the information received from our licensees regarding royalties 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. We sell the majority of our products with
warranties ranging from three to twenty-four months. We record the estimated
warranty costs during the quarter the revenue is recognized. Historically,
warranty-related costs and related accruals have not been significant. We offer
a general right of return on the MicroScribe G2 product line for 14 days after
purchase. We recognize revenue at the time of shipment of a MicroScribe system
and provide an accrual for potential returns based on historical experience. No
other general right of return is offered on our products. 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.
Losses on contracts are recognized when determined. Revisions in estimates are
reflected in the period in which the conditions become known. Our revenue
recognition policies are significant because our 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.

         We have executed a series of agreements with Microsoft Corporation as
described in Note 9 to our consolidated financial statements that provide for
settlement of our lawsuit against Microsoft as well as various licensing,
sublicensing and financing arrangements. We have accounted for the proceeds
received under the agreements as a long-term customer advance based on certain
provisions that would result in payment of funds to Microsoft.

         We maintain allowances for doubtful accounts for estimated losses
resulting from our review and assessment of our customers' 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.

         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.

         We have acquired patents and other intangibles. Our business
acquisitions typically result in goodwill and other intangible assets. In
addition, we capitalize the external legal and filing fees associated with
patents and trademarks. 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. We amortize our intangible assets related to patents
and

                                       6
<PAGE>

trademarks, once they issue, over their estimated useful lives, generally 10
years. Future changes in the estimated useful life could affect the amount of
future period amortization expense that we will incur. During 2003, we
capitalized external costs associated with patents and trademarks of $1.6
million and our amortization expense for the same period was $102,000.

         The above listing is not intended to be a comprehensive list of all of
our accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting principles
in the United States of America, with no need for management's judgment in their
application. There are also areas in which management's judgment in selecting
any available alternative would not produce a materially different result. See
our consolidated financial statements which contain accounting policies and
other disclosures required by GAAP.

RESULTS OF OPERATIONS

OVERVIEW OF 2003

         During 2003, we achieved several significant milestones. We advanced
penetration into our core markets and succeeded at gaining market acceptance of
new haptics-based solutions. In addition,

    -    Our medical business was profitable for the full year, driven largely
         by $3.2 million in licensing and development revenues associated with
         license and development agreements signed with Medtronic.

    -    We signed a multiyear licensing agreement with Samsung, enabling this
         cell phone innovator to deliver a new generation of phones that include
         Immersion's TouchSense touch feedback technology.

    -    We have programs in production or development with four of the top 10
         automotive OEMs spanning Europe, Asia, and North America and three of
         the world's most prestigious brands.

    -    We achieved a successful outcome to our litigation with Microsoft.

    -    Our intellectual property portfolio continued to grow, and we continued
         to pursue our patent infringement litigation with Sony Computer
         Entertainment.

         During 2003 we experienced a decline in medical product sales mainly
due to the cautious economic environment and its impact on our customer's
ability to secure capital funding for such purchases. Furthermore, our royalty
and license revenues were negatively impacted by the decline in the PC gaming
market, in part due to the trend away from PC gaming towards console gaming.
During 2003, we continued to pursue our litigation against Sony Computer
Entertainment which diverted, and is likely to continue to divert, the efforts
and attention of some of our key management and personnel. We incurred
significant costs, $7.0 million associated with the litigation during the year,
as our litigation expenses increased by $5.1 million from 2002. We anticipate
that the litigation will continue to 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 case is scheduled to go to trial in April 2004.

         In 2004, we expect to see continued growth in our business segments as
our technology gains further acceptance. However, our success could be limited
by several factors, including the timely release of our new products or our
licensees' products, continued market acceptance of our products and technology,
the introduction of new products by existing or new competitors and the cost of
ongoing litigation. For a further discussion of these and other risk factors,
see the section titled "Factors That May Affect Future Results."

                                       7
<PAGE>

         The following table sets forth our statement of operations data as a
percentage of total revenues.

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED
                                                                                 DECEMBER 31,
                                                                         --------------------------
                                                                          2003      2002     2001
                                                                         ------    ------   ------
<S>                                                                      <C>       <C>      <C>
Revenues:
   Royalty and license ...............................................    30.1%     25.9%     27.9%
   Product sales .....................................................    46.8      53.0      53.9
   Development contracts and other ...................................    23.1      21.1      18.2
                                                                         -----     -----     -----
       Total revenues ................................................   100.0     100.0     100.0
                                                                         -----     -----    ------

Costs and expenses:
   Cost of product sales .............................................    26.1      29.0      31.6
   Sales and marketing ...............................................    38.4      37.4      51.3
   Research and development ..........................................    34.8      32.1      39.2
   General and administrative ........................................    61.8      39.8      40.0
   Amortization of intangibles and deferred stock compensation .......    12.3      15.4      27.3
   Impairment of goodwill ............................................       -      18.6         -
   Other charges .....................................................       -       2.0       1.2

       Total costs and expenses ......................................   173.4     174.3     190.6
                                                                         -----     -----    ------
   Operating loss ....................................................   (73.4)    (74.3)    (90.6)
                                                                         -----     -----    ------
   Interest and other income .........................................     0.6       1.5       5.7
   Interest expense ..................................................    (0.3)     (2.9)     (4.5)
   Other expense .....................................................   (10.1)     (6.0)    (23.6)
                                                                         -----     -----    ------
   Loss before provision for income taxes ............................   (83.2)    (81.7)   (113.0)
   Provision for income taxes ........................................    (0.7)        -         -
                                                                         -----     -----    ------
   Net loss ..........................................................   (83.9)%   (81.7)%  (113.0)%
                                                                         =====     =====    ======
</TABLE>

COMPARISON OF YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

    Revenues

<TABLE>
<CAPTION>
                                             2003      % Change   2002       % Change    2001
                                             ----      --------   ----       --------    ----
<S>                                        <C>         <C>       <C>         <C>       <C>
Royalty and license ....................   $ 6,088        16%    $ 5,231        (2)%   $ 5,362
Product sales ..........................     9,455       (12)%    10,723         4%     10,360
Development contracts and other ........     4,680         9%      4,281        22%      3,510
                                           -------       ---     -------        --     -------
   Total revenue .......................   $20,223         -%    $20,235         5%    $19,232
                                           =======       ===     =======        ==     =======
</TABLE>

    FISCAL 2003 COMPARED TO FISCAL 2002

         Total Revenue. Our total revenues for the year ended December 31, 2003
were flat compared to the year ended December 31, 2002. While the overall
revenue did not increase, the revenue mix did change from 2002 to 2003.

         Royalty and license revenue. Royalty and license revenue is comprised
of royalties earned on sales by our TouchSense licensees and license fees
charged for our intellectual property portfolio. Royalty and license revenue
increased $857,000 or 16% from 2002 to 2003. The increase in royalty and license
revenue is a combination of an increase in medical royalty and license fees of
$1.5 million and an increase in automotive

                                       8
<PAGE>

royalties of $237,000, offset by a decrease in gaming royalties of $899,000. The
significant increase in royalty and license revenue from our medical licensees
is primarily due to license revenue of $1.9 million recognized on our license
and development agreements with Medtronic. During the fourth quarter, we
achieved the second of three milestones associated with our development and
licensing agreements with Medtronic. By delivering a suite of new simulation
products in December 2003, which Medtronic is currently using for
cardiac-related therapy training, we were able to recognize $2.9 million, the
majority of which was previously deferred revenue. Of the $2.9 million
recognized, $1.9 million was included in royalty and license revenue and $1.0
million was included in development contract and other revenue. We expect to
recognize the remaining license revenue under the agreements during 2004 and
2005. We have had a series of licensing and development agreements with
Medtronic since 1998 and we will continue to seek additional arrangements in the
future. Automotive royalties increased due to an increase in the number of
vehicles manufactured with our technology incorporated in them. The decrease in
royalty and license revenue from licensees who sell gaming peripherals is
attributable to weakness in the PC gaming market due in part to the trend away
from PC gaming towards console gaming and delays in product introductions by
some of our licensees. In addition, the Chapter 11 bankruptcy protection filing
of one of our licensees contributed $446,000 to the decline in gaming royalties.

         Product sales. Product sales decreased by $1.3 million or 12% from 2002
to 2003. The decrease in product sales is mainly due to a $1.6 million decrease
in the volume of medical products sales offset in part by an increase in the
volume of 3D and professional product sales. Medical product sales consist of
sales of our virtual reality medical simulators in the vascular, endoscopic,
endovascular, and laparoscopic product lines. Many of our customers rely on
grant monies to purchase our medical simulation devices. During this economic
downturn, our customers have had difficulties in securing these funding sources
and hence our medical product sales, primarily in the intravenous
catheterization and endoscopic surgical simulator lines have declined.

         Development contract and other revenue. Development contract and other
revenue is comprised of revenue on commercial and government contracts.
Development contract and other revenue increased $399,000 or 9% from 2002 to
2003. The increase in this category is attributable to an increase of $733,000
in government contracts offset by a decrease in commercial contracts in the
medical and automotive sectors in the amount of $334,000. While the commercial
sector has experienced decreased development contract spending due to declining
research and development budgets, the government has increased spending related
to military and security needs.

     FISCAL 2002 COMPARED TO FISCAL 2001

         Total Revenue. Our total revenues for the year ended December 31, 2002
increased by $1.0 million or 5% to $20.2 million from $19.2 million in 2001.

         Royalty and license revenue. Royalty and license revenue decreased by
$131,000 or 2% from 2001 to 2002. Royalties from our gaming licensees decreased
by $953,000 due to the decline in sales of general computing and PC gaming
peripheral devices as well as delayed product introductions from some of our
licensees. The decrease in gaming royalties was offset by an increase of
$401,000 in automotive royalties and license fees and an increase of $421,000 in
medical royalty and license revenue due in part from signing new automotive and
medical license agreements during 2002.

         Product sales. Product sales for the period ended increased by $363,000
or 4% from 2001 to 2002. The increase in product sales is primarily due to a
$2.0 million increase in the volume of sales of our medical products as compared
to 2001 offset by decreased microprocessor sales of $907,000 and decreased 3D
products sales of $306,000. Demand for medical products increased across all
product lines, and in particular the endoscopy simulator. 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. Sale of our 3D products such as
our MicroScribe G2 digitizer and our line of whole-hand interface devices
decreased in 2002 from 2001 mainly due to delays in purchasing decisions by
customers affected by the current economic slowdown.

         Development contract and other revenue. Development contract and other
revenue increased by $771,000 or 22% during fiscal 2002 as compared to fiscal
2001 due to securing new commercial and government development contracts in the
medical field.

                                       9
<PAGE>

     COST OF PRODUCT SALES

<TABLE>
<CAPTION>
                           2003      % Change   2002      % Change    2001
                           ----      --------   ----      --------    ----
<S>                       <C>        <C>       <C>        <C>        <C>
Cost of product sales..   $5,276       (10)%   $5,881        (3)%    $6,074
% of product sales ....       56%                  55%                   59%
</TABLE>

         Our cost of product sales consists primarily of materials, labor and
overhead. There is no cost of sales associated with royalty and license revenue
or development contract revenue. The cost of product sales decreased by $605,000
or 10% from 2002 to 2003 due to a combination of decreased product sales,
decreased royalty costs, decreased price and production variances and decreased
overhead costs, offset by increased inventory write offs for excess and obsolete
inventory. Product sales decreased by 12% from 2002 to 2003 but direct material
and labor costs only decreased by $134,000 or 4% due to a reduction in sales of
our higher margin products such as our medical simulators, causing an
unfavorable product mix. Royalty costs decreased by $274,000 from 2002 to 2003
due in part to the elimination of royalties on our MicroScribe G2 product line
due to the settlement agreement reached with MicroScribe LLC in 2002. In
addition there were cost savings from decreased price and production variances
of $249,000 and decreased overhead costs of $33,000 during fiscal 2003 as
compared to fiscal 2002. These cost savings were offset by inventory write offs
for excess and obsolete inventory of $197,000 due to design revisions made to
products to improve product quality.

         The cost of product sales decreased by $193,000 or 3% from 2001 to 2002
due to a combination of favorable product mix, decreased inventory write-downs,
and decreased royalties offset by increased price and production variances and
increased overhead costs. Product sales volume increased by 4% from 2001 to 2002
but direct material and labor costs decreased by $194,000 or 5% due to the
reduction in sales of our lower margin products such as our microprocessors
causing a favorable product mix and reduced direct costs. Inventory write-downs
decreased by $151,000 largely due to a write-down taken during fiscal 2001 for
our LightScribe product line. Royalty costs decreased by $52,000 from 2001 to
2002 due to the elimination of royalties due on our MicroScribe G2 product line
after June of 2002. These cost savings were offset by increased price and
production variances of $133,000 and increased overhead costs of $80,000 during
fiscal 2002 as compared to fiscal 2001.

     EXPENSES

<TABLE>
<CAPTION>
                                                                      2003      % Change    2002      % Change    2001
                                                                      ----      --------    ----      --------    ----
<S>                                                                 <C>         <C>       <C>         <C>       <C>
Sales and marketing .............................................   $ 7,764         3%    $ 7,566       (23)%   $ 9,868
Research and development ........................................     7,045         8%      6,496       (14)%     7,548
General and administrative ......................................    12,508        55%      8,064         5%      7,694
Amortization of intangibles and deferred stock compensation .....     2,480       (20)%     3,108       (41)%     5,252
Impairment of goodwill ..........................................         -      (100)%     3,758       100%          -
Other charges ...................................................         -      (100)%       397        77%        224
</TABLE>

         Sales and Marketing. 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 increased by
$198,000 or 3% in 2003 compared to 2002. The increase in expense was
attributable to increased sales and marketing focus on medical and cell phone
market opportunities as well as upgrading our corporate marketing function,
offset by decreased spending in collateral and advertising which we were able to
leverage from prior period investments and decreased bad debt expense. In 2003,
we increased headcount and related compensation, benefits and overhead by
$99,000, increased professional consulting and license fees by $92,000 and
increased travel by $251,000 to support the sales and marketing efforts noted
above. Offsetting this, we reduced advertising, market development funds, Web
site development and corporate identity by $101,000 leveraging investments in
those categories from prior periods and we reduced bad debt expense by $166,000.
During the later half of 2003 and the beginning of 2004, we reorganized and
redeployed our sales and marketing teams to capitalize on our leading technology
and progress with strategic customers in order to better execute our market
development and our sales strategy. We hired a number of new sales and marketing

                                       10
<PAGE>

employees during this period and anticipate increased compensation expense
related to these new hires in the future. We anticipate increased and continued
investment in sales and marketing in future periods to exploit market
opportunities for our technology.

         Sales and marketing expenses decreased by $2.3 million or 23% in 2002
compared to 2001. The reduction in expenses was attributable to our continued
cost cutting measures and leverage of prior period investments in sales and
marketing. In 2002, we reduced advertising, market development funds, Web site
development and corporate identity by $1.1 million. In addition we reduced
expenses associated with headcount and related overhead costs by $819,000 due to
decreased headcount. The remaining cost reduction is associated with reduced
travel expenses of $149,000 and reduced office and supplies expenses of
$133,000.

         Research and Development. Our research and development expenses are
comprised primarily of employee headcount and related compensation and benefits,
consulting fees, costs of acquired technology, tooling and supplies and an
allocation of facilities costs. Research and development expenses increased to
$7.0 million in 2003 compared to $6.5 million in 2002. The increase of $549,000
or 8% increase from the prior fiscal year was primarily due to increased salary,
benefit and related overhead costs of $262,000 related to upgrading our
engineering talent and relocation costs related to moving our vice president of
engineering, from Montreal, Quebec to San Jose, California. Other factors
causing this increase in expenses were increased outside professional services
and license fees of $164,000 and increased supplies and materials of $87,000. We
believe that continued investment in research and development is critical to our
future success, and we expect these expenses may increase in absolute dollars in
the future periods but decrease as a percentage of revenue.

         Research and development expenses decreased to $6.5 million in 2002
compared to $7.5 million in 2001. The decrease of $1.0 million or 14% reduction
from the prior fiscal year was primarily due to reduced headcount and related
overhead costs of $693,000 and reduced outside professional services of
$389,000.

         General and Administrative. Our general and administrative expenses are
comprised primarily of employee headcount and related compensation and benefits,
legal and professional fees, office supplies, recruiting, travel and an
allocation of facilities costs. General and administrative expenses increased to
$12.5 million in 2003 compared to $8.1 million in 2002. The increase of $4.4
million or 55% is primarily attributable to increased legal and professional
fees of $4.7 million, mostly related to the litigation against both Sony
Computer Entertainment and Microsoft, offset by decreased personnel and related
overhead costs of $121,000 and public company expenses of $78,000. We expect
that the dollar amount of general and administrative expenses will increase in
the future as we incur additional costs related to these legal matters and
compliance costs associated with Sarbanes-Oxley and new Nasdaq listing
requirements among others.

         General and administrative expenses increased to $8.1 million in 2002
compared to $7.7 million in 2001. The increase of $370,000 or 5% is primarily
attributable to increased legal and professional fees of $1.5 million, mostly
related to the litigation against us and litigation against both Sony Computer
Entertainment and Microsoft, offset by decreased personnel and related overhead
costs of $1.1 million due in part to the elimination of some executive
management positions.

         Amortization of Intangibles and Deferred Stock Compensation.
Amortization of intangibles and deferred stock compensation decreased by
$628,000 or 20% from 2002 to 2003. The decrease is mainly attributable to
intangible amortization that decreased by $211,000 as some intangible assets
reached full amortization and a decrease in deferred stock compensation expense
of $417,000 due to the expiration of certain option vesting periods.

         Amortization of intangibles and deferred stock compensation decreased
by $2.1 million or 41% from 2001 to 2002. The decrease is mainly attributable to
$1.4 million of goodwill amortization incurred during 2001 prior to the adoption
of Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 provides that goodwill and intangible
assets with indefinite lives not be amortized but tested at least annually for
impairment, and therefore no goodwill amortization was recorded during fiscal
2002. Intangible amortization decreased by $516,000 as some intangible assets
reached full amortization and deferred stock compensation expense decreased by
$218,000 due to the expiration of certain option vesting periods.

                                       11
<PAGE>

         Impairment of Goodwill. Impairment of goodwill decreased $3.8 million
or a 100% decrease from 2002 to 2003. During the fourth quarter of 2002, in
accordance with SFAS No. 142, an impairment test was performed on goodwill in
conjunction with the annual forecasting process. Based on that analysis, it was
determined that goodwill was impaired and a $3.8 million impairment loss was
recognized during 2002.

         Other Charges. Other charges decreased $397,000 or a 100% decrease from
2002 to 2003. The costs in 2002 primarily consisted of severance benefits paid
as a result of the reduction in force of twelve employees in 2002. Employees
from manufacturing, sales and marketing, research and development and general
and administrative were included in the reduction in force. We did not incur any
additional charges related to the aforementioned reduction in force. For fiscal
year 2002, other charges increased $173,000 or 77% from 2001 to 2002. The
$224,000 of costs incurred in 2001 mainly consists of $199,000 in severance
benefits paid as part of a reduction in force of eighteen employees in 2001 and
$25,000 of accounting and legal charges, relating to the merger that occurred in
the prior fiscal year. Employees from sales and marketing, research and
development and general and administrative were included in the reduction in
force. We did not incur any additional charges related to the 2001 reduction in
force.

INTEREST AND OTHER

<TABLE>
<CAPTION>
                                  2003     % Change   2002     % Change   2001
                                  ----     --------   ----     --------   ----
<S>                              <C>       <C>       <C>       <C>       <C>
Interest and other income ....   $  126      (59)%   $  306      (72)%   $1,088
Interest expense .............       50      (91)%      582      (32)%      859
Other expense ................    2,046       68%     1,219      (73)%    4,547
</TABLE>

         Interest and Other Income. Interest and other income, consists
primarily of interest income, dividend income and capital gains from cash and
cash equivalents and short-term investments. Interest and other income declined
by $180,000 and $782,000 for the year ended December 31, 2003 and 2002,
respectively. The decline is primarily due to reduced cash, cash equivalents and
short-term investments invested for the period due to cash used in operating and
investing activities as well as reduced yields on investments.

         Interest Expense. Interest expense consists primarily of interest
expense on notes payable and capital leases. The decrease in interest expense
from 2002 to 2003 and from 2001 to 2002 is related to the maturity and
subsequent payment of certain notes payable in 2002 and 2003.

         Other Expense. Other expense consists primarily of impairment losses on
our investments in privately held companies and accretion and dividend expense
on our long-term customer advance from Microsoft. Other expense was $2.0 million
in 2003, $1.2 million in 2002 and $4.5 million in 2001. Other expense in 2003
consisted primarily of a noncash impairment loss due to the write off of our
investment in a technology application developer, There, Inc., in the amount of
$1.0 million. We review our cost-method investments on a quarterly basis to
determine if there has been an other-than-temporary decline in the investment's
value based on our estimate of their net realizable value taking into account
the companies' respective business prospects, financial condition and ability to
raise third party financing. The impairment loss was based on There, Inc.'s
continued decline in financial condition, uncertain future revenue streams and
inability to raise adequate third-party financing. In addition to the impairment
loss, other expense for 2003 included accretion of payments which may be due
Microsoft of $867,000 and dividend expense on our Series A Redeemable
Convertible Preferred Stock ("Series A Preferred Stock") of $183,000 as further
discussed in Note 9 to the consolidated financial statements. Other expense in
2002 consisted primarily of our noncash impairment loss due to the write down of
our investment in an early stage technology company, Geometrix, Inc in the
amount of $1.2 million. The impairment loss was based on Geometrix's continued
decline in financial condition and uncertain future revenue streams, as well as
Geometrix's inability to raise third-party financing. During 2001 other expense
primarily consisted of our noncash impairment loss of $4.3 million due to the
write down of our investment in End Points, Inc. and Geometrix, Inc. and
$239,000 of interest due to us from our investment in Geometrix, Inc.

                                       12
<PAGE>

PROVISION FOR TAXES

<TABLE>
<CAPTION>
                                 2003   % Change   2002      % Change      2001
                                 ----   --------   ----      --------      ----
<S>                              <C>    <C>        <C>       <C>           <C>
Provision for income taxes ...   $154      N/A       -           -%         -
</TABLE>

         Provision for Income taxes. For the year ended 2003, we recorded a
provision for income taxes of $154,000 on a pre-tax loss of $16.8 million,
yielding an effective tax rate of (0.9%). The provision for income tax was based
on federal alternative minimum income tax due on taxable income primarily the
result of the $20 million license fee paid by Microsoft during 2003. This rate
differs from the statutory rate primarily due to the recording of a full
valuation allowance of $31.3 million against deferred tax assets. For the year
ended 2002, we recorded no provision for income taxes on a pre-tax loss of $16.5
million yielding an effective tax rate of 0%. This rate differs from the
statutory rate primarily due to the recording of a full valuation allowance of
$25.2 million against net deferred tax assets.

SEGMENT RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 ARE AS
FOLLOWS:

         The Company has two operating and reportable segments. 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. The second segment, Immersion Medical develops, manufactures, and
markets medical simulators that recreate realistic healthcare environments.

<TABLE>
<CAPTION>
                                                            2003         % CHANGE    2002        % CHANGE     2001
                                                            ----         --------    ----        --------     ----
<S>                                                       <C>            <C>       <C>           <C>        <C>
Revenues:

  Immersion Computing, Entertainment and Industrial ...   $ 11,855          (6)%   $ 12,551        (11)%    $ 14,174
  Immersion Medical ...................................      9,574          19%       8,030         58%        5,090
  Intersegment eliminations ...........................     (1,206)                    (346)                     (32)
                                                          --------                 --------                 --------
Total .................................................   $ 20,223           0%    $ 20,235          5%     $ 19,232
                                                          ========                 ========                 ========

Net Income (loss):
  Immersion Computing, Entertainment and Industrial ...   $(17,100)         16%    $(14,789)        (9)%    $(16,330)
  Immersion Medical ...................................        101        (106)%     (1,619)       (70)%      (5,411)
  Intersegment eliminations ...........................         25                     (122)                      (5)
                                                          --------                 --------                 --------
Total .................................................   $(16,974)          3%    $(16,530)       (24)%    $(21,746)
                                                          ========                 ========                 ========
</TABLE>

FISCAL 2003 COMPARED TO FISCAL 2002

         Immersion Computing, Entertainment and Industrial segment. Revenues
from the Immersion Computing, Entertainment and Industrial segment decreased
$696,000, or 6% for the year ended December 31, 2003 compared to the year ended
December 31, 2002. The decrease is mainly due to decreased royalty and license
revenue from our gaming licensees due to a general weakness in PC gaming market.
Net loss for the year ended December 31, 2003 increased by $2.3 million or 16%
as compared to the year ended December 31, 2002. The increase was primarily
attributable to decreased gross margin of $763,000, increased legal and
professional fees of $4.9 million, increased other expense of $1.1 million
offset by decreased impairment of goodwill of $3.8 million and decreased
amortization of intangibles and deferred stock compensation of $595,000. The
decrease in gross margin is mainly due to the decrease in revenue. Increased
legal and professional fees are primarily related to the litigation against

                                       13
<PAGE>

both Sony Computer Entertainment and Microsoft. Other expense increased due to
the accretion of amounts that may be due to Microsoft of $867,000 and dividend
expense on our Series A Preferred Stock of $183,000. We did not incur an
impairment loss on goodwill during fiscal 2003.

         Immersion Medical segment. Revenues from Immersion Medical increased
$1.5 million or 19% for the year ended December 31, 2003, compared to the year
ended December 31, 2002. The increase is primarily due to a $1.7 million
increase in royalty revenue attributable to $1.9 million of license revenue
recognized on the Medtronic licensing and development agreement and a $444,000
increase in development contract revenue, primarily government related and due
to securing new government contracts, offset by a $560,000 decrease in product
sales. We expect to recognize the remaining license and development revenue of
$4.0 million under the Medtronic agreements in 2004 and 2005. Net income for the
year ended December 31, 2003 increased by $1.7 million compared to the net loss
for the year ended December 31, 2002. Net income for the year ended December
31,2003 increased mainly due to increased gross margin of $1.3 million, a
decrease in general and administrative expenses of $570,000 and a decrease in
interest expense of $529,000, offset by an increase in research and development
costs of $604,000. The increase in gross margin is mainly due to the increase in
royalty and license revenue offset by lower product sales and the resulting
product margin. General and administrative expenses decreased due to decreased
compensation and benefits. Interest expense decreased due to the repayment of
notes payable in 2002 and 2003. Research and development costs increased to
further our technology development and in support of our development contracts.
We expect sales and marketing expense will increase in 2004 as we continue to
develop and fund industry collaboration programs to advance the use of medical
simulation as an important training tool. These programs include our continued
efforts to work with medical professional associations on re-certification
processes and with healthcare institutions on accreditation programs.

FISCAL 2002 COMPARED TO FISCAL 2001

         Immersion Computing, Entertainment and Industrial segment. Revenues
from the Immersion Computing, Entertainment and Industrial segment decreased
$1.6 million, or 11% for the year ended December 31, 2002 compared to the year
ended December 31, 2001. The decrease is mainly due to decreased product sales
namely our microprocessors and decreased royalty revenue related to our gaming
licensees. Net loss for the year ended December 31, 2002 decreased by $1.5
million or 9% as compared to the year ended December 31, 2001. The decrease was
primarily attributable to reduced sales and marketing expenses of $2.0 million,
reduced amortization of intangibles and deferred stock compensation of $2.4
million, and reduced other expense of $3.3 million offset by impairment of
goodwill of $3.8 million, increased general and administrative expenses of $1.2
million and reduced interest and other income of $902,000.

         Immersion Medical segment. Revenues from Immersion Medical increased
$2.9 million or 58% for the year ended December 31, 2002, compared to the year
ended December 31, 2001. The increase is primarily due to a $1.5 million
increase in product sales and $1.2 million in development contract revenue. Net
loss for the year ended December 31, 2002 decreased by $3.8 million or 70%
compared to the year ended December 31, 2001. Net loss for the year ended
December 31, 2002 decreased mainly due to increased gross profit of $2.0 million
due to increased product sales and development contract revenue, a decrease in
research and development of $593,000 and a reduction in general and
administrative expenses of $866,000.

LIQUIDITY AND CAPITAL RESOURCES

         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 No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The securities are stated at market value with
unrealized gains and losses reported as a component of accumulated other
comprehensive income (loss) within stockholders' equity (deficit).

         At December 31, 2003 our cash and cash equivalents totaled $21.7
million, up $13.0 million from $8.7 million at December 31, 2002.

         During the year ended December 31, 2003, we entered into agreements
with Microsoft providing for certain license rights under our patents, the
settling of our lawsuit and providing for an investment in our new

                                       14
<PAGE>

Series A Preferred Stock; as a result, our cash position increased by $26.0
million. Pursuant to the license agreement, we granted Microsoft a worldwide
royalty-free, irrevocable license in exchange for $20.0 million. Under the terms
of the Series A Redeemable Convertible Preferred Stock purchase agreement,
Microsoft purchased 2,185,792 shares of Preferred Stock for $2.745 each, an
aggregate purchase price of $6.0 million. The Preferred Stock accrues cumulative
dividends at a rate of 7% per year, payable in cash or additional shares of
Preferred Stock and can be redeemed at the request of Microsoft for twice the
original purchase price plus any dividends in the form of additional shares that
remain unpaid and any accrued but unpaid cash dividends per share on or after
July 25, 2006. In addition, and at our discretion, we may require Microsoft to
buy up to $9.0 million of our 7% Senior Redeemable Convertible Debentures, $3.0
million in the first year plus $2.0 million per annum for the next three years.
No debentures have been sold to date.

         Net cash used in operating activities during the fiscal year 2003 was
$12.6 million, a change of $14.1 million from the $1.5 million provided during
the comparable period during fiscal year 2002. Cash used in operations during
the year ended December 31, 2003 comprised primarily of a $17.0 million net loss
offset by noncash charges and credits of $5.6 million, including $1.0 million in
depreciation, $2.5 million in amortization of intangibles and deferred stock
compensation, $1.1 million in dividend expense and accretion on our Series A
Preferred Stock and $1.0 million related to the write down of a cost-method
investment in There, Inc. Cash used in operations during fiscal 2003 was also
impacted by a decrease of $1.3 million due to a change in accounts receivable
mainly due to $1.0 million that became due from Medtronic near year end, a
decrease of $722,000 due to a change in deferred revenue and customer advances,
mainly due to amortization of prepaid royalties, a decrease of $207,000 due to a
change in accounts payable offset by an increase of $933,000 due to a change in
accrued compensation and other current liabilities due to the timing of certain
payments and increased litigation expenses related to our litigation against
Sony Computer Entertainment. Net cash provided in operating activities during
the fiscal year 2002 was $1.5 million, a change of $13.9 million from the $12.4
million used during the comparable period during fiscal year 2001. Cash provided
by operations during the year ended December 31, 2002 comprised primarily of a
$16.5 million net loss offset by noncash charges and credits of $9.8 million,
including $3.8 million impairment of goodwill, $3.1 million in amortization of
intangibles and deferred stock compensation, $1.3 million in depreciation and
$1.2 million related to the write down of a cost-method investment in Geometrix,
Inc. Cash provided by operations during fiscal 2002 was also impacted by an
increase of $7.1 million due to a change in deferred revenue and customer
advances, an increase due to a change of $450,000 in prepaid and other current
assets and an increase of $421,000 due to a change in accounts payable and an
increase of $237,000 due to a change in accrued compensation and other current
liabilities. The significant increase in deferred revenue and customer advances
was primarily the result of a $5.0 million upfront payment by one licensee
pursuant to the terms of a royalty and license agreement and a $2.5 million
increase in customer advances due to a prepayment from another licensee.
Subsequent to December 31, 2002, $500,000 of the prepayment was returned to the
licensee upon reaching final terms of the prepayment agreement. Net cash used in
operating activities during 2001 was $12.4 million, primarily attributable to a
net loss of $21.7 million offset by noncash charges and credits of $11.7
million, including amortization of intangibles and deferred stock compensation
of $5.3 million and the write down of our cost-method investments in EndPoints,
Inc. and Geometrix, Inc. of $4.3 million and interest charges on a loan of
$239,000. Cash used in operations during fiscal 2001 was also impacted by a
decrease of $343,000 due to a change in prepaid expenses and other current
assets, a decrease of $344,000 due to a change in accounts receivable, a
decrease of $1.0 million due to a change in accounts payable and a decrease of
$430,000 due to a change in accrued compensation and other current liabilities.
The decrease in accounts payable and other current liabilities is primarily due
to reduced spending during 2001 as a result of cost reduction programs.

         Net cash used in investing activities during the fiscal year 2003 was
$2.0 million, as opposed to the $1.5 million provided by investing activities
during fiscal year 2002, a change of $3.6 million. Net cash used in investing
activities during the period consisted of a $1.6 million increase in other
assets, primarily due to capitalization of external patent filing and
application costs and $441,000 used to purchase capital equipment. Net cash
provided by investing activities during 2002 was $1.5 million, as opposed to the
$1.3 million used by investing activities during fiscal year 2001, a change of
$2.8 million. Net cash provided by investing activities during the period
consisted of $2.6 million sale of short-term investments, offset by $442,000
used to purchase capital equipment and an increase of $566,000 in other assets
for the capitalization of external patent filing and application costs. Net cash
used by investing activities for 2001 was $1.3 million and was made of $3.4
million of sales and maturities of short-term investments, offset by short-term
investment purchases of $3.6 million, $612,000 used to purchase property and

                                       15
<PAGE>

equipment for our corporate facilities and information technology infrastructure
and an increase of $481,000 in other assets for the capitalization of external
patent filing and application costs.

         Net cash provided by financing activities during fiscal year 2003 was
$26.8 million compared to $4.7 million used during fiscal year 2002, or a $31.5
million change from prior year. The increase was primarily due to $26.0 million
received from Microsoft as discussed in Note 9 to the consolidated financial
statements, and issuances of common stock and exercise of stock options in the
amount of $893,000. Net cash used in financing activities during 2002 was $4.7
million compared to $660,000 provided during fiscal year 2001, or a $5.3 million
change from prior year. Net cash used in financing activities included payments
of $5.0 million on notes payable and capital leases including $4.4 million on
our convertible note payable to Medtronic, offset by issuances of common stock
and exercise of stock options and warrants of $369,000. In 2001, net cash
provided by financing activities was $660,000, and was primarily attributable to
the net proceeds from the exercise of stock options and issuance of stock of
$763,000, offset by payment on capital leases of $120,000.

         We believe that our cash and cash equivalents will be sufficient to
meet our working capital needs and our continued litigation costs for the next
twelve months. 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
2004 as a result of our lawsuit against Sony Computer Entertainment. We
anticipate that capital expenditures for the year ended December 31, 2004 will
total approximately $750,000 in connection with anticipated upgrades to
operations and infrastructure. Dividends accrue on our Series A Preferred Stock
at a rate of 7% per annum; we may elect to pay these dividends in cash which
would require a cash payment of $420,000 annually. To the extent we raise
additional capital through debt or equity financing, this could result in
substantial dilution for our stockholders. If we acquire one or more businesses,
patents or products, our cash or 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 be able to raise additional capital, there is no assurance that
such additional capital will be available on terms acceptable to us, if at all.
In addition, pursuant to the Certificate of Designation of the Powers,
Preferences and Rights of Series A Redeemable Convertible Preferred Stock, if
the closing price for our common stock exceeds an amount equal to the sum of
$6.8625 plus any dividends in the form of additional shares of Series A
Preferred Stock that remain unpaid plus any accrued but unpaid cash dividends
per share (the "Accretive Value") for thirty consecutive trading days, at our
election we may redeem all (and not less than all) of the shares of Series A
Preferred Stock (a "Company Redemption"), at a redemption price equal to 125% of
the then Accretive Value (the "Redemption Price"), payable in cash in
immediately available funds to an account designated by the holder of the Series
A Preferred Stock. Our stock traded on the Nasdaq National Market from January
30, 2004 to March 12, 2004 in an amount in excess of two and one half times the
Accretive Value. As a result, we have the option to send notice to the holder of
our Series A Preferred Stock informing it of our intention to enact a Company
Redemption. We calculate a Company Redemption would utilize approximately $7.5
million in cash, if the holder did not convert the Series A Preferred Stock into
common stock prior to the effective date of the Company Redemption. We have not
yet made a decision whether to exercise redemption rights.

         In addition, events may occur during the next year that may require us
to redeem our outstanding Series A Preferred Stock. The holder of our Series A
Preferred Stock will be entitled to receive a multiple of the original purchase
price upon the occurrence of the following events: (i) a sale of all or
substantially all of our assets or intellectual property, (ii) a merger or
acquisition where our stockholders hold less than fifty percent of the voting
power of the combined company, (iii) with certain exceptions, the withdrawal
from or dismissal of our lawsuit against Sony Computer Entertainment with or
without prejudice before a settlement or judicial resolution of the lawsuit by
us, (iv) the sale of the lawsuit to Sony Computer Entertainment or its
affiliates, (v) the sale or transfer of the patents which are the subject of the
lawsuit to Sony Computer Entertainment or its affiliates before the settlement
or judicial resolution of the lawsuit, (vi) Microsoft negotiates a settlement
with Sony Computer Entertainment on terms that are within previously agreed upon
parameters, and requests that we settle the lawsuit based upon those terms, but
we decline to do so, or (vii) we settle the lawsuit for proceeds within certain
parameters. The holder of our Series A Preferred Stock may also elect to trigger
a redemption and receive a multiple of the original purchase price should there
be a change in any twelve month period of two or more of our incumbent directors
that are not eligible for reelection in that year or any expansion in the number
of the incumbent directors of our Board above nine. A settlement with Sony
Computer Entertainment in an amount less than $30.0 million would

                                       16
<PAGE>

result in a reduction of our cash and cash equivalents as more fully discussed
in Note 9 to the consolidated financial statements.

         Under our agreements with the holder of our Series A Preferred Stock,
we agreed to file, at our expense, with the Securities and Exchange Commission
(the "Commission"), a shelf registration statement on Form S-3 covering the
resale of shares of our common stock issued to the holder of the Series A
Preferred Stock upon conversion of such Series A Preferred Stock and the Common
Stock issuable upon the conversion of any debentures issued to the holder. There
is a monthly penalty (equal to $45,000) for the failure to file or update this
registration statement on Form S-3, failure to deliver our response letter to
the Commission within 15 days of receipt, obtain the effectiveness of the
registration statement within 180 days after filing, to fail to maintain the
effectiveness of the registration statement, or for the suspension of trading
under the registration statement on Form S-3 for more than 90 days in any
six-month period. As we did not obtain the effectiveness of the registration
statement by March 6, 2004, we have not satisfied our obligation to do so within
180 days after filing. On March 18, 2004, Microsoft waived its right to receive
penalties for this failure to timely register their shares, as well as its right
to receive dividends that would otherwise accrue after the registration
statement becomes effective.  In exchange, we agreed that Microsoft shall have
the right to convert its shares of Series A Preferred Stock into common stock in
advance of any decision by us to redeem such shares of Series A Preferred Stock.
We also agreed to continue to work diligently towards obtaining the
effectiveness of the registration statement.

SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

         The following table reflects a summary of our contractual cash
obligations and other commercial commitments as of December 31, 2003 (in
thousands):

<TABLE>
<CAPTION>
                                                    LESS THAN  1 - 3     4 - 5   AFTER 5
CONTRACTUAL OBLIGATIONS                    TOTAL      1 YEAR   YEARS     YEARS    YEARS
-----------------------                    -----    ---------  -----     -----   ------
<S>                                        <C>      <C>        <C>      <C>      <C>
Long-Term Debt .........................   $   26     $   10   $   16   $    -   $    -
Capital Lease Obligations ..............       24         24        -        -        -
Operating Leases .......................    3,208      1,255    1,137      672      144
                                           --------------------------------------------
Total Contractual Cash Obligations .....   $3,258     $1,289   $1,153   $  672   $  144
                                           ============================================
</TABLE>

         On July 28, 2003 Microsoft purchased 2,185,792 shares of our Series A
Preferred Stock for $2.745 each, an aggregate purchase price of $6.0 million.
Series A Preferred Stock accrues cumulative dividends at a rate of 7% per year,
payable in cash or additional shares of Series A Preferred Stock semi-annually
in arrears on July 25 and January 25 of each year commencing on January 25, 2004
and ending on July 25, 2008. The Series A Preferred Stock can be redeemed at the
request of the holder for twice the original purchase price plus any dividends
in the form of additional shares that remain unpaid and any accrued but unpaid
cash dividends per share on or after July 25, 2006. In addition as discussed
above, certain other events, including a settlement of the lawsuit with Sony
Computer Entertainment, could result in redemption of the Series A Preferred
Stock prior to July 25, 2006 for an amount up to $15.0 million as adjusted for
cumulative dividends. In connection with our series of agreements with Microsoft
executed in July 2003, we are also obligated to pay Microsoft certain amounts
based on a settlement of the Sony Computer Entertainment litigation (see Note 9
to the consolidated financial statements.)

RECENT ACCOUNTING PRONOUNCEMENTS

         In November 2002, the EITF reached a consensus on Issue No. 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables." The EITF
concluded that revenue arrangements with multiple elements should be divided
into separate units of accounting if the deliverables in the arrangement have
value to the customer on a standalone basis, if there is objective and reliable
evidence of fair value of the undelivered elements, and as long as there are no
rights of return or additional performance guarantees by the Company. The
provisions of EITF Issue No. 00-21 are applicable to agreements entered into in
fiscal periods beginning after June 15, 2003. The adoption of EITF No. 00-21 did
not have a material impact on our financial position, results of operations or
cash flows.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." The statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosures in both annual and interim

                                       17
<PAGE>

financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We adopted
the disclosure provisions of SFAS No. 148 at December 31, 2002.

         The Financial Accounting Standards Board ("FASB") issued Interpretation
No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," in January
2003, and a revised interpretation of FIN 46 ("FIN 46-R") in December 2003. FIN
46 requires certain variable interest entities ("VIEs") to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
FIN 46 are effective immediately for all arrangements entered into after January
31, 2003. Since January 31, 2003, we have not invested in any entities we
believe are variable interest entities for which we are the primary beneficiary.
For all arrangements entered into after January 31, 2003, we are required to
continue to apply FIN 46 through the end of the first quarter of fiscal 2004. We
are required to adopt the provisions of FIN 46-R for those arrangements in the
second quarter of fiscal 2004. For arrangements entered into prior to February
1, 2003, we are required to adopt the provisions of FIN 46-R in the second
quarter of fiscal 2004. We do not expect the adoption of FIN 46-R to have an
impact on our financial position, results of operations or cash flows.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which requires that certain financial instruments be presented as liabilities
that were previously presented as equity or as temporary equity. Such
instruments include mandatory redeemable preferred and common stock, and certain
options and warrants. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and was effective at the beginning
of the first interim period beginning after June 15, 2003. In November 2003, the
FASB issued FASB Staff Position ("FSP") No. 150-3, "Effective Date, Disclosures,
and Transition for Mandatorily Redeemable Financial Instruments of Certain
Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests
under SFAS No. 150," which defers the effective date for various provisions of
SFAS No. 150. We believe that we have properly classified and measured in our
balance sheets and disclosed in our interim consolidated financial statements
both characteristics of both liabilities and equity appropriately. While not
required by SFAS No. 150, we have classified the Series A Preferred Stock as a
liability rather than between total liabilities and stockholders' equity
(deficit).

         In December 2003 the SEC issued SAB 104, "Revenue Recognition." SAB 104
updates portions of existing interpretative guidance in order to make this
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104 did not have a material
effect on our consolidated financial statements.

                                       18

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>5
<FILENAME>f97550exv99w2.txt
<DESCRIPTION>EXHIBIT 99.2
<TEXT>
<PAGE>

                                                                    EXHIBIT 99.2

                          INDEPENDENT AUDITORS' REPORT

         To the Board of Directors and Stockholders of Immersion Corporation:

         We have audited the accompanying consolidated balance sheets of
Immersion Corporation (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the three years in the period ended December 31,
2003. Our audits also included the consolidated financial statement schedule
listed in Exhibit 99.3. These consolidated financial statements and the
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and the consolidated financial statement
schedule based on our audits.

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

         In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Immersion Corporation at
December 31, 2003 and 2002, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2003 in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set therein.

         As discussed in Note 5 to the consolidated financial statements, in
2002 the Company changed its method of accounting for goodwill and other
intangible assets to conform to Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets."

Deloitte & Touche LLP
San Jose, California
March 23, 2004

                                       19
<PAGE>

                              IMMERSION CORPORATION

                           CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                                  --------------------
                                                                                    2003        2002
                                                                                  --------    --------
<S>                                                                               <C>         <C>
                                     ASSETS

Current assets:
  Cash and cash equivalents ............................................          $ 21,738    $  8,717
  Accounts receivable (net of allowances for doubtful accounts of:
    2003, $147; and 2002, $334) ........................................             4,927       3,645
  Inventories ..........................................................             2,099       2,128
  Prepaid expenses and other current assets ............................             1,099       1,151
                                                                                  --------    --------
    Total current assets ...............................................            29,863      15,641
Property and equipment, net ............................................             1,454       2,044
Intangibles and other assets, net ......................................             6,596       6,616
Other investments ......................................................                 -       1,000
                                                                                  --------    --------
Total assets ...........................................................          $ 37,913    $ 25,301
                                                                                  ========    ========
                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
  Accounts payable .....................................................          $  1,752    $  1,160
  Accrued compensation .................................................               864         671
  Other current liabilities ............................................             2,066       1,311
  Deferred revenue and customer advances ...............................             3,116       3,515
  Current portion of long-term debt ....................................                10          64
  Current portion of capital lease obligation ..........................                23          22
                                                                                  --------    --------
    Total current liabilities ..........................................             7,831       6,743
Long-term debt, less current portion ...................................                16          26
Capital lease obligation, less current portion .........................                 -          25
Long-term deferred revenue, less current portion .......................             4,235       4,559
Long-term customer advance from Microsoft (Note 9) .....................            27,050           -
                                                                                  --------    --------
    Total liabilities ..................................................            39,132      11,353
                                                                                  --------    --------
Commitments and contingencies (Notes 9, 10 and 17)

Stockholders' equity (deficit):
  Common stock - $0.001 par value; 100,000,000 shares authorized; shares
    issued and outstanding: 2003, 20,670,541; 2002, 20,137,040 .........            89,903      89,061
  Warrants .............................................................             1,974       1,974
  Deferred stock compensation ..........................................              (130)     (1,046)
  Accumulated other comprehensive income (loss) ........................                33         (16)
  Accumulated deficit ..................................................           (92,999)    (76,025)
                                                                                  --------    --------
    Total stockholders' equity (deficit) ...............................            (1,219)     13,948
                                                                                  --------    --------
Total liabilities and stockholders' equity (deficit) ...................          $ 37,913    $ 25,301
                                                                                  ========    ========
</TABLE>

                 See notes to consolidated financial statements.

                                       20
<PAGE>

                              IMMERSION CORPORATION

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                              YEARS ENDED
                                                                                              DECEMBER 31,
                                                                                   --------------------------------
                                                                                     2003        2002        2001
                                                                                   --------    --------    --------
<S>                                                                                <C>         <C>         <C>
Revenues:
  Royalty and license ..........................................................   $  6,088    $  5,231    $  5,362
  Product sales ................................................................      9,455      10,723      10,360
  Development contracts and other ..............................................      4,680       4,281       3,510
                                                                                   --------    --------    --------
    Total revenues .............................................................     20,223      20,235      19,232

Costs and expenses:
  Cost of product sales (exclusive of amortization of intangibles shown
    separately below) ..........................................................      5,276       5,881       6,074
  Sales and marketing (exclusive of amortization of deferred stock compensation)      7,764       7,566       9,868
  Research and development (exclusive of amortization of deferred stock
    compensation) ..............................................................      7,045       6,496       7,548
  General and administrative (exclusive of amortization of deferred stock
    compensation) ..............................................................     12,508       8,064       7,694
  Amortization of intangibles and deferred stock compensation (*) ..............      2,480       3,108       5,252
  Impairment of goodwill .......................................................          -       3,758           -
  Other charges ................................................................          -         397         224
                                                                                   --------    --------    --------
    Total costs and expenses ...................................................     35,073      35,270      36,660
                                                                                   --------    --------    --------
Operating loss .................................................................    (14,850)    (15,035)    (17,428)

Interest and other income ......................................................        126         306       1,088
Interest expense ...............................................................        (50)       (582)       (859)
Other expense ..................................................................     (2,046)     (1,219)     (4,547)
                                                                                   --------    --------    --------

Loss before provision for income taxes .........................................    (16,820)    (16,530)    (21,746)
Provision for income taxes .....................................................       (154)          -           -
                                                                                   --------    --------    --------
Net loss .......................................................................   $(16,974)   $(16,530)   $(21,746)
                                                                                   ========    ========    ========

Basic and diluted net loss per share ...........................................   $  (0.83)   $  (0.83)   $  (1.16)
                                                                                   ========    ========    ========

Shares used in calculating basic and diluted net loss per share ................     20,334      19,906      18,702
                                                                                   ========    ========    ========
</TABLE>

<TABLE>
<S>                                                                                <C>         <C>         <C>
(*) Amortization of intangibles and deferred stock compensation
     Amortization of intangibles ...............................................   $  1,619    $  1,830    $  3,756
     Deferred stock compensation - sales and marketing .........................          4          12          10
     Deferred stock compensation - research and development ....................        854       1,248       1,231
     Deferred stock compensation - general and administrative ..................          3          18         255
                                                                                   --------    --------    --------
     Total .....................................................................   $  2,480    $  3,108    $  5,252
                                                                                   ========    ========    ========
</TABLE>

                 See notes to consolidated financial statements.

                                       21
<PAGE>

                              IMMERSION CORPORATION

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                           ACCUMULATED
                                         COMMON STOCK                       DEFERRED          OTHER
                                    ---------------------                     STOCK       COMPREHENSIVE
                                      SHARES      AMOUNT      WARRANTS    COMPENSATION    INCOME (LOSS)
                                    ----------   --------     --------    ------------    -------------
<S>                                 <C>          <C>          <C>         <C>             <C>
Balances at January 1, 2001 .....   18,476,061   $ 89,334     $  1,990      $ (5,255)          $  40

Net loss ........................
Change in net unrealized gains
  from short-term investments ...                                                                  2
Foreign currency translation
  adjustment. ...................                                                                (61)

Comprehensive loss ..............

Repayment of note receivable ....
Issuance of stock for ESPP
  purchase ......................       41,824        297
Exercise of stock options .......      455,223        466
Reversal of deferred stock
  compensation due to
  cancellation of stock options..                    (803)                       803
Amortization of deferred stock
  compensation ..................                                              1,496
                                    ----------   --------     --------      --------           -----

Balances at December 31, 2001 ...   18,973,108   $ 89,294     $  1,990      $ (2,956)          $ (19)
</TABLE>

<TABLE>
<CAPTION>
                                       NOTE
                                    RECEIVABLE                                    TOTAL
                                       FROM        ACCUMULATED                 COMPREHENSIVE
                                    STOCKHOLDER      DEFICIT        TOTAL          LOSS
                                    -----------    -----------    ---------    -------------
<S>                                 <C>            <C>            <C>          <C>
Balances at January 1, 2001 ......    $   (17)     $  (37,749)    $  48,343

Net loss .........................                    (21,746)      (21,746)      $ (21,746)
Change in net unrealized gains
  from short-term investments ....                                        2               2
Foreign currency translation
  adjustment. ....................                                      (61)            (61)
                                                                                  ---------
Comprehensive loss ...............                                                $ (21,805)
                                                                                  =========
Repayment of note receivable .....         17                            17
Issuance of stock for ESPP
  purchase .......................                                      297
Exercise of stock options ........                                      466
Reversal of deferred stock
  compensation due to
  cancellation of stock options...                                        -
Amortization of deferred stock
  compensation ...................                                    1,496
                                      -------      ----------     ---------

Balances at December 31, 2001.....    $     -      $  (59,495)    $  28,814
</TABLE>

                                                                     (CONTINUED)

                                       22
<PAGE>

                              IMMERSION CORPORATION

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                           ACCUMULATED
                                         COMMON STOCK                       DEFERRED          OTHER
                                    ---------------------                     STOCK       COMPREHENSIVE
                                      SHARES      AMOUNT      WARRANTS    COMPENSATION    INCOME (LOSS)
                                    ----------   --------     --------    ------------    -------------
<S>                                 <C>          <C>          <C>         <C>             <C>
Net loss .........................
Foreign currency translation
  adjustment .....................                                                                 3

Comprehensive loss ...............

Exercise of common stock warrants       11,972         66          (16)
Issuance of stock for ESPP
  purchase .......................      41,957         95
Exercise of stock options ........   1,110,003        224
Stock based compensation .........                     14
Reversal of deferred stock
  compensation due to cancellation
  of stock options ...............                   (632)                         632
Amortization of deferred stock
  compensation ...................                                               1,278
                                    ----------   --------     --------       ---------         -----
Balances at December 31, 2002       20,137,040   $ 89,061     $  1,974       $  (1,046)        $ (16)
</TABLE>

<TABLE>
<CAPTION>
                                         NOTE
                                      RECEIVABLE                                     TOTAL
                                         FROM        ACCUMULATED                 COMPREHENSIVE
                                      STOCKHOLDER      DEFICIT        TOTAL          LOSS
                                      -----------    -----------    ---------    -------------
<S>                                   <C>          <C>            <C>          <C>
Net loss .........................                       (16,530)     (16,530)     $   (16,530)
Foreign currency translation
  adjustment .....................                                          3                3
                                                                                   -----------
Comprehensive loss ...............                                                 $   (16,527)
                                                                                   ===========
Exercise of common stock warrants.                                         50
Issuance of stock for ESPP
  purchase .......................                                         95
Exercise of stock options .........                                       224
Stock based compensation ..........                                        14
Reversal of deferred stock
  compensation due to cancellation
  of stock options ................                                         -
Amortization of deferred stock
  compensation ....................                                     1,278
                                        -------      -----------    ---------
Balances at December 31, 2002 .....     $     -      $   (76,025)   $  13,948
</TABLE>

                                                                     (CONTINUED)


                                       23
<PAGE>

                              IMMERSION CORPORATION

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                             ACCUMULATED
                                           COMMON STOCK                       DEFERRED          OTHER
                                      ---------------------                     STOCK       COMPREHENSIVE
                                        SHARES      AMOUNT      WARRANTS    COMPENSATION    INCOME (LOSS)
                                      ----------   --------     --------    ------------    -------------
<S>                                   <C>          <C>          <C>         <C>             <C>
Net loss ..........................
Foreign currency translation
  adjustment ......................                                                                  49

Comprehensive loss ................

Exercise of common stock warrants .
Issuance of stock for ESPP purchase       31,367         35
Exercise of stock options .........      502,134        858
Stock based compensation ..........                       4
Reversal of deferred stock
  compensation due to cancellation
  of stock options ................                     (55)                        55
Amortization of deferred stock
  compensation ....................                                                861
                                      ----------   --------     --------    ----------      ----------
Balances at December 31, 2003 .....   20,670,541   $ 89,903     $  1,974    $     (130)     $       33
                                      ==========   ========     ========    ==========      ==========
</TABLE>

<TABLE>
<CAPTION>

                                                                                  TOTAL
                                                   ACCUMULATED                 COMPREHENSIVE
                                                     DEFICIT        TOTAL          LOSS
                                                   -----------    ---------    -------------
<S>                                                <C>            <C>          <C>
Net loss ..........................                    (16,974)     (16,974)      $  (16,974)
Foreign currency translation
  adjustment ......................                                      49               49
                                                                                  ----------
Comprehensive loss ................                                               $  (16,925)
                                                                                  ==========
Exercise of common stock warrants .                                       -
Issuance of stock for ESPP purchase                                      35
Exercise of stock options .........                                     858
Stock based compensation ..........                                       4
Reversal of deferred stock
  compensation due to cancellation
  of stock options ................                                       -
Amortization of deferred stock
  compensation ....................                                     861
                                                   -----------    ---------
Balances at December 31, 2003 .....                $   (92,999)   $  (1,219)
                                                   ===========    =========
</TABLE>

                                                                     (CONCLUDED)


                 See notes to consolidated financial statements.

                                       24
<PAGE>

                             IMMERSION CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                         YEARS ENDED
                                                                                                         DECEMBER 31,
                                                                                              ---------------------------------
                                                                                                2003        2002        2001
                                                                                              --------    --------    ---------
<S>                                                                                           <C>         <C>         <C>
Cash flows from operating activities:
  Net loss ................................................................................   ($16,974)   ($16,530)   ($21,746)
  Adjustments to reconcile net loss to net cash provided by (used in) operating
    activities:
    Depreciation and amortization .........................................................      1,040       1,294       1,263
    Amortization of intangibles ...........................................................      1,619       1,830       3,756
    Amortization of deferred stock compensation ...........................................        861       1,278       1,496
    Interest and other expense - Microsoft (Note 9) .......................................      1,050           -           -
    Amortization of discount on notes payable .............................................          1         293         451
    Fair value adjustment for warrant liability ...........................................         (2)       (118)       (169)
    Noncash interest expense ..............................................................         16         212         316
    Noncash compensation expense ..........................................................          4          14           -
    Impairment of goodwill ................................................................          -       3,758           -
    Loss on disposal of equipment .........................................................          3          22          34
    Loss on writedown of investments ......................................................      1,000       1,200       4,300
    Loss on writedown of interest receivable ..............................................          -           -         239
    Changes in operating assets and liabilities:
      Accounts receivable .................................................................     (1,257)        135        (344)
      Inventories .........................................................................         29        (163)       (256)
      Prepaid expenses and other current assets ...........................................         26         450        (343)
      Accounts payable ....................................................................       (207)        421      (1,034)
      Accrued compensation and other current liabilities ..................................        933         237        (430)
      Deferred revenue and customer advances ..............................................       (722)      7,121          21
                                                                                              --------    --------    --------
        Net cash provided by (used in) operating activities ...............................    (12,580)      1,454     (12,446)
                                                                                              --------    --------    --------
Cash flows from investing activities:
  Purchases of short-term investments .....................................................          -          (5)     (3,564)
  Sales and maturities of short-term investments ..........................................          -       2,550       3,381
  Purchase of property and equipment ......................................................       (441)       (442)       (612)
  Other assets ............................................................................     (1,573)       (566)       (481)
                                                                                              --------    --------    --------
        Net cash provided by (used in) investing activities ...............................     (2,014)      1,537      (1,276)
                                                                                              --------    --------    --------
Cash flows from financing activities:
  Issuance of common stock ................................................................         35          95         297
  Exercise of stock options ...............................................................        858         224         466
  Exercise of warrants ....................................................................          -          50           -
  Long-term customer advance from Microsoft (Note 9) ......................................     26,000           -           -
  Payment on notes payable and capital leases .............................................       (102)     (5,042)       (120)
  Proceeds from shareholder note ..........................................................          -           -          17
                                                                                              --------    --------    --------
        Net cash provided by (used in) financing activities ...............................     26,791      (4,673)        660
                                                                                              --------    --------    --------
</TABLE>

                                                                     (Continued)

                                       25
<PAGE>

<TABLE>
<S>                                                                                           <C>         <C>         <C>
Effect of exchange rates on cash and cash equivalents .....................................        824          18         (31)
                                                                                              --------    --------    --------
Net increase (decrease) in cash and cash equivalents ......................................     13,021      (1,664)    (13,093)
Cash and cash equivalents:
  Beginning of year .......................................................................      8,717      10,381      23,474
                                                                                              --------    --------    --------
  End of year .............................................................................   $ 21,738    $  8,717    $ 10,381
                                                                                              ========    ========    ========
Supplemental disclosure of cash flow information:

  Cash paid for interest ..................................................................   $     32    $  1,003    $     92
                                                                                              ========    ========    ========
Supplemental disclosure of noncash investing and financing activities:
  Change in net unrealized gains from short-term investments ..............................   $      -    $      -    $      2
                                                                                              ========    ========    ========
</TABLE>

          See notes to consolidated financial statements.            (Concluded)

                                       26
<PAGE>

                              IMMERSION CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

1.       SIGNIFICANT ACCOUNTING POLICIES

         Description of Business - Immersion Corporation (the "Company") was
incorporated in May 1993 in California and reincorporated in Delaware in 1999
and provides technologies that let users interact with digital devices using
their sense of touch.

         Principles of Consolidation and Basis of Presentation - The
consolidated financial statements include the accounts of Immersion Corporation
and its majority-owned subsidiaries. All intercompany accounts, transactions and
balances have been eliminated in consolidation.

         Reclassifications - Certain reclassifications have been made to prior
year balances in order to conform to the current year presentation. These
reclassifications had no material effect on net loss or stockholders' equity
(deficit).

         Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with an original or remaining maturity of less than three
months at the date of purchase to be cash equivalents.

         Short-Term Investments - Short-term investments consist primarily of
highly liquid debt instruments purchased with an original or remaining maturity
at the date of purchase of greater than 90 days and investments in mutual funds.
Short-term investments are classified as available-for-sale securities and are
stated at market value with unrealized gains and losses reported as a component
of accumulated other comprehensive income (loss) within stockholders' equity
(deficit).

         Inventories - Inventories are stated at the lower of cost (principally
on a standard cost basis which approximates FIFO) or market.

         Property and Equipment - Property is stated at cost and is generally
depreciated using the straight-line method over the estimated useful life of the
related asset. The estimated useful lives are as follows:

<TABLE>
<S>                                                      <C>
Computer equipment and purchased software.............     3 years
Machinery and equipment...............................   3-5 years
Furniture and fixtures................................   5-7 years
</TABLE>

         Leasehold improvements are amortized over the shorter of the lease term
or their useful life.

         Intangible Assets - In June 2001, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 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. 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. 142 effective January 1, 2002 and discontinued the amortization of goodwill
(see Note 5).

         In addition to purchased intangible assets the Company capitalizes the
external legal and filing fees associated with its patents and trademarks. These
costs are amortized once the patent or trademark is issued.

         For intangibles with definite useful lives amortization is recorded
utilizing the straight-line method, which approximates the pattern of
consumption, over the estimated useful lives of the respective assets, generally
two to ten years.

                                       27
<PAGE>

         Long-Lived Assets - The Company evaluates its long-lived assets for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," whenever events or changes in circumstances
indicate that the carrying amount of that asset may not be recoverable. An
impairment loss would be recognized when the sum of the undiscounted future net
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. Measurement of an impairment loss
for long-lived assets and certain identifiable intangible assets that management
expects to hold and use are based on the fair value of the asset. As of December
31, 2003, management believes that no impairment losses are required.

         Product Warranty - The Company sells the majority of its products with
warranties ranging from three to twenty-four months. Historically,
warranty-related costs have not been significant.

         Revenue Recognition - The Company recognizes revenues in accordance
with applicable accounting standards including Staff Accounting Bulletin ("SAB")
No. 104, "Revenue Recognition," EITF 00-21 "Accounting for Revenue Arrangements
with Multiple Deliverables" and the American Institute of Certified Public
Accountants' (the "AICPA") Statement of Position ("SOP") 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. The Company derives
its revenues from three principal sources: royalty and license fees, product
sales, and development contracts. The Company recognizes royalty and license
revenue based on royalty reports or related information received from the
licensee as well as time-based licenses of its intellectual property portfolio.
Up-front payments under license agreements are deferred and recognized as
revenue based on either the royalty reports received or amortized over the
license period depending on the nature of the agreement. Advance payments under
license agreements that also require the Company to provide future services to
the licensee are deferred and recognized over the service period when vendor
specific objective evidence related to the value of the services does not exist.
Examples of the Company's typical license models are as follows:

<TABLE>
<CAPTION>
        LICENSE REVENUE MODEL                             REVENUE RECOGNITION
        ---------------------                             -------------------
<S>                                               <C>
Perpetual license of intellectual property        Based on royalty reports received from
portfolio based on per unit royalties, no         licensees. No further obligations to
services contracted                               licensee exist.

Time-based license of intellectual                Based on straight-line amortization of an
property portfolio with up-front                  annual minimum/up-front payments
payments and/or annual minimum                    recognized over contract period or
royalty requirements, no services                 annual minimum period. No further
contracted                                        obligations to licensee exist.

Perpetual license of intellectual property        Based on cost-to-cost percentage-of-
portfolio or technology license along             completion accounting method over the
with contract for development work                service period. Obligation to licensee
                                                  exists until development work is
                                                  complete.

License of software or technology, no             Up-front revenue recognition based
modification necessary                            on SOP 97-2 criteria or EITF 00-21, as
                                                  applicable.
</TABLE>

         The Company generally licenses and recognizes revenue from its
licensees under the above license models or a combination thereof. Individual
contracts may have characteristics that do not fall within a specific license
model or may have characteristics of a combination of license models. Under
those circumstances, the Company recognizes revenue in accordance with SAB No.
104, EITF 00-21 and SOP 97-2, as amended, to guide the accounting treatment for
each individual contract. If the information received from the Company's
licensees regarding royalties is

                                       28
<PAGE>

incorrect or inaccurate, it could adversely affect revenue in future periods. To
date all information received from the Company's licensees has caused no
material adjustment to period revenues. The Company recognizes revenues from
product sales when the product is shipped provided collection is determined to
be probable and no significant obligation remains. The Company sells the
majority of its products with warranties ranging from three to twenty-four
months. The Company records the estimated warranty costs during the quarter the
revenue is recognized. Historically, warranty-related costs and related accruals
have not been significant. The Company offers a general right of return on the
MicroScribe G2 product line for 14 days after purchase. The Company recognizes
revenue at the time of shipment of a MicroScribe digitizer and provides an
accrual for potential returns based on historical experience. No other general
right of return is offered on its products. 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. Losses on contracts
are recognized when determined. Revisions in estimates are reflected in the
period in which the conditions become known. The Company's revenue recognition
policies are significant because its revenue is a key component of its results
of operations. In addition, the Company's revenue recognition determines the
timing of certain expenses, such as commissions and royalties.

         At December 31, 2003, the Company has no obligation to repay amounts
received under development contracts with the U.S. government or other
commercial customers.

         Advertising - Advertising costs (including obligations under
cooperative marketing programs) are expensed as incurred and included in sales
and marketing expense. Advertising expense was $166,000, $388,000 and $817,000
in 2003, 2002 and 2001 respectively.

         Research and Development - Research and development costs are expensed
as incurred. The Company has generated revenues from development contracts with
the U.S. government and other commercial customers that have enabled it to
accelerate its own product development efforts. Such development revenues have
only partially funded the Company's product development activities, and the
Company generally retains ownership of the products developed under these
arrangements. As a result, the Company classifies all development costs related
to these contracts as research and development expenses.

         Income Taxes - The Company provides for income taxes using the asset
and liability approach defined by SFAS No. 109, "Accounting for Income Taxes."
Deferred tax assets and liabilities are recognized for the expected tax
consequences between the tax bases of assets and liabilities and their reported
amounts. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized and are reversed at such time
that realization is believed to be more likely than not.

         Software Development Costs - Certain of the Company's products include
software. Costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized in accordance with SFAS No. 86, "Computer Software to
be Sold, Leased or Otherwise Marketed." The Company considers technological
feasibility to be established upon completion of a working model of the software
and the related hardware. Because the Company believes its current process for
developing software is essentially completed concurrently with the establishment
of technological feasibility, no costs have been capitalized to date.

         Stock-Based Compensation - The Company accounts for its stock-based
awards to employees using the intrinsic value method in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and its related interpretations. The Company accounts for
stock-based awards to non-employees in accordance with EITF 96-18. Pro forma
disclosures required under SFAS No. 123, "Accounting for Stock-Based
Compensation," as if the Company had adopted the fair value based method of
accounting for stock options are as follows (in thousands, except per share
amounts):

                                       29
<PAGE>

<TABLE>
<CAPTION>
                                                                 2003        2002        2001
                                                                 ----        ----        ----
<S>                                                            <C>         <C>         <C>
Net loss - as reported ...............................         $(16,974)   $(16,530)   $(21,746)
  Add: Stock-based employee compensation included in
  reported net loss, net of related tax effects ......              861       1,278       1,496
  Less: Stock-based compensation expense determined
  using fair value method, net of tax ................           (4,134)     (6,792)    (15,125)
                                                               --------    --------    --------
Net loss - pro forma .................................         $(20,247)   $(22,044)   $(35,375)
                                                               ========    ========    ========

Basic and diluted loss per common share - as reported.         $  (0.83)   $  (0.83)   $  (1.16)
Basic and diluted loss per common share - pro forma ..         $  (1.00)   $  (1.11)   $  (1.89)
</TABLE>

         Comprehensive Income (Loss) - Comprehensive income (loss) includes net
loss as well as other items of comprehensive income (loss). The Company's other
comprehensive loss consists of unrealized gains and losses on available-for-sale
securities and foreign currency translation adjustments. Total comprehensive
loss and the components of accumulated other comprehensive income (loss) are
presented in the accompanying Consolidated Statement of Stockholders' Equity
(Deficit).

         Net Loss per Share - Basic net loss per share excludes dilution and is
computed by dividing net loss by the weighted average number of common shares
outstanding for the period (excluding shares subject to repurchase). Diluted net
loss per common share was the same as basic net loss per common share for all
periods presented since the effect of any potentially dilutive securities is
excluded, as they are anti-dilutive because of the Company's net losses.

         Use of Estimates - The preparation of consolidated financial statements
and related disclosures in accordance with accounting principles generally
accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

         Concentration of Credit Risks - Financial instruments that potentially
subject the Company to a concentration of credit risk principally consist of
cash and cash equivalents, short-term investments and accounts receivable. The
Company invests primarily in money market accounts, commercial paper, and debt
securities of U.S. government agencies. Deposits held with banks may exceed the
amount of insurance provided on such deposits. Generally, these deposits may be
redeemed upon demand. The Company sells products primarily to companies in North
America, Europe and the Far East. To reduce credit risk, management performs
periodic credit evaluations of its customers' financial condition. The Company
maintains reserves for potential credit losses, but historically has not
experienced any significant losses related to individual customers or groups of
customers in any particular industry or geographic area.

         Certain Significant Risks and Uncertainties - The Company operates in a
dynamic industry and, accordingly, can be affected by a variety of factors. For
example, management of the Company believes that changes in any of the following
areas could have a negative effect on the Company in terms of its future
financial position and results of operations: its ability to obtain additional
financing; the mix of revenues; the loss of significant customers; fundamental
changes in the technology underlying the Company's products; market acceptance
of the Company's and its licensees' products under development; the availability
of contract manufacturing capacity; development of sales channels; litigation or
other claims against the Company; the ability to successfully assert its patent
rights against others; the hiring, training and retention of key employees;
successful and timely completion of product and technology development efforts;
and new product or technology introductions by competitors.

                                       30
<PAGE>

         The Company has incurred net losses each year since 1997 including
losses of $17.0 million in 2003, $16.5 million in 2002, and $21.7 million in
2001. As of December 31, 2003, the Company had an accumulated deficit of $93.0
million. The Company believes its cash and cash equivalents of $21.7 million are
sufficient to meet its anticipated cash needs for working capital and capital
expenditures through at least December 31, 2004. If cash generated from
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may seek to raise additional financing or reduce the scope of its
planned product development and marketing efforts.

         Supplier Concentrations - The Company depends on a single supplier to
produce some of its medical simulators. While the Company seeks to maintain a
sufficient level of supply and endeavors to maintain ongoing communications with
this supplier to guard against interruptions or cessation of supply, any
disruption in the manufacturing process from its sole supplier could adversely
affect the Company's ability to deliver its products, ensure quality workmanship
and could result in a reduction of the Company's product sales.

         Fair Value of Financial Instruments - Financial instruments consist
primarily of cash equivalents, short-term investments, accounts receivable,
accounts payable and long-term debt. Cash equivalents and short-term investments
are stated at fair value based on quoted market prices. The recorded cost of
accounts receivable, accounts payable and long-term debt approximate the fair
value of the respective assets and liabilities.

         Foreign Currency Translation - The functional currency of the Company's
foreign subsidiary is its local currency. Accordingly, gains and losses from the
translation of the financial statements of the foreign subsidiary are reported
as a separate component of accumulated other comprehensive income (loss).
Foreign currency transaction gains and losses are included in earnings.

         Recent Accounting Pronouncements - In November 2002, the EITF reached a
consensus on Issue No. 00-21 "Accounting for Revenue Arrangements with Multiple
Deliverables." The EITF concluded that revenue arrangements with multiple
elements should be divided into separate units of accounting if the deliverables
in the arrangement have value to the customer on a standalone basis, if there is
objective and reliable evidence of fair value of the undelivered elements, and
as long as there are no rights of return or additional performance guarantees by
the Company. The provisions of EITF Issue No. 00-21 are applicable to agreements
entered into in fiscal periods beginning after June 15, 2003. The adoption of
EITF No. 00-21 did not have a material impact on the Company's financial
position, results of operations or cash flows.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." The statement amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company adopted the disclosure provisions
of SFAS No. 148 at December 31, 2002.

         The FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of
Variable Interest Entities," in January 2003, and a revised interpretation of
FIN 46 ("FIN 46-R") in December 2003. FIN 46 requires certain variable interest
entities ("VIEs") to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of FIN 46 are effective immediately
for all arrangements entered into after January 31, 2003. Since January 31,
2003, the Company has not invested in any entities it believes are variable
interest entities for which the Company is the primary beneficiary. For all
arrangements entered into after January 31, 2003, the Company is required to
continue to apply FIN 46 through the end of the first quarter of fiscal 2004.
The Company is required to adopt the provisions of FIN 46-R for those
arrangements in the second quarter of fiscal 2004. For arrangements entered into
prior to February 1, 2003, the Company is required to adopt the provisions of
FIN 46-R in the second quarter of fiscal 2004. The Company does not expect the
adoption of FIN 46-R to have an impact on the financial position, results of
operations or cash flows of the Company.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity,"
which requires that certain financial instruments be presented as

                                       31
<PAGE>

liabilities that were previously presented as equity or as temporary equity.
Such instruments include mandatory redeemable preferred and common stock, and
certain options and warrants. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003 and was effective at the
beginning of the first interim period beginning after June 15, 2003. In November
2003, the FASB issued FASB Staff Position ("FSP") No. 150-3, "Effective Date,
Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests under SFAS No. 150," which defers the effective date for various
provisions of SFAS No. 150. The Company believes that it has properly classified
and measured in its balance sheets and disclosed in its interim consolidated
financial statements both characteristics of both liabilities and equity
appropriately. While not required by SFAS No. 150, the Company has classified
its Series A Preferred Stock as a liability rather than between total
liabilities and stockholders' equity (deficit).

         In December 2003 the SEC issued SAB 104, "Revenue Recognition." SAB 104
updates portions of existing interpretative guidance in order to make this
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The adoption of SAB 104 did not have a material
effect on the Company's consolidated financial statements.

2.       CASH AND CASH EQUIVALENTS

         Cash and cash equivalents consist of the following (in thousands):

<TABLE>
<CAPTION>
                                         DECEMBER 31,
                                      -----------------
                                        2003      2002
                                      -------   -------
<S>                                   <C>       <C>
Cash ..............................   $   916   $ 3,510
Cash equivalents:
  Certificate of deposit ..........        25        25
  Money market funds ..............    20,797     5,182
                                      -------   -------
    Total cash equivalents ........    20,822     5,207
                                      -------   -------
Total cash and cash equivalents ...   $21,738   $ 8,717
                                      =======   =======
</TABLE>

         The Company realized no gains or losses on the sales of
available-for-sale securities in 2003, 2002 and 2001.

3.       INVENTORIES

         Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                    DECEMBER 31,
                                  ---------------
                                   2003     2002
                                  ------   ------
<S>                               <C>      <C>
Raw materials and subassemblies   $1,539   $1,587
Work in process ...............      247      183
Finished goods ................      313      358
                                  ------   ------
  Total .......................   $2,099   $2,128
                                  ======   ======
</TABLE>

4.       PROPERTIES AND EQUIPMENT

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

                                       32
<PAGE>

<TABLE>
<CAPTION>
                                                DECEMBER 31,
                                            -------------------
                                              2003       2002
                                            -------    --------
<S>                                         <C>        <C>
Computer equipment and purchased software   $ 2,251    $ 2,002
Machinery and equipment .................     2,010      1,810
Furniture and fixtures ..................     1,320      1,325
Leasehold improvements ..................       692        692
                                            -------    -------
  Total .................................     6,273      5,829
Less accumulated depreciation ...........    (4,819)    (3,785)
                                            -------    -------

Property and equipment, net .............   $ 1,454    $ 2,044
                                            =======    =======
</TABLE>

5.       INTANGIBLES AND OTHER ASSETS

         The components of intangibles and other assets are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                     --------------------
                                                       2003        2002
                                                     --------    --------
<S>                                                  <C>         <C>
Patents and technology ...........................   $  8,535    $  6,962
Other intangibles ................................      5,748       5,748
Other assets .....................................        110          83
                                                     --------    --------

Gross intangibles and other assets ...............   $ 14,393    $ 12,793

Accumulated amortization of patents and technology     (3,226)     (2,545)
Accumulated amortization of other intangibles ....     (4,571)     (3,632)
                                                     --------    --------

Net purchased intangibles and other assets .......   $  6,596    $  6,616
                                                     ========    ========
</TABLE>

         Amortization of intangibles during the years ended December 31, 2003
and 2002 was $1.6 million and $1.8 million respectively. The estimated annual
amortization expense for intangible assets as of December 31, 2003 is $1.4
million in 2004, $1.1 million in 2005, $694,000 in 2006, $614,000 in 2007,
$195,000 in 2008, and $271,000 in 2009 through 2014.

         In connection with adopting SFAS No. 142, the Company reassessed the
useful lives and the classification of its identifiable intangible assets and
determined that they continued to be appropriate except for acquired workforce
of $82,000, which was reclassified into goodwill.

         In conjunction with the adoption of SFAS No. 142 the Company performed
its transition impairment test of goodwill as of January 1, 2002 and determined
that there was no impairment upon adoption of SFAS No. 142. The Immersion
Computing, Entertainment & Industrial reporting unit was tested for impairment
in the fourth quarter of 2002, after the annual forecasting process. The
continued economic slowdown during 2002 caused delayed purchasing decisions by
the Company's customers for its high-end products as well as reduced royalties
from gaming licensees due to a reduction in the general personal computing and
PC gaming peripheral device sales. These factors contributed to the operating
profits and cash flows for this unit during the third and fourth quarter of 2002
to be lower than expected. Based on that trend the earnings forecast for the
next six years was revised. In December 2002, a goodwill impairment loss of $3.8
million was recognized in the Immersion Computing, Entertainment & Industrial
unit. The fair value of that reporting unit was estimated using the expected
present value of future cash flows.

         The changes in the carrying amount of goodwill were as follows (in
thousands):

                                       33
<PAGE>

<TABLE>
<CAPTION>
                                       YEAR ENDED
                                      DECEMBER 31,
                                      ------------
                                          2002
                                        -------
<S>                                   <C>
Balance as of December 31, 2001         $ 3,676
Acquired workforce reclass ....              82
Impairment loss ...............          (3,758)
                                        -------
Balance as of December 31, 2002         $     -
                                        =======
</TABLE>

         The following pro forma financial information reflects net loss and
diluted net loss per share as if goodwill and certain intangible assets were not
subject to amortization for the periods presented (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
                                                           YEARS ENDED
                                                           DECEMBER 31,
                                             ---------------------------------------
                                                 2003          2002          2001
                                             -----------   -----------   -----------
<S>                                          <C>           <C>           <C>
Net loss:
  Amounts as reported ....................   $  (16,974)   $  (16,530)   $  (21,746)
  Amortization of goodwill and intangibles            -             -         1,676
                                             ----------    ----------    ----------
  Pro forma amounts ......................   $  (16,974)   $  (16,530)   $  (20,070)
                                             ==========    ==========    ==========

Diluted net loss per share:
  Amounts as reported ....................   $    (0.83)   $    (0.83)   $    (1.16)
  Amortization of goodwill and intangibles            -             -          0.09
                                             ----------    ----------    ----------
  Pro forma amounts ......................   $    (0.83)   $    (0.83)   $    (1.07)
                                             ==========    ==========    ==========
</TABLE>

6.       OTHER INVESTMENTS

         Other investments comprise investments in privately held companies and
are accounted for under the cost method. The balance of other investments was
written off in the fourth quarter of 2003 and comprised the following investment
(in thousands):

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                        ----------------
                                                        2003        2002
                                                        ----        ----
<S>                                                    <C>        <C>
There, Inc., a technology application developer           -        1,000
                                                       ----       ------
                                                       $  -       $1,000
                                                       ====       ======
</TABLE>

         The Company's approach is to hold its investments for the long term and
monitor whether there have been other-than-temporary declines in value of these
investments based on management's estimates of their net realizable value taking
into account the companies' respective business prospects, financial condition
and ability to raise third-party financing. If the decline in fair value has
been determined to be other-than-temporary, an impairment loss is recorded in
other expense and the individual security is written down to a new cost basis.
As a result of its review, the Company recorded a noncash impairment loss of
$1.0 million during the fourth quarter of 2003. The impairment loss was based on
There, Inc.'s continued decline in financial condition, uncertain future revenue
streams and inability to raise adequate third-party financing. Additionally the
Company recorded noncash impairment losses of $1.2 million and $4.3 million on
other investments during 2002 and 2001 respectively.

7.       COMPONENTS OF OTHER CURRENT LIABILITIES AND DEFERRED REVENUE AND
         CUSTOMER ADVANCES

         Other current liabilities consist of (in thousands):

                                       34
<PAGE>

<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                                 ---------------
                                                  2003     2002
                                                 ------   ------
<S>                                              <C>      <C>
Accrued legal ................................   $  945   $  523
Other current liabilities ....................    1,121      788
                                                 ------   ------
  Total other current liabilities ............   $2,066   $1,311
                                                 ======   ======

Deferred revenue .............................   $3,032   $  976
Customer advances ............................       84    2,539
                                                 ------   ------

  Total deferred revenue and customer advances   $3,116   $3,515
                                                 ======   ======
</TABLE>

         At December 31, 2002, customer advances included a $2.5 million
prepayment from one licensee. Subsequent to December 2002, $500,000 of this
prepayment was returned to the licensee as a result of the final agreement
reached between the Company and the licensee regarding the terms of the
prepayment and the Company reclassified $2.0 million to deferred revenue, which
is being amortized to revenue based on royalty reports received from the
licensee. The deferred revenue increase is primarily attributable to $1.0
million from one customer related to a medical development contract, the
unamortized portion reclassed from customer advances during 2003 noted above,
and other prepayments by the Company's licensees.

8.       LONG-TERM DEBT

         The components of long-term debt are as follows (in thousands):

<TABLE>
<CAPTION>
                                          DECEMBER 31,
                                         -------------
                                         2003    2002
                                         ----    ----
<S>                                      <C>     <C>
Secured promissory note repaid in 2003   $  -    $ 52
Other ................................     26      38
                                         ----    ----
  Total ..............................     26      90
Current portion ......................    (10)    (64)
                                         ----    ----
  Total long-term debt ...............   $ 16    $ 26
                                         ====    ====
</TABLE>

         Annual maturities of long-term debt at December 31, 2003 are as follows
(in thousands):

<TABLE>
<S>                                            <C>
2004 ........................................  $ 10
2005 ........................................    10
2006 ........................................     6
                                               ----
Total........................................  $ 26
                                               ====
</TABLE>

9.       LONG-TERM CUSTOMER ADVANCE FROM MICROSOFT

         On July 25, 2003, the Company contemporaneously executed a series of
agreements with Microsoft Corporation ("Microsoft") that (1) settled the
Company's lawsuit against Microsoft, (2) granted Microsoft a worldwide
royalty-free, irrevocable license to the Company's portfolio of patents (the
"License Agreement") in exchange for a payment of $19.9 million, (3) provided
Microsoft with sublicense rights to pursue certain license arrangements directly
with third parties including Sony Computer Entertainment which, if consummated,
would result in payments to the Company (the "Sublicense Rights") and conveyed
to Microsoft the right to a payment of cash in the event of a settlement within
certain parameters of the Company's patent litigation against Sony Computer
Entertainment of America, Inc. and Sony Computer Entertainment, Inc.
(collectively, "Sony Computer Entertainment;" the "Participation Rights") in
exchange for a payment of $0.1 million, (4) issued Microsoft shares of the
Company's Series A Redeemable Convertible Preferred Stock that includes
redemption features discussed below ("Series A Preferred Stock") for a payment
of $6.0 million and (5) allows the Company to sell debentures of

                                       35
<PAGE>

$9.0 million to Microsoft under the terms and conditions established in newly
authorized 7% Senior Redeemable Convertible Debentures ("7% Debentures") with
annual draw down rights over a 48 month period.

         Under these agreements the Company is required to make certain cash
payments to Microsoft based on a settlement of the Company's ongoing patent
litigation against Sony Computer Entertainment. As discussed in Note 17, the
Company intends to continue its patent litigation against Sony Computer
Entertainment. In the event of a settlement of the Sony Computer Entertainment
litigation under certain terms, the Company will be required to make a cash
payment to Microsoft of (i) an amount to be determined based on the settlement
proceeds, (ii) a redemption of the Series A Preferred stock for a maximum of two
and one half (2 1/2) times the original purchase price plus any dividends in the
form of additional shares of Series A Preferred Stock that remain unpaid plus
any accrued but unpaid cash dividends per share, (iii) any accrued but unpaid
dividends on the Series A Preferred Stock, and (iv) any funds received from
Microsoft under the 7% Debentures.

         In a settlement outcome of the Sony Computer Entertainment litigation,
the Company will realize and retain net cash proceeds received from Sony
Computer Entertainment only to the extent that settlement proceeds exceed the
amounts due Microsoft for its Participation Rights and the payments required to
redeem the Series A Preferred Stock, 7% Debentures and accrued dividends and
interest as specified above. Under certain circumstances related to a Company
initiated settlement with Sony Computer Entertainment, the Company would be
obligated to pay Microsoft a minimum of $30.0 million. Such amount would be
reduced to the extent that Microsoft elects to convert its shares of Series A
Preferred Stock to Company common stock.

         In the event of an unfavorable judicial resolution or a dismissal or
withdrawal by Immersion of the lawsuit meeting certain conditions, the Company
would not be required to make any payments to Microsoft except pursuant to the
redemption and dividend provisions of the Series A Preferred Stock and the
payment provisions relating to the 7% Debentures.

         Under certain other specified circumstances, including the acquisition
of the Company, the redemption of the Series A Preferred Stock as well as the 7%
Debentures would become immediately due and payable.

         The $26.0 million received from Microsoft as described above has been
reflected as a liability in the accompanying financial statements. The Company
does not believe that it is possible to separate and value the contingent
payments due Microsoft pursuant to its Participation Rights and the payments due
Microsoft upon redemption of the Series A Preferred Stock under all possible
litigation settlement outcomes. The Series A Preferred Stock, while not meeting
the definition of a liability under SFAS 150, does not qualify as shareholders'
equity pursuant to Securities and Exchange Commission regulations regarding the
form and content requirements for financial statements.

         Payments, which may be due Microsoft as a result of a settlement with
Sony Computer Entertainment, will accrete from $26.0 million to $30.0 million
over the expected life of the litigation, which the Company has estimated to be
24 months. During the year ended December 31, 2003, the Company recorded as
interest and other expense, $1.0 million related to the accretion of payments
which may be due Microsoft and the cumulative dividends on the Series A
Preferred Stock.

         Series A Redeemable Convertible Preferred Stock. The Company has
authorized and issued 2,185,792 shares of Series A Preferred Stock, par value
$0.001 per share. Under the terms of the Series A Redeemable Convertible
Preferred Stock purchase agreement, Microsoft purchased 2,185,792 shares of
Series A Preferred Stock for $2.745, an aggregate purchase price of $6.0
million. The Series A Preferred Stock accrues cumulative dividends at a rate of
7% per year, payable in cash or additional shares of Series A Preferred Stock,
is initially convertible into one share of Immersion common stock for each share
of Series A Preferred Stock, is entitled to the number of votes equal to the
number of whole shares of common stock into which each share of Series A
Preferred Stock is convertible with the exception of dilutive issuances and is
redeemable under certain circumstances by either the holder or Immersion. The
Series A Preferred Stock can be redeemed at the request of Microsoft for twice
the original purchase price plus any dividends in the form of additional shares
that remain unpaid and any accrued but unpaid cash dividends per share on or
after July 25, 2006.

                                       36

<PAGE>

         In addition, if at any time that the closing price for the Company's
common stock shall be two and one half (2 1/2) times the original purchase price
plus any dividends in the form of additional shares that remain unpaid and any
accrued but unpaid cash dividends per share for each of thirty (30) successive
trading days, at the election of the Company, it may redeem all (and not less
than all) of the shares of Series A Preferred Stock at a redemption price equal
to 125% of the original purchase price plus any dividends in the form of
additional shares that remain unpaid and any accrued but unpaid cash dividends
per share. On March 12, 2004, the Company satisfied the closing price and
trading day requirements and therefore the Company has the ability to redeem the
Series A Preferred Stock pursuant to this provision, but has not yet exercised
this right.

         Under the Company's agreements with Microsoft, the Company agreed to
file, at its expense, with the Securities and Exchange Commission (the
"Commission"), a shelf registration statement on Form S-3 covering the resale of
shares of common stock issued to Microsoft upon conversion of the Series A
Preferred Stock and the common stock issuable upon the conversion of any
debentures issued to Microsoft. There is a monthly penalty (equal to $45,000)
for the failure to file or update this registration statement on Form S-3,
failure to deliver the Company's response letter to the Commission within 15
days of receipt, obtain the effectiveness of the registration statement within
180 days after filing, to fail to maintain the effectiveness of the registration
statement, or for the suspension of trading under the registration statement on
Form S-3 for more than 90 days in any six-month period. As the Company did not
obtain the effectiveness of the registration statement by March 6, 2004, the
Company has not satisfied its obligation to do so within 180 days after filing.
On March 18, 2004, Microsoft waived its right to receive penalties for this
failure to timely register their shares, as well as its right to receive
dividends that would otherwise accrue after the registration statement becomes
effective.  In exchange, the Company agreed that Microsoft shall have the right
to convert its shares of Series A Preferred Stock into common stock in advance
of any decision by us to redeem such shares of Series A Preferred Stock.  The
Company also agreed to continue to work diligently towards obtaining the
effectiveness of the registration statement.

         Senior Redeemable Convertible Debentures. Under the terms of the Senior
Redeemable Convertible Debentures agreement, the Company may sell to Microsoft
up to $9.0 million of Senior Redeemable Convertible Debentures over a 48-month
period. The Company can sell up to $3.0 million the first year and $2.0 million
per year for the following three years under the provisions of the Senior
Redeemable Convertible Debentures agreement. Debenture proceeds may only be used
to finance the Sony Computer Entertainment litigation. The Senior Redeemable
Convertible Debentures are callable by Microsoft after 3 years at 110%. It is
also callable by Microsoft upon settlement of the Sony Computer Entertainment
litigation at 125% of par. The Senior Redeemable Convertible Debentures are
convertible into common stock at 364 shares/$1,000 face value (based on $2.75
per share).

10.      COMMITMENTS

         The Company leases several of its facilities under operating leases. In
addition, the Company has several operating leases for vehicles and various
computer and office equipment that expire during fiscal years 2004 through 2005.

         Minimum future lease payments are as follows (in thousands):

<TABLE>
<CAPTION>
                                           CAPITAL LEASE   OPERATING LEASE
                                           -------------   ---------------
<S>                                        <C>             <C>
2004 ....................................             24             1,255
2005 ....................................              -               815
2006 ....................................              -               322
2007 ....................................              -               331
2008 ....................................              -               341
Thereafter                                                             144
                                           -------------   ---------------
Total future minimum lease payments        $          24   $         3,208
                                                           ---------------
Portion representing interest                         (1)
                                           $          23
                                           =============
</TABLE>

         Rent expense was $1.3 million, $1.3 million and $1.4 million in 2003,
2002 and 2001 respectively.

         Under the terms of a co-marketing agreement with a significant
customer, we reimbursed the customer for certain marketing related expenses not
to exceed $200,000 per quarter for the five quarters ended March 31, 2001.

                                       37

<PAGE>

11.      STOCKHOLDERS' EQUITY (DEFICIT)

     STOCK OPTIONS

         Under the Company's stock option plans, the Company may grant options
to purchase up to 12,747,744 shares of common stock to employees, directors and
consultants at prices not less than the fair market value on the date of grant
for incentive stock options and not less than 85% of fair market value on the
date of grant for nonstatutory stock options. These options generally expire ten
years from the date of grant. The Company has granted immediately exercisable
options as well as options that become exercisable over periods ranging from
three months to five years.

         As part of the business combination with Immersion Medical in fiscal
2000, the Company assumed Immersion Medical's 1995B and 1998 stock option plans.
Under the plans, a total of 310,560 shares of common stock are reserved for
issuance. The majority of the options cliff vest on each anniversary date over a
five-year period. The 1998 Plan provides for certain provisions for accelerated
vesting upon a change of control. All of the options expire ten years from the
date of the grant.

         As part of the business combination with Virtual Technologies, Inc.
("VTI") in fiscal 2000, the Company assumed VTI's 1997 stock option plan. Under
VTI's 1997 stock option plan, a total of 700,000 shares of common stock are
reserved for issuance to employees (Incentive Stock Options) and non-employees
(Nonstatutory Stock Options). The options expire ten years from the date of the
grant. The majority of the options cliff vest on each anniversary date over a
five-year period. The plan provided that in the event of a merger of the Company
with or into another corporation, each outstanding option or stock purchase
right under the plan must be assumed or an equivalent option or right
substituted by the successor corporation or an affiliate.

         Details of activity under the option plans are as follows:

<TABLE>
<CAPTION>
                                                                                                            WEIGHTED
                                                                                        NUMBER               AVERAGE
                                                                                      OF SHARES          EXERCISE PRICE
                                                                                      ----------         --------------
<S>                                                                                   <C>                <C>
Outstanding, January 1, 2001 (2,917,937 exercisable at a weighted
 average price of $9.79 per share) .............................................       7,047,489         $         9.61
Granted (weighted average fair value of $5.22 per share) .......................       2,349,590         $         7.27
Exercised ......................................................................        (455,223)        $         1.02
Canceled .......................................................................      (1,180,470)        $        14.85
                                                                                      ----------
Balances, December 31, 2001 (3,700,069 exercisable at a weighted
 average price of $6.64 per share) .............................................       7,761,386         $         8.61
Granted (weighted average fair value of $1.67 per share) .......................       2,958,500         $         1.99
Exercised ......................................................................      (1,110,003)        $         0.20
Canceled .......................................................................      (2,060,158)        $         7.50
                                                                                      ----------
Balances, December 31, 2002 (3,989,165 exercisable at a weighted
 average price of $9.66 per share) .............................................       7,549,725         $         7.56
Granted (weighted average fair value of $ 2.56 per share) ......................       2,250,750         $         3.37
Exercised ......................................................................        (502,134)        $         1.71
Canceled .......................................................................      (1,961,433)        $         8.56
                                                                                      ----------
Balances, December 31, 2003 (3,470,621 exercisable at a weighted
 average price of $9.61 per share) .............................................       7,336,908         $         6.40
                                                                                      ==========
</TABLE>

         Additional information regarding options outstanding as of December 31,
2003 is as follows:

                                       38

<PAGE>

<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING
                -------------------------------------    OPTIONS EXERCISABLE
                                WEIGHTED                ----------------------
                                AVERAGE      WEIGHTED                  WEIGHTED
  RANGE OF                     REMAINING     AVERAGE                   AVERAGE
  EXERCISE        NUMBER       CONTRACTUAL   EXERCISE      NUMBER     EXERCISE
   PRICES       OUTSTANDING   LIFE (YEARS)    PRICE     EXERCISABLE    PRICE
   ------       -----------   ------------    -----     -----------    -----
<S>             <C>           <C>            <C>        <C>           <C>
$0.12 - $1.20       409,772           6.42   $   0.87       227,924   $   0.61
  1.20 - 1.28     1,073,536           8.98       1.27        35,960       1.22
  1.32 - 1.76     1,012,100           8.82       1.66       260,140       1.68
  1.77 - 2.74       883,341           8.32       2.41       362,884       2.41
  2.75 - 6.03       979,074           8.38       5.09       387,119       4.80
  6.06 - 6.25       746,291           9.18       6.20       173,728       6.23
  6.26 - 8.98       853,073           5.85       8.66       812,023       8.71
  9.63 -15.50       776,794           6.56      12.13       660,490      12.03
17.13 - 34.75       578,041           6.43      24.15       527,541      24.45
43.25 - 43.25        24,886           6.28      43.25        22,812      43.25
                -----------                             -----------
$0.12 -$43.25     7,336,908           7.85   $   6.40     3,470,621   $   9.61
                ===========                             ===========
</TABLE>

         At December 31, 2003, the Company had 921,254 shares available for
future grants under the option plans.

     ADDITIONAL STOCK PLAN INFORMATION

         As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with APB No. 25 and its related
interpretations. SFAS No. 123 requires the disclosure of pro forma net loss had
the Company adopted the fair value method as of the beginning of fiscal 1996.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though these models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they occur.
The Company's calculations were made using the following weighted average
assumptions:

<TABLE>
<CAPTION>
                                OPTIONS         EMPLOYEE STOCK PURCHASE PLAN
                           ------------------   ----------------------------
                           2003   2002   2001   2003        2002        2001
                           ----   ----   ----   ----        ----        ----
<S>                        <C>    <C>    <C>    <C>         <C>         <C>
Expected life (in years)    2.5    2.5    2.5    0.5         0.5         1.5
Interest rate               2.8%   3.6%   4.1%   1.2%        2.4%        4.1%
Volatility                  112%   144%   110%   112%        144%        110%
Dividend yield                -      -      -      -           -           -
</TABLE>

     EMPLOYEE STOCK PURCHASE PLAN

         The Company has an employee stock purchase plan ("ESPP"). Under the
ESPP, eligible employees may purchase common stock through payroll deductions at
a purchase price of 85% of the lower of the fair market value of the Company's
stock at the beginning of the offering period or the purchase date. Participants
may not purchase more than 2,000 shares in a six-month offering period or stock
having a value greater than $25,000 in any calendar year as measured at the
beginning of the offering period. A total of 500,000 shares of common stock are
reserved for the issuance under the ESPP plus an automatic annual increase on
January 1, 2001 and on each January 1 thereafter through January 1, 2010 by an
amount equal to the lesser of 500,000 shares per year or a number of shares
determined by the Board of Directors. As of December 31, 2003, 141,313 shares
had been purchased under the plan.

                                       39

<PAGE>

     DEFERRED STOCK COMPENSATION

         In January 2000, Immersion Medical's board of directors approved a
repricing of all outstanding stock options relating to Immersion Medical that
had been granted on or after June 1, 1998 from $15.46 per share to $7.73 per
share. A total of 30,797 options were repriced. Beginning July 1, 2000, the
Company began to recognize stock compensation relating to the unexpired repriced
shares. The Company recognized $374,000 as stock compensation expense relating
to the repricing and acceleration of option vesting at the time of the merger.
The repricing requires that compensation associated with these options be
remeasured until they are exercised, or forfeited or expire. During the years
ended December 31, 2003 and 2002, the Company did not record any deferred stock
compensation in connection with these repriced options, as the price of
Immersion's stock was not higher than the repriced amount at any quarter-end
during those periods. During the year ended December 31, 2001, the Company
reversed $202,000 of previously recorded deferred stock compensation expense on
these repriced options as a result of the price of Immersion's stock falling
below that of the repriced options. Future expense related to vested and
unvested stock option shares is dependent on the market value of the shares at
the end of each quarter until the repriced stock options are exercised,
forfeited or expire and is therefore unknown at this time.

         In fiscal 2000, in connection with two business combinations accounted
for under the purchase method, the Company recorded $5.8 million of deferred
stock compensation which represented the intrinsic value of unvested assumed
stock options, and is being amortized over the respective remaining service
periods on a straight-line basis.

     WARRANTS

         In conjunction with a note payable to Medtronic Asset Management, Inc.
("Medtronic") dated August 10, 1999, amended in March 2000 and subsequently
repaid in 2002, the Company granted Medtronic a warrant to purchase up to
$2,000,000 of common stock at a price per share equal to the lesser of $15.46
per share or the price per share at which any shares of common stock are sold.
The warrant may also be exercised for any other class of capital stock that the
Company may issue at a per share price equal to the lowest per share price at
which any such shares are issued or sold. The warrant expires on the later to
occur of November 10, 2000 or six months after Immersion Medical completes a
sale of capital stock of at least $6 million. The Company allocated $1,126,849
of the note payable proceeds to the warrant and amortized the amount to interest
expense using the effective interest method over the three-year period of the
debt. The effective interest rate was 17% based on this method of allocation.

         In 2000, the Company issued to a lender ten-year warrants to purchase
1,618 shares of common stock at $15.46 per share. These warrants may be
exercised at any time prior to April 9, 2010. The Company allocated $11,281 of
the proceeds to the warrant and amortized this amount to interest expense using
the effective interest method over the three-year period that the related debt
was outstanding. None of the warrants have been exercised, and all remain
outstanding at December 31, 2003.

12.      NET LOSS PER SHARE

         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 data):

                                       40

<PAGE>

<TABLE>
<CAPTION>
                                                                      YEARS ENDED
                                                                      DECEMBER 31,
                                                         -----------------------------------
                                                            2003        2002         2001
                                                            ----        ----         ----
<S>                                                      <C>          <C>          <C>
Numerator:

Net loss .............................................   $ (16,974)   $ (16,530)   $ (21,746)
                                                         =========    =========    =========

Denominator:
Shares used in computation, basic and diluted
(weighted average common shares outstanding) .........      20,334       19,906       18,702
                                                         ---------    ---------    ---------

Net loss per share, basic and diluted ................   $   (0.83)   $   (0.83)   $   (1.16)
                                                         =========    =========    =========
</TABLE>

         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:

<TABLE>
<CAPTION>
                                                                      YEARS ENDED
                                                                      DECEMBER 31,
                                                         -----------------------------------
                                                            2003        2002         2001
                                                            ----        ----         ----
<S>                                                      <C>          <C>          <C>
Convertible note payable .............................           -            -      226,450
Outstanding stock options ............................   7,336,908    7,549,725    7,761,386
Warrants .............................................     480,943      511,999      523,971
Series A Redeemable Convertible Preferred Stock ......   2,185,792            -            -
</TABLE>

13.      INCOME TAXES

         A provision for federal income tax of $154,000 was made during the year
ended December 31, 2003. No provision for federal income taxes was required for
the years ended December 31, 2002 and 2001 due to net losses in these periods.

         Significant components of the net deferred tax assets and liabilities
for federal and state income taxes consisted of (in thousands):

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                              ---------------------
                                                                                2003         2002
                                                                              --------     --------
<S>                                                                           <C>          <C>
Deferred tax assets:
 Net operating loss carryforwards .....................................       $ 18,859     $ 21,758
 Deferred revenue .....................................................          2,961        2,259
 Deferred rent ........................................................             71           44
 Research and development credits .....................................          1,243        1,763
 Reserves and accruals recognized in different periods ................            261          375
 Long-term customer advance from Microsoft ............................          8,225            -
 Basis difference in investment .......................................          1,328          923
 Capitalized R& D Expenses ............................................            613          441
                                                                              --------     --------

Total deferred tax assets .............................................         33,561       27,563
Deferred tax liabilities:
 Depreciation and amortization ........................................         (1,131)        (624)
 Difference in tax basis of purchased technology ......................         (1,162)      (1,712)
Valuation allowance ...................................................        (31,268)     (25,227)
                                                                              --------     --------
Net deferred tax assets ...............................................       $      -     $      -
                                                                              ========     ========
</TABLE>

                                       41

<PAGE>

         The Company's effective tax rate differed from the expected benefit at
the federal statutory tax rate as follows:

<TABLE>
<CAPTION>
                                                 2003        2002
                                                ------      ------
<S>                                             <C>         <C>
Federal statutory tax rate ..................    (35.0)%     (35.0)%
State taxes, net of federal benefit..........     (3.0)       (3.0)
Deferred stock compensation..................      1.8         2.7
Amortization of goodwill and in process R&D..      0.0         8.0
Other........................................      5.3        (1.7)
Valuation allowance..........................     31.8        29.0
                                                ------      ------

Effective tax rate...........................      0.9%          -%
                                                ======      ======
</TABLE>

         Substantially all of the Company's loss from operations for all periods
presented is generated from domestic operations.

         At December 31, 2003, the Company has federal and state net operating
loss carryforwards of $51.1 million and $17.1 million, respectively, expiring
through 2022 and through 2013, respectively.

         Current federal and state tax laws include provisions limiting the
annual use of net operating loss carryforwards in the event of certain defined
changes in stock ownership. The Company's issuances of common and preferred
stock may have resulted in such a change. Accordingly, the annual use of the
Company's net operating loss carryforwards would be limited according to these
provisions. Management has not yet determined the extent of this limitation, and
this limitation may result in the loss of carryforward benefits due to their
expiration.

14.      EMPLOYEE BENEFIT PLAN

         The Company has a 401(k) tax-deferred savings plan under which eligible
employees may elect to have a portion of their salary deferred and contributed
to the 401(k) plan. Contributions may be made by the Company at the discretion
of the Board of Directors. The recorded expenses were $0, $0 and $160,000 for
2003, 2002 and 2001, respectively.

15.      GOVERNMENT AUDITS

         Billings under certain cost-based government contracts are calculated
using provisional rates that permit recovery of indirect costs. These rates are
subject to audit on an annual basis by the government agencies' audit
department. The cost audit will result in the negotiation and determination of
the final indirect cost rates that the Company may use for the period(s)
audited. The final rates, if different from the provisionals, may create an
additional receivable or liability.

         As of December 31, 2003, the Company has not reached final settlements
on indirect rates. The Company has negotiated provisional indirect rates for the
years ended December 31, 2003, 2002 and 2001. The Company periodically reviews
its cost estimates and experience rates, and any needed adjustments are made and
reflected in the period in which the estimates are revised. In the opinion of
management, redetermination of any cost-based contracts for the open years will
not have a material effect on the Company's financial position or results of
operations.

16.      RELATED PARTIES

         In July 1997, the Company transferred certain patent rights related to
its MicroScribe product to a newly created limited liability corporation,
MicroScribe LLC, in exchange for 1,000 Class 1 Units and 98,999 Class 2 Units.
This investment represents a 99% ownership of MicroScribe LLC. Subsequently, the
Company distributed all Class 2 Units to its then outstanding common, preferred
and vested option holders on a pro rata basis. The Company maintained a 1%
ownership of MicroScribe LLC subsequent to the distribution of the Class 2
Units. There was no

                                       42

<PAGE>

recorded value related to these internally-developed patent agreements, and thus
no amount was recognized as a result of the transfer.

         During July 1997, the Company also entered into a non-exclusive license
agreement with MicroScribe LLC (the "Agreement") for the right to manufacture,
market and sell products incorporating the MicroScribe technology. Under the
terms of the Agreement, the Company must pay a royalty to MicroScribe LLC based
on a variable percentage of net receipts as defined under the Agreement. Royalty
expense under the Agreement was $0, $103,000 and $167,000 in 2003, 2002, and
2001, respectively.

         In 2002, certain disputes arose between the Company and MicroScribe
regarding the Company's relations with MicroScribe, ownership of the
"MicroScribe" name and other matters. To settle the disputes, the Company and
MicroScribe entered into a settlement agreement whereby the Company agreed not
to pursue its claims against MicroScribe in exchange for MicroScribe granting
the Company certain rights, including ownership of the MicroScribe name and the
right to produce new products under that name without payment of further
royalties to MicroScribe. In 2003, MicroScribe LLC assigned and transferred its
interest in the MicroScribe patents and related technology to the Company for
$20,000.

         In August 2001, the Company loaned an executive officer $420,000, at 4%
interest per annum to be repaid on January 7, 2003. Any amounts payable to such
officer may be offset against the indebtedness at the option of the Company. The
loan was offset against amounts due the executive officer in March of 2002.

         In July of 2003 the Company entered into an independent consulting
agreement with a member of its board of directors to assist with certain
marketing initiatives of its wholly owned subsidiary Immersion Medical. Under
the terms of the consulting agreement the board member will receive $15,000 per
month compensation and reimbursement of out-of-pocket travel expenses. The
initial term of the consulting agreement was six months and is renewable for
subsequent three-month terms unless either party notifies the other in writing
at least ten days prior to the expiration of the then-current term of its
election to terminate the agreement. During 2003 the board member earned
compensation of $90,000. As of March 10, 2004 the consulting agreement had not
been terminated by either party.

17.      CONTINGENCIES

     IN RE IMMERSION CORPORATION

         The Company is involved in legal proceedings relating to a class action
lawsuit filed on November 9, 2001. In re Immersion Corporation Initial Public
Offering Securities Litigation, No. 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
named defendants are the Company and three of its current or former officers or
directors (the "Immersion Defendants"), and certain underwriters of the
Company's November 12, 1999 initial public offering ("IPO"). Subsequently, two
of the individual defendants stipulated to a dismissal without prejudice.

         The operative amended complaint is brought on purported behalf of all
persons who purchased the common stock of the Company from the date of the IPO
through December 6, 2000. It alleges liability under Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, on the grounds that the registration statement for the IPO did not
disclose that: (1) the underwriters agreed to allow certain customers to
purchase shares in the IPO in exchange for excess commissions to be paid to the
underwriters; and (2) the underwriters arranged for certain customers to
purchase additional shares in the aftermarket at predetermined prices. The
complaint also appears to allege that false or misleading analyst reports were
issued. The complaint does not claim any specific amount of damages.

         Similar allegations were made in other lawsuits challenging over 300
other initial public offerings and follow-on offerings conducted in 1999 and
2000. The cases were consolidated for pretrial purposes. On February 19, 2003,
the Court ruled on all defendants' motions to dismiss. The motion was denied as
to claims under the Securities Act of 1933 in the case involving the Company, as
well as in all other cases (except for 10 cases). The motion was denied as to
the claim under Section 10(b) as to the Company, on the basis that the complaint
alleged

                                       43

<PAGE>

that the Company had made acquisition(s) following the IPO. The motion was
granted as to the claim under Section 10(b), but denied as to the claim under
Section 20(a), as to the remaining individual defendant.

         The Company has decided to accept a settlement proposal presented to
all issuer defendants. In this settlement, plaintiffs will dismiss and release
all claims against the Immersion Defendants, in exchange for a contingent
payment by the insurance companies collectively responsible for insuring the
issuers in all of the IPO cases, and for the assignment or surrender of certain
claims the Company may have against the underwriters. The Immersion Defendants
will not be required to make any cash payments in the settlement, unless the pro
rata amount paid by the insurers in the settlement exceeds the amount of the
insurance coverage, a circumstance which the Company believes is remote. The
settlement will require approval of the Court, which cannot be assured, after
class members are given the opportunity to object to the settlement or opt out
of the settlement.

     IMMERSION CORPORATION VS. MICROSOFT CORPORATION, SONY COMPUTER
     ENTERTAINMENT INC. AND SONY COMPUTER ENTERTAINMENT OF AMERICA, INC.

         On February 11, 2002, the Company 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
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. Under the counterclaims, the defendants are also seeking damages for
attorneys' fees. The process of discovery and exchanging information and
documents on infringement, invalidity, and damages, is ongoing. On October 8,
2002, the Company filed an amended complaint, withdrawing the claim under the
`672 patent and adding claims under a new patent, U.S. Patent No. 6,424,333.

         On October 10, 2002, the Court entered an Amended Case Management Order
that set, among other dates in the case, April 25, 2003 for a hearing to
construe the claims of the asserted patents and April 5, 2004 for the start of
trial. On October 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. On March
21, 2003, Sony Computer Entertainment filed a motion for summary judgment of
non-infringement. At Immersion's request, the Court ordered this motion
stricken, without prejudice to its being refiled at a later date after the Court
rules on claim construction. On April 25, 2003, the Court held the scheduled
claim construction hearing. On July 9, 2003, the Court issued an Order Modifying
Case Management Order that reset certain scheduled dates in the case, including
setting April 12, 2004 as the start of trial. On October 2, 2003, the Court
issued its Claim Construction Order construing certain terms of the patents
asserted in the lawsuit. On January 16, 2004, Sony Computer Entertainment filed
a motion for summary judgment of invalidity and that Sony Computer Entertainment
Inc. should be dismissed as a party. Immersion filed a motion for summary
judgment seeking to dismiss Sony's defenses that the asserted patents are
unenforceable. On February 27, 2004, the Court held a hearing on these motions.
On March 2, 2004, the Court issued a written ruling on the summary judgment
motions. The Court denied Sony's motion for summary judgment of invalidity. The
Court granted all but one of Immersion's motions and dismissed several Sony
defenses. On March 23, 2004 the court rescheduled the trial from April 12, 2004
to April 19, 2004.

         On July 28, 2003, the Company announced that it had settled its legal
differences with Microsoft and Immersion and Microsoft agreed to dismiss all
claims and counterclaims relating to this matter as well as assume financial
responsibility for their respective legal costs with respect to the lawsuit
between Immersion and Microsoft. The Company continues to pursue its claims of
infringement against Sony Computer Entertainment. In the event the Company
settles its lawsuit with Sony Computer Entertainment, the Company will be
obligated to pay certain sums to Microsoft as described in Note 9. If Sony
Computer Entertainment were successful in its counterclaims and the Company's
patents were deemed invalid and unenforceable, the assets relating to the
patents that were deemed invalid would be impaired and the Company may be
required to pay Sony Computer Entertainment's attorneys fees. The case is
scheduled to go to trial in April 2004.

         Due to the inherent uncertainties of litigation, the Company cannot
accurately predict the ultimate outcome of the litigation. The Company
anticipates that the litigation will continue to be costly, and there can be no
assurance that the Company will be able to recover the costs it incurs in
connection with the litigation. The

                                       44

<PAGE>

Company expenses litigation costs as incurred and only accrues for costs that
have been incurred but not paid to the vendor as of the financial statement
date. The litigation has diverted, and is likely to continue to divert, the
efforts and attention of some of the Company's key management and personnel. As
a result, until such time as it is resolved, the litigation could adversely
affect the Company's business. Further, any unfavorable outcome could adversely
affect the Company's business.

     OTHER CONTINGENCIES

         The Company has received claims from third parties asserting that the
Company's technologies, or those of its licensees, infringe on the other
parties' intellectual property rights. Management believes that these claims are
without merit. The Company from time to time is involved in routine legal
matters and contractual disputes incidental to its normal operations. In
management's opinion, the resolution of such matters will not have a material
adverse effect on the Company's consolidated financial condition, results of
operations or liquidity.

         In the normal course of business, the Company provides indemnifications
of varying scope to customers against claims of intellectual property
infringement made by third parties arising from the use of the Company's
intellectual property, technology or products. Historically, costs related to
these guarantees have not been significant and the Company is unable to estimate
the maximum potential impact of these guarantees on its future results of
operations.

         As permitted under Delaware law, we have agreements whereby we
indemnify our officers and directors for certain events or occurrences while the
officer or director is, or was serving, at our request in such capacity. The
term of the indemnification period is for the officer's or director's lifetime.
The maximum potential amount of future payments we could be required to make
under these indemnification agreements is unlimited; however, we currently have
director and officer insurance coverage that limits our exposure and enables us
to recover a portion of any future amounts paid. We believe the estimated fair
value of these indemnification agreements in excess of applicable insurance
coverage is minimal.

18.      SEGMENT REPORTING

         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. The
Company's chief operating decision maker ("CODM") is the Chief Executive
Officer. The CODM allocates resources to and assesses the performance of each
operating segment using information about their revenue and operating profit
before interest and taxes. A description of the types of products and services
provided by each operating segment is as follows:

         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.

         Summarized financial information concerning the Company's reportable
segments for the respective years ended December 31 is shown in the following
table (in thousands):

                                       45

<PAGE>

<TABLE>
<CAPTION>
                                                                 IMMERSION
                                                                 COMPUTING,
                                                                ENTERTAINMENT   IMMERSION    INTERSEGMENT
                                                               AND INDUSTRIAL    MEDICAL    ELIMINATIONS (5)    TOTAL
                                                               --------------   ---------   ----------------   --------
<S>                                                            <C>              <C>         <C>                <C>
2003

REVENUES FROM EXTERNAL CUSTOMERS
 Royalty and license .......................................   $        4,157   $   1,931   $              -   $  6,088
 Product sale revenues .....................................            5,994       4,460               (999)     9,455
 Development contract revenues .............................            1,704       3,183               (207)     4,680
                                                               --------------   ---------   ----------------   --------
TOTAL REVENUES .............................................   $       11,855   $   9,574   $         (1,206)  $ 20,223
                                                               ==============   =========   ================   ========

 Income (loss) from operations .............................   $      (14,995)  $     120   $             25   $(14,850)
 Interest and other income (2) .............................              109          17                  -        126
 Interest expense (1) ......................................               (2)        (48)                 -        (50)
 Depreciation and amortization .............................            3,244         276                  -      3,520
 Other expense - write down of investments (4) .............           (1,000)          -                  -     (1,000)
 Net income (loss) .........................................          (17,100)        101                 25    (16,974)
 Capital expenditures ......................................              209         232                  -        441
 Total assets ..............................................           47,543       5,136            (14,766)    37,913

2002

REVENUES FROM EXTERNAL CUSTOMERS
 Royalty and license .......................................   $        4,960   $     271   $              -   $  5,231
 Product sale revenues .....................................            5,952       5,020               (249)    10,723
 Development contract revenues .............................            1,639       2,739                (97)     4,281
                                                               --------------   ---------   ----------------   --------
TOTAL REVENUES .............................................   $       12,551   $   8,030   $           (346)  $ 20,235
                                                               ==============   =========   ================   ========

 Loss from operations ......................................   $      (13,759)  $  (1,154)  $           (122)  $(15,035)
 Interest and other income (1) (2) .........................              188         118                  -        306
 Interest expense (1) ......................................               (4)       (578)                 -       (582)
 Depreciation and amortization .............................            4,051         351                  -      4,402
 Impairment of goodwill ....................................            3,758           -                  -      3,758
 Other expense - write down of investments (4) .............           (1,200)          -                  -     (1,200)
 Net loss ..................................................          (14,789)     (1,619)              (122)   (16,530)
 Capital expenditures ......................................              244         198                  -        442
 Total assets ..............................................           36,389       2,919            (14,007)    25,301

2001

REVENUES FROM EXTERNAL CUSTOMERS
 Royalty and license .......................................   $        5,362   $       -   $              -   $  5,362
 Product sale revenues .....................................            6,860       3,532                (32)    10,360
 Development contract revenues .............................            1,952       1,558                  -      3,510
                                                               --------------   ---------   ----------------   --------
TOTAL REVENUES .............................................   $       14,174   $   5,090   $            (32)  $ 19,232
                                                               ==============   =========   ================   ========

 Loss from operations ......................................   $      (12,861)  $  (4,558)  $             (9)  $(17,428)
 Interest and other income (1) (2) .........................            1,091         169               (172)     1,088
 Interest expense (1) ......................................               (9)     (1,022)               172       (859)
 Depreciation and amortization (3) .........................            6,429          86                  -      6,515
 Other expense - write down of investments (4) .............           (4,539)          -                  -     (4,539)
 Net loss ..................................................          (16,330)     (5,411)                (5)   (21,746)
 Capital expenditures ......................................              362         250                  -        612
 Total assets ..............................................           41,670       2,990             (7,635)    37,025
</TABLE>

                                       46

<PAGE>

(1)   Includes interest on amounts previously owed from Immersion Medical to
      Immersion Computing, Entertainment and Industrial in 2001, and
      amortization of notes payable recorded as interest expense.

(2)   Includes a noncash fair value adjustment of $2,000, $118,000 and $169,000
      in 2003, 2002 and 2001 respectively, related to the warrants issued in
      connection with the SECA VII debt for Immersion Medical in 2001.

(3)   Includes a noncash fair value adjustment of $202,000 for deferred stock
      compensation in connection with options issued by Immersion Medical prior
      to the acquisition of Immersion Medical in September 2000.

(4)   Includes amounts written off of investments held by Immersion Computing,
      Entertainment and Industrial (see Note 6).

(5)   Intersegment eliminations consist of eliminations for intercompany sales
      and cost of sales and intercompany receivable and payables between
      Immersion Computing, Entertainment and Industrial and Immersion Medical
      segments.

         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'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.

     REVENUE BY PRODUCT LINES

         Information regarding revenue from external customers by product lines
is as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                YEARS ENDED
                                                                                DECEMBER 31,
                                                                    ----------------------------------
                                                                      2003         2002         2001
                                                                    --------     --------     --------
<S>                                                                 <C>          <C>          <C>
Revenues:

 Consumer, Computing and Entertainment ...........................  $  3,571     $  4,324     $  6,244
 3D and Professional Products ....................................     5,026        6,029        6,343
 Automotive ......................................................     1,284        1,157          870
 Other ...........................................................       792          695          685
                                                                    --------     --------     --------
  Subtotal Immersion Computing, Entertainment and Industrial .....    10,673       12,205       14,142
 Immersion Medical ...............................................     9,550        8,030        5,090
                                                                    --------     --------     --------
Total ............................................................  $ 20,223     $ 20,235     $ 19,232
                                                                    ========     ========     ========
</TABLE>

     REVENUE BY REGION

         The following is a summary of revenues by geographic areas. Revenues
are broken out geographically by the ship-to location of the customer.
Geographic revenue as a percentage of total revenue was as follows:

                                       47

<PAGE>

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED
                                                                                 DECEMBER 31,
                                                                      --------------------------------
                                                                       2003         2002         2001
                                                                      ------       ------       ------
<S>                                                                   <C>          <C>          <C>
North America ...............................................           69%          65%          71%
Europe ......................................................           18%          21%          12%
Far East ....................................................           10%          13%          16%
Rest of the world ...........................................            3%           1%           1%
                                                                      ----         ----         ----
   Total ....................................................          100%         100%         100%
                                                                      ====         ====         ====
</TABLE>

         During the years ended 2003, 2002 and 2001 we derived 68%, 64% and 68%,
respectively of our revenues from the United States. Revenues from other
countries represented less than 10% individually for the periods presented.

     SIGNIFICANT CUSTOMERS

         Customers comprising 10% or greater of the Company's net revenues are
summarized as follows:

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED
                                                                                 DECEMBER 31,
                                                                      --------------------------------
                                                                       2003         2002         2001
<S>                                                                   <C>          <C>          <C>

Customer A ..................................................             *            *          14%
Customer B ..................................................           18%          10%            *
                                                                        ---          ---            -
   Total ....................................................           18%          10%          14%
                                                                        ==           ==           ==

* Revenue derived from customer represented less than 10% for the period.

</TABLE>

         Of the significant customers noted above, Customer B had a balance of
23% of the outstanding accounts receivable at December 31, 2003. Customer A had
a balance of 11% of the outstanding accounts receivable at December 31, 2002.
None of the significant customers listed above had a balance of 10% or greater
of the outstanding accounts receivable at December 31, 2001.

         The majority of our 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 December 31, 2003 and 2002.

19.      QUARTERLY RESULTS OF OPERATIONS - (UNAUDITED)

         The following table presents certain unaudited consolidated statement
of operations data for our eight most recent quarters.

<TABLE>
<CAPTION>
                                        DEC 31,   SEPT 30,   JUNE 30,    MAR 31,    DEC 31,   SEPT 30,   JUNE 30,    MAR 31,
                                       2003 (1)     2003       2003       2003     2002 (2)   2002 (3)     2002     2002 (4)
                                       --------   --------   --------   --------   --------   --------   --------   --------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Revenues                               $  8,284   $  4,061   $  4,142   $  3,736   $  5,492   $  4,477   $  5,461   $  4,805
Gross Profit                              6,737      2,900      2,680      2,630      3,998      2,854      3,982      3,520
Operating loss                           (1,932)    (4,848)    (4,415)    (3,655)    (6,386)    (3,120)    (1,948)    (3,581)
Net loss                                 (3,656)    (5,217)    (4,444)    (3,657)    (6,373)    (4,432)    (2,071)    (3,654)
Basic and diluted net loss per share   $  (0.18)  $  (0.26)  $  (0.22)  $  (0.18)  $  (0.32)  $  (0.22)  $  (0.10)  $  (0.19)
Shares used in calculating basic
   and diluted net loss per share        20,619     20,384     20,179     20,144     20,134     20,113     20,002     19,351
</TABLE>

     (1) During the fourth quarter of 2003, operating loss, net loss and basic
     and diluted net loss per share included an impairment loss on a cost-method
     investment in a privately held company of $1.0 million. Additionally net
     loss and basic and diluted net loss per share included a provision for
     income taxes of $154,000 related to federal alternative minimum tax.

                                       48
<PAGE>

     (2) During the fourth quarter of 2002, operating loss, net loss and basic
     and diluted net loss per share included a loss due to an impairment of
     goodwill of $3.8 million.

     (3) During the third quarter of 2002, operating loss, net loss and basic
     and diluted net loss per share included an impairment loss on a cost-method
     investment in a privately held company of $1.2 million.

     (4) During the first quarter of 2002, operating loss, net loss and basic
     and diluted net loss per share included a $397,000 charge for severance
     payments made in conjunction with a reduction in force during February
     2002.

                                       49


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.3
<SEQUENCE>6
<FILENAME>f97550exv99w3.txt
<DESCRIPTION>EXHIBIT 99.3
<TEXT>
<PAGE>
                                                                               .
                                                                               .
                                                                               .

                                                                    EXHIBIT 99.3

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                 BALANCE AT   CHARGED TO                 BALANCE AT
                                                 BEGINNING    COSTS AND    DEDUCTIONS/     END OF
                                                 OF PERIOD     EXPENSES    WRITE-OFFS      PERIOD
                                                 ----------   ----------   -----------   ----------
                                                                  (IN THOUSANDS)
<S>                                              <C>          <C>          <C>           <C>
Year ended December 31, 2003
 Allowance for doubtful accounts .............   $      334   $     (129)  $        58   $      147

Year ended December 31, 2002
 Allowance for doubtful accounts .............   $      356   $       38   $        60   $      334

Year ended December 31, 2001
 Allowance for doubtful accounts .............   $      227   $      136   $         7   $      356
</TABLE>

Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the consolidated financial
statements or notes therein.

                                       50

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