IMMERSION CORP (Form: S-3, Received: 09/08/2003 16:37:41)

As filed with the Securities and Exchange Commission on September 8, 2003

Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM S-3

REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933

IMMERSION CORPORATION

(Exact name of Registrant as specified in its charter)


Delaware		94-3180138
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

801 Fox Lane
San Jose, California 95131
(408) 467-1900
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

VICTOR A. VIEGAS
President, Chief Executive Officer
and Chief Financial Officer
IMMERSION CORPORATION
801 Fox Lane
San Jose, California 95131
(408) 467-1900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copy to:

JAMES M. KOSHLAND, ESQ.
Gray Cary Ware & Freidenrich LLP
2000 University Avenue
East Palo Alto, CA 94303-2248
(650) 833-2000

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.

If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box: o

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: x

If this Form is filed to a register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

CALCULATION OF REGISTRATION FEE

Proposed Maximum

Title of Each Class of

Amount to be

Offering Price Per

Aggregate Offering

Amount of

Securities to be Registered

Registered

Share (1)

Price (1)

Registration Fee

Common Stock ($0.001 par value)

6,542,552 shares ⁽²⁾

4.705

30,782,707

2,490.32

(1)		Estimated solely for the purpose of calculating the registration fee pursuant to Rules 457(c) and 457(g) of the Securities Act of 1933, and based on the average of the high and low sales prices of the common stock, as reported on the Nasdaq National Market on August 29, 2003.

(2)		Represents shares issuable (i) upon conversion of outstanding preferred stock and debentures (assuming issuance of maximum amount of debentures), and (ii) in lieu of cash upon payment of dividends on outstanding preferred stock and interest on debentures (assuming issuance of maximum amount of debentures). Pursuant to Rule 416, this Registration Statement also covers such indeterminable additional shares as may become issuable upon conversion of preferred stock and debentures as a result of any future stock splits, stock dividends or similar transactions.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.

Subject to Completion, Dated September 8, 2003
PROSPECTUS

6,542,552 Shares of Common Stock of

Immersion Corporation

(issuable upon conversion of preferred stock and debentures)

This prospectus relates to the public offering, which is not being underwritten, of 6,542,552 shares of common stock of Immersion Corporation. The shares of our common stock may be offered by the selling stockholder named in this prospectus, upon conversion of issued and issuable shares of Series A Redeemable Convertible Preferred Stock and upon the conversion of issuable Senior Redeemable Convertible Debentures. The shares of Preferred Stock are convertible into approximately 2,686,897 shares of Immersion’s Common Stock, and the Debentures are convertible into approximately 3,855,655 shares of Immersion’s Common Stock. Additional shares of Immersion’s Preferred Stock and additional Debentures, which are convertible into Immersion’s Common Stock, may be issued in lieu of cash as dividends on the Preferred Stock and interest on the Debentures, respectively. We will not receive any proceeds from the sale of our Common Stock by the selling stockholders. All expenses of registration incurred in connection with this offering are being borne by us, but all selling and other expenses incurred by the selling stockholder will be borne by the selling stockholder. None of the shares offered pursuant to this prospectus have been registered prior to the filing of the registration statement of which this prospectus is a part.

The Common Stock offered in this prospectus may be offered and sold by the selling stockholder directly or through broker-dealers acting solely as agents. The distribution of the Common Stock may be effected in one or more of the following types of transactions:

• transactions on any national securities exchange or quotation service on which the common stock may be listed or quoted at the time of the sale, including the Nasdaq National Market;

• transactions in the over-the-counter market; or

• transactions otherwise than on such exchanges or services or in the over-the-counter market.

These transactions may include block transactions or crosses. Crosses are transactions in which the same broker acts as an agent on both sides of the trade. These transactions may be made at market prices and on terms prevailing at the time of sale, prices related to such prevailing market prices or negotiated prices. Usual and customary or specially negotiated brokerage fees or commissions may be paid by the selling stockholder in connection with these sales.

Immersion Corporation’s Common Stock is traded on the Nasdaq National Market under the symbol “IMMR”. On September 5, 2003, the last reported sales price for the common stock was $5.54 per share.

INVESTING IN THE COMMON STOCK OFFERED IN THIS PROSPECTUS INVOLVES A HIGH DEGREE OF RISK. SEE “RISK FACTORS” BEGINNING ON PAGE 4.

The selling stockholder and any brokers executing selling orders on behalf of the selling stockholder may be deemed to be “underwriters” within the meaning of the Securities Act of 1933. Commissions received by a broker executing selling orders may be deemed to be underwriting commissions under the Securities Act.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

TABLE OF CONTENTS


DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
SUMMARY
RISK FACTORS
USE OF PROCEEDS
DIVIDEND POLICY
DESCRIPTION OF CAPITAL STOCK
SELLING STOCKHOLDER
PLAN OF DISTRIBUTION
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 23.2

TABLE OF CONTENTS


	Page

Disclosure Regarding Forward-Looking Statements		i
Summary		1
Risk Factors		4
Use of Proceeds		16
Dividend Policy		16
Description of Capital Stock		17
Selling Stockholder		19
Plan of Distribution		20
Legal Matters		21
Experts		22
Where You Can Find More Information		23

You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The selling stockholder is not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

Immersion is a registered trademark of Immersion Corporation. This prospectus contains product names, trade names and trademarks of Immersion and other organizations.

The terms “Immersion,” “we,” “us,” “our,” and the “company,” as used in this prospectus, refer to Immersion Corporation and its consolidated subsidiaries.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus 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 listed under “Risk Factors” and elsewhere in this prospectus and those described in our other reports filed with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and we undertake no obligation to update these forward-looking statements after the filing of this report. You are urged to review carefully and consider our various disclosures in this report and in our other reports filed with the SEC that attempt to advise you of the risks and factors that may affect our business.

SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. You should read the entire prospectus and the documents incorporated by reference in this prospectus carefully before making an investment decision.

Immersion Corporation

We develop, manufacture, license and support a wide range of hardware and software technologies that enable users to interact with a multitude of computing and other devices using their sense of touch. We focus on four application areas — consumer, computing and entertainment, medical simulation, industrial and automotive, and three-dimensional and professional. In high volume market areas such as consumer computer peripherals and automotive interfaces, we primarily license our touch-enabling technologies to third party manufacturers. We have licensed our intellectual property to numerous manufacturers of mice, joysticks, knobs, wheels and gamepads targeted at consumers. For lower-volume markets like medical simulation systems and three-dimensional and professional products, our primary strategy is to manufacture and sell products through direct sales, distributors and value added resellers. We sell medical simulation devices used to train and allow health care providers to practice and enhance their skills in a variety of procedures. These devices simulate such procedures as intravenous catheterization, endovascular interventions, and laparoscopic and endoscopic surgical procedures. We also sell three-dimensional and professional products. Our three-dimensional products include the MicroScribe G2 desktop digitizer product line and associated software and accessories, specialized whole-hand sensing gloves, armatures and software, including the CyberGlove, CyberGrasp, CyberForce, CyberTouch and VirtualHand software products that permit simulated interaction with three-dimensional environments. In all market areas, we also engage in development projects for government agencies and corporations from time to time. The government contracts help fund advanced research and development and corporate contracts are typically for product development.

Our objective is to proliferate our TouchSense® technologies across markets, platforms and applications so that touch and feel become as common as color, graphics and sound in modern user interfaces. Immersion and its wholly-owned subsidiaries hold more than 185 issued patents and more than 200 pending patent applications worldwide covering various aspects of hardware and software technologies.

We were incorporated in California in May 1993 and reincorporated in Delaware in November 1999. Our principal executive offices are located at 801 Fox Lane, San Jose, California 95131, our telephone number is (408) 467-1900 and our website is located at www.immersion.com. Information on our website is not a part of this prospectus.

Recent Developments

Microsoft Settlement

On July 25, 2003, we entered into agreements with Microsoft Corporation regarding certain license rights under our patents, the settlement of our lawsuit against Microsoft, and certain investments by Microsoft in our Series A Redeemable Convertible Preferred Stock and 7% Senior Redeemable Convertible Debentures. Pursuant to a License Agreement, we granted to Microsoft a royalty-free, perpetual, irrevocable license to our world-wide portfolio of patents. This license permits Microsoft to make, use and sell hardware, software and services (excluding adult products, medical products and foundry products, referred to as “excluded products”) covered by our patents. We also granted to Microsoft a limited right, under our patents relating to touch technology, to sublicense certain rights (excluding rights to excluded products and peripheral devices) to third party customers of Microsoft’s or Microsoft’s subsidiary’s operating systems (other than Sony Corporation, Sony Computer Entertainment, Inc., Sony Computer Entertainment of America, Inc., and their subsidiaries). In exchange, for these rights and the rights included in the Sublicense Agreement described below, Microsoft paid Immersion a one-time payment of $20 million. Under a Settlement Agreement, Microsoft and Immersion agreed to settle and dismiss the patent infringement litigation that we brought in 2002 against Microsoft in the United States District Court for the Northern District of California. Under a Sublicense Agreement, we granted to Microsoft the right to grant a sublicense under our world-wide portfolio of patents relating to touch technology to entities which distribute game

platforms under their own name, which will permit such game platform vendors to make, use and sell consumer computer game platforms (excluding excluded products). This sublicense right includes the right for the game platform vendors to further sublicense third party developers to use certain software development tools to develop games for the applicable game platform. The parties will share revenues from the sublicense rights granted. Microsoft’s right to grant sublicenses under the Sublicense Agreement expires 24 months after the effective date of the Sublicense Agreement.

Under the terms of the Series A Redeemable Convertible Preferred Stock Purchase Agreement, Microsoft agreed to purchase 2,185,792 shares of the Preferred Stock for $2.745 per share, an aggregate purchase price of $6,000,000. The Preferred Stock accrues cumulative dividends at a rate of 7% per year, payable in either cash or additional shares of Preferred Stock, is initially convertible into one share of our Common Stock for each share of Preferred Stock, and is redeemable under certain circumstances by either Microsoft or Immersion. In addition, upon other events, including the acquisition of Immersion or a settlement of the lawsuit with Sony Computer Entertainment of America, Inc. and Sony Computer Entertainment, Inc., under specified circumstances, the holder of Series A Preferred Stock shall receive a liquidation preference of up to two and one-half (2.5) times the original purchase price of the Series A Preferred Stock. Further, under specified circumstances, the holder of the Series A Redeemable Convertible Preferred Stock shall receive a liquidation preference equal to three and one-eighths (3.125) times the original purchase price of the Series A Preferred Stock. Immersion and Microsoft also entered into (i) a Registration Rights Agreement pursuant to which we have, among other things, agreed to prepare and file with the Securities and Exchange Commission within 45 days of the closing of the sale of the Preferred Stock a registration statement to cover the resale of shares of Immersion Common Stock issuable upon conversion of the Preferred Stock and the Debentures, and (ii) a Stockholder’s Agreement pursuant to which Microsoft has, among other things, agreed to not directly purchase additional securities of Immersion without our consent as long as it holds in excess of 25% of the shares of Preferred Stock originally issued to it.

Under the terms of the Senior Redeemable Convertible Debenture Purchase Agreement, we may require Microsoft to purchase up to $3,000,000 in Debentures during the first twelve months following the execution of the Debenture Purchase Agreement, and an additional $2,000,000 each year over the following three years. We intend to use the proceeds from the sale of the Debentures for litigation expenses related to our lawsuit against Sony. The Debentures accrue interest at a rate of 7% per year, are redeemable (i) at one hundred ten percent (110%) of the principal amount at Microsoft’s option three years after the fulfillment of certain customary closing conditions by Immersion, or (ii) at one hundred twenty-five percent (125%) of the principal amount immediately upon the occurrence of certain events, and are initially convertible into shares of Immersion’s Common Stock at a rate of approximately 0.364 shares for every dollar of outstanding principal and accrued but unpaid interest, subject to adjustment in certain circumstances. In order to comply with applicable Nasdaq rules, we have agreed not to issue any Debentures or Series A Preferred Stock to Microsoft which would require approval of our stockholders, unless and until our stockholders have approved the issuance.

The Offering


Common stock offered by the selling stockholder		6,542,552 shares, includes 2,686,897 shares issuable upon conversion of the Preferred Stock and dividends on the Preferred Stock and 3,855,655 shares issuable upon conversion of the Debentures and interest on the Debentures.

Common stock to be outstanding after this offering		Up to 27,047,394 shares, which includes 20,504,842 shares outstanding as of September 2, 2003.

Use of proceeds		We will not receive any of the proceeds from the sale of shares by the selling stockholder.

Nasdaq National Market symbol		IMMR

Risk Factors		See “Risk Factors” beginning on page 4 and other information in this prospectus for a discussion of factors you should consider carefully before investing in shares of our Common Stock.

The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of September 2, 2003 and excludes shares of common stock reserved for issuance under our stock option plans, employee stock purchase plan and outstanding warrants and upon exercise of stock options and warrants assumed in connection with our acquisitions of HT Medical Systems, Inc. and Virtual Technologies, Inc.

RISK FACTORS

An investment in the securities offered by this prospectus involves a high degree of risk. You should carefully consider the following factors and other information in this prospectus and in the documents incorporated by reference in this prospectus before deciding to purchase shares of our common stock. If any of these risks occur, our business could be harmed, the trading price of our stock could decline and you may lose all or part of your investment.

WE HAD AN ACCUMULATED DEFICIT OF $84 MILLION AS OF JUNE 30, 2003, HAVE A HISTORY OF LOSSES, WILL EXPERIENCE LOSSES IN THE FUTURE AND MAY NOT ACHIEVE OR MAINTAIN PROFITABILITY.

Since 1997, we have incurred losses in every fiscal quarter. We will need to generate significant revenue to achieve and maintain profitability. We anticipate that our expenses will increase in the foreseeable future as we:

• protect and enforce our intellectual property, including the costs of our litigation against Sony Computer Entertainment;

• continue to develop our technologies;

• attempt to expand the market for touch-enabled products;

• increase our sales efforts; and

• pursue strategic relationships.

If our revenues grow more slowly than we anticipate or if our operating expenses exceed our expectations, we may not achieve or maintain profitability.

OUR CURRENT LITIGATION AGAINST SONY COMPUTER ENTERTAINMENT IS EXPENSIVE, DISRUPTIVE AND TIME CONSUMING AND WILL CONTINUE TO BE, AND IF WE ARE NOT SUCCESSFUL, COULD ADVERSELY AFFECT OUR BUSINESS.

On February 11, 2002, we filed a complaint against Microsoft Corporation, Sony Computer Entertainment, Inc., and Sony Computer Entertainment of America, Inc. in the U.S. District Court for the Northern District Court of California alleging infringement of U.S. Patent Nos. 5,889,672 and 6,275,213. The case was assigned to United States District Judge Claudia Wilken. On April 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, we 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. It is anticipated that the Court will issue a written claim construction decision, though the timing of when the Court issues its ruling is within the Court’s discretion. 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 July 28, 2003, we announced that we had settled our legal differences with Microsoft and we and Microsoft have agreed to dismiss all claims and counterclaims relating to this matter as well as assume financial responsibility for our respective legal costs with respect to the lawsuit between Immersion and Microsoft. We continue to pursue our claims of infringement against Sony Computer Entertainment. In the event we settle our lawsuit with Sony

Computer Entertainment, we will have certain obligations to pay certain sums to Microsoft. If Sony Computer Entertainment were successful in its counterclaims and our patents were deemed invalid and unenforceable, the assets relating to the patents that were deemed invalid would be impaired and we may be required to pay attorneys fees.

Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. 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. We expense litigation costs as incurred and only accrue 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 our key management and personnel. As a result, until such time as it is resolved, the litigation could adversely affect our business. Further, any unfavorable outcome could adversely affect our business.

THE MARKET FOR TOUCH-ENABLING TECHNOLOGIES AND TOUCH-ENABLED PRODUCTS IS AT AN EARLY STAGE AND IF MARKET DEMAND DOES NOT DEVELOP, WE MAY NOT ACHIEVE OR SUSTAIN REVENUE GROWTH.

The market for our touch-enabling technologies, and our licensees’ touch-enabled products is at an early stage. If we and our licensees are unable to develop demand for touch-enabling technologies and touch-enabled products, we may not achieve or sustain revenue growth. We cannot accurately predict the growth of the markets for these technologies and products, the timing of product introductions or the timing of commercial acceptance of these products. We are currently working to increase the demand for these technologies and products in the following five principal application areas:

• touch-enabled medical simulators that can be used for training and skills assessment for procedures such as catheterization, bronchoscopy, colonoscopy, sigmoidoscopy and laparoscopic procedures;

• touch-enabled peripherals for gaming on personal computers and dedicated gaming consoles;

• touch-enabled automotive interfaces;

• touch-enabled, whole-hand sensing gloves, such as our CyberForce product;

• cursor control peripherals, such as touch-enabled mice and trackballs, for use with personal computers; and

• touch-enabled personal electronics, such as cell phones and PDAs.

Even if our touch-enabling technologies and our licensees’ touch-enabled products are ultimately widely adopted, widespread adoption may take a long time to occur. The timing and amount of royalties and product sales that we receive will depend on whether the products marketed achieve widespread adoption and, if so, how rapidly that adoption occurs. We expect that we will need to pursue extensive and expensive marketing and sales efforts to educate prospective licensees and end users about the uses and benefits of our technologies and to persuade software developers to create software that utilizes our technologies.

OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE VOLATILE, AND IF OUR FUTURE RESULTS ARE BELOW THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR INVESTORS, THE PRICE OF OUR COMMON STOCK IS LIKELY TO DECLINE.

Our revenues and operating results are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control and any of which could cause the price of our common stock to decline.

These factors include:

• the establishment or loss of licensing relationships;

• the timing of payments under fixed and/or up-front license agreements;

• the timing of our expenses, including costs related to litigation, acquisitions of technologies or businesses;

• the timing of introductions of new products and product enhancements by us, our licensees or their competitors;

• our ability to develop and improve our technologies;

• our ability to attract, integrate and retain qualified personnel; and

• seasonality in the demand for our licensees’ products.

Accordingly, we believe that period-to-period comparisons of our operating results should not be relied upon as an indicator of our future performance. In addition, because a high percentage of our operating expenses are fixed, a shortfall of revenues can cause significant variations in operating results from period to period.

IF WE ARE UNABLE TO ENTER INTO NEW LICENSING ARRANGEMENTS WITH OUR EXISTING LICENSEES AND WITH ADDITIONAL THIRD-PARTY MANUFACTURERS FOR OUR TOUCH-ENABLING TECHNOLOGY, OUR ROYALTY REVENUE MAY NOT GROW.

Our revenue growth is significantly dependent on our ability to enter into new licensing arrangements. Our failure to enter into new licensing arrangements will cause our operating results to suffer. We face numerous risks in obtaining new licenses on terms consistent with our business objectives and in maintaining, expanding and supporting our relationships with our current licensees. These risks include:

• the lengthy and expensive process of building a relationship with potential licensees;

• the fact that we may compete with the internal design teams of existing and potential licensees;

• difficulties in persuading consumer product manufacturers to work with us, to rely on us for critical technology and to disclose to us proprietary product development and other strategies;

• difficulties in persuading existing and potential licensees to bear the development costs necessary to incorporate our technologies into their products; and

• challenges in demonstrating the compelling value of our technologies in new applications like cell phones and automobiles.

A substantial majority of our current royalty revenue has been derived from the licensing of our portfolio of touch-enabling technologies for personal computer gaming peripherals, such as joysticks and steering wheels. The market for joysticks and steering wheels for use with personal computers is a substantially smaller market than either the mouse market or the dedicated gaming console market and is characterized by declining average selling prices. If we are unable to gain market acceptance beyond the personal computer gaming peripherals market, we may not achieve royalty revenue growth.

BECAUSE WE HAVE A FIXED PAYMENT LICENSE WITH MICROSOFT, OUR ROYALTY REVENUE FROM LICENSING IN THE GAMING MARKET AND OTHER CONSUMER MARKETS MIGHT DECLINE IF MICROSOFT INCREASES ITS VOLUME OF SALES OF TOUCH-ENABLED GAMING PRODUCTS AND CONSUMER PRODUCTS AT THE EXPENSE OF OUR OTHER LICENSEES.

Under the terms of our present agreement with Microsoft, Microsoft receives a royalty-free, perpetual, irrevocable license to Immersion’s world-wide portfolio of patents. This license permits Microsoft to make, use and sell hardware, software and services excluding specified products covered by Immersion’s patents. Immersion also granted to Microsoft a limited right, under Immersion’s patents relating to touch technology, to sublicense specified rights excluding rights to excluded products and peripheral devices, to third party customers of Microsoft’s or Microsoft’s subsidiary’s operating systems (other than Sony Corporation, Sony Computer Entertainment, Inc., Sony Computer Entertainment of America, Inc., and their subsidiaries). In exchange, for these rights and the rights included in a separate Sublicense Agreement, Microsoft paid Immersion a one-time payment of $20 million. We will not receive any further revenues or royalties from Microsoft under our current agreement with Microsoft. Microsoft has a significant share of the market for touch-enabled gaming computer peripherals and is pursuing other consumer markets such as cell phones and PDAs. Microsoft has significantly greater financial, sales and marketing resources, as well as greater name recognition and a larger customer base, than our other licensees. In the event that Microsoft increases its share of these markets, our royalty revenue from other licensees in these market segments might decline.

OUR RELATIONSHIP WITH MEDTRONIC, A LEADING MEDICAL DEVICE COMPANY, MAY INTERFERE WITH OUR ABILITY TO ENTER INTO DEVELOPMENT AND LICENSING RELATIONSHIPS WITH MEDTRONIC’S COMPETITORS.

In February 2003, we entered into an agreement with Medtronic, a leading medical device company, in which Medtronic was granted a right of first negotiation. The right of first negotiation applies to any agreement

under which we would grant a third party, which we refer to as a “proposed agreement,” rights to use specified Immersion intellectual property in specified fields of use. Under the terms of the right of first negotiation, we must notify Medtronic if we have received a written offer from a third party to enter into a proposed agreement, or if we are seeking to find a third party to enter into a proposed agreement. Medtronic has the exclusive right, for a period of forty days, to negotiate with us regarding the material terms of the proposed agreement. If during such forty-day period, Medtronic and Immersion fail to reach agreement in principle upon the material terms of the proposed agreement, then we will have twelve months after the expiration of such forty day period to enter into an agreement with the applicable third party, provided that the terms of such agreement are in the aggregate more favorable to Immersion than the offer presented by Medtronic or the terms under which we initially sought to find a third party to enter into the proposed agreement. The right of first negotiation ceases to apply to any proposed agreement for which Medtronic and Immersion reach agreement in principle upon the material terms during the applicable forty-day period, but thereafter do not execute a definitive agreement within 145 days after the expiration of such forty-day period. In addition, Medtronic’s right of first negotiation terminates upon the second anniversary of the completion of a development project to be undertaken by us for Medtronic. Although the right of first negotiation has not impeded our ability to interest other medical device companies in our technologies to date, this right of first negotiation or our relationship with Medtronic may impede, restrict or delay our ability to enter into development or license agreements with large medical device companies that compete with Medtronic. Any restriction in our ability to enter into development or license agreements with other medical device companies would adversely affect our revenues.

MEDTRONIC ACCOUNTS FOR A LARGE PORTION OF OUR REVENUES AND A REDUCTION IN SALES TO MEDTRONIC, A REDUCTION IN DEVELOPMENT WORK, OR A DECISION NOT TO RENEW EXISTING LICENSES BY MEDTRONIC MAY REDUCE OUR TOTAL REVENUE.

For the three months ended June 30, 2003 and 2002 we derived 3% and 14%, respectively, of our net revenues from Medtronic. For the six months ended June 30, 2003 and 2002, Medtronic accounted for 3% and 12% of our net revenues. If our product sales to Medtronic decline, and/or Medtronic reduces the development activities we perform then our total revenues may decline. In addition, under our recent agreements with Medtronic, monies advanced by Medtronic are subject to refund provisions under certain circumstances. These circumstances have not arisen to date, but we cannot predict whether these circumstances will arise in the future.

MADCATZ ACCOUNTS FOR A LARGE PORTION OF OUR ROYALTY REVENUE AND THE FAILURE OF MADCATZ TO ACHIEVE SALES VOLUMES FOR ITS GAMING PRODUCTS THAT INCORPORATE OUR TOUCH-ENABLING TECHNOLOGIES MAY REDUCE OUR ROYALTY REVENUE.

MadCatz accounts for a large portion of our royalty revenue. For the quarter ended June 30, 2003 our royalty revenues from MadCatz significantly increased as compared to the same period during 2002. For the three months ended June 30, 2003 we derived 9% of our net revenues and 46% of our royalty and license revenue from MadCatz, and for the three months ended June 30, 2002, we derived 8% of our net revenue and 19% of our royalty and license revenue from MadCatz. For the six months ended June 30, 2003, we derived 10% of our total revenues and 50% of our royalty and license revenue from MadCatz as compared to the six months ended June 30, 2002, MadCatz accounted for 8% of our total revenues and 22% of our royalty and license revenue. We expect that a significant portion of our total revenues will continue to be derived from MadCatz. If MadCatz fails to achieve anticipated sales volumes for its computer peripheral products that incorporate our technologies, our royalty revenue would be reduced.

LOGITECH ACCOUNTS FOR A LARGE PORTION OF OUR ROYALTY REVENUE AND THE FAILURE OF LOGITECH TO ACHIEVE SALES VOLUMES FOR ITS GAMING AND CURSOR CONTROL PERIPHERAL PRODUCTS THAT INCORPORATE OUR TOUCH-ENABLING TECHNOLOGIES MAY REDUCE OUR ROYALTY REVENUE.

Logitech has in the past and may in the future account for a large portion of our royalty revenue. For the quarter ended June 30, 2003 our revenues from Logitech significantly declined as compared to the same period during 2002. For the three months ended June 30, 2003 we derived 3% of our net revenues and 14% of our royalty and license revenue from Logitech, and for the three months ended June 30, 2002, we derived 7% of our net revenue and 22% of our royalty and license revenue from Logitech. For the six months ended June 30, 2003, we derived 2%

of our total revenues and 8% of our royalty and license revenue from Logitech as compared to the six months ended June 30, 2002, Logitech accounted for 8% of our total revenues and 28% of our royalty and license revenue. We expect that a significant portion of our total revenues will continue to be derived from Logitech. If Logitech fails to achieve anticipated sales volumes for its computer peripheral products that incorporate our technologies, our royalty revenue would be reduced.

WE MAY ELECT TO RAISE ADDITIONAL CAPITAL IN THE FUTURE WHICH MAY RESULT IN SUBSTANTIAL DILUTION TO OUR STOCKHOLDERS.

Should any unanticipated circumstances arise which significantly increase our cash or capital requirements we may elect to raise additional capital to have a supply of cash for such events or future periods. Our plans to raise additional capital may include possible customer prepayments of certain royalty obligations in exchange for a royalty discount and/or other negotiated concessions, entering into new license agreements that require up-front license payments, and through debt or equity financing. We have taken measures to control our costs and will continue to monitor these efforts. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all. Changes in equity markets over the past two years have adversely affected the ability of companies to raise equity financing and have adversely affected the markets for financing for companies with a history of losses such as ours. Additional financing may require us to issue additional shares of our common or preferred stock such that our existing stockholders may experience substantial dilution.

THE RECENT SLOWDOWN IN PERSONAL COMPUTER SALES MAY LEAD TO A REDUCTION IN SALES OF OUR LICENSEES’ TOUCH-ENABLED PERIPHERAL PRODUCTS, SUCH AS TOUCH-ENABLED MICE AND JOYSTICKS, WHICH MAY ADVERSELY AFFECT OUR ROYALTY REVENUE.

Over the past year, large personal computer manufacturers have announced slower than anticipated sales of personal computers. This slowdown in personal computer sales may adversely affect sales of our licensees’ royalty bearing, touch-enabled peripheral products, such as touch-enabled mice and joysticks, that are used with personal computers. The slowdown affecting personal computer companies may also make it more difficult to persuade such manufacturers to incorporate more costly touch-enabled mice products into their product lines. The impact of this downturn on our royalty revenue may be more pronounced if a significant cause of this trend is a reduction in the amount that individuals and companies have budgeted for personal computer-related devices, such as touch-enabled mice, rather than saturation of the market for personal computers generally. As a result, our results of operations and financial condition may be adversely affected.

WE MAY BE UNABLE TO INCREASE SALES OF OUR MEDICAL SIMULATION DEVICES IF, AS A RESULT OF THE CURRENT ECONOMIC SLOWDOWN OR OTHER FACTORS, MEDICAL INSTITUTIONS DO NOT BUDGET FOR SUCH DEVICES.

Our medical simulation products, such as our AccuTouch Endoscopy Simulator, the AccuTouch Endovascular Simulator and our Laparoscopic Surgical Workstation, have only recently begun to be used by hospitals and medical schools to train healthcare professionals. As a result, many of these medical institutions do not budget for such simulation devices. To increase sales of our simulation devices, we must, in addition to convincing medical institution personnel of the utility of the devices, persuade them to include a significant expenditure for the devices in their budgets. If these medical institutions are unwilling to budget for simulation devices or reduce their budgets as a result of the economic slowdown, cost-containment pressures or other factors, we may not be able to increase sales of medical simulators at a satisfactory rate. As a result of the terrorist attacks against the United States on September 11, 2001 and the continuing threat of terrorist acts, hospitals may have assigned priority in their capital expenditure budgets to equipment that will enable them to respond more effectively to catastrophic emergencies, and federal, state and local governments may have delayed certain funding for medical and educational institutions, in which case purchases of medical simulators may have been deferred. If we are unable to increase sales of our medical simulation products, our results of operations and financial condition may be adversely affected. We believe that medical device companies may also decrease their expenditures in corporate research and development budgets and this may adversely affect our contract and development revenue generated by the medical segment.

WE DO NOT CONTROL OR INFLUENCE OUR LICENSEES’ MANUFACTURING, PROMOTION, DISTRIBUTION OR PRICING OF THEIR PRODUCTS INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES, UPON WHICH WE ARE DEPENDENT TO GENERATE ROYALTY REVENUE.

A key part of our business strategy is to license our intellectual property to companies that manufacture and sell products incorporating our touch-enabling technologies. Sales of those products generate royalty and license revenue for us. For the quarters ended June 30, 2003 and 2002, 19% and 30% of our total revenues were royalty and license revenues. For the six months ended June 30, 2003 and 2002, 21% and 28% of our total revenues were royalty and license revenues. However, we do not control or influence the manufacture, quality control, promotion, distribution or pricing of products that are manufactured and sold by our licensees. In addition, we generally do not have commitments from our licensees that they will continue to use our technology in future products. As a result, products incorporating our technologies may not be brought to market, meet quality control standards, achieve commercial acceptance or generate meaningful royalty revenue for us. For us to generate royalty revenue, licensees that pay us per-unit royalties must manufacture and distribute products incorporating our touch-enabling technologies in a timely fashion and generate consumer demand through marketing and other promotional activities. Products incorporating our touch-enabling technologies are generally difficult to design and manufacture which may cause product introduction delays or quality control problems. If our licensees fail to stimulate and capitalize upon market demand for products that generate royalties for us, or if products are recalled because of quality control problems, our revenues will not grow and could decline.

Peak demand for products that incorporate our technologies, especially in the computer gaming peripherals market, typically occurs in the third and fourth calendar quarters as a result of increased demand during the year-end holiday season. If our licensees do not ship licensed products in a timely fashion or fail to achieve strong sales in the fourth quarter of the calendar year, we may not receive related royalty and license revenue.

REDUCED SPENDING BY CORPORATE RESEARCH AND DEVELOPMENT DEPARTMENTS MAY ADVERSELY AFFECT SALES OF OUR THREE-DIMENSIONAL AND PROFESSIONAL PRODUCTS.

We believe that the current economic downturn has led to a reduction in corporations’ budgets for research and development in several sectors, including the automotive and aerospace sectors, which use our three-dimensional and professional products. Sales of our three-dimensional and professional products, including our CyberGlove line of whole-hand sensing gloves and our MicroScribe G2 line of three-dimensional digitizers may be adversely affected by these cuts in corporate research and development budgets.

WE HAVE LIMITED DISTRIBUTION CHANNELS AND RESOURCES TO MARKET AND SELL OUR MEDICAL SIMULATION AND THREE-DIMENSIONAL SIMULATION PRODUCTS, AND IF WE ARE UNSUCCESSFUL IN MARKETING AND SELLING THESE PRODUCTS WE MAY NOT ACHIEVE OR SUSTAIN PRODUCT REVENUE GROWTH.

We have limited resources for marketing and selling medical simulation or three-dimensional simulation products either directly or through distributors. To achieve our business objectives we must build a balanced mixture of sales through a direct sales channel and through qualified distribution channels. The success of our efforts to sell medical simulation and three-dimensional simulation products will depend upon our ability to retain and develop a qualified sales force and effective distributor channels. We may not be successful in attracting and retaining the personnel necessary to sell and market our simulation products. A number of our distributors represent small-specialized companies that may not have sufficient capital or human resources to support the complexities of selling and supporting simulation products. There is no assurance that our direct selling efforts will be effective, distributors will market our products successfully or, if our relationships with distributors terminate, we will be able to establish relationships with other distributors on satisfactory terms, if at all. Any disruption in the distribution, sales or marketing network for our simulation products could have a material adverse effect on our product revenues.

LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS COULD BE EXPENSIVE, DISRUPTIVE, AND TIME CONSUMING; COULD RESULT IN THE IMPAIRMENT OR LOSS OF PORTIONS OF OUR INTELLECTUAL PROPERTY; AND COULD ADVERSELY AFFECT OUR BUSINESS.

Intellectual property litigation, whether brought by us or by others against us, could result in the expenditure of significant financial resources and the diversion of management’s time and efforts. From time to time, we initiate claims against third parties that we believe infringe our intellectual property rights. We intend to enforce our intellectual property rights vigorously and may initiate litigation against parties that we believe are infringing our intellectual property rights if we are unable to resolve matters satisfactorily through negotiation. Litigation brought to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. In addition, any litigation in which we are accused of infringement may cause product shipment delays, require us to develop non-infringing technology or require us to enter into royalty or license agreements even before the issue of infringement has been decided on the merits. If any litigation were not resolved in our favor, we could become subject to substantial damage claims from third parties and indemnification claims from our licensees. We and our licensees could be enjoined from the continued use of the technology at issue without a royalty or license agreement. Royalty or license agreements, if required, might not be available on acceptable terms, or at all. If a third party claiming infringement against us prevailed and we could not develop non-infringing technology or license the infringed or similar technology on a timely and cost-effective basis, our expenses would increase and our revenues could decrease.

We attempt to avoid infringing known proprietary rights of third parties. However, third parties may hold, or may in the future be issued, patents that could be infringed by our products or technologies. Any of these third parties might make a claim of infringement against us with respect to the products that we manufacture and the technologies that we license. From time to time, we have received letters from companies, several of which have significantly greater financial resources than we do, asserting that some of our technologies, or those of our licensees, infringe their intellectual property rights. Certain of our licensees have received similar letters from these or other companies. Such letters may influence our licensees’ decisions whether to ship products incorporating our technologies. Although none of these matters has resulted in litigation to date, any of these notices, or additional notices that we could receive in the future from these or other companies, could lead to litigation.

We have acquired patents from third parties and also license some technologies from third parties. We must rely upon the owners of the patents or the technologies for information on the origin and ownership of the acquired or licensed technologies. As a result, our exposure to infringement claims may increase. We generally obtain representations as to the origin and ownership of acquired or licensed technology and indemnification to cover any breach of these representations. However, representations may not be accurate and indemnification may not provide adequate compensation for breach of the representations. Intellectual property claims against our licensees, or us whether or not they have merit, could be time-consuming to defend, cause product shipment delays, require us to pay damages, harm existing license arrangements, or require us or our licensees to cease utilizing the technology unless we can enter into royalty or licensing agreements. Royalty or licensing agreements might not be available on terms acceptable to us or at all. Furthermore, claims could also result in claims from our licensees under the indemnification provisions of their agreements with us.

IF WE FAIL TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, OUR ABILITY TO LICENSE OUR TECHNOLOGIES AND TO GENERATE REVENUES WOULD BE IMPAIRED.

Our business depends on generating revenues by licensing our intellectual property rights and by selling products that incorporate our technologies. If we are not able to protect and enforce those rights, our ability to obtain future licenses and royalty revenue could be impaired. In addition, if a court were to limit the scope of, declare unenforceable or invalidate any of our patents, current licensees may refuse to make royalty payments or may themselves choose to challenge one or more of our patents. Also it is possible that:

• our pending patent applications may not result in the issuance of patents;

• our patents may not be broad enough to protect our proprietary rights; and

• effective patent protection may not be available in every country in which our licensees do business.

We also rely on licenses, confidentiality agreements and copyright, trademark and trade secret laws to establish and protect our proprietary rights. It is possible that:

• laws and contractual restrictions may not be sufficient to prevent misappropriation of our technologies or deter others from developing similar technologies; and

• policing unauthorized use of our products and trademarks would be difficult, expensive and time-consuming, particularly overseas.

PRODUCT LIABILITY CLAIMS COULD BE TIME-CONSUMING AND COSTLY TO DEFEND, AND COULD EXPOSE US TO LOSS.

Claims that our products or our licensees’ products have flaws or other defects that lead to personal or other injury are common in the computer peripherals industry and medical fields. If products that we or our licensees sell cause personal injury, financial loss or other injury to our or our licensees’ customers, the customers or our licensees may seek damages or other recovery from us. Any claims against us would be time-consuming, expensive to defend and distracting to management and could result in damages and injure our reputation or the reputation of our licensees or their products. This damage could limit the market for our and our licensees’ products and harm our results of operations.

In the past, manufacturers of peripheral products, such as computer mice and certain gaming products such as joysticks, wheels or gamepads, have been subject to claims alleging that use of their products has caused or contributed to various types of repetitive stress injuries, including carpal tunnel syndrome. We have not experienced any product liability claims to date. Although our license agreements typically contain provisions designed to limit our exposure to product liability claims, existing or future laws or unfavorable judicial decisions could limit or invalidate the provisions.

THE HIGHER COST OF PRODUCTS INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES MAY INHIBIT OR PREVENT THE WIDESPREAD ADOPTION AND SALE OF PRODUCTS INCORPORATING OUR TECHNOLOGIES.

Personal computer gaming peripherals, computer mice and automotive controls incorporating our touch-enabling technologies are more expensive than similar competitive products that are not touch-enabled. Although major manufacturers, such as Logitech, Microsoft, ALPS Electric Co., Ltd. and BMW, have licensed our technology, the greater expense of products containing our touch-enabling technologies as compared to non-touch-enabled products may be a significant barrier to the widespread adoption and sale of touch-enabled products.

COMPETITION BETWEEN OUR PRODUCTS AND OUR LICENSEES’ PRODUCTS MAY REDUCE OUR REVENUE.

Rapid technological change, short product life cycles, cyclical market patterns, declining average selling prices and increasing foreign and domestic competition characterize the markets in which we and our licensees’ compete. We believe that competition in these markets will continue to be intense, and that competitive pressures will drive the price of our products and our licensees’ products downward. These price reductions, if not offset by increases in unit sales or productivity, will cause our revenues to decline.

We face competition from unlicensed products as well. Our licensees or other third parties may seek to develop products, which they believe do not require a license under our intellectual property. These potential competitors may have significantly greater financial, technical and marketing resources than we do, and the costs associated with asserting our intellectual property rights against such products and such potential competitors could be significant. Moreover, if such alternative designs were determined by a court not to require a license under our intellectual property rights, competition from such unlicensed products could limit or reduce our revenues.

IF WE ARE UNABLE TO CONTINUALLY IMPROVE, AND REDUCE THE COST OF OUR TECHNOLOGIES, COMPANIES MAY NOT INCORPORATE OUR TECHNOLOGIES INTO THEIR PRODUCTS, WHICH COULD IMPAIR OUR REVENUE GROWTH.

Our ability to achieve revenue growth depends on our continuing ability to improve, and reduce the cost of, our technologies and to introduce these technologies to the marketplace in a timely manner. If our development efforts are not successful or are significantly delayed, companies may not incorporate our technologies into their products and our revenue growth may be impaired.

IF WE FAIL TO DEVELOP NEW OR ENHANCED TECHNOLOGIES FOR NEW APPLICATIONS AND PLATFORMS, WE MAY NOT BE ABLE TO CREATE A MARKET FOR OUR TECHNOLOGIES OR OUR TECHNOLOGIES MAY BECOME OBSOLETE AND OUR ABILITY TO GROW AND OUR RESULTS OF OPERATIONS MIGHT BE HARMED.

Our initiatives to develop new and enhanced technologies and to commercialize these technologies for new applications and new platforms may not be successful. Any new or enhanced technologies may not be favorably received by consumers and could damage our reputation or our brand. Expanding our technology could also require significant additional expenses and strain our management, financial and operational resources. Moreover, technology products generally have relatively short product life cycles and our current products may become obsolete in the future. Our ability to generate revenues will be harmed if we:

• fail to develop new technologies;

• our new technologies fail to gain market acceptance; or

• our current products become obsolete.

WE DEPEND ON A SINGLE SUPPLIER TO PRODUCE SOME OF OUR MEDICAL SIMULATORS AND MAY LOSE CUSTOMERS IF THIS SUPPLIER DOES NOT MEET OUR REQUIREMENTS.

We have one supplier for some of our custom medical simulators. Any disruption in the manufacturing process from our sole supplier could adversely affect the Company’s ability to deliver our products, ensure quality workmanship and could result in a reduction of the Company’s product sales.

MEDICAL LICENSING AND CERTIFICATION AUTHORITIES MAY NOT ENDORSE OR REQUIRE USE OF OUR TECHNOLOGIES FOR TRAINING PURPOSES, SIGNIFICANTLY SLOWING OR INHIBITING THE MARKET PENETRATION OF OUR MEDICAL SIMULATION TECHNOLOGIES.

Several key medical certification bodies, including the American Board of Internal Medicine, or ABIM, and the American College of Cardiology, or ACC, have great influence in endorsing particular medical methodologies, including medical training methodologies, for use by medical professionals. In the event that the ABIM and the ACC, as well as other, similar bodies, do not endorse our medical simulation training products as a training vehicle, market penetration for our products could be significantly and adversely affected.

AUTOMOBILES INCORPORATING OUR TOUCH-ENABLING TECHNOLOGIES ARE SUBJECT TO LENGTHY PRODUCT DEVELOPMENT PERIODS, MAKING IT DIFFICULT TO PREDICT WHEN AND WHETHER WE WILL RECEIVE PER UNIT AUTOMOTIVE ROYALTIES.

The product development process for automobiles is very lengthy. We do not earn per unit royalty revenue on our automotive technologies unless, and until, automobiles featuring our technologies are shipped to customers, which may not occur until several years after we enter into an agreement with an automobile manufacturer. Throughout the product development process, we face the risk that an automobile manufacturer or supplier may delay the incorporation of, or choose not to incorporate, our technologies into its automobiles, making it difficult for us to predict the per unit automotive royalties we may receive, if any.

VICTOR VIEGAS, OUR PRESIDENT, CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND DIRECTOR, RECENTLY BECAME THE CHIEF EXECUTIVE OFFICER AND DIRECTOR OF THE COMPANY AND IF THERE ARE DIFFICULTIES WITH THIS LEADERSHIP TRANSITION IT COULD IMPEDE THE EXECUTION OF OUR BUSINESS STRATEGY.

Victor Viegas, our President, Chief Executive Officer, Chief Financial Officer and Director, took over the duties of Chief Executive Officer and Director in October 2002. Our success will depend to a significant extent on his ability to implement a successful strategy, to successfully lead and motivate our employees, and to work effectively with our executive staff and board of directors. If this leadership transition is not successful, our ability to execute our business strategy would be impeded.

WE MIGHT BE UNABLE TO RETAIN OR RECRUIT NECESSARY PERSONNEL, WHICH COULD SLOW THE DEVELOPMENT AND DEPLOYMENT OF OUR TECHNOLOGIES.

Our ability to develop and deploy our technologies and to sustain our revenue growth depends upon the continued service of our executive officers and other key personnel and upon hiring additional key personnel. A number of employees of our subsidiaries, including several members of these subsidiaries senior management, have departed since the acquisitions were completed. It may not be possible to retain enough key employees of our subsidiaries to operate these businesses effectively.

We may hire additional sales, support, marketing and research and development personnel. We may not be able to attract, assimilate or retain additional highly qualified personnel in the future. Our executive officers and key employees hold stock options with exercise prices considerably above the current market price of our common stock. In addition, merit increases were suspended for fiscal 2002. Each of these factors may impair our ability to retain the services of our executive officers and key employees. Our technologies are complex and we rely upon the continued service of our existing engineering personnel to support licensees, enhance existing technology and develop new technologies.

OUR MAJOR STOCKHOLDERS RETAIN SIGNIFICANT CONTROL OVER US, WHICH MAY LEAD TO CONFLICTS WITH OTHER STOCKHOLDERS OVER CORPORATE GOVERNANCE MATTERS AND COULD ALSO AFFECT THE VOLATILITY OF OUR STOCK PRICE.

Certain stockholders hold a substantial amount of our outstanding common stock. Acting together, these stockholders would be able to exercise significant influence over matters that our stockholders vote upon, including the election of directors and mergers or other business combinations, which could have the effect of delaying or preventing a third party from acquiring control over or merging with us. Further, if any individuals in this group elect to sell a significant portion or all of their holdings of our common stock, the trading price of our common stock could experience volatility.

BECAUSE PERSONAL COMPUTER PERIPHERAL PRODUCTS THAT INCORPORATE OUR TOUCH-ENABLING TECHNOLOGIES CURRENTLY MUST WORK WITH MICROSOFT’S OPERATING SYSTEM SOFTWARE, OUR COSTS COULD INCREASE AND OUR REVENUES COULD DECLINE IF MICROSOFT MODIFIES ITS OPERATING SYSTEM SOFTWARE.

Our hardware and software technology for personal computer peripheral products that incorporate our touch-enabling technologies is currently compatible with Microsoft’s Windows 98, Windows 2000, Windows Me and Windows XP operating systems software, including DirectX, Microsoft’s entertainment applications programming interface. If Microsoft modifies its operating system, including DirectX, we may need to modify our technologies and this could cause delays in the release of products by our licensees. If Microsoft modifies its software products in ways that limit the use of our other licensees’ products, our costs could be increased and our revenues could decline.

LEGISLATIVE ACTIONS, HIGHER INSURANCE COST AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS.

There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings which will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as proposed legislative initiatives following the Enron bankruptcy are likely to increase general and administrative costs. In

addition, insurers are likely to increase premiums as a result of high claims rates over the past year, which we expect will increase our premiums for our various insurance policies. Further, proposed initiatives are expected to result in changes in certain accounting rules, including legislative and other proposals to account for employee stock options as a compensation expense. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.

IF OUR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS, OUR OPERATIONS WOULD BE SERIOUSLY HARMED.

Our facilities could be subject to a catastrophic loss such as fire, flood, earthquake, power outage or terrorist activity. California has experienced problems with its power supply in recent years. As a result, we have experienced utility cost increases and may experience unexpected interruptions in our power supply that could have a material adverse effect on our sales, results of operations and financial condition. In addition, a substantial portion of our research and development activities, manufacturing, our corporate headquarters and other critical business operations are located near major earthquake faults in San Jose, California, an area with a history of seismic events. Any such loss at our facilities could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair and replace the facility. While we believe that we maintain insurance sufficient to cover most long-term potential losses at our facilities, our existing insurance may not be adequate for all possible losses.

WE HAVE EXPERIENCED SIGNIFICANT CHANGE IN OUR BUSINESS, AND OUR FAILURE TO MANAGE THE COMPLEXITIES ASSOCIATED WITH THE CHANGING ECONOMIC ENVIRONMENT AND TECHNOLOGY LANDSCAPE COULD HARM OUR BUSINESS.

Any future periods of rapid change may place significant strains on our managerial, financial, engineering and other resources. Further economic weakness, in combination with our complex technologies, may demand an unusually high level of managerial effectiveness in anticipating, planning, coordinating and meeting our operational needs as well as the needs of our licensees.

WE MAY ENGAGE IN ACQUISITIONS THAT COULD DILUTE STOCKHOLDERS’ INTERESTS, DIVERT MANAGEMENT ATTENTION OR CAUSE INTEGRATION PROBLEMS.

As part of our business strategy, we have in the past acquired, and may in the future acquire, businesses or intellectual property that we feel could complement our business, enhance our technical capabilities or increase our intellectual property portfolio. If we consummate acquisitions through an exchange of our securities, our stockholders could suffer significant dilution. Acquisitions could also create risks for us, including:

• unanticipated costs associated with the acquisitions;

• use of substantial portions of our available cash to consummate the acquisitions;

• diversion of management’s attention from other business concerns;

• difficulties in assimilation of acquired personnel or operations; and

• potential intellectual property infringement claims related to newly acquired product lines.

Any acquisitions, even if successfully completed, might not generate significant additional revenue or provide any benefit to our business.

WE COULD LOSE SOME OR ALL OF THE INVESTMENT THAT WE HAVE MADE IN AN EARLY STAGE TECHNOLOGY COMPANY IF THAT COMPANY IS NOT SUCCESSFUL IN DEVELOPING ITS TECHNOLOGIES OR UNABLE TO OBTAIN ADDITIONAL FINANCING IF AND WHEN NEEDED.

From time to time we have made strategic investments in early stage technology companies that are developing technologies that we believe could complement or enhance our own technologies, if successful. We have made these investments to provide funding for the development of these companies technologies primarily because of the anticipated benefits to Immersion of the availability of these technologies. The prospect of realizing a substantial return on these investments was a secondary, though important, consideration. We wrote down $1.2 million of these investments in the third quarter of 2002, and in the third quarter of 2001 we wrote down

$4.3 million of these investments and approximately $239,000 of interest receivable from these companies, and do not expect to realize any return on these amounts. The remaining company in which we have invested may not succeed in developing its technology, might be unsuccessful in marketing its technology or products based on its technology or might fail for any number of other reasons, including an inability to obtain additional capital if required to fund operations, including the completion of the development of its technology. In the event that this company in which we have invested fails or does not achieve a level of success that permits us to realize the value of this investment, we could experience a complete or partial loss on some or all of this investment. If we experience additional losses and related write-downs on the carrying value of our remaining investment, it would decrease our assets and increase our losses.

OUR CURRENT CLASS ACTION LAWSUIT COULD BE EXPENSIVE, DISRUPTIVE AND TIME CONSUMING TO DEFEND AGAINST, AND IF WE ARE NOT SUCCESSFUL, COULD ADVERSELY AFFECT OUR BUSINESS.

In re Immersion Corporation

We are 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 the 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 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.

We have 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 we 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 we believe 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.

IF WE FAIL TO COMPLY WITH NASDAQ’S MAINTENANCE STANDARDS FOR CONTINUED LISTING ON THE NASDAQ NATIONAL MARKET, OUR COMMON STOCK COULD BE DELISTED.

To maintain the listing of our common stock on The Nasdaq National Market, we are required to comply with certain maintenance criteria for continued listing. If we are unable to comply with the applicable criteria and our common stock is delisted from The Nasdaq National Market, it would likely be more difficult to effect trades and to

market price of our common stock. Delisting of our common stock could materially affect the market price and liquidity of our common stock and our future ability to raise necessary capital.

OUR STOCK PRICES MAY FLUCTUATE REGARDLESS OF OUR PERFORMANCE.

The stock market has experienced extreme volatility that often has been unrelated or disproportionate to the performance of particular companies. These market fluctuations may cause our stock price to decline regardless of our performance. The market price of our common stock has been, and in the future could be, significantly affected by factors such as: actual or anticipated fluctuations in operating results; announcements of technical innovations; announcements regarding litigation in which we are involved; new products or new contracts; sales or the perception in the market of possible sales of large number of shares of Immersion common stock by insiders or others; changes in securities analysts’ recommendations; changing circumstances regarding competitors or their customers; governmental regulatory action; developments with respect to patents or proprietary rights; inclusion in or exclusion from various stock indices; and general market conditions. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has been initiated against that company, such as the suit currently filed against us.

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL, WHICH COULD REDUCE THE MARKET PRICE OF OUR COMMON STOCK.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. In addition, certain provisions of Delaware law may discourage, delay or prevent someone from acquiring or merging with us. These provisions could limit the price that investors might be willing to pay in the future for shares.

USE OF PROCEEDS

We will not receive any proceeds from the sale by the selling stockholder of the common stock offered hereby. The selling stockholder will receive all of the proceeds.

DIVIDEND POLICY

We have never paid cash dividends on our common stock. Except for the 7% accrual of dividends on our Series A Redeemable Convertible Preferred Stock which are payable semi-annually in, at our option cash or additional shares of Series A Redeemable Convertible Preferred Stock, we currently intend to retain earnings for use in our business and do not anticipate paying any cash dividend on our common stock in the foreseeable future. Any future declaration and payment of dividends on our common stock will be subject to the discretion of our board of directors, will be subject to applicable law and will depend on our results of operations, earnings, financial condition, contractual limitations, cash requirements, future prospects and other factors deemed relevant by our Board of Directors.

DESCRIPTION OF CAPITAL STOCK

Our authorized capital stock consists of 100,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share.

The following is a summary of the material terms of our common stock and preferred stock. Please see our certificate of incorporation for more detailed information.

Common Stock

The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of a majority of the shares of common stock entitled to vote in any election of directors may elect all of the directors standing for election. Subject to preferences applicable to the Series A Redeemable Convertible Preferred Stock and any other outstanding preferred stock, holders of common stock are entitled to receive ratably any dividends declared by the Board of Directors out of funds legally available therefor. See “Dividend Policy.” In the event of a liquidation, dissolution or winding up of Immersion, holders of common stock are entitled to share ratably in the assets remaining after payment of liabilities and the liquidation preferences of the Series A Redeemable Convertible Preferred Stock and any other outstanding preferred stock. Holders of our common stock have no preemptive, conversion or redemption rights.

Preferred Stock

Our Series A Redeemable Convertible Preferred Stock accrues dividends at a rate of 7% per year which are payable semi-annually. At our option, we may pay such dividends in cash or additional shares of Series A Redeemable Convertible Preferred Stock. In the event of a liquidation, dissolution or winding up of Immersion, the holder of Series A Redeemable Convertible Preferred Stock is entitled to receive up to two and one-half times the original purchase price of the Series A Redeemable Convertible Preferred Stock, except that the holder of the Series A Redeemable Convertible Preferred Stock is entitled to three and one-eighths times the original purchase price of the Series A Redeemable Convertible Preferred Stock under specified circumstances. The Series A Redeemable Convertible Preferred Stock is convertible at the holder’s option at any time based upon a 1:1 conversion ratio. In the event of the issuance of any equity securities, equity linked securities or securities convertible into equity securities of the Company, at a price less than the sum of the original purchase price of the Series A Redeemable Convertible Preferred Stock plus any accrued dividends that remain unpaid, we will pay the holder of the Series A Redeemable Convertible Preferred Stock fifty percent of the original purchase price plus any accrued but unpaid cash dividends for each outstanding share of Series A Redeemable Convertible Preferred Stock. We may redeem the Series A Redeemable Convertible Preferred Stock at any time our Common Stock has traded at or above a value equal to two and one-half times the original purchase price plus any accrued but unpaid dividends for a period of 30 successive trading days, subject to certain exceptions, for a redemption price of 125% of the sum of the original purchase price of the Series A Redeemable Convertible Preferred Stock plus accrued but unpaid dividends. The holder of the Series A Redeemable Convertible Preferred Stock may cause us to redeem the Series A Redeemable Convertible Preferred Stock, at any time after three years from the original purchase date, for cash equal to two times the original purchase price plus accrued but unpaid dividends.

The holder of our Series A Redeemable Convertible Preferred Stock is entitled to one vote for each share held of record on all matters submitted to a vote of stockholders on an as converted basis. Following certain dilutive issuances as described above which would result in a payment to the holder of the Series A Redeemable Convertible Preferred Stock of an amount equal to fifty percent of the original purchase price plus any accrued but unpaid cash dividends for each outstanding share of Series A Redeemable Convertible Preferred Stock, the voting power of each share of Series A Redeemable Preferred Stock may be reduced as described in the certificate of designations.

In addition to our Series A Redeemable Convertible Preferred Stock, up to 2,814,208 shares of our preferred stock remain undesignated and are authorized for issuance. Our Board of Directors has the authority, without further action by our stockholders, to issue preferred stock in one or more series. In addition, the Board of Directors may fix the rights, preferences and privileges of any preferred stock it determines to issue. Any or all of these rights may be superior to the rights of the Common Stock with terms calculated to delay or prevent a change in

control of Immersion or to make removal of management more difficult. Additionally, the issuance of preferred stock may decrease the market price of our Common Stock.

Registration Rights

Under our agreements with Microsoft, we agreed to file, at our expense, with the Commission a shelf registration statement on Form S-3 covering the resale of shares of Immersion common stock issued to Microsoft upon conversion of the Series A Redeemable Convertible 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 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. Other terms of our agreement with respect to the registration of the shares are set forth under the caption “Plan of Distribution” below.

Antitakeover Provisions

Delaware Law

Immersion is subject to Section 203 of the Delaware General Corporation Law regulating corporate takeovers, which prohibits a Delaware corporation from engaging in any business combination with an “interested stockholder,” unless:

• prior to the date of the transaction, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

• the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers, and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

• on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.

Except as otherwise specified in Section 203, an “interested stockholder” is defined to include (a) any person that is the owner of 15% or more of the outstanding voting securities of the corporation, or is an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the date of determination and (b) the affiliates and associates of any such person.

Certificate of Incorporation and Bylaw Provisions

Our Certificate of Incorporation provides that the Board of Directors will be divided into three classes of directors serving staggered three-year terms. Each class of directors need not be of equal number, with the size to be fixed exclusively by the Board. As a result, only one of the three classes of the Board will be elected each year. The directors are removable only for cause upon the affirmative vote of the holders of at least a majority of the voting power of all outstanding shares of voting stock, voting together as a single class. The Board has the exclusive right to set the authorized number of directors and to fill vacancies on the Board. Our Certificate of Incorporation requires that any action required or permitted to be taken by stockholders of Immersion must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing. In addition, special meetings of the stockholders of Immersion may be called only by the Board or the holders of not less than

ten percent of the shares entitled to vote at such a meeting. Advance notice is required for stockholder proposals or director nominations by stockholders.

In addition, pursuant to our Certificate of Incorporation, the Board has authority to issue up to 5,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any further vote or action by the stockholders. The rights of the holders of the common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the company, thereby delaying, deferring or preventing a change in control of the company. Furthermore, such preferred stock may have other rights, including economic rights, senior to the common stock, and as a result, the issuance of such preferred stock could have a material adverse effect on the market price of the common stock.

These provisions could discourage potential acquisition proposals and could delay or prevent a change in control of the company. Such provisions could diminish the opportunities for a stockholder to participate in tender offers, including tender offers at a price above the then current market price of the common stock. Such provisions also may inhibit fluctuations in the market price of the common stock that could result from takeover attempts.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is Boston Equiserve.

SELLING STOCKHOLDER

The shares of common stock offered hereby were issued by us in a private placement in connection with a series of agreements with the selling stockholder including licenses, issuance of equity and a settlement of ongoing litigation between Immersion and the selling stockholder. The selling stockholder may, from time to time, offer and sell pursuant to this prospectus any or all of the common stock offered hereby.

The following table sets forth the number of shares owned by the selling stockholder as of September 8, 2003. No estimate can be given as to the amount of shares that will be held by the selling stockholder after completion of this offering because the selling stockholder may offer all, some or none of the shares. The shares offered by this prospectus may be offered from time to time by the selling stockholder named below.

Number of Shares of

Common Stock

Outstanding and

Issuable Upon

Selling

Beneficially

Conversion of

Offered

Owned After

Stockholder

Owned(1)

Debentures(2)

Hereby(3)

the Offering(4)

Microsoft Corporation

2,686,897

3,855,655

6,542,552

(1)		Represents shares issuable upon conversion of the Series A Redeemable Convertible Preferred Stock previously issued to the selling stockholder plus three years of dividends that we may elect to pay in lieu of cash to the selling stockholder in the form of additional shares of Series A Redeemable Convertible Preferred Stock.

(2)		Represents shares issuable upon conversion of the maximum amount of Debentures that may be issued to the selling stockholder plus three years of interest payments that we may elect to pay in lieu of cash to the selling stockholder in the form of additional Debentures convertible into Common Stock.

(3)		This registration statement shall also cover any additional shares of Immersion Common Stock which become issuable in connection with the shares registered for sale hereby by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration which results in an increase in the number of outstanding shares of Immersion Common Stock.

(4)		Assumes sale, transfer or other disposition of all Common Stock issuable upon conversion of the Series A Redeemable Convertible Preferred Stock and the Debentures.

PLAN OF DISTRIBUTION

Selling Stockholder

The selling stockholder may transfer, pledge, donate or assign the Common Stock to lenders or others and each of such persons and their transferees and successors in interest will be deemed to be a “selling stockholder” for purposes of this prospectus. The number of Common Stock beneficially owned by a selling stockholder who transfers, pledges, donates or assigns Common Stock will decrease as and when they take such actions. The plan of distribution for Common Stock sold hereunder will otherwise remain unchanged, except that the transferees, pledgees, donees or other successors will be a selling stockholder hereunder.

Method of Sale

The Common Stock may be sold pursuant to this prospectus by the selling stockholder in any of the following ways:

The Common Stock may be sold through underwriters in one or more underwritten offerings on a firm commitment or best efforts basis.

The Common Stock may be sold through a broker or brokers. Transactions through broker-dealers may include block trades in which brokers or dealers will attempt to sell the Common Stock as agent but may position and resell the block as principal to facilitate the transaction. The Common Stock may be sold through dealers or agents or to dealers acting as market makers.

The Common Stock may be sold on any exchange on which the securities are listed.

The Common Stock may be sold in private sales directly to purchasers.

A selling stockholder may enter into hedging transactions with counterparties (including broker-dealers), and the counterparties may engage in short sales of the Common Stock in the course of hedging the positions they assume with such selling stockholder, including, without limitation, in connection with distribution of the Common Stock by such counterparties. In addition, the selling stockholder may sell short the Common Stock, and in such instances, this prospectus may be delivered in connection with such short sales and the Common Stock offered hereby may be used to cover such short sales. The selling stockholder may also enter into option or other transactions with counterparties that involve the delivery of the Common Stock to the counterparties, who may then resell or otherwise transfer such Common Stock.

The selling stockholder may also loan or pledge the Common Stock and the borrower or pledgee may sell the Common Stock as loaned or upon a default may sell or otherwise transfer the pledged Common Stock.

Common Stock covered by this prospectus which qualify for sale pursuant to Rule 144 or Rule 145 of the Common Stock Act may be sold under Rule 144 or Rule 145 rather than pursuant to this prospectus.

The selling stockholder reserves the right to accept and, together with its agents from time to time to reject, in whole or in part, any proposed purchase of Common Stock to be made directly or through agents.

Timing and Price

The Common Stock may be sold from time to time by a selling stockholder. There is no assurance that any selling stockholder will sell or dispose of Common Stock.

Selling stockholders will be subject to applicable provisions of the Securities Exchange Act of 1934 and the rules and regulations thereunder, which provisions may limit the timing of purchases and sales of our securities by them.

Common Stock may be sold at a fixed price, which may be changed, or at varying prices determined at the time of sale or at negotiated prices. Such prices will be determined by the holders of such securities or by agreement between such holders and purchasers or underwriters and/or dealers (who may receive fees or commissions in connection therewith).

Proceeds, Commissions and Expenses

We will not receive any of the proceeds from this offering.

The selling stockholder will be responsible for payment of all commissions, concessions and discounts of underwriters, dealers or agents, if any.

We will pay for all costs of the registration of the securities, including, without limitation, SEC filing fees and expenses of compliance with state securities or “blue sky” laws.

The selling stockholder and any broker-dealers or agents that participate with the selling stockholder in the distribution of the Common Stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any commissions received by them and any profit on the resale of the Common Stock may be deemed to be underwriting commissions or discounts under the Securities Act.

Registration

We agreed with the selling stockholder to keep the registration statement of which this prospectus constitutes a part effective until the earlier of:

• Such time as all of the shares have been sold by the selling stockholder;

• Such time as all of the shares have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act; or

• Such time as the selling stockholder may sell all of the shares held by them without registration pursuant to Rule 144 under the Securities Act within a three-month period.

We intend to de-register any of the shares not sold by the selling stockholder at the end of such period. At such time, however, any unsold shares may be freely tradable subject to compliance with Rule 144 under the Securities Act.

LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed upon for us by Gray Cary Ware & Freidenrich LLP, East Palo Alto, California. As of September 5, 2003, attorneys of Gray Cary Ware & Freidenrich LLP beneficially own an aggregate of 1000 shares of our common stock.

EXPERTS

The consolidated financial statements and the related consolidated financial statement schedules incorporated in this prospectus by reference from the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated herein by reference, and have been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file reports, proxy statements and other information with the SEC. You may read and copy all or any portion of any materials we file with the SEC at the SEC’s public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC. You can request copies of these documents upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings will also be available to you on the SEC’s Web site at http://www.sec.gov. Our SEC filings are also available at the offices of the Nasdaq National Market, 1730 K Street, N.W., Washington, D.C. 20006-1500.

Copies of our SEC filings and other information about us are also available on our website at www.immersion.com. The information on our website is neither incorporated into, nor a part of, this prospectus.

The information incorporated by reference is considered to be a part of this prospectus, and information that we file later with the Commission will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings made by us with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act until this offering is complete:

• our Annual Report on Form 10-K for the year ended December 31, 2002;

• our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003;

• our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003;

• our definitive Proxy Statement on Schedule 14A filed on April 29, 2003;

• our Current Report on Form 8-K dated July 29, 2003; and

• our Registration Statement on Form 8-A12G, filed on November 5, 1999, which contains a description of our common stock.

Any statement contained in a document that is incorporated by reference will be modified or superseded for all purposes to the extent that a statement contained in this prospectus (or in any other document that is subsequently filed with the Commission and incorporated by reference) modifies or is contrary to that previous statement. Any statement so modified or superseded will not be deemed a part of this prospectus except as so modified or superseded.

You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: Investor Relations, Immersion Corporation, 801 Fox Lane, San Jose, California 95131 (408) 467-1900.

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the fees and expenses in connection with the issuance and distribution of the securities being registered hereunder. Except for the SEC registration fee, all amounts are estimates.


SEC registration fee	$	2,490
Accounting fees and expenses	$	10,000

Legal fees and expenses	$	17,510
Printing and engraving expenses	$	20,000

Miscellaneous expenses		0

Total	$	50,000

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law (“DGCL”) permits indemnification of officers, directors and other corporate agents under certain circumstances and subject to certain limitations. The Registrant’s Certificate of Incorporation and Bylaws provided that the Registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by the DGCL, including in circumstances in which indemnification is otherwise discretionary under such law. In addition, with the approval of the Board of Directors and the stockholders, the Registrant has entered into separate indemnification agreements with its directors, officers and certain employees which require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status or service (other than liabilities arising from willful misconduct of a culpable nature) and to obtain directors’ and officers’ insurance, if available on reasonable terms.

These indemnification provisions may be sufficiently broad to permit indemnification of the Registrant’s officers, directors and other corporate agents for liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933.

The Registrant’s President, Chief Executive Officer and Chief Financial Officer has been named a defendant in the securities class action lawsuit described under the caption “Risk Factors–Our current class action lawsuit could be expensive, disruptive and time consuming to defend against, and if we are not successful, could adversely affect our business” in Part I of the registration statement. This officer is likely to assert claims for indemnification in connection with that litigation. Other than the securities class action lawsuit, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Registrant in which indemnification is being sought nor is the Registrant aware of any threatened litigation that may result in a claim for indemnification by any director, officer, employee or other agent of the Registrant.

The Registrant has obtained liability insurance for the benefit of its directors and officers.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

Exhibits:


Exhibit
Number		Description

3.1		Amended and Restated Bylaws(1)
3.2		Amended and Restated Certificate of Incorporation(2)
3.3		Certificate of Designation(3)
4.1		7% Senior Redeemable Convertible Debenture(4)
4.2		Registration Rights Agreement dated July 25, 2003(5)
4.3		Stockholder’s Agreement dated July 25, 2003(6)

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Exhibit
Number		Description

5.1		Opinion of Gray Cary Ware & Freidenrich LLP(7)
10.1		Series A Redeemable Convertible Preferred Stock Purchase Agreement dated July 25, 2003(8)
10.2		Senior Redeemable Convertible Debenture Purchase Agreement dated July 25, 2003(9)
10.3		Settlement Agreement dated July 25, 2003 by and between Microsoft Corporation and Immersion Corporation(10)
10.4		License Agreement dated July 25, 2003 by and between Microsoft Corporation and Immersion Corporation(10)
10.5		Sublicense Agreement dated July 25, 2003 by and between Microsoft Corporation and Immersion Corporation(10)
10.6		Consulting Agreement dated July 1, 2003 by and between Robert Van Naarden and Immersion Corporation
23.1		Consent of Gray Cary Ware & Freidenrich LLP (contained in Exhibit 5.1)
23.2		Consent of Deloitte & Touche LLP, Independent Auditors
24		Power of Attorney (contained in the signature page hereof)

(1)		Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed March 28, 2003.

(2)		Incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q on August 14, 2000.

(3)		Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K on July 29, 2003.

(4)		Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K on July 29, 2003.

(5)		Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K on July 29, 2003.

(6)		Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K on July 29, 2003.

(7)		To be filed by Amendment.

(8)		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K on July 29, 2003.

(9)		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K on July 29, 2003.

(10)		This exhibit has been filed separately with the Commission pursuant to an application for confidential treatment. The confidential portions of this exhibit have been omitted and are marked by asterisks.

ITEM 17. UNDERTAKINGS.

Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 15 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

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(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and

(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Jose, State of California on September 8, 2003.


		IMMERSION CORPORATION

		By:		/s/ Victor A. Viegas

				Victor A. Viegas
				President, Chief Executive Officer and
				Chief Financial Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Victor A. Viegas as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement on Form S-3, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, and him, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:


Name	Title	Date

/s/ Victor A. Viegas Victor A. Viegas	President, Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer and Principal Financial and Accounting Officer)	September 8, 2003

/s/ Steven Blank Steven Blank	Director	September 5, 2003

/s/ Jonathan Rubinstein Jonathan Rubinstein	Director	September 8, 2003

/s/ John Hodgman John Hodgman	Director	September 8, 2003

/s/ Jack Saltich Jack Saltich	Director	September 8, 2003

/s/ Robert Van Naarden Robert Van Naarden	Director	September 8, 2003

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INDEX TO EXHIBITS


Exhibit
Number		Description

3.1		Amended and Restated Bylaws(1)
3.2		Amended and Restated Certificate of Incorporation(2)
3.3		Certificate of Designation(3)
4.1		7% Senior Redeemable Convertible Debenture(4)
4.2		Registration Rights Agreement dated July 25, 2003(5)
4.3		Stockholder’s Agreement dated July 25, 2003(6)
5.1		Opinion of Gray Cary Ware & Freidenrich LLP(7)
10.1		Series A Redeemable Convertible Preferred Stock Purchase Agreement dated July 25, 2003(8)
10.2		Senior Redeemable Convertible Debenture Purchase Agreement dated July 25, 2003(9)
10.3		Settlement Agreement dated July 25, 2003 by and between Microsoft Corporation and Immersion Corporation(10)
10.4		License Agreement dated July 25, 2003 by and between Microsoft Corporation and Immersion Corporation(10)
10.5		Sublicense Agreement dated July 25, 2003 by and between Microsoft Corporation and Immersion Corporation(10)
10.6		Consulting Agreement dated July 1, 2003 by and between Robert Van Naarden and Immersion Corporation
23.1		Consent of Gray Cary Ware & Freidenrich LLP (contained in Exhibit 5.1)
23.2		Consent of Deloitte & Touche LLP, Independent Auditors
24		Power of Attorney (contained in the signature page hereof)

(1)		Incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed March 28, 2003.

(2)		Incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q on August 14, 2000.

(3)		Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K on July 29, 2003.

(4)		Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K on July 29, 2003.

(5)		Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K on July 29, 2003.

(6)		Incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K on July 29, 2003.

(7)		To be filed by Amendment.

(8)		Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K on July 29, 2003.

(9)		Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K on July 29, 2003.

(10)		This exhibit has been filed separately with the Commission pursuant to an application for confidential treatment. The confidential portions of this exhibit have been omitted and are marked by asterisks.

Exhibit 10.3

CONFIDENTIAL TREATMENT HAS BEEN REQUESTED AS TO CERTAIN PORTIONS OF THIS EXHIBIT, WHICH PORTIONS HAVE BEEN OMITTED AND REPLACED WITH [****] AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.

SETTLEMENT AGREEMENT
AND MUTUAL RELEASE

THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE ("SETTLEMENT") is made and entered into as of July 25, 2003 (the "EFFECTIVE DATE"), by and between Microsoft Corporation, a Washington corporation with principal offices in Redmond, Washington (hereinafter "MICROSOFT") and Immersion Corporation, a Delaware corporation with principal offices in San Jose, California (hereinafter "IMMERSION"), each a "PARTY" and collectively, the "PARTIES."

RECITALS

WHEREAS, Immersion filed an action in the United States District Court for the Northern District of California entitled Immersion Corporation v. Sony Computer Entertainment of America, Inc., Sony Computer Entertainment Inc., and Microsoft Corporation, Northern District of California Case No. C02-00710 CW
(WDB) (the "LAWSUIT");

WHEREAS, in the Lawsuit Immersion alleged infringement of U.S. Patent Nos. 5,889,672 and 6,275,213, and thereafter on October 8, 2002 Immersion filed a First Amended Complaint withdrawing the allegations of infringement under U.S. Patent No. 5,889,672 and adding allegations of infringement under U.S. Patent No. 6,424,333 (U.S. Patent Nos. 6,275,213 and 6,424,333 shall be referred to as the "PATENTS-IN-SUIT");

WHEREAS, Microsoft filed various counterclaims in the Lawsuit alleging invalidity, non-infringement, and unenforceability of the Patents-in-Suit; and

WHEREAS, Microsoft and Immersion wish to settle the Lawsuit insofar as it involves claims or disputes between Immersion and Microsoft, including all claims and counterclaims made or that could have been made by or against Microsoft in, or in connection with, the Lawsuit (such claims by or against Microsoft are referred to as the "MICROSOFT LAWSUIT").

NOW, THEREFORE, in consideration of the mutual covenants, agreements and understandings hereinafter contained, and for good and valuable consideration, the Parties hereto agree as follows:

TERMS

1. LICENSE. Simultaneously with the execution of this Settlement, the Parties shall enter into the License Agreement attached as Exhibit A (the "LICENSE AGREEMENT").

2. PAYMENT AMOUNT. Within five (5) days after the Effective Date, Microsoft shall pay Immersion by cashier's check, wire transfer or other immediately available funds the sum of money set forth in the License Agreement.

PROVIDED UNDER RULE 408

3. TERMINATION OF THE MICROSOFT LAWSUIT. In consideration of the payments made under the License Agreement and upon verification of Immersion's receipt of the wire transfer for the amount set forth in the License Agreement and the Purchase Price (as defined in the Stock Purchase Agreement executed contemporaneously with this Settlement) (the "PAYMENT DATE"), the Parties will immediately jointly file stipulations of dismissal of the Microsoft Lawsuit with prejudice in the form attached hereto as Exhibit B with the clerk of the United States District Court for the Northern District of California. This Settlement is final and binding upon the Parties as of the Payment Date. Immersion and Microsoft agree to each bear their own expenses, legal costs and attorneys' fees stemming from the Microsoft Lawsuit up through and including the Payment Date.

4. CLAIMS. Each Party represents and warrants that as of the Effective Date it has not assigned or otherwise transferred or subrogated any interest in any of its claims that are the subject of this Settlement, whether voluntarily, involuntarily or by operation of law. Each Party agrees to indemnify, defend and hold any other Party harmless from any liability, loss, claims, demands, damages, costs, expenses or attorneys' or experts' fees incurred as a result of its breach of any of the representations and warranties set forth in this
Section 4.

5. GENERAL RELEASE. Effective as of the Payment Date, Microsoft, on behalf of itself and its current and future officers, directors, agents, shareholders, attorneys, insurers, employees, successors, assigns, parent companies, subsidiaries, divisions, affiliates, and representatives, and Immersion, on behalf of itself and its current and future officers, directors, agents, shareholders, attorneys, insurers, employees, successors, assigns, parent companies, subsidiaries, divisions, affiliates, and representatives, each hereby mutually release and forever discharge the other Party (and the other Party's current and future officers, directors, employees, attorneys, successors, assigns, subsidiaries, divisions and affiliates) from any and all liability and claims, debts, rights, actions, suits, damages, losses, costs, expenses, and demands whatsoever, in law or equity, of every kind, nature or description, whether known or unknown, fixed or contingent, which Microsoft or Immersion, as the applicable releasing Party, now has, or may hereafter acquire, by reason of any matter, cause or thing whatsoever accruing, occurring, or arising at any time prior to the Payment Date.

6. JOINT PRESS RELEASE. The Parties shall issue, between 12:01 a.m. and 1:30 p.m. Pacific Time on July 28, 2003, the mutually-agreed-upon joint press release attached hereto as Exhibit C.

7. NO ADMISSION OF WRONGDOING. This Settlement does not constitute and shall not be construed as an admission or acknowledgment of any wrongdoing by any Party, including but not limited to patent infringement by Microsoft.

8. MUTUAL RELEASE OF ALL CLAIMS. Effective as of the Payment Date, Microsoft, on behalf of itself and its current and future officers, directors, agents, shareholders, attorneys, insurers, employees, successors, assigns, parent companies, subsidiaries, divisions, affiliates, and representatives, and Immersion, on behalf of itself and its current and future officers, directors, agents, shareholders, attorneys, insurers, employees, successors, assigns, parent companies, subsidiaries, divisions, affiliates, and representatives, each hereby mutually release and forever discharge the other Party (and the other Party's current and future officers, directors, employees, attorneys, successors, assigns, subsidiaries, divisions and affiliates) from any and all liability and

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PROVIDED UNDER RULE 408

claims, debts, rights, actions, suits, damages, losses, costs, expenses, and demands whatsoever, in law or equity, of every kind, nature or description, whether known or unknown, fixed or contingent, which Microsoft, Immersion, or any of them ever had, now has, or may hereafter acquire, by reason of any matter, cause or thing whatsoever accruing, occurring, or arising at any time prior to the Payment Date ("CLAIMS"), and solely to the extent that such Claims arise from, refer to, or in any manner relate to any of the complaints, cross-complaints or counterclaims that were filed in the Microsoft Lawsuit. Immersion's release under this Settlement shall inure to the benefit of the licensees, distributors and customers, direct and indirect, of Microsoft and all Microsoft Subsidiaries (as defined in the License Agreement) (collectively, "MICROSOFT CUSTOMERS") solely with respect to (i) any hardware, software, service or associated component licensed, manufactured, distributed, published, or sold by or for Microsoft or a Microsoft Subsidiary which is either (a) distributed or sold in the form created by or for Microsoft or a Microsoft Subsidiary, or (b) incorporated into the products or components of Microsoft Customers; and (ii) any game, other than a Medical Product (as defined in the License Agreement), developed by a third party prior to the Payment Date and licensed for use on a [****] (as defined in the License Agreement). However, notwithstanding anything to the contrary herein, in no event shall the release by Immersion set forth in this Settlement be construed [****] or to third parties to the extent that such third parties make products or provide services designed specifically for, or specifically for use in conjunction with the products, of the foregoing entities.

9. REPRESENTATION BY COUNSEL. Immersion and Microsoft have both been represented by counsel in entering into this Settlement and the Exhibits, counsel has reviewed the Settlement, including the Exhibits, and advised as to any and all risks, and Immersion and Microsoft each freely enter into this Settlement.

10. WAIVER OF SECTION 1542. It is understood and agreed that this Settlement is intended to cover and does cover all claims or possible claims of every nature and kind whatsoever arising prior to the Effective Date, whether known or unknown, suspected or unsuspected, or hereafter discovered or ascertained, and all rights under Section 1542 of the Civil Code of California are hereby expressly waived. The Parties hereto acknowledge that they are familiar with Section 1542, which reads as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

The Parties hereto expressly, knowingly, and intentionally waive and relinquish any and all rights which they have under Section 1542, as well as under any other similar state or federal statute or common law principle.

11. CONFIDENTIALITY OF THIS SETTLEMENT. The Parties shall use their best efforts to keep the terms and conditions of this Settlement in strict confidence, and neither Party shall, without first securing the written consent of the other Party, knowingly disclose any of the terms and conditions of this Settlement to any non-affiliated third party or make any such disclosure in

-3-

PROVIDED UNDER RULE 408

any public announcement, press release, or publication, or in any publicity, advertising or promotional activity, except as follows or as additionally permitted under the License Agreement, but only to the extent specifically authorized under the License Agreement: (a) in the joint press release as provided for in this Settlement; (b) disclosures required by law, government regulation, or court order, including, but not limited to, any securities laws or Securities and Exchange Commission rules or regulations; (c) necessary disclosures to the Party's directors, accountants, legal advisors, investors, and financial advisors; and (d) disclosures necessary to bring an action to enforce this Settlement. The restrictions of this Section 11 shall not prevent either Party from disclosing the fact of settlement, and that they have resolved all disputes regarding the Microsoft Lawsuit, or representing that Microsoft has clear rights to all intellectual property in its products, nor shall they apply to any information which now is or hereafter becomes publicly available except through a violation of this Section 11.

12. CONFIDENTIALITY OF PROPRIETARY INFORMATION. Except as may reasonably be agreed to in writing within thirty (30) days of the Payment Date by counsel for the Parties, Immersion and Microsoft expressly agree to destroy any information marked as "Confidential" or "Attorneys Eyes Only" pursuant to the Stipulated Protective Order entered on September 23, 2002 and the Stipulation and Order Revising Protective Order entered on March 6, 2003 (collectively, "PROTECTIVE ORDER") in the Microsoft Lawsuit. Each of Immersion and its counsel and Microsoft and its counsel agrees to provide the others with a sworn statement that all documents produced by one Party to the other subject to the Protective Order have either been destroyed or returned to the producing Party within sixty (60) days of the Effective Date. Immersion further agrees to return all source code provided to Immersion under the Protective Order (whether existing in electronic or paper form) within thirty (30) days after the Effective Date and to provide Microsoft with a sworn statement from an officer of Immersion that (i) no unauthorized copies of such source code were made while in Immersion's possession; and (ii) all such source code has been returned to Microsoft. In no event will any agreement between the Parties' counsel with respect to any information that Immersion may retain pursuant to the first sentence of this Section 12 extend to any Microsoft source code (whether existing in electronic or paper form).

13. DISPUTE RESOLUTION. This Settlement shall be construed and controlled by the laws of the State of Washington, and each Party consents to exclusive jurisdiction and venue in the federal courts sitting in King County, Washington, unless no federal subject matter jurisdiction exists, in which case each Party consents to exclusive jurisdiction and venue in the Superior Court of King County, Washington. Each Party waives all defenses of lack of personal jurisdiction and forum non-conveniens. Process may be served on either Party in the manner authorized by applicable law or court rule. In any action to enforce any right or remedy under this Settlement or to interpret any provision of this Settlement, the prevailing Party shall be entitled to recover its reasonable attorneys' fees, costs and other expenses.

14. NOTICE. All notices and requests in connection with this Settlement will be given in writing and will be deemed given as of the day they are received either by messenger, delivery service, or in the mails of the United States of America, postage prepaid, certified or registered, return receipt requested, and addressed as follows:

-4-

                            PROVIDED UNDER RULE 408

TO: MICROSOFT                                    TO: IMMERSION
Microsoft Corporation                            Immersion Corporation
Attention:  Vice President, Litigation           Attention:  Vice President,
                                                 Legal Affairs
One Microsoft Way                                801 Fox Lane
Redmond, Washington  98052-6399                  San Jose, California 95131
Phone: (425) 882-8080                            Phone:  (408) 467-1900
Fax: (425) 936-7329                              Fax:  (408) 467-1901
Copy to: Law & Corporate Affairs
Attention:  Vice President, Intellectual
Property
Fax:  (425) 936-7409

or at such other address as either Party hereto may specify by notice given in accordance with this Section 14.

15. ASSIGNMENT. This Settlement, including all releases and covenants not to sue by Immersion of or to Microsoft, are fully assignable by Microsoft, other than to [****] and provided such assignment is made in connection with an assignment of all rights and obligations under the License Agreement. This Settlement, including all releases and covenants not to sue by Microsoft of or to Immersion, may be assigned by Immersion to any acquiror of all or substantially all of the business or assets of Immersion, or in connection with a merger. This Settlement will be binding upon and inure to the benefit of the successors and assigns of the Parties. Notwithstanding anything to the contrary in this Settlement, in the event of any permitted assignment by a Party pursuant to this Section 15, in no event will the assignee be deemed to have released any claims other than the claims of the assigning Party (i.e. Microsoft or Immersion) which are expressly released by the assigning Party hereunder. If Immersion is acquired by Company X, in no event will Company X be deemed to have released any claims that it possessed prior to the acquisition of Immersion or that are independent of or unrelated to Immersion.

16. SEVERABILITY. If any provision of this Settlement shall be held to be illegal, invalid or unenforceable, that provision will be enforced to the maximum extent permissible so as to effect to the intent of the Parties, and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Each Party hereby waives its right to challenge the validity and enforceability of this Settlement.

17. CONSTRUCTION. This Settlement has been negotiated by the Parties and their respective counsel and will be fairly interpreted in accordance with its terms and without any construction in favor of or against any Party. Failure by either Party to enforce any provision of this Settlement will not be deemed a waiver of future enforcement of that or any other provision hereof.

18. COUNTERPARTS. This Settlement may be executed by the Parties in separate counterparts, each of which so executed and delivered shall be an original. Delivery by facsimile shall be sufficient for purposes of this paragraph.

-5-

PROVIDED UNDER RULE 408

19. RECITALS AND EXHIBITS. The recitals and exhibits are hereby incorporated into this Settlement by this reference.

20. ENTIRE AGREEMENT. This Settlement, together with the Exhibits hereto, which are hereby incorporated into and made a part of this Settlement, contain the entire and only agreement between the Parties with respect to the subject matter hereof and thereof, and supersede and cancel all previous and contemporaneous oral and written agreements, discussions, communications, negotiations, commitments and writings in connection with such subject matter. The terms and conditions of this Settlement may be altered, modified, changed or amended only by a written agreement executed by duly authorized representatives of Immersion and Microsoft.

21. AUTHORIZED SIGNATORIES. The Parties hereby warrant that they are legally authorized and entitled to settle and release every claim herein referred to and as provided by this Settlement, and to give a valid, full, and final acquittance therefor.

[SIGNATURE PAGE FOLLOWS]

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SIGNATURE PAGE TO THE

SETTLEMENT AGREEMENT AND MUTUAL RELEASE

IN WITNESS WHEREOF, the Parties have executed this Settlement on the dates opposite their respective signatures and have read and fully understand the provisions of this Settlement.

IMMERSION CORPORATION

By:                                              Dated:
    ---------------------------------------             ------------------------
     VICTOR VIEGAS
     President, Chief Executive Officer and
     Chief Financial Officer

MICROSOFT CORPORATION

By:                                              Dated:
    ---------------------------------------             ------------------------
     Name:
     Title:


By:                                              Dated:
    ---------------------------------------             ------------------------
     Name:
     Title:


By:                                              Dated:
    ---------------------------------------             ------------------------
     Name:
     Title:


By:                                              Dated:
    ---------------------------------------             ------------------------
     Name:

Title:

Exhibit 10.4

LICENSE AGREEMENT

THIS LICENSE AGREEMENT (this "AGREEMENT") is entered into and is effective on this 25th day of July, 2003 (the "EFFECTIVE DATE") by and between MICROSOFT CORPORATION, a Washington corporation with principal offices in Redmond, Washington ("MICROSOFT") and IMMERSION CORPORATION, a Delaware corporation with principal offices in San Jose, California ("IMMERSION"), each a "PARTY" and collectively, the "PARTIES."

RECITALS

WHEREAS, Immersion has the right to grant a license to Microsoft and its Subsidiaries under certain patent rights more fully described below; and

WHEREAS, Microsoft desires to acquire a license under such patent rights, on the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the Parties agree as follows:

AGREEMENT

1. DEFINITIONS.

A. "ADULT PRODUCT" means: [****].

B. "CONDITIONAL PATENTS" means [****] .

C. "FOUNDRY PRODUCT" means [****].

D. "LICENSED PATENTS" means all Patents under which Immersion or any of its present or future Subsidiaries owns or has as of the Effective Date (or as of the acquisition date in the case of future Subsidiaries), or thereafter obtains, the ability or right to grant licenses, releases or freedom from suit, with the exception of Conditional Patents.

E. "LICENSED PRODUCT" means all hardware, software, and services, excluding Adult Products, Medical Products, and Foundry Products.

F. "MEDICAL PRODUCT" means any [****]. General purpose hardware or software whose primary function is not the delivery of one of the foregoing is not a Medical Product.

G. [****].

H. [****].

PROVIDED UNDER RULE 408

I. "PATENT" means any patent, patent application, provisional application, continuation, continuation-in-part, divisional, reissue, renewal, reexamination, utility model, design patent, and foreign counterparts thereof.

J. "PERIPHERAL DEVICE" means [****]. For example, [****] is a "Peripheral Device" as each of those devices [****]. Similarly, a [****] is also a "Peripheral Device," as each of those [****]. For purposes of this Agreement, the Parties expressly agree that:

(I) [****] shall not be deemed a "Peripheral Device" for purposes of this definition and this Agreement, even if it includes or comprises [****];

(II) a [****] is not a "Peripheral Device," even if it includes or comprises [****]; and

(III) any [****] with any of the devices identified in (i) or (ii) above is a Peripheral Device (for example, a
[****] is a "Peripheral Device").

K. "SUBSIDIARY" means a corporation, company or other entity: (i) fifty percent (50%) or more of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a Party hereto, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists; or (ii) which does not have outstanding shares or securities, as may be the case in a partnership, joint venture or unincorporated association, but fifty percent (50%) or more of whose ownership interest representing the right to make the decisions for such corporation, company or other entity is, now or hereafter, owned or controlled, directly or indirectly, by a Party hereto, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists.

L. "TOUCH TECHNOLOGY" means technology related to calculating, processing, amplifying, communicating, transmitting, controlling, applying, producing, using, or enhancing touch sensations or information related to the sense of touch (e.g., resistance, texture, force). Examples include force feedback, vibration, and tactile response applications.

M. All terms not defined herein shall have the meaning set forth in the Settlement Agreement and Mutual Release executed by Microsoft and Immersion simultaneously with the execution of this Agreement (the "SETTLEMENT").

2. LICENSE RIGHTS.

A. LICENSE TO LICENSED PATENTS. Subject to the terms of this Agreement, Immersion, on behalf of itself and its Subsidiaries, hereby grants to Microsoft and its Subsidiaries a worldwide, perpetual, paid-up, irrevocable, non-terminable, royalty-free and non-exclusive license under the Licensed Patents to make, have made, use, lease, distribute, have distributed, publish, have published, import, offer for sale, provide as a service, sell, or otherwise dispose of Licensed Products.

PROVIDED UNDER RULE 408

B. SUBLICENSING RIGHTS. Immersion, on behalf of itself and its Subsidiaries, hereby irrevocably and non-terminably grants to Microsoft and its Subsidiaries the worldwide, royalty-free (subject to the terms of Section 2(e)), paid-up right to sublicense the Licensed Patents (excluding Patents not directed to Touch Technology) to third parties [****]. The right to sublicense shall exclude the following fields of use:

(I) Medical Products, Adult Products or Foundry Products;

(II) hardware, (a) to the extent that [****];

(III) software and services, to the extent that [****]; and

(IV) [****].

In the event that at [****].

C. COMBINATIONS. Immersion, on behalf of itself and its Subsidiaries, hereby covenants not to sue any third party, under any Licensed Patent claim, for making, using, selling, importing, offering for sale, providing as a service, leasing, distributing or otherwise disposing of a Licensed Product created or distributed by or for Microsoft or a Microsoft Subsidiary in combination with one or more other items licensed by, or sold or manufactured by or for, such third party, but only to the extent that:

(I) the sale of the Licensed Product by Microsoft (or one of its Subsidiaries) would, absent this Agreement, constitute direct or contributory infringement of such Licensed Patent claim; and

(II) such Licensed Patent claim would not be directly or contributorily infringed by such other item(s) separate and apart from the combination with such Licensed Product. For the purposes of this Section, the determination of infringement above shall assume the existence of any necessary knowledge or intent required to constitute contributory infringement.

D. PRODUCT/SERVICE RELATED MATERIALS. Immersion, on behalf of itself and its Subsidiaries, hereby represents, warrants and covenants not to sue Microsoft or any Microsoft Subsidiary for contributory infringement or induced infringement of the Licensed Patents arising out of the publication or distribution of product and/or service-related: (1) documentation for a Microsoft or Microsoft Subsidiary Licensed Product (e.g., reference designs, specifications, etc.), and
(2) marketing, training and/or support relating to a Microsoft or Microsoft Subsidiary Licensed Product. The foregoing sentence shall not be construed to provide customers of Microsoft or Microsoft Subsidiaries with any implied licenses or sublicenses.

E. CONDITIONAL PATENTS. Immersion on behalf of itself and its Subsidiaries, agrees that [****].

F. TRANSFER OF PATENTS. Immersion agrees that any transfer or assignment of the Licensed Patents shall be subject to the licenses granted to Microsoft and Microsoft's Subsidiaries under this Agreement. [****]

PROVIDED UNDER RULE 408

G. OWNERSHIP. Except as expressly licensed to Microsoft in this Agreement, Immersion retains all right, title and interest in and to the Licensed Patents. Immersion reserves all rights not expressly granted in this Agreement.

3. PAYMENT. Within five (5) days after the Effective Date, Microsoft shall pay Immersion by cashier's check, wire transfer or other immediately available funds, nineteen million nine hundred thousand dollars (USD $19,900,000), in consideration of the rights and covenants set forth herein.

4. ADDITIONAL RIGHTS, OBLIGATIONS/RESTRICTIONS.

A. NO OBLIGATIONS. Notwithstanding any other provision of this Agreement, Microsoft will have no obligation to market, sell or otherwise distribute Licensed Products.

B. MEMBERSHIP IN MICROSOFT TOOL AND MIDDLEWARE PROGRAMS. Immersion will have the right to apply for and participate in all publicly available Microsoft tool and middleware programs in accordance with their standard terms, conditions, and fees.

C. NO RESTRICTIONS. Nothing in this Agreement will be construed as restricting Microsoft's ability to acquire, license, develop, manufacture or distribute for itself, or have others acquire, license, develop, manufacture or distribute on its behalf, similar technology performing the same or similar functions as the technology subject to the Licensed Patents, or to market and distribute such similar technology in addition to, or in lieu of, the technology subject to the Licensed Patents.

D. MAINTENANCE OF PATENTS. In the event Immersion plans to forego payment of any maintenance fees or not take any other steps required to maintain Immersion's rights under any of the Licensed Patents, Immersion shall assign, without additional compensation, all right, title, and interest in and to the applicable Licensed Patents to Microsoft. If any of the Licensed Patents lapses (other than by expiration), then Immersion will promptly use its best efforts to revive the patent. It shall not be a breach of this Agreement, and the above provisions of this Section 4(d) shall not apply, if a Licensed Patent lapses because of an inadvertent failure to pay any maintenance fees or inadvertent failure to take any other steps required to maintain Immersion's rights under any of the Licensed Patents.

5. CONFIDENTIALITY. The terms and conditions, but not the existence, of this Agreement shall be treated as confidential information by the Parties, and neither Party shall disclose the terms or conditions of this Agreement to any third party (other than its Subsidiaries licensed pursuant to this Agreement) without the prior written permission of the other Party. Each Party, however, shall have (a) the right to represent to third parties that such Party is licensed for the products and patents as provided by this Agreement, and (b) the right to make disclosures to the extent required by an order of court, regulation of another governmental body, or otherwise by law or by a stock exchange, provided that the Party shall promptly provide written notice to the non-disclosing Party of the intended disclosure and of the court order or regulation prior to such disclosure and that the Party shall take all reasonable steps to minimize such disclosure by, for example, obtaining a

PROVIDED UNDER RULE 408

protective order and/or appropriate confidentiality provisions requiring that such information to be disclosed be used only for the purpose for which such law, order, regulation or requirement was issued. Additionally, each Party may disclose the terms and conditions of this Agreement to the extent reasonably necessary, under a suitable confidentiality agreement, to its accountants, attorneys, financial advisors and in connection with due diligence activities relating to the sale of the stock or a portion of the business of a Party or its Subsidiaries.

6. WARRANTIES.

A. IMMERSION. Immersion represents, warrants, and covenants that:

(I) it has the full power and has taken the necessary and appropriate steps to enter into this Agreement and assume the obligations hereunder;

(II) it has the right to license the Licensed Patents, and it has the full power and has taken the necessary and appropriate steps to enter into this Agreement and assume the obligations hereunder, and to grant the license rights and covenants set forth herein;

(III) it has not previously and will not grant any rights in the Licensed Patents to any third party that are inconsistent with the rights granted to Microsoft herein;

(IV) [****];

(V) [****];

(VI) as of the Effective Date, there are no actual or threatened lawsuits or claims relating to the Licensed Patents other than (i) the Lawsuit (as defined in the Settlement), (ii) contract, business or licensing discussions with existing or potential licensees and customers, and (iii) as set forth in Schedule 3.12 to the Series A Redeemable Convertible Preferred Stock Purchase Agreement executed by the Parties on even date herewith; and

(VII) as of the Effective Date, Immersion believes, in good faith, that the issued Licensed Patents owned by Immersion are valid and enforceable.

B. BY MICROSOFT. Microsoft represents, warrants, and covenants that it has the full power and has taken the necessary and appropriate steps to enter into this Agreement and assume the obligations hereunder.

C. DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED IN SECTIONS 6(a) AND
6(b) ABOVE, THE PATENTS ARE PROVIDED "AS IS" AND WITHOUT WARRANTY OF ANY KIND. EACH PARTY DISCLAIMS ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT.

Nothing in this Agreement shall be construed (i) as a warranty or representation by Immersion as to the validity or scope of any Licensed Patents; (ii) as a warranty or representation that anything made, used, sold or otherwise disposed of under any license or sublicense granted in or under this Agreement is or will be free from infringement by patents, copyrights, trade secrets, trademarks, or other

PROVIDED UNDER RULE 408

rights of third parties; (iii) as granting by implication, estoppel or otherwise any licenses or rights under patents or other intellectual property rights of Immersion other than expressly granted herein; or (iv)(a) to require Immersion to file any patent application, or (b) as a warranty that Immersion will be successful in securing the grant of any patent or any reissue or extensions thereof. Immersion does not assume any responsibility for the manufacture of any product that is manufactured or sold by or for Microsoft or Microsoft's Subsidiaries, or their sublicensees. All warranties in connection with such products shall be made by the manufacturer or seller of such products.

7. TERM; TERMINATION.

A. TERM. Unless terminated by Microsoft pursuant to Section 7(b), the term of this Agreement shall be from the Effective Date until the expiration of the last to expire of the Licensed Patents.

B. TERMINATION. The parties expressly agree that this Agreement may not be terminated by Immersion, even in the event of Microsoft's breach of this Agreement. Notwithstanding the foregoing, Microsoft may terminate this Agreement in its sole discretion and at any time upon thirty (30) days' written notice in advance to Immersion. In the event Microsoft elects to terminate this Agreement, (i) such termination shall not terminate or otherwise affect any sublicenses granted by Microsoft under this Agreement prior to such termination, and
(ii) Sections 5, 6, 7(b), 8, and 9 shall survive. Termination of this Agreement by Microsoft shall not in any way affect or relieve Microsoft's obligations to make payment pursuant to
Section 2(e).

8. LIMITATION OF LIABILITIES.

NEITHER PARTY WILL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES RELATING TO THIS AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

PROVIDED UNDER RULE 408

9. GENERAL.

A. NOTICES. All notices and requests in connection with this Agreement will be given in writing and will be deemed given as of the day they are received either by messenger, delivery service, or in the mails of the United States of America, postage prepaid, certified or registered, return receipt requested, and addressed as follows:

TO: MICROSOFT                                        TO: IMMERSION
Microsoft Corporation                                Immersion Corporation
Attention:  Vice President, Intellectual Property    Attention:  Vice President, Legal Affairs
One Microsoft Way                                    801 Fox Lane
Redmond, Washington  98052-6399                      San Jose, California 95131
Phone: (425) 882-8080                                Phone:  (408) 467-1900
Fax: (425) 936-7329                                  Fax:  (408) 467-1901
Copy to: Law & Corporate Affairs
Fax:  (425) 936-7409

or to such other address as the Party to receive the notice or request so designates by written notice to the other.

B. INDEPENDENT CONTRACTORS. The Parties are independent contractors, and nothing in this Agreement will be construed as creating an employer-employee relationship, a partnership, or a joint venture between the Parties. Neither Party will have the power to bind the other Party or incur obligations on the other Party's behalf without the other Party's prior written consent.

C. GOVERNING LAW. This Agreement shall be construed and controlled by the laws of the State of Washington, and each Party consents to exclusive jurisdiction and venue in the federal courts sitting in King County, Washington, unless no federal subject matter jurisdiction exists, in which case each Party consents to exclusive jurisdiction and venue in the Superior Court of King County, Washington. Each Party waives all defenses of lack of personal jurisdiction and forum non-conveniens. Process may be served on either Party in the manner authorized by applicable law or court rule. In any action to enforce any right or remedy under this Agreement or to interpret any provision of this Agreement, the prevailing Party shall be entitled to recover its reasonable attorneys' fees, costs and other expenses.

D. ASSIGNMENT. This Agreement will be binding upon and inure to the benefit of each Party's respective successors and lawful assigns. Microsoft will have the right to assign this Agreement or any or all of its rights under the Agreement, in whole or in part (in any case together with all restrictive terms continuing with such assignment) to any purchaser of any Microsoft business that uses the licenses granted herein, provided that (i) such purchaser of a Microsoft business may use the assigned rights solely as necessary to operate such purchased Microsoft business, (ii) the assignee's license rights under Section 2(a) shall exclude the fields of use specified in Sections 2(b)(ii) and (iii), and (iii) in any case Microsoft

PROVIDED UNDER RULE 408

may not assign any of its rights under this Agreement to
[****]. This Agreement may be assigned by Immersion to any acquiror of all or substantially all of the business or assets of Immersion, or in connection with a merger. Microsoft and Immersion will each have the right to merge or consolidate without the prior approval of the other Party. Except as permitted above, assignment of this Agreement, whether by contract, operation of law, or otherwise, will be void.

E. CONSTRUCTION. If for any reason a court of competent jurisdiction finds any provision of this Agreement, or portion thereof, to be unenforceable, that provision of the Agreement will be enforced to the maximum extent permissible so as to effect the intention of the Parties, and the remainder of this Agreement will continue in full force and effect. Failure by either Party to enforce any provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. This Agreement has been negotiated by the Parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against either Party.

F. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and merges all prior and contemporaneous communications regarding the subject matter hereof. This Agreement will not be modified except by a written agreement dated subsequent to the Effective Date and signed on behalf of Immersion and Microsoft by their respective duly authorized representatives. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the Agreement. Delivery of an executed counterpart of this Agreement by facsimile transmission shall be effective as delivery of an originally executed counterpart of this Agreement.

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SIGNATURE PAGE TO THE
LICENSE AGREEMENT

IN WITNESS WHEREOF, the Parties have entered into this Agreement as of the Effective Date written above.

IMMERSION CORPORATION

By: ______________________________________
VICTOR VIEGAS
President, Chief Executive Officer and
Chief Financial Officer

MICROSOFT CORPORATION

By: ______________________________________
Name:
Title:

Exhibit 10.5

SUBLICENSE AGREEMENT

THIS SUBLICENSE AGREEMENT ("SUBLICENSE AGREEMENT") is entered into and is effective on this 25th day of July, 2003 (the "EFFECTIVE DATE") by and between MICROSOFT CORPORATION, a Washington corporation with principal offices in Redmond, Washington ("MICROSOFT") and IMMERSION CORPORATION, a Delaware corporation with principal offices in San Jose, California ("IMMERSION"), each a "PARTY" and collectively, the "PARTIES."

RECITALS

WHEREAS, Immersion has the right to grant a license to Microsoft and its Subsidiaries to enable Microsoft and its Subsidiaries to grant the below described sublicenses to third parties, under certain patent rights more fully described below; and

WHEREAS, Microsoft desires to acquire a sublicensing right under such patent rights and Immersion desires to grant such a sublicensing right, all on the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the Parties agree as follows:

AGREEMENT

1. DEFINITIONS.

A. "ADULT PRODUCT" means: [****].

B. "CONDITIONAL PATENTS" means [****].

C. "FOUNDRY PRODUCT" means [****].

D. "GAME PLATFORM" means: [****].

E. "GAME PLATFORM VENDOR" means an entity which distributes a Game Platform under its own name.

F. "LICENSED PATENTS" means all Patents under which Immersion or any of its present or future Subsidiaries owns or has as of the Effective Date (or as of the acquisition date in the case of future Subsidiaries), or thereafter obtains, the ability or right to grant licenses, releases or freedom from suit, with the exception of Conditional Patents.

G. "MEDICAL PRODUCT" means [****]. General purpose hardware or software whose primary function is not the delivery of one of the foregoing is not a Medical Product.

PROVIDED UNDER RULE 408

H. "PATENT" means any patent, patent application, provisional application, continuation, continuation-in-part, divisional, reissue, renewal, reexamination, utility model, design patent, and foreign counterparts thereof.

I. "ROYALTY-BEARING [****] PRODUCTS" means:

(I) [****] except to the extent that such devices constitute Adult Products, Medical Products, or Foundry Products; and

(II) [****], except to the extent that such devices constitute Adult Products, Medical Products, or Foundry Products.

A handheld device having a primary purpose of playing games shall be deemed to fall within the "Game Platform" definition and is not a Royalty-Bearing [****] Product.

J. [****]

K. [****]

L. "SUBLICENSEE" means any entity to which Microsoft may grant a sublicense in accordance with this Sublicense Agreement.

M. "SUBSIDIARY" means a corporation, company or other entity: (i) fifty percent (50%) or more of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a given entity, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists; or (ii) which does not have outstanding shares or securities, as may be the case in a partnership, joint venture or unincorporated association, but fifty percent (50%) or more of whose ownership interest representing the right to make the decisions for such corporation, company or other entity is, now or hereafter, owned or controlled, directly or indirectly, by a given entity, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists.

N. "TOUCH TECHNOLOGY" means technology related to calculating, processing, amplifying, communicating, transmitting, controlling, applying, producing, using, or enhancing touch sensations or information related to the sense of touch (e.g., resistance, texture, force). Examples include force feedback, vibration, and tactile response applications.

2. SUBLICENSING RIGHTS AND PAYMENTS.

A. SUBLICENSE RIGHTS FOR GAME PLATFORM VENDORS.

(I) Grant of Rights. Immersion on behalf of itself and its Subsidiaries, hereby grants to Microsoft and its Subsidiaries the worldwide, irrevocable, non-terminable right, subject to and during the period set forth in Section 2(j), to sublicense Game Platform Vendors and their Subsidiaries under the Licensed Patents (excluding Patents not directed to Touch Technology) to:

(1) make, have made, use, lease, distribute, have distributed, publish, have published, import, provide as a service, offer to sell, sell or

PROVIDED UNDER RULE 408

otherwise dispose of such Game Platform Vendor's and its
Subsidiaries' Game Platforms; and

(2) further sublicense third party software developers to use such Game Platform Vendor's and its Subsidiaries' Game Platform software development tools to develop games solely for such Game Platforms.

(II) Delivery of Copy of Game Platform Sublicense. Microsoft's grant of such a sublicense to a Game Platform Vendor is referred to herein as a "GAME PLATFORM SUBLICENSE." Except as set forth in the last sentence of Section 2(c), Microsoft shall provide Immersion with a copy of the fully executed Game Platform Sublicense within ten (10) days after the Game Platform Sublicense is executed by Microsoft and the applicable Game Platform Vendor.

B. COMPENSATION FOR GAME PLATFORM VENDORS [****]. As Immersion's entire compensation with respect to each individual sublicense granted under Section 2(a) above to a particular Game Platform Vendor
[****], (a) Microsoft shall pay Immersion [****] within ten (10) days of Microsoft's granting any such Game Platform Sublicense, and
(b) thereafter Microsoft shall pay Immersion [****] of the cash amounts (if any, and including royalty payments and upfront, annual or other license fees) received by Microsoft from such Game Platform Vendor for the Game Platform Sublicense in excess of [****] ("ADDITIONAL SUBLICENSING REVENUE") within thirty (30) days of Microsoft's receipt of any such Additional Sublicensing Revenue.

C. COMPENSATION FOR [****] GAME PLATFORM SUBLICENSE. In the event Microsoft grants [****] a Game Platform Sublicense on the terms set forth in Section 2(a) above, the following terms shall apply in place of the terms of Section 2(b). Within ten (10) days after Microsoft grants [****] the Game Platform Sublicense, Microsoft shall pay Immersion:

(I) [****] if the Game Platform Sublicense is entered into prior to the date that is thirty (30) days prior to the then most recently [****];

(II) [****] if the Game Platform Sublicense is entered into within the thirty (30) day period immediately prior to the then most recently [****];

(III) [****] if the Game Platform Sublicense is entered into during the time period the [****] is underway, but prior to the delivery of [****] to Immersion (if any) [****]; or

(IV) the greater of [****] or the amount that is [****] of any
[****] that has been [****] if the Game Platform Sublicense is entered into after the delivery of the [****] referenced in
(3) above. Microsoft shall be entitled to deduct [****] of the cash amount received by Microsoft [****] for the Game Platform Sublicense from the amounts payable under this clause (4); provided that the amount payable by Microsoft under this clause (4) will in no event be less than [****].

PROVIDED UNDER RULE 408

In any of the cases described under clauses (1) - (4) above, the Parties shall each be entitled to [****] of the cash amounts (if any, and including royalty payments and upfront, annual or other license fees) received by Microsoft [****] for the Game Platform Sublicense in excess of the applicable amount specified in such clauses (1) - (4) (after implementation of the calculation specified in clause (4)). Any license grant [****] under the Game Platform Sublicense shall not become effective until [****] renders all compensation required under the Game Platform Sublicense to be paid by [****] as of the effective date of such Game Platform Sublicense. At the time of making payment to Immersion for the [****] Game Platform Sublicense, Microsoft shall also provide Immersion with a fully executed copy of the [****] Game Platform Sublicense.

D. MICROSOFT'S RIGHT TO SUBLICENSE [****] FOR ADDITIONAL
[****]PRODUCTS. Immersion on behalf of itself and its Subsidiaries, hereby grants to Microsoft and its Subsidiaries the worldwide, irrevocable, non-terminable right, subject to and during the period set forth in Section 2(j), to sublicense [****] under the Licensed Patents (excluding Patents not directed to Touch Technology) to make, have made, use, offer to sell and sell or otherwise distribute Royalty-Bearing [****] Products, subject to the royalty obligations set forth in Exhibit A. In the event Microsoft and [****] execute an agreement for such a sublicense, Immersion shall pay Microsoft
[****] within ten (10) days after the execution thereof. Within ten
(10) days after execution of any sublicense under this Section 2(d), Microsoft shall provide a fully executed copy thereof to Immersion.

E. PAYMENTS TO MICROSOFT IN THE EVENT IMMERSION [****] PRIOR TO MICROSOFT GRANTING [****] A GAME PLATFORM SUBLICENSE. In the event Immersion elects in its discretion to [****] prior to Microsoft's granting [****] the Game Platform Sublicense (and regardless of whether such [****] occurs during or after the twenty-four (24) month period following the Effective Date), then Immersion shall pay Microsoft an amount determined as follows:

(I) If Immersion [****] for an amount of [****] up to and including [****], then Immersion shall pay Microsoft the sum of [****].

(II) If Immersion [****] for an amount in excess of [****] up to and including [****], then Immersion shall pay Microsoft the sum of [****] plus an additional amount equal to [****] of the amount of the settlement in excess of [****] up to and including [****].

(III) If Immersion [****] for an amount in excess of [****], then Immersion shall pay Microsoft the sum specified in the preceding clause (3) plus an additional amount equal to [****] of the amount of the settlement in excess of [****].

The [****] amounts specified in clauses (i) - (iii) above shall include all amounts, including all royalty payments and upfront, annual or other license fees (regardless of when received), received by Immersion on account of any license, [****], or similar consideration granted by Immersion to [****] in respect of the Licensed Patents, including for fields of use outside of the area of Game Platforms, and(a) in connection with the [****], including any agreement, license,

PROVIDED UNDER RULE 408

sublicense, option, investment, or other transaction associated with
[****], and (b) with respect to any other agreement, license, sublicense, option, investment, or other transaction entered into during the time period that is the lesser of (1) the period set forth in Section 2(j), or (2) eighteen (18) months after [****]. Any amounts due under this Section 2(e) shall be paid to Microsoft within ten (10) days of Immersion's [****]. Immersion further agrees to promptly provide Microsoft with sufficient documentation of
[****] to enable Microsoft to determine and confirm the payment owed to Microsoft in the event of such [****].

F. [****]. Within five (5) days after Microsoft grants [****] a Game Platform Sublicense and pays Immersion the amount due under Section
2(c), Immersion, for no additional consideration or payment whatsoever (whether from Microsoft or [****]) will: (i) [****]; and
(ii) [****] licensees, distributors, and customers, direct and indirect, [****]. The Immersion obligations set forth in the foregoing sentence shall be contingent on [****] (for no additional consideration or payment whatsoever from Immersion) [****].

G. SUBLICENSING REVENUE FROM [****] JOINT VENTURE. If, during the period set forth in Section 2(j), Immersion grants a third party the right to grant licenses for the equivalent of Royalty-Bearing [****] Products to [****], Microsoft shall be entitled to receive [****] f all amounts received on account of the grant of such rights, including all royalty payments and upfront, annual or other license fees (regardless of when received). All such amounts shall be paid to Microsoft no than thirty (30) days after receipt by Immersion. In the event that [****], the aforementioned percentage shall be increased to [****].

H. CONDITIONAL PATENTS. Immersion on behalf of itself and its Subsidiaries, agrees that [****].

I. OWNERSHIP. Except as expressly licensed to Microsoft in this Sublicense Agreement, Immersion retains all right, title and interest in and to the Licensed Patents. Immersion reserves all rights not expressly granted in this Sublicense Agreement.

J. LIMITATION. Microsoft's right to grant sublicenses to [****] or other third parties pursuant to this Section 2 shall only be effective during the [****] month period following the Effective Date; provided, however, that any such sublicense granted by Microsoft pursuant to this Section 2 during such [****] month period shall be effective for the life of the Licensed Patents or for such lesser duration as Microsoft and the applicable sublicensee may agree, in their sole discretion.

PROVIDED UNDER RULE 408

3. PAYMENT. Within five (5) days after the Effective Date, Microsoft shall pay Immersion by cashier's check, wire transfer or other immediately available funds, one hundred thousand dollars (USD $100,000), in consideration of the rights and covenants set forth herein. The payment referenced in this Section 3 is in addition to any payments that Microsoft may be obligated to make to Immersion under Sections 2(b), 2(c) or 2(h) of this Sublicense Agreement.

4. CONFIDENTIALITY. The terms, conditions, and existence of this Sublicense Agreement shall be treated as confidential information by the Parties, and neither Party shall disclose the existence, terms or conditions of this Sublicense Agreement to any third party (other than, in the case of Microsoft, to [****] and to any other Game Platform Vendor entering into a Game Platform Sublicense) without the prior written permission of the other Party. Each Party, however, shall have the right to make disclosures to the extent required by an order of court, regulation of another governmental body, or otherwise by law or by a stock exchange, provided that the Party shall promptly provide written notice to the non-disclosing Party of the intended disclosure and of the court order or regulation prior to such disclosure and that the Party shall take all reasonable steps to minimize such disclosure by, for example, obtaining a protective order and/or appropriate confidentiality provisions requiring that such information to be disclosed be used only for the purpose for which such law, order, regulation or requirement was issued. Additionally, (i) each Party may disclose the terms and conditions of this Sublicense Agreement to the extent reasonably necessary, under a suitable confidentiality agreement, to its accountants, attorneys, financial advisors and in connection with due diligence activities relating to the sale of the stock or a portion of the business of a Party or its Subsidiaries, and
(ii) Immersion shall be permitted to disclose to [****] and any other Game Platform Vendor entering into a Game Platform Sublicense the permitted scope of Microsoft's sublicense rights under this Sublicense Agreement, provided that Immersion gives Microsoft notice of such proposed disclosure and Microsoft does not respond within thirty (30) days after such notice.

5. WARRANTIES.

A. IMMERSION. Immersion represents, warrants, and covenants that:

(I) it has the full power and has taken the necessary and appropriate steps to enter into this Sublicense Agreement and assume the obligations hereunder;

(II) it has the right to license the Licensed Patents, and it has the full power and has taken the necessary and appropriate steps to enter into this Sublicense Agreement and assume the obligations hereunder, and to grant the license rights and covenants set forth herein;

(III) it has not previously and will not grant any rights in the Licensed Patents to any third party that are inconsistent with the rights granted to Microsoft herein;

(IV) it has not previously and will not grant during the period set forth in Section 2(j) to any third party the right to grant
[****] the sublicense rights granted in Sections 2(a) herein;

PROVIDED UNDER RULE 408

(V) it has not assigned or otherwise transferred or subrogated any interest [****], and, except in connection with an assignment by Immersion permitted by Section 8(d), will not assign or otherwise transfer or subrogate any interest [****];

(VI) [****];

(VII) [****];

(VIII) as of the Effective Date, there are no actual or threatened lawsuits or claims relating to the Licensed Patents other than the action in the United States District Court for the Northern District of California entitled Immersion Corporation
v. Sony Computer Entertainment of America, Inc., Sony Computer Entertainment Inc., and Microsoft Corporation, Northern District of California Case No. C02-00710 CW (WDB), contract, business or licensing discussions with existing or potential licensees and customers, and as set forth in Schedule 3.12 to the Series A Redeemable Convertible Preferred Stock Purchase Agreement executed by the Parties on even date herewith; and

(IX) as of the Effective Date, Immersion believes, in good faith, that the issued Licensed Patents owned by Immersion are valid and enforceable.

B. BY MICROSOFT. Microsoft represents, warrants, and covenants that it has the full power and has taken the necessary and appropriate steps to enter into this Sublicense Agreement and assume the obligations hereunder.

C. DISCLAIMER. EXCEPT AS EXPRESSLY PROVIDED IN SECTIONS 5(a) AND 5(b) ABOVE, THE PATENTS ARE PROVIDED "AS IS" AND WITHOUT WARRANTY OF ANY KIND. EACH PARTY DISCLAIMS ALL IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT.

Nothing in this Sublicense Agreement shall be construed (i) as a warranty or representation by Immersion as to the validity or scope of any Licensed Patents; (ii) as a warranty or representation that anything made, used, sold or otherwise disposed of under any license or sublicense granted in or under this Sublicense Agreement is or will be free from infringement by patents, copyrights, trade secrets, trademarks, or other rights of third parties; (iii) as granting by implication, estoppel or otherwise any licenses or rights under patents or other intellectual property rights of Immersion other than expressly granted herein; or (iv)(a) to require Immersion to file any patent application, (b) as a warranty that Immersion will be successful in securing the grant of any patent or any reissue or extensions thereof, or (c) to require Immersion to pay any maintenance fees or take any other steps to maintain Immersion's patent rights. Immersion does not assume any responsibility for the manufacture of any product that is manufactured or sold by or for Microsoft or Microsoft's Subsidiaries, or their sublicensees. All warranties in connection with such products shall be made by the manufacturer or seller of such products.

6. TERM; TERMINATION.

PROVIDED UNDER RULE 408

A. TERM. Unless terminated by Microsoft pursuant to Section 6(b), the term of this Sublicense Agreement shall be from the Effective Date until the expiration of the last to expire of the Licensed Patents.

B. TERMINATION. The parties expressly agree that this Sublicense Agreement may not be terminated by Immersion, even in the event of Microsoft's breach of this Sublicense Agreement. Notwithstanding the foregoing, Microsoft may terminate this Sublicense Agreement in its sole discretion and at any time upon thirty (30) days' written notice in advance to Immersion. In the event Microsoft elects to terminate this Sublicense Agreement, (i) such termination shall not terminate or otherwise affect any sublicenses granted by Microsoft under this Sublicense Agreement prior to such termination, and (ii) Sections 4, 5, 6(b), 7, 8, and 9 shall survive. Termination of this Sublicense Agreement by Microsoft shall not in any way affect or relieve either of the Parties of the payment obligations set forth in Sections 2(b), 2(c), 2(d) and 2(h) of this Sublicense Agreement.

7. LIMITATION OF LIABILITIES.

NEITHER PARTY WILL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES RELATING TO THIS SUBLICENSE AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

8. GENERAL.

A. NOTICES. All notices and requests in connection with this Sublicense Agreement will be given in writing and will be deemed given as of the day they are received either by messenger, delivery service, or in the mails of the United States of America, postage prepaid, certified or registered, return receipt requested, and addressed as follows:

TO: MICROSOFT                            TO: IMMERSION
Microsoft Corporation                    Immersion Corporation
Attention:  Vice President,              Attention:  Vice President,
Intellectual Property                    Legal Affairs
One Microsoft Way                        801 Fox Lane
Redmond, Washington  98052-6399          San Jose, California 95131
Phone: (425) 882-8080                    Phone:  (408) 467-1900
Fax: (425) 936-7329                      Fax:  (408) 467-1901
Copy to: Vice President, Litigation
Fax:  (425) 936-7409

or to such other address as the Party to receive the notice or request so designates by written notice to the other.

B. INDEPENDENT CONTRACTORS. The Parties are independent contractors, and nothing in this Sublicense Agreement will be construed as creating an employer-employee relationship, a partnership, or a joint venture between the Parties. Neither Party will have the power to bind the other Party or incur obligations on the other Party's behalf without the other Party's prior written consent.

PROVIDED UNDER RULE 408

C. DISPUTE RESOLUTION. This Sublicense Agreement shall be construed and controlled by the laws of the State of Washington, and each Party consents to exclusive jurisdiction and venue in the federal courts sitting in King County, Washington, unless no federal subject matter jurisdiction exists, in which case each Party consents to exclusive jurisdiction and venue in the Superior Court of King County, Washington. Each Party waives all defenses of lack of personal jurisdiction and forum non-conveniens. Process may be served on either Party in the manner authorized by applicable law or court rule. In any action to enforce any right or remedy under this Sublicense Agreement or to interpret any provision of this Sublicense Agreement, the prevailing Party shall be entitled to recover its reasonable attorneys' fees, costs and other expenses.

D. ASSIGNMENT. This Sublicense Agreement will be binding upon and inure to the benefit of each Party's respective successors and lawful assigns. Microsoft will have the right to assign this Sublicense Agreement or any or all of its rights under this Sublicense Agreement, in whole or in part (in any case together with all restrictive terms continuing with such assignment) to any purchaser of any Microsoft business that grants the sublicenses authorized herein; provided, that Microsoft may not make any such assignment to
[****]. This Sublicense Agreement may be assigned by Immersion to any acquiror of all or substantially all of the business or assets of Immersion, or in connection with a merger. Microsoft and Immersion will each have the right to merge or consolidate without the prior approval of the other Party. Except as permitted above, assignment of this Sublicense Agreement, whether by contract, operation of law, or otherwise, will be void.

E. CONSTRUCTION. If for any reason a court of competent jurisdiction finds any provision of this Sublicense Agreement, or portion thereof, to be unenforceable, that provision of the Sublicense Agreement will be enforced to the maximum extent permissible so as to effect the intention of the Parties, and the remainder of this Sublicense Agreement will continue in full force and effect. Failure by either Party to enforce any provision of this Sublicense Agreement will not be deemed a waiver of future enforcement of that or any other provision. This Sublicense Agreement has been negotiated by the Parties and their respective counsel and will be interpreted fairly in accordance with its terms and without any strict construction in favor of or against either Party.

F. ENTIRE AGREEMENT. This Sublicense Agreement constitutes the entire agreement between the Parties with respect to the subject matter hereof and merges all prior and contemporaneous communications regarding the subject matter hereof. This Sublicense Agreement will not be modified except by a written agreement dated subsequent to the Effective Date and signed on behalf of Immersion and Microsoft by their respective duly authorized representatives. This Sublicense Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of which taken together shall constitute one and the Sublicense Agreement. Delivery of an executed counterpart of this Sublicense Agreement by facsimile transmission shall be

PROVIDED UNDER RULE 408

effective as delivery of an originally executed counterpart of this Sublicense Agreement.

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SIGNATURE PAGE TO THE
GAME CONSOLE SUBLICENSE AGREEMENT

IN WITNESS WHEREOF, the Parties have entered into this Sublicense Agreement as of the Effective Date written above.

IMMERSION CORPORATION

By:
     ----------------------------------
     VICTOR VIEGAS
     President, Chief Executive Officer
     and Chief Financial Officer

MICROSOFT CORPORATION

By:
     ----------------------------------
     Name:
     Title:


By:
     ---------------------------------
     Name:
     Title:


By:
     ---------------------------------
     Name:
     Title:


 By:
      ---------------------------------
      Name:
      Title:

EXHIBIT A

ROYALTIES FOR ROYALTY-BEARING [****] PRODUCTS

1. In the event Microsoft grants [****] the additional license rights referenced in Section 2(d), Microsoft shall arrange for [****] to pay royalties directly to Immersion as described below.

A. The royalty applicable to each unit of a given type of Royalty-Bearing [****] Product that is licensed, sold, or otherwise distributed or disposed of by any entity licensed under the sublicense granted pursuant to Section 2(d) of the Sublicense Agreement (a "UNIT") shall be the greater of:

(I) [****] per Unit; or

(II) [****] of the wholesale cost of production of such Unit.

B. Alternatively, at [****] option, in the event that Immersion has entered into an agreement with a party other than [****] (excluding
(i) the License Agreement entered into by Microsoft and Immersion simultaneously with the execution of this Agreement, (ii) any other agreement with a third party in connection with the [****]; and
(iii) any agreement under which Immersion receives a license or
[****] from such third party) (a "THIRD PARTY AGREEMENT") in which Immersion grants such third party rights under the Licensed Patents of equivalent scope to the rights sublicensed to [****] under
Section 2(d), if, taken as a whole, the terms of such Third Party Agreement are more favorable than the terms of the agreement entered into by [****] and Microsoft pursuant to Section 2(d) ("SECTION 2(D) AGREEMENT"), [****] may elect that all material terms of such Third Party Agreement shall apply to [****] in place of the Section 2(d) Agreement. In the event of such an election by [****] and Microsoft shall terminate the Section 2(d) Agreement, and Immersion and [****] will enter into an agreement containing all such material terms of such Third Party Agreement.

2. Except as otherwise agreed by [****] and Immersion, royalties payable for Units shall be paid within 30 days after the end of the calendar quarter in which [****] receives revenue for such Unit and to a bank account designated by Immersion.

3. [****] bundled with [****] shall not bear a separate royalty; the only royalty payable shall be on the underlying [****] which such [****] intended to be used.

A-1

Exhibit 10.6

INDEPENDENT CONTRACTOR SERVICES AGREEMENT

This Agreement is made and entered into as of July 1, 2003 ("Effective Date"), by and between Immersion Corporation, a corporation having a principal place of business at 801 Fox Lane, San Jose, CA ("Immersion"), and Robert Van Naarden, an individual residing at 514 Long Lane, Huntington Valley, PA 19006 ("Van Naarden").

1. Engagement of Services. Immersion hereby retains Van Naarden for the sole and specific purpose of completion of the Statement of Work ("SOW") attached hereto as Exhibit 1. During the term of this Agreement, Van Naarden shall commit to working at least three (3) days per week, completing the tasks set forth in the SOW and shall report to Victor Viegas, President and CEO of Immersion.

2. Term and Termination.

2.1 Term. This Agreement shall commence as of the Effective Date and continue for an initial six (6) month term. Thereafter, this Agreement shall automatically be renewed for subsequent three (3) month terms unless either party notifies the other in writing at least ten (10) days prior to the expiration of the then-current term of its election to terminate this Agreement.

2.2 Termination by Immersion. Immersion may terminate this Agreement without cause at any time, with termination effective fifteen (15) days after Immersion's delivery to Van Naarden of written notice of termination. Immersion also may terminate this Agreement (i) immediately upon Van Naarden's breach of Paragraph 5 ("Intellectual Property Rights") or 6 ("No Conflict of Interest"), or (ii) thirty (30) days after Immersion's delivery to Van Naarden of written notice of Van Naarden's material breach of any other provision or obligation owed by Van Naarden under this Agreement, which is not cured within such thirty
(30) day period

2.3 Termination by Van Naarden. Van Naarden may terminate this Agreement without cause at any time, with termination effective fifteen (15) days after Van Naarden's delivery to Immersion of written notice of termination. Van Naarden also may terminate this Agreement for material breach by Immersion if Immersion has not cured the breach within thirty (30) days of receiving written notice from Van Naarden.

3. Compensation; Expenses.

3.1 Compensation. Immersion will pay Van Naarden a monthly fee of $15,000.00 for Van Naarden's work hereunder. Upon termination of this Agreement for any reason, Van Naarden will be paid fees for any work completed by that date that has not yet been compensated, but shall be entitled to no other compensation from Immersion.

3.2 Expenses. Van Naarden will be reimbursed for any reasonable, out-of-pocket, travel-related expenses incurred in furtherance of Van Naarden's performance hereunder. Van Naarden will be reimbursed only for expenses which are incurred prior to termination of this Agreement for any reason and which have been expressly authorized by Immersion in writing.

Van Naarden will be reimbursed for such fees and expenses no later than thirty
(30) days after Immersion's receipt of Van Naarden's invoice, provided that reimbursement for expenses may be delayed until such time as Van Naarden has furnished such documentation for authorized expenses as Immersion may reasonably request.

4. Independent Contractor Relationship. Van Naarden's relationship with Immersion is that of an independent contractor, and nothing in this Agreement is intended to, or should be construed to, create a partnership, agency, joint venture or employment relationship. Van Naarden will not be entitled to any of the benefits, which Immersion may make available to its employees, including, but not limited to, group health or life insurance, profit-sharing or retirement benefits. Van Naarden is not authorized to make any representation, contract or commitment on behalf of Immersion unless specifically requested or authorized in writing to do so by an Immersion manager. Van Naarden is solely responsible for, and will file, on a timely basis, all tax returns and payments required to be filed with, or made to, any federal, state or local tax authority with respect to the performance of services and receipt of fees under this Agreement. Van Naarden is solely responsible for, and must maintain adequate records of expenses incurred in the course of performing services under this Agreement. No part of Van Naarden's compensation will be subject to withholding by Immersion for the payment of any social security, federal, state or any other employee payroll taxes. Immersion will regularly report amounts paid to Van Naarden by filing Form 1099-MISC with the Internal Revenue Service as required by law.

5. Intellectual Property Rights.

5.1 Disclosure and Assignment of Innovations.

(a) Innovations; Immersion Innovations. "Innovations" includes processes, machines, compositions of matter, improvements, inventions (whether or not protectable under patent laws), works of authorship, information fixed in any tangible medium of expression (whether or not protectable under copyright laws), moral rights, mask works, trademarks, trade names, trade dress, trade secrets, know-how, ideas (whether or not protectable under trade secret laws), and all other subject matter protectable under patent, copyright, moral right, mask work, trademark, trade secret or other laws, and includes without limitation all new or useful art, combinations, discoveries, formulae, manufacturing techniques, technical developments, discoveries, artwork, software, and designs. "Immersion Innovations" are Innovations that Van Naarden, solely or jointly with others, conceives, reduces to practice, creates, derives, develops or makes within the scope of Van Naarden's work for Immersion under this Agreement.

(b) Disclosure and Ownership of Immersion Innovations. Van Naarden agrees to make and maintain adequate and current records of all Immersion Innovations, which records shall be and remain the property of Immersion. Van Naarden agrees to promptly disclose to Immersion every Immersion Innovation. Van Naarden hereby does and will assign to Immersion or Immersion's designee Van Naarden's entire worldwide right, title and interest in and to all Immersion Innovations and all associated records and intellectual property rights.

(c) Assistance. Van Naarden agrees to execute upon Immersion's request a signed transfer of Immersion Innovations to Immersion as reasonably requested by Immersion, including but not limited to computer programs, notes, sketches, drawings and reports. Van Naarden agrees to assist Immersion in any reasonable manner to obtain, perfect and enforce, for Immersion's benefit, Immersion's rights, title and interest in any and all countries, in and to all patents, copyrights, moral rights, mask works, trade secrets, and other property rights in each of the Immersion Innovations. Van Naarden agrees to execute, when requested, for each of the Immersion Innovations (including derivative works, improvements, renewals, extensions, continuations, divisionals, continuations in part, or continuing patent applications thereof), (i) patent, copyright, mask work or similar applications related to such Immersion Innovation, (ii) documentation (including without limitation assignments) to permit Immersion to obtain, perfect and enforce Immersion's right, title and interest in and to such Immersion Innovation, and (iii) any other lawful documents deemed necessary by Immersion to carry out the purpose of this Agreement. If called upon to render assistance under this paragraph, Van Naarden will be entitled to a fair and reasonable fee in addition to reimbursement of authorized expenses incurred at the prior written request of Immersion. In the event that Immersion is unable for any reason to secure Van Naarden's signature to any document Van Naarden is required to execute under this Paragraph 4.1(c) ("Assistance"), Van Naarden hereby irrevocably designates and appoints Immersion and Immersion's duly authorized officers and agents as Van Naarden's agents and attorneys-in-fact to act for and in Van Naarden's behalf and instead of Van Naarden, to execute such document with the same legal force and effect as if executed by Van Naarden.

(d) Out-of-Scope Innovations. If Van Naarden incorporates into any Immersion Innovations any Innovations relating in any way to Immersion's business or demonstrably anticipated research or development or business which were conceived, reduced to practice or created by Van Naarden either outside of the scope of Van Naarden's work for Immersion under this Agreement or prior to the Effective Date (collectively, the "Out-of-Scope Innovations"), Van Naarden hereby grants to Immersion or Immersion's designees a royalty-free, irrevocable, worldwide, fully paid-up license (with rights to sublicense through multiple tiers of sublicensees) to practice all applicable patent, copyright, moral right, mask work, trade secret and other intellectual property rights relating to any Out-of-Scope Innovations which Van Naarden incorporates, or permits to be incorporated, in any Immersion Innovations. Van Naarden agrees that Van Naarden will not incorporate, or permit to be incorporated, any Innovations conceived, reduced to practice, created, derived, developed or made by others into any of the Immersion Innovations without Immersion's prior written consent.

5.2 Confidential Information.

(a) Definition of Confidential Information. "Confidential Information" as used in this Agreement shall mean any and all technical and non-technical information including patent, copyright, trade secret, and proprietary information, techniques, sketches, drawings, models, inventions, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents, and formulae related to the current, future and proposed products and services of Immersion, Immersion's suppliers and customers, and includes, without limitation, Immersion Innovations, Immersion Property, and Immersion's information concerning research, experimental work, development, design details and specifications, engineering, financial information, procurement requirements, purchasing

manufacturing, customer lists, business forecasts, sales and merchandising and marketing plans and information.

(b) Nondisclosure and Nonuse Obligations. Except as permitted in this paragraph, Van Naarden shall neither use nor disclose the Confidential Information. Van Naarden may use the Confidential Information solely to perform services hereunder for the benefit of Immersion. Van Naarden agrees that Van Naarden shall treat all Confidential Information of Immersion with the same degree of care as Van Naarden accords to Van Naarden's own Confidential Information, but in no case less than reasonable care. Van Naarden agrees not to communicate any information to Immersion in violation of the proprietary rights of any third party. Van Naarden will immediately give notice to Immersion of any unauthorized use or disclosure of the Confidential Information. Van Naarden agrees to assist Immersion in remedying any such unauthorized use or disclosure of the Confidential Information.

(c) Exclusions from Nondisclosure and Nonuse Obligations. Van Naarden's obligations under Paragraph 5.2(b) ("Nondisclosure and Nonuse Obligations") with respect to any portion of the Confidential Information shall not apply to any such portion which Van Naarden can demonstrate, (a) was, through no fault of Van Naarden, in the public domain at the time such portion was communicated to Van Naarden by Immersion; (b) was rightfully in Van Naarden's possession free of any obligation of confidence at the time such portion was communicated to Van Naarden by Immersion; or (c) was developed by Van Naarden independently of and without reference to any information communicated to Van Naarden by Immersion. A disclosure of Confidential Information by Van Naarden, either (a) in response to a valid order by a court or other governmental body, (b) otherwise required by law, or (c) necessary to establish the rights of either party under this Agreement, shall not be considered to be a breach of this Agreement or a waiver of confidentiality for other purposes; provided, however, that Van Naarden shall provide prompt prior written notice thereof to Immersion to enable Immersion to seek a protective order or otherwise prevent such disclosure. Nothing in this Agreement shall be interpreted or construed as granting a license to Van Naarden under Immersion's patents, copyrights or trademarks, except as necessary to carry out Project Assignment(s) authorized hereunder.

5.3 Ownership and Return of Immersion Property. All materials (including, without limitation, documents, drawings, models, apparatus, sketches, designs, lists, and all other tangible media of expression) furnished to Van Naarden by Immersion, whether delivered to Van Naarden by Immersion or made by Van Naarden in the performance of services under this Agreement (collectively, the "Immersion Property") are the sole and exclusive property of Immersion or Immersion's suppliers or customers, and Van Naarden hereby does and will assign to Immersion all rights, title and interest Van Naarden may have or acquire in the Immersion Property. Van Naarden agrees to keep all Immersion Property at Van Naarden's premises unless otherwise permitted in writing by Immersion. At Immersion's request and no later than five (5) days after such request, Van Naarden shall destroy or deliver to Immersion, at Immersion's option, (a) all Immersion Property, (b) all tangible media of expression in Van Naarden's possession or control which incorporate or in which are fixed any Confidential Information, and (c) written certification of Van Naarden's compliance with Van Naarden's obligations under this sentence.

5.4 Observance of Immersion Rules. At all times while on Immersion's premises, Van Naarden will observe Immersion's rules and regulations with respect to conduct, health and safety and protection of persons and property.

6. No Conflict of Interest. During the term of this Agreement, Van Naarden will not accept work, enter into a contract, or accept an obligation, inconsistent or incompatible with Van Naarden's obligations, or the scope of services rendered for Immersion, under this Agreement. Van Naarden warrants that, to the best of Van Naarden's knowledge, there is no other contract or duty on Van Naarden's part which conflicts with or is inconsistent with this Agreement. Van Naarden agrees to indemnify Immersion from any and all loss or liability incurred by reason of the alleged breach by Van Naarden of any obligation owed by Van Naarden to any third party.

7. Survival. The definitions contained in this Agreement and the rights and obligations contained in Paragraphs 5 ("Intellectual Property Rights"), 7 ("Survival"), and 8 ("General Provisions") will survive any termination or expiration of this Agreement.

8. General Provisions.

8.1 Successors and Assigns. Van Naarden may not subcontract or otherwise delegate Van Naarden's obligations under this Agreement without Immersion's prior written consent. Subject to the foregoing, this Agreement will be for the benefit of Immersion's successors and assigns, and will be binding on Van Naarden's assignees.

8.2 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows, with notice deemed given as indicated: (a) by personal delivery, when delivered personally; (b) by overnight courier, upon written verification of receipt; (c) by telecopy or facsimile transmission, upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to the addresses set forth above or to such other address as either party may specify in writing.

8.3 Governing Law. This Agreement shall be governed in all respects by the laws of the United States of America and by the laws of the State of California; as such laws are applied to agreements entered into and to be performed entirely within California between California residents. Each of the parties irrevocably consents to the exclusive personal jurisdiction of the federal and state courts located in the State of California, as applicable, for any action brought to enforce the terms of this Agreement, except that in actions seeking to enforce any order or any judgment of such federal or state courts located in Maryland, such personal jurisdiction shall be nonexclusive.

8.4 Severability. If any provision of this Agreement is held by a court of law to be illegal, invalid or unenforceable, (i) that provision shall be deemed amended to achieve as nearly as possible the same economic effect as the original provision, and (ii) the legality, validity and enforceability of the remaining provisions of this Agreement shall not be affected or impaired thereby.

8.5 Waiver; Amendment; Modification. No term or provision hereof will be considered waived by Immersion, and no breach excused by Immersion, unless such waiver or

consent is in writing signed by Immersion. The waiver by Immersion of, or consent by Immersion to, a breach of any provision of this Agreement by Van Naarden, shall not operate or be construed as a waiver of, consent to, or excuse of any other or subsequent breach by Van Naarden. This Agreement may be amended or modified only by mutual agreement of authorized representatives of the parties in writing.

8.6 Injunctive Relief for Breach. Van Naarden's obligations under this Agreement are of a unique character that gives them particular value. Van Naarden's breach of any of such obligations will result in irreparable and continuing damage to Immersion for which there will be no adequate remedy at law; and, in the event of such breach, Immersion will be entitled to seek injunctive relief and/or a decree for specific performance, and such other and further relief as may be proper (including monetary damages if appropriate).

8.7 Entire Agreement. This Agreement constitutes the entire agreement between the parties relating to this subject matter and supersedes all prior or contemporaneous oral or written agreements concerning such subject matter. The terms of this Agreement will govern all Project Assignments and services undertaken by Van Naarden for Immersion.

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

IMMERSION CORPORATION                         ROBERT VAN NAARDEN


By: /s/ Victor Viegas                         /s/ Robert Van Naarden
    ------------------------                  -----------------------------

Name: Victor Viegas

Title: President & CEO

EXHIBIT 1
STATEMENT OF WORK

Van Naarden will complete the following tasks within the first term of this Agreement:

1. Identify those medical associations that could provide accreditation and influence in the industry.

2. Develop a plan to bring the above into the fold

3. Assess the viability of a medical advisory committee to become the industry guru evangelists for Immersion Medical

4. Determine whether a change in product mix is appropriate (this is an issue of focus relative to maximizing the available resources to be applied to the largest revenue potential)

5. Determine what the market is asking for (this can best be done by going on some sales calls around the country with sales staff)

6. Determine what additional services could be added to increase revenues without straining the organization

7. Assess the sales process and make recommendations for improvement in order to reach a goal of 10X revenue from today's levels, if possible.

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in this Registration Statement of Immersion Corporation on Form S-3 of our reports dated March 26, 2003, appearing in and incorporated by reference in the Annual Report on Form 10-K of Immersion Corporation for the year ended December 31, 2002 and to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement.

/s/ DELOITTE & TOUCHE LLP
--------------------------

San Jose, California
September 5, 2003

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	•		transactions on any national securities exchange or quotation service on which the common stock may be listed or quoted at the time of the sale, including the Nasdaq National Market;

	•		transactions in the over-the-counter market; or

	•		transactions otherwise than on such exchanges or services or in the over-the-counter market.

	•		protect and enforce our intellectual property, including the costs of our litigation against Sony Computer Entertainment;

	•		continue to develop our technologies;

	•		attempt to expand the market for touch-enabled products;

	•		increase our sales efforts; and

	•		pursue strategic relationships.

	•		touch-enabled medical simulators that can be used for training and skills assessment for procedures such as catheterization, bronchoscopy, colonoscopy, sigmoidoscopy and laparoscopic procedures;

	•		touch-enabled peripherals for gaming on personal computers and dedicated gaming consoles;

	•		touch-enabled automotive interfaces;

	•		touch-enabled, whole-hand sensing gloves, such as our CyberForce product;

	•		cursor control peripherals, such as touch-enabled mice and trackballs, for use with personal computers; and

	•		touch-enabled personal electronics, such as cell phones and PDAs.

	•		the establishment or loss of licensing relationships;

	•		the timing of payments under fixed and/or up-front license agreements;

	•		the timing of our expenses, including costs related to litigation, acquisitions of technologies or businesses;

	•		the timing of introductions of new products and product enhancements by us, our licensees or their competitors;

	•		our ability to develop and improve our technologies;

	•		our ability to attract, integrate and retain qualified personnel; and

	•		seasonality in the demand for our licensees’ products.

	•		the lengthy and expensive process of building a relationship with potential licensees;

	•		the fact that we may compete with the internal design teams of existing and potential licensees;

	•		difficulties in persuading consumer product manufacturers to work with us, to rely on us for critical technology and to disclose to us proprietary product development and other strategies;

	•		difficulties in persuading existing and potential licensees to bear the development costs necessary to incorporate our technologies into their products; and

	•		challenges in demonstrating the compelling value of our technologies in new applications like cell phones and automobiles.

	•		our pending patent applications may not result in the issuance of patents;

	•		our patents may not be broad enough to protect our proprietary rights; and

	•		effective patent protection may not be available in every country in which our licensees do business.

	•		laws and contractual restrictions may not be sufficient to prevent misappropriation of our technologies or deter others from developing similar technologies; and

	•		policing unauthorized use of our products and trademarks would be difficult, expensive and time-consuming, particularly overseas.

	•		fail to develop new technologies;

	•		our new technologies fail to gain market acceptance; or

	•		our current products become obsolete.

	•		unanticipated costs associated with the acquisitions;

	•		use of substantial portions of our available cash to consummate the acquisitions;

	•		diversion of management’s attention from other business concerns;

	•		difficulties in assimilation of acquired personnel or operations; and

	•		potential intellectual property infringement claims related to newly acquired product lines.

	•		prior to the date of the transaction, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

	•		the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers, and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

	•		on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.

	•		Such time as all of the shares have been sold by the selling stockholder;

	•		Such time as all of the shares have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act; or

	•		Such time as the selling stockholder may sell all of the shares held by them without registration pursuant to Rule 144 under the Securities Act within a three-month period.

	•		our Annual Report on Form 10-K for the year ended December 31, 2002;

	•		our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003;

	•		our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003;

	•		our definitive Proxy Statement on Schedule 14A filed on April 29, 2003;

	•		our Current Report on Form 8-K dated July 29, 2003; and

	•		our Registration Statement on Form 8-A12G, filed on November 5, 1999, which contains a description of our common stock.

	(ii)		To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and

	(iii)		To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

	(2)		That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

	(3)		To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

	(1)		For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and

	(2)		For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof.