<DOCUMENT>
<TYPE>424B3
<SEQUENCE>1
<FILENAME>f64652b3e424b3.txt
<DESCRIPTION>PROXY/PROSPECTUS FILED PURSUANT TO RULE 424(B)(3)
<TEXT>

<PAGE>   1
                     Proxy Statement/Prospectus filed pursuant to Rule 424(b)(3)
                                            Registration Statement No. 333-45254

LOGO                                                                        LOGO

                           PROXY STATEMENT/PROSPECTUS

<TABLE>
<S>                                    <C>
       PROSPECTUS OF IMMERSION                  PROXY STATEMENT OF
             CORPORATION                     HT MEDICAL SYSTEMS, INC.
</TABLE>

     The boards of directors of Immersion Corporation and HT Medical Systems,
Inc. have approved the merger of a subsidiary of Immersion and HT. Under the
terms of the merger, each share of HT common stock and preferred stock will be
converted into approximately 0.5176 of a share of Immersion common stock at the
effective time of the merger. Based on the number of HT common stock and
preferred stock expected to be outstanding at the effective time of the merger,
the holders of HT common stock and preferred stock will receive approximately
1.298 million shares of Immersion common stock, subject to the closing
adjustment and escrow arrangements provided in the merger agreement. Based on
the closing stock price of Immersion common stock of $14.25 on September 13,
2000, the equivalent value of each share of HT common stock and preferred stock
would be approximately $7.38, and the shares of Immersion common stock to be
received by HT stockholders in the merger would have an aggregate market value
of approximately $18.491 million. The foregoing amounts and the actual number of
shares of common stock received by HT's stockholders in the merger will be
subject to the closing adjustment and escrow arrangement provisions of the
merger agreement.

     The merger cannot be completed unless the HT stockholders approve the
merger and the merger agreement. The board of directors of HT has called a
special meeting of HT stockholders to be held on September 27, 2000 to vote on
these matters. HT stockholders that are record owners of shares of HT common
stock or preferred stock as of the record date, which is the close of business
on September 6, 2000, may vote at the HT special meeting.

     THE BOARDS OF DIRECTORS OF IMMERSION AND HT ARE FURNISHING THIS DOCUMENT TO
YOU TO PROVIDE YOU WITH IMPORTANT INFORMATION ABOUT THE MERGER AND OTHER
MATTERS. HT STOCKHOLDERS WHO QUALIFY AS OBJECTING STOCKHOLDERS UNDER MARYLAND
LAW ARE ENTITLED TO APPRAISAL RIGHTS.

     Immersion common stock is traded on the Nasdaq National Market under the
symbol "IMMR." On September 13, 2000, the last reported sale price for the
common stock on the Nasdaq National Market was $14.25 per share.

     THE PROPOSED MERGER IS A COMPLEX TRANSACTION. IMMERSION AND HT STRONGLY
URGE YOU TO READ AND CONSIDER THIS PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY,
INCLUDING THE MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING ON PAGE 11.

<TABLE>
<S>                                            <C>

             /s/ Louis Rosenberg                           /s/ Gregory L. Merril
               Louis Rosenberg                               Gregory L. Merril
   President, Chief Executive Officer and                  Chairman of the Board
     Chairman of the Board of Immersion                     and Treasurer of HT
</TABLE>

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE IMMERSION COMMON STOCK TO BE
ISSUED UNDER THIS PROXY STATEMENT/PROSPECTUS OR DETERMINED THE ADEQUACY OR
ACCURACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

     This proxy statement/prospectus is dated September 13, 2000 and was first
mailed to HT stockholders on September 14, 2000.
<PAGE>   2

                            HT MEDICAL SYSTEMS, INC.
                            55 W. WATKINS MILL ROAD
                             GAITHERSBURG, MD 20878

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

                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
                         TO BE HELD SEPTEMBER 27, 2000

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

Dear Stockholder:

     A special meeting of the stockholders of HT Medical Systems, Inc. will be
held at the offices of HT located at 55 W. Watkins Mill Road, Gaithersburg, MD
20878, on September 27, 2000 at 9:00 a.m., local time. At the special meeting,
the holders of HT's common stock and preferred stock will be asked to consider
and vote upon an agreement and plan of reorganization, referred to as the merger
agreement, providing for the merger of a subsidiary of Immersion Corporation
with and into HT, pursuant to which HT will become a wholly owned subsidiary of
Immersion and each share of HT's common stock and preferred stock will be
converted into the right to receive an estimated 0.5176 of a share of Immersion
common stock.

     HT stockholders are entitled to vote at the special meeting if they owned
shares of HT common stock and/or preferred stock as of September 6, 2000, the
record date for the special meeting. On that date there were 2,266,908 shares of
common stock and 240,107 shares of preferred stock outstanding entitled to vote.
The holders of common stock and preferred stock will vote together as a single
class, and each share is entitled to one vote. The affirmative vote of
two-thirds of the outstanding shares of HT common stock and preferred stock will
be required to approve the merger agreement and the merger.

     HT's board of directors unanimously approved the merger agreement and the
merger after considering various factors and believes that the merger is in the
best interest of HT and its stockholders.

     Stockholders of HT holding a total of 1,443,173 shares of common stock and
preferred stock, or approximately 58% of the total votes entitled to be cast at
the special meeting, have agreed with Immersion that they will vote in favor of
the merger agreement and the merger.

     Stockholders who vote against the merger are entitled to objecting
stockholders' appraisal rights, although Immersion may elect not to proceed with
the merger if the holders of more than three percent of HT's shares seek to
exercise their objecting stockholders' appraisal rights.

     WE URGE YOU TO READ THE ENCLOSED MATERIAL CAREFULLY AND REQUEST THAT YOU
COMPLETE, DATE AND SIGN AND RETURN THE ENCLOSED PROXY AS SOON AS POSSIBLE. YOUR
VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF THE SHARES YOU OWN.

                                          By Order of the Board of Directors,

                                          Jill N. Whitley,
                                          Secretary
<PAGE>   3

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
WHERE YOU CAN FIND MORE INFORMATION.........................     1
QUESTIONS AND ANSWERS ABOUT THE MERGER......................     2
SUMMARY.....................................................     4
  The Companies.............................................     4
  The Merger................................................     5
  Reasons for the Merger....................................     5
  HT Special Meeting........................................     5
  Which Stockholders May Vote...............................     5
  Recommendation to HT Stockholders.........................     6
  What HT Securityholders Will Receive in the Merger........     6
  Closing Adjustment........................................     7
  Escrow Agreement..........................................     7
  The Representative........................................     7
  Indemnification and Joinder Agreements and Appointment of
     Representative.........................................     7
  Conditions to the Merger..................................     7
  Some HT Stockholders Have Entered into Voting Agreements
     Obligating Them to Vote in Favor of the Merger.........     8
  Employment Agreements.....................................     8
  Noncompetition Agreements.................................     8
  Limitation on Negotiations................................     8
  Termination of the Merger Agreement.......................     8
  HT Financial Advisor......................................     8
  Interests of Some HT Officers and Directors in the Merger
     May Be Conflicts of Interest...........................     9
  Federal Income Tax Consequences...........................     9
  Anticipated Accounting Treatment..........................     9
  Affiliate Agreements......................................     9
  Management Following the Merger...........................     9
  Rights of HT Stockholders Following the Merger............     9
  Rights of Objecting Stockholders..........................    10
  HT Equivalent Per Share Value.............................    10
RISK FACTORS................................................    11
  Risks Related to the Merger...............................    11
  Risks Related to the Business and Operations of Immersion
     and HT as a Combined Company...........................    14
  Investment Risk...........................................    24
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL
  DATA......................................................    26
  Immersion Selected Historical Financial Data..............    26
  HT Selected Historical Financial Data.....................    27
  Selected Unaudited Pro Forma Combined Financial Statement
     Data...................................................    29
IMMERSION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS.......................    31
  Overview..................................................    31
  Comparison of Six Months Ended June 30, 2000 and 1999.....    33
  Comparison of Years Ended December 31, 1999, 1998, and
     1997...................................................    35
  Liquidity and Capital Resources...........................    37
HT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
  CONDITION AND RESULTS OF OPERATIONS.......................    40
  Overview..................................................    40
  Comparison of 2000 to 1999................................    41
  Liquidity and Capital Resources...........................    42
</TABLE>

                                        i
<PAGE>   4

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
COMPARATIVE PER SHARE DATA..................................    43
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.............    44
IMMERSION MARKET PRICE AND DIVIDEND INFORMATION.............    44
  Recent Closing Prices.....................................    44
  Dividends.................................................    45
  Number of Stockholders....................................    45
THE HT STOCKHOLDERS' MEETING................................    46
  When and Where the Meeting Will Be Held...................    46
  What Will Be Voted Upon...................................    46
  Which Stockholders May Vote...............................    46
  How Do HT Stockholders Vote...............................    46
  How to Change Your Vote...................................    46
  Vote Required to Approve the Merger.......................    46
  Expenses of Proxy Solicitation............................    47
APPROVAL OF THE MERGER AND RELATED TRANSACTIONS.............    47
  Background of the Merger..................................    47
  Reasons for the Merger....................................    49
  Immersion Board Considerations............................    50
  HT Board Considerations...................................    51
  HT Board of Directors Recommendations Relating to the
     Merger.................................................    52
  Interests of Some HT Directors, Officers and Stockholders
     in the Merger..........................................    52
  Prior Relationship of Immersion and HT....................    52
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS......    54
  General...................................................    54
  Effective Time of the Merger..............................    54
  Merger Consideration......................................    54
  HT Options and Warrants and the Convertible Note..........    55
  Closing Adjustment to the Merger Consideration............    56
  Escrow Arrangements and Indemnification and Joinder
     Agreement..............................................    56
  Exchange of HT Stock Certificates.........................    57
  The Merger Agreement......................................    58
  Voting Agreements.........................................    60
  Employment Agreement......................................    61
  Noncompetition Agreements.................................    61
  Anticipated Accounting Treatment..........................    61
  Affiliate Agreements......................................    61
  Material Federal Income Tax Consequences..................    62
  Appraisal Rights of Objecting Stockholders................    64
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
  FINANCIAL STATEMENTS AND RELATED NOTES....................    66
IMMERSION BUSINESS..........................................    71
  Company Overview..........................................    71
  Industry Background.......................................    71
  Immersion's Solution......................................    72
  Strategy..................................................    73
  Market Applications.......................................    75
  Technology Licensing and Products.........................    76
  Technology................................................    78
  Sales, Marketing and Support..............................    79
  Research and Development..................................    80
  Competition...............................................    80
</TABLE>

                                       ii
<PAGE>   5

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
  Intellectual Property.....................................    81
  Employees.................................................    81
  Properties................................................    81
  Legal Proceedings.........................................    82
IMMERSION MANAGEMENT FOLLOWING THE MERGER...................    83
  Executive Officers and Directors..........................    83
  Compensation Committee Interlocks and Insider
     Participation..........................................    84
  Compensation of Directors.................................    85
  Compensation of Executive Officers........................    86
  Option Grants in Last Fiscal Year.........................    87
  Aggregated Option Exercises in Last Fiscal Year and Fiscal
     Year End Option Values.................................    88
  Employment Contracts and Change in Control Arrangements...    88
  Certain Relationships and Related Transactions............    89
  Other Transactions........................................    89
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  OF IMMERSION..............................................    93
HT BUSINESS.................................................    94
  Overview..................................................    94
  HT's Product Offerings....................................    94
  Vascular Access Product Line: CathSim.....................    94
  Endoscopy Product Line: PreOp Endoscopic Simulator........    95
  Endovascular Interventional Product Line: PreOp
     Endovascular Simulator.................................    95
  The Market................................................    95
  Simulation Product Market Segments........................    96
  Sales Organization........................................    96
  Technology................................................    97
  Intellectual Property.....................................    97
  Competition...............................................    98
  Medtronic Agreement.......................................    98
  Employees and Contractors.................................    99
  Facilities and Properties.................................    99
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  OF HT.....................................................   100
DESCRIPTION OF IMMERSION'S CAPITAL STOCK....................   101
  Common Stock..............................................   101
  Preferred Stock...........................................   101
  Delaware Anti-Takeover Law and Certain Charter and Bylaw
     Provisions.............................................   101
  Transfer Agent and Registrar..............................   103
COMPARISON OF IMMERSION AND HT STOCKHOLDER RIGHTS...........   104
  HT Capital Stock..........................................   104
  Differences in Stockholder Rights.........................   105
EXPERTS.....................................................   109
LEGAL MATTERS...............................................   109
TRADEMARKS..................................................   110
INDEX TO FINANCIAL STATEMENTS...............................   F-1
PART II INFORMATION NOT REQUIRED IN PROSPECTUS..............  II-1
  Item 20. Indemnification of directors and officers........  II-1
  Item 21. Exhibits and Financial Statement Schedules.......  II-1
  Item 22. Undertakings.....................................  II-3
SIGNATURES..................................................  II-5
POWER OF ATTORNEY...........................................  II-5
</TABLE>

                                       iii
<PAGE>   6

<TABLE>
<S>                                                           <C>
Appendix A -- Agreement and Plan of Reorganization
Appendix B -- Form of Escrow Agreement
Appendix C -- Form of Indemnification and Joinder Agreement
Appendix D -- Form of HT Voting Agreement
Appendix E -- Form of Noncompetition Agreement -- Employee
  and Stockholder Form
Appendix F -- Form of Noncompetition Agreement -- Employee
  Form
Appendix G -- Form of Affiliate Agreement
Appendix H -- Title 3, Subtitle 2, of the Maryland General
  Corporation Law: Rights of Objecting Stockholders
Appendix I -- Form of HT Proxy Card
</TABLE>

                                       iv
<PAGE>   7

                     ABOUT THIS PROXY STATEMENT/PROSPECTUS

     Except where the context requires otherwise, references in this proxy
statement/prospectus to "Immersion Corporation" or "Immersion" refer to
Immersion Corporation, a Delaware corporation and its consolidated subsidiaries.
References in this proxy statement/prospectus to "Immersion common stock," or
"common stock of Immersion" refer to the common stock, par value $0.001 per
share, of Immersion. References in this proxy statement/prospectus to "Immersion
stockholders" or "stockholders of Immersion" refer to holders of the outstanding
shares of Immersion common stock.

     References in this proxy statement/prospectus to "HT Merger, Inc." or "HT
Merger" refer to HT Merger, Inc., a Maryland corporation and a wholly-owned
subsidiary of Immersion.

     References in this proxy statement/prospectus to "HT Medical Systems,
Inc.," or "HT" refer to HT Medical Systems, Inc., a Maryland corporation.
References in this proxy statement/prospectus to "HT common stock" or "common
stock of HT" refer to the common stock, $0.01 par value per share, of HT.
References in this proxy statement/prospectus to "preferred stock of HT" or "HT
preferred stock" refer to the Series A preferred stock, par value of $0.01 per
share, of HT. References in this proxy statement/ prospectus to "HT stock" refer
to HT common stock or HT preferred stock. References in this proxy
statement/prospectus to "HT stockholder" or "stockholder of HT" refer to an
individual holder of the outstanding shares of HT common stock or preferred
stock.

     References in this proxy statement/prospectus to "you" or "your" refer to
an individual HT stockholder.

     You should rely only on the information contained or incorporated by
reference in this document to vote or consent with respect to the matters
submitted to you. Neither Immersion nor HT has authorized anyone to provide you
with information that is different from what is contained in this document. This
proxy statement/prospectus is dated September 13, 2000. You should not assume
that the information contained in this proxy statement/prospectus is accurate as
of any date other than that date, and the issuance of Immersion common stock in
the merger will not create any implication to the contrary. Immersion provided
the information concerning Immersion. HT provided the information concerning HT.

                                        v
<PAGE>   8

                      WHERE YOU CAN FIND MORE INFORMATION

     Immersion files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission or SEC. You may
read and copy any reports, statements or other information filed by Immersion at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Immersion's filings with the SEC are also
available to the public from commercial document retrieval services and at the
world wide web site maintained by the SEC at "http://www.sec.gov."

     Immersion filed a Registration Statement on Form S-4 to register with the
SEC the shares of Immersion common stock to be delivered in connection with the
merger. This document is a part of that Registration Statement and constitutes a
prospectus of Immersion. This document is also a proxy statement of HT for a
special meeting of its stockholders. As allowed by SEC rules, this document does
not contain all the information you can find in the Registration Statement or
the exhibits to the Registration Statement.

     Immersion's world wide web home page is located at
http://www.immersion.com. HT's world wide web home page is located at
http://www.ht.com. Information contained in either Immersion's or HT's website
does not constitute, and shall not be deemed to constitute, part of this proxy
statement/prospectus.

                                        1
<PAGE>   9

                     QUESTIONS AND ANSWERS ABOUT THE MERGER

Q: WHEN WILL THE MERGER BE COMPLETED?

A: Immersion and HT wish to complete the merger as quickly as possible, and hope
   to complete the merger shortly following the HT special meeting to be held on
   September 27, 2000. The merger cannot be completed until the stockholders of
   HT approve the merger. Following approval by the HT stockholders, the merger
   will be completed when all of the other conditions to completion of the
   merger are satisfied or waived. The merger will become effective when
   articles of merger are filed with the Maryland Department of Assessments &
   Taxation.

Q: AS AN HT STOCKHOLDER, WHAT WILL I RECEIVE IN THE MERGER?

A: You will receive an estimated 0.5176 of a share of Immersion common stock for
   each share of HT stock that you own. For example, if you own 1,000 shares of
   HT stock, you will receive approximately 517 shares of Immersion common
   stock. These amounts are subject to the closing adjustment provisions of the
   merger agreement and the escrow arrangements described in this proxy
   statement/prospectus. The closing adjustment would reduce the number of
   shares of Immersion common stock to be issued in the merger if and to the
   extent that HT's merger expenses exceed $240,000. The merger agreement
   provides that 10% of the shares of Immersion common stock issued in the
   merger will be held in escrow to compensate Immersion for any losses
   resulting from a breach of HT's representations, warranties and covenants.
   The calculation of what you will receive in the merger is based on a number
   of assumptions described in this proxy statement/prospectus. You will receive
   only whole shares. You will receive cash for any fractional shares.

Q: HAS SOMEONE DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF THE HT
   STOCKHOLDERS?

A: Yes, the board of directors of HT has determined that the merger is in the
   best interests of its stockholders. The board of directors of HT has
   unanimously approved the merger and the merger agreement.

Q: WILL IMMERSION STOCKHOLDERS VOTE ON THE MERGER?

A: No, Immersion stockholders will not vote on the merger.

Q: ARE HT STOCKHOLDERS ENTITLED TO APPROVE THE MERGER?

A: Yes, HT stockholders will have the opportunity to approve the merger and the
   merger agreement at a special meeting to be held on September 27, 2000.
   Holders of HT common stock and preferred stock owning approximately 58% of
   the issued and outstanding HT common stock and preferred stock have agreed to
   approve the merger and the merger agreement. The merger and the merger
   agreement must be approved by two-thirds of the issued and outstanding shares
   of HT's common stock and preferred stock.

Q: WHAT DO HT STOCKHOLDERS NEED TO DO NOW?

A: HT stockholders should promptly mail their signed proxy card in the enclosed
   postage-paid envelope so that their shares will be represented at the HT
   special meeting.

Q: CAN HT STOCKHOLDERS CHANGE THEIR VOTES AFTER THEY HAVE MAILED IN THEIR PROXY
   CARDS?

A: Yes, an HT stockholder can change his or her vote by delivering a written
   notice of revocation to HT's secretary, sending in a later-dated, signed
   proxy card to HT's secretary or attending the HT special meeting and voting
   in person.

                                        2
<PAGE>   10

Q: SHOULD HT STOCKHOLDERS SEND IN THEIR STOCK CERTIFICATES NOW?

A: No. After the merger is completed, Immersion will send HT stockholders a
   letter of transmittal and written instructions for exchanging their stock
   certificates. HT stockholders should not surrender their HT stock
   certificates until after the merger and until they receive the letter of
   transmittal.

Q: WHO CAN ANSWER QUESTIONS REGARDING THE MERGER?

A: If you would like additional copies of this proxy statement/prospectus, or if
   you have questions about the merger or the other matters discussed in this
   document, you should contact:

       HT Medical Systems, Inc.
        55 West Watkins Mill Road
        Gaithersburg, Maryland 20878
        Telephone: (301) 984-3706
        Attention: Rodney G. Hilton

                                        3
<PAGE>   11

                                    SUMMARY

     This summary highlights selected information contained in this proxy
statement/prospectus. This summary may not contain all of the information that
is important to you and is qualified in its entirety by the more detailed
information appearing elsewhere in this document or that is incorporated by
reference. Page references are included in parentheses to direct you to a more
complete description of the items presented in this summary.

THE COMPANIES (PAGES 71 AND 94)

    Immersion Corporation
     801 Fox Lane
     San Jose, California 95131
     Telephone: (408) 467-1900
     www.immersion.com

     Immersion develops hardware and software technologies that enable users to
interact with computers using their sense of touch. Its patented technologies,
which Immersion calls TouchSense(TM), enable devices, such as mice, joysticks,
knobs, and steering wheels, to deliver tactile sensations that correspond to on-
screen events. Immersion focuses on four application areas -- consumer computer
peripherals, automotive interfaces, medical simulation products and specialized
computer peripherals for professional and industrial applications. In high
volume market areas such as consumer computer peripherals and automotive
interfaces, Immersion primarily licenses its touch-enabling technologies to
third party manufacturers. Immersion currently licenses its technology to market
leaders in these areas, including companies such as Microsoft, Logitech and BMW.
In lower volume markets, such as medical simulation and three-dimensional
computer imaging, Immersion focuses on both product sales and technology
licensing. In all market areas, Immersion engages in development projects for
third parties. Immersion's objective is to proliferate its TouchSense
technologies across markets, platforms and applications so that touch and feel
become as common as graphics and sound in the modern computer user interface.

     Immersion and its wholly owned subsidiaries together hold more than 65
issued patents and 185 pending patent applications in the U.S. and abroad
covering various aspects of their hardware and software technologies. To date,
Immersion has licensed its intellectual property to more than 16 companies,
including market leaders Microsoft and Logitech, which incorporate Immersion's
patented touch-enabling technologies, together with other technologies necessary
for computer gaming peripherals, into joysticks, gamepads and steering wheels
that they manufacture. To target the computer mouse market, Immersion has
licensed its touch-enabling intellectual property to multiple mice
manufacturers, including market leader Logitech. Logitech began marketing and
selling the first version of its touch-enabled mouse during the fourth quarter
of 1999. In August 2000, Logitech announced two new lower-cost, touch-enabled
mouse products, each of which is targeted for use with general purpose computer
applications such as business productivity and web applications. In the
automotive market, Immersion has licensed its touch-enabling technologies to BMW
for use in automotive controls. In the medical simulation market, Immersion
manufactures and sells a number of low volume specialized medical products,
including devices for simulating laparoscopic and endoscopic surgical
procedures. With respect to professional and industrial applications, Immersion
manufactures specialized computer peripherals, including computer digitizing
devices that allow users to create three-dimensional computer models directly
from physical objects, touch-enabled joysticks and steering wheels for use in
arcades, and an advanced computer mouse used for mapmaking.

     Immersion Corporation was incorporated in California in 1993 and
reincorporated in Delaware in 1999.

                                        4
<PAGE>   12

    HT Medical Systems, Inc.
     55 West Watkins Mill Road
     Gaithersburg, Maryland 20878
     Telephone: (301) 984-3706
     www.ht.com

     HT designs, manufactures, and markets computer-based medical simulators
that allow medical personnel to practice procedures without placing patients at
risk. HT's products integrate proprietary computer software and tactile feedback
robotics with new low-cost and high-power graphics computers to achieve highly
realistic simulation systems. HT's three key simulation product lines address
intravenous catheterization (CathSim(TM)), endovascular interventions (PreOp(TM)
Endovascular) and endoscopy (PreOp(TM) Endoscopy). All are comprised of software
modules, an interface device and a hardware platform. HT's strategy is to sell
hardware systems to customers, followed by sales of multiple higher-margin
software packages for specific medical procedures. HT sells its three key
simulation products in the United States, Canada, Europe and Asia.

     HT Medical Systems, Inc. was incorporated in Delaware in 1987 and
reincorporated in Maryland in 1995.

THE MERGER (PAGE 54)

     A subsidiary of Immersion will merge into HT, and HT will become a
wholly-owned subsidiary of Immersion. The merger is subject to various
conditions and rights of termination described in this document and in the
merger agreement. For a more detailed description of the terms of the merger
agreement, see pages 53 to 59. In addition, a copy of the merger agreement is
attached as Appendix A to this proxy statement/prospectus. It is the legal
document governing the merger.

REASONS FOR THE MERGER (PAGE 49)

     Immersion and HT believe that the merger will provide a number of mutual
benefits to the combined company, including greater potential for:

     - exploitation of their technologies by combining Immersion's leading
       position in force feedback technology with HT's expertise in system
       hardware and software development;

     - deeper market penetration and access to broader markets by improving
       products and processes, lowering costs and applying technologies to
       adjacent markets;

     - attracting and retaining key personnel through the opportunity to become
       part of a larger, higher profile organization and by offering options for
       Immersion's publicly traded common stock;

     - improving operating and financial results through the addition of HT's
       revenues and the anticipated shift in HT Product mix toward higher-margin
       software modules; and

     - competing more effectively than would either company alone by merging the
       two companies' recognized brands and technology capabilities.

HT SPECIAL MEETING (PAGE 46)

     The HT special meeting of stockholders will be held on September 27, 2000
at 9:00 a.m., local time at HT's corporate headquarters at 55 West Watkins Mill
Road, Gaithersburg, Maryland.

     The purpose of the HT meeting is to consider and vote upon a proposal to
approve the merger and the merger agreement.

WHICH STOCKHOLDERS MAY VOTE

     Only holders of record of HT common stock and preferred stock at the close
of business on September 6, 2000, the HT record date, are entitled to notice of
and to vote at the HT special meeting.
                                        5
<PAGE>   13

As of the close of business on the HT record date, there were 2,266,908 shares
of HT common stock and 240,107 shares of HT preferred stock outstanding and
entitled to vote, held of record by 95 stockholders. Approval of the merger and
the merger agreement will require the affirmative vote of two-thirds of the
outstanding shares of HT stock.

RECOMMENDATION TO HT STOCKHOLDERS (PAGE 52)

     The HT board of directors has unanimously approved the merger and the
merger agreement, and has determined that the merger is fair to, and in the best
interests of, both HT and its stockholders. After careful consideration, the HT
board of directors recommends that HT stockholders vote for approval of the
merger and the merger agreement.

WHAT HT SECURITYHOLDERS WILL RECEIVE IN THE MERGER (PAGE 54)

     HT Stockholders. When the merger is effective, subject to the closing
adjustment described below, each outstanding share of HT common stock and
preferred stock will be converted into a fraction of a share of Immersion common
stock equal to an exchange ratio computed as provided in the merger agreement.
The exchange ratio is expected to be approximately 0.5176. Subject to the
closing adjustment and the escrow arrangement described below, the current
holders of HT common stock and preferred stock will receive approximately 1.298
million shares of Immersion common stock based on the number of securities of HT
that are expected to be outstanding at the closing of the merger. Based on the
closing stock price of Immersion common stock of $14.25 on September 13, 2000,
the equivalent value of each share of HT common stock and HT preferred stock is
approximately $7.38, and the shares of Immersion common stock that HT
stockholders will receive in the merger would have an aggregate market value of
approximately $18.491 million.

     HT Optionholders. Each outstanding option to purchase shares of HT common
stock, other than the Medtronic option described below, will be assumed by
Immersion. After the merger, each HT stock option will be exchanged for an
option to acquire shares of Immersion common stock upon the same terms and
conditions, except for the number of shares and the exercise price. The number
of shares subject to the new option will be determined by multiplying the number
of shares presently subject to the HT option for the number of shares and the
exercise price by the exchange ratio by which the HT common and preferred shares
are to be exchanged for shares of Immersion common stock in the merger, and the
exercise price of the new option will be determined by dividing the exercise
price of the HT option by the exchange ratio.

     HT Warrantholders. Each outstanding warrant to purchase HT common stock and
preferred stock that is not exercised before the merger will be treated after
the merger as a warrant to purchase shares of Immersion common stock on the same
terms and conditions, except for the number of shares and the exercise price.
The number of shares subject to the warrant shall be adjusted by multiplying the
number of shares presently subject to the HT warrant by the exchange ratio at
which the HT common stock and preferred stock is to be converted into shares of
Immersion common stock in the merger, and the new exercise price will be
determined by dividing the exercise price of the HT warrant by the exchange
ratio.

     Convertible Note and Medtronic Option. Medtronic, Inc. holds an HT
promissory note convertible into 437,500 shares of HT preferred stock and an
option to purchase 250,000 shares of HT preferred stock. The convertible note
and the Medtronic option will be treated after the merger as a convertible note
and an option to purchase shares of Immersion common stock on the same terms and
conditions, except for the number of shares and the exercise price. The number
of shares subject to the convertible note and option will be adjusted by
multiplying the number of shares presently subject to the convertible note and
option by the exchange ratio by which the HT common stock and preferred stock is
to be converted into shares of Immersion common stock in the merger and by
dividing the exercise price for such shares of HT common stock by the exchange
ratio to determine the new exercise price.

                                        6
<PAGE>   14

CLOSING ADJUSTMENT (PAGE 56)

     The aggregate number of shares of Immersion common stock that HT
stockholders will receive in the merger will be reduced if HT's merger expenses
exceed $240,000. The reduction in the number of shares of Immersion common stock
received in the merger will equal the dollar amount by which the merger expenses
exceed $240,000 divided by $25.52, which was the average closing stock price of
a share of Immersion common stock for the last 10 trading days ending two days
before July 31, 2000, the date the merger agreement was signed.

ESCROW AGREEMENT (PAGE 56 AND APPENDIX B)

     At the closing of the merger, Immersion will deposit into an escrow account
with U.S. Trust Company, NA, as escrow agent, 10% of the shares of Immersion
common stock that holders of HT common stock and preferred stock are to receive
in the merger. The escrowed shares of Immersion common stock will be held in the
escrow account under the terms of the escrow agreement, attached as Appendix B
to this proxy statement/prospectus, to compensate Immersion for losses incurred
by Immersion that are caused by breaches by HT of its representations,
warranties, covenants and agreements in the merger agreement, but only if the
total of all such losses exceed $50,000. Immersion may assert claims for losses
until it issues audited financial statements for the year ended December 31,
2000, or until March 31, 2001, whichever is sooner. Subject to the satisfaction
of any claims asserted by Immersion, the remaining escrowed shares will be
distributed to HT stockholders 30 days after the time that Immersion may no
longer submit claims or when all claims have been resolved, whichever is later.

THE REPRESENTATIVE (PAGE 57)

     The merger agreement provides that Gregory L. Merril will be the
representative of the HT stockholders with full authority to dispute, resolve,
settle and compromise all issues relating to the indemnification of Immersion by
the stockholders as provided in the merger agreement and all matters relating to
or arising under the escrow agreement or the indemnification and joinder
agreement described below.

INDEMNIFICATION AND JOINDER AGREEMENTS AND APPOINTMENT OF REPRESENTATIVE (PAGE
57 AND APPENDIX C)

     All HT stockholders will be asked to sign an indemnification and joinder
agreement in the form attached as Appendix C to this proxy statement/prospectus
in which they agree to indemnify Immersion for losses resulting from breaches of
HT's representations, warranties and covenants by the release to Immersion of
escrowed shares from the escrow account. In the absence of fraud, the HT
stockholders' indemnification obligations to Immersion will be limited to their
escrowed shares held in the escrow account. The indemnification and joinder
agreement also appoints Mr. Merril the representative and attorney-in-fact of
the HT stockholders with authority to make all decisions on behalf of the HT
stockholders regarding indemnification claims and release of escrowed shares to
Immersion.

CONDITIONS TO THE MERGER (PAGE 59)

     Immersion and HT will complete the merger only if a number of contractual
and legal conditions are either satisfied or waived. In addition to these
standard conditions, Immersion and HT will complete the merger only if:

     - The auditors for both Immersion and HT have delivered letters to
       Immersion concurring as of the dates of such letters with the conclusions
       of Immersion management and HT management that pooling-of-interests
       accounting treatment for the merger is appropriate;

     - The registration statement filed with the SEC is not the subject of any
       stop order or stop order proceeding;

     - Holders of at least two-thirds of the outstanding shares of HT common
       stock and preferred stock have voted in favor of the merger and the
       merger agreement;

                                        7
<PAGE>   15

     - Holders of 97% of the outstanding shares of common stock and preferred
       stock will have signed the indemnification and joinder agreement; and

     - Holders of no more than three percent of HT stock have filed written
       objections to the merger so as to become eligible to demand payment in
       cash for their shares.

SOME HT STOCKHOLDERS HAVE ENTERED INTO VOTING AGREEMENTS OBLIGATING THEM TO VOTE
IN FAVOR OF THE MERGER (PAGE 60 AND APPENDIX D)

     Some HT stockholders have agreed with Immersion that they will vote their
shares of HT stock in favor of the merger and have granted irrevocable proxies
to Immersion authorizing management to vote their shares for the merger. These
stockholders beneficially own approximately 58% of the outstanding shares of HT
common stock and preferred stock.

EMPLOYMENT AGREEMENT (PAGE 61)

     Rodney G. Hilton, CEO of HT, has an employment agreement with HT that
Immersion will continue to honor after the merger.

NONCOMPETITION AGREEMENTS (PAGE 61 AND APPENDICES E AND F)

     Gregory L. Merril, Rodney G. Hilton, Richard L. Stacey and Richard L.
Cunningham, all of whom are officers of HT, and two other HT employees will
execute two-year noncompetition agreements in the forms attached as Appendices E
& F to this proxy statement/prospectus with Immersion at the closing of the
merger. The noncompetition agreements will restrict the individuals from
disclosing any confidential information of HT and prohibit them from engaging in
activities that are similar to or competitive with the business of HT.

LIMITATION ON NEGOTIATIONS (PAGE 59)

     Until the merger is completed or the merger agreement is terminated, HT has
agreed not to solicit other acquisition proposals. HT also agreed to notify
Immersion promptly of any third party inquiries or requests for information that
may result in any acquisition proposals.

TERMINATION OF THE MERGER AGREEMENT (PAGE 60)

     The merger agreement may be terminated at any time before the effective
time of the merger as follows:

     - By Immersion or HT if a breach of any material provision of the merger
       agreement has been committed by the other party and is not cured within
       seven business days of notice to the breaching party;

     - By mutual consent of Immersion and HT; or

     - By Immersion or HT if the merger has not become effective on or before
       October 27, 2000 other than because the party seeking to terminate has
       made an untrue representation or warranty or has not complied fully with
       its obligations under the merger agreement.

HT FINANCIAL ADVISOR (PAGE 52)

     In deciding to approve the merger, the HT board of directors also
considered the advice of its financial advisor, Janney Montgomery Scott Inc.
Although Janney Montgomery Scott Inc. was not asked to furnish a formal fairness
opinion, it did discuss with the HT board of directors its analysis of the
fairness of the merger consideration.

                                        8
<PAGE>   16

INTERESTS OF SOME HT OFFICERS AND DIRECTORS IN THE MERGER MAY BE CONFLICTS OF
INTEREST (PAGE 52)

     Several officers and directors of HT have personal interests in the merger
that are different from, or in addition to, the interests of most HT
stockholders. These personal interests include:

     - The agreement of Immersion to assume all of the outstanding options
       granted to HT's officers, directors and employees and exchange them for
       options for Immersion common stock;

     - The agreement of Immersion to adopt a stock option plan to grant options
       for Immersion common stock exclusively to HT employees, including current
       HT officers; and

     - The agreement of Immersion to honor Rodney G. Hilton's employment
       agreement with HT.

FEDERAL INCOME TAX CONSEQUENCES (PAGE 62)

     The merger is intended to be a tax-free reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended, so that, in
general, except for gain or loss recognized with respect to cash received by HT
stockholders instead of fractional shares of Immersion common stock, HT
stockholders would not have any gain or loss for federal income tax purposes on
their receipt of Immersion common stock in exchange for their HT common and
preferred stock in the merger, and Immersion stockholders would not have any
gain or loss for federal income tax purposes by reason of the merger. Each
company has received an opinion from its tax counsel that the statements in the
section of this proxy statement/prospectus entitled "Material Federal Income Tax
Consequences," insofar as they purport to describe federal income tax laws of
the United States or legal conclusions therefrom, fairly present in all material
respects the information set forth. These opinions are based on various
representations, qualifications and assumptions.

     TAX MATTERS ARE VERY COMPLICATED. THE TAX CONSEQUENCES OF THE MERGER TO YOU
WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. WE URGE YOU TO CONSULT YOUR OWN
TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO YOU, INCLUDING
THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES.

ANTICIPATED ACCOUNTING TREATMENT (PAGE 61)

     Immersion and HT expect that the merger will be accounted for as a
pooling-of-interests in which the companies will be treated as if they had
always been combined for financial reporting and accounting purposes.

AFFILIATE AGREEMENTS (PAGE 61 AND APPENDIX G)

     Gregory L. Merril, Jonathan R. Merril, Donald M. Spero, Stephen B. Schuler,
Rodney G. Hilton and Jill N. Whitley will enter into affiliate agreements in the
form attached as Appendix G to this proxy statement/prospectus with Immersion at
or before the closing date of the merger. The agreements provide restrictions on
the transfer of any HT stock held before the merger as well as any Immersion
common stock received in the merger for a period ranging from the 30 day period
prior to the effective date of the merger through the time at which Immersion
publicly releases a financial report following the effective time of the merger
including the combined sales and net income of Immersion and HT covering a
period of at least 30 days of combined operations.

MANAGEMENT FOLLOWING THE MERGER (PAGE 83)

     The management of Immersion will not change as a result of the merger.

RIGHTS OF HT STOCKHOLDERS FOLLOWING THE MERGER (PAGE 104)

     The rights of HT's stockholders are currently governed by Maryland law and
HT's articles of incorporation and bylaws. HT's preferred stockholders have
additional rights and obligations under HT's articles of incorporation and
various stockholders' agreements specific to them. The rights of Immersion's

                                        9
<PAGE>   17

stockholders are governed by Delaware law and Immersion's certificate of
incorporation and bylaws. As of the effective time of the merger, HT
stockholders will become Immersion stockholders. There are important differences
between the rights of stockholders of HT and the rights of stockholders of
Immersion.

RIGHTS OF OBJECTING STOCKHOLDERS (PAGE 64 AND APPENDIX H)

Immersion

     Under the Delaware General Corporation Law, Immersion stockholders do not
have appraisal rights.

HT

     Under the Maryland General Corporation Law, notwithstanding the approval of
the merger by the holders of the requisite number of shares of common stock and
preferred stock of HT, an HT stockholder can object to the merger and exercise
appraisal rights and obtain payment for the fair value of his or her common
stock and preferred stock.

HT EQUIVALENT PER SHARE VALUE

     Immersion common stock is quoted on the Nasdaq National Market under the
symbol "IMMR." Neither HT common stock nor HT preferred stock is traded or
quoted on any market or exchange.

     On July 31, 2000, the day on which the merger was announced after the close
of the market, and on September 13, 2000, the last reported sale prices per
share of Immersion common stock on the Nasdaq National Market and the equivalent
per share values of HT stock based on these Immersion stock prices were as set
forth below:

<TABLE>
<CAPTION>
                                                              IMMERSION
                                                            COMMON STOCK      HT EQUIVALENT
                                                           PER SHARE PRICE   PER SHARE VALUE
                                                           ---------------   ---------------
<S>                                                        <C>               <C>
July 31, 2000............................................      $20.375           $10.55
September 13, 2000.......................................      $14.250           $ 7.38
</TABLE>

     The "HT Equivalent Per Share Values" set forth above are based on an
estimated exchange ratio of 0.5176 shares of Immersion common stock for each
share of HT common stock and preferred stock, which was determined based on the
assumptions that (1) on the indicated dates the number of shares of HT common
stock subject to options that are vested or exercisable was the same as it is
expected to be on the anticipated closing date, (2) there will be no reduction
in the merger consideration based on the closing adjustment, and (3) all
escrowed shares of Immersion common stock will ultimately be distributed to HT
stockholders. These assumptions may not prove correct, and each HT stockholder
may receive a different "HT Equivalent Per Share Value" than that indicated
above for his or her shares of HT common stock or preferred stock. The value at
the effective time of the Immersion common stock to be received by holders of HT
preferred stock may be less than the liquidation preference of their HT
preferred stock.

     STOCK PRICES CAN FLUCTUATE DRAMATICALLY. HT STOCKHOLDERS ARE URGED TO CHECK
RECENT STOCK PRICES OF IMMERSION COMMON STOCK.

                                       10
<PAGE>   18

                                  RISK FACTORS

     The following factors should be considered together with the other
information included in this proxy statement/prospectus. Any of the following
risks could materially adversely affect the business, operating results and
financial condition of Immersion, HT or the combined company. You should
consider these factors in conjunction with the other information contained in
this proxy statement/prospectus and its Appendices.

RISKS RELATED TO THE MERGER

DIFFICULTIES AND SUBSTANTIAL COSTS INVOLVED IN INTEGRATING THE TECHNOLOGY,
OPERATIONS AND PERSONNEL OF IMMERSION AND HT MAY REDUCE THE OPERATIONAL
EFFICIENCIES AND FINANCIAL BENEFITS OF THE MERGER.

     Immersion will not receive the benefits it anticipates from the merger
unless it successfully combines its operations with those of HT and integrates
the two companies' technologies, research and development activities and other
aspects of operations in a timely manner. If Immersion and HT do not integrate
their personnel and technologies quickly and smoothly, then the combined company
may incur substantial expenses and may not attain the operational efficiencies
and financial benefits of the merger or may experience delays in new product
introductions, which may adversely affect the operating results of the combined
company.

     The difficulties, costs and delays involved in integrating the companies,
which may be substantial, include:

     - Diversion of management's attention from the business of the combined
       company;

     - Technical difficulties in implementing or combining the HT technology
       with that of Immersion;

     - Perceived and potential problems arising out of the respective companies'
       differing business foci and product offerings;

     - Potential incompatibility of business cultures;

     - Difficulties resulting from Immersion's lack of experience in integrating
       its operations with those of another company;

     - Costs and delays in implementing common systems and procedures,
       particularly in integrating different information systems; and

     - Inability to retain and integrate key management, technical, sales and
       customer support personnel.

IMMERSION HAS LIMITED EXPERIENCE SELLING AND MARKETING MEDICAL SIMULATION
PRODUCTS.

     Immersion has limited experience marketing and selling products either
directly or through distributors. The success of the combined company's efforts
to sell HT's medical simulation products will depend upon its ability to
establish a qualified sales force and establish relationships with distributors.
HT's current sales and marketing staff is very limited and the combined company
must attract and retain qualified personnel to direct the sales and marketing of
its medical procedural simulation products. The combined company may not be
successful in attracting and retaining the personnel necessary to successfully
sell and market its products. There is no assurance that the combined company's
direct selling efforts will be effective, its distributors will market its
products successfully or, if its relationships with distributors terminate, it
will be able to establish relationships with other distributors on satisfactory
terms, if at all. Any disruption in its distribution, sales or marketing network
could have a material adverse effect on the combined company.

                                       11
<PAGE>   19

NEITHER IMMERSION NOR HT CAN PRECISELY PREDICT THE AGGREGATE NUMBER OF SHARES OF
IMMERSION COMMON STOCK THAT WILL BE ISSUED IN THE MERGER OR THE VALUE THAT HT
STOCKHOLDERS WILL RECEIVE FOR EACH SHARE OF HT STOCK BECAUSE BOTH OF THESE
CALCULATIONS ARE BASED UPON SEVERAL VARIABLES.

     The aggregate number of shares of Immersion common stock that HT
stockholders will ultimately receive in the merger will be affected primarily by
the effect of the closing adjustment and escrow arrangements provided for in the
merger agreement. In particular, the aggregate number of shares of Immersion
common stock that Immersion will issue in the merger is subject to adjustment at
the time of the closing of the merger based on the amount of merger expenses
incurred by HT. HT's stockholders will receive fewer shares of Immersion common
stock if the amount of merger expenses exceeds $240,000. In addition, the
aggregate number of shares of Immersion common stock that HT stockholders will
ultimately receive in the merger is subject to the escrow arrangements described
in the merger agreement. As described below, a portion of the consideration to
be received by HT's stockholders in the merger will be placed into an escrow
account and will be subject to claims that may result in HT's stockholders
receiving less than all of the consideration placed into the escrow account. The
number of shares of Immersion common stock received by HT stockholders in the
merger will not change due to any increase or decrease in the market price of
Immersion common stock between the date of the merger agreement and the
effective time of the merger. Hence, HT stockholders risk a loss in the value
that they will receive for their shares of HT common stock and preferred stock
in the event of a decrease in the market value of Immersion common stock. The
market price of Immersion common stock at the effective time of the merger may
vary substantially from its price on the date the merger agreement was signed
and the date of this proxy statement/prospectus, and neither Immersion nor HT
can assure HT stockholders as to the market price of Immersion common stock at
the time of or at any time after the merger. An adverse outcome with respect to
any of the foregoing variables could adversely affect the value that each HT
stockholder will receive in the merger for each share of HT common stock or
preferred stock. The value at the effective time of the Immersion common stock
to be received by holders of HT preferred stock may be less than the liquidation
preference of their HT preferred stock.

A PORTION OF THE MERGER CONSIDERATION TO BE RECEIVED BY THE HT STOCKHOLDERS IN
THE MERGER WILL BE HELD IN ESCROW, AND HT STOCKHOLDERS MAY NOT RECEIVE ALL OR A
PART OF THE ESCROWED MERGER CONSIDERATION.

     At the effective time of the merger, 10% of the total number of Immersion
shares to be issued by Immersion in the merger will be placed in escrow to
provide compensation to Immersion for any breach by HT of its representations,
warranties and covenants in the merger agreement. If Immersion successfully
asserts one or more claims for breach of those representations, warranties or
covenants that, in the aggregate, exceed $50,000, the HT stockholders will not
receive all or part of the escrowed shares. Immersion may assert claims until it
issues its audited financial statements for the year ending December 31, 2000 or
until March 31, 2001, whichever is sooner. The escrowed shares will remain in
escrow until 30 days after the time that Immersion can no longer submit claims
or until all claims are resolved, whichever is later. The value of the Immersion
escrowed shares that may be subsequently distributed to the HT stockholders may
be less than the value of those shares at the effective time of the merger.

HT'S PREEXISTING RELATIONSHIP WITH MEDTRONIC, INC., A LEADING MEDICAL DEVICE
COMPANY, MAY INTERFERE WITH IMMERSION'S ABILITY TO ENTER INTO DEVELOPMENT AND
LICENSING RELATIONSHIPS WITH MEDTRONIC COMPETITORS.

     In August 1999, HT and Medtronic, Inc., a leading medical device company,
entered into an investment agreement amended in March 2000, pursuant to which
Medtronic made a loan to HT represented by a note convertible into HT preferred
stock and received an option to purchase additional shares of HT preferred
stock. The Medtronic agreement also provides for HT to develop medical
simulation technology for use by Medtronic. Although Immersion is not aware that
this relationship has impeded HT's ability to interest other medical device
companies in its technologies, it is possible that the relationship between HT
and Medtronic may impede Immersion's ability to enter into development or
license agreements with other large medical device companies that compete with
Medtronic.

                                       12
<PAGE>   20

BECAUSE THE MEDICAL DEVICE MARKET ADDRESSES ISSUES OF HUMAN HEALTH, PRODUCT
LIABILITY EXPOSURE IN THAT MARKET MAY BE SIGNIFICANT AND AVAILABLE INSURANCE
COVERAGE MAY BE EXPENSIVE OR INADEQUATE.

     As the combined company expands its business and product offerings and the
uses and applications of its products and technologies, its exposure to
significant product liability risks may increase, requiring it to purchase
expanded insurance coverage sufficient to cover potentially larger risks.
Further, there is no assurance that expanded coverage will be available or
sufficient to protect Immersion from judgments in excess of applicable policy
limits.

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

     Several key medical certification bodies, including the American Board of
Internal Medicine (ABIM) and the American College of Cardiology (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 the combined
company's medical simulation training products as a training vehicle, market
penetration for the combined company's products could be significantly and
adversely affected.

SOME EXECUTIVE OFFICERS, DIRECTORS AND STOCKHOLDERS OF HT MAY HAVE CONFLICTS OF
INTEREST ARISING FROM PERSONAL BENEFITS TO BE RECEIVED IN THE MERGER AND, HENCE,
THERE IS A RISK THAT THE MERGER CONSIDERATION THAT HT STOCKHOLDERS WILL RECEIVE
IN THE MERGER IS LESS THAN IT WOULD HAVE BEEN HAD NO PERSONAL BENEFITS BEEN
EXTENDED TO THESE EXECUTIVE OFFICERS, DIRECTORS AND STOCKHOLDERS.

     The personal benefits that some executive officers, directors and
stockholders of HT may receive in the merger could be considered conflicts of
interest because these benefits may favorably influence their support of the
merger. In the absence of these personal benefits, these executive officers,
directors and stockholders may have concluded that the consideration to be
received by HT stockholders under the terms of the merger agreement was not
adequate. In particular, Immersion will assume all of the outstanding options
granted to officers, directors and employees of HT, and exchange them for
options for Immersion common stock. In addition, Immersion has agreed to adopt a
stock option plan for the purpose of granting options to purchase Immersion
common stock exclusively to HT employees, including current HT officers.
Immersion has also agreed to honor the employment agreement of HT's chief
executive officer.

FAILURE TO QUALIFY FOR POOLING-OF-INTERESTS ACCOUNTING TREATMENT MAY HARM THE
FUTURE OPERATING RESULTS OF THE COMBINED COMPANY.

     Immersion intends to account for the merger as a pooling-of-interests
business combination. Under the pooling-of-interests method of accounting, each
of Immersion and HT's historical recorded assets and liabilities will be carried
forward to the combined company at their recorded amounts. In addition, the
operating results of the combined company will include Immersion's and HT's
operating results for the entire fiscal year in which the merger is completed
and Immersion's and HT's historical reported operating results for prior periods
will be combined and restated as the operating results of the combined company.

     If after completion of the merger, events occur that cause the merger to no
longer qualify for pooling-of-interests accounting treatment, the purchase
method of accounting would apply. Under that method, Immersion would record the
estimated fair value of Immersion common stock issued in the merger as the cost
of acquiring the business of HT. That cost would be allocated to the net assets
acquired, with the excess of the estimated fair value of Immersion common stock
over the fair value of net assets acquired recorded as goodwill or other
intangible assets. To the extent goodwill and other intangibles are recorded on
Immersion's financial statements, Immersion will be required to take a noncash
charge to earnings every year for periods of up to 5 years until the full values
of this goodwill and other intangibles have been fully amortized. The estimated
fair value of Immersion common stock to be issued in the merger is

                                       13
<PAGE>   21

expected to be much greater than the historical net book value at which HT
carries its assets in its accounts. Therefore, purchase accounting treatment
would result in charges to operations of the combined company for several years
compared to pooling-of-interests accounting treatment.

AS A RESULT OF THE MERGER AND OTHER TRANSACTIONS, THE NUMBER OF FREELY TRADABLE
SHARES OF IMMERSION COMMON STOCK WILL INCREASE SIGNIFICANTLY, WHICH COULD
DEPRESS THE TRADING PRICE OF IMMERSION COMMON STOCK.

     Immersion expects that HT stockholders will receive approximately 1.298
million shares of Immersion common stock in the merger, based upon the number of
shares of HT common stock and preferred stock expected to be outstanding at the
effective time, and subject to adjustments provided in the merger agreement. In
addition, Immersion recently acquired Virtual Technologies, Inc., or VTi, in a
similar merger. Stockholders of VTi received approximately 320,000 shares of
common stock in that transaction, based on various assumptions. Actual sales or
the perception in the market of potential sales of significant numbers of shares
of Immersion common stock to be issued in these or other possible transactions
could adversely affect the market price of Immersion common stock.

THE REPRESENTATIVE MAY NOT ACT IN THE MANNER THAT HT STOCKHOLDERS DESIRE.

     The merger agreement and the indemnification and joinder agreement to be
signed by HT stockholders provide that Mr. Merril will act as the HT
stockholders' representative for all matters involving the HT stockholders'
indemnification of Immersion and the shares of Immersion common stock to be held
in escrow. The representative may, among other things, dispute claims for
indemnification made by Immersion against the escrowed shares, litigate these
claims, compromise and settle these claims and agree to release escrowed shares
to Immersion as compensation for these claims. The representative may not act in
the manner that HT stockholders desire, and decisions made by the representative
could have the effect of reducing the consideration that HT stockholders
ultimately receive in the merger.

THE RIGHTS OF THE HT STOCKHOLDERS AS HOLDERS OF IMMERSION COMMON STOCK WILL
DIFFER FROM THEIR RIGHTS AS HOLDERS OF HT COMMON STOCK AND PREFERRED STOCK.

     After the merger, HT stockholders will become Immersion stockholders. There
are important differences between the rights of stockholders of Immersion and
the rights of stockholders of HT common stock and preferred stock, including
differences due to the fact that HT is a Maryland corporation and Immersion is a
Delaware corporation. In addition, Immersion common stock will not entitle
former holders of HT preferred stock to any of the preferences associated with
preferred stock. For a description of these differences, see "Comparison of
Immersion and HT Stockholder Rights."

RISKS RELATED TO THE BUSINESS AND OPERATIONS OF IMMERSION AND HT AS A COMBINED
COMPANY

     The risks set forth below are a number of the risks relating to the
business and operations of Immersion and HT that could harm the business of the
combined company after the merger.

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

     The market for Immersion's touch-enabling technology and HT's medical
simulation products is at an early stage, and if the combined company and its
licensees are unable to develop demand for its products and the products of its
licensees, it may not achieve or sustain revenue growth. To date, consumer
demand for products incorporating Immersion's technologies has been limited to
the computer gaming peripherals markets. Sales of touch-enabled joysticks began
in late 1996 and sales of touch-enabled steering wheels began in late 1998.

     Immersion is currently working to increase the demand for its
touch-enabling technologies in the general purpose personal computer market by
licensing touch-enabling technologies for computer mice and in the automotive
market by licensing out touch-enabling technologies for automotive controls. The
first
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<PAGE>   22

computer mouse incorporating Immersion's touch-enabling technologies was
launched by Logitech, one of its licensees, during the fourth quarter of 1999.
In August 2000, Logitech announced two new lower-cost, touch-enabled mouse
products, the iFeel(TM) Mouse and the iFeel(TM) MouseMan(R), each of which is
targeted for use with general purpose computer applications, such as business
productivity and web applications. Although Logitech has stated that these mouse
products will be available to consumers in late September 2000, touch-enabled
mice may not achieve commercial acceptance or generate significant royalty
revenue for Immersion. In addition, software developers may elect not to create
additional games or other applications that support Immersion's touch-enabling
technology. In the automotive market, Immersion has licensed its touch-enabling
technologies to BMW for use in automotive controls and has entered into a
strategic partnership with ALPS, which designates ALPS as a preferred supplier
of Immersion's TouchSense-enabled automotive controls. Immersion's efforts to
increase its royalty revenue in these markets may be unsuccessful.

     Even if Immersion's technologies are ultimately widely adopted by
consumers, widespread adoption may take a long time to occur. The timing and
amount of royalties that Immersion receives will depend on whether the products
marketed by those licensees that pay Immersion per-unit royalties achieve
widespread adoption and, if so, how rapidly that adoption occurs. Immersion
expects that it will need to pursue extensive and expensive marketing and sales
efforts to educate prospective licensees and consumers about the uses and
benefits of the combined company's technologies and to persuade software
developers to create software that utilizes its technologies.

     The market for HT's medical procedural simulation products is at an early
stage and may not develop as HT and Immersion anticipate. Even if the market for
medical procedure simulation products develops, HT's products may not achieve
widespread commercial acceptance.

IMMERSION AND HT EACH HAVE A HISTORY OF LOSSES AND THE COMBINED COMPANY EXPECTS
TO EXPERIENCE LOSSES IN THE FUTURE.

     Neither Immersion nor HT have been profitable in recent years, and each has
incurred significant net losses. For the six months ended June 30, 2000,
Immersion's net loss was $5.6 million. For the fiscal year ended December 31,
1999, its net loss was $4.4 million and as of June 30, 2000, Immersion's
accumulated deficit was $14.2 million. HT incurred net losses of $5.1 million
and $2.0 million for the years ended May 31, 2000 and 1999. As of May 31, 2000,
HT had an accumulated deficit of $9.3 million. It is expected that the combined
company will continue to incur significant marketing, research and development
and administrative expenses. As a result, the combined company will need to
generate significant revenue to achieve and maintain profitability in the
future. The combined company cannot be certain that it will achieve
profitability in the future, or if achieved, that profitability can be sustained
or increased. Any failure to increase its revenue significantly as the combined
company implements its product and distribution strategies would materially
adversely affect the combined company's business, operating results and
financial condition and adversely affect the market price of Immersion common
stock. The combined company's expenses are likely to increase substantially in
the foreseeable future as it:

     - attempts to expand the market for touch-enabled products;

     - increases its sales and manufacturing efforts;

     - continues to develop its technologies;

     - pursues strategic relationships; and

     - protects and enforces its intellectual property.

     If the combined company's revenues grow more slowly than anticipated or if
its operating expenses exceed its expectations, the combined company may not
achieve or maintain profitability.

                                       15
<PAGE>   23

IMMERSION'S HISTORICAL FINANCIAL INFORMATION DOES NOT REFLECT ITS BUSINESS
STRATEGY FOR ACHIEVING REVENUE GROWTH THROUGH ROYALTY PAYMENTS FROM SALES BY ITS
LICENSEES OF TOUCH-ENABLED PRODUCTS, A STRATEGY FROM WHICH IMMERSION HAS
HISTORICALLY DERIVED LESS THAN ONE-THIRD OF ITS REVENUES.

     The combined company's future revenues cannot be predicted based on
Immersion's historical financial information. Historically, Immersion derived
the majority of its revenues from product sales, including sales of devices used
to create three-dimensional computer images of small objects, medical simulation
products and a specialized non-touch-enabled computer mouse used for mapmaking.
Historically, Immersion has also derived revenues from contracts with its
licensees to assist in the development of its licensees' touch-enabled products
and from development contracts with government agencies for touch-enabling
technology. The majority of Immersion's historical product sales resulted from
sales of products that did not utilize its touch-enabling technology but
utilized related advanced computer peripheral technologies.

     Immersion's current marketing, research and development activities
concentrate on licensing the company's touch-enabling technology to a greater
degree than in the past. Accordingly, Immersion's historical results should not
be relied upon as an indicator of the company's future performance. For example,
Immersion derived only 6% of its total revenues for 1998 from royalty revenue.
By contrast, for 1999, Immersion derived 28% of its total revenues from royalty
revenue, and for the six months ended June 30, 2000 Immersion derived 37% of its
total revenues from royalty revenue. Immersion anticipates that royalty revenue
from licensing its technologies will constitute an increasing portion of its
revenues; however, on a period-to-period basis royalty revenue as a percentage
of total revenue may vary significantly due to factors such as the timing of new
product introductions and the seasonality of royalty revenue. In addition, HT
and VTi have historically derived most of their revenues from product sales. As
a result of the acquisition of HT and VTi, Immersion's revenues attributable to
products sales are likely to increase in the short term.

IMMERSION HAS IN THE PAST, AND THE COMBINED COMPANY MAY IN THE FUTURE, ENGAGE IN
ACQUISITIONS THAT DILUTE STOCKHOLDER VALUE, DIVERT MANAGEMENT ATTENTION OR CAUSE
INTEGRATION PROBLEMS.

     As part of its business strategy, Immersion has in the past acquired, and
the combined company may in the future acquire, businesses or intellectual
property that Immersion or the combined company believes could complement its
business, enhance its technical capabilities or increase its intellectual
property portfolio. For example, in addition to the pending acquisition of HT,
Immersion recently acquired VTi, a corporation with approximately 20 employees
based in Palo Alto, California. As a result of the acquisitions of HT and VTi,
its stockholders could suffer significant dilution. Acquisitions could create
risks for the combined company, including:

     - unanticipated costs associated with the acquisitions;

     - use of substantial portions of its available cash to consummate the
       acquisitions;

     - diversion of management's attention from other business concerns;

     - difficulties in assimilation of acquired personnel or operations; and

     - intellectual property infringement claims and claims related to the
       ownership of acquired intellectual property.

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

IMMERSION'S BUSINESS STRATEGY FOR ACHIEVING REVENUE GROWTH RELIES SIGNIFICANTLY
ON ROYALTY PAYMENTS FROM SALES BY ITS LICENSEES OF THEIR TOUCH-ENABLED MICE
PRODUCTS.

     If Immersion's licensees' touch-enabled mice products do not achieve
commercial acceptance or if production or other difficulties that sometimes
occur when a new product is introduced interfere with sales of Immersion's
licensees' mice products, Immersion's ability to achieve revenue growth could be
                                       16
<PAGE>   24

significantly impaired. The first computer mouse incorporating Immersion's
technology was launched by Logitech, a licensee of Immersion's technology,
during the fourth quarter of 1999. To date, sales of Logitech's current
touch-enabled mouse product, the Wingman Force Feedback Mouse, have not reached
desired levels. Immersion believes that the facts that the current product is
being marketed, in part, as a gaming product, that it was introduced late in the
1999 Christmas buying season, that it was relatively expensive, and that many
popular software titles targeted at mice do not yet support force feedback, have
contributed to slow sales of this product.

     Immersion and Logitech amended their existing license agreement and product
technology agreement in March 2000 to cover a new technology developed by
Immersion for lower-cost, touch-enabled mouse products to be targeted for use
with productivity and web applications. In August 2000, Logitech announced two
of these mouse products, the iFeel Mouse and the iFeel MouseMan. Logitech
expects both these new mouse products to be available to consumers in late
September 2000. In the second half of 2000, Immersion expects Logitech to
transition its manufacturing, sales and marketing efforts from the Wingman Force
Feedback Mouse to these new iFeel mouse products. In addition, Immersion
recently licensed its lower-cost, touch-enabling mice technology to an
additional manufacturer of computer mice. However, there is no assurance that
these new mice products will be widely accepted in the marketplace, and if it is
not widely accepted, the combined company may be unable to grow its revenues.

IMMERSION DOES NOT CONTROL OR INFLUENCE ITS LICENSEES' MANUFACTURING, PROMOTION,
DISTRIBUTION OR PRICING OF THEIR PRODUCTS INCORPORATING ITS TOUCH-ENABLING
TECHNOLOGIES, UPON WHICH THE COMBINED COMPANY WILL BE DEPENDENT TO GENERATE
ROYALTY REVENUE.

     A key part of the combined company's primary business strategy will be to
license the combined company's intellectual property to companies that
manufacture and sell products incorporating its touch-enabling technologies. The
sale of those products currently generates royalty revenue for Immersion. For
the year ended December 31, 1999, 28% of Immersion's total revenues was royalty
revenue, for the six-month period ended June 30, 2000, 37% of its total revenues
was royalty revenue. However, Immersion does not control or influence the
manufacture, promotion, distribution or pricing of products that are
manufactured and sold by its licensees and that incorporate its touch-enabling
technologies. As a result, products incorporating its technologies may not be
brought to market, achieve commercial acceptance or generate meaningful royalty
revenue for the combined company. For the combined company to generate royalty
revenue, those licensees that pay Immersion per-unit royalties must manufacture
and distribute products incorporating its touch-enabling technologies in a
timely fashion and generate consumer demand through marketing and other
promotional activities. Products incorporating Immersion's touch-enabling
technologies are generally more difficult to design and manufacture than
products that do not incorporate its touch-enabling technologies, and these
difficulties may cause product introduction delays. If Immersion's licensees
fail to stimulate and capitalize upon market demand for products that generate
royalties for Immersion, the combined company's revenues will not grow. Peak
demand for products that incorporate Immersion's 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 Immersion's licensees do not ship licensed products in a timely
fashion or fail to achieve strong sales in the second half of the calendar year,
Immersion would not receive related royalty revenue.

BECAUSE LOGITECH IS IMMERSION'S ONLY LICENSEE CURRENTLY SELLING TOUCH-ENABLED
MICE, IMMERSION'S ROYALTY REVENUE FROM TOUCH-ENABLED MICE WILL NOT INCREASE IF
LOGITECH DOES NOT EFFECTIVELY MANUFACTURE AND MARKET TOUCH-ENABLED MICE
PRODUCTS.

     Logitech is currently the only licensee selling touch-enabled mice. If
Logitech does not effectively manufacture, market and distribute its
touch-enabled mouse products, Immersion's royalty revenue from touch-enabled
mice will not increase. In addition, a lack of market acceptance of Logitech
touch-enabled mice might dissuade other potential licensees from licensing
Immersion's technologies for touch-enabled mice and other products.

                                       17
<PAGE>   25

IF THE COMBINED COMPANY FAILS TO PROTECT AND ENFORCE ITS INTELLECTUAL PROPERTY
RIGHTS, ITS ABILITY TO LICENSE ITS TECHNOLOGIES AND SELL ITS PRODUCTS WOULD BE
IMPAIRED.

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

     - the combined company's pending patent applications may not result in the
       issuance of patents;

     - the combined company patents may not be broad enough to protect its
       proprietary rights;

     - effective patent protection may not be available in every country in
       which the combined company's licensees do business.

     Immersion also relies on licenses, confidentiality agreements and
copyright, trademark and trade secret laws to establish and protect its
proprietary rights. It is possible that:

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

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

IF THE COMBINED COMPANY IS UNABLE TO ENTER INTO NEW LICENSING ARRANGEMENTS WITH
IMMERSION'S EXISTING LICENSEES AND WITH ADDITIONAL THIRD PARTY MANUFACTURERS FOR
ITS TOUCH-ENABLING TECHNOLOGY, THE COMBINED COMPANY'S ROYALTY REVENUE MAY NOT
GROW.

     The combined company's revenue growth will be significantly dependent on
its ability to enter into new licensing arrangements. Its failure to enter into
new licensing arrangements will cause its operating results to suffer. The
combined company faces numerous risks in obtaining new licenses on terms
consistent with its business objectives and in maintaining, expanding and
supporting its relationships with Immersion's current licensees. These risks
include:

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

     - the fact that the combined company may compete with the internal design
       teams of existing and potential licensees;

     - difficulties in persuading consumer product manufacturers to work with
       the combined company, to rely on the combined company for critical
       technology and to disclose to the combined company proprietary product
       development and other strategies; and

     - difficulties in persuading existing and potential licensees to bear the
       development costs necessary to incorporate its technologies into their
       products.

THE HIGHER COST OF PRODUCTS INCORPORATING IMMERSION'S TOUCH-ENABLING
TECHNOLOGIES MAY INHIBIT OR PREVENT THE WIDESPREAD ADOPTION AND SALE OF PRODUCTS
INCORPORATING ITS TECHNOLOGIES.

     Personal computer gaming peripherals, computer mice and automotive controls
incorporating Immersion's touch-enabling technologies are more expensive than
similar competitive products that are not touch-enabled. Although major
manufacturers, such as Logitech, Microsoft and BMW, have licensed Immersion's
technology, the greater expense of products containing its 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.

                                       18
<PAGE>   26

IF IMMERSION'S TECHNOLOGIES ARE UNABLE TO GAIN MARKET ACCEPTANCE OTHER THAN IN
TOUCH-ENABLED JOYSTICKS AND STEERING WHEELS, THE COMBINED COMPANY'S ROYALTY
REVENUE GROWTH WILL BE LIMITED.

     Substantially all of Immersion's royalty revenue is derived from the
licensing of its portfolio of touch-enabling technology for personal computer
gaming peripherals such as joysticks and steering wheels. The market for
joysticks and steering wheels for use with personal computers is substantially
smaller than either the mouse market or the dedicated gaming console market and
is characterized by declining average selling prices. If Immersion is unable to
gain market acceptance beyond the personal computer gaming peripherals market,
the combined company may not achieve royalty revenue growth.

COMPETITION IN COMPUTER PERIPHERAL PRODUCTS IN BOTH THE GENERAL PURPOSE
COMPUTING AND COMPUTER GAMING MARKETS COULD LEAD TO REDUCTIONS IN THE SELLING
PRICE OF PERIPHERAL PRODUCTS OF IMMERSION'S LICENSEES, WHICH WOULD REDUCE THE
COMBINED COMPANY'S ROYALTY REVENUE.

     The general purpose computing and computer gaming markets in which
Immersion's licensees sell peripheral products are highly competitive and are
characterized by rapid technological change, short product life cycles, cyclical
market patterns, a trend of declining average selling prices and increasing
foreign and domestic competition. Immersion believes that competition among
computer peripheral manufacturers will continue to be intense, and that
competitive pressures will drive the price of its licensees' products downward.
Any reduction in Immersion's royalties per unit that is not offset by
corresponding increases in unit sales will cause the combined company's revenues
to decline.

COMPETITION IN THE MEDICAL SIMULATION PRODUCTS MARKET COULD LEAD TO REDUCTIONS
IN THE SELLING PRICES OF HT'S PRODUCTS, WHICH WOULD REDUCE THE COMBINED
COMPANY'S REVENUE.

     Like the computer peripheral product market, the medical simulation product
market is highly competitive and subject to rapid technological change, a trend
toward declining average selling prices and increasing competition. HT expects
that competition in its market will continue and that this competition could
drive the price of its products downward. Declining prices of HT's products that
are not offset by increased volume will also cause the combined company's
revenues to decline.

BECAUSE IMMERSION HAS A FIXED PAYMENT LICENSE WITH MICROSOFT, IMMERSION'S
ROYALTY REVENUE FROM LICENSING JOYSTICKS AND STEERING WHEELS IN THE GAMING
MARKET MIGHT DECLINE IF MICROSOFT INCREASES MICROSOFT'S VOLUME OF SALES OF
TOUCH-ENABLED JOYSTICKS AND STEERING WHEELS AT THE EXPENSE OF IMMERSION'S OTHER
LICENSEES.

     Under the terms of Immersion's present agreement with Microsoft, Microsoft
receives a perpetual, worldwide, irrevocable, non-exclusive license under
Immersion's patents for Microsoft's SideWinder Force Feedback Pro Joystick and
its SideWinder Force Feedback Wheel, and for a future replacement version of
these specific SideWinder products having essentially similar functional
features. Instead of an ongoing royalty on Microsoft's sales of licensed
products, the agreement provides for a payment of $2.35 million, which Immersion
recognized in equal monthly increments over a one-year period that ended in
mid-July 2000. Immersion will not receive any further revenues or royalties from
Microsoft under its current agreement with Microsoft. Immersion derived 13% of
its total revenues and 48% of its royalty revenue for the year ended December
31, 1999 from Microsoft. In addition, Immersion derived 23% of its total
revenues and 63% of its royalty revenues for the six months ended June 30, 2000
from Microsoft. At the present time, Immersion does not have a license agreement
with Microsoft for products other than the SideWinder joystick and steering
wheel. Microsoft has a significant share of the market for touch-enabled
joysticks and steering wheels for personal computers. Microsoft has
significantly greater financial, sales and marketing resources, as well as
greater name recognition and a larger customer base, than its other licensees.
In the event that Microsoft increases its share of this market, Immersion's
royalty revenue from other licensees in this market segment might decline.

                                       19
<PAGE>   27

BECAUSE IMMERSION NO LONGER RECEIVES ROYALTY REVENUE UNDER ITS CURRENT AGREEMENT
WITH MICROSOFT, ITS ROYALTY REVENUES IN FUTURE PERIODS MAY DECLINE.

     As described above, revenue recognized under Immersion's current agreement
with Microsoft ended in mid-July 2000. Because the agreement with Microsoft
accounted for a substantial portion of Immersion's royalty revenues, the
combined company's royalty revenues in future periods will decline if Immersion
fails to enter into agreements with additional licensees of its touch-enabling
technologies. Immersion may not be successful in entering into such agreements.

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

     Immersion derived 13% of its total revenues and 32% of its royalty revenue
for the twelve months ended December 31, 1999 from Logitech. For the six-month
period ended June 30, 2000, Immersion derived 7% of its total revenues and 20%
of its royalty revenue from Logitech. Immersion expects that a significant
portion of its total revenues will continue to be derived from Logitech. If
Logitech fails to achieve anticipated sales volumes for its computer peripheral
products that incorporate Immersion's technologies, the combined company's
royalty revenue would be reduced.

BECAUSE PERSONAL COMPUTER PERIPHERAL PRODUCTS THAT INCORPORATE IMMERSION'S AND
HT'S TOUCH-ENABLING TECHNOLOGIES CURRENTLY MUST WORK WITH MICROSOFT'S OPERATING
SYSTEM SOFTWARE, THE COMBINED COMPANY'S COSTS COULD INCREASE AND ITS REVENUES
COULD DECLINE IF MICROSOFT MODIFIES ITS OPERATING SYSTEM SOFTWARE.

     Immersion's hardware and software technology for personal computer
peripheral products that incorporate its touch-enabling technologies is
currently compatible with Microsoft's Windows 98 operating system software,
including DirectX, Microsoft's entertainment applications programming interface.
HT's software products run on Microsoft's Windows NT operating system software.
If Microsoft modifies its operating system, including DirectX, the combined
company may need to modify its technologies, possibly causing delays in the
release of products by its licensees. If Microsoft modifies its software
products in ways that limit the use of the combined company's other licensees'
products, the combined company's costs could be increased and its revenues could
decline.

LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS COULD BE EXPENSIVE,
DISRUPTIVE, AND TIME CONSUMING, AND COULD ADVERSELY AFFECT THE COMBINED
COMPANY'S BUSINESS.

     Intellectual property litigation, whether brought by Immersion or by
others, could result in the expenditure of significant financial resources and
the diversion of management's time and efforts. From time to time, Immersion and
HT initiate claims against third parties that they believe infringe their
intellectual property rights. To date, most of these claims have not led to any
litigation. However, on June 18, 2000, Immersion filed an action for patent
infringement in the United States District Court for the Northern District of
California against InterAct Accessories, Inc., one of its existing licensees,
based on some unlicensed gamepad products currently being marketed by InterAct.
This litigation, like any litigation brought to protect and enforce intellectual
property rights, could be costly, time-consuming and distracting to management
and could result in the impairment or loss of portions of Immersion's
intellectual property. In addition, any litigation in which the combined company
is accused of infringement may cause product shipment delays, require the
combined company to develop non-infringing technology or require the combined
company 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 its favor, the combined company could become subject to substantial damage
claims from third parties and indemnification claims from its licensees. The
combined company and its 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 the combined company
prevailed and the combined company could not develop non-infringing technology
or

                                       20
<PAGE>   28

license the infringed or similar technology on a timely and cost-effective
basis, its expenses would increase and its revenues could decrease.

     Immersion and HT attempt to avoid infringing known proprietary rights of
third parties. Immersion and HT have not, however, conducted and do not conduct
comprehensive patent searches to determine whether aspects of their technology
infringe patents held by third parties. Third parties may hold, or may in the
future be issued, patents that could be infringed by the combined company's
products or technologies. Any of these third parties might make a claim of
infringement against the combined company with respect to the products that it
manufactures and the technologies that it licenses. From time to time, Immersion
has received letters from companies, several of which have significantly greater
financial resources than Immersion does, asserting that some of its
technologies, or those of its licensees, infringe their intellectual property
rights. Certain of Immersion's licensees have received similar letters from
these or other companies. Such letters may influence the combined company's
licensees' decisions whether to ship products incorporating its technologies.
Although none of these matters has resulted in litigation to date, any of these
notices, or additional notices that the combined companies could receive in the
future from these or other companies, could lead to litigation.

IF THE COMBINED COMPANY IS UNABLE TO CONTINUALLY IMPROVE, AND REDUCE THE COST
OF, ITS TECHNOLOGIES, CUSTOMERS MAY NOT PURCHASE ITS PRODUCTS AND OTHER
COMPANIES MAY NOT INCORPORATE ITS TECHNOLOGIES INTO THEIR PRODUCTS, WHICH COULD
IMPAIR ITS REVENUE GROWTH.

     The combined company's ability to achieve revenue growth will depend on its
continuing ability to improve, and reduce the cost of, its technologies and to
introduce these products and technologies to the marketplace in a timely manner.
If its development efforts are not successful or are significantly delayed,
other companies may not incorporate its technologies into their products or
sales of its products may decrease, impairing its revenue growth.

THREE KEY MEMBERS OF IMMERSION'S MANAGEMENT TEAM HAVE RECENTLY JOINED IMMERSION,
AND THEY MAY NOT BE EFFECTIVELY INTEGRATED INTO ITS OPERATIONS, WHICH COULD
IMPEDE THE EXECUTION OF THE COMBINED COMPANY'S BUSINESS STRATEGY.

     Immersion's vice president of finance, vice president of marketing and vice
president of business development each joined Immersion in July or August 1999.
Accordingly, each of these individuals has limited experience with Immersion's
business. The combined company's success will depend to a significant extent on
the ability of these new officers to integrate themselves into Immersion's daily
operations, to gain the trust and confidence of other employees and to work
effectively as a team. If any of them fails to do so, the combined company's
ability to execute its business strategy would be impeded.

COMPETITION FROM UNLICENSED PRODUCTS COULD LEAD TO REDUCED PRICES AND SALES
VOLUMES OF THE COMBINED COMPANY'S LICENSEES' PRODUCTS, WHICH COULD LIMIT THE
COMBINED COMPANY'S REVENUES OR CAUSE ITS REVENUES TO DECLINE.

     The combined company's licensees or other third parties may seek to develop
products which they believe do not require a license under the combined
company's intellectual property. These potential competitors may have
significantly greater financial, technical and marketing resources than the
combined company does, and the costs associated with asserting the combined
company's intellectual property 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 the combined company's
intellectual property, competition from such unlicensed products could limit or
reduce its revenues.

COMPETITION WITH THE COMBINED COMPANY'S IMMERSION PROCESSORS MAY LEAD TO REDUCED
PRICES AND SALES VOLUMES OF ITS MICROPROCESSORS.

     To date, the market for Immersion's Immersion Processors has been small. If
the market grows, Immersion expects more companies to compete in this market.
Increased competition could result in

                                       21
<PAGE>   29

significant price erosion, reduced revenues or loss of market share, any of
which would have an adverse effect on the combined company's business and
operating results. Currently, semiconductor companies, including Mitsubishi and
ST Microelectronics, manufacture products that compete with Immersion's
microprocessors, and ST Microelectronics has recently started selling to its
licensees at least one competitive chip for use in low-end touch-enabled
peripheral products. These companies may have greater financial, technical,
manufacturing, distribution and other resources, greater name recognition and
market presence, longer operating histories, lower cost structures and larger
customer bases than the combined company. Accordingly, the combined company may
not be able to compete successfully against either current or future
competitors.

IMMERSION IS DEPENDENT ON KAWASAKI LSI TO PRODUCE IMMERSION PROCESSORS AND MAY
LOSE CUSTOMERS IF KAWASAKI LSI DOES NOT MEET ITS REQUIREMENTS.

     Kawasaki LSI is the sole supplier of custom Immersion Processors, which
Immersion develops, licenses and sells to improve the performance and to help
reduce the cost of computer peripheral products, such as joysticks and mice,
incorporating Immersion's touch-enabling technology. Immersion has limited
control over delivery schedules, quality assurance, manufacturing capacity,
yields, costs and misappropriation of its intellectual property. Although
Kawasaki LSI warrants that microprocessors it supplies to Immersion or to its
customers will conform to its specifications and be free from defects in
materials and workmanship for a period of one year from delivery, any delays in
delivery of the processor, quality problems or cost increases could cause
Immersion to lose customers and could damage its relationships with its
licensees.

THE COMBINED COMPANY MIGHT BE UNABLE TO RECRUIT OR RETAIN NECESSARY PERSONNEL,
WHICH COULD SLOW THE DEVELOPMENT AND DEPLOYMENT OF ITS TECHNOLOGIES AND
PRODUCTS.

     The combined company's ability to develop and deploy its technologies and
products and to sustain its revenue growth depends upon the continued service of
its executive officers and other key personnel and upon hiring additional key
personnel. Both Immersion and HT intend to hire additional sales, support,
marketing and research and development personnel in 2000. However, competition
for these individuals is intense, and the combined company may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. In addition, the technologies of Immersion and HT are complex, and the
combined company will rely upon the continued service of its existing
engineering personnel to support licensees, enhance existing technology and
products and develop new technologies and products.

IMMERSION AND HT HAVE EXPERIENCED RAPID GROWTH AND CHANGES IN THEIR BUSINESSES,
AND THE COMBINED COMPANY'S FAILURE TO MANAGE THIS AND ANY FUTURE GROWTH COULD
HARM ITS BUSINESS.

     In addition to the employees of HT and VTi that Immersion will have to
integrate, Immersion is rapidly increasing the number of Immersion's employees
in its San Jose headquarters and in its recently-acquired Montreal facility and
intends to increase the number of employees at HT's Maryland facility as well.
HT has also experienced rapid growth. The combined company's business may be
harmed if it does not integrate and train its new employees quickly and
effectively. The combined company's revenues may not continue to grow at a rate
sufficient to support the costs associated with an increasing number of
employees. Any future periods of rapid growth may place significant strains on
the combined company's managerial, financial, legal, engineering and other
resources. The rate of any future expansion, in combination with its complex
technologies and products, may demand an unusually high level of managerial
effectiveness in anticipating, planning, coordinating and meeting its
operational needs as well as the needs of the combined company's licensees.

PRODUCT LIABILITY CLAIMS, INCLUDING CLAIMS RELATING TO ALLEGED REPETITIVE STRESS
INJURIES, COULD BE TIME-CONSUMING AND COSTLY TO DEFEND, AND COULD EXPOSE THE
COMBINED COMPANY TO LOSS.

     Claims that consumer products have flaws or other defects that lead to
personal or other injury are common in the computer peripherals industry. If
products that the combined company or its licensees sell
                                       22
<PAGE>   30

cause personal injury, financial loss or other injury to its or its licensees'
customers, the customers or its licensees may seek damages or other recovery
from the combined company. Any claims against the combined company would be
time-consuming, expensive to defend and distracting to management and could
result in damages and injure its reputation or the reputation of its licensees
or their products. This damage could limit the market for the combined company's
and its licensees' touch-enabled products and harm its results of operations. In
the past, manufacturers of peripheral products, such as computer mice, 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. Neither Immersion nor HT has experienced any product liability claims
to date. Although their license agreements typically contain provisions designed
to limit their exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could limit or invalidate the provisions.

IF THE COMBINED COMPANY FAILS TO DEVELOP NEW OR ENHANCED TECHNOLOGIES FOR NEW
COMPUTER APPLICATIONS AND PLATFORMS, IT MAY NOT BE ABLE TO CREATE A MARKET FOR
ITS TECHNOLOGIES AND ITS ABILITY TO GROW AND ITS RESULTS OF OPERATIONS MIGHT BE
HARMED.

     Any initiatives the combined company undertakes to develop new and enhanced
technologies and to license 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 its reputation or its brand. Expanding
the combined company's technology could also require significant additional
expenses and strain its management, financial and operational resources. The
lack of market acceptance of these efforts or its inability to generate
additional revenues sufficient to offset the associated costs could harm the
combined company's results of operations.

THE EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL RETAIN SIGNIFICANT
CONTROL OVER THE COMBINED COMPANY, WHICH MAY LEAD TO CONFLICTS WITH OTHER
STOCKHOLDERS OVER CORPORATE GOVERNANCE MATTERS.

     Immersion's current directors, officers and more than 5% stockholders, as a
group, beneficially own more than 40% of its outstanding common stock, and will
beneficially own more than 38% of the combined company's common stock following
the merger. Acting together, these stockholders would be able to exercise
significant control on matters that the combined company's 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 the combined company.

IMMERSION AND HT HAVE LIMITED EXPERIENCE IN MANUFACTURING PRODUCTS AND LITTLE
EXPERIENCE IN MANUFACTURING PRODUCTS IN COMMERCIAL QUANTITIES.

     The combined company may encounter difficulties in scaling-up production of
HT's existing medical simulation products and any new products developed by the
combined company, including problems involving production yields, quality
control and assurance, and shortages of qualified personnel. Production
difficulties, if they occur, could have the effect of limiting the combined
company's revenues.

HT RELIES ON SOLE SOURCE SUPPLIERS THAT IT CANNOT QUICKLY REPLACE FOR CERTAIN
COMPONENTS CRITICAL TO THE MANUFACTURE OF ITS PRODUCTS.

     Any delay or interruption in the supply of these components could have a
material adverse effect on the combined company by significantly impairing its
ability to manufacture products in sufficient quantities, particularly as the
combined company increases its manufacturing activities.

                                       23
<PAGE>   31

INVESTMENT RISK

THE COMBINED COMPANY'S QUARTERLY REVENUES AND OPERATING RESULTS ARE LIKELY TO BE
VOLATILE, AND IF ITS FUTURE RESULTS ARE BELOW THE EXPECTATIONS OF PUBLIC MARKET
ANALYSTS OR INVESTORS, THE PRICE OF ITS COMMON STOCK IS LIKELY TO DECLINE.

     Immersion's revenues and operating results have, and the combined company's
results are likely to continue to, vary significantly from quarter to quarter
due to a number of factors, many of which are outside of its control and any of
which could cause the price of its 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 expenses, including costs related to acquisitions of
       technologies or businesses;

     - the timing of introductions of new products and product enhancements by
       the combined company, its licensees and their competitors;

     - its ability to develop and improve its technologies;

     - its ability to attract, integrate and retain qualified personnel; and

     - seasonality in the demand for its licensees' products.

     Accordingly, the combined company's period-to-period operating results
should not be relied upon as an indicator of its future performance. In
addition, because a high percentage of the combined company's operating expenses
will be fixed, a shortfall in revenues can cause significant variations in
operating results from period to period.

THE STOCK PRICE OF IMMERSION HAS BEEN AND MAY CONTINUE TO BE EXTREMELY VOLATILE
DUE TO MANY FACTORS, WHICH MAY MAKE IT DIFFICULT FOR IMMERSION STOCKHOLDERS TO
SELL THEIR SHARES AT PRICES THEY FIND ATTRACTIVE.

     The price of Immersion common stock has been extremely volatile in the past
and may be extremely volatile in the future, which could result in the future
market price of Immersion common stock being lower than its market price at the
effective time of the merger. The market price of Immersion common stock could
fluctuate widely in response to a variety of factors, including the following:

     - Actual or anticipated variations in quarterly operating results;

     - The ability of the combined company to successfully develop, introduce
       and market new or enhanced products and technologies on a timely basis;

     - Unexpected changes in demand for the combined company's products and
       services;

     - The pricing policies of the combined company's competitors;

     - Announcements of technological innovations or new products by the
       combined company or its competitors;

     - 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;

     - Announcements by the combined company or its competitors of significant
       acquisitions, strategic partnerships, joint ventures or capital
       commitments; and

     - Changes in the market price of the stock of other companies in the
       combined company's industry.

     In addition, the trading prices of technology stocks as a whole have
experienced extreme price and volume fluctuations and such effects have often
been unrelated to the operating performance of the

                                       24
<PAGE>   32

applicable companies. Any negative change in the public's perception of the
prospects of technology companies or other broad market and industry factors
could depress the market price of Immersion common stock, regardless of the
combined company's operating performance. Market fluctuations, as well as
general political and economic conditions, such as recession or interest rate or
currency rate fluctuations, also may decrease the market price of Immersion's
common stock.

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

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

                                       25
<PAGE>   33

         SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA

IMMERSION SELECTED HISTORICAL FINANCIAL DATA

     The consolidated statements of operations data set forth below for the
years ended December 31, 1999, 1998 and 1997, and the consolidated balance sheet
data at December 31, 1999 and 1998 are derived from the consolidated financial
statements of Immersion included elsewhere in this proxy statement/ prospectus.
The consolidated statement of operations data for the year ended December 31,
1996 and the consolidated balance sheet data at December 31, 1997 and 1996 are
derived from audited consolidated financial statements not included in this
proxy statement/prospectus. The selected financial data as of and for the year
ended December 31, 1995 has been derived from unaudited consolidated financial
statements not included in this proxy statement/prospectus. The consolidated
statement of operations data for the six months ended June 30, 2000 and 1999 and
the balance sheet data as of June 30, 2000 are derived from Immersion's
unaudited consolidated financial statements included elsewhere in this proxy
statement/ prospectus. Immersion believes that the unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the statements. The
following financial data is qualified in its entirety by, and should be read in
conjunction with, "Immersion Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this proxy statement/prospectus.
Historic results are not necessarily indicative of the results that may be
expected for any future period or for a full year.

<TABLE>
<CAPTION>
                                             SIX MONTHS ENDED
                                                 JUNE 30,                         YEAR ENDED DECEMBER 31,
                                            -------------------      -------------------------------------------------
                                              2000       1999         1999       1998       1997      1996      1995
                                            --------    -------      -------    -------    ------    ------    -------
                                                              (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                         <C>         <C>          <C>        <C>        <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS
  DATA:
Revenues:
  Royalty revenue.....................      $  1,866    $   622      $ 2,232    $   321    $   14    $   --    $    --
  Product sales.......................         2,267      2,133        4,583      3,725     2,908     2,022      1,068
  Development contracts and other.....           883        748        1,223        975     1,410       715        285
                                            --------    -------      -------    -------    ------    ------    -------
    Total revenues....................         5,016      3,503        8,038      5,021     4,332     2,737      1,353
                                            --------    -------      -------    -------    ------    ------    -------
Costs and expenses:
  Cost of product sales...............         1,193        970        2,106      1,507     1,186       947        540
  Sales and marketing.................         3,891        459        1,801        656       658       422        224
  Research and development............         1,544      1,057        2,273      1,817     1,515       710        393
  General and administrative..........         2,786      1,548        4,171      2,677     1,550       766        267
  Amortization of intangibles and
    deferred stock compensation.......         1,793        463        1,339        211        --         1         --
  In-process research and
    development.......................           887      1,190        1,190         --        --        --         --
                                            --------    -------      -------    -------    ------    ------    -------
    Total costs and expenses..........        12,094      5,687       12,880      6,868     4,909     2,846      1,424
                                            --------    -------      -------    -------    ------    ------    -------
Operating loss........................        (7,078)    (2,184)      (4,842)    (1,847)     (577)     (109)       (71)
Interest and other income, net........         1,451         66          488        174        50        28         14
                                            --------    -------      -------    -------    ------    ------    -------
Net loss..............................      $ (5,627)   $(2,118)     $(4,354)   $(1,673)   $ (527)   $  (81)   $   (57)
                                            ========    =======      =======    =======    ======    ======    =======
Basic and diluted net loss per
  share...............................      $  (0.35)   $ (0.43)     $ (0.66)   $ (0.43)   $(0.17)   $(0.03)   $ (0.02)
                                            ========    =======      =======    =======    ======    ======    =======
Shares used in calculating basic and
  diluted net loss per share..........        16,006      4,944        6,599      3,909     3,162     2,825      2,468
                                            ========    =======      =======    =======    ======    ======    =======
</TABLE>

<TABLE>
<CAPTION>
                                                    JUNE 30,                                 DECEMBER 31,
                                              --------------------          -----------------------------------------------
                                                      2000                   1999       1998      1997      1996      1995
                                              --------------------          -------    ------    ------    ------    ------
                                                                             (IN THOUSANDS)
<S>                                           <C>              <C>          <C>        <C>       <C>       <C>       <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................        $22,839                 $46,527    $2,592    $  490    $  324    $   37
Working capital.............................         39,089                  51,299     3,975     2,080     1,151       779
Total assets................................         61,228                  59,438     5,959     2,900     1,562       963
Redeemable convertible preferred stock......           --                        --     1,476     1,471        --        --
Total stockholders' equity..................         57,620                  56,648     3,773       944     1,383       876
</TABLE>

                                       26
<PAGE>   34

HT SELECTED HISTORICAL FINANCIAL DATA

     The consolidated statement of operations data set forth below for the years
ended May 31, 2000 and 1999 and the consolidated balance sheet data at May 31,
2000 and 1999 are derived from the audited consolidated financial statements of
HT (which contain an explanatory paragraph with respect to substantial doubt
about HT's ability to continue as a going concern and management's plan
described in Note 11 to the financial statements) included elsewhere in this
proxy statement/prospectus. The statement of operations data for the years ended
May 31, 1998 and the balance sheet data at May 31, 1998 are derived from audited
consolidated financial statements not included in this proxy
statement/prospectus. The statement of operations data for the year ended May
31, 1997 and the balance sheet data as at May 31, 1997 are derived from audited
financial statements which disclaimed an opinion on the statements of income,
stockholders' equity (deficiency) and cash flows for the year then ended due to
a scope limitation on the opening May 31, 1996 balance sheet. The statement of
operations data for the year ended May 31, 1996 and the balance sheet data as at
May 31, 1996 are derived from unaudited financial statements which in the
opinion of management contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the statements. The
following financial data is qualified in its entirety by, and should be read in
conjunction with, "HT Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this proxy statement/prospectus.
Historical results are not necessarily indicative of the results that may be
expected for any future period.

<TABLE>
<CAPTION>
                                                            YEAR ENDED MAY 31,
                                            --------------------------------------------------
                                             2000       1999       1998       1997       1996
                                            -------    -------    -------    -------    ------
                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                         <C>        <C>        <C>        <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
  Contract revenues.......................  $ 1,445    $ 2,935    $ 2,508    $ 2,180    $2,390
  Product sales...........................    1,480        747         44         --        --
                                            -------    -------    -------    -------    ------
     Total revenues                           2,925      3,682      2,552      2,180     2,390
                                            -------    -------    -------    -------    ------
Costs and expenses:
  Cost of contract revenues...............      706      1,963      1,596      1,559     1,302
  Cost of product sales...................      879        447         40         --        --
  Selling, general and administrative.....    2,871      1,596      1,096        855       800
  Research and development................    2,539      1,388        676        883       413
                                            -------    -------    -------    -------    ------
     Total costs and expenses.............    6,995      5,394      3,408      3,297     2,515
                                            -------    -------    -------    -------    ------
Operating loss............................   (4,070)    (1,712)      (856)    (1,117)     (125)
Interest expense, net.....................   (1,004)      (242)      (217)      (132)      (25)
                                            -------    -------    -------    -------    ------
Net loss..................................  $(5,074)   $(1,954)   $(1,073)   $(1,249)   $ (150)
                                            =======    =======    =======    =======    ======
Basic and diluted net loss per share......  $ (2.33)   $ (0.91)   $ (0.66)   $ (0.87)   $(0.11)
                                            =======    =======    =======    =======    ======
Shares used in calculating basic and
  diluted net loss per share..............    2,236      2,153      1,627      1,441     1,414
                                            =======    =======    =======    =======    ======
</TABLE>

                                       27
<PAGE>   35

<TABLE>
<CAPTION>
                                                                 MAY 31,
                                            --------------------------------------------------
                                             2000       1999       1998       1997       1996
                                            -------    -------    -------    -------    ------
                                                              (IN THOUSANDS)
<S>                                         <C>        <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................  $    79    $     3    $   173    $   135    $   15
Working capital(deficiency)...............     (642)       (35)       251       (170)        7
Total assets..............................    1,549      1,164        676        691       841
Long-term obligations.....................    3,721      1,854      1,849      1,313       281
Convertible preferred stock with a put
  option..................................      200         --         --         --        --
Total stockholders' equity (deficit)......   (3,783)    (1,577)    (1,372)    (1,136)       88
</TABLE>

                                       28
<PAGE>   36

SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENT DATA

     The following unaudited selected pro forma combined financial data is
derived from the unaudited pro forma condensed combined consolidated financial
statements appearing elsewhere in this proxy statement/prospectus. The unaudited
selected pro forma combined financial data is presented to reflect the estimated
impact of the merger on the historical consolidated financial statements of
Immersion and HT using the pooling-of-interests method of accounting for
business combinations, which assumes that Immersion and HT have been a single
company throughout the periods set forth below. The data below gives effect to
the merger between Immersion and HT as of January 1, 1998 for statement of
operations and as of June 30, 2000 for the balance sheet. Immersion's
consolidated statements of operations for the six months ended June 30, 2000 and
the years ended December 31, 1999 and 1998 have been combined with HT's
consolidated statement of operations for the six months ended May 31, 2000 and
the years ended May 31, 2000 and 1999 respectively, and Immersion's June 30,
2000 consolidated balance sheet has been combined with HT May 31, 2000 balance
sheet. The presentation has the effect of including HT's results of operations
for the six months ended May 31, 2000 in the unaudited pro forma condensed
combined consolidated statements of operations for both the year ended December
31, 1999 and the six months ended June 30, 2000.

     The pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, does not
attempt to predict or suggest future results. It also does not necessarily
reflect the historical results the combined company would have had if Immersion
and HT had been combined during the periods presented. The pro forma data does
not reflect any costs associated with the integration and consolidation of the
companies anticipated by the management of Immersion as a result of the merger.

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED
                                                              SIX MONTHS           DECEMBER 31,
                                                            ENDED JUNE 30,     --------------------
                                                                 2000            1999        1998
                                                            ---------------    --------    --------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                         <C>                <C>         <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
Revenues:
  Royalty revenue.........................................      $ 1,851        $ 2,211     $   321
  Product sales...........................................        2,948          6,063       4,472
  Development contracts and other.........................        1,368          2,668       3,910
                                                                -------        -------     -------
     Total revenues.......................................        6,167         10,942       8,703
                                                                -------        -------     -------
Costs and expenses:
  Cost of product sales...................................        1,575          2,964       1,954
  Sales and marketing.....................................        4,845          3,547       1,612
  Research and development................................        3,385          5,518       5,168
  General and administrative..............................        3,439          5,296       3,317
  Amortization of intangibles and deferred stock
     compensation.........................................        1,793          1,339         211
  In-process research and development.....................          887          1,190          --
                                                                -------        -------     -------
     Total costs and expenses.............................       15,924         19,854      12,262
                                                                -------        -------     -------
Operating loss............................................       (9,757)        (8,912)     (3,559)
Interest and other income/(expense), net..................        1,085           (516)        (68)
                                                                -------        -------     -------
Net loss..................................................      $(8,672)       $(9,428)    $(3,627)
Redeemable convertible preferred stock accretion..........           --              6           6
                                                                -------        -------     -------
Net loss applicable to common stockholders................       (8,672)        (9,434)     (3,633)
                                                                =======        =======     =======
Basic and diluted net loss per share......................      $ (0.50)       $ (1.20)    $ (0.72)
                                                                =======        =======     =======
Shares used in calculating basic and diluted net loss per
  share...................................................       17,392          7,852       5,023
                                                                =======        =======     =======
</TABLE>

                                       29
<PAGE>   37

<TABLE>
<CAPTION>
                                                                 JUNE 30,
                                                                   2000
                                                              --------------
                                                              (IN THOUSANDS)
<S>                                                           <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and cash equivalents...................................     $22,918
Working capital.............................................      38,447
Total assets................................................      62,777
Long-term obligations.......................................       3,721
Total stockholders' equity..................................      54,037
</TABLE>

                                       30
<PAGE>   38

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

     This Immersion Management's Discussion and Analysis of Financial Condition
and Results of Operations contains numerous forwarding-looking statements that
involve risks and uncertainties. See "Forward-Looking Statements May Prove
Inaccurate" on page 44.

OVERVIEW

     Immersion was founded in 1993 to develop technologies that help improve
human to computer interaction. Historically, Immersion has derived most of its
revenues from sales of products and from development contracts. Immersion began
generating royalty revenue in the first quarter of 1997 and anticipates that
royalty revenue will become an increasing percentage of its total revenues.

     Immersion began developing touch-enabled computer peripherals in 1993. In
1995, it introduced its Impulse Engine line of high-end touch-enabled devices
for industrial, research and education markets. Immersion manufactures and sells
these products directly to its customers. In 1996, Immersion introduced I-FORCE,
its first branded portfolio of touch-enabling technology for consumer markets.
Immersion licenses I-FORCE, now called TouchSense, generally on a per unit
royalty basis, to computer gaming peripheral manufacturers. Also in 1996, the
first computer joystick incorporating I-FORCE was introduced.

     Immersion introduced FEELit, now called TouchSense, a technology for
touch-enabled cursor control products, such as mice and trackballs, in 1997. In
1998, Immersion licensed FEELit to Logitech, which began selling the first mouse
during the fourth quarter of 1999. In August 2000, Logitech announced two new
lower-cost, touch-enabled mouse products, the iFeel Mouse and the iFeel
MouseMan, each of which is targeted for use with general purpose computer
applications, such as business productivity and web applications.

     Immersion has developed the Immersion Processors, custom microprocessors
for touch-enabled products that are manufactured by Kawasaki LSI, and it began
selling the Immersion Processors in September 1998. In addition to selling the
Immersion Processors itself, Immersion granted Kawasaki LSI a limited
royalty-bearing license to sell the Immersion Processors to Logitech for use in
its touch-enabled computer mouse.

     Immersion currently sells specialized computer peripherals used in
industrial and professional applications. It developed its first
three-dimensional digitizer product, which is used to create three-dimensional
computer images of small objects, in 1994 and currently sells this product under
the name MicroScribe-3D. Immersion began developing its Softmouse product, a
specialized computer mouse used for mapmaking, in 1994. This mouse product is
sold to original equipment manufacturers. Immersion began developing technology
and products for the medical market in 1993. Immersion derives revenues from
selling medical training and simulation products. In June 1999, Immersion also
began to license technologies for the medical training and simulation market. In
May 2000, Immersion licensed its touch-enabled products to BMW for use in
automotive controls.

     Immersion has entered into numerous contracts with government agencies and
corporations since 1993. Government contracts help fund advanced research and
development, are typically less than two years in duration, are usually for a
fixed price or for its costs plus a fixed fee, and allow the government agency
to license the resulting technology for government applications, specifically
excluding any commercial activity. Corporate contracts are typically for product
development consulting, are for a fixed fee and are also less than two years in
duration.

     Logitech accounted for 13% of Immersion's total revenues in 1999 and 11% of
its total revenues in 1998. The U.S. Government accounted for 7% of Immersion's
total revenues in 1999, 10% of its total revenues in 1998, and 24% of its total
revenues in 1997.

                                       31
<PAGE>   39

     Since inception, Immersion has completed a number of acquisitions of
patents and technology. It capitalizes the cost of patents and technology and
license agreements, except for amounts relating to acquired in-process research
and development for which there is no alternative future use. As of December 31,
1999, Immersion had capitalized patents and technology of $4.7 million, net of
accumulated amortization of $772,000. It is amortizing these patents and
technology over the estimated useful life of the technology of nine years. Of
this amount, Immersion capitalized patents and technology of $3.3 million, net
of accumulated amortization of $335,000, associated with the acquisition of
patents and technology from Cybernet in March 1999. Immersion is amortizing the
Cybernet patents and technology over the estimated useful life of the technology
of nine years, resulting in an amortization expense anticipated to be
approximately $402,000 per year.

     Immersion records revenues from product sales upon shipment. It recognizes
fixed-fee contract revenue under the cost-to-cost percentage-of-completion
accounting method based on the actual physical completion of work performed and
the ratio of costs incurred to total estimated costs to complete the contract.
Immersion recognizes allowable fees under cost-reimbursement contracts as costs
are incurred. Losses on contracts are recognized when determined. Revisions in
estimates are reflected in the period in which the conditions become known.
Immersion recognizes royalty revenue based on royalty reports or related
information received from the licensee. On July 19, 1999, Immersion entered into
an irrevocable, perpetual, non-exclusive, worldwide license agreement with
Microsoft under which Microsoft paid Immersion a lump sum of $2.35 million to
cover all shipments of Microsoft's SideWinder Force Feedback Wheel and its
SideWinder Force Feedback Pro Joystick and a replacement version of these
specific SideWinder products having essentially similar functional features.
Under the terms of the agreement, Immersion is to provide marketing services
related to touch-enabling technology and related products for a twelve-month
period following the effective date of the agreement. Accordingly, Immersion is
recognizing the license payment as revenue over this twelve-month period ending
mid-July, 2000.

     Immersion's cost of product sales consists primarily of materials, labor
and overhead. There is no cost of sales associated with royalty revenue or
development contract revenue. Its research and development expenses are
comprised primarily of headcount and related compensation and benefits,
consulting fees, costs of acquired technology, tooling and supplies and an
allocation of facilities costs. Immersion's sales and marketing expenses are
comprised primarily of employee headcount and related compensation and benefits,
advertising, trade shows, brochures, travel and an allocation of facilities
costs. Immersion's general and administrative expenses are comprised primarily
of employee headcount and related compensation and benefits, legal and
professional fees, office supplies, recruiting, travel and an allocation of
facilities costs.

     Immersion signed a co-marketing agreement with Logitech during the fourth
quarter of fiscal 1999 in which Immersion agreed to assist Logitech with the
launch and promotion of its touch-enabled mice. Under the terms of the
agreement, for a period of five calendar quarters, beginning in the first
calendar quarter of 2000, Immersion is required to reimburse Logitech for
certain marketing related expenses not to exceed $200,000 per quarter, an
expense funded with working capital. Only third-party marketing services that
are targeted at promoting Logitech's touch-enabled mice are eligible for
reimbursement. In addition, all promotional activities must be approved by
Immersion in advance. In order to remain eligible for reimbursement, Logitech
must include Immersion's brand and slogan on all its marketing materials that
reference touch-enabled functionality or products, and meet other conditions
regarding its touch-enabled mice.

     Immersion recorded deferred stock compensation of $1.5 million in 1999 from
the issuance of employee stock options. Immersion is amortizing the deferred
stock compensation over the terms of the related option agreements, which range
up to four years.

                                       32
<PAGE>   40

COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999

     Results of Operations for the six months ended June 30, 2000 and 1999 are
as follows:

<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                                  JUNE 30,
                                                              ----------------
                                                               2000      1999     CHANGE
                                                              ------    ------    ------
                                                              ($ IN THOUSANDS)
<S>                                                           <C>       <C>       <C>
REVENUES
  Royalty revenue...........................................  $1,866    $  622     200%
  Product sales.............................................   2,267     2,133       6%
  Development contracts and other...........................     883       748      18%
                                                              ------    ------
     Total Revenue..........................................  $5,016    $3,503      43%
                                                              ======    ======
</TABLE>

     Total Revenue. Immersion's total revenue for the first half of fiscal 2000
increased by $1.5 million or 43% from the first half of fiscal 1999. All revenue
categories experienced growth during the first half of fiscal 2000 with the
largest increase in royalty revenues of $1.2 million or 200%. The increase is
attributable to the slightly less than $1.2 million recognized under the
Microsoft agreement during the six months ended June 30, 2000. Immersion did not
recognize any revenue under this agreement for the same period ended June 30,
1999. Revenue recognition under the Microsoft agreement ended mid-July 2000. The
increase in product sales for the six-month period ended June 30, 2000 of
$134,000 is mainly attributable to the increased sales of Immersion's
MicroScribe-3D products offset by lower sales in other product categories. The
increase in development contract and other revenue of $135,000 for the first
half of fiscal 2000 compared to the first half of fiscal 1999 is due to an
increase in related development activity on commercial contracts.

     Immersion categorizes its geographic information into four major regions:
North America, Europe, Far East, and the rest of the world. In the first half of
fiscal 2000, revenue generated in North America, Europe, and Far East
represented 67%, 21%, and 12% respectively compared to 72%, 13%, and 14%
respectively, for the first half of fiscal 1999. The shift in revenues among
regions is primarily due to an increase in licensing and development contract
efforts for customers in Europe and a decrease in product shipments to customers
in North America, mainly due to the timing of shipments of Immersion's
professional medical products, for the six months ended June 30, 2000 versus the
same period ended June 30, 1999.

<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                                                                  JUNE 30,
                                                              ----------------
                                                               2000      1999     CHANGE
                                                              -------    -----    ------
                                                              ($ IN THOUSANDS)
<S>                                                           <C>        <C>      <C>
COST OF PRODUCT SALES
  Cost of product sales.....................................  $1,193     $970        23%
     % of total product revenue.............................     53%      45%
</TABLE>

     Cost of Product Sales. Cost of product sales increased by $223,000 or 23%
for the six months ended June 30, 2000 as compared to the six months ended June
30, 1999. The increase is due to a combination of increased overhead costs and
the mix of product sold. The increase in overhead costs contributed $105,000 to
the overall increase while the shift in product mix due to increased sales of
the MicroScribe-3D and Immersion Processors, which have higher cost of product
sales than Immersion's professional medical products, accounted for the
remainder of the increase in cost of products sold for the six months ended June
30, 2000.

                                       33
<PAGE>   41

<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                              ------------------
                                                               2000        1999     CHANGE
                                                              ------      ------    ------
                                                               ($ IN THOUSANDS)
<S>                                                           <C>         <C>       <C>
OPERATING EXPENSES AND OTHER
  Sales and marketing.......................................  $3,891      $  459     748%
     % of total revenue.....................................     78%         13%
  Research and development..................................  $1,544      $1,057      46%
     % of total revenue.....................................     31%         30%
  General and administrative................................  $2,786      $1,548      80%
     % of total revenue.....................................     56%         44%
  Amortization of intangibles and deferred stock
     compensation...........................................  $1,793      $  463     287%
     % of total revenue.....................................     36%         13%
  In-process research and development.......................  $  887      $1,190     (25)%
     % of total revenue.....................................     18%         34%
</TABLE>

     Sales and Marketing. Sales and marketing expenses increased by $3.4 million
or 748% in the first half of fiscal 2000 compared to the same period last year.
The significant increase was mainly due to increased headcount and related
compensation, benefits, and overhead costs of $1.6 million. Expenses related to
corporate identity, advertising, collateral design and production and expenses
incurred under Immersion's co-marketing agreement with Logitech contributed
$932,000 to the increase for the first half of fiscal 2000 versus the first half
of fiscal 1999. The remainder of the increase was associated with developer
programs and production of showcase applications of Immersion's tools of
$365,000, website development and maintenance of $158,000 and increased travel
expenses of $112,000. Immersion anticipates sales and marketing expenses to
continue to increase in absolute dollars due to the planned growth of
Immersion's sales and marketing organizations and Immersion's co-marketing
agreement with Logitech. Under the terms of the agreement, for a period of five
calendar quarters, beginning in the first calendar quarter of 2000, Immersion
will reimburse Logitech for certain marketing related expenses not to exceed
$200,000 per quarter. Only third-party marketing services that are targeted at
promoting Logitech's touch-enabled mice are eligible for reimbursement. In
addition, all promotional activities will have to be approved by Immersion in
advance. In order to remain eligible for reimbursement, Logitech will have to
include Immersion's brand and slogan on all its marketing materials that
reference touch-enabled functionality or products, and commit to other
conditions regarding its touch-enabled mice.

     Research and Development. Research and development expenses increased by
$487,000 or 46% in the first half of fiscal 2000 compared to the same period
last year. The increase is due to increased headcount and related compensation,
benefits, and overhead costs of $311,000 and subcontracted non-recurring
engineering expenses of $141,000. Immersion believes that continued investment
in Immersion's research and development is critical to Immersion's future
success, and Immersion expects these expenses to increase in absolute dollars in
future periods.

     General and Administrative. General and administrative expenses increased
by $1.2 million or 80% in the second half of fiscal 2000 compared to the same
period last year. The increase is attributed to increased headcount and related
compensation, benefits, and overhead costs of $357,000 and recruiting costs of
$378,000 for recruiting employees and members of the board of directors. The
remainder of the increase is due to increased legal expenses and investor
expenses of $475,000 for Immersion's proxy, acquisition related matters,
intellectual property litigation, annual report, annual stockholders' meeting,
and other costs related to being a public company. Immersion expects that the
dollar amount of general and administrative expenses will increase in the future
as Immersion continues to increase infrastructure and incur the additional costs
of being a public company. In addition, in the quarter in which the merger is
completed, Immersion will incur substantial transaction expenses, estimated at
approximately $1,750,000, including financial consulting, legal and accounting
fees incurred in connection with the merger.

     Amortization of Intangibles and Stock Compensation. Amortization of
intangibles and deferred stock compensation grew by $1.3 million or 287% in the
first half of fiscal 2000 compared to the same period last year. The increase in
amortization of intangibles of $658,000 is comprised of $477,000 of amortization

                                       34
<PAGE>   42

of goodwill and other purchased intangibles related to the acquisition of
Haptic, and $181,000 of amortization related to purchased patents and
technology. Deferred stock compensation amortization increased by $672,000. Of
the $672,000 increase, $489,000 is the result of amortization related to the
$5.5 million of deferred stock compensation recorded in conjunction with the
assumption of Haptic's unvested options at the time of acquisition, and $183,000
is related to the $1.5 million of deferred stock compensation recorded during
the second quarter of fiscal 1999.

     In-Process Research and Development. During the six months ended June 30,
2000, Immersion incurred a charge of $887,000 for in-process research and
development resulting from the March 2000 acquisition of all the outstanding
shares of Haptic compared to a charge of $1.2 million during the prior year
resulting from the acquisition of Cybernet. See Note 2 to condensed consolidated
financial statements for the six months ended June 30, 2000 included in the
proxy statement/prospectus.

     Interest and Other Income, Net. Interest and other income consists
primarily of interest income, dividend income and capital gains from cash and
cash equivalents and short-term investments. Interest and other income grew by
$1.4 million for the six months ended June 30, 2000 versus the six-month period
ended June 30, 1999. The increase during the six months ended June 30, 2000 is
due to the increase in cash and cash equivalents and short-term investments
chiefly from the $48.3 million net proceeds from Immersion's public offering in
November 1999.

COMPARISON OF YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

     Total Revenues. Immersion's total revenues for the year ended December 31,
1999 increased to $8.0 million from $5.0 million in 1998, an increase of 60%.
The year over year increase was primarily the result of a $1.9 million or 595%
increase in royalty revenue due to increased 1999 sales by Immersion's I-FORCE
licensees and $ 1.1 million in revenues recognized under the Microsoft
agreement. The remainder of the 1999 increase in sales over 1998 was due to an
increase in product sales of $858,000 or 23%. The increase in product sales is
mainly attributed to a $566,000 increase in professional medical products, and
$343,000 increase in Immersion Processors sales with smaller increases and
decreases in other product categories. Total revenue for the year ended December
31, 1998 grew by $689,000 over total 1997 revenues. The 1998 increase was
principally the result of an $817,000 increase in product sales, primarily from
Immersion's MicroScribe-3D and industrial products, and a $307,000 increase in
royalty revenue due to increased sales by Immersion's I-FORCE licensees in 1998.
The increase in product sales and royalty revenue was partially offset by a
$435,000 decrease in contract revenue.

     Cost of Product Sales. Costs of product sales were $2.1 million in 1999,
$1.5 million in 1998 and $1.2 million in 1997. The $0.6 million increase in cost
of product sales in 1999 is mainly due higher sales volume, a 23% increase in
product sales over last year and increased sales of Immersion Processors which
have a higher cost of sales as a percentage of product sales than Immersion's
other products. The $0.3 million increase in 1998 cost of product sales over
1997 was due to increased product sales volume. Cost of product sales as a
percentage of product sales was 46% in 1999, 40% in 1998 and 41% in 1997. Cost
of product sales as a percentage of product sales increased in 1999 from 1998
primarily due to a 276% increase in sales of Immersion's microprocessors, which
have a higher cost as a percentage of sales than Immersion's other products.

     Sales and Marketing. Sales and marketing expenses grew to $1.8 million in
1999 from $656,000 in 1998 and $658,000 in 1997. The $1.1 million or 175%
increase in 1999 was primarily a result of increased headcount and related
compensation, benefits, and overhead costs of $606,000 and corporate identity
and web development costs of $319,000. Immersion expects sales and marketing
expenses to increase significantly in absolute dollars due to planned growth of
its sales and marketing organization. These planned increases include higher
employee headcount and related compensation and increased advertising and
marketing expenses. These planned increases also include expenses related to a
co-marketing agreement that Immersion entered into with Logitech in November
1999. Under the co-marketing agreement, Immersion agreed to reimburse Logitech
for certain marketing-related expenses not to exceed $200,000 per quarter during
a five-quarter period beginning the first quarter of 2000.

                                       35
<PAGE>   43

     Research and Development. Research and development expenses increased to
$2.3 million in 1999 from $1.8 million in 1998 and $1.5 million in 1997. The
$456,000 or 25% increase in 1999 is mainly due to a $421,000 increase in
employee headcount and the related compensation, benefits and overhead costs.
The increase from 1997 to 1998 was principally due to an increase in employee
headcount and related compensation of $424,000, partially offset by a decrease
in consulting services of $142,000. Immersion believes that continued investment
in research and development is critical to its future success, and it expects
these expenses to increase in absolute dollars in future periods.

     General and Administrative. General and administrative expenses increased
to $4.2 million in 1999 from $2.7 million in 1998 and $1.6 million in 1997. The
$1.5 million or 56% increase in 1999 is mainly attributed to an increase of
$576,000 in employee headcount and related compensation, benefits, overhead
costs and a $824,000 increase in recruiting costs. The recruiting expenses are
predominantly from cash and stock compensation given to a recruiter for
identifying and employing three senior members of Immersion's management team.
The increase from 1997 to 1998 was principally due to an increase in employee
headcount and related compensation and benefits of $584,000, an increase in
legal and professional fees of $147,000 and an increase in consulting services
of $109,000. Immersion expects that the dollar amount of general and
administrative expenses will increase in the future as it incurs the significant
additional costs related to being a public company.

     Amortization of Intangibles and Stock Compensation. Amortization of
intangibles and stock compensation expense grew by $1.1 million in 1999 to $1.3
million from $211,000 in 1998. Immersion did not incur amortization expenses
related to intangibles or stock compensation in 1997. Amortization of licenses
and patents was $551,000 in 1999 and $211,000 in 1998 representing a $340,000
increase year over year. The remainder of the 1999 increase is due to $482,000
of amortization on a consulting agreement signed in March 1999 and $306,000 of
stock compensation amortization.

     In-Process Research and Development. During the year ended December 31,
1999 Immersion incurred a charge of $1.2 million for in-process research and
development resulting from the March 1999 acquisition of patents and in-process
technology from Cybernet. The patents and technology were acquired in exchange
for 1,291,200 shares of Immersion's common stock. Immersion capitalized $3.6
million of purchased patents and technology in connection with this acquisition.
Strategically, this acquisition allowed Immersion to increase the strength of
its intellectual property portfolio by obtaining Cybernet's portfolio of issued
patents and pending patent applications relating to hardware mechanisms and
software architectures designed to deliver tactile sensations to computer users.
It also allowed Immersion to obtain five in-process research and development
projects that embody aspects of the acquired intellectual property and that have
potential commercial value. These include the following:

     - a flexible force feedback development environment that allows developers
       to implement varying levels of force feedback functionality;

     - a three-degree-of-freedom joystick that uses brushless motor and encoder
       technology;

     - a six-degree-of-freedom hand controller;

     - a flight yoke that realistically simulates the motion and feel of
       airplane controls; and

     - a device that allows the user to touch three-dimensional objects.

     In the quarter ended March 31, 1999, Immersion expensed $1.2 million of
in-process research and development related to five development projects
acquired from Cybernet. The first of these projects is a flexible force feedback
development environment that allows developers to choose the level of
complexity/ functionality that fits their needs. At the time of acquisition, the
development was 81% completed and the estimated cost to complete this
development was $438,000. Management expects to ship products using this
software beginning in September 2001. The second of these projects, a
three-degree-of-freedom joystick, gives the operator smooth, intuitive movement
and feedback along three axes -- roll, pitch and yaw -- using brushless motor
and encoder technology. At the time of acquisition, the development was 36%
completed and the estimated cost to complete this development was $109,000.
Management expects products based on this technology to become available in
December 2000. The third of these projects is a

                                       36
<PAGE>   44

six-degree-of-freedom hand controller, a small back-drivable robot that moves in
six degrees of freedom, three linear positions and attitudes. At the time of
acquisition, the development was 70% completed and the estimated cost to
complete this development was $88,000. Management expects to complete
development of a product based on this technology and begin shipping it in
fiscal 2000. The fourth project is a Flight Yoke, which provides the intuitive
motion and feel of an airplane control yoke. It translates in and out to control
the pitch, rotates for roll control, and provides the corresponding feel along
these axes of motion. At the time of acquisition, the development was 49%
completed and the estimated cost to complete this development was $175,000.
Management expects that licensees will ship licensed products using this
technology in fiscal 2001. The fifth development project is a device that allows
the user to physically interact with computer generated three-dimensional
objects. At the time of acquisition, the development was 11% completed and the
estimated cost to complete this development was $248,000. Management expects
that a product based on this technology will become available for sale in fiscal
2000.

     Immersion will begin to benefit from the acquired research and development
of these products once they begin shipping. Failure to reach successful
completion of these projects could result in impairment of the associated
capitalized intangible assets and could require Immersion to accelerate the time
period over which the intangibles are being amortized, which could have a
material adverse effect on its business, financial condition and results of
operation. Significant assumptions used to determine the value of in-process
research and development include the following: (i) forecast of net cash flows
that were expected to result from the development effort using projections
prepared by Immersion and the seller's management; (ii) the portion of the
projects completed estimated by considering a number of factors, including the
costs invested to date relative to total costs of the development effort and the
amount of development completed as of the acquisition date, on a technological
basis, relative to the overall technological achievements required to achieve
the functionality of the eventual product. The technological issues were
addressed by engineering representatives from both Immersion and the seller, and
when estimating the value of the technology, the projected financial results of
the acquired assets were estimated on a stand-alone basis without any
consideration of potential synergistic benefits or "investment value" related to
the acquisition. As there were no existing products acquired, separate projected
cash flows were prepared for only the in-process projects.

     These projected results were based on the number of units sold times the
average selling price less the associated costs. After preparing the estimated
cash flows from the products being developed, a portion of these cash flows were
attributed to the existing technology, which was embodied in the in-process
product lines and enabled a quicker and more cost-effective development of these
products. When estimating the value of the in-process technologies, a discount
rate of 30% was used. The discount rate considered both the status and risks
associated with the cash flows at the acquisition date. Projected revenues from
the in-process products are expected to commence in 2000 and 2001 as the
products are completed and begin to ship. Initial annual revenue growth rates
after introduction are projected to exceed 50% and decline to less than 15% by
2005. Gross margins from these products are anticipated to be consistent with
the gross margins from Immersion's other products.

     Other Income. Other income consists primarily of interest income, dividend
income and capital gains from cash and cash equivalents and short-term
investments. Interest and other income was $488,000 in 1999, $174,000 in 1998
and $50,000 in 1997. The significant increase in 1999 is due to the increase in
cash and cash equivalents and short-term investments chiefly from the $48.3
million net proceeds of Immersion's public offering on November 12, 1999. The
1998 increase over 1997 other income is largely due to increases in cash and
cash equivalents and short-term investments of those years.

LIQUIDITY AND CAPITAL RESOURCES

     Immersion's cash, cash equivalents, and short-term investments consist
primarily of money market funds and highly liquid debt instruments. All of
Immersion's short-term investments are classified as available-for-sale under
the provisions of SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities." The securities are stated at market value with unrealized
gains and losses reported as a component of accumulated other comprehensive loss
within stockholders' equity.
                                       37
<PAGE>   45

     At June 30, 2000 Immersion's cash, cash equivalents and short-term
investments totaled $37.7 million, down $13.6 million from $51.3 million at
December 31, 1999. Excluding short-term investments Immersion's cash and cash
equivalents totaled $22.8 million, down $23.7 million from $46.5 million at
December 31, 1999.

     Net cash used in operating activities during the first half of fiscal 2000
was $4.2 million, a significant increase from the $195,000 used during the same
period last year. Cash used in operations during the six-month period ended June
30, 2000 was comprised of Immersion's $5.6 million net loss, a decrease due to a
change in deferred revenue of $983,000 mainly attributable to revenue recognized
under the Microsoft agreement, a decrease due to a $586,000 change in accounts
receivable and a decrease of $805,000 due to a change in prepaid expenses and
other assets primarily the result of capitalization of patent application costs
of $225,000 and a lump sum payment to buy out the future royalties due on
Immersion's microprocessors of $370,000. Cash used in operations was offset by
noncash activities of $2.9 million, including amortization of intangibles and
deferred compensation of $1.8 million and the $887,000 one-time charge for
in-process research and development relating to the Haptic acquisition and a
$977,000 increase in accrued liabilities mostly due to the timing of payments to
vendors used on Immersion's new corporate facilities.

     Net cash used in investing activities during the first half of fiscal 2000
was $19.9 million, a considerable increase from the $345,000 used during the
same period last year. Net cash used in investing during the period was made up
of $18.3 million purchases of short-term investments offset by sales and
maturities of $8.1 million, $6.5 million purchases of equity investments in
privately-held companies, $2.0 million to purchase capital equipment and
leasehold improvements on Immersion's new corporate facilities and information
technology infrastructure, and $581,000 related to the Haptic acquisition. To
improve Immersion's rate of return on cash and still provide short-term
liquidity, Immersion periodically purchases or sells short-term investments,
which typically are interest-bearing, investment-grade securities with a
maturity of greater than 90 days and less than one year.

     During January 2000 Immersion signed a noncancelable operating lease for
expanded facilities, which will expire in 2005, five years from the lease
commencement date of June 2000. The operating lease payments in fiscal year 2000
on the new lease are expected to be approximately $500,000. The aggregate of the
lease payments after fiscal year 2000 on the new lease are expected to be
approximately $3.8 million. Subsequent to the quarter ended June 30, 2000
Immersion was released from all further obligations under the operating lease
for its former corporate headquarters.

     At June 30, 1999 Immersion's cash, cash equivalents and short-term
investments totaled $2.4 million, down $590,000 from $3.0 million at December
31, 1998. Excluding short-term investments Immersion's cash and cash equivalents
totaled $2.2 million, down $388,000 from $2.6 million at December 31, 1998.

     Net cash used in operating activities during the first half of fiscal 1999
was $195,000. Cash used in operations during the six-month period ended June 30,
1999 was comprised of Immersion's $2.1 million net loss, offset by noncash
activities of $1.9 million, including the $1.2 million one-time charge for in-
process research and development relating to the Cybernet technology
acquisition.

     Net cash used in investing activities during the first half of fiscal 1999
was $345,000 which was made up of $323,000 to purchase patents and technology,
$153,000 to purchase capital equipment offset by sales and maturities of short
term investments of $201,000.

     Immersion believes that Immersion's cash, cash equivalents and short-term
investments will be sufficient to meet Immersion's working capital needs and
capital expenditure requirements for at least the next 12 months. Immersion
anticipates that capital expenditures for the full year ended December 31, 2000
will total approximately $3.0 million in connection with anticipated growth in
operations, infrastructure and personnel in Immersion's core business. Immersion
anticipates that its capital requirements will increase as a result of the
acquisitions of HT and VTi and that it may make additional capital expenditures
on behalf of HT and VTi. If Immersion acquires one or more businesses or
products in addition to HT and VTi, Immersion's capital requirements could
increase substantially. In the event that acquisitions or other unanticipated
circumstances result in a significant increase in Immersion's capital
requirements, it may elect to raise additional capital through debt or equity
financing. There is no assurance that necessary additional capital will be
available on terms acceptable to Immersion, if at all.

                                       38
<PAGE>   46

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     Immersion has limited exposure to financial market risks, including changes
in interest rates. The fair value of the Immersion's portfolio or related income
would not be significantly impacted by a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of its
investment portfolio. An increase or decrease in interest rates would not
significantly increase or decrease interest expense on debt obligations due to
the fixed nature of Immersion's debt obligations. Immersion's foreign operations
are limited in scope and thus it is not materially exposed to foreign currency
fluctuations.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities, or SFAS No. 133. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for Immersion
beginning in 2001. Immersion believes that this statement will not have a
significant impact on its financial condition and results of operations.

                                       39
<PAGE>   47

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

     This HT Management's Discussion and Analysis of Financial Condition and
Results of Operations contains numerous forward-looking statements that involve
risks and uncertainties. See "Forward-Looking Statements May Prove Inaccurate"
on page 44.

OVERVIEW

     HT designs, manufactures, and markets computer-based medical simulators
that allow medical personnel to practice procedures without placing patients at
risk. HT's products integrate proprietary computer software and tactile feedback
robotics with new low-cost and high-power graphics computers to achieve highly
realistic simulation systems. HT sells its three key simulation products in the
United States, Canada, Europe and Asia.

     HT seeks initially to sell hardware systems to customers, followed by the
sales of multiple software packages for specific medical procedures. This
strategy enables HT to generate repeat software sales with relatively high
margins. HT believes that its ability to achieve profitability may depend on its
ability to change its product mix so that a much greater portion of its revenue
is derived from high margin software products.

     HT believes that strategic relationships with medical device and
pharmaceutical companies may be important to its future growth. Currently HT
maintains a co-marketing relationship with Becton Dickinson and Co., the market
leader in intravenous catheters and blood collection devices. Required
in-service training in the use of both of those product lines can be facilitated
by HT's CathSim products and a co-development relationship with Medtronic, Inc.,
a world leader in medical technology. Based on initial success with the
simulation technology, Medtronic is working to broaden the use of simulation
across its product lines.

     Grant and contract support for HT's simulation development has come from
the U.S. Department of Commerce's Advanced Technology Program, the Defense
Advanced Research Project Agency, the Health Care Finance Agency, Small Business
Innovative Research agreements with the National Institutes of Health and the
Department of the Navy, and grants and cooperative agreements with the
Department of the Army.

     HT's three simulation product lines address intravenous catheterization
(CathSim), endovascular interventions (PreOp Endovascular) and endoscopy (PreOp
Endoscopy). All are comprised of software modules, an interface device and a
hardware platform. HT sells hardware systems at prices ranging from $6,000 to
$30,000, followed by repeat sales of software to the installed base of systems.
The following table shows net sales of HT's three product lines during the two
years ended May 31, 2000 and 1999:

<TABLE>
<CAPTION>
                                                       YEAR ENDED
                                                        MAY 31,
                                                    ----------------
                                                     2000      1999     CHANGE
                                                    -------    -----    ------
                                                    ($ IN THOUSANDS)
                                                    ----------------
<S>                                                 <C>        <C>      <C>
CathSim...........................................  $1,221     $454      169%
PreOp Endovascular................................     214      246      (13)%
PreOp Endoscopy...................................      45       47       (4)%
                                                    ------     ----      ---
  Total...........................................  $1,480     $747       98%
                                                    ======     ====      ===
</TABLE>

     Originally incorporated in 1987, HT was profitable as a contract and
service company until 1995 when it began to invest in commercialization of its
three product lines.

                                       40
<PAGE>   48

COMPARISON OF 2000 TO 1999

     Revenues. Product revenues for the year ended May 31, 2000 increased 98% to
$1.5 million from $747,000 in 1999. The increase in revenue was due to the
availability of additional products, increased market awareness and acceptance
of the products, and an increase in HT's sales personnel. Two additional
software modules were released for CathSim in September 1999. During 2000 the
average number of full time sales representatives was increased to 4.25 from an
average of 3 in 1999. HT anticipates that revenues from products will continue
to increase during 2001 as it further expands its product offerings and sales
force, but there is no assurance that all or any of these expectations will be
realized.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                                    MAY 31,
                                                                ---------------
                                                                 2000     1999    CHANGE
                                                                ------   ------   ------
                                                                (IN THOUSANDS)
  <S>                                                           <C>      <C>      <C>
  Contract Revenues...........................................  $1,445   $2,935    (51)%
</TABLE>

     Contract revenues for the year ended May 31, 2000 decreased by 51% to $1.4
million from $2.9 million in 1999. This decrease reflects the shift in the focus
of HT from contract and research and development revenues to product revenues.
Several long term contracts ended during 2000. HT is selectively pursuing
additional commercial and government development agreements in the areas where
it has a market presence.

     Cost of revenues. Cost of product revenues decreased to 59% of product
revenue for the year ended May 31, 2000 compared to 60% for the year ended May
31, 1999. Cost of contract revenues decreased to 49% for the year ended May 31,
2000 from 67% for the year ended May 31, 1999. This decrease reflects a greater
percentage of higher profit margin commercial contracts than government grants.

     Research and development costs. Research and development costs increased by
$1.2 million during fiscal year 2000 or 83%. These increased costs reflect
increased product development efforts. HT believes that continued investment in
its research and development is critical to its future success, and expects
these expenses to increase in absolute dollars in future periods.

     Selling, general and administrative costs. Selling, general and
administrative costs increased by 80% in fiscal year 2000. This increase is due
to increased personnel costs and related benefit and overhead expenses. HT added
personnel in the areas of sales and marketing, materials management and
inventory control, and customer and technical support. HT believes that
continued investment in the areas of sales and marketing, and infrastructure
will be critical to its future success and expects these expenses will continue
to increase in the future.

     Other income. Other income, which represents interest earned on cash and
cash equivalents, decreased by 12% from $25,000 in the year ended May 31, 1999
to $22,000 in the year ended May 31, 2000. This was due to lower average cash
balances during 2000.

     Other expense. Other expense, which represents interest expense, increased
284% to $1.0 million in the year ended May 31, 2000 from $267,000 in the year
ended May 31, 1999. This increase was related in part to the Medtronic $3.5
million convertible loan and a warrant to purchase up to $2.0 million of Series
A preferred stock. HT allocated $1.1 million of the note proceeds to the warrant
and is amortizing this amount to interest expense using the effective interest
method over the three year period that the note is expected to be outstanding.
The increase in interest expense was also related to the conversion of the
investment agreement with Maryland Health Care Product Development Corp., Cook,
Inc., and Maryland Department of Business and Economic Development to cash and
equity which resulted in a rate of return of 25% on their initial investment.

                                       41
<PAGE>   49

     Net Loss. The net loss incurred in the year ended May 31, 2000 increased
160% to $5.1 million from $2.0 million in the prior year due to a decrease in
revenue and an increase in operating expenses and interest expenses. HT
management expects that operating losses will continue to be sustained through
2001.

LIQUIDITY AND CAPITAL RESOURCES

     At May 31, 2000, HT had cash of $79,000, an increase of $76,000 over May
31, 1999. Net cash used in operating activities during fiscal year 2000 was $3.2
million compared to $1.7 million in fiscal year 1999. Cash used in operations
was comprised of HT's net loss of $5.1 million, and an increase in inventory of
$129,000. Cash used in operations was offset by depreciation of $155,000,
non-cash interest expense of $411,000, amortization of interest expense on
warrants of $319,000, amortization of deferred stock compensation of $46,000, a
decrease in accounts receivable of $324,000, an increase in accounts payable and
accrued liabilities of $570,000 and an increase in deferred revenue of $196,000.

     Net cash used in investing activities was $662,000, of which $412,000 was
used for furniture, fixtures and leasehold improvements for the new corporate
facilities and $250,000 was used for additional computer equipment and software
for personnel.

     HT is an early-stage company that has relied on investments and financing
from private investors and strategic partnerships, such as Medtronic, to fund
its operations. Net cash from investors provided $990,000 during the year ended
May 31, 2000, cash from a convertible loan from Medtronic provided $3.5 million,
and proceeds from a secured equipment note provided approximately $317,000.
Under the terms of the investment agreement with Maryland Health Care Product
Development Corp., Cook, Inc. and the Maryland Department of Business and
Economic Development mentioned above, HT had the option to convert its
obligation to pay royalties through a combination of cash and equity upon
receipt of $3 million of financing. HT elected to convert its obligation to pay
royalties in August 1999 and paid approximately $862,000 as the 50% cash portion
and converted the remainder of the obligation to equity in the form of preferred
stock.

     As of May 31, 2000 HT had negative working capital of $642,000. Since May
31, 2000, HT has received $2 million in debt financing from Immersion. This note
carries an interest rate of 15% and is due March 9, 2001. HT management believes
that these funds will be sufficient to fund its operations through September
2000. HT will require additional capital in the future, which could be provided
by Immersion if the merger is completed. If the merger is not completed, there
is no assurance that HT could obtain capital from other sources to fund its
future operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     HT has limited exposure to financial market risks, including changes in
interest rates. An increase or decrease in interest rates would not
significantly increase or decrease interest expense on debt obligations due to
HT's debt obligations having fixed interest rates. HT's foreign operations are
very limited in scope and thus HT is not materially exposed to foreign currency
fluctuations.

                                       42
<PAGE>   50

                           COMPARATIVE PER SHARE DATA

     The following table summarizes per share information for Immersion on a
historical and pro forma combined basis and for HT on a historical and pro forma
equivalent basis. The pro forma information gives effect to the merger accounted
for on a pooling-of-interests basis, and the issuance of shares based on an
assumed exchange ratio of 0.5176. The actual number of Immersion common shares
to be issued will be determined at the effective time as provided in the merger
agreement.

     You should read the information presented in the table in conjunction with
the unaudited pro forma combined consolidated financial statements, the separate
consolidated financial statements and notes to the consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations of the respective companies, which are included elsewhere
in this proxy statement/prospectus.

     The pro forma information, while helpful in illustrating the financial
characteristics of the new company under one set of assumptions, does not
attempt to predict or suggest future results. It also does not necessarily
reflect the historical results the combined company would have had if Immersion
and HT had been combined during the periods presented. The pro forma data does
not reflect any costs associated with the integration and consolidation of the
companies anticipated by the management of Immersion.

IMMERSION

<TABLE>
<CAPTION>
                                                 SIX MONTHS ENDED
                                                     JUNE 30,         YEAR ENDED DECEMBER 31,
                                                 ----------------    --------------------------
                                                       2000           1999      1998      1997
                                                 ----------------    ------    ------    ------
<S>                                              <C>                 <C>       <C>       <C>
Basic and diluted net loss per common share:
  Historical...................................       $(0.35)        $(0.66)   $(0.43)   $(0.17)
  Pro forma....................................       $(0.50)        $(1.20)   $(0.72)   $(0.40)
Book value per common share:(1)
  Historical...................................       $ 3.49         $ 3.59
  Pro forma....................................       $ 2.86         $ 2.92
</TABLE>

HT

<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                                  MAY 31,
                                                              ----------------
                                                               2000      1999
                                                              ------    ------
<S>                                                           <C>       <C>
Basic and diluted net loss per common share:
  Historical................................................  $(2.33)   $(0.91)
  Equivalent pro forma(2)...................................  $(0.62)   $(0.37)
Book value per common share:
  Historical................................................  $(1.68)   $(0.71)
  Equivalent pro forma(3)...................................  $ 1.48    $ 1.51
</TABLE>

-------------------------
(1) Historical book value per share is computed by dividing stockholders' equity
    (deficit) by the number of shares of common stock outstanding at the end of
    each period. Pro forma book value per share is computed by dividing pro
    forma stockholders' equity by the pro forma number of shares of common stock
    outstanding at the end of the period.

(2) Computed by multiplying pro forma basic and diluted net loss per common
    share for Immersion for the years ended December 31, 1999 and 1998
    respectively by 0.5176 which represents the assumed exchange ratio.

(3) Computed by multiplying pro forma book value per common share for Immersion
    as of June 30, 2000 and December 31, 1999 respectively by 0.5176 which
    represents the assumed exchange ratio.

                                       43
<PAGE>   51

                FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE

     Statements made in this proxy statement, other than statements of
historical fact, are forward-looking statements. This proxy statement, including
the sections entitled "Summary," "Risk Factors," "Immersion Management's
Discussion and Analysis of Financial Condition and Results of Operations," "HT
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Immersion Business" and "HT Business" contain forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause Immersion's actual results, level of activity,
performance or achievements to differ materially from the results, level of
activity, performance or achievements expressed or implied by the
forward-looking statements.

     These risks and other factors include those listed under "Risk Factors" and
elsewhere in this proxy statement. In some cases, you can identify
forward-looking statements by terminology such as "may," "might," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue," the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risks
Factors." These factors may cause Immersion's, HT's or the combined company's
actual results to differ materially from any forward-looking statement. Although
Immersion and HT believe the expectations reflected in the forward-looking
statements are reasonable, Immersion and HT cannot guarantee future results,
level of activity, performance or achievements. Moreover, neither Immersion, HT
nor any other person assumes responsibility for the accuracy and completeness of
any of these forward-looking statements. Immersion and HT are under no duty to
update any of the forward-looking statements after the date of this proxy
statement/prospectus to conform the prior statements to actual results or
revised expectations.

                IMMERSION MARKET PRICE AND DIVIDEND INFORMATION

     Immersion common stock has been traded on the Nasdaq National Market since
November 12, 1999 under the symbol "IMMR." The following table sets forth for
the quarters indicated the high and low closing sale prices per share of
Immersion common stock as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                               HIGH        LOW
                                                              -------    -------
<S>                                                           <C>        <C>
1999
  Fourth Quarter (from November 12).........................  $48.000    $18.625
2000
  First Quarter.............................................  $72.875    $31.875
  Second Quarter............................................  $54.500    $13.938
  Third Quarter (to September 13)...........................  $30.188    $13.688
</TABLE>

     No information regarding the market prices of HT's common stock and
preferred stock is provided because there is no established trading market for
shares of HT common stock and preferred stock.

RECENT CLOSING PRICES

     On July 31, 2000, the day on which the merger was publicly announced after
the close of the market, the last reported closing sale price of Immersion
common stock on the Nasdaq National Market was $20.375. On September 13, 2000,
the last reported sale price of Immersion common stock on the Nasdaq National
Market was $14.25.

     Since the market price of Immersion common stock is subject to fluctuation,
the market value of the shares of Immersion common stock that HT stockholders
will receive in the merger may increase or decrease prior to and following the
merger.

     NEITHER IMMERSION NOR HT CAN PREDICT THE FUTURE PRICES FOR IMMERSION COMMON
STOCK. YOU ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR IMMERSION COMMON
STOCK.

                                       44
<PAGE>   52

DIVIDENDS

     Immersion has never declared or paid any cash dividends on its common stock
or other securities and does not anticipate paying cash dividends in the
foreseeable future.

NUMBER OF STOCKHOLDERS

     As of August 7, 2000, Immersion had 188 holders of record of Immersion
common stock, and as of September 6, 2000, HT had 95 holders of record of HT
common stock and preferred stock.

                                       45
<PAGE>   53

                          THE HT STOCKHOLDERS' MEETING

WHEN AND WHERE THE MEETING WILL BE HELD

     This proxy statement/prospectus is being furnished to HT stockholders as
part of the solicitation of proxies by HT's board of directors for use at the HT
special meeting, to be held on September 27, 2000 at 9:00 a.m., local time at
HT's corporate headquarters at 55 West Watkins Mill Road, Gaithersburg, Maryland
20878 and at any adjournments or postponements thereof.

     This proxy statement/prospectus, and the accompanying proxy card, are first
being mailed to holders of HT common stock and preferred stock on or about
September 14, 2000.

WHAT WILL BE VOTED UPON

     The purpose of the HT special meeting is to consider and vote upon a
proposal to approve the merger and the merger agreement.

WHICH STOCKHOLDERS MAY VOTE

     Only holders of record of HT common stock and preferred stock at the close
of business on September 6, 2000, the HT record date, are entitled to notice of
and to vote at the HT special meeting. As of the close of business on the HT
record date, there were 2,507,015 shares of HT common stock and preferred stock
outstanding and entitled to vote, held of record by 95 stockholders. Each holder
of HT common stock and preferred stock will be entitled to cast one vote for
each share held. A majority, or 1,253,508 of these shares, present in person or
represented by proxy, will constitute a quorum for the transaction of business.

HOW DO HT STOCKHOLDERS VOTE

     The HT proxy card accompanying this proxy statement/prospectus is solicited
on behalf of the HT board of directors for use at the HT special meeting.
Stockholders are requested to complete, date and sign the accompanying proxy
card and promptly return it in the accompanying envelope or otherwise mail it to
HT. All proxies that are properly executed and returned, and that are not
revoked, will be voted at the HT meeting in accordance with the instructions
indicated thereon. Executed but unmarked proxies will be voted for approval of
the merger and the merger agreement.

HOW TO CHANGE YOUR VOTE

     An HT stockholder who has given a proxy may revoke it at any time before it
is exercised at the HT meeting, by doing one of the following:

     - delivering a written notice of revocation to the secretary of HT;

     - executing a subsequently dated proxy and delivering it to the secretary
       of HT; or

     - attending the HT special meeting and voting in person.

     Attending the HT special meeting will not, by itself, revoke a proxy. The
HT stockholder must also vote at the meeting.

VOTE REQUIRED TO APPROVE THE MERGER

     Under Maryland law and the charter documents of HT, approval of the merger
and the merger agreement requires the affirmative vote of two-thirds of the
outstanding shares of HT common stock and preferred stock, voting as one class.

     At the special meeting, each stockholder is entitled to one vote for each
share held. The right to vote may be exercised in person or by properly executed
proxy.

                                       46
<PAGE>   54

     THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE
TO THE STOCKHOLDERS OF HT. ACCORDINGLY, STOCKHOLDERS ARE URGED TO READ AND
CAREFULLY CONSIDER THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS AND TO
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.

     HT expects that, pursuant to voting agreements and related irrevocable
proxies, 1,443,173 shares of HT common stock and preferred stock beneficially
owned by certain stockholders of HT on September 6, 2000 (representing
approximately 58% of the total number of shares of HT common stock and preferred
stock outstanding at such date) will be voted for approval of the merger and the
merger agreement.

EXPENSES OF PROXY SOLICITATION

     HT proxies are being solicited by and on behalf of the HT board of
directors. HT will bear all expenses in connection with such solicitation. In
addition to solicitation by use of the mail, HT proxies may be solicited by
directors, officers and employees of HT in person or by telephone or other means
of communication. Such directors, officers and employees will not be
additionally compensated for, but may be reimbursed for out-of-pocket expenses
incurred in connection with, such solicitation.

     HT STOCKHOLDERS SHOULD READ AND CAREFULLY CONSIDER THE INFORMATION
PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS, AND COMPLETE, DATE, SIGN AND
PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE.

                APPROVAL OF THE MERGER AND RELATED TRANSACTIONS

BACKGROUND OF THE MERGER

     HT has been an important user of Immersion's TouchSense technology and has
worked with Immersion since 1994. Immersion has developed and manufactured
several custom medical simulation products to HT's specifications. In June 1999,
Immersion and HT entered into a non-exclusive intellectual property license
agreement that provides that HT will pay Immersion per unit royalties on medical
simulation interface devices incorporating Immersion's TouchSense technology.

     On January 28, 2000, HT informally approached Michael Levin, Immersion's
senior director, professional & industrial products, to explore possible mutual
business opportunities. On January 31, HT sent its business plan to Immersion.
Over the next few days, Mr. Levin and Rodney G. Hilton, HT's chief executive
officer, had several telephone discussions about a possible investment by
Immersion in HT.

     On March 17, 2000, Gregory L. Merril, HT's founder and chairman of the
board, Mr. Hilton and other senior HT management met with Louis Rosenberg,
Immersion's president and chief executive officer, and other senior Immersion
management at Immersion's offices. HT demonstrated its products and discussed
its business plan. At the end of the meeting, HT proposed that Immersion
consider investing $6 million in HT.

     During the rest of March, the managements of Immersion and HT continued to
discuss the investment proposal, other ways to mutually expand their businesses,
and the technological and market synergies that a closer relationship between
the two companies might foster.

     In early April, Stuart Mitchell, Immersion's vice president, business
development, called Mr. Hilton to communicate Immersion's interest in seriously
exploring HT's investment proposal. Mr. Mitchell requested certain due diligence
materials from HT, and Victor Viegas, Immersion's chief financial officer,
followed up with a written request for due diligence materials. By letter dated
April 10, HT transmitted the requested information and described its
understanding of the potential investment and expanded business relationship.

     In mid-April, Immersion engaged Alliant Partners, a financial consultant,
to assist management in assessing and structuring a possible investment in or
other strategic combination with HT. On April 19,

                                       47
<PAGE>   55

Immersion's board of directors discussed HT's investment proposal and instructed
management to continue to investigate the proposal and other possible business
combinations.

     On April 27, 2000, Mr. Mitchell, Mr. Levin and a representative of Alliant
Partners met with Messrs. Merril and Hilton and other HT senior management at
HT's offices. Immersion presented its views on the investment proposal, HT's
valuation and various due diligence matters. Immersion also suggested a possible
acquisition of HT as an alternative to an investment. At that time, however,
Immersion proposed no specific terms or conditions.

     In early May, HT arranged a conference call between Immersion and
Medtronic, Inc., a medical device manufacturer that uses HT's products to
develop simulation programs to train surgeons in the use of Medtronic's
products. Medtronic and HT had entered into an investment agreement in August
1999, which was amended in March 2000. Under the agreement, Medtronic loaned
$3,500,000 to HT against a note convertible into HT preferred stock and received
an option to purchase 250,000 shares of HT preferred stock, HT and Medtronic
agreed to engage in joint development efforts and Medtronic received a right of
first offer on new issuances of HT stock or an acquisition of HT. Discussion at
the meeting centered around possible transactions between Immersion and HT
ranging from a small investment in HT to an acquisition of HT. Medtronic
informally indicated that it would support an investment in or acquisition of HT
as long as the investment did not adversely impact Medtronic's existing
contractual arrangements with HT.

     On May 4, Mr. Mitchell and a representative of Alliant Partners proposed in
a conference call with Messrs. Merril and Hilton and other senior HT management
that Immersion acquire HT in a tax-free merger. In the merger, HT common stock
and preferred stock would be converted into Immersion common stock and Immersion
would assume HT's outstanding stock options by exchanging them for Immersion
options. The transaction would be accounted for as a pooling of interests.
Immersion's proposal also contemplated further due diligence investigations by
Immersion and a renegotiation of the Medtronic agreement.

     Discussions between the management teams continued after the May 4
conference call. The discussions centered on the terms of the proposed
acquisition. The HT board of directors met on May 5, May 9 and May 11. At the
meetings the board of directors reviewed and finally approved the terms of the
merger ultimately embodied in a letter of intent.

     On May 17, the executive committee of Immersion's board of directors
discussed the acquisition of HT, reviewed a draft of a letter of intent that
described the principal terms of the merger and approved the letter of intent. A
few days later, Immersion presented a draft letter of intent to HT setting out
proposed terms of the merger. On May 23, Mr. Mitchell and Mary Beth Baust,
Immersion's controller, conducted additional due diligence at HT's office.

     After additional discussions between the management teams to negotiate the
terms, the parties signed a final letter of intent on June 9, 2000. In the
letter of intent, Immersion agreed to lend HT $2 million to fund its operations.

     HT and Immersion informed Medtronic of the letter of intent, which
commenced Medtronic's 30 day right of first offer under the Medtronic agreement.
On June 14, Mr. Levin and Bruce Schena, Immersion's chief technical officer,
visited HT's offices to conduct additional technical due diligence. On June 15,
Messrs. Mitchell, Merril and Hilton and other senior management met with
representatives of Medtronic to discuss Medtronic's views on Immersion's
proposed acquisition of HT and possible amendments to the Medtronic agreement.

     Medtronic's 30 day right of first offer expired on July 10 without being
exercised. Thereafter, Immersion's counsel distributed drafts of the merger
agreement and other agreements related to the merger for review. Discussions and
negotiations of the terms of the agreements were carried on among senior
management and the legal advisors of both companies in numerous telephone and
conference calls, including conference calls on July 18, 20, 27 and 30. During
the same period, Immersion continued to conduct financial and legal due
diligence.
                                       48
<PAGE>   56

     At a meeting on July 26, the Immersion board of directors reviewed the
terms of the merger and the merger agreement and the results of Immersion's due
diligence investigations, discussed management's recommendations and unanimously
approved the merger and the merger agreement.

     The HT board of directors met on July 26 and received an oral report from
Janney Montgomery Scott to the effect that the merger consideration was fair to
the HT stockholders from a financial point of view. After receiving the report
and discussing the terms of the merger and the merger agreement with legal
counsel, the HT board of directors unanimously approved the merger and the
merger agreement and voted to recommend it to the HT stockholders.

     Immersion and HT signed the merger agreement in the morning of July 31,
2000 and announced it in a press release after the close of the securities
markets the same day.

REASONS FOR THE MERGER

     This section contains numerous forward-looking statements that involve
risks and uncertainties. See "Forward-Looking Statements May Prove Inaccurate"
on page 44.

     The boards of directors of both Immersion and HT believe that the combined
company will have greater potential to exploit their technologies, penetrate
markets more deeply, access broader markets, attract and retain key personnel,
improve operating and financial results over the long term and compete more
effectively than would either company operating alone. The boards of directors
of both companies have identified potential mutual benefits of the merger that
include the following:

     Enhanced Technological Capabilities. Immersion has developed technology for
the simulation of tactile sensations in medical procedures. HT has extensive
experience in the development of touch-enabled medical simulation systems and
software authoring tools. Immersion's leading position in force feedback
technology will complement and improve HT's systems and software, while HT will
add its expertise in systems hardware and software development to the combined
company. Immersion and HT believe that combining the core competencies of the
two companies will result in even stronger technical leadership in the medical
simulation systems market.

     Deeper Market Penetration; Access to Broader Markets. The market for
medical simulation products is an emerging market. Immersion and HT, believe
that by combining their technology assets they will be able to improve the
fidelity of the tactile feedback of HT's products, expand the combined company's
software base, improve software authoring tools and reduce costs. These
accomplishments, if realized, will allow the combined company to penetrate the
market more deeply and increase the rate at which the medical education market
adopts medical simulation training technology. Immersion will be able to use
HT's leadership position to expand Immersion's penetration of the medical
simulation products market. Immersion and HT also believe that as a result of
combining the technologies of the two companies, new technologies and tools will
emerge that will have application in adjacent markets including other
professional, as well as industrial and consumer, markets. This will provide the
combined company the opportunity to address broader markets.

     Expansion of Key Employee Pool. The competition for technical, sales,
support and other personnel in high technology industries is intense, and both
Immersion and HT have experienced difficulty in attracting and retaining key
employees in these fields. Immersion and HT believe that combining their
existing staffs will not only provide a greater concentration of expertise in
areas critical to achievement of the combined company's goals, but will also
enhance the ability of Immersion and HT to recruit qualified key personnel. HT
believes that the merger will improve its recruiting opportunities because it
will be able to offer increased benefits, including particularly the opportunity
to participate in the stock option plans of a company whose securities are
publicly traded and have a readily ascertainable market value. In addition, the
opportunity to be part of a larger organization with an overall higher profile
may assist in attracting key personnel. Immersion may also derive a benefit from
being able to recruit personnel to be located outside of the California Silicon
Valley, where competition among technology companies for key personnel is
particularly intense.

                                       49
<PAGE>   57

     Improved Operating Results. HT's revenues will add significantly to
Immersion's. The companies believe that potentially greater revenues will raise
the combined company's profile and provide it more opportunities and greater
leverage in negotiating strategic partnering, joint development and other
arrangements. Increased revenues and improved operating results may also
increase the combined company's credibility within the investment community.

     Stronger Competitive Position. Immersion and HT believe that each of them
has achieved brand recognition in the medical simulation products market and
that the combining of the two brands will prove to be a powerful competitive
tool. Immersion and HT also believe that the merging of brands combined with the
foregoing and other factors will converge to put the combined company in a
stronger competitive position than either of the companies could expect
operating on its own. The combination of the technological capabilities and
enhanced market access of the combined company alone are expected to add to its
competitive strength. To the extent that the merger improves the combined
company's ability to attract key personnel and leads to improved operating
results, it will further strengthen its ability to compete effectively.

IMMERSION BOARD CONSIDERATIONS

     The Immersion board of directors decided to approve the merger and the
merger agreement after consulting with Immersion's management and its legal and
accounting advisors. In reaching its decision, the board considered the
anticipated mutual benefits of the merger described above as well as various
other factors, including the following:

     Access to HT's Intellectual Property. HT has developed an important
portfolio of intellectual property in haptics (force feedback) that the
Immersion board of directors believes may prove valuable to Immersion. Some of
the HT intellectual property may have application to Immersion's business in
fields beyond medical procedure simulation.

     Strategic Relationships. HT has strong strategic relationships with
Medtronic and other major companies in the healthcare industry. Immersion and HT
believe that these relationships will be advantageous to the combined company
and may facilitate an expansion of the combined company's relationships with
healthcare companies.

     Enhanced Market Access. While Immersion currently participates in the
medical simulation products market to a limited degree, the Immersion board of
directors believes that the merger will provide Immersion greater access to the
medical procedure simulation market which currently represents an important high
end market for haptic technologies.

     Financial Condition and Operating Results. The Immersion board considered
the financial condition and operating results of Immersion and HT on both
historical and prospective bases. The anticipated increase in the proportion of
HT's revenues that will be derived from higher profit margin software is
expected to improve HT's operating results.

     Pooling-of-Interests. Immersion and HT expect that the merger will be
treated under the pooling-of-interests-method of accounting for business
combinations. Under the pooling-of-interests accounting method, which treats the
companies as if they had been combined for all historical periods, Immersion
would not be required to record a substantial amount of the merger consideration
as goodwill to be amortized against future operations.

     Terms of the Merger Agreement and Related Agreement. The Immersion board of
directors considered management's description of the terms of the merger
agreement and related agreements, which management believes to be reasonable
from Immersion's viewpoint. The board noted that key employees of HT would
execute noncompetition agreements.

                                       50
<PAGE>   58

     The Immersion board of directors also considered several potential
disadvantages to the merger, including the following:

     - The risk that some or all of the expected benefits the merger described
       above may not be achieved in spite of the best efforts of the parties.

     - The fact that HT, which is an early stage development company competing
       in an emerging market, has substantial working capital requirements and a
       history of operating losses.

     - The risk that Immersion may be unable to retain some of the key technical
       and management personnel of HT.

     - The risk that the market price of Immersion common stock might be
       adversely affected by the public announcement of the merger.

     - The possibly dilutive effect of the Immersion common stock to be issued
       in the merger.

     In view of the variety of factors considered in connection with its
evaluation of the merger, the Immersion board of directors did not find it
possible to and did not quantify or otherwise assign relative weights to the
specific factors considered in reaching its determination.

HT BOARD CONSIDERATIONS

     The HT board of directors decided to recommend the merger for approval by
the stockholders of HT after consultation with HT management and its financial,
legal and accounting advisors. In reaching its decision, the HT board of
directors considered a number of factors, including the following:

     Need for funds and access to capital. HT has continually struggled to raise
sufficient capital to pursue its research and development activities and fund
its operations. The merger will provide HT with access to Immersion's cash
reserves to fund its current operations. Also, the HT board of directors
believes that, as a public company, the combined company will have a greater
ability than HT alone to access the capital markets, which would enhance HT's
ability to obtain the capital necessary for its operations, product development
and continued growth. The HT board of directors believes that, if the merger is
not completed, HT will require a near-term investment of additional capital.

     Enhanced development capacity and expansion of product and customer
base. The HT board of directors believes that the combination of Immersion and
HT will result in a combined company with an enhanced development capability and
expanded product and customer base. Both HT and Immersion have developed highly
qualified engineering staffs and significant research and development
capabilities. The HT board of directors believes that by combining the two
engineering departments, they will complement each other and enhance the overall
scope of expertise beyond the capabilities of the individual companies. The HT
board of directors also took into account Immersion's production capabilities,
which complement HT's development capabilities. The HT board of directors
believes that, as a result of enhanced development capability and other factors,
the combined company will be able to develop more innovative technology and
offer more products to Immersion's and HT's markets, which should result in a
greater increase in overall sales than that which would be achieved if the
companies operated independently.

     Optimized stockholder value and liquidity. The HT board of directors
considered the fact that HT stockholders will receive publicly traded securities
that are quoted on the Nasdaq National Market. By contrast, there is no way to
readily determine the value of HT stock as there is no active market in HT
securities. Although the HT board of directors has considered having HT become a
public company at some time in the future, the ability of HT to complete an
initial public offering in the near term is doubtful. The HT board of directors
believes that the conversion of HT stock into publicly traded Immersion stock
with readily determinable market values substantially enhances stockholder value
and lowers the risk that HT stockholders will not achieve liquidity and value
for their investments in HT. This conclusion was further supported by the fact
that HT stockholders would receive registered Immersion stock, which would
provide them with enhanced liquidity.

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<PAGE>   59

     Merger Consideration. The HT board of directors believes that the merger
agreement provides for a fair method of combining the equities of the two
companies and that the consideration to be paid to HT stockholders is fair to
the HT stockholders. In reaching this conclusion, the HT board of directors
relied in part upon its own knowledge of HT's financial condition, results of
operations, business, technologies, services and products, on both a historical
and prospective basis, as well as the current industry, economic and market
conditions. The HT board of directors also considered the advice of its
financial advisor, Janney Montgomery Scott Inc. Although Janney Montgomery Scott
will not be asked to furnish a formal written fairness opinion, it did discuss
with the HT board of directors at its July 26, 2000 meeting the terms of the
merger and the merger consideration and Janney Montgomery Scott's analysis of
the relative values of the companies. Janney Montgomery Scott advised the HT
board of directors orally that the merger consideration was fair to the
stockholders of HT from a financial point of view and explained that they had
based their conclusion on analyses of comparable companies, comparable cash
flows and projected discounted cash flows.

     In view of the variety of factors considered by the HT board of directors
in connection with its evaluation of the merger, the HT board of directors did
not find it practicable to and did not quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination.

HT BOARD OF DIRECTORS RECOMMENDATIONS RELATING TO THE MERGER

     The HT board of directors has unanimously approved the merger and the
merger agreement, and has determined that the merger is fair to, and in the best
interests of, both HT and its stockholders. After careful consideration, the HT
board of directors recommends that HT stockholders vote for approval of the
merger and the merger agreement by executing and returning the HT proxy card.

INTERESTS OF SOME HT DIRECTORS, OFFICERS AND STOCKHOLDERS IN THE MERGER

     Some officers and directors of HT have personal interests in the merger
that are different from, or in addition to, the interests of most HT
stockholders. These personal interests include:

     - The agreement of Immersion to assume all of the outstanding options
       granted under HT's stock option plans and exchange them for options to
       purchase Immersion common stock. The new options will be exercisable on
       the same terms and conditions as currently provided in the HT options,
       except for adjustments, based on the exchange ratio, to the numbers of
       shares subject to options and the exercise prices;

     - The agreement of Immersion to adopt a stock option plan to grant options
       to purchase Immersion common stock exclusively to HT employees, including
       current HT officers. The option plan will provide for the grant of up to
       550,000 shares of Immersion common stock plus an additional number of
       shares to cover shares subject to the HT options that are vested or
       exercisable at the effective time and assumed by Immersion. In addition
       to the grant of options to replace the assumed HT options, the new plan
       will provide for the grant of new options to HT employees; and

     - The agreement of Immersion to continue to honor Mr. Hilton's existing
       employment agreement with HT.

     As a result of the personal interests described above, several HT officers
and directors may have a conflict of interest that could have influenced their
support of the merger.

PRIOR RELATIONSHIP OF IMMERSION AND HT

     Immersion and HT have worked together since 1994. Prior to 1998, Immersion
developed and manufactured several custom medical products to meet HT
specifications, including:

     - Virtual Scalpel;

     - Virtual Laparoscopic Interface;

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<PAGE>   60

     - IV Needle Insertion Simulator;

     - Virtual Ureteroscope; and

     - Catheter Simulator.

     In June 1999, Immersion and HT entered into an Intellectual Property
License Agreement. Under the terms of the agreement, Immersion granted to HT a
non-exclusive license for Immersion intellectual property for medical simulation
interface devices, in exchange for a per unit royalty fee. Since that date, HT
has been working to integrate Immersion TouchSense technology into HT's three
lines of simulation products. During the six months ended June 30, 2000 and the
year ended December 31, 1999, HT paid $15,000 and $21,000 respectively in
royalties to Immersion under the license.

     In the letter of intent between Immersion and HT with respect to the
merger, Immersion agreed to lend HT $2 million to fund HT's operations.
Immersion agreed to advance funds in three installments of $750,000, $500,000
and $750,000 as various conditions specified in the letter of intent are
satisfied. Immersion and HT believe that interest rate and other terms of the
loan are equivalent to interest rate and the terms that HT could have obtained
in the market. Immersion has advanced the entire $2 million to HT.

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<PAGE>   61

             TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS

     The merger agreement and the forms of several related agreements are
attached to this proxy statement/prospectus as appendices. Immersion and HT
encourage you to read the merger agreement and the related agreements in their
entirety. They are the legal documents that govern the merger and related
transactions. If there is a discrepancy between the terms of the legal documents
and the following summary, the legal documents will control.

GENERAL

     On July 31, 2000, Immersion, its wholly owned subsidiary, HT Merger, Inc.,
HT and Gregory L. Merril entered into the merger agreement attached to this
proxy statement/prospectus as Appendix A that provides for the merger of HT
Merger into HT. HT will be the surviving corporation and will become a
wholly-owned subsidiary of Immersion at the effective time of the merger. The
merger agreement is attached to this proxy statement/prospectus as Appendix A.
After the merger, the articles of incorporation and the bylaws of the surviving
corporation will be the same as the articles of incorporation and bylaws of HT
Merger. The name of the surviving corporation will be "HT Medical Systems, Inc."

     If the merger is completed, holders of HT common stock and preferred stock
will no longer hold any direct interest in HT other than through their interest
in shares of Immersion common stock. They will become stockholders of Immersion
and will have only an indirect interest in HT as a subsidiary of Immersion.
Their rights will be governed by Immersion's amended and restated certificate of
incorporation and bylaws and the laws of the State of Delaware. See "Comparison
of Immersion and HT Stockholder Rights" for a comparison of the rights of
stockholders of Immersion and HT.

EFFECTIVE TIME OF THE MERGER

     The merger will become effective when the articles of merger signed by HT
and HT Merger are filed with the Maryland Department of Assessments and
Taxation. The merger agreement provides that the parties will file articles of
merger on September 25, 2000 or as soon afterward as all of the conditions to
the completion of the merger have been satisfied or waived.

     There is no assurance that the conditions to the merger will be satisfied.
Also, the merger agreement may be terminated by either Immersion or HT under
various circumstances as specified in the merger agreement. Therefore, there is
no assurance as to whether or when the merger will become effective.

MERGER CONSIDERATION

     When the merger is effective, subject to the closing adjustment described
below, each outstanding share of HT common stock and preferred stock will be
converted into a fraction of a share of Immersion common stock equal to an
exchange ratio computed as provided in the merger agreement. The exchange

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<PAGE>   62

ratio is expressed as fraction. The numerator of the fraction is 1,998,433
shares of Immersion common stock. The denominator is the total of:

<TABLE>
<S>                                                           <C>
- all of the shares of HT common stock and preferred stock
  outstanding at the effective time.........................   2,507,015
- the number of shares of HT common stock subject to
  outstanding stock options, other than the Medtronic
  option, that are vested or exercisable at the effective
  time......................................................     538,538*
- the number of shares of HT common stock and preferred
  stock subject to outstanding warrants.....................     128,046
- the number of shares of HT preferred stock subject to the
  convertible note held by Medtronic........................     437,500
- the number of shares of HT preferred stock subject to the
  Medtronic option..........................................     250,000
  Total.....................................................   3,861,099*
</TABLE>

-------------------------
* Estimated based on the number of options expected to be vested or exercisable
  at the effective time of the merger

     Based on the estimate indicated in the table above, Immersion and HT
anticipate that the exchange ratio will be approximately 0.5176. Subject to the
closing adjustment, each holder of HT common stock and preferred stock will have
the right to receive a number of whole shares of Immersion common stock equal to
the number of shares of HT common stock and preferred stock held by the
stockholder at the effective time of the merger multiplied by the exchange
ratio. Each HT stockholder will also be entitled to receive cash for any
fraction of a share of Immersion common stock based on a value of $25.52 per
share of Immersion common stock.

     The actual exchange ratio could be higher or lower than 0.5176 depending on
whether fewer or more HT options than Immersion anticipates are actually vested
or exercisable at the effective time. The exercise of options or warrants or
conversion of the convertible note before the effective time will not affect the
exchange ratio because any increase in the outstanding HT stock resulting from
the exercise or conversion will be offset by a corresponding decrease in the
shares subject to options, warrants or the convertible note.

     Assuming that no options, warrants or the convertible note are exercised or
converted before the effective time and that the number of HT shares subject to
vested or exercisable options is as estimated, holders of outstanding shares of
HT common stock and preferred stock will be entitled to receive, subject to the
closing adjustment, a total of approximately 1.298 million shares of Immersion
common stock. Ten percent of the Immersion common stock issued in the merger
will be placed in escrow, and the final disposition of the escrowed shares will
be subject to the terms of the escrow arrangements, as described below.

     The value that HT stockholders will receive in the merger will depend on
the market price of Immersion common stock at the effective time, the closing
adjustment and the final disposition of escrowed shares. There is no provision
in the merger agreement to adjust the merger consideration based on changes in
the market price of HT common stock. In addition, HT does not have a right to
terminate the merger agreement because the market price of Immersion common
stock declines. The value at the effective time of the Immersion common stock to
be received by holders of HT preferred stock may be less than the liquidation
preference of their HT preferred stock. YOU ARE ADVISED TO OBTAIN RECENT MARKET
QUOTATIONS FOR IMMERSION COMMON STOCK. IMMERSION CANNOT PREDICT THE MARKET PRICE
OF ITS COMMON STOCK AT THE EFFECTIVE TIME OF THE MERGER OR THE MARKET PRICE OF
ITS COMMON STOCK AT ANY TIME AFTER THE MERGER IS COMPLETED.

HT OPTIONS AND WARRANTS AND THE CONVERTIBLE NOTE

Options. Each outstanding option to purchase HT common stock granted under HT's
1995 B Employee Stock Option Plan and 1998 Stock Option Plan will be assumed by
Immersion and will be exchanged for an option to acquire shares of Immersion
common stock on the same terms and conditions, except that the number of shares
subject to the option will be determined by multiplying the number of shares
presently subject to the HT option by the exchange ratio at which the HT common
stock and preferred stock is to be converted into shares of Immersion common
stock in the merger, and the new exercise price will be

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<PAGE>   63

determined by dividing the exercise price of the HT option by the exchange
ratio. Based on the number of HT options that are expected to be outstanding at
the effective time and the estimated exchange ratio of 0.5176, the HT options
will be exchanged for options to purchase approximately 316,697 shares of
Immersion common stock, assuming that none are exercised and none are terminated
before the effective time.

Warrants. Each outstanding warrant to purchase HT common stock and preferred
stock will be treated after the merger as a warrant to purchase shares of
Immersion common stock on the same terms and conditions, except that the number
of shares subject to the warrant shall be adjusted by multiplying the number of
shares presently subject to the warrant by the exchange ratio at which the HT
common stock and preferred stock is to be converted into shares of Immersion
common stock in the merger and the new exercise price will be determined by
dividing the exercise price of the HT warrant by the exchange ratio. Based on
the expected exchange ratio of 0.5176, the outstanding HT warrants will
represent the right to purchase approximately 66,277 shares of Immersion common
stock, assuming that none of the warrants are exercised before the effective
time.

Convertible Note and Medtronic Option. Medtronic, Inc. holds an HT promissory
note convertible into 437,500 shares of HT preferred stock and an option to
purchase 250,000 shares of HT preferred stock. The convertible note and the
Medtronic option will be treated after the merger as a convertible note and an
option to purchase shares of Immersion common stock upon the same terms and
conditions, except that the number of shares subject to the convertible note and
option shall be adjusted by multiplying the number of shares presently subject
to the convertible note and option and the conversion and exercise prices by the
exchange ratio by which the HT common stock and preferred stock is to be
converted into shares of Immersion common stock in the merger and by dividing
the conversion or exercise price for such shares of HT common stock by the
exchange ratio to determine the new conversion or exercise price. Based on the
expected exchange ratio of 0.5176, the convertible note and option will
represent the right to purchase approximately 226,450 and 129,400 shares of
Immersion common stock, assuming that neither is exercised or converted before
the effective time.

CLOSING ADJUSTMENT TO THE MERGER CONSIDERATION

     Subject to the assumptions described above and the escrow arrangements
described below, HT stockholders are expected to receive approximately 1.298
million shares of Immersion common stock in the merger, or approximately 0.5176
share of Immersion common stock for each outstanding share of HT common stock or
preferred stock. The aggregate number of shares of Immersion common stock that
HT stockholders will receive at the closing of the merger will be reduced if
HT's merger expenses exceed $240,000. The number of shares of Immersion common
stock by which the merger consideration will be reduced will be the amount by
which HT's merger expenses exceed $240,000 divided by $25.52, which was the
average closing stock price of a share of Immersion common stock for the 10
trading days ended two days before the merger agreement was signed on July 31,
2000. For example, if the actual HT merger expenses were $300,000, the reduction
in the number of shares of Immersion common stock issued in the merger would be
2,351 -- $60,000 excess merger expenses divided by $25.52. The number of shares
of Immersion common stock that each HT stockholder would receive will be reduced
pro rata from what they would otherwise have received.

ESCROW ARRANGEMENTS AND INDEMNIFICATION AND JOINDER AGREEMENT

Escrow. At the effective time, Immersion will deposit in escrow with U.S. Trust
Company, NA, the escrow agent, 10% of the shares of Immersion common stock
issued in the merger. The deposit of the escrowed shares will reduce by 10% the
number of shares that each HT stockholder would otherwise be entitled to receive
at the effective time. The escrowed shares will be held subject to the terms of
the escrow agreement. A copy of the escrow agreement is attached to this proxy
statement/prospectus as Appendix B. Some or all of the escrowed shares may be
returned to Immersion to compensate it for all losses incurred by Immersion
caused by the inaccuracy or breach of any of HT's representations,

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<PAGE>   64

warranties and covenants in the merger agreement if the total losses incurred by
Immersion exceed $50,000. The number of escrowed shares of Immersion common
stock to be returned to Immersion to compensate it for any such losses will be
determined by dividing the amount of the indemnifiable loss by $25.52, the
average closing price of Immersion common stock for the 10 trading days ended
two days before the merger agreement was signed on July 31, 2000.

     The merger agreement provides that Immersion may make indemnification
claims at any time until it issues its audited financial statements for the year
ended December 31, 2000 or until March 31, 2001, whichever is sooner. The escrow
agreement provides that the escrow agent will distribute the escrowed stock that
has not been paid to Immersion as compensation for losses to HT stockholders 30
days after the last date on which Immersion may make indemnification claims,
provided that any escrowed shares that may be required to compensate Immersion
for claims that are unresolved at that date will remain in escrow until the
resolution of all claims that were timely made by Immersion.

     The duties of the escrow agent include safeguarding the escrowed shares
during the escrow period and the delivery to HT stockholders at the expiration
of the escrow period of all of the escrowed shares in excess of any shares
necessary to cover claims made by Immersion on a timely basis. Immersion will
pay the escrow agent's fees and expenses up to $25,000. Any fees and expenses in
excess of $25,000 will be paid half by Immersion and half by the representative
with the representative's share being paid from the escrow fund. Unless and
until Immersion asserts a claim under the escrow agreement, the representative
will instruct the escrow agent as to the manner of voting the escrowed shares.

The Representative. The merger agreement provides that, after the effective
time, Mr. Merril will act on behalf of the HT stockholders as their
representative in connection with the escrow arrangements. The representative is
the only person authorized to take any action on behalf of the HT stockholders
with respect to the indemnification provisions in the merger agreement, the
indemnification and joinder agreement and the escrow agreement. The HT
stockholders will be bound by any action taken by the representative, who will
have full authority, among other things, to settle any dispute relating to the
merger agreement or the escrow agreement. The representative will not have any
liability to the HT stockholders for any actions taken in good faith, except in
the case of his gross negligence, recklessness or willful misconduct. Any
actions by the representative relating to the escrow arrangements under the
terms of the escrow agreement will be the act of HT stockholders, and the escrow
agent and Immersion may rely on any act or decision of the representative as
being final and binding on HT stockholders, the escrow agent and Immersion.

Indemnification and Joinder Agreement. Each of the HT stockholders will be asked
to sign the indemnification and joinder agreement in which the stockholders
agree to join in and be bound by the indemnification provisions of the merger
agreement and agree to the appointment of the representative as the
representative of the stockholders. The indemnification and joinder agreement is
attached as Appendix C to this proxy statement/prospectus. It is a condition to
the closing of the merger that at least 97% of the HT stockholders sign the
indemnification and joinder agreement. The merger agreement provides that the
obligation of the HT stockholders to indemnify Immersion is limited to the
number of escrowed shares allocable to each HT stockholder and that they will
have no additional liability in the absence of fraud. In addition to agreeing to
the appointment of the representative, by signing the indemnification and
joinder agreement, the HT stockholders appoint the representative as their
attorney-in-fact and agent for service of process for all matters related to the
indemnification and escrow arrangements.

EXCHANGE OF HT STOCK CERTIFICATES

     Promptly after the effective time, Immersion's exchange agent will mail to
each HT stockholder of record a letter of transmittal with instructions to be
used by the stockholder in exchanging certificates which, prior to the merger,
represented shares of HT common stock and preferred stock for certificates

                                       57
<PAGE>   65

representing Immersion common stock. After the effective time, there will be no
further registration of transfers of HT stock on the stock transfer books of HT.

     Upon the surrender of an HT stock certificate to the exchange agent
together with a duly executed letter of transmittal and the other documents as
may be reasonably required by the exchange agent, the exchange agent will send
the holder of the HT stock certificate a certificate representing the number of
whole shares of Immersion common stock to which the holder of HT stock is
entitled plus cash in lieu of any fractional share. Each payment of cash may be
reduced by the amount of any withholding taxes required under applicable law.

     If there has been a transfer of ownership of HT stock that was not
registered in the transfer records of HT, a certificate representing the
appropriate number of shares of Immersion common stock may be issued to a
transferee if the certificate representing the shares of HT stock is presented
to the exchange agent with a duly executed letter of transmittal, together with
all documents required to evidence and effect the transfer and evidence that any
applicable stock transfer taxes have been paid.

     Until a certificate representing HT stock has been surrendered to the
exchange agent, each HT stock certificate will be deemed at any time after the
effective time of the merger to represent only the right to receive a
certificate representing the number of shares of Immersion common stock to which
the HT stockholder is entitled under the merger agreement plus cash in lieu of
fractional shares.

THE MERGER AGREEMENT

Representations, Warranties and Covenants. Immersion and HT made representations
and warranties in the merger agreement relating, among other things, to:

As to Immersion and HT

     - The organization of Immersion, HT and HT's subsidiary and matters of
       corporate authority;

     - The authorization, execution, delivery, performance and enforceability of
       the merger agreement and related matters;

     - The capital structures of Immersion, HT and of HT Merger;

     - The absence of conflicts under charter documents or bylaws, required
       consents or approvals and violations of any instruments or law; and

     - The financial statements of Immersion and HT.

As to HT

     - The absence of specified material adverse changes, material litigation or
       material undisclosed liabilities;

     - Matters related to inventories, products and accounts receivable;

     - Tax, labor and employee benefit matters;

     - Title to properties and intellectual property matters;

     - Compliance with applicable law, including environmental laws, and
       possession of required licenses and permits; and

     - The accuracy of information supplied for use in the preparation of this
       proxy statement/prospectus and the related registration statement.

As to Immersion

     - Documents filed by Immersion with the SEC and the accuracy of the
       information contained therein.

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<PAGE>   66

     HT has covenanted that until the consummation of the merger or the
termination of the merger agreement, it will, among other things, maintain its
business, conduct its operations in the ordinary course, not take actions
outside the ordinary course without Immersion's consent, provide Immersion with
reasonable access to its financial, operating and other information, and use all
reasonable efforts to consummate the merger. HT has also made covenants
regarding amendments to agreements with third persons.

     Immersion has covenanted to extend board observer rights to Mr. Merril,
HT's chairman, and to use all reasonable efforts to register with the SEC the
Immersion common stock to be issued in the merger.

Conditions to the Completion of the Merger. The obligations of Immersion and HT
to consummate the merger are subject to the satisfaction or waiver of each of
the following conditions:

     - The approval of the merger by the required votes of the stockholders of
       HT;

     - The accuracy in all material respects on the closing date of the merger
       of the representations and warranties made by the other party;

     - The performance in all material respects by the other party of its
       covenants;

     - The receipt by Immersion of specified consents and executed agreements,
       including the escrow agreement and indemnification and joinder agreement
       signed by holders of at least 97% of HT common stock and preferred stock;

     - The delivery of specified ancillary documents and legal opinions;

     - The resignation from office of those HT officers and directors specified
       by Immersion;

     - Immersion's registration statements filed with the SEC shall be effective
       and shall not be the subject of any stop orders or stop order proceeding;

     - There shall be no order, decree or injunction of any court or agency that
       would prevent or delay the merger;

     - Immersion shall have received advice from its and HT's auditors that
       pooling-of-interests accounting for the merger is appropriate;

     - The absence of any material adverse change in the business, operations,
       affairs, properties, assets or condition of the other party;

     - The holders of no more than three percent of the HT common stock and
       preferred stock shall be eligible to demand payment in cash for their
       shares; and

     - There shall have been no material adverse change affecting HT.

An additional condition that HT and Medtronic, Inc. amend the Medtronic
agreement in a manner satisfactory to Immersion has been satisfied.

Limitation on Negotiations. The merger agreement provides that HT shall not
solicit or encourage the making of any acquisition proposal, take any action
that could reasonably be expected to lead to an acquisition proposal, furnish
any non-public or confidential information in connection with any acquisition
proposal, engage in any discussions or negotiations with any person with respect
to any acquisition proposal or approve or enter into any agreement or
understanding with respect to any acquisition proposal. The merger agreement
also requires HT to immediately notify Immersion of any offer or proposal to
enter into negotiations relating to an acquisition proposal. For purposes of the
merger agreement, "acquisition proposal" means any offer or proposal regarding:

     - Any merger, consolidation, share exchange, business combination,
       securities issuance or acquisition or tender or exchange offer in which
       HT is involved, and any person or "group" defined under Section 13(d) of
       the Securities Exchange Act of 1934 and the rules and regulations
       thereunder

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<PAGE>   67

       acquires HT or more than 50% of its business or beneficial or record
       ownership of securities representing more than 50% of the outstanding
       securities of any class of HT's voting stock; or

     - Any sale, lease, exchange, transfer, license (in each event other than in
       the ordinary course of business) or disposition of more than 50% of the
       net assets of HT.

Termination. The merger agreement may be terminated at any time before the
effective time of the merger as follows:

     - By Immersion or HT if a breach of any material provision of the merger
       agreement has been committed by the other party and is not cured within
       seven business days of notice to the breaching party;

     - By mutual consent of Immersion and HT; or

     - By Immersion or HT if the merger has not become effective on or before
       October 27, 2000 other than because the party seeking to terminate made
       an untrue representation or warranty or has not complied fully with its
       obligations under the merger agreement.

     If the merger agreement is terminated as provided above, the parties'
obligations, other than those related to payment of expenses, confidentiality,
indemnification and various miscellaneous provisions, will terminate. If,
however, the agreement is terminated by a party because of an untrue
representation or warranty of the other party or failure of the other party to
comply with its obligations, the rights of the terminating party to pursue legal
remedies will survive the termination.

Waiver and Amendment. At any time before the effective time of the merger,
either Immersion or HT may:

     - Extend the time for the performance of any of the obligations or other
       acts of the other party under the merger agreement; or

     - Waive compliance by the other with any of the agreements or conditions
       contained in the merger agreement.

Fees and Expenses. Immersion and HT will each pay their own fees and expenses in
connection with the merger, whether or not the merger is completed. However, any
fees and expenses in excess of $240,000 will be deducted from the merger
consideration otherwise payable to the HT stockholders. The reduction in the
number of shares of Immersion common stock received in the merger will equal the
dollar amount by which the merger expenses exceed $240,000 divided by $25.52,
which was the average closing price of a share of Immersion common stock for the
last 10 trading days ending two days before July 31, 2000, the date the merger
agreement was signed.

VOTING AGREEMENTS

     At the same time as or shortly after the execution of the merger agreement,
several HT stockholders entered into voting agreements with Immersion, the form
of which is attached as Appendix D to this proxy statement/prospectus. Based on
the number of shares of HT common and preferred stock outstanding on September
6, 2000, the HT stockholders that signed voting agreements beneficially own,
excluding shares subject to options to purchase HT common stock, 58% of the
outstanding HT common stock and preferred stock.

     The voting agreements provide, among other things, for the following:

     - The agreement on the part of the HT stockholders to vote all shares of HT
       stock held by them at any stockholders' meeting and in every written
       consent solicited in favor of approval of the merger and the merger
       agreement and to not take any action inconsistent with their obligations
       under the voting agreements;

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<PAGE>   68

     - The grant to Immersion by the HT stockholders of irrevocable proxies to
       vote the shares of HT stock in favor of the merger agreement and the
       merger;

     - Some representations by the HT stockholders relating to ownership of
       their shares of HT stock and authority to execute the voting agreement
       and to deliver the proxy; and

     - The provision of any necessary consents or waivers required to complete
       the merger.

The voting agreements terminate upon the earlier to occur of the effective date
of the merger or the date the merger agreement is terminated. Each of the
persons who signed a voting agreement is a director, officer or holder of more
than five percent of the outstanding HT stock.

EMPLOYMENT AGREEMENT

     Immersion has agreed that it will cause HT to continue to honor the
existing employment agreement between HT and Mr. Hilton, HT's chief executive
officer. The agreement, which the parties entered into on September 22, 1999,
provides for an initial term of one year and is automatically renewed for
additional one year terms unless one party notifies the other, upon which
notification the agreement will terminate at the end of its current term.

NONCOMPETITION AGREEMENTS

     Messrs. Merril, Hilton, Stacey and Cunningham, all of whom are officers of
HT, and two other HT employees will execute two-year noncompetition agreements
with Immersion at the closing of the merger. The forms of the noncompetition
agreements are attached as Appendices E and F to this proxy statement/
prospectus. The terms of the noncompetition agreements restrict the employees
from disclosing any confidential information of Immersion and HT and prohibit
the employees from engaging in activities that are similar to the business of HT
or holding any equity interest in or lending money to any person or entity
engaged in a business similar to that of Immersion or HT.

ANTICIPATED ACCOUNTING TREATMENT

     It is expected that the merger will be accounted for under the
pooling-of-interests method of accounting for business combinations in
accordance with generally accepted accounting principles. Under this method of
accounting, the assets and liabilities of HT will be carried on the combined
company's books at their current book values, and none of the merger
consideration will be allocated to goodwill.

AFFILIATE AGREEMENTS

     Gregory L. Merril, Jonathan R. Merril, Donald M. Spero, Stephen B. Schuler,
Rodney G. Hilton and Jill N. Whitley will enter into affiliate agreements with
Immersion at or before the closing date of the merger, the form of which is
attached as Appendix G to this proxy statement/prospectus. The agreements
provide restrictions on the transfer of the HT stock held by the signing HT
stockholders as well as the Immersion common stock received by the signing HT
stockholders in the merger. Based on an estimated exchange ratio of 0.5176
shares of Immersion common stock per share of HT stock, Messrs. Gregory L.
Merril, Jonathan R. Merril, Spero, Schuler and Hilton and Ms. Whitley will hold
an aggregate of approximately 749,940 shares or four percent of the outstanding
Immersion common stock following the merger.

     The affiliate agreements prohibit the transfer of any securities of HT that
the signing stockholder beneficially owns during the 30-day period prior to the
effective time of the merger. The agreements also prohibit the transfer of any
securities of HT or Immersion, including options, owned by the signing
stockholder or obtained pursuant to the merger by the signing stockholder
through the time at which Immersion publicly releases a financial report
including the combined sales and net income of Immersion and HT covering a
period of at least 30 days of combined operations following the effective time
of the merger. The restrictions on transfer will lapse when Immersion releases
the report.

                                       61
<PAGE>   69

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

     The following is a summary of the material United States federal income tax
consequences of the merger to the HT stockholders. The summary does not address
the tax consequences of any related transactions. The summary is based on
current provisions of the Internal Revenue Code, current Treasury Regulations
thereunder, published administrative rulings and court decisions, all of which
are subject to change. Any such change, which may or may not be retroactive,
could alter the tax consequences summarized below.

     The following summary does not deal with all United States federal income
tax consequences that may be relevant to particular HT stockholders, such as
those who are:

     - banks;

     - insurance companies;

     - tax-exempt organizations;

     - dealers in securities;

     - foreign persons;

     - persons who do not hold their HT common or preferred stock as capital
       assets within the meaning of Section 1221 of the Internal Revenue Code;

     - persons who acquired their shares in connection with stock option or
       stock purchase plans or in other compensatory transactions;

     - persons subject to the alternative minimum tax provisions of the Internal
       Revenue Code or persons who hold their shares as part of a hedging,
       straddle, conversion or other risk reduction or constructive sale
       transaction; or

     - objecting HT stockholders who exercise appraisal rights with respect to
       the merger.

In addition, the following summary does not address the tax consequences of the
merger under foreign, state or local tax laws or the tax consequences of any
other transactions completed before, after or concurrently with the merger,
whether or not those transactions are in connection with the merger.

     HT STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE MERGER TO THEM IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES.

     Subject to the limitations and qualifications referred to in this summary,
the merger will be a "reorganization" within the meaning of Section 368 of the
Internal Revenue Code. Immersion has received a tax opinion from its counsel,
Heller Ehrman White & McAuliffe LLP, and HT has received a tax opinion from its
counsel, Duane, Morris & Heckscher LLP, each dated September 6, 2000, that the
statements in this summary, insofar as they purport to describe federal income
tax laws of the United States or legal conclusions therefrom, fairly present in
all material respects the information set forth. Such tax opinions are based on
certain assumptions and qualifications and on the truth and accuracy, as of the
date of the opinions, of certain representations of Immersion, HT Merger and HT
regarding factual matters as of the date of the opinions and as of the effective
time of the merger. Such representations include representations in certificates
delivered to counsel by the respective managements of Immersion, HT Merger and
HT on the date of the opinions. If, at the effective time of the merger, the
representations are not true and accurate or there has been a change in
applicable law, the tax opinions will have no force or effect and the merger may
not qualify as a reorganization. If the merger does not qualify as a
reorganization, the tax consequences described in the following numbered
paragraphs will not be applicable. Neither Immersion nor HT intends to ask its
counsel to reevaluate and reissue its tax opinion as of the effective time of
the merger. In any event, the tax opinions will not be binding upon the Internal
Revenue Service, and no assurance can be given that the IRS will not disagree
with the opinions.

                                       62
<PAGE>   70

Furthermore, neither Immersion nor HT intends to ask the IRS to issue a ruling
on the tax consequences of the merger.

     Assuming that the merger qualifies as a reorganization, and subject to the
limitations and qualifications referred to in this summary, the merger will
result in the following federal income tax consequences:

          (1) No gain or loss will be recognized by holders of HT stock on their
     receipt of Immersion common stock in exchange for their HT common and
     preferred stock in the merger, except with respect to gain or loss
     attributable to any cash they receive in lieu of fractional shares of
     Immersion common stock.

          (2) Cash payments received by HT stockholders in lieu of fractional
     shares of Immersion common stock will be treated as if such fractional
     shares of Immersion common stock had been issued in the merger and then
     redeemed by Immersion. An HT stockholder receiving such cash will generally
     recognize gain or loss upon such payment, equal to the difference, if any,
     between the amount of cash received and the portion of the aggregate tax
     basis of the HT stock held by the stockholder allocable to the fractional
     share. This gain or loss will be capital gain or loss. The deductibility of
     capital losses is substantially limited.

          (3) The aggregate tax basis of the Immersion common stock received in
     the merger, including the shares placed in an escrow account, will be equal
     to the tax basis of the HT shares surrendered in the merger, decreased by
     the amount of cash received in lieu of a fractional share of Immersion
     common stock and increased by the amount of gain or income recognized due
     to the receipt of such cash.

          (4) An HT stockholder's holding period for the Immersion common stock
     received in the merger, including any fractional interest in a share of
     Immersion common stock for which cash is received and the shares placed in
     an escrow account, will include the holding period of the HT stock
     surrendered in exchange.

          (5) As discussed under "Escrow Arrangements and Indemnification and
     Joinder Agreement", 10% of the shares of Immersion common stock issued in
     the merger will be placed in an escrow account at closing. These shares
     will be treated as issued to and beneficially owned by the HT stockholders
     on the date of the merger. Any cash dividends paid by Immersion on the
     shares held in the escrow account will be paid out, immediately following
     their receipt by the escrow agent, to the representative. Such dividends
     will be taxable to the HT stockholders as ordinary income. Some or all of
     the shares held in the escrow account may be transferred to Immersion in
     satisfaction of indemnification obligations. Under these circumstances,
     shares of Immersion common stock held in escrow which are equal in value to
     the amount of an indemnification claim will be transferred to Immersion.
     The number of shares of Immersion common stock to be returned will be based
     on the average closing price of $25.52. The return of any Immersion common
     stock will be treated as an adjustment to the amount of consideration
     issued by Immersion and received by the HT stockholders in the merger and
     will not be treated as a taxable disposition of the returned shares. The
     tax basis of any shares of Immersion common stock returned to Immersion
     will be added to the basis of the remaining shares of Immersion common
     stock received by the HT stockholders in the merger.

     A successful IRS assertion that the merger is not a reorganization within
the meaning of Section 368 of the Internal Revenue Code would result in the HT
stockholders being taxed on the Immersion common stock received in the merger.
Gain or loss would be computed based on the difference between the tax basis in
the HT shares and the fair market value, as of the effective time of the merger,
of the Immersion common stock received in the merger. In that case, a
stockholder's aggregate tax basis in the Immersion common stock received would
be equal to such stock's fair market value and the holding period for such stock
would begin the day after the merger.

     HT stockholders will be required to attach a statement to their tax returns
for the year of the merger that contains all of the facts relevant to the
nonrecognition of gain or loss upon the exchange of HT stock
                                       63
<PAGE>   71

in the merger. This statement must include the tax basis of the stockholder's HT
stock exchanged in the merger, and the number of shares and value of the
Immersion common stock and any cash in lieu of fractional shares received in the
merger.

APPRAISAL RIGHTS OF OBJECTING STOCKHOLDERS

     Each holder of shares of HT common stock and preferred stock who objects to
the merger may, under specified conditions, become entitled to receive cash
instead of Immersion common stock in the merger. The objecting stockholders must
comply with the procedural requirements of the Maryland General Corporation Law
set forth below in order to be eligible to receive such payment.

     Under the Maryland General Corporation Law, each objecting stockholder must
take the following actions:

     - The stockholder must file with HT a written objection to the merger
       either prior to or at the special stockholders' meeting;

     - The stockholder must not vote in favor of the merger in person or by
       proxy; and

     - Within 20 days after the articles of merger have been accepted for
       recording by the Maryland State Department of Assessments and Taxation,
       the objecting stockholder must demand in writing from HT, as the
       surviving corporation, payment of such stockholder's shares of common
       stock and preferred stock. The written demand must state the number and
       class of shares for which payment is demanded.

Any stockholder who fails to comply with these requirements will be bound by the
terms of the merger. Any stockholder of HT who elects to exercise these
appraisal rights must mail or send the written demand for payment to:

    Jill N. Whitley
    HT Medical Systems, Inc.
    55 West Watkins Mill Road
    Gaithersburg, Maryland 20878

     After the merger, HT, as the surviving corporation, will promptly deliver
or mail to each objecting stockholder requesting appraisal written notice of the
date of acceptance of the articles of merger for recording by the Maryland State
Department of Assessments and Taxation. HT may also send to each objecting
stockholder a written offer to pay the stockholder an amount that HT considers
to be the fair value of the shares. In such event, the written offer must be
accompanied by HT's balance sheet as of a date not more than six months before
the date of the offer and a statement of profit and loss for the twelve months
ending on the date of the balance sheet.

     Within 50 days after the acceptance of the articles of merger for
recording, any objecting stockholder who has not received payment for his or her
shares may petition a court of equity in Montgomery County, Maryland for an
appraisal to determine the fair value of such shares as of the date of the
special stockholders' meeting at which the stockholders voted on the merger. If
the court finds that the stockholder is entitled to appraisal of his or her
stock, the court will appoint three disinterested appraisers to determine the
fair value of such shares on terms and conditions that the court considers
proper. Within 60 days after appointment, or such longer period as directed by
the court, the appraisers are required to file with the court and mail to each
party to the proceeding the appraisers' report containing their conclusion as to
the determination of the fair value of the shares.

     Within 15 days after the filing of the report, any party may object to the
report and request a hearing. At any such hearing, the court will, upon motion
of any party, enter an order either confirming, modifying or rejecting the
report and, if confirmed or modified, enter judgment directing the time within
which payment must be made. If the appraisers' report is rejected, the court may
determine the fair value of the shares of the objecting stockholders requesting
appraisal, or the court may remit the proceeding to the same appraisers or
different appraisers on terms and conditions determined by the court.
                                       64
<PAGE>   72

     Any judgment entered in a court proceeding will include interest from the
date of the special stockholders' meeting at which the stockholders voted on the
merger. However, if HT previously provided a written offer to each objecting
stockholder to pay the fair value as described above, the court may not allow
interest to be included in the judgment if the court finds that the
stockholder's refusal to accept the written offer was arbitrary and vexatious or
not in good faith. All costs of the proceeding, excluding attorneys' fees, will
be determined by the court and will be assessed against HT, as the successor
corporation, or, under certain circumstances, against the stockholder requesting
appraisal, or both.

     At any time after the filing of a petition for appraisal, the court may
require any stockholder requesting appraisal to submit the stock certificates
representing his or her shares to the clerk of the court for notation of the
pendency of the appraisal proceedings. In order to receive payment, the
stockholder must surrender the stock certificates endorsed in blank and in
proper form for transfer.

     An objecting stockholder who demands payment for his or her shares will not
have the right to receive any dividends or distributions payable to holders of
record after the close of business on the date of the special stockholders'
meeting at which the stockholders vote on the merger and shall cease to have any
rights as a stockholder with respect to the shares except the right to receive
payment of the fair value of the shares. The stockholder's rights may be
restored only upon the following:

     - the withdrawal of the demand for payment, which must be approved by HT;

     - the failure to file a petition for appraisal within the required time
       period;

     - a determination by the court that the stockholder is not entitled to an
       appraisal; or

     - the abandonment or rescission of the merger.

     The summary above is a brief overview of the statutory procedures that must
be followed by a stockholder of HT in order to dissent from and object to the
merger and to perfect appraisal rights under the Maryland General Corporation
Law. This summary is not intended to be complete and is qualified in its
entirety by reference to Title 3, Subtitle 2, of the Maryland General
Corporation Law, a copy of which is attached hereto as Appendix H.

                                       65
<PAGE>   73

              UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
                     FINANCIAL STATEMENTS AND RELATED NOTES

     The following unaudited pro forma condensed combined consolidated financial
statements reflect adjustments to the historical consolidated balance sheets and
consolidated statements of operations of Immersion and HT to give effect to the
merger using the pooling-of-interests method of accounting for business
combinations.

     The unaudited pro forma condensed combined consolidated statements of
operations for the six months ended June 30, 2000 and for the years ended
December 31, 1999 and 1998 assume the merger was effected on January 1, 1998.
Immersion's consolidated statements of operations for the six months ended June
30, 2000 and the years ended December 31, 1999 and 1998 have been combined with
HT's consolidated statements of operations for the six months ended May 31, 2000
and the years ended May 31, 2000 and 1999 respectively. The presentation has the
effect of including HT's results of operations for the six month period ended
May 31, 2000 in the unaudited pro forma condensed combined consolidated
statement of operations for both the year ended December 31, 1999 and the six
months ended June 30, 2000.

     The unaudited pro forma condensed combined consolidated balance sheet at
June 30, 2000 reflects the Immersion June 30, 2000 consolidated balance sheet
combined with the HT May 31, 2000 consolidated balance sheet.

     Immersion and HT estimate that they will incur direct transaction costs of
approximately $1,750,000 in connection with the merger. These direct transaction
costs will be charged to operations upon consummation of the merger. In
addition, it is expected that following the merger, the combined company will
incur additional charges to operations, which are not currently estimable, to
reflect costs associated with integrating the two companies.

     The pro forma adjustments and the resulting unaudited pro forma condensed
combined consolidated financial statements are based upon available information
and certain assumptions that Immersion and HT believe are reasonable under the
circumstances. The unaudited pro forma condensed combined consolidated financial
information should be read in conjunction with the historical consolidated
financial statements and notes to the consolidated financial statements of
Immersion and HT and the Management's Discussion and Analysis of Financial
Condition and Results of Operations of Immersion and HT and other financial
information which are included elsewhere in this proxy statement/prospectus.

                                       66
<PAGE>   74

       UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
                              AS OF JUNE 30, 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          ADJUSTMENTS
                                                                              FOR          PRO FORMA
                                             IMMERSION(1)     HT(2)       THE MERGER       COMBINED
                                             ------------    -------    ---------------    ---------
<S>                                          <C>             <C>        <C>                <C>
ASSETS
Current assets:
  Cash and cash equivalents................    $ 22,839      $    79        $              $ 22,918
  Short-term investments...................      14,886           --                         14,886
  Accounts receivable......................       1,716          298                          2,014
  Inventories..............................         855          289                          1,144
  Prepaids and other current assets........       2,401(4)       103                          2,504
                                               --------      -------        -------        --------
     Total current assets..................      42,697          769                         43,466
Property and equipment, net................       2,435          725                          3,160
Purchased intangibles and other assets,
  net......................................       9,596           55                          9,651
Other investments..........................       6,500           --                          6,500
                                               --------      -------        -------        --------
     Total assets..........................    $ 61,228      $ 1,549        $              $ 62,777
                                               ========      =======        =======        ========
LIABILITIES AND STOCKHOLDERS' EQUITY
  (DEFICIT)
Current Liabilities:
  Accounts payable and accrued
     liabilities...........................    $  3,236      $   920        $              $  4,156
  Current portion of long-term debt........          --          110                            110
  Deferred revenue and customer advances...         372          381                            753
                                               --------      -------        -------        --------
     Total current liabilities.............       3,608        1,411                          5,019
Long-term debt.............................          --        3,682                          3,682
Other long-term liabilities................          --           39                             39
                                               --------      -------        -------        --------
     Total liabilities.....................       3,608        5,132                          8,740
Series A convertible preferred stock with a
  put option...............................          --          200           (200)             --
STOCKHOLDERS' EQUITY (DEFICIT)
  Common stock.............................      77,036           22          5,597(3)       82,655
  Series A convertible preferred stock.....          --            2             (2)(3b)         --
  Additional paid-in capital...............          --        6,522         (6,522)(3a)         --
  Warrants.................................         831           --          1,127(3a)       1,958
  Deferred stock compensation..............      (6,020)        (999)                        (7,019)
  Accumulated other comprehensive loss.....         (12)          --                            (12)
  Note receivable from stockholder.........         (17)          --                            (17)
  Accumulated deficit......................     (14,198)      (9,330)                       (23,528)
                                               --------      -------        -------        --------
     Total stockholders' equity
       (deficit)...........................      57,620       (3,783)           200          54,037
                                               --------      -------        -------        --------
  Total liabilities and stockholders'
     equity................................    $ 61,228      $ 1,549        $    --        $ 62,777
                                               ========      =======        =======        ========
</TABLE>

-------------------------
(1) Represents historical consolidated balance sheet of Immersion as of June 30,
    2000.

(2) Represents historical consolidated balance sheet of HT as of May 31, 2000.

(3) Represents adjustments to reflect the following

   (a) the reclassification of additional paid-in capital of HT to conform to
       Immersion's presentation.

   (b) the issuance of approximately 124,279 shares of Immersion common stock in
       connection with the merger upon the conversion of the outstanding shares
       of HT preferred stock based on an assumed exchange ratio of 0.5176.

(4)  Immersion's prepaids and other current assets include $750,000 advanced to
     HT during June 2000. The balance has not been eliminated due to different
     fiscal year-ends.

                                       67
<PAGE>   75

                     UNAUDITED PRO FORMA CONDENSED COMBINED
                      CONSOLIDATED STATEMENT OF OPERATIONS
                     FOR THE SIX MONTHS ENDED JUNE 30, 2000
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                            PRO FORMA     PRO FORMA
                                                IMMERSION(1)     HT(2)     ADJUSTMENTS    COMBINED
                                                ------------    -------    -----------    ---------
<S>                                             <C>             <C>        <C>            <C>
Revenues:
  Royalty revenue.............................    $ 1,866       $    --      $   (15)(4)   $ 1,851
  Product sales...............................      2,267           681                      2,948
  Development contracts and other.............        883           485                      1,368
                                                  -------       -------      -------       -------
     Total revenues...........................      5,016         1,166          (15)        6,167
                                                  -------       -------      -------       -------
Costs and expenses:
  Cost of product sales.......................      1,193           397          (15)(4)     1,575
  Cost of contract revenue....................         --           299         (299)(5)        --
  Sales and marketing.........................      3,891            --          954(6)      4,845
  Research and development....................      1,544         1,542          299(5)      3,385
  General and administrative..................      2,786         1,607         (954)(6)     3,439
  Amortization of intangibles and deferred
     stock compensation.......................      1,793            --                      1,793
  In-process research and development.........        887            --                        887
                                                  -------       -------      -------       -------
     Total costs and expenses.................     12,094         3,845          (15)       15,924
                                                  -------       -------      -------       -------
Operating loss................................     (7,078)       (2,679)          --        (9,757)
Interest and other income (expense), net......      1,451          (366)                     1,085
                                                  -------       -------      -------       -------
Net loss......................................    $(5,627)      $(3,045)     $    --       $(8,672)
                                                  =======       =======      =======       =======
Basic and diluted net loss per share..........    $ (0.35)      $ (1.24)                   $ (0.50)
                                                  =======       =======                    =======
Shares used in calculating basic and diluted
  net loss per share..........................     16,006         2,457       (1,071)(3)    17,392(3)
                                                  =======       =======      =======       =======
</TABLE>

-------------------------
(1) Represents the historical consolidated results of operations of Immersion
    for the six months ended June 30, 2000.

(2) Represents the historical consolidated results of operations of HT for the
    six months ended May 31, 2000.

(3) Gives effect to the conversion in the merger of HT common stock and
    preferred stock into Immersion common stock based on an assumed 0.5176
    exchange ratio.

(4) Represents royalty revenue derived by Immersion from HT during the six
    months ended June 30, 2000.

(5) Reclassification of HT's cost of contract revenue to conform to Immersion's
    presentation.

(6) Reclassification of HT's selling, general and administrative expenses to
    conform to Immersion's presentation.

                                       68
<PAGE>   76

                     UNAUDITED PRO FORMA CONDENSED COMBINED
                      CONSOLIDATED STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1999
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                            PRO FORMA     PRO FORMA
                                                IMMERSION(1)     HT(2)     ADJUSTMENTS    COMBINED
                                                ------------    -------    -----------    ---------
<S>                                             <C>             <C>        <C>            <C>
Revenues:
  Royalty revenue.............................    $ 2,232       $    --      $   (21)(4)   $ 2,211
  Product sales...............................      4,583         1,480                      6,063
  Development contracts and other.............      1,223         1,445                      2,668
                                                  -------       -------      -------       -------
     Total revenues...........................      8,038         2,925          (21)       10,942
                                                  -------       -------      -------       -------
Costs and expenses:
  Cost of product sales.......................      2,106           879          (21)(4)     2,964
  Cost of contract revenue....................         --           706         (706)(5)        --
  Sales and marketing.........................      1,801            --        1,746(6)      3,547
  Research and development....................      2,273         2,539          706(5)      5,518
  General and administrative..................      4,171         2,871       (1,746)(6)     5,296
  Amortization of intangibles and deferred
     stock compensation.......................      1,339            --                      1,339
  In-process research and development.........      1,190            --                      1,190
                                                  -------       -------      -------       -------
     Total costs and expenses.................     12,880         6,995          (21)       19,854
                                                  -------       -------      -------       -------
Operating loss................................     (4,842)       (4,070)                    (8,912)
Interest and other income/(expense), net......        488        (1,004)                      (516)
                                                  -------       -------      -------       -------
Net loss......................................     (4,354)       (5,074)          --        (9,428)
Redeemable convertible preferred stock
  accretion...................................          6            --                          6
                                                  -------       -------      -------       -------
Net loss applicable to common stockholders....    $(4,360)      $(5,074)     $    --       $(9,434)
                                                  =======       =======      =======       =======
Basic and diluted net loss per share..........    $ (0.66)      $ (2.33)                   $ (1.20)
                                                  =======       =======                    =======
Shares used in calculating basic and diluted
  net loss per share..........................      6,599         2,236         (983)(3)     7,852(3)
                                                  =======       =======      =======       =======
</TABLE>

-------------------------
(1) Represents the historical consolidated results of operations of Immersion
    for the year ended December 31, 1999.

(2) Represents the historical consolidated results of operations of HT for the
    year ended May 31, 2000.

(3) Gives effect to the conversion in the merger of HT common stock and
    preferred stock into Immersion common stock based on an assumed 0.5176
    exchange ratio.

(4) Represents royalty revenue derived by Immersion from HT during the year
    ended December 31, 1999.

(5) Reclassification of HT's cost of contract revenue to conform to Immersion's
    presentation.

(6) Reclassification of HT's selling, general and administrative expenses to
    conform to Immersion's presentation.

                                       69
<PAGE>   77

                     UNAUDITED PRO FORMA CONDENSED COMBINED
                      CONSOLIDATED STATEMENT OF OPERATIONS
                      FOR THE YEAR ENDED DECEMBER 31, 1998
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                            PRO FORMA     PRO FORMA
                                                IMMERSION(1)     HT(2)     ADJUSTMENTS    COMBINED
                                                ------------    -------    -----------    ---------
<S>                                             <C>             <C>        <C>            <C>
Revenues:
  Royalty revenue.............................    $   321       $    --      $             $   321
  Product sales...............................      3,725           747                      4,472
  Development contracts and other.............        975         2,935                      3,910
                                                  -------       -------      ------        -------
     Total revenues...........................      5,021         3,682                      8,703
                                                  -------       -------      ------        -------
Costs and expenses:
  Cost of product sales.......................      1,507           447                      1,954
  Cost of contract revenue....................         --         1,963      (1,963)(4)         --
  Sales and marketing.........................        656            --         956(5)       1,612
  Research and development....................      1,817         1,388       1,963(4)       5,168
  General and administrative..................      2,677         1,596        (956)(5)      3,317
  Amortization of intangibles and deferred
     stock compensation.......................        211            --                        211
                                                  -------       -------      ------        -------
     Total costs and expenses.................      6,868         5,394          --         12,262
                                                  -------       -------      ------        -------
Operating loss................................     (1,847)       (1,712)                    (3,559)
Interest and other income/(expense), net......        174          (242)                       (68)
                                                  -------       -------      ------        -------
Net loss......................................     (1,673)       (1,954)                    (3,627)
Redeemable convertible preferred stock
  accretion...................................          6            --                          6
                                                  -------       -------      ------        -------
Net loss applicable to common stockholders....    $(1,679)      $(1,954)     $   --        $(3,633)
                                                  =======       =======      ======        =======
Basic and diluted net loss per share..........    $ (0.43)      $ (0.91)                   $(0.72)
                                                  =======       =======                    =======
Shares used in calculating basic and diluted
  net loss per share..........................      3,909         2,153      (1,039)(3)      5,023(3)
                                                  =======       =======      ======        =======
</TABLE>

-------------------------
(1) Represents the historical consolidated results of operations of Immersion
    for the year ended December 31, 1998.

(2) Represents the historical results of operations of HT for the year ended May
    31, 1999.

(3) Gives effect to the conversion in the merger of HT common stock and
    preferred stock into Immersion common stock based on an assumed 0.5176
    exchange ratio.

(4) Reclassification of HT's cost of contract revenue to conform to Immersion's
    presentation.

(5) Reclassification of HT's selling, general and administrative expenses to
    conform to Immersion's presentation.

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<PAGE>   78

                               IMMERSION BUSINESS

COMPANY OVERVIEW

     Immersion develops hardware and software technologies that enable users to
interact with computers using their sense of touch. Immersion's patented
technologies, which it calls TouchSense, enable devices such as mice, joysticks,
knobs, and steering wheels to deliver tactile sensations that correspond to on-
screen events. Immersion focuses on four application areas -- consumer computer
peripherals, automotive interfaces, medical simulation products and specialized
computer peripherals for professional and industrial applications. In high
volume market areas such as consumer computer peripherals and automotive
interfaces, Immersion primarily licenses its touch-enabling technologies to
third party manufacturers. Immersion currently licenses its technology to market
leaders in these areas, including companies such as Microsoft, Logitech and BMW.
In lower volume markets, such as medical simulation and three-dimensional
computer imaging, Immersion focuses on both product sales and technology
licensing. In all market areas, Immersion engages in development projects for
third parties. Immersion's objective is to proliferate its TouchSense
technologies across markets, platforms and applications so that touch and feel
become as common as graphics and sound in the modern computer user interface.

     Immersion and its wholly owned subsidiaries hold more than 65 issued
patents and 185 pending patent applications in the U.S. and abroad covering
various aspects of their hardware and software technologies. To date, Immersion
has licensed its intellectual property to more than 16 companies, including
market leaders Microsoft and Logitech, which incorporate its patented
touch-enabling technologies, together with other technologies necessary for
computer gaming peripherals, into joysticks, gamepads and steering wheels that
they manufacture. To target the computer mouse market, Immersion has licensed
its touch-enabling intellectual property to multiple mouse manufacturers,
including market leader Logitech. Logitech began marketing and selling the first
version of its touch-enabled mouse during the fourth quarter of 1999. In the
automotive market, Immersion has licensed its touch-enabling technologies to BMW
for use in automotive controls. In the medical simulation market, Immersion
manufactures and sells a number of low volume specialized medical products,
including devices for simulating laparoscopic and endoscopic surgical
procedures. With respect to professional and industrial applications, Immersion
manufactures specialized computer peripherals, including computer digitizing
devices that allow users to create three-dimensional computer models directly
from physical objects, touch-enabled joysticks and steering wheels for use in
arcades, and an advanced computer mouse used for mapmaking.

INDUSTRY BACKGROUND

     Early computers had crude user interfaces that only displayed text and
numbers. These machines, commonly known as "green screen" computers, were
effective at processing data but did not communicate information in an engaging
and intuitive manner. As a result, computing was used primarily in selected
scientific and business applications. In the early 1980s, computers began to use
graphics and sound to engage users' perceptual senses more naturally. Graphics
technologies brought pictures, charts, diagrams and animation to the computer
screen. Audio technologies enabled sound and music.

     By the late 1980s, graphics and audio technologies had spread to consumer
markets, initially through computer gaming applications. By the early 1990s, the
penetration of graphics and sound into consumer markets had expanded beyond
gaming into mainstream productivity applications, largely due to the
introduction of the Windows 3.0 graphical user interface. By the late 1990s, the
proliferation of graphics and audio content helped transform the Internet into a
highly interactive and popular medium for communication, commerce and
entertainment.

     The evolution from alphanumeric characters to the modern user interface is
widely considered to be one of the great advances in computing. By presenting
content in ways that engage the senses more fully, computers were "humanized,"
becoming more personal, less intimidating and easier to use. These improvements
helped expand the audience for computer technologies, encouraging people to use
software

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for business, home and entertainment applications. Today, graphics and audio
technologies are standard features of most computer systems.

     While most modern computers realistically present information to the senses
of sight and sound, they still lack the ability to convey content through the
sense of touch. The absence of touch is a substantial barrier to making computer
use more natural and intuitive. For example, current computing environments do
not allow online shoppers to feel physical attributes of products prior to
purchase and do not permit students to feel physical concepts like gravity and
magnetism. Software designers strive to develop compelling applications for
users to see and hear, but do not provide applications that engage users' sense
of touch. As a result, software is not as engaging and informative as it would
be if tactile sensations were conveyed.

     The absence of touch and feel in modern computers also limits user
productivity. The Windows interface, for example, is based on a physical
metaphor: users must move the cursor on a screen to drag, drop, stretch and
click. However, users must manipulate graphical elements without the benefit of
tactile feedback. As a result, using a cursor is visually taxing. Selecting an
icon, clicking on a hyperlink or grabbing the edge of a window are common tasks
that would be easier to perform if users could feel the engagement of their
cursor with the intended target.

     Like sight and sound, touch is critical for interacting with and
understanding one's physical surroundings. Technology that brings the sense of
touch to computing has the potential to further humanize the computer and
increase the ease, usefulness and enjoyment of computing.

IMMERSION'S SOLUTION

     Immersion develops and licenses technologies that allow computer users to
touch and feel computer content. In diverse applications like computer gaming,
business productivity, medical simulation, automotive controls, and surfing the
Web, Immersion's technologies enable software applications to engage a user's
sense of touch through peripheral devices such as mice, joysticks, knobs,
steering wheels, and gamepads. In addition, BMW has recently announced that it
intends to license and deploy Immersion's TouchSense technology for use in the
dashboard controls of certain models of its upcoming vehicles.

     Immersion's hardware and software technologies work together to enable
peripheral devices to present touch sensations. Immersion's patented designs
include specialized hardware elements such as motors, control electronics and
mechanisms, which are incorporated into common computer peripheral devices such
as mice and joysticks. Driven by sophisticated software algorithms, these
hardware elements direct tactile sensations corresponding to on-screen events to
the user's hand. For example, when a touch-enabled mouse is used to lift a
"heavy" object within the computer application, software directs the mouse's
motors to apply resistance to that motion to create a realistic simulation of
weight. By contrast, when the cursor is moved against a "soft" object, the
motors apply gradations of force to simulate the soft compliance of the object.

     Key benefits of Immersion's solution include:

          Complete Solution. Immersion offers a complete technical solution that
     allows its licensees to incorporate Immersion's touch-enabling technologies
     into its computer interface products such as mice, joysticks, knobs, wheels
     and gamepads at a reasonable cost and in a reasonable time frame.
     Immersion's technical solution also allows software programmers and Web
     site developers to add touch-enabling elements to their applications.
     Immersion's software automatically enables users to feel the basic user
     interface features of software applications running on Windows 98 and
     Windows 2000 without additional developer support. Immersion's software
     enables users to feel basic Web page features represented through standard
     Hypertext Markup Language (HTML), Java and ActiveX protocols. In addition,
     Immersion provides authoring tools that permit software developers to
     quickly design and incorporate custom touch sensations into their own
     applications.

          Compatible with Industry Standards. Immersion has designed its
     hardware and software technologies to be compatible with leading hardware
     and software standards. Immersion's technologies
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     operate across multiple platforms and comply with such standards as
     DirectX, Microsoft's entertainment application programming interface, and
     USB (Universal Serial Bus). In addition, Immersion's software technology
     works with the Flash(TM) and Shockwave(TM) standards from Macromedia.

          Cost-Effective Solution. Immersion has developed component
     technologies that permit peripheral device manufacturers to design and
     manufacture peripheral devices that incorporate Immersion's touch-enabling
     technologies more cost effectively than would otherwise be possible.
     Immersion has also developed and licensed sophisticated software drivers
     and firmware that permit its licensees to avoid substantial development
     costs and accelerate product introduction.

          Presents Information to the Sense of Touch. It is difficult to
     communicate physical properties such as texture, compliance, weight and
     friction solely through words or pictures. Immersion's technologies allow
     computer users to use their sense of touch to perceive these physical
     properties in a way that is instantly understandable and intuitively
     accessible. Immersion's technologies significantly improve the ability of
     software to communicate to users the physical features of a product, the
     physical properties of a scientific or engineering principle or the
     physical response of an object in a simulated gaming environment.

          Improves User Productivity in Cursor Manipulation Tasks. Computer
     users routinely select items on the screen using a cursor. This task
     involves precisely positioning a cursor on a desired target like a menu or
     a hyperlink, and then pressing a button to indicate that the target should
     be selected. With a traditional mouse, users can confirm only through
     visual feedback that the correct item has been selected. This task demands
     significant visual attention, slows execution and distracts the user from
     other activities. With a touch-enabled mouse, the user can feel each
     encounter between the cursor and an item on the screen. For example, the
     edge of a window feels like a groove carved into a desktop; when the cursor
     slides into the groove, users feel a distinct physical engagement. Users
     interpret these sensations intuitively because of their similarity to
     real-world encounters. When selecting icons, scrolling through a menu or
     clicking on a hyperlink on a Web page, the ability to feel the encounter
     greatly facilitates interaction.

          Increases Satisfaction and Enjoyment of the Computing Experience. By
     engaging the user's sense of touch, Immersion's technologies have the
     potential to make a variety of software applications more interesting,
     engaging and satisfying. In the personal computer gaming market,
     Immersion's licensees, such as Logitech and Microsoft, are currently
     manufacturing and selling products incorporating its intellectual property.
     Immersion believes that its technologies will increase user satisfaction
     across many additional applications, including business productivity,
     engineering, education and e-commerce.

          Enhances the Effectiveness of Simulation and Training
     Applications. Some computer applications, such as medical training, require
     realism to be effective. Companies and institutions have begun to replace
     traditional means of surgical training with more accessible and versatile
     simulation systems for training doctors to perform surgical procedures.
     Immersion's technologies increase the effectiveness of these systems by
     providing tactile feedback that simulates what a doctor would feel when
     performing an actual procedure. Immersion's technologies are used in
     training systems for laparoscopic surgery, endoscopic surgery and catheter
     insertion.

STRATEGY

     Immersion's objective is to proliferate its TouchSense technologies across
markets, platforms and applications so that touch becomes as common as graphics
and sound in the modern computer interface. Immersion intends to maintain and
enhance its position as the leading provider of touch-enabling technology by
employing the following strategies:

          Pursue Royalty-Based Licensing Model for High Volume
     Markets. Immersion believes that the most effective way to proliferate its
     touch-enabling technology across high volume markets is to

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     license its intellectual property to computer peripheral device
     manufacturers. Immersion has licensed its intellectual property to numerous
     manufacturers of mice, joysticks and steering wheels targeted at consumers.
     Immersion has also licensed its intellectual property to companies that
     make medical simulation hardware and arcade systems. In addition, Immersion
     has recently licensed its technology to BMW for use in the controls of its
     upcoming vehicles. Immersion intends to expand the number and scope of its
     licensing relationships and expects that licensing royalties will
     constitute an increasingly significant portion of its revenues in the
     future.

          Facilitate Development of Touch-Enabled Products. Immersion will
     continue to devote significant resources to facilitate the development and
     manufacture by its licensees of products incorporating Immersion's
     touch-enabling technologies. Immersion offers complete design packages that
     include sample hardware, software, firmware and related documentation, and
     offers its technical expertise on a consulting basis. To facilitate
     development of products incorporating Immersion's touch-enabling
     technologies, Immersion also offers specialized microprocessors for
     controlling the motors in mice, joysticks and steering wheels. Immersion
     will continue to invest in research and development to improve its
     technologies, with a particular emphasis on reducing the cost of
     touch-enabled products.

          Pursue Direct Product Sales in Low-Volume Markets. For certain
     vertical markets like medical simulation systems, arcade components, and
     three-dimensional computer imaging products, Immersion's primary strategy
     is to manufacture and sell products through direct sales, distributors and
     value added resellers.

          Expand Software Support for Our Touch-Enabling Technology. In addition
     to licensing Immersion's intellectual property to computer peripheral
     device manufacturers and supporting their product development efforts,
     Immersion has focused on expanding software support for its touch-enabling
     technology. Immersion has developed software that enables users to
     automatically feel icons, menus and other objects in software running in
     Windows 98 and Windows 2000 applications or on Web pages accessed through
     Internet Explorer and Netscape Navigator. Immersion offers specialized
     authoring tools that simplify adding touch sensations to software
     applications and Web pages. Immersion also is promoting an efficient file
     format, called ".ifr," to facilitate the creation and storage of custom
     touch sensations.

          Utilize the Internet to Create Market Demand for Touch-Enabled
     Products. Immersion believes that adding touch sensations to Web pages will
     provide on-line advertisers with a new means to attract and keep customers
     on their sites. Immersion promotes this benefit to Web developers and
     encourages them to incorporate touch-enabled content into their Web pages.
     When software developers add touch-enabled content to a Web site using
     Immersion's Immersion Web Designer authoring tool, they are required by
     license to include an active link from their Web page to Immersion's Web
     site, www.immersion.com. Immersion's Web site is also linked to its
     licensees' Web sites, at which users may buy touch-enabled products.

          Expand Market Awareness. Immersion promotes adoption of its
     touch-enabling technology by increasing market awareness among peripheral
     device manufacturers, software developers and consumers. Immersion devotes
     significant resources to working directly with its licensees to encourage
     and assist their product development efforts. Immersion encourages software
     developers to add touch-enabled content to their applications by providing
     them with its authoring tools and technical support. As part of Immersion's
     license agreements, Immersion requires its licensees to use Immersion's
     trademarks and logos to create brand awareness among consumers. Immersion
     also devotes significant resources to promote its brands.

          Secure Licensees in New Markets for Touch-Enabling
     Technology. Immersion believes that its touch-enabling technology can be
     used in virtually all areas of computing. Immersion initially focused on
     the computer gaming market where it has experienced rapid acceptance of its
     technologies by key licensees. Immersion has recently broadened its focus
     to include the mainstream computing and automotive markets and has licensed
     its touch-enabling technologies for use in computer mice and automotive
     controls. Immersion intends to expand its market opportunities by
     addressing new
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     platforms such as dedicated game consoles and set-top boxes, which are
     small computer appliances that plug into a television set enabling it to
     access the Internet.

          Develop and Protect Touch-Enabling Technology. Immersion and its
     wholly owned subsidiaries hold more than 65 issued patents and 185 pending
     patent applications in the U.S. and abroad covering various aspects of
     their hardware and software technologies, including touch-enabling
     technology. Immersion's success depends on its ability to license and
     commercialize its intellectual property and to continue to expand its
     intellectual property portfolio. Immersion devotes substantial resources to
     research and development and is engaged in projects focused on expanding
     the scope and application of its technologies. Immersion has also secured
     technology by acquisition. Immersion intends to continue to invest in
     technology development and potential acquisitions and to protect its
     intellectual property rights.

MARKET APPLICATIONS

     While Immersion believes that its technologies are broadly applicable,
Immersion is focusing its initial marketing and business development activities
on the following target markets:

          Computer Gaming. Immersion initially licensed its intellectual
     property for touch-enabling technologies for consumer gaming peripherals in
     1996 and branded this technology under the name I-FORCE, now TouchSense.
     Immersion has licensed its TouchSense intellectual property to 16
     manufacturers, including Logitech and Microsoft. According to PC Data,
     touch-enabled joysticks accounted for approximately 3% of domestic PC
     joystick sales by unit volume in 1997, 6% of the domestic PC joystick sales
     by unit volume in 1998, and 10% of the domestic PC joystick sales by unit
     volume in 1999. In addition, Immersion has developed TouchSense
     technologies for gaming applications designed specifically for arcade and
     location-based entertainment markets. Immersion intends to expand its
     TouchSense licensing business to include new product categories for the PC
     platform, such as gamepads, which are hand-held controllers for gaming
     consoles, and flight yokes, which are game controllers that simulate the
     controls of an airplane, and to target additional gaming platforms.

          General Purpose Personal Computers. In order to bring touch-enabling
     technology to every desktop, Immersion has targeted the general purpose
     computer market. To address this large opportunity, Immersion developed a
     touch-enabling technology designed for cursor control products that enables
     all the basic functionality of a traditional mouse but also presents
     information to the sense of touch. In 1998, Immersion entered into a
     license with Logitech under which Logitech sells the Wingman Force Feedback
     Mouse incorporating Immersion's touch-enabling technology. In August 2000,
     Logitech announced two new lower-cost, touch-enabled mouse products, the
     iFeel Mouse and the iFeel MouseMan, each of which is targeted for use with
     general purpose computer applications, such as business productivity and
     web applications. In its announcement, Logitech stated that the products
     will list for $39.95 and $59.95 and will be available to consumers in late
     September 2000.

          Automotive. In recent years there has been an accelerating
     proliferation of automotive sub-systems which are directly accessed by
     drivers and passengers. These include radio, CD, navigation, telephone and
     climate control systems, among others. As a result, there has been a
     corresponding increase in the number of physical control devices in the
     automotive cockpit. This clutter may be hazardous to the extent it
     distracts the driver's attention. Immersion's TouchSense control knob
     controls multiple systems and has a different feel for each system to allow
     the driver to identify tactilely which system is being controlled. The
     result is a cleaner, more easily-accessed control environment. Immersion
     has recently licensed its automotive control knob technology to BMW, which
     has indicated that it intends to introduce the TouchSense control knob in
     future models.

          Medical Simulation and Other Medical Equipment. Immersion has
     developed numerous technologies that can be used for medical training and
     simulation. By enabling computers to deliver touch sensations to users,
     Immersion's technologies can support realistic simulations that are
     effective
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     in teaching medical students and doctors what it feels like to perform a
     given procedure. Currently, Immersion manufactures and sells a number of
     low volume specialized medical products, including a variety of surgical
     simulators and PinPoint, a stereotactic arm used to enable image-guided
     biopsies and radiation therapy.

          Specialized Computer Peripherals for Professional and Industrial
     Applications. In addition to its touch-enabling technologies for the
     consumer peripheral market, Immersion has developed a variety of advanced
     computer peripherals designed for specific professional or industrial
     applications. Whether touch-enabled or not, these products allow Immersion
     to take advantage of its advanced computer peripheral technologies in
     targeting specific market niches. A major focus of Immersion's current
     efforts in this area is computer peripherals that it manufactures and sell
     and which are targeted at three-dimensional computer imaging applications.
     These include the MicroScribe-3D product line and the recently introduced
     LightScribe-3D product. Both allow users to create three-dimensional
     computer models directly from physical objects. The MicroScribe-3D products
     contain sensor and microprocessor technologies that allow users to digitize
     physical objects simply by tracing their contours with a stylus. The
     LightScribe-3D product uses a camera and a hand-held laser to achieve the
     same result. In both instances, the computer records the three-dimensional
     geometry of the object and reproduces it on the screen as a
     three-dimensional computer model. Another focus of Immersion's efforts is
     peripherals used in arcade and location-based entertainment centers. To
     address this market, Immersion manufactures, sells and in some cases
     licenses extremely rugged versions of its touch-enabled joysticks and
     steering wheels. Furthermore, Immersion manufactures and sells the
     Softmouse, a high performance mouse optimized for use in geographic
     information systems and mapmaking. Immersion recently acquired VTi. VTi
     will continue to sell its CyberGlove(R) line of touch-enabled gloves and
     its three-dimensional interaction software products that simulate the
     manipulation of objects in three-dimensional environments.

TECHNOLOGY LICENSING AND PRODUCTS

     Technology Licensing. Immersion currently licenses its intellectual
property to manufacturers which produce peripheral devices incorporating its
touch-enabling technologies. In general, Immersion's licenses permit
manufacturers to produce only a particular category of product within a
specified field of use. Prior to the introduction of its TouchSense brand,
Immersion granted licenses for gaming products, such as joysticks, steering
wheels and gamepads, under the I-FORCE brand, and licenses for cursor control
products, such as mice or trackballs under the FEELit brand. The Immersion
TouchSense brand now covers all of its touch-enabling technologies.

     Immersion's basic licensing model includes a per unit royalty paid by the
manufacturer that is a percentage of the wholesale selling price of the
touch-enabled product. In addition, each licensee must abide by a branding
obligation. The prominent display of the TouchSense logo on retail packaging
generates customer awareness for Immersion's technologies.

     Consumer Products. Immersion licenses its intellectual property to
manufacturers which incorporate its touch-enabling technologies into various
computer peripheral devices targeted at the PC platform. Currently, there are a
number of consumer joysticks sold using TouchSense technology, including the
Wingman Force Feedback Joystick from Logitech, the Sidewinder Force Feedback
Joystick from Microsoft, the Pegasus Force Feedback Joystick from Guillemot and
the TopShot Force Feedback from AVB. There are also a number of steering wheel
gaming peripherals licensed under the TouchSense brand, including the Wingman
Formula Force from Logitech, the Force Feedback Racing Wheel from Guillemot and
the Sidewinder Force Feedback Wheel from Microsoft.

     Logitech began selling its touch-enabled computer mouse during the fourth
quarter of 1999 and has recently announced two new mouse products, the iFeel
Mouse and the iFeel MouseMan. These products automatically allow users to feel
many of the basic desktop controls in Windows 98 and Windows 2000 and standard
interface elements of Web pages accessed through Internet Explorer and Netscape
Navigator.

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     Medical Products. Immersion licenses its intellectual property for its
touch-enabling technologies to HT for use in three medical simulation products,
CathSim, PreOp Endoscopic Simulator and PreOp Endovascular Simulator. These
devices are used for training purposes and enable clinicians to feel simulations
of sensations experienced during medical procedures, such as encountering an
unexpected obstruction in an artery.

     Automotive Controls. Immersion has developed TouchSense technology
appropriate for use in automobile dashboards. Immersion has recently begun
efforts to license this technology to automobile manufacturers and automobile
component suppliers. BMW has taken a license to Immersion's TouchSense knob
technology for use in the dashboard controls of certain of its upcoming
automobiles. Immersion has also formed a strategic partnership with ALPS
Electronics, a leading automotive component supplier, as part of a strategy to
speed adoption of its TouchSense technologies.

     Arcade and Location-Based Entertainment Products. In order to help increase
consumer awareness of touch-enabling technology in gaming applications,
Immersion licenses its touch-enabling technology to manufacturers of joystick
and steering wheel arcade units.

     Software and Developer Products. Demand for computer peripheral devices
incorporating our touch-enabling technologies depends on the existence of
software applications and Web pages that take advantage of these devices. The
development of such software likewise depends on the existence of an installed
base of touch-enabled hardware devices. Immersion has addressed this
interdependency of hardware and software solutions in two ways. First, Immersion
has developed end-user software that is included with Logitech's touch-enabled
mice at no additional cost, and which automatically adds touch to many of the
basic Windows 98 and Windows 2000 controls. Second, Immersion has developed and
provides to developers and end users software authoring tools that help
programmers add touch-enabled content to software applications and Web pages.
Immersion has developed an efficient file format, called an ".ifr" file, for
representing, storing and transmitting touch sensations. This file format allows
the development of touch sensation libraries that facilitate the development of
touch-enabled applications software. Immersion currently makes Immersion Studio,
Immersion Desktop and Immersion Web Designer available to developers and
Immersion Desktop and Immersion Web Plugin available to end users free of
charge. Immersion has licensed a limited number of copies of Immersion Studio to
persons other than developers but has not generated significant revenues from
these licenses.

     Automatic Support

     - Immersion Desktop adds touch sensations to many of the basic Windows 98
       and Windows 2000 controls, such as icons, menus, buttons, sliders and
       windows. It immediately makes any application running under Windows 98 or
       Windows 2000 more interesting and enhances productivity during mouse use.
       It includes a control panel that gives users the ability to customize the
       feel of their desktop. This product is bundled with each touch-enabled
       mouse.

     - Immersion Web Plugin adds touch to web pages accessed through Internet
       Explorer and Netscape Navigator. In conjunction with Immersion Desktop,
       it adds touch sensations to many of the standard interface elements of
       Web pages such as hyperlinks, check boxes and menus. It also allows users
       to feel custom sensations that have been added to Web pages. This product
       is bundled with each touch-enabled mouse.

     Authoring Tools

     - Immersion Studio is a fully animated graphical environment that allows
       developers of mainstream productivity, Web and gaming software to design
       touch sensations for their software titles by adjusting physical
       parameters. Each software file describing the touch sensation that a
       developer creates can be saved into an ".ifr" file and then can be
       quickly inserted into gaming applications and Web pages during the
       development process.

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     - Immersion Web Designer is an easy-to-use authoring tool that allows Web
       developers to add touch sensations to Web pages. They can load any HTML
       Web page into the tool and modify it to support touch sensations.

     Custom Microprocessors. Many touch-enabled peripheral devices utilize
commercially available microprocessors that process instructions needed to
deliver force sensations to the user. These microprocessors have not been
tailored for the specific requirements of touch-enabled products. Immersion has
developed its custom Immersion Processors to improve the performance and to help
to reduce the cost of gaming and peripheral products manufactured by its
licensees. For example, Immersion's microprocessors contain circuitry to work
with low cost sensors used in touch-enabled gaming and peripheral products, and
have been designed to streamline processing of information sent between a
personal computer and a touch-enabled gaming or computer peripheral product.
Immersion believes that these microprocessors are cost-effective components that
allow its licensees to reduce their costs of goods and the amount of custom
development that they must perform to bring a product to market, speeding their
development cycle.

     Immersion has invested in this technology because it believes it is
important as an enabling technology for low-cost touch-enabled devices. By
incorporating commonly used components on a single piece of silicon, Immersion's
microprocessors reduce the number of discrete components required on a printed
circuit board and can help lower overall system costs for its licensees. This
level of integration also simplifies the manufacture of touch-enabled products
while increasing performance and reliability.

     Immersion Processors are manufactured for Immersion solely by Kawasaki LSI,
with which it has entered into an ASIC Design and Development Agreement that
remains in effect until cancelled by either party. Immersion purchases the
Immersion Processors from Kawasaki LSI and sells them to those licensees
incorporating its touch-enabling technology in their gaming products that want
to use the microprocessors in their gaming products. Immersion generally
warrants its microprocessors to conform to its specifications and to be free
from defects in materials and workmanship for a period of one year from
delivery, and Kawasaki LSI extends a similar warranty to Immersion.

TECHNOLOGY

     Touch or feel simulation, also known as force feedback, haptic feedback or
force reflection, refers to the technique of adding touch sensations to computer
software by imparting physical forces upon the user's hand. These forces are
imparted by actuators, usually motors, that are incorporated into consumer
peripheral devices such as mice, joysticks, steering wheels or gamepads, or into
more sophisticated interfaces designed for industrial, medical or scientific
applications. Touch-enabled peripheral devices can impart to users physical
sensations like rough textures, smooth surfaces, viscous liquids, compliant
springs, jarring vibrations, heavy masses and rumbling engines.

     As a user manipulates a touch-enabled device, such as a mouse, motors
within the device apply computer-modulated forces that resist, assist or
otherwise enhance the manipulations. These forces are generated based on
mathematical models that simulate the desired sensations. For example, when
simulating the feel of a rigid wall with a force feedback mouse, motors within
the mouse apply forces that simulate the feel of encountering the wall. As the
user moves the mouse to penetrate the wall, the motors apply a force that
resists the penetration. The harder the user pushes, the harder the motors push
back. The end result is a sensation that feels like a physical encounter with an
obstacle.

     The mathematical models that control the motors may be simple modulating
forces based on a function of time, such as jolts and vibrations, or may be more
complex modulating forces based on user manipulations such as surfaces,
textures, springs and liquids. Complex sensations can be created by combining a
number of simpler sensations. For example, a series of simulated surfaces can be
combined to give the seamless feel of a complex object like a sports car or a
telephone. Textures can be added to these complex surfaces so that the
windshield of the sportscar feels smooth and its tires feel rubbery.

     To simplify the process of generating touch sensations, Immersion has
developed a parallel processing architecture in which a combination of host
driver software and a dedicated processor within the peripheral

                                       78
<PAGE>   86

device performs the required computations. In some implementations, the
dedicated processor offloads the processing burden from the host computer. This
distributed processing architecture, along with specialized software, provides a
software developer with an easy-to-use high-level application programming
interface that abstracts touch-enabled programming into a perceptual rather than
mathematical level. The application programming interface allows programmers to
define and initiate touch sensations with software routines that have
descriptive physical names such as "wall," "vibration" or "liquid." Programmers
can easily adjust multiple parameters to customize different types of
sensations.

     Immersion has developed an application programming interface called the
Immersion API. It allows software developers to incorporate touch sensations
into software applications quickly. In 1997, Microsoft included support for
Immersion's Immersion API, which was then known as the I-FORCE API, into
DirectX, Microsoft's standard gaming device application programming interface
for the Windows platform.

     Most computer interface devices, such as mice and joysticks, are input-only
devices, meaning that they track a user's physical manipulations but provide no
manual feedback. As a result, information flows in only one direction, from the
peripheral to the computer. Touch-enabled devices are input-output devices,
meaning that they track a user's physical manipulations (input) and provide
realistic physical sensations coordinated with on-screen events (output). The
computer and the device need to communicate quickly in order to present
realistic sensations.

     Immersion has developed a variety of efficient processing techniques to
optimize the flow of information between the computer and the peripheral. In one
of these, dedicated processors in the device produce touch sensations in
response to high-level commands from the computer. In another technique, the
host computer determines the desired forces and sends specific commands or data
directly to the device. Immersion's control architecture has the added benefit
of performing force feedback computations in parallel with the computer's
execution of a software application.

SALES, MARKETING AND SUPPORT

     Immersion establishes licensing relationships and sells a number of its
products through its direct sales efforts. Immersion also sells some of its
products indirectly through distributors and value-added resellers. As part of
its strategy to increase its visibility and promote its touch-enabling
technology, Immersion's license agreements generally require its licensees to
display the TouchSense logos on licensed products they distribute.

     Consistent with its intellectual property licensing strategy, Immersion has
focused its marketing activities on developing relationships with potential
licensees and on participating with existing licensees in their marketing and
sales efforts. To generate awareness of its technologies and its licensees'
products, Immersion participates in industry trade shows, maintains ongoing
contact with industry press, provides product information over its Web site and
advertises in entertainment and game industry publications.

     Another focus of Immersion's marketing efforts is to promote the adoption
of its touch-enabling technology by software and Web developers to facilitate
the implementation of touch sensations into software applications. Immersion has
developed the Immersion TouchSense Developer Toolkit, which contains its
software authoring tools, as well as documentation, tutorials and software files
containing sample touch sensations. Immersion currently distributes this
software to software developers at no cost. Its software support staff also
works closely with developers to assist them in developing compelling touch-
enabled applications. Immersion provides sample touch sensations to developers
through its Web site and through its Immersion Studio and Immersion Web Designer
authoring tools. Immersion intends to devote substantial resources to supporting
software developers and Web page designers in the creation of touch-enabled
software applications, including hiring additional software engineers and other
technical personnel.

     Immersion believes that it is important to increase awareness of its
touch-enabling technology among potential end users. Immersion is engaged in a
series of marketing and promotional campaigns, including advertisements,
in-store product demonstrations, and press tours in the United States and
Europe. The goal of these efforts is to create consumer awareness of the
benefits of touch-enabling technologies.

                                       79
<PAGE>   87

Immersion's sales and marketing expenses were $3.9 million and $459,000 for the
six months ended June 30, 2000 and 1999, $1.8 million in 1999, $0.7 million in
1998 and $0.7 million in 1997. Immersion currently anticipates that it will
incur at least $9.0 million in sales and marketing expenses through the end of
the year 2000.

RESEARCH AND DEVELOPMENT

     Immersion's success depends on its ability to improve, and reduce the costs
of, its technologies in a timely manner. Immersion has assembled a team of
highly skilled engineers who possess experience in the disciplines required for
touch-enabling technology development, including mechanical engineering,
electrical engineering and computer science.

     Immersion's research and development expenses were $1.5 million and $1.1
million in the six months ended June 30, 2000 and 1999, $2.3 million in 1999,
$1.8 million in 1998 and $1.5 million in 1997. Immersion currently anticipates
that it will incur at least $3.5 million in research and development expenses
through the end of the year 2000. Its research and development efforts have been
focused on technology development, including hardware, software and designs.
Immersion has entered into numerous contracts with government agencies and
corporations that help fund advanced research and development. Its government
contracts permit Immersion to retain ownership of the technology developed under
the contracts, provided that Immersion provides the applicable government agency
a license to use the technology for non-commercial purposes. Although it expects
to continue to invest substantially in research and development activities,
Immersion expects government-sponsored research activity to decline.

COMPETITION

     Immersion is aware of several companies that claim to possess force
feedback technology applicable to the consumer market, but it is not aware that
any of these companies or their licensees have introduced touch-enabled
products. Several companies also currently market force feedback products to
non-consumer markets and could shift their focus to the consumer market. In
addition, Immersion's licensees may develop products that compete with products
employing its touch-enabling technology but are based on alternative
technologies. Many of our licensees, including Microsoft and Logitech, and other
potential competitors have greater financial and technical resources upon which
to draw in attempting to develop computer peripheral technologies that do not
make use of our touch-enabling technology.

     Immersion's competitive position is partially dependent on the competitive
positions of those Immersion licensees that pay a per-unit royalty. Immersion's
licensees' markets are highly competitive. Immersion believes that the principal
competitive factors in its licensees' markets include price, performance,
user-centric design, ease of use, quality and timeliness of products, as well as
the manufacturer's responsiveness, capacity, technical abilities, established
customer relationships, retail shelf space, advertising, promotion programs and
brand recognition. Touch-related benefits in such markets may be viewed simply
as enhancements and compete with non-touch-enabled technologies. Products
incorporating Immersion's high fidelity touch-enabling technology may also face
competition from computer peripheral devices that use simple on-off,
rotating-mass vibration technology, sometimes referred to as "dual shock" or
"rumble pak."

     Immersion's microprocessors have been optimized to work with low cost
sensors used in touch-enabled gaming and peripheral products and to streamline
processing of information sent between a personal computer and a touch-enabled
gaming or computer peripheral product. Currently, semiconductor companies,
including Mitsubishi and ST Microelectronics, manufacture products that compete
with the Immersion Processors, and ST Microelectronics has recently started
selling to Immersion's licensees at least one competitive chip for use in
low-end, touch-enabled peripheral products technology.

     There are several companies that currently sell high-end simulation
products that compete with Immersion's professional and medical products. The
principal bases for competition in these markets are technological
sophistication and price. Immersion believes it competes favorably on these
bases.

                                       80
<PAGE>   88

INTELLECTUAL PROPERTY

     Immersion relies on a combination of patents, copyrights, trade secrets,
trademarks, employee and third-party nondisclosure agreements and licensing
arrangements to protect its intellectual property. Immersion considers its
ability to protect its intellectual property to be critical to its success.

     Immersion and its wholly owned subsidiaries hold more than 65 issued
patents and 185 pending patent applications in the U.S. and abroad covering
various aspects of their hardware and software technologies. Immersion's current
U.S. patents expire between the years 2011 and 2017. Immersion's failure to
obtain or maintain adequate protection for its intellectual property rights for
any reason could hurt its competitive position. Patents may not issue from the
patent applications that Immersion has filed or may file. Immersion's issued
patents may be challenged, invalidated or circumvented, and claims of its
patents may not be of sufficient scope or strength, or issued in the proper
geographic regions, to provide meaningful protection or any commercial
advantage.

     In addition, others may attempt to develop technologies that are similar or
superior to Immersion's technologies, duplicate its technologies or design
around its patents. Effective intellectual property protection may be
unavailable or limited in some foreign countries. Despite its efforts to protect
its proprietary rights, unauthorized parties may attempt to copy or otherwise
use aspects of Immersion's methods and devices that it regards as proprietary.
If its intellectual property protection is insufficient to protect its
intellectual property rights, Immersion could face increased competition in the
market for its technologies or be unable to persuade or require companies to
enter into royalty-bearing license arrangements.

     Immersion has acquired patents from third parties and also licenses some
technologies from third parties. Immersion 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, Immersion's exposure to
infringement claims may increase. Immersion generally obtains 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.

     From time to time, Immersion has received claims from third parties that
its technologies, or those of its licensees, infringe the intellectual property
rights of these third parties. Between May 1995 and June 1999, Immersion
received four such letters. After examination of these claims and consultation
with counsel, Immersion believes that these claims are without merit. To date,
none of these companies has filed a legal action against Immersion. However,
these or other matters might lead to litigation costs in the future.
Intellectual property claims, whether or not they have merit, could be
time-consuming to defend, cause product shipment delays, require Immersion to
pay damages, or require it to cease utilizing the technology unless it can enter
into royalty or licensing agreements. Royalty or licensing agreements might not
be available on terms acceptable to Immersion or at all. Furthermore, claims
could also result in claims from Immersion's licensees under the indemnification
provisions of their agreements with Immersion.

EMPLOYEES

     As of July 31, 2000 Immersion had 91 full-time employees, including 29 in
research and development, 36 in sales and marketing and 26 in finance,
administration and operations. As of that date, Immersion also had two
independent contractors. None of Immersion's employees is represented by a labor
union, and Immersion considers its employee relations to be good.

PROPERTIES

     Immersion leases approximately 48,000 square feet of office and
manufacturing space in San Jose, California. Other than Immersion Processors,
which are manufactured by Kawasaki LSI, Immersion manufactures all of the
products that Immersion sells at the San Jose office facility. The lease on the

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<PAGE>   89

facility expires in June 2005. Immersion believes that its facility is adequate
for its needs for the foreseeable future.

LEGAL PROCEEDINGS

     In June 2000, Immersion filed a complaint against InterAct Accessories,
Inc. in the United States District Court for the Northern District of California
(Case No. C-00-20663 JF). The complaint alleges that InterAct's Dual Impact and
Barracuda 2 gamepads, and its V3FX and Concept 4 steering wheels, infringe three
of Immersion's United States patents. Immersion seeks to recover compensatory
damages, and based on allegations that InterAct's infringement is willful, to
have such damages trebled. InterAct has filed an answer to the complaint denying
infringement and asserting on various grounds that the patents-in-suit are
invalid. Immersion believes its claims are meritorious and intends to pursue
them vigorously. However, if InterAct's defenses were to prevail, Immersion's
ability to pursue licensing arrangements relating to a class of vibrotactile
peripheral devices would be compromised.

                                       82
<PAGE>   90

                   IMMERSION MANAGEMENT FOLLOWING THE MERGER

     The directors and officers of Immersion will not change following the
merger.

EXECUTIVE OFFICERS AND DIRECTORS

     Set forth below is some information about the current executive officers
and directors of Immersion.

<TABLE>
<CAPTION>
               NAME                  AGE                           POSITION
               ----                  ---                           --------
<S>                                  <C>   <C>
Dr. Louis Rosenberg, Ph.D. ........  31    President, Chief Executive Officer and Chairman, Director
Victor Viegas......................  43    Chief Financial Officer and Vice President, Finance
J. Stuart Mitchell.................  46    Vice President, Business Development
Bruce Schena.......................  35    Vice President, Chief Technology Officer and Secretary
Jennifer Saffo.....................  45    Vice President, Marketing
Kenneth Martin.....................  35    Vice President, Engineering
Steven Blank.......................  46    Director
Charles Boesenberg.................  51    Director
Jonathan Rubinstein................  43    Director
</TABLE>

     DR. LOUIS ROSENBERG is a founder of Immersion and has served as chairman of
Immersion's board of directors and as president and chief executive officer
since May 1993. Since April 1997, Dr. Rosenberg has also served as a manager of
MicroScribe LLC, a licensing company in which Immersion holds a membership
interest. Dr. Rosenberg holds bachelor of science, master of science and
doctorate degrees in mechanical engineering from Stanford University.

     MR. VICTOR VIEGAS has served as Immersion's chief financial officer and
vice president, finance since August 1999. From June 1996 to August 1999, he
served as vice president, finance and administration and chief financial officer
of Macrovision Corporation, a developer and licensor of video and software copy
protection technologies. From October 1986 to June 1996, he served as vice
president of finance and chief financial officer of Balco Incorporated, a
manufacturer of advanced automotive service equipment. He holds a bachelor of
science degree in accounting and a master of business administration degree from
Santa Clara University. Mr. Viegas is also a certified public accountant in the
State of California.

     MR. J. STUART MITCHELL has served as Immersion's vice president, business
development since August 1999. From February 1987 to February 1999, Mr. Mitchell
served as vice president of sales and marketing, systems products division and
vice president of worldwide technology licensing business for Adobe Systems,
Inc., a technology licensing desktop publishing and graphics software company.
From May 1982 to January 1987, Mr. Mitchell served in various sales and
marketing management positions for Zentec Corporation, a computer systems and
display terminal company and, from April 1977 to April 1982, Mr. Mitchell served
in various sales and marketing positions for Xerox Corporation, an information
technology and document systems company. Mr. Mitchell holds a bachelor of
science degree in engineering physics with a minor in business from the
University of Colorado, Boulder.

     MR. BRUCE SCHENA has served as Immersion's vice president, chief technology
officer and secretary since January 1995. Mr. Schena also served on Immersion's
board of directors form January 1995 until February 2000. Since April 1997, Mr.
Schena has also served as a manager of MicroScribe LLC, a licensing company in
which Immersion holds a membership interest. From June 1993 to December 1994,
Mr. Schena consulted for Pandemonium Product Development, a product design
company owned by Mr. Schena. Mr. Schena holds bachelor of science and master of
science degrees in mechanical engineering from Massachusetts Institute of
Technology and a degree of engineer in mechanical engineering from Stanford
University.

     MS. JENNIFER SAFFO has served as Immersion's vice president, marketing
since July 1999. From January 1991 to July 1999, Ms. Saffo owned and operated a
sole proprietorship marketing company delivering strategic marketing advice to
Internet and software companies. From 1987 to 1990, Ms. Saffo served as director
of marketing for Adobe Systems, Inc., a technology licensing desktop publishing
and

                                       83
<PAGE>   91

graphics software company. From 1984 to 1987, Ms. Saffo was a founder and
director of Aldus Corporation, a desktop publishing company, and from 1981 to
1984, she served as national accounts manager at Microsoft Corporation, a
software company. Ms. Saffo holds a bachelor of arts degree in linguistics from
the University of Colorado, Boulder.

     MR. KENNETH MARTIN has served as Immersion's vice president, engineering
since February 2000. From April 1996 to January 2000, Mr. Martin served as
Immersion's director of product development. From June 1994 to April 1996, Mr.
Martin served as a design engineer at IDEO Product Development Inc., a product
design company. Since 1994, Mr. Martin also has served as a lecturer in the
design division in the mechanical engineering department of Stanford University.
Mr. Martin holds a bachelor of applied science degree from the University of
Toronto and a master of science degree in manufacturing systems engineering from
Stanford University.

     MR. STEVEN BLANK has served as a member of Immersion's board of directors
since October 1996. From November 1996 until August 1999, Mr. Blank served as
executive vice president of marketing for E.piphany, an enterprise software
company that Mr. Blank co-founded. From February 1993 to October 1996, Mr. Blank
served as chief executive officer of Rocket Science Games, a video game software
company. From February 1990 to January 1993, Mr. Blank served as vice president
of marketing of SuperMac, a supplier of Macintosh peripherals.

     MR. CHARLES BOESENBERG has served as a member of Immersion's board of
directors since February 2000. From February 2000, Mr. Boesenberg has served as
co-manager of the merger transition and integration team of Wind River Systems,
Inc., an embedded software and services company which was the surviving
corporation of a merger with Integrated Systems, Inc., an embedded systems
software company, where Mr. Boesenberg served as president and chief executive
officer from December 1998 until February 2000. From December 1997 to December
1998, Mr. Boesenberg served as president and chief executive officer of Magellan
Corporation, a satellite access products company, which was the surviving
corporation of a merger with Ashtech, Inc., a business-to-business global
positioning systems company, where Mr. Boesenberg served as president and chief
executive officer from January 1995 to January 1997. Mr. Boesenberg currently
serves as a director of Symantec Corporation and Blaze Software. Mr. Boesenberg
has a bachelor of science degree in mechanical engineering from the Rose Hulman
Institute of Technology and a master of science degree in business
administration from Boston University.

     MR. JONATHAN RUBINSTEIN has served as a member of Immersion's board of
directors since October 1999. Since February 1997, Mr. Rubinstein has served as
senior vice president of hardware engineering at Apple Computer, Inc., a
personal computer company. From August 1993 to August 1996, Mr. Rubinstein was
executive vice president and chief operating officer of Fire Power Systems, a
developer and manufacturer of Power PC-based computer systems. Mr. Rubinstein
has a bachelors and masters of science degree in electrical engineering from
Cornell University and a master of science degree in computer science from
Colorado State University.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     Prior to the formation of Immersion's compensation committee in October
1999, the duties customarily performed by a compensation committee were the
responsibility of the Immersion's board of directors. The members of Immersion's
board of directors who were also officers or employees of Immersion are Dr.
Rosenberg, Mr. Lacey and Mr. Schena. These directors abstained from voting on
their own compensation.

     In 1999, Mr. Rosenberg and Mr. Schena served as directors and executive
officers of Immersion, and Mr. Lacey served as a director of Immersion. In
addition, they had certain interests in the agreements with MicroScribe, which
are more fully discussed below under "Certain Relationships and Related
Transactions."

     Neither of the members currently serving on Immersion's compensation
committee has at any time since MicroScribe's formation been one of its officers
or employees, and neither had a material interest in

                                       84
<PAGE>   92

the transactions described under "Certain Relationships and Related
Transactions." None of MicroScribe's executive officers currently serves or in
the past has served as a member of a compensation committee or board of
directors of any other entity that has one or more executive officers serving as
a member of Immersion's board of directors or compensation committee.

COMPENSATION OF DIRECTORS

     Directors of Immersion do not receive cash compensation for their services
as directors. Under the 1997 Immersion Corporation Stock Option Plan,
nonemployee directors are eligible to receive stock option grants at the
discretion of the board of directors.

     In 1999, Immersion granted to Mr. Blank options to purchase shares of
Immersion's common stock as follows:

<TABLE>
<CAPTION>
                                                  SHARES SUBJECT       EXERCISE
                 DATE OF GRANT                      TO OPTION       PRICE PER SHARE
                 -------------                    --------------    ---------------
<S>                                               <C>               <C>
April 22, 1999..................................      20,175             $3.66
June 21, 1999...................................       3,228             $3.66
</TABLE>

     In 1999, Immersion granted to Mr. Rubinstein options to purchase shares of
Immersion's common stock as follows:

<TABLE>
<CAPTION>
                                                  SHARES SUBJECT       EXERCISE
                 DATE OF GRANT                      TO OPTION       PRICE PER SHARE
                 -------------                    --------------    ---------------
<S>                                               <C>               <C>
June 21, 1999*..................................      32,280            $ 3.66
November 5, 1999................................      48,000            $10.00
</TABLE>

-------------------------
* The options granted to Mr. Rubinstein on June 21, 1999 were cancelled except
  for 5,380 options which remain exercisable.

                                       85
<PAGE>   93

COMPENSATION OF EXECUTIVE OFFICERS

     The following table presents information concerning compensation received
during the year ended December 31, 1999 by Immersion's chief executive officer
and each of Immersion's three other executive officers whose total salary and
bonus earned during that year exceeded $100,000, such officers referred to in
this proxy statement/prospectus as the named executive officers. In accordance
with the rules of the SEC, the compensation described in this table does not
include perquisites and other personal benefits received by these executive
officers that do not exceed the lesser of $50,000 or 10% of the total salary and
bonus reported for these officers.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                       LONG-TERM
                                                                                      COMPENSATION
                                                                                      ------------
                                                                                       NUMBER OF
                                                              ANNUAL COMPENSATION      SECURITIES
                                                   FISCAL    ---------------------     UNDERLYING
           NAME AND PRINCIPAL POSITION              YEAR     SALARY($)    BONUS(1)     OPTIONS(2)
           ---------------------------             ------    ---------    --------    ------------
<S>                                                <C>       <C>          <C>         <C>
Louis Rosenberg, Ph.D.
President and Chief
Executive Officer................................   1999     $179,587     $ 50,000      227,894
Bruce Schena
Vice President, Chief
Technology Officer...............................   1999     $141,963           --       49,087
Kenneth Martin
Vice President, Engineering......................   1999     $117,275     $ 10,000       14,526
Timothy Lacey
Vice President, Operations(3)....................   1999     $131,250           --       59,524
</TABLE>

-------------------------
(1) Bonuses are reported in the year earned, even if actually paid in a
    subsequent year.

(2) All figures in this column represent options to purchase Immersion's common
    stock.

(3) Mr. Lacey was serving as Immersion's chief financial officer until August
    1999 when he resigned as Immersion's chief financial officer and was
    appointed vice president, operations.

                                       86
<PAGE>   94

OPTION GRANTS IN LAST FISCAL YEAR

     The following table presents information with respect to stock options
granted during 1999 to the named executive officers.

<TABLE>
<CAPTION>
                                                                                             POTENTIAL REALIZABLE
                                                                                                   VALUE AT
                                                                                                ASSUMED ANNUAL
                                   NUMBER OF     PERCENT OF TOTAL                               RATES OF STOCK
                                  SECURITIES     OPTIONS GRANTED                               APPRECIATION FOR
                                  UNDERLYING       TO EMPLOYEES     EXERCISE                    OPTION TERM(2)
                                    OPTIONS           DURING          PRICE     EXPIRATION   ---------------------
             NAME                GRANTED(#)(1)      PERIOD(%)       ($/SHARE)      DATE         5%          10%
             ----                -------------   ----------------   ---------   ----------   ---------   ---------
<S>                              <C>             <C>                <C>         <C>          <C>         <C>
Louis Rosenberg, Ph.D.(3)......     71,984             3.06            4.02       3/19/09    $181,987    $461,190
                                       403*            0.02            4.02       6/21/04         448         989
                                    71,984             3.06            4.02       6/21/09     181,987     461,190
                                    80,700             3.43            4.02       6/29/09     204,022     517,032
                                     1,008*            0.04            8.67       7/27/09       5,496      13,928
                                     1,210*            0.05           11.00      11/07/09       8,371      21,213
                                       605*            0.03           11.00      11/05/09       4,185      10,606
Bruce Schena...................     23,838             1.01            3.66        3/8/09      54,869     139,049
                                       403*            0.02            3.66       6/21/09         928       2,351
                                    23,838             1.01            3.66       6/21/09      54,869     139,049
                                     1,008*            0.04            8.67       7/29/09       5,496      13,928
Kenneth Martin.................      7,263             0.31            3.66        3/8/09      16,718      42,366
                                     7,263             0.31            3.66       6/21/09      16,718      42,366
Timothy Lacey..................     29,762             1.26            3.66        3/8/09      68,505     173,605
                                    29,762             1.26            3.66       6/21/09      68,505     173,605
</TABLE>

-------------------------
(1) Except where noted otherwise by an * (in which case the options vest
    immediately), each option vests as to 1/24 of the shares per month for 24
    months. The exercise price for the option may be paid in cash, in shares of
    common stock valued at fair market value on the exercise date or through a
    cashless exercise procedure involving a same-day sale of the purchased
    shares. The option has a maximum term of ten years measured from the option
    grant date, subject to earlier termination in the event of the optionee's
    cessation of service with Immersion. Under the option, the option will vest
    upon an acquisition of Immersion by merger or asset sale, unless the option
    is assumed by the acquiring entity.

(2) The potential realizable value represents the hypothetical gains of the
    options granted based on assumed annual compound stock appreciation rates
    over the exercise price per share (before taxes). Actual gains, if any, on
    stock option exercises are dependent on the future performance of
    Immersion's common stock. There is no assurance that any of the value
    reflected in this table will be achieved.

(3) In 1999, Immersion granted options to purchase an aggregate of 2,352,767
    shares to employees. The exercise price of each option granted to Dr.
    Rosenberg was equal to 110% of the fair market value of the common stock on
    the date of grant as determined by the board of directors, except for the
    non-statutory stock option granted on July 27, 1999 for 1,008 shares for
    which the option exercise price is equal to 100% of the fair market value of
    the common stock on the date of grant as determined by the board of
    directors.

                                       87
<PAGE>   95

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

     The following table presents information for Immersion's executive officers
listed in the summary compensation table concerning option exercises during 1999
and the value of exercisable and unexercisable options held as of December 31,
1999 by these officers:

<TABLE>
<CAPTION>
                                                               NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                                                               UNDERLYING OPTIONS AT         IN-THE-MONEY OPTIONS
                                     SHARES       VALUE           FISCAL YEAR END          AT FISCAL YEAR END($)(2)
                                   ACQUIRED ON   REALIZED   ---------------------------   ---------------------------
              NAME                 EXERCISE(#)    ($)(1)    EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
              ----                 -----------   --------   -----------   -------------   -----------   -------------
<S>                                <C>           <C>        <C>           <C>             <C>           <C>
Louis Rosenberg, Ph.D............    80,700      $284,064    1,045,954       177,539      $39,642,081    $6,121,384
Bruce Schena.....................    16,140      $ 58,427      432,078        35,404      $16,441,145    $1,235,582
Kenneth Martin...................    40,350      $142,113       83,075        27,847      $ 3,150,134    $1,028,842
Timothy Lacey....................        --            --      201,871        44,201      $ 7,602,088    $1,542,196
</TABLE>

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

(1) Upon exercise of the options, an option holder did not necessarily receive
    the amount reported above under the column "Value Realized." The amounts
    reported above under the column "Value Realized" merely reflect the amount
    by which the fair market value of the common stock of Immersion on the date
    the option was exercised exceeded the exercise price of the option. The
    option holder does not realize any cash until the shares of common stock
    issued upon exercise of the options are sold.

(2) Based on the closing price of the common stock of Immersion as reported on
    The Nasdaq National Market System at December 31, 1999, the last day of
    trading of Immersion's common stock during fiscal year 1999, of $38.375 per
    share, less the exercise price payable for such shares.

EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL ARRANGEMENTS

     Options granted to Victor Viegas, vice president, finance and chief
financial officer of Immersion, accelerate in the event of a change in control
of Immersion, if he resigns due to a material reduction in his duties or if
Immersion moves his principal office more than 60 miles from San Jose. If one of
these events occurs within 18 months of his start date, vesting will be
accelerated by 12 months, and if one of these events occurs more than 18 months
after his start date, 50% of the unvested shares will become vested. In
addition, if Immersion terminates Mr. Viegas' employment other than for cause,
Immersion will pay him a severance payment equal to six months of base salary
(or, if lesser, the number of months before he finds other employment) and a
portion of his options will also accelerate. If the termination occurs before
the first anniversary of his start date, 37.5% of the shares will become vested.
If the termination occurs after his first anniversary but within 18 months of
his start date, vesting will be accelerated by 12 months.

     The options granted to J. Stuart Mitchell, vice president, business
development of Immersion, accelerate in the event that Immersion moves his
principal office more than 60 miles from San Jose within 12 months of his start
date, there is a change in Immersion's control that results in his termination
of employment or if he resigns due to a material reduction in his duties. If one
of these events occurs, vesting will be accelerated by 12 months. In addition,
if Immersion terminates Mr. Mitchell's employment other than for cause,
Immersion will pay him a severance payment equal to three months of base salary
(or, if lesser, the number of months before he finds other employment) and the
vesting of his options will be accelerated by three months.

     The options granted to Jennifer Saffo, vice president, marketing of
Immersion, accelerate in the event of a change in control of Immersion that
results in her termination of employment, if she resigns due to a material
reduction in her duties or if Immersion moves her principal office more than 60
miles from San Jose within 12 months of her start date. If one of these events
occurs, vesting will be accelerated by 12 months. In addition, if Immersion
terminates Ms. Saffo's employment other than for cause, Immersion will pay her a
severance payment equal to three months of base salary (or, if lesser, the
number of months before she finds other employment) and the vesting of her
options will be accelerated by three months.

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<PAGE>   96

     Immersion's 1994 stock option plan provides that, in the event of a change
in control, the board of directors may arrange with the acquiring corporation
that outstanding options be assumed or that equivalent options be substituted by
the acquiring corporation. Alternatively, the board of directors may provide
that any unexercisable or unvested portions of the outstanding options shall be
immediately exercisable and vested in full.

     The options terminate if they are not assumed, substituted or exercised
prior to a change of control.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Since January 1, 1999, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which Immersion is or was a
party in which the amount involved exceeds $60,000 and in which any of its
directors, executive officers or holders of more than 5% of Immersion's capital
stock had or will have a direct or indirect material interest other than: the
salaries, options, share repurchase and other agreements that are described in
the transactions described below.

OTHER TRANSACTIONS

     Logitech Agreements. In addition to Logitech being a holder of more than 5%
of Immersion's capital stock, Logitech is a licensee which accounts for a large
portion of Immersion's licensing and consulting services revenue. In 1999,
Immersion recorded revenue of approximately $1.0 million from Logitech. In
October 1996, Immersion entered into a royalty-based license agreement and a
technology product development agreement with Logitech. The license agreement
grants Logitech a world-wide, irrevocable, non-exclusive license under
Immersion's patents for touch-enabled gaming products. Pursuant to the
technology product development agreement, Immersion provided Logitech consulting
services with respect to the development of a touch-enabled joystick. In March
2000, Immersion and Logitech amended this technology product development
agreement in response to Logitech's desire for Immersion's assistance in
developing an updated joystick product. Pursuant to the license agreement,
Logitech is required to pay Immersion a royalty of 5% of the revenue it receives
when it sells a gaming product incorporating Immersion's technology to third
parties. If Logitech ships more than 100,000 units in a single year without a
modification in technical specifications, the royalty for that product will be
reduced by 0.67% for the following year. If Logitech ships more than 200,000
units in subsequent years without a modification in technical specifications,
the royalty will be reduced in each subsequent year by a further 0.67%. However,
the royalty rate may not drop below 3%.

     In April 1998, Immersion entered into a royalty-based license agreement and
a technology product development agreement with Logitech. Pursuant to the
technology product development agreement, Immersion provided Logitech consulting
services with respect to the development of a touch-enabled mouse. Under the
development agreement, Immersion also agreed that it would not enable a
third-party to ship a similar touch-enabled mouse product until October 23,
1999. Pursuant to the license agreement, Immersion granted Logitech an
irrevocable, non-exclusive, worldwide license to technology incorporated by
Logitech into a touch-enabled mouse product. Pursuant to the license agreement,
Logitech is required to pay Immersion a royalty of 5% of the revenue it receives
from the sale of touch-enabled mouse products. In March 2000, Immersion and
Logitech amended this license agreement cover a new technology developed by
Immersion for a lower-cost, touch-enabled mouse to be targeted for use with
productivity and web applications. Under the amendment, Immersion and Logitech
have agreed to promote the existing mouse technology together with the new
lower-cost mouse technology as a product family. The amendment also requires
Logitech to pay Immersion a royalty of 5% of the revenue it receives from
products based upon this new tactile mouse technology. In July 2000, Immersion
and Logitech amended both the 1996 and 1998 license agreements. Under the
amendment, Immersion and Logitech agreed that Logitech's royalty-bearing
products would be licensed under all of Immersion's patents and that there would
be a per lawsuit limit on each party's indemnification obligation to the other.

     Immersion signed a co-marketing agreement with Logitech in November 1999 in
which Immersion agreed to assist Logitech with the launch and promotion of its
touch-enabled mice. Under the terms of the

                                       89
<PAGE>   97

agreement, for a period of five calendar quarters beginning in the first
calendar quarter of 2000, Immersion will reimburse Logitech for certain
marketing related expenses not to exceed $200,000 per quarter. Only third-party
marketing services that are targeted at promoting Logitech's touch-enabled mice
are eligible for reimbursement. In addition, all promotional activities will
have to be approved by Immersion in advance. In order to remain eligible for
reimbursement, Logitech will have to include Immersion's brand and logo on
marketing materials that reference touch-enabled functionality or products, and
commit to other conditions regarding its touch-enabled mice.

     MicroScribe Agreements. On July 1, 1997, Immersion formed MicroScribe LLC,
a privately-held limited liability company with two types of outstanding
membership interests -- class 1 membership interests and class 2 membership
interests.

     In July 1997, Immersion entered into an exchange agreement, a patent
license agreement and an intellectual property license agreement with
MicroScribe. Pursuant to the exchange agreement and the patent license
agreement, Immersion assigned its patents and associated intellectual property
relating to three-dimensional digitizing products and the Pin-Point arm, a
medical device used for image-guided biopsies whose design is based on
Immersion's three-dimensional digitizing product, to MicroScribe in exchange for
a worldwide, royalty-free, exclusive, irrevocable license and all of the class 1
membership interests and class 2 membership interests in MicroScribe. Immersion
retained the class 1 membership interest and distributed the class 2 membership
interests to the stockholders of Immersion at the time of the exchange
agreement, including:

<TABLE>
<CAPTION>
                                                    PERCENTAGE INTEREST
            NAME OF BENEFICIAL HOLDER               OWNED IN MICROSCRIBE
            -------------------------               --------------------
<S>                                                 <C>
Louis Rosenberg, Ph.D. ...........................          25.9%
Bruce Schena......................................           8.6
Timothy Lacey.....................................          10.8
</TABLE>

     There are no membership interests in MicroScribe other than the class 1 and
class 2 membership interests. MicroScribe has not issued any additional
membership interests other than the initial issuance of the class 1 and class 2
membership interests to Immersion. Accordingly, stockholders who have acquired
shares of Immersion after the one-time distribution do not own any membership
interests in MicroScribe. The following table presents information regarding the
percentage interest in MicroScribe of each director,

                                       90
<PAGE>   98

officer and 5% stockholder and each member of the immediate family of such
director, officer and 5% stockholder.

<TABLE>
<CAPTION>
                                                              PERCENTAGE INTEREST
                 NAME OF BENEFICIAL HOLDER                    OWNED IN MICROSCRIBE
                 -------------------------                    --------------------
<S>                                                           <C>
5% STOCKHOLDERS
Cybernet Systems Corporation................................            --%
Timothy Lacey...............................................         10.78
DIRECTORS AND EXECUTIVE OFFICERS
Steven Blank................................................           1.0
Charles Boesenberg..........................................            --
Kenneth Martin..............................................           2.0
J. Stuart Mitchell..........................................            --
Louis Rosenberg, Ph.D. .....................................         25.94
Jonathan Rubinstein.........................................            --
Jennifer Saffo..............................................            --
Bruce Schena................................................          8.56
Victor Viegas...............................................            --
IMMEDIATE FAMILY OF 5% STOCKHOLDERS, DIRECTORS AND OFFICERS
Max and Helen Johnston......................................          0.36
Patrick Lacey...............................................          0.37
Patrick and Nina Lacey......................................          0.29
Arthur and Marilynn Rosenberg...............................          0.79
Arthur Rosenberg............................................          0.32
Marilynn Rosenberg..........................................          0.21
</TABLE>

     The total distribution paid to these persons pursuant to their percentage
interests owned in MicroScribe in 1999 was approximately $45,000.

     MicroScribe's sole business is the licensing of its patents and associated
intellectual property to Immersion. Distributable cash from its licensing
activities is distributed 99% to the class 2 members and 1% to Immersion, as the
sole class 1 member. Pursuant to the terms of the license agreement, MicroScribe
granted Immersion rights to use intellectual property of MicroScribe for the
development and distribution of three-dimensional digitizing products.

     Under the intellectual property license agreement, Immersion pays
MicroScribe a formula-based royalty that varies between 5% and 10% of the net
receipts Immersion receives from selling products incorporating MicroScribe
technology. Based upon the formula-based royalty with MicroScribe, Immersion
recorded an expense of $116,000 in 1998 and $132,000 in 1999. The agreement,
which has a term of ten years and is scheduled to expire in 2007, also provides
that beginning in 2002 the royalty rate will be set at 10% for the remainder of
the license term. Products for which Immersion currently pays MicroScribe a
royalty include Immersion's MicroScribe-3D digitizing product and the Pin-Point
arm, a medical device used for image-guided biopsies whose design is based upon
the MicroScribe-3D. The agreement also requires MicroScribe to indemnify
Immersion against claims that the technology MicroScribe has delivered to
Immersion infringes a third party's intellectual property rights.

     Cybernet Agreements. In March 1999, Immersion acquired patents and
in-process technology from Cybernet Systems Corporation in exchange for
1,291,200 shares of Immersion's common stock. In addition, Immersion entered
into a consulting services agreement with Cybernet, under which Immersion issued
Cybernet a warrant to purchase 322,800 shares of common stock at an exercise
price of $3.66 and agreed to pay Cybernet $300,000. Immersion paid $150,000 of
this amount in March 1999 and $75,000 of this amount in January 2000. Immersion
will pay the remaining $75,000 to Cybernet in January 2001. In connection with
this acquisition and consulting arrangement, Immersion agreed to provide
Cybernet with registration rights with respect to its common stock and the
common stock issuable upon exercise of the

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<PAGE>   99

warrant. As a result of these transactions, Cybernet is a holder of more than 5%
of Immersion's capital stock.

     There Agreements. In October 1999, Immersion entered into a marketing
agreement with There. Mr. Blank, a member of Immersion's board of directors,
serves as a director and is a minority shareholder of There. Pursuant to the
marketing agreement, There has agreed to promote Immersion's touch-enabling
technologies and its licensees' touch-enabled products. Immersion also has
agreed to promote There's services through a number of means, including
providing There up to $300,000 for its advertising and marketing programs. In
addition, in April 2000 Immersion purchased 540,540 shares of Series D preferred
stock of There for approximately $1.0 million.

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<PAGE>   100

                  STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                          AND MANAGEMENT OF IMMERSION

     The following table sets forth as of July 31, 2000 certain information with
respect to shares beneficially owned by (i) each person who is known by
Immersion to be the beneficial owner of more than 5% of Immersion's outstanding
shares of common stock, (ii) each of Immersion's directors, and the executive
officers named in the Summary Compensation Table and (iii) all current directors
and executive officers as a group. Beneficial ownership has been determined in
accordance with Rule 13d-3 under the Exchange Act. Under this rule, certain
shares may be deemed to be beneficially owned by more than one person (if, for
example, persons share the power to vote or the power to dispose of the shares).
In addition, shares are deemed to be beneficially owned by a person if the
person has the right to acquire shares (for example, upon exercise of an option
or warrant) within 60 days of the date as of which the information is provided;
in computing the percentage ownership of any person, the total number of shares
outstanding is deemed to include the number of shares deemed beneficially owned
by such person (and only such person) by reason of such acquisition rights. As a
result, the percentage of outstanding shares of any person is shown in the
following table does not necessarily reflect the person's actual voting power at
any particular date.

<TABLE>
<CAPTION>
                                              AMOUNT AND NATURE OF      OPTIONS INCLUDED IN      PERCENTAGE
            BENEFICIAL OWNER               BENEFICIAL OWNERSHIP(1)(2)   BENEFICIAL OWNERSHIP   OF OWNERSHIP(3)
            ----------------               --------------------------   --------------------   ---------------
<S>                                        <C>                          <C>                    <C>
Cybernet Systems Corporation.............          1,396,110                   311,502               8.3
  727 Airport Boulevard
  Ann Arbor, Michigan 48108-1639
Logitech International S.A. .............          1,197,329                        --               7.3
  6505 Kaiser Drive
  Fremont, California 94555-3615
Timothy Lacey............................            979,768                   172,191               5.9
Kenneth Martin...........................            171,671                    66,207               1.0
J. Stuart Mitchell.......................             99,049                    96,594                 *
Louis Rosenberg..........................          2,334,682                 1,072,682              13.2
Jennifer Saffo...........................             68,452                    64,728                 *
Bruce Schena(4)..........................            808,969                   417,582               4.8
Victor Viegas............................            155,278                   152,993                 *
Steven Blank.............................            148,437                    62,703                 *
Charles Boesenberg.......................             18,050                    17,500                 *
Jonathan Rubinstein......................             40,592                    30,522                 *
All executive officers and directors as a
  group (9 persons)......................          3,845,180                 1,981,511              20.8
</TABLE>

-------------------------
 *  Less than 1% of the outstanding shares of common stock.

(1) Except as indicated in the footnotes to this table and pursuant to
    applicable community property laws, the persons named in the table have sole
    voting and investment power with respect to all shares of common stock. To
    Immersion's knowledge, the entities named in the table have sole voting and
    investment power with respect to all shares of common stock shown as
    beneficially owned by them. Except as otherwise indicated, the address of
    each of the persons in this table is as follows: c/o Immersion Corporation,
    801 Fox Lane, San Jose, California 95131.

(2) The number of shares of common stock deemed outstanding includes shares
    issuable pursuant to stock options that may be exercised within 60 days
    after July 31, 2000.

(3) Based on 16,507,518 shares of common stock deemed outstanding as of July 31,
    2000.

(4) Includes 4,734 shares held of record by Mr. Schena's mother as custodian for
    a minor child.

                                       93
<PAGE>   101

                                  HT BUSINESS

OVERVIEW

     HT designs, manufactures, and markets computer-based medical simulators
that allow medical personnel to practice procedures without placing patients at
risk or practicing on live animals. HT's products integrate proprietary computer
software and tactile feedback robotics with new low-cost and high-power graphics
computers to achieve highly realistic simulation systems. HT sells its three key
simulation products in the United States, Canada, Europe and Asia.

     HT seeks initially to sell hardware systems to customers, followed by sales
of multiple software packages for specific medical procedures. This strategy
enables HT to generate repeat software sales with relatively high margins. HT
anticipates that as high margin software products begin to account for a greater
proportion of its product mix, HT will move toward profitability. HT employs a
direct sales force to leverage its strategic relationships with leading medical
device companies to provide simulation systems to hospitals, HMOs, nursing
schools, medical schools, emergency medical technician training programs, the
military, and other organizations involved in procedural medicine. HT markets
products through distributors outside the U.S.

     HT has several strategic relationships with medical device and
pharmaceutical companies. Currently HT maintains a co-marketing relationship
with Becton Dickinson and Co., the market leader in intravenous catheters and
blood collection devices. Required in-service training in the use of both of
these product lines can be facilitated by HT's CathSim products. HT also has a
co-development relationship with Medtronic, Inc. a world leader in medical
devices. Based on its initial success with the simulation technology, Medtronic
is working to broaden the use of simulation across its product lines.

     Grant and contract support for HT's simulation development has come from
the U.S. Department of Commerce's Advanced Technology Program, the Defense
Advanced Research Project Agency, the Health Care Finance Agency, Small Business
Innovative Research agreements with the National Institutes of Health and the
Department of the Navy, and grants and cooperative agreement with the Department
of the Navy.

HT'S PRODUCT OFFERINGS

     HT's three simulation product lines address intravenous catheterization
(CathSim), endovascular interventions (PreOp Endovascular) and endoscopy (PreOp
Endoscopy). All are comprised of software modules, an interface device and a
hardware platform. HT sells hardware systems for between $6,000 and $30,000,
followed by repeat sales of software to the installed base of hardware systems.
HT designs each product line to maximize the number of procedures that can be
simulated with minimal additional customer investment. The relatively low price
of HT's software modules provides an opportunity for repeat sales of high margin
software. In addition to sales, HT offers leasing options for its products.

VASCULAR ACCESS PRODUCT LINE: CATHSIM

     CathSim allows nurses, doctors, emergency medical technicians, and other
healthcare providers to practice and become skilled in each step of the most
common invasive medical procedures -- vascular access.

     The product line integrates a small robotic system developed by HT, called
AccuTouch(R). AccuTouch is a tactile feedback device that, under computer
control, simulates the feel of the procedure. AccuTouch simulates stretching the
skin to stabilize blood vessels as well as the manipulation of catheters, blood
collection tubes, needles and other related devices.

     In each CathSim software module, the user is presented with numerous
patient case studies. Each case study challenges the user's cognitive and motor
skills. Features for each of the modules include digital educational videos,
on-line help functions, the ability to cause a variety of complications and
instant

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<PAGE>   102

feedback for each decision during the procedure. CathSim modules track each
decision and construct an evaluation database for later review by the user or by
a supervisor.

     CathSim is a Microsoft Windows-compatible product. The four CathSim
software modules currently available cover intravenous access, pediatric
vascular access, geriatric vascular access, and phlebotomy. Other software
modules in development include an intravenous access skill evaluation module,
and those for peripherally inserted central catheters, mid-line catheters and
central venous catheters. HT offers the system with computer hardware as an
available option.

ENDOSCOPY PRODUCT LINE: PREOP ENDOSCOPIC SIMULATOR

     The PreOp Endoscopic Simulator simulates the look and feel of performing a
wide range of flexible endoscopic procedures. The system integrates a tactile
feedback robotic device that tracks the insertion of various fiberoptic
endoscopes and related medical devices and provides the user with realistic
tactile feel. The software replicates the video image of a real endoscopy to
provide an immersive environment that very closely approximates the visual and
tactile experience of treating a living patient.

     The PreOp Endoscopic Simulator provides training and skills maintenance for
one of the fast growing areas of procedural medicine, fiber optic endoscopy. The
PreOp Endoscopic Simulator was launched in April 1999. Three current software
modules provide simulations for diagnostic bronchoscopy, for establishing the
difficult airway, and for flexible sigmoidoscopy. These software modules provide
educational content for training in navigational and diagnostic skills and
biopsy capability. New software modules are being developed in urology,
gastroenterology, and other specialty areas to provide on-going releases of
software modules related to different procedures, anatomical variation and
severity of disease. Features for each of the modules includes digital
educational videos, on-line help functions, the ability to cause a variety of
complications, and instant feedback for each decision during the procedure. The
PreOp Endoscopic Simulator modules track the user's every move and construct an
evaluation database for later review by the user or by a supervisor.

     The PreOp Endoscopic Simulator consists of a personal computer, a robotic
interface device, a cart and case-based software modules containing a number of
training, skills maintenance and certification scenarios.

ENDOVASCULAR INTERVENTIONAL PRODUCT LINE: PREOP ENDOVASCULAR SIMULATOR

     HT's PreOp Endovascular product line simulates a real-time fluoroscopic
display and the manipulation of guidewires, catheters, angioplasty balloons and
many other interventional devices. HT launched the first software module for
cardiac pacemaker leads placement in January 1999 and has completed four
additional pacemaker leads placement software modules. HT is developing new
software for catheter navigation, balloon angioplasty and stent deployment for
peripheral, cardiac and neuro-anatomies. Features for each of the modules
include digital educational videos, on-line help functions, the ability to cause
a variety of complications, and instant feedback for each decision during the
procedure. The PreOp Endovascular Simulator modules track the user's every move
and construct an evaluation database for later review by the user or by a
supervisor.

     The PreOp Endovascular system consists of a personal computer, a robotic
interface device and case-based software modules containing a number of
training, skills maintenance and certification scenarios.

THE MARKET

     Practicing physicians, surgeons, nurses and allied healthcare workers
follow a required program of continuing education in their particular field,
leading to certification and periodic re-certification. New medical procedures
are continually being introduced in healthcare, and education and training play
a significant role in the efforts of medical device companies and healthcare
professionals to gain acceptance of new procedures as quickly as possible.

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<PAGE>   103

     Medical education can be divided into the teaching of cognitive skills and
that of essential motor skills. Much of the practice of medicine today is based
on procedures that involve motor skills. For example, putting a needle in a
patient's arm or using a fiber optic endoscope to examine pathology within the
patient's anatomy both require familiarity and dexterity. Simulation products
serve that part of the medical education curriculum involving training for
procedures that require motor skills to be carried out efficiently and
effectively.

SIMULATION PRODUCT MARKET SEGMENTS

     Medical Schools. These primary institutions for medical education provide
pre-clinical and clinical training to entry level medical students. Medical
schools use simulation products primarily for the initial training of novices
for basic procedures, such as vascular access and some endoscopic procedures.

     Teaching Hospitals. These institutions provide clinical training for
resident and fellow level students as well as continuing medical education for
practicing physicians and other healthcare professionals. Each individual
institution has a variety of different residency and fellowship programs that HT
believes will be served with multiple existing and new simulation products.
Leaders in various professional disciplines teach and practice in these
institutions. HT believes that these leaders will recognize the potential of
simulation products for competency assessment leading to certification.

     Non-teaching Hospitals. These acute care institutions are staffed by
practicing clinicians and other healthcare professionals who require continuing
education in new procedures and devices. Simulation products may be adopted for
competency assessment and certification and as a means for continuing education
on new procedures.

     Other Teaching Institutions. These institutions, which include nursing
schools and other institutions involved in allied healthcare professional
training, use simulation products primarily for training in basic procedures,
such as vascular access techniques.

     Medical Device/Pharmaceutical Companies. These manufacturers currently
provide medical training related to their products through in-house programs,
sponsored local training and in-service activities. HT believes that device
manufacturers will increasingly desire to integrate their product marketing with
simulation systems. The FDA is requiring more emphasis on training in the
approval process of medical devices, and HT believes that simulation training
will assist manufacturers in meeting these requirements in this area.

     Other. HT addresses other market segments with a limited number of
products. For example, clinical laboratories and home health companies use the
phlebotomy module with the CathSim product.

SALES ORGANIZATION

     HT employs a direct sales force that markets simulation systems to
hospitals, HMOs, nursing schools, medical schools, emergency medical technician
training programs, the military and other organizations involved in procedural
medicine. Within the U.S., HT has six regional sales representatives who are
responsible for achieving sales goals in their region. HT's sales force is
augmented through co-marketing arrangements with strategic partners. HT's sales
representatives work with partner sales people to promote and support HT's
products and to achieve agreed sales objectives.

     HT sells products in countries other than the U.S., including Japan, Korea,
Malaysia, China, Brazil, Lebanon and several major European countries, through
distributors and agents. HT has established relationships with distributors in
Japan, Korea, Hong Kong, and Malaysia and established relationships with agents
in Europe.

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<PAGE>   104

TECHNOLOGY

     HT has developed proprietary technologies that deliver four levels of
realism in a medical simulator as described below:

     Visual Realism. Like flight simulation technology for pilot training,
medical simulators should look realistic. HT's proprietary computer-based
anatomical models are made up of thousands of individual computer rendered
polygons - the more polygons in a model, the more realistic it can be. Realism
on the surface of these models is enhanced through a technique called texture
mapping. The result is an image that closely resembles an actual patient case.

     Physical Realism. Medical training requires direct interaction with objects
in the virtual environment. HT's researchers and engineers have developed
proprietary technology that allows for realistic interactive deformation of
virtual tissues based on Newtonian physics. With physical realism, the virtual
anatomy and medical devices "know" how to react to forces and gravity based on
characteristics of mass, elasticity, and damping.

     Physiological Realism. To make anatomical models more realistic, HT has
developed proprietary software methods for programmed behaviors, allowing
virtual objects to react with simulated muscle contractions, bruising, bleeding,
and many other physiological properties.

     Tactile Realism. A large part of learning a complex medical procedure,
particularly minimally invasive surgical and interventional procedures, relates
to motor skills. For training to be effective, it needs to allow the user to
feel appropriate forces between medical devices and tissue. HT's AccuTouch
tactile feedback technology has been developed to provide realistic force
feedback to the user.

INTELLECTUAL PROPERTY

     HT has built a significant competitive advantage though creation of an
extensive library of medical simulation software. HT's engineers do not build
simulators -- rather, they build libraries of software tools that enable
simulators to be built. HT's simulation development staff uses these tools to
create simulator products. It is HT's strategy to protect this library through a
combination of trade secrets, patents, and copyrights.

     HT has extended the field of haptics, or force feedback, in a number of
areas that make its simulators feel more realistic, more effective in training
and more cost-effective and convenient to use. These innovations are contained
in a group of utility and design patents, of which one U.S. patent is issued and
four U.S. and three international patents are pending that cover key elements of
each of our product areas.

     HT's policy is to protect its proprietary position by, among other methods,
filing patent applications in the United States and in other selected countries
to protect technology, inventions and improvements that are important to the
development of its business and protection of its competitive position. HT has
filed several patent applications with the United States Patent and Trademark
Office covering key elements within each of its product lines. HT has also filed
several Patent Cooperation Treaty patent applications to obtain patent
protection outside of the United States. HT is in the process of filing
additional patent applications to cover additional technologies related to HT's
simulation products. There is no assurance that the pending patent applications
or future patent applications will result in issued patents and that, if issued,
the patents will not be challenged or circumvented by competitors. HT also
relies on trade secrets and proprietary technology that it seeks to protect, in
part, through written confidentiality agreements with employees, consultants and
other parties.

     Registered trademark certification has been received for AccuTouch,
CathSim, TELEOS(R), High Techsplanations(R), HT (and design)(R) and T-VOX(R). HT
retains the rights to web site names: ht.com, htmedical.com, endosim.com and
cathsim.com.

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COMPETITION

     Due to the significant potential market for the proposed technologies,
other organizations are pursuing similar technologies. Although HT believes that
its current and planned products possess a unique combination of characteristics
and that its competitors are not currently marketing or testing any products
that include all of the attributes of HT's products, there is no assurance that
such competitors will not develop and market products in the future that
effectively compete with HT's products.

     Two of HT's competitors are targeting markets similar to those targeted by
HT. Simbionics Ltd., a small start-up company based in Tel-Aviv, Israel, has
demonstrated prototypes recently for flexible sigmoidoscopy and cystoscopy. VP
Medical, formerly known as VR Solutions and Virtual Presence, based in the
United Kingdom and with a US operation in Boston, has a computer-based
simulation product called MYST VR for laparoscopic simulation. The product is
focused on basic skills training and the primary customer for the system to date
has been Ethicon Endosurgery. The U.S. Operations are directed by former HT
engineer Dwight Meglan, Ph.D. and is focused on endovascular simulation. Other
potential competitors include:

     - Lockheed Martin;

     - Mitsubishi Electric Company;

     - Boston Dynamics;

     - Medical Educational Technologies, Inc.; and

     - MedSim/Eagle Simulations.

     HT believes that none of these potential competitors have addressed the
segments targeted by HT, and the competitive technologies that have been
demonstrated are generally more expensive or not as realistic. Many of these
competitors and potential competitors have greater financial and other resources
than HT.

MEDTRONIC AGREEMENT

     HT has developed a multifaceted relationship with Medtronic, Inc., a world
leader in medical device technology for whom HT developed a physician training
product for transvenous pacemaker leads placement. Under the terms of the
investment agreement between HT and Medtronic dated August 10, 1999 and first
amended on March 3, 2000, Medtronic invested $3.5 million in the form of a
secured note convertible into HT preferred stock, and was given an option to
purchase 250,000 shares of HT preferred stock. The convertible note and the
option are convertible into and exercisable for HT preferred stock at a price
equal to the lower of $8.00 per share or the price at which any shares of HT
preferred stock are sold. The convertible note and the option provide that if HT
is acquired, the convertible note and option will be convertible or exercisable
for the same consideration that HT stockholders receive in the acquisition.
Additional rights that the investment agreement provides to Medtronic include
the exclusive right for varying periods of time to use technologies developed
for Medtronic by HT, the right to receive pricing no less favorable than that
given to other companies by HT for comparable virtual reality simulation
systems, and rights of first offer with respect to development project
opportunities with HT and with respect to the purchase of all or a portion of
HT. On August 15, 2000, Immersion, HT and Medtronic entered into a second
amendment to the investment agreement which more precisely defines the fields in
which Medtronic may assert its right of first refusal for proposed development
agreements, clarifies the right of HT and Immersion to grant intellectual
property licenses for technology otherwise included in the scope of Medtronic's
limited exclusivity rights, more precisely defines the scope of Medtronic's
right to receive favorable pricing on comparable products, and eliminates
certain reporting and board observer rights provided by the original agreement.
The second amendment acknowledges that, pursuant to the terms of the merger
agreement, Medtronic's convertible note and option will be convertible into or
exercisable for Immersion common stock after the merger, but the amendment does
not substantively affect Medtronic's rights under the convertible note or option
or otherwise affect Medtronic's investment in HT.

                                       98
<PAGE>   106

EMPLOYEES AND CONTRACTORS

     As of August 15, 2000, HT had fifty-one full time employees, of whom 12 are
engaged in management and administration, 25 are engaged in engineering and
development, and 14 are engaged in sales and marketing.

FACILITIES AND PROPERTIES

     HT leases approximately 19,000 square feet of office space in Gaithersburg,
Maryland. This ten-year lease commenced on June 1, 1999. Approximately 2,500
square feet of the Gaithersburg facility has been set aside for sublet until
expansion is necessary. In addition, other provisions for expansion into
adjacent space have been negotiated. The current monthly lease payment is
approximately $23,000. HT's Gaithersburg, Maryland facility is expected to be
adequate for at least the next twelve months.

                                       99
<PAGE>   107

                  STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                              AND MANAGEMENT OF HT

     The following table sets forth information, as of August 15, 2000, known to
HT with respect to the beneficial ownership of HT capital stock by: (1) each
stockholder known to HT to be the beneficial owner of more than 5% of HT's
capital stock; (2) all directors; (3) all named executive officers; and (4) all
directors and executive officers as a group.

     Shares are deemed to be beneficially owned by a person if the person has
the right to acquire shares (for example, upon exercise of an option or warrant)
within 60 days of the date as of which the information is provided; in computing
the percentage ownership of any person, the total number of shares outstanding
is deemed to include the number of shares deemed beneficially owned by such
person, and only such person, by reason of such acquisition rights. As a result,
the percentage of outstanding shares of any person shown in the following table
does not necessarily reflect the person's actual voting power at any particular
date. Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. Unless
otherwise indicated, the address of each of these individuals is HT Medical
Systems, Inc., 55 West Watkins Mill Road, Gaithersburg, Maryland 20878.

<TABLE>
<CAPTION>
                                          AMOUNT AND                 OPTIONS
                                          NATURE OF                INCLUDED IN              AGGREGATE PERCENT
            NAME AND ADDRESS              BENEFICIAL               BENEFICIAL    PERCENT     OF OUTSTANDING
          OF BENEFICIAL OWNER             OWNERSHIP      CLASS      OWNERSHIP    OF CLASS     CAPITAL STOCK
          -------------------             ----------   ---------   -----------   --------   -----------------
<S>                                       <C>          <C>         <C>           <C>        <C>
Jonathan R. Merril......................    429,486       Common                  19.0%(1)        17.2%
  11718 Bowman Green Drive
  Reston, VA 20190
Medtronic, Inc.(2)......................    687,500     Series A     687,500        74%(3)          30%
  7000 Central Ave., NE                                Preferred
  Minneapolis, MN 55432
Gregory L. Merril.......................    937,500       Common                  41.4%(1)        37.4%
Rodney G. Hilton........................    161,352       Common     161,352       7.1%(1)         6.1%
Jill N. Whitley.........................     46,987       Common      41,281       2.0%(1)         1.9%
Donald M. Spero.........................     88,185       Common      12,000       3.9%(1)         3.5%
Stephen B. Schuler......................     13,500       Common      13,500          *              *
All executive officers and directors as   1,247,524       Common     228,133      50.0%(1)        45.7%
  a group (5 persons)...................
</TABLE>

-------------------------
 *  Less than 1% of the outstanding shares of HT stock.

(1) Based on 2,264,508 shares of common stock deemed outstanding as of August
    15, 2000.

(2) Includes 437,500 shares of Series A preferred stock which Medtronic has the
    right to acquire upon the conversion of a convertible note and 250,000
    shares of Series A preferred stock which Medtronic has the right to acquire
    pursuant to an option exercisable at a price of $8.00 per share.

(3) Based on 240,107 shares of preferred stock deemed outstanding as of August
    15, 2000.

                                       100
<PAGE>   108

                    DESCRIPTION OF IMMERSION'S CAPITAL STOCK

     Immersion's 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 summary of provisions of the
common stock and preferred stock is subject to, and qualified in its entirety
by, Immersion's certificate of incorporation and bylaws and by the provisions of
applicable law.

COMMON STOCK

     As of August 7, 2000, there were 16,513,018 shares of common stock
outstanding held by approximately 188 stockholders of record. Subject to
preferences that may be applicable to any preferred stock outstanding at the
time, the holders of outstanding shares of common stock are entitled to receive
dividends out of assets legally available at the times and in the amounts that
the board from time to time may determine in its sole discretion. Holders of
common stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders. Cumulative voting for the election of
directors is not authorized by Immersion's certificate of incorporation, which
means that the holders of a majority of the shares voted can elect all of the
directors then standing for election. Immersion's common stock is not entitled
to preemptive rights and is not subject to conversion or redemption. If
Immersion liquidates, dissolves, or winds-up its business, the holders of common
stock would be entitled to share ratably in all assets remaining after payment
of liabilities and the liquidation of any preferred stock. Each outstanding
share of common stock is, and all shares of common stock to be outstanding upon
completion of this offering upon payment will be, duly and validly issued, fully
paid and nonassessable. The rights, preferences and privileges of the holders of
common stock are subject to, and may be adversely affected by, the rights of the
holders of any shares of preferred stock that Immersion may issue in the future.

PREFERRED STOCK

     In connection with Immersion's reincorporation in the state of Delaware in
1999, all outstanding shares of preferred stock were converted into an aggregate
of 5,131,100 shares of common stock, and 5,000,000 shares of undesignated
preferred stock were authorized for issuance. Immersion's board of directors has
the authority, without further action by the stockholders, to issue this
undesignated preferred stock in one or more series. In addition, the board may:

     - fix the designations, powers, preferences, privileges and relative
       participating, optional or special rights of this preferred stock; and

     - set the qualifications, limitations or restrictions of this preferred
       stock, including dividend rights, conversion rights, voting rights, terms
       of redemption and liquidation preferences.

     Any or all of these rights may be greater than the rights of the common
stock. As a result, the board of directors, without stockholder approval, may
issue preferred stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of common
stock. Preferred stock could thus be issued quickly with terms calculated to
delay or prevent a change in Immersion's control or make removal of Immersion's
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the common stock. Immersion
has no present plans to issue any shares of preferred stock.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS

     Provisions of Delaware law and Immersion's certificate of incorporation and
bylaws could make more difficult the acquisition of Immersion by means of a
tender offer, a proxy contest or other means, or the removal of incumbent
officers and directors. Immersion expects these provisions to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of Immersion to negotiate first
with its board of directors. Immersion believes that the benefits provided by
its ability to negotiate with the proponent of an unfriendly or unsolicited
proposal outweigh the

                                       101
<PAGE>   109

disadvantages of discouraging these proposals. Immersion believes the
negotiation of an unfriendly or unsolicited proposal could result in an
improvement of its terms.

     Immersion is subject to Section 203 of the Delaware General Corporation
Law. This provision generally prohibits any Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years following the date the stockholder became an interested stockholder,
unless:

     - prior to that date, the board of directors approved either the business
       combination or the transaction that resulted in the stockholder's
       becoming an interested stockholder;

     - upon completion of the transaction that resulted in the stockholder's
       becoming an interested stockholder, the interested stockholder owned at
       least 85% of the voting stock outstanding at the time the transaction
       began; or

     - on or following that date, the business combination is approved by the
       board of directors and authorized at an annual or special meeting of
       stockholders by the affirmative vote of at least 66 2/3% of the
       outstanding voting stock that is not owned by the interested stockholder.

     Section 203 defines a business combination to include:

     - any merger or consolidation involving the corporation and the interested
       stockholder;

     - any sale, transfer, pledge or other disposition of 10% or more of the
       assets of the corporation in a transaction involving the interested
       stockholder;

     - subject to exceptions, any transaction that results in the issuance or
       transfer by the corporation of any stock of the corporation to the
       interested stockholder;

     - any transaction involving the corporation that has the effect of
       increasing the proportionate share of the stock of any class or series of
       the corporation beneficially owned by the interested stockholder; and

     - the receipt by the interested stockholder of the benefit of any loans,
       advances, guarantees, pledges or other financial benefits provided by or
       through the corporation.

     In general, Section 203 defines an interested stockholder as an entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by that entity or person.

     Immersion's certificate of incorporation provides that its board of
directors will be divided into three classes of directors, with each class
serving a three-year term. The term of the first class of directors expires at
the 2003 annual meeting. The term of the second class expires at the 2001 annual
meeting. The term of the third class expires at the 2002 annual meeting.

     Immersion believes that a classified board of directors helps assure the
continuity and stability of the board of directors and its business strategies
and policies as determined by the board of directors, since a majority of the
directors at any given time will have had prior experience as directors of
Immersion. Immersion believes that this, in turn, will permit the board of
directors to represent the interests of stockholders more effectively.

     With a classified board of directors, at least two annual meetings of
stockholders will generally be required to effect a change in the majority of
the board of directors. As a result, a classified board of directors may
discourage proxy contests for the election of directors or purchases of a
substantial block of Immersion's common stock because it could prevent obtaining
control of the board of directors in a relatively short period of time. The
classification provision could also have the effect of discouraging a third
party from making a tender offer or attempting to obtain control of Immersion in
some other manner. Under the Delaware General Corporation Law, a director on a
classified board may be removed by the stockholders of the corporation only for
cause. Immersion's certificate of incorporation does not

                                       102
<PAGE>   110

provide for cumulative voting in the election of directors. The amendment of the
provisions relating to the classified board requires approval by 66 2/3% or more
of the outstanding common stock.

     Further, provisions of Immersion's certificate of incorporation and bylaws
prevent Immersion's stockholders from taking action by means of written consent
and require Immersion's stockholders to provide advance notice before nominating
directors and bringing stockholder proposals.

TRANSFER AGENT AND REGISTRAR

     The transfer agent and registrar for Immersion's common stock is
BankBoston, N.A.

                                       103
<PAGE>   111

               COMPARISON OF IMMERSION AND HT STOCKHOLDER RIGHTS

     The rights of holders of HT common stock and preferred stock are governed
by the Maryland General Corporation Law, known as Maryland law. The rights of
the HT stockholders are also governed by HT's Articles of Incorporation, as
amended, referred to as the HT charter, and HT's Bylaws, referred to as the HT
bylaws.

     The rights of holders of Immersion common stock are governed by the
Delaware General Corporation Law, known as Delaware law. The rights of the
Immersion stockholders are also governed by Immersion's Certificate of
Incorporation, referred to as the Immersion charter, and Immersion's Bylaws,
which are referred to as the Immersion bylaws. After the completion of the
merger, the holders of HT common stock and preferred stock will become holders
of Immersion common stock. As a result, the rights of the former HT stockholders
will be governed by Delaware law, the Immersion charter and the Immersion
bylaws.

     The following is a summary of some of the differences between the HT
capital stock and the Immersion capital stock, between Maryland law and Delaware
law, between the HT charter and the Immersion charter and between the HT bylaws
and the Immersion bylaws. This summary is an overview of only certain portions
of these laws and documents and does not purport to be a complete description of
their similarities and differences. We encourage you to also read the charters
and bylaws of HT and Immersion carefully, copies of which may be obtained by
contacting the Secretaries of Immersion and HT.

HT CAPITAL STOCK

     The authorized capital stock of HT consists of 6,000,000 shares of common
stock, par value $0.01 per share, and 1,500,000 shares of preferred stock, of
which an unspecified number of shares are designated Series A preferred stock,
par value $0.01 per share, referred to as preferred stock or HT preferred stock.

     The holders of HT preferred stock are entitled to receive dividends prior
to any payment of any dividend on the common stock or any other equity security
of HT that is junior to the preferred stock. The holders of preferred stock are
entitled to receive annual dividends in an amount equal to the greater of $0.80
per share, when and if declared by the board, or the dividend paid on each
outstanding share of common stock. The dividends are cumulative and payable on a
quarterly basis, but they may be paid only when funds are legally available. Any
dividends on any shares of preferred stock that are accrued but unpaid as of the
date of conversion of any such shares will be forfeited.

     In the event of any voluntary or involuntary liquidation, dissolution or
winding up of HT, holders of HT preferred stock are entitled to receive a
liquidation preference amount prior to any distribution to the holders of the
common stock or any other junior equity security, unless the shares are
converted into common stock at or prior to that time. The amount of this
liquidation preference is equal to the sum of $8.00 per share plus all accrued
but unpaid dividends on each such share. If the funds available for distribution
are insufficient to permit payment of the full liquidation preference amount,
the entire assets and funds of the corporation legally available for
distribution will be distributed pro rata to the holders of preferred stock.

     Each share of HT preferred stock is convertible into one share of HT common
stock, subject to adjustment on the happening of various events. Shares of
preferred stock will be automatically converted into common stock at the
conversion ratio in effect upon the consummation of a firm commitment
underwritten public offering of the common stock of at least $10,00,000 at a
price of at least $10 per share.

     Some holders of HT preferred stock have a right of first refusal pursuant
to an agreement with HT to purchase their pro rata share, calculated on a fully
diluted, as-if converted basis, of additional shares of common stock that HT may
propose to issue and sell from time to time. The right of first refusal also
applies to the issuance of securities that are convertible into shares of common
stock.

                                       104
<PAGE>   112

     Some holders of shares of HT preferred stock are parties to a registration
rights agreement with HT that entitles them to request that HT prepare and file
a registration statement under the Securities Act of 1933, as amended, covering
the sale of shares of common stock issued or issuable to these stockholders on
the conversion of the preferred stock. In addition, at any time that HT proposes
to register any shares of its common stock or any securities convertible into
common stock (other than securities issuable pursuant to employee compensation
plans or for other specified purposes), the same holders of preferred stock are
entitled to require HT to register for sale all or a portion of shares of common
stock issued or issuable to these stockholders.

     Upon the conversion of the HT preferred stock into Immersion common stock
in the merger, former holders of HT preferred stock will no longer have dividend
and liquidation preferences, rights of first refusal or registration rights.

DIFFERENCES IN STOCKHOLDER RIGHTS

     There are some differences between Delaware law, the Immersion charter and
Immersion bylaws, and Maryland Law, the HT charter and HT bylaws. We have
summarized some of these differences below, although this is only a summary of
some provisions and does not purport to be a complete description of these
similarities and differences.
             IMMERSION                                       HT

                   INDEMNIFICATION OF DIRECTORS AND OFFICERS

<TABLE>
<S>                                                <C>
Delaware law generally permits                     Under Maryland law, a corporation may
indemnification of expenses incurred in the        indemnify and advance expenses to its
defense or settlement of a derivative or           directors and officers and other persons who
third party action, provided there is a            are made a party to any proceeding by reason
determination:                                     of their service to or on behalf of the
- by a majority of the disinterested               corporation, unless:
  directors, even though less than a quorum,       - the act or omission was material to the
- by a committee of such directors                 matter giving rise to the proceeding and was
  designated by a majority vote of such              committed in bad faith or was the result
  directors, even though less than a quorum,         of active and deliberate dishonesty,
- by independent legal counsel, regardless         - the person actually received an improper
  of whether a disinterested quorum of             personal benefit in money, property or
  directors exists or                                services, or
- by a majority vote of a quorum of the            - in the case of any criminal proceeding,
  stockholders that the person seeking             the person had reasonable cause to believe
  indemnification acted in good faith and in         that the act or omission was unlawful.
  a manner reasonably believed to be in or         Also, Maryland law requires that such
  not opposed to the best interests of the         indemnification may not be made until it has
  corporation. Without court approval,             been determined that the person has met the
  however, no indemnification may be made in       applicable standard of conduct necessary for
  respect of any derivative action in which        indemnification and until the corporation
  such person is adjudged liable for negli-        has received a written undertaking by the
  gence or misconduct in the performance of        person seeking indemnification to repay the
  his or her duty to the corporation.              amount paid or reimbursed in the event that
Under Delaware law, rights to                      it is ultimately determined that the
indemnification and expenses are                   applicable standard of conduct was not met.
non-exclusive, in that they need not be            The HT charter requires HT to indemnify and
limited to those expressly provided by             advance expenses to each director, officer
statute. The Immersion bylaws provide for          and other persons who have served in
indemnification and advancement of expenses        specified capacities at the request of HT to
to each of its directors, officers and             the fullest extent permitted by Maryland
employees to the fullest extent permitted by       law.
Delaware law, provided that Immersion
receive a written undertaking from such
persons to repay any amounts advanced if it
</TABLE>

                                       105
<PAGE>   113

             IMMERSION                                       HT
<TABLE>
<S>                                                <C>
is determined that they were not entitled to
indemnification
</TABLE>

                         CLASSIFIED BOARD OF DIRECTORS

<TABLE>
<S>                                                <C>
The Immersion charter and bylaws divide the        Although Maryland law permits a
board of directors into three classes.             corporation's charter to divide its
Directors serve for three years, with one          directors into classes with specified terms
class being elected each year.                     of office, the HT charter does not provide
                                                   for a classified board of directors.
</TABLE>

                      REMOVAL OF DIRECTORS BY STOCKHOLDERS

<TABLE>
<S>                                                <C>
Delaware law provides that, unless the             Under Maryland law, unless otherwise
charter provides otherwise, directors              specified in the charter, the stockholders
serving on a classified board of directors         may remove any director, with or without
may be removed only for cause. The Immersion       cause, by the affirmative vote of a majority
charter does not provide for removal without       of all of the votes entitled to be cast
cause.                                             generally for the election of directors. The
                                                   HT bylaws provide that any director may be
                                                   removed, with or without cause, by the
                                                   affirmative vote of the holders of a
                                                   majority of the issued and outstanding stock
                                                   and entitled to vote at any meeting called
                                                   for that purpose.
</TABLE>

                            FILLING BOARD VACANCIES

<TABLE>
<S>                                                <C>
Delaware law provides that vacancies and           Under Maryland law, vacancies that result
newly created directorships may be filled as       from the removal of a director may be filled
provided in the bylaws. The Immersion bylaws       by the stockholders or by a majority of the
provide that vacancies may be filled by a          remaining directors. The HT bylaws provide
majority of the directors then in office,          that vacancies that result from death,
even if less than a quorum.                        resignation, removal, increase in the number
                                                   of directors or any other reason may be
                                                   filled by a majority of the remaining
                                                   directors.
</TABLE>

                         SPECIAL STOCKHOLDERS' MEETING

<TABLE>
<S>                                                <C>
Under Delaware law, a special meeting of           Under Maryland law, a special meeting of the
stockholders may be called by the board of         stockholders may be called by the President,
directors or by any other person authorized        the board of directors or any other person
to do so in the charter or the bylaws. The         specified in the charter or the bylaws.
Immersion charter and bylaws provide that a        Also, Maryland law provides that a special
special stockholders' meeting may be called        meeting of the stockholders may also be
either by a majority of the board of               called upon the written request of the
directors or by the holders of at least 10%        holders of at least 25% of the votes
of all of the outstanding shares entitled to       entitled to be cast at a meeting, or such
vote at the meeting.                               greater or lesser percentage as the charter
                                                   or bylaws provide. The HT bylaws provide
                                                   that a special stockholders' meeting may be
                                                   called at any time by the president, vice
                                                   president or by a majority of the members of
                                                   the board of directors and that such a
                                                   meeting must be called by the president,
                                                   vice president, secretary or any director
                                                   upon the written request of the holders of a
                                                   majority of all of the outstanding shares
                                                   that are entitled to vote.
</TABLE>

                                       106
<PAGE>   114

             IMMERSION                                       HT
                   ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
              IN LIEU OF A STOCKHOLDER VOTE AT STOCKHOLDER MEETING

<TABLE>
<S>                                                <C>
Under Delaware law, stockholders may take          Under Maryland law, stockholders entitled to
action by written consent signed by a              vote may take action in lieu of voting at a
majority of the stockholders' entitled to          stockholders' meeting if a unanimous written
vote in lieu of a stock holder meeting             consent setting forth the action to be taken
unless otherwise provided in the charter.          is signed by each stockholder entitled to
The Immersion charter prohibits stock              vote on the matter. The HT bylaws provide
holders to take any action by written              that stockholders may take action by
consent in lieu of a meeting. All                  unanimous written consent in lieu of a
stockholder action must take place by a            stockholders' meeting.
stockholder vote at a meeting of
stockholders.
</TABLE>

                       BUSINESS COMBINATION OFFER STATUTE

<TABLE>
<S>                                                <C>
Under Delaware law, certain business               There is no comparable statute under
combinations, namely mergers, sales of             Maryland law.
assets, and similar transactions between a
Delaware corporation and certain "interested
stockholders" are subject to a three-year
moratorium unless specified conditions are
met. This restriction only applies to
Delaware corporations that have a class of
voting stock that is:
- listed on a national securities exchange,
- authorized for quotation on the Nasdaq
  Stock Market, or
- held of record by more than 2,000
stockholders. Because Immersion's common
stock is currently authorized for quotation
on Nasdaq, this restriction applies to
Immersion.
</TABLE>

                              AMENDMENT OF CHARTER

<TABLE>
<S>                                                <C>
Under Delaware law, a corporation's charter        Under Maryland law, the charter of a
may be amended upon the approval of the            corporation may be amended if the board of
board of directors and the approval of a           directors adopts a resolution setting forth
majority of the outstanding shares entitled        the proposed amendment and, as provided in
to vote on the amendment.                          the HT charter, the stockholders approve the
                                                   amendment by the affirmative vote of a
                                                   majority of all of the votes entitled to be
                                                   cast on the amendment.
</TABLE>

                              AMENDMENT OF BYLAWS

<TABLE>
<S>                                                <C>
Delaware law provides that a corporation's         Under Maryland law, the stockholders have
bylaws may be amended by the stockholders,         the power to amend or repeal the bylaws
and the charter may grant such power to            except to the extent that the charter or
amend to the board of directors. The               bylaws vest such power in the board of
Immersion charter and bylaws provide that          directors. The HT bylaws provide that the
the Immersion bylaws may be amended by the         board of directors also has the power to
affirmative vote of a majority of the              amend or repeal the bylaws.
outstanding shares entitled to vote at an
election of directors or by a majority of
the board of directors.
</TABLE>

                                       107
<PAGE>   115

             IMMERSION                                       HT
                                APPRAISAL RIGHTS

<TABLE>
<S>                                                <C>
Under Delaware law, a stockholder of a             Under Maryland law, a stockholder may demand
corporation participating in certain mergers       and receive payment of the fair value of the
and reorganizations may be entitled to             stockholder's shares if:
receive the fair value of its shares in lieu       - the corporation consolidates or merges
of the consideration it would otherwise            with another corporation;
receive in the transaction. Appraisal rights       - the stockholder's stock is to be acquired
are not available to stockholders with             in a stock exchange;
respect to a merger or consolidation by a          - the corporation transfers all or
corporation, the shares of which are either        substantially all of its assets; or
listed on a national securities exchange or        - the corporation amends its charter in a
designated as a national market system             way that substantially adversely affects the
security or an interdealer quotation system          stockholder's rights.
security by the National Association of            The objecting stockholder must comply with
Securities Dealers, Inc., or are held of           the procedural requirements of Maryland law
record by more than 2,000 holders if the           in order to perfect his or her appraisal
stockholders receive shares of the surviving       rights. For a more detailed discussion of
corporation or shares of any other                 these appraisal rights, see "Terms of the
corporation that are similarly listed or           Merger Agreement and Related
dispersed, and the stockholders do not             Transactions -- Appraisal Rights of
receive any other property in exchange for         Objecting Stockholders" hereunder.
their shares except cash for fractional
shares. Appraisal rights are also
unavailable under Delaware law to
stockholders of a corporation surviving a
merger if no vote of those stockholders is
required to approve the merger because,
among other things, the number of shares to
be issued in the merger does not exceed 20%
of the shares of the surviving corporation
outstanding immediately before the merger
and certain other conditions are met.
</TABLE>

                                   DIVIDENDS

<TABLE>
<S>                                                <C>
Delaware law permits the payment of                The HT charter provides for dividend and
dividends and redemption of stock out of           liquidation preferences as described above.
surplus (including paid-in and earned              Upon the conversion of HT preferred stock
surplus) or out of net profits for the             into Immersion common stock in the merger,
current and immediately preceding fiscal           former holders of HT preferred stock will no
years.                                             longer have any preferences.
</TABLE>

                                       108
<PAGE>   116

             IMMERSION                                       HT
                        LIMITATION OF DIRECTOR LIABILITY

<TABLE>
<S>                                                <C>
The Immersion charter eliminates the               Under Maryland law, a director's liability
liability of directors to the fullest extent       to the corporation or its stockholders may
permissible under Delaware law. Delaware law       not be limited or eliminated to the extent
permits a corporation to limit the personal        that it is proved that the director or
liability of a director to the corporation         officer actually received an improper
or its stockholders for monetary damages for       benefit or profit for the amount of the
breach of duties as a director, except in          benefit or to the extent that a final
the following circumstances:                       adjudication is entered in a proceeding
- breach of the director's duty of loyalty         based on a finding that the director's or
  to the corporation or its stockholders;          officer's action, or failure to act, was the
- acts or omissions not in good faith or           result of active and deliberate dishonesty
  involving intentional misconduct or              and was material to the cause of the action
  knowing violations of law;                       adjudicated in the proceeding. The HT
- the payment of unlawful dividends or             charter provides that, to the maximum extent
  unlawful stock repurchases or redemptions;       permitted by Maryland law, no person who is
  or                                               or was a director or officer of the
- transactions in which the director               corporation shall be personally liable to
  received an improper personal benefit.           the corporation or its stockholders for
                                                   money damages.
</TABLE>

                        STOCKHOLDERS APPROVAL OF MERGERS

<TABLE>
<S>                                                <C>
Delaware law generally requires that the           Maryland law provides that two-thirds of all
holders of a majority of the shares of the         of the votes entitled to be cast at a
target and the acquiring corporations              stockholders' meeting are required to
approve statutory mergers.                         approve a merger or consolidation, a
                                                   transfer of all or substantially all of the
                                                   corporation's assets or an exchange of the
                                                   corporation's stock.
</TABLE>

                                    EXPERTS

     The consolidated financial statements of Immersion Corporation as of and
for the years ended December 31, 1999, 1998 and 1997 included in this proxy
statement/prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing in this proxy statement/prospectus
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.

     The consolidated financial statements of HT Medical Systems, Inc. at May
31, 2000 and 1999, and for the years then ended, included in the proxy statement
of HT Medical Systems, Inc., which is referred to and made a part of this
registration statement of Immersion Corporation, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon (which
contains an explanatory paragraph describing conditions that raise substantial
doubt about the Company's ability to continue as a going concern as described in
Note 11 to the consolidated financial statements) appearing elsewhere herein,
and are included in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.

                                 LEGAL MATTERS

     The validity of the shares of Immersion common stock offered by this proxy
statement/prospectus and the discussion of federal income tax consequences in
connection with the merger in this proxy statement/prospectus will be passed
upon for Immersion by Heller Ehrman White & McAuliffe LLP. The discussion of
federal income tax consequences in connection with the merger in this proxy
statement/ prospectus will be passed upon for HT by Duane, Morris & Heckscher
LLP.

                                       109
<PAGE>   117

                                   TRADEMARKS

     Immersion and HT own trademarks rights with respect to various trademarks
and service marks contained in this proxy statement/prospectus. This document
also includes trademarks, service marks or tradenames of companies other than
Immersion and HT, which are the property of their respective owners.

                                       110
<PAGE>   118

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
IMMERSION'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................   F-2
Consolidated Balance Sheets as of December 31, 1999 and
  1998......................................................   F-3
Consolidated Statements of Operations for the Years Ended
  December 31, 1999, 1998 and 1997..........................   F-4
Consolidated Statements of Stockholders' Equity and
  Comprehensive Loss for the Years Ended December 31, 1999,
  1998 and 1997.............................................   F-5
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1999, 1998 and 1997..........................   F-6
Notes to Consolidated Financial Statements..................   F-7

IMMERSION'S UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
  STATEMENTS
Condensed Consolidated Balance Sheets as of June 30, 2000
  and 1999..................................................  F-21
Condensed Consolidated Statements of Operations for the Six
  Months Ended June 30, 2000 and 1999.......................  F-22
Condensed Consolidated Statements of Cash Flows for the Six
  Months Ended June 30, 2000 and 1999.......................  F-23
Notes to Condensed Consolidated Financial Statements........  F-24

HT'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors..............................  F-32
Consolidated Balance Sheets at May 31, 2000 and 1999........  F-33
Consolidated Statements of Operations for the Years Ended
  May 31, 2000 and 1999.....................................  F-34
Consolidated Statements of Stockholders' Deficit for the
  Years Ended May 31, 2000 and 1999.........................  F-35
Consolidated Statements of Cash Flows for the Years Ended
  May 31, 2000 and 1999.....................................  F-36
Notes to Consolidated Financial Statements..................  F-37
</TABLE>

                                       F-1
<PAGE>   119

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders
  of Immersion Corporation:

     We have audited the accompanying consolidated balance sheets of Immersion
Corporation and its subsidiary (the Company) as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity and
comprehensive loss and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Immersion Corporation and its
subsidiary at December 31, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1999
in conformity with accounting principles generally accepted in the United States
of America.

DELOITTE & TOUCHE LLP
San Jose, California
February 4, 2000

(March 9, 2000 as to Note 14)

                                       F-2
<PAGE>   120

                             IMMERSION CORPORATION

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

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1999       1998
                                                              -------    -------
<S>                                                           <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $46,527    $ 2,592
  Short-term investments....................................    4,781        402
  Accounts receivable (net of allowances for doubtful
     accounts of: 1999, $134; and 1998, $92)................    1,064      1,111
  Inventories...............................................      660        481
  Prepaid expenses and other assets.........................    1,057         99
                                                              -------    -------
       Total current assets.................................   54,089      4,685
Property -- net.............................................      591        329
Purchased patents and technology............................    4,687        945
Other assets................................................       71         --
                                                              -------    -------

Total assets................................................  $59,438    $ 5,959
                                                              =======    =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
  STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $   750    $   410
  Accrued compensation......................................      180        171
  Other accrued liabilities.................................      503         82
  Deferred revenue..........................................    1,316         --
  Customer advances.........................................       39         46
  Income taxes payable......................................        2          1
                                                              -------    -------
       Total current liabilities............................    2,790        710
                                                              -------    -------
Commitments and contingencies (Notes 6 and 13)
Redeemable convertible preferred stock, Series C -- $0.001
  par value; 863,778 shares designated; shares issued and
  outstanding: 1999, none; 1998, 863,771....................       --      1,476
                                                              -------    -------
Stockholders' equity:
  Convertible preferred stock, $0.001 par value; 5,000,000
     shares authorized:
     Series A -- $0.001 par value; 2,495,648 shares
      designated; shares issued and outstanding: 1999, none;
      1998, 2,495,644.......................................       --      1,012
     Series B -- $0.001 par value; 467,390 shares
      designated; shares issued and outstanding: 1999, none;
      1998, 394,757.........................................       --        566
     Series D -- $0.001 par value; 1,388,901 shares
      designated; shares issued and outstanding: 1999, none;
      1998, 1,376,928.......................................       --      5,377
  Common stock -- $0.001 par value; 100,000,000 shares
     authorized; shares issued and outstanding: 1999,
     15,765,211; 1998, 4,164,231............................   65,554        961
  Warrants..................................................      831         85
  Deferred compensation.....................................   (1,167)        --
  Accumulated other comprehensive loss......................       19          1
  Note receivable from stockholder..........................      (17)       (17)
  Accumulated deficit.......................................   (8,572)    (4,212)
                                                              -------    -------
       Total stockholders' equity...........................   56,648      3,773
                                                              -------    -------
Total liabilities, redeemable preferred stock and
  stockholders' equity......................................  $59,438    $ 5,959
                                                              =======    =======
</TABLE>

See Notes to Consolidated Financial Statements.
                                       F-3
<PAGE>   121

                             IMMERSION CORPORATION

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

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                              ----------------------------
                                                               1999       1998       1997
                                                              -------    -------    ------
<S>                                                           <C>        <C>        <C>
Revenues:
  Royalty revenue...........................................  $ 2,232    $   321    $   14
  Product sales.............................................    4,583      3,725     2,908
  Development contracts and other...........................    1,223        975     1,410
                                                              -------    -------    ------
     Total revenues.........................................    8,038      5,021     4,332
Costs and expenses:
  Cost of product sales.....................................    2,106      1,507     1,186
  Sales and marketing.......................................    1,801        656       658
  Research and development..................................    2,273      1,817     1,515
  General and administrative................................    4,171      2,677     1,550
  Amortization of intangibles and deferred stock
     compensation*..........................................    1,339        211        --
  In-process research and development.......................    1,190         --        --
                                                              -------    -------    ------
     Total costs and expenses...............................   12,880      6,868     4,909
Operating loss..............................................   (4,842)    (1,847)     (577)
Other income................................................      488        174        50
                                                              -------    -------    ------
Net loss....................................................   (4,354)    (1,673)     (527)
Redeemable convertible preferred stock accretion............        6          6         3
                                                              -------    -------    ------
Net loss applicable to common stockholders..................  $(4,360)   $(1,679)   $ (530)
                                                              =======    =======    ======
Basic and diluted net loss per share........................  $ (0.66)   $ (0.43)   $(0.17)
                                                              =======    =======    ======
Shares used in calculating basic and diluted net loss per
  share.....................................................    6,599      3,909     3,162
                                                              =======    =======    ======
* Amortization of intangibles and deferred stock
  compensation Amortization of intangibles..................  $ 1,033    $   211    $   --
  Deferred stock compensation -- sales and marketing........       20         --        --
  Deferred stock compensation -- research and development...       99         --        --
  Deferred stock compensation -- general and
     administrative.........................................      187         --        --
                                                              -------    -------    ------
     Total..................................................  $ 1,339    $   211    $   --
                                                              =======    =======    ======
</TABLE>

See Notes to Consolidated Financial Statements.

                                       F-4
<PAGE>   122

                             IMMERSION CORPORATION

     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                        CONVERTIBLE                                                          ACCUMULATED
                                      PREFERRED STOCK          COMMON STOCK                                     OTHER
                                    --------------------   --------------------                DEFERRED     COMPREHENSIVE
                                      SHARES     AMOUNT      SHARES     AMOUNT    WARRANTS   COMPENSATION   INCOME (LOSS)
                                    ----------   -------   ----------   -------   --------   ------------   -------------
<S>                                 <C>          <C>       <C>          <C>       <C>        <C>            <C>
Balances at January 1, 1997.......   2,741,109   $1,473     3,313,351   $   29      $ 39            --           $ 5
Net loss..........................
Change in net unrealized gains
 from short-term investments......                                                                                (3)
Comprehensive loss................
Issuance of warrants in connection
 with issuance of Series C
 redeemable convertible preferred
 stock............................                                                     6
Exercise of Series A preferred
 stock warrant....................     121,050       72                              (12)
Exercise of stock options.........                            105,144       23
Issuance of stock options for
 license agreement................                                           5
Preferred stock accretion.........
                                    ----------   -------   ----------   -------     ----       -------           ---
Balances at December 31, 1997.....   2,862,159   $1,545     3,418,495   $   57      $ 33            --           $ 2
Net loss..........................
Change in net unrealized gains
 from short-term investments......                                                                                (1)
Comprehensive loss................
Issuance of Series D convertible
 preferred stock, net of issuance
 costs of $374....................   1,376,928    5,376                               17
Exercise of Series A preferred
 stock warrants...................      30,260       36                               (6)
Exercise of common stock
 warrants.........................                             85,945        4
Extension of Series B preferred
 stock warrants...................                                                    41
Exercise of stock options.........                          1,024,615      114
Issuance of common stock and
 options for patents..............                            137,190      720
Issuance of stock options for
 consulting services..............                                          68
Repurchase of stock...............      (2,018)      (2)     (502,014)      (2)
Preferred stock accretion.........
                                    ----------   -------   ----------   -------     ----       -------           ---
Balances at December 31, 1998.....   4,267,329   $6,955     4,164,231   $  961      $ 85       $    --           $ 1
Net loss..........................
Change in net unrealized gains
 from short-term investments......                                                                                18
Comprehensive loss................
Issuance of common stock options
 for services.....................                             76,665      770
Exercise of common stock
 warrants.........................                              7,061       --
Exercise of convertible preferred
 stock warrants...................      72,630      108                     62       (62)
Warrants issued for services......                                                   808
Exercise of stock options.........                            459,818      215
Issuance of common stock and
 options for patents..............                          1,379,970    5,092
Issuance of stock options for
 license agreement................                                         129
Deferred stock compensation.......                                       1,473                  (1,473)
Amortization of stock
 compensation.....................                                                                 306
Issuance of common stock in
 connection with initial public
 offering, net of expenses of
 $1,620...........................                          4,473,736   48,307
Conversion of preferred stock to
 common stock.....................  (4,339,959)  (7,063)    4,339,959    7,063
Conversion of redeemable
 convertible preferred stock to
 common stock.....................                            863,771    1,482
Preferred stock accretion.........
                                    ----------   -------   ----------   -------     ----       -------           ---
Balances at December 31, 1999.....          --   $   --    15,765,211   $65,554     $831       $(1,167)          $19
                                    ==========   =======   ==========   =======     ====       =======           ===

<CAPTION>
                                       NOTE
                                    RECEIVABLE                                TOTAL
                                       FROM       ACCUMULATED             COMPREHENSIVE
                                    STOCKHOLDER     DEFICIT      TOTAL        LOSS
                                    -----------   -----------   -------   -------------
<S>                                 <C>           <C>           <C>       <C>
Balances at January 1, 1997.......       --         $  (163)    $ 1,383
Net loss..........................                     (527)       (527)     $  (527)
Change in net unrealized gains
 from short-term investments......                                   (3)          (3)
                                                                             -------
Comprehensive loss................                                           $  (530)
                                                                             =======
Issuance of warrants in connection
 with issuance of Series C
 redeemable convertible preferred
 stock............................                                    6
Exercise of Series A preferred
 stock warrant....................                                   60
Exercise of stock options.........                                   23
Issuance of stock options for
 license agreement................                                    5
Preferred stock accretion.........                       (3)         (3)
                                       ----         -------     -------
Balances at December 31, 1997.....       --         $  (693)    $   944
Net loss..........................                   (1,673)     (1,673)     $(1,673)
Change in net unrealized gains
 from short-term investments......                                   (1)          (1)
                                                                             -------
Comprehensive loss................                                           $(1,674)
                                                                             =======
Issuance of Series D convertible
 preferred stock, net of issuance
 costs of $374....................                                5,393
Exercise of Series A preferred
 stock warrants...................                                   30
Exercise of common stock
 warrants.........................                                    4
Extension of Series B preferred
 stock warrants...................                                   41
Exercise of stock options.........      (17)                         97
Issuance of common stock and
 options for patents..............                                  720
Issuance of stock options for
 consulting services..............                                   68
Repurchase of stock...............                   (1,840)     (1,844)
Preferred stock accretion.........                       (6)         (6)
                                       ----         -------     -------
Balances at December 31, 1998.....     $(17)        $(4,212)    $ 3,773
Net loss..........................                   (4,354)     (4,354)     $(4,354)
Change in net unrealized gains
 from short-term investments......                                   18           18
                                                                             -------
Comprehensive loss................                                           $(4,336)
                                                                             =======
Issuance of common stock options
 for services.....................                                  770
Exercise of common stock
 warrants.........................                                   --
Exercise of convertible preferred
 stock warrants...................                                  108
Warrants issued for services......                                  808
Exercise of stock options.........                                  215
Issuance of common stock and
 options for patents..............                                5,092
Issuance of stock options for
 license agreement................                                  129
Deferred stock compensation.......                                   --
Amortization of stock
 compensation.....................                                  306
Issuance of common stock in
 connection with initial public
 offering, net of expenses of
 $1,620...........................                               48,307
Conversion of preferred stock to
 common stock.....................                                   --
Conversion of redeemable
 convertible preferred stock to
 common stock.....................                                1,482
Preferred stock accretion.........                       (6)         (6)
                                       ----         -------     -------
Balances at December 31, 1999.....     $(17)        $(8,572)    $56,648
                                       ====         =======     =======
</TABLE>

See Notes to Consolidated Financial Statements.

                                       F-5
<PAGE>   123

                             IMMERSION CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                              -----------------------------
                                                               1999       1998       1997
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $(4,354)   $(1,673)   $  (527)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization...........................      229        142        102
    Amortization of intangibles.............................    1,033        211         --
    Amortization of deferred stock compensation.............      306         --         --
    In-process research and development.....................    1,190         --         --
    Stock and options issued for consulting services and
      other.................................................      770         68         --
    Stock options issued for license agreement..............       --         --          5
    Extension of warrants for consulting services...........       --         41         --
    Changes in assets and liabilities:
      Accounts receivable...................................       47       (592)      (100)
      Inventories...........................................     (179)      (186)       (25)
      Prepaid expenses and other assets.....................     (381)       (50)         2
      Accounts payable......................................      340        122        189
      Accrued liabilities...................................      430        123         52
      Deferred revenue......................................    1,316         --         --
      Customer advances.....................................       (7)       (18)        64
      Income taxes payable..................................       --         (2)         1
                                                              -------    -------    -------
         Net cash provided by (used in) operating
           activities.......................................      740     (1,814)      (237)
                                                              -------    -------    -------
Cash flows from investing activities:
  Purchases of short-term investments.......................   (4,764)    (2,943)    (1,487)
  Sales and maturities of short-term investments............      403      3,752        538
  Purchase of property......................................     (489)      (138)      (205)
  Purchases of patents and technology.......................     (445)      (434)        --
  Other assets..............................................     (140)        --         --
                                                              -------    -------    -------
         Net cash provided by (used in) investing
           activities.......................................   (5,435)       237     (1,154)
                                                              -------    -------    -------
Cash flows from financing activities:
  Issuance of Series D convertible preferred stock and
    warrants, net...........................................       --      5,393         --
  Issuance of Series C redeemable convertible preferred
    stock, net..............................................       --         (1)     1,474
  Exercise of stock options.................................      215         97         23
  Repurchase of stock.......................................       --     (1,844)        --
  Exercise of warrants......................................      108         34         60
  Issuance of common stock in connection with public
    offering................................................   48,307         --         --
                                                              -------    -------    -------
         Net cash provided by financing activities..........   48,630      3,679      1,557
                                                              -------    -------    -------
Net increase in cash and cash equivalents...................   43,935      2,102        166
Cash and cash equivalents:
  Beginning of the year.....................................    2,592        490        324
                                                              -------    -------    -------
  End of the year...........................................  $46,527    $ 2,592    $   490
                                                              =======    =======    =======
Supplemental disclosure of cash flow information:
  Cash paid for taxes.......................................  $    --    $     1    $    12
                                                              =======    =======    =======
Noncash activities:
  Change in net unrealized gains from short-term
    investments.............................................  $    18    $    (1)   $    (3)
                                                              =======    =======    =======
  Issuance of equity instruments for patents, technology and
    licenses................................................  $ 5,221    $   720    $    --
                                                              =======    =======    =======
  Issuance of warrants......................................  $   808    $    --    $     6
                                                              =======    =======    =======
  Accretion of redeemable preferred stock...................  $     6    $     6    $     3
                                                              =======    =======    =======
  Exercise of stock option for note receivable..............  $    --    $    17    $    --
                                                              =======    =======    =======
</TABLE>

See Notes to Consolidated Financial Statements.

                                       F-6
<PAGE>   124

                             IMMERSION CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

1. SIGNIFICANT ACCOUNTING POLICIES

     Description of Business -- Immersion Corporation was incorporated in May
1993 in California and provides technologies that enable users to interact with
computers using their sense of touch.

     Principles of Consolidation -- The consolidated financial statements
include the accounts of Immersion Corporation and its wholly-owned subsidiary
(the "Company"). All intercompany transactions and balances have been eliminated
in consolidation.

     Cash Equivalents -- The Company considers all highly liquid debt or equity
instruments purchased with an original maturity at the date of purchase of 90
days or less to be cash equivalents.

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

     Inventories -- Inventories are stated at the lower of cost (first-in,
first-out basis) or market.

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

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

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

     Purchased Patents and Technology -- Purchased patents and technology are
stated at cost and are amortized over the shorter of the remaining life of the
patent or the estimated useful life of the technology, generally nine years.

     Accumulated amortization was $714,000 and $221,000 at December 31, 1999 and
1998 respectively.

     Long-Lived Assets -- The Company reviews for the impairment of a long-lived
asset whenever events or changes in circumstances indicate that the carrying
amount of that asset may not be recoverable. An impairment loss would be
recognized when the sum of the undiscounted future net cash flows expected to
result from the use of the asset and its eventual disposition is less than its
carrying amount.

     Product Warranty -- The Company sells the majority of its products with
warranties ranging from three to twelve months. Historically, warranty-related
costs have been immaterial.

     Note Receivable from Stockholder -- The note receivable from stockholder
was issued in exchange for common stock, bears interest at 5.39% per annum and
is due March 2001.

     Revenue Recognition -- Revenues from product sales are recorded upon
shipment. Revenues from development contracts with the U.S. Government and other
commercial customers are derived from either fixed price or reimbursement of
costs contracts. Contract revenues are recognized under the cost-to-cost
percentage-of-completion accounting method based on the actual physical
completion of work performed and the ratio of costs incurred to total estimated
costs to complete the contract. Losses on contracts are recognized when
determined. Revisions in estimates are reflected in the period in which the
conditions become known. Allowable fees under cost-reimbursement contracts are
recognized as costs are incurred. The Company recognizes royalty revenue based
on royalty reports or related information received from the licensee. Advance
payments under license agreements that also require the Company to provide
future

                                       F-7
<PAGE>   125
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

services to the licensee are deferred and recognized over the service period
when vendor specific objective evidence related to the value of the services
does not exist.

     At December 31, 1999, the Company has no obligation to repay amounts
received under development contracts with the U.S. government or other
commercial customers.

     Advertising -- Advertising costs are expensed as incurred and included in
sales and marketing expense. Advertising expense was $153,000, $147,000, and
$164,000 in 1999, 1998 and 1997 respectively.

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

     Income Taxes -- The Company provides for income taxes using the asset and
liability approach defined by Statement of Financial Accounting Standards
("SFAS") No. 109.

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

     Stock-Based Compensation -- The Company accounts for its stock-based awards
to employees using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock issued to
Employees.

     Comprehensive Income -- In June 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income, which
requires that an enterprise report, by major components and as a single total,
the change in its net assets during the period from nonowner sources. The
Company adopted this statement in 1998 and has presented its total comprehensive
loss in the statements of stockholders' equity. Accumulated other comprehensive
loss during 1999, 1998 and 1997 is comprised of unrealized gains on
available-for-sale investments of $19,000, $1,000 and $2,000, respectively.

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

     Use of Estimates -- The preparation of consolidated financial statements in
accordance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. These management estimates include the
allowance for doubtful accounts and the net realizable value of inventory.
Actual results could differ from those estimates.

                                       F-8
<PAGE>   126
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

     Concentration of Credit Risks -- Financial instruments that potentially
subject the Company to a concentration of credit risk principally consist of
cash and cash equivalents, short-term investments and accounts receivable. The
Company invests primarily in money market accounts, commercial paper, and debt
securities of U.S. Government agencies. The Company sells products primarily to
companies in North America, Europe and the Far East. A majority of these sales
are to customers in the personal computer industry. To reduce credit risk,
management performs periodic credit evaluations of its customers' financial
condition. The Company maintains reserves for potential credit losses, but
historically has not experienced any significant losses related to individual
customers or groups of customers in any particular industry or geographic area.

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

     Fair Value of Financial Instruments -- Financial instruments consist
primarily of cash equivalents and short-term investments. Cash equivalents and
short-term investments are stated at fair value based on quoted market prices.

     Recently Issued Accounting Standards -- In June 1997, the FASB issued SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information,
which establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas and major customers. The Company currently operates in one
reportable segment under SFAS No. 131.

     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's
year ending December 31, 2001. Management believes that this statement will not
have a material impact on the Company's financial position or results of
operations.

     Reclassifications -- Certain prior year amounts have been reclassified to
conform to the current year presentation. These reclassifications had no effect
on net loss or stockholders' equity.

2. PURCHASED PATENTS AND TECHNOLOGY

     During 1998, the Company entered into a license agreement and acquired
various patents relating to touch-enabling technology. In connection with these
agreements, the Company paid $434,000, issued 137,190 shares of common stock and
issued an option to purchase 242,100 shares of common stock at $3.66 per share
(see Note 7). The Company has recorded the estimated fair value of the aggregate
consideration of $1,154,000 as purchased patents and technology.

     In February 1999, the Company acquired certain patents and related
materials pertaining to touch-enabling technology from another company in
exchange for $25,000 in cash and 88,770 shares of the
                                       F-9
<PAGE>   127
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

Company's common stock. In addition, the Company is required to issue an
additional 16,140 shares of common stock to the seller if the Company is
successful in obtaining either a reissue or a foreign version of at least one of
the patents. The Company's stock issued in this transaction is being held in
escrow until the successful reissue of at least one of the patents. If this
condition is not met at the end of five years and the stock is therefore still
held in escrow, the seller has the right to put the shares back to the Company
for $3.72 per share. The existence of the put option has the effect of
increasing the value assigned to the shares issued to $3.72 per share. As a
result, the estimated value of $355,000 (representing 88,770 shares at $3.72 per
share plus $25,000) has been recorded as purchased patents and technology.

     In March 1999, the Company acquired certain additional patents relating to
touch-enabling technologies and in-process research and development from another
company in exchange for 1,291,200 shares of the Company's common stock with an
estimated fair value of $4,720,000. The seller had the option to put 807,000 of
the shares back to the Company after five years and to require the Company to
return the patents, subject to the Company's retaining a non-exclusive license
to the patents. This put option expired upon our initial public offering in
November, 1999. The Company has included in the aggregate purchase price of the
purchased patents and in-process research and development the estimated fair
value of $42,000 for the put option and $45,000 of direct acquisition costs. The
aggregate purchase price of $4,807,000 has been allocated $3,617,000 to
purchased patents and technology and $1,190,000 to acquired in-process research
and development. The purchased patents and technology are being amortized over
the estimated useful life of nine years. The allocation of the purchase price to
the respective intangibles was based on management's estimates of the after-tax
cash flows and gave explicit consideration to the Securities and Exchange
Commission's views on purchased in-process research and development as set forth
in its September 9, 1998 letter to the American Institute of Certified Public
Accountants. Specifically, the valuation gave consideration to the following:
(i) the employment of a fair market value premise excluding any Company-specific
considerations that could result in estimates of investment value for the
subject assets; (ii) comprehensive due diligence concerning all potential
intangible assets; (iii) the determination that none of the technology
development had been completed at the time of acquisition; and (iv) the
allocation to in-process research and development based on a calculation that
considered only the efforts completed as of the transaction date, and only the
cash flow associated with these completed efforts for one generation of the
products currently in process. As indicated above, the Company recorded a
one-time charge of $1,190,000 upon the acquisition in March 1999 for purchased
in-process research and development related to five development projects. The
charge related to the portion of these products that had not reached
technological feasibility, had no alternative future use and for which
successful development was uncertain. Management's conclusion that the
in-process development effort had no alternative future use was reached in
consultation with the engineering personnel from both the Company and the
seller.

     The first of these projects is a flexible force feedback development
environment that allows developers to choose the level of
complexity/functionality that fits their needs. At the time of acquisition, the
development was 81% complete and the estimated cost to complete this development
was $438,000. Management expects to complete this development of this product
and begin shipping it in September 2001. The second of these projects, a
three-degree-of-freedom joystick, gives the operator smooth, intuitive movement
and feedback along three axes -- roll, pitch and yaw -- using brushless motor
and encoder technology. At the time of acquisition, the development was 36%
complete and the estimated cost to complete this development was $109,000.
Management expects products based on this technology to become available in
December 2000. The third of these projects, a six-degree-of-freedom hand
controller, is a small back drivable robot that moves in six degrees of freedom,
three linear positions and attitudes. At the time of acquisition, the
development was 70% completed and the estimated cost to complete this
development was $88,000. Management expects to complete development of this
product

                                      F-10
<PAGE>   128
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

and begin shipping it in June 2001. The fourth project is a Flight Yoke, which
provides the intuitive motion and feel of an airplane control yoke. It
translates in and out to control the pitch, rotates for roll control, and
provides the corresponding feel along these axes of motion. At the time of
acquisition, the development was 49% completed and the estimated cost to
complete this development was $175,000. Management expects that licensees will
ship products in fiscal 2001. The fifth development project is a device that
allows the user to physically interact with computer generated three-dimensional
objects. At the time of acquisition, the development was 11% completed and the
estimated cost to complete this development was $248,000. Management expects
that the product will become available for sale in fiscal 2000.

     The Company will begin to benefit from the acquired research and
development of these products once they begin shipping. Failure to reach
successful completion of these projects could result in impairment of the
associated capitalized intangible assets and could require the Company to
accelerate the time period over which the intangibles are being amortized, which
could have a material adverse effect on the Company's business, financial
condition and results of operation. Significant assumptions used to determine
the value of in-process research and development, include the following: (i)
forecast of net cash flows that were expected to result from the development
effort using projections prepared by the Company's and the seller's management;
(ii) the portion of the projects estimated by considering a number of factors,
including the costs invested to date relative to total cost of the development
effort and the amount of progress completed as of the acquisition date, on a
technological basis, relative to the overall technological achievements required
to achieve the functionality of the eventual product. The technological issues
were addressed by engineering representatives from both the Company and the
seller, and when estimating the value of the technology, the projected financial
results of the acquired assets were estimated on a stand-alone basis without any
consideration to potential synergistic benefits or "investment value" related to
the acquisition. As there were no existing products acquired, separate projected
cash flows were prepared for only the in-process projects.

     These projected results were based on the number of units sold times the
average selling price less the associated costs. After preparing the estimated
cash flows from the products being developed, a portion of these cash flows were
attributed to the existing technology, which was embodied in the in-process
product lines and enabled a quicker and more cost-effective development of these
products. When estimating the value of the in-process technologies, a discount
rate of 30% was used. The discount rate considered both the status and risks
associated with the cash flows at the acquisition date. Projected revenues from
the in-process products are expected to commence in 2000 and 2001 as the
products are completed and begin to ship. Initial annual revenue growth rates
after introduction are projected to exceed 50% and decline to less than 15% by
2005. Gross margins from these products are anticipated to be consistent with
the gross margins from its other products.

     The technology was acquired in a transaction that was tax-free to the
seller and, as a result, the Company has a minimal tax basis in the acquired
technology. Accordingly, a deferred tax liability of $1,410,000 has been
recorded for the difference in the book and tax bases of the acquired assets.
This resulted in the concurrent recognition of previously reserved deferred tax
assets of an equal amount. Also, in connection with this acquisition, the
Company entered into a consulting arrangement with the seller to provide
consulting services related to the development of various platforms of
touch-enabling technology, and collaborate with the Company, in executing
development agreements with the U.S. government and other commercial customers
for a three year period. In consideration for certain consulting services and
rights, the Company granted to the seller a warrant to purchase 322,800 shares
of the Company's common stock at $3.66 per share (see Note 7), paid the seller
$150,000, and is obligated to pay an additional $75,000 in 2000 and 2001. The
consideration for the consulting services of $1,108,000, including the estimated
fair value of the warrant ($808,000), has been recorded as prepaid expenses and
noncurrent
                                      F-11
<PAGE>   129
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

other assets. The consideration for the consulting service will be amortized
over the two-year estimated period of benefit of the consulting services. The
warrants were fully vested at the date of grant. Accordingly, the fair value of
the warrants was determined at the date of grant using the methods specified by
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), with the
following assumptions: expected life, 10 years; risk free interest rate, 5.7%;
volatility, 50% and no dividends during the expected term.

     Also during 1999, in consideration for a technology license agreement, the
Company issued an option to purchase 20,175 shares of common stock at an
exercise price of $3.66 per share. The Company has recorded the estimated fair
value of the option of $129,000 as purchased patents and technology at December
31, 1999 (see Note 7).

3. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

     The following is a summary of available-for-sale securities at December 31,
1999 (in thousands):

<TABLE>
<CAPTION>
                                                                UNREALIZED    UNREALIZED
                                                   AMORTIZED     HOLDINGS      HOLDING      MARKET
                                                     COST         GAINS         LOSSES       VALUE
                                                   ---------    ----------    ----------    -------
                                                                    (IN THOUSANDS)
<S>                                                <C>          <C>           <C>           <C>
Commercial paper.................................   $49,495        $19            $--       $49,514
                                                    =======        ===            ==        =======
Included in cash equivalents.....................                                           $44,733
Included in short-term investments...............                                             4,781
                                                                                            -------
  Total available-for-sale securities............                                           $49,514
                                                                                            =======
</TABLE>

     The following is a summary of available-for-sale securities at December 31,
1998 (in thousands):

<TABLE>
<CAPTION>
                                                                  UNREALIZED    UNREALIZED
                                                     AMORTIZED     HOLDING       HOLDING      MARKET
                                                       COST         GAINS         LOSSES      VALUE
                                                     ---------    ----------    ----------    ------
                                                                     (IN THOUSANDS)
<S>                                                  <C>          <C>           <C>           <C>
Mutual funds.......................................    $401           $1            $--        $402
                                                       ====           ==            ==         ====
Included in cash equivalents.......................                                            $ --
Included in short-term investments.................                                             402
                                                                                               ----
  Total available-for-sale securities..............                                            $402
                                                                                               ====
</TABLE>

     The Company realized gains on the sales of securities of none, $56,000 and
$14,000 in 1999, 1998 and 1997, respectively, while realizing losses of none,
$1,000 and $1,000 for 1999, 1998 and 1997 respectively.

4. INVENTORIES

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              --------------
                                                              1999     1998
                                                              -----    -----
                                                              (IN THOUSANDS)
<S>                                                           <C>      <C>
Raw materials and subassemblies.............................  $504     $378
Work in process.............................................    23       37
Finished goods..............................................   133       66
                                                              ----     ----
  Total.....................................................  $660     $481
                                                              ====     ====
</TABLE>

                                      F-12
<PAGE>   130
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

5. PROPERTY

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                              ---------------
                                                               1999     1998
                                                              ------    -----
                                                              (IN THOUSANDS)
<S>                                                           <C>       <C>
Computer equipment and purchased software...................  $  573    $ 314
Machinery and equipment.....................................     292      177
Furniture and fixtures......................................     180      123
Leasehold improvements......................................      42       13
                                                              ------    -----
  Total.....................................................   1,087      627
Less accumulated depreciation...............................    (496)    (298)
                                                              ------    -----
Property, net...............................................  $  591    $ 329
                                                              ======    =====
</TABLE>

6. COMMITMENTS

     The Company leases its manufacturing and office facilities under a
noncancelable operating lease that expires in October 2002.

     Minimum future operating lease payments are as follows:

<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
                                                              --------------
<S>                                                           <C>
2000........................................................        243
2001........................................................        255
2002........................................................        263
                                                                   ----
  Total minimum lease payments..............................       $761
                                                                   ====
</TABLE>

     Rent expense was approximately $268,000, $169,000, and $117,000 in 1999,
1998, and 1997 respectively.

     The Company has signed an agreement with a significant customer to
co-market a licensed product. Pursuant to the terms of the agreement, the
Company will reimburse the customer for certain marketing related expenses not
to exceed $200,000 per quarter for a period of five quarters beginning with the
first calendar quarter of 2000.

7. STOCKHOLDERS' EQUITY

     Common Stock -- On November 12, 1999, the Company completed its initial
public offering ("IPO") of 4,887,500 shares of its common stock (including
637,500 shares issued upon the exercise of the underwriters' over-allotment
option) at $12.00 per share. Of the 4,887,500 shares sold 4,473,736 shares were
sold by the Company and 413,764 shares were sold by selling shareholders. Net
proceeds to the Company, after deducting underwriting discounts and commissions
and offering expenses, aggregated approximately $48.3 million. At the closing of
the initial public offering all preferred stock was converted to common stock.

     Common stock issued to the founders and certain other employees is subject
to repurchase agreements under which the Company has the option to repurchase
the unvested shares upon termination of employment at the original issue price.
The Company's repurchase right generally lapses over four years. At December 31,
1999, the Company's repurchase rights had lapsed. At December 31, 1998, 23,537
shares of common stock were subject to repurchase by the Company.

                                      F-13
<PAGE>   131
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

     During 1999, the Company issued 1,379,970 shares of common stock in
connection with purchases of patents and technology (see Note 2) and 68,595
shares of common stock with a fair value of $562,000 for recruiting services.
During 1998, the Company issued 137,190 shares of common stock in connection
with purchases of patents. The fair value of the common stock of $501,000 was
recorded as purchased patents and technology.

     Stock Split -- In November 1999, the Company's Board of Directors approved
a 0.807-for-one reverse common and Series C and D preferred stock split and a
4.035-for-one Series A and B preferred stock split. All references to share and
per-share date for all periods presented have been retroactively adjusted to
give effect to the split.

     Common Stock Warrants -- During June 1997, the Company issued a warrant to
purchase 91,191 shares of the Company's common stock at an exercise price of
$0.19 per share to a Series C preferred investor. The warrant is exercisable
through 2002. The estimated fair value of this warrant of $6,000 has been
accounted for as a reduction to the Series C preferred stock financing proceeds.

     In connection with the sale of Series D preferred stock, the Company issued
a warrant to purchase 11,972 shares of Series D preferred stock at an exercise
price of $4.18 to an investment banker. The estimated fair value of this warrant
of $17,000 has been accounted for as a reduction to the Series D preferred stock
financing proceeds. At the closing of our initial public offering, this warrant
to purchase preferred stock was converted to a warrant to purchase common stock.

     As discussed in Note 2, during March 1999, the Company issued a warrant to
purchase 322,800 shares of the Company's common stock at an exercise price of
$3.66 per share for consulting services. The warrant is exercisable through
2009. The estimated fair value of the warrant of $808,000 has been recorded as
prepaid consulting services and is being amortized over the service period of
two years.

     Stock Options -- Under the Company's stock option plans, the Company may
grant options to purchase up to 7,991,975 shares of common stock to employees,
directors and consultants at prices not less than the fair market value on the
date of grant for incentive stock options and not less than 85% of fair market
value on the date of grant for nonstatutory stock options. These options
generally expire ten years from the date of grant. The Company has granted
immediately exercisable options as well as options that become exercisable over
periods ranging from three months to four years.

                                      F-14
<PAGE>   132
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

     Details of activity under the option plans are as follows:

<TABLE>
<CAPTION>
                                                                            WEIGHTED
                                                                            AVERAGE
                                                              NUMBER OF     EXERCISE
                                                                SHARES       PRICE
                                                              ----------    --------
<S>                                                           <C>           <C>
Outstanding, January 1, 1997................................   2,395,458     $0.10
  Granted (weighted average fair value $0.04)...............   1,022,860     $0.30
  Exercised.................................................    (105,144)    $0.21
  Canceled..................................................        (168)    $0.19
                                                              ----------     -----
Outstanding, December 31, 1997 (2,871,999 exercisable at a
  weighted average price of $0.16)..........................   3,313,006     $0.16
  Granted (weighted average fair value $0.38)...............     721,976     $1.31
  Exercised.................................................  (1,024,615)    $0.11
  Canceled..................................................     (88,484)    $3.59
                                                              ----------     -----
Outstanding, December 31, 1998 (2,722,380 exercisable at a
  weighted average price of $0.32)..........................   2,921,883     $0.36
  Granted (weighted average fair value $1.32)...............   2,526,659     $7.53
  Exercised.................................................    (459,818)    $0.47
  Canceled..................................................     (85,737)    $3.25
                                                              ----------     -----
Outstanding, December 31, 1999..............................   4,902,987     $3.99
                                                              ==========     =====
</TABLE>

     Additional information regarding options outstanding as of December 31,
1999 is as follows:

<TABLE>
<CAPTION>
                         OPTIONS OUTSTANDING
                -------------------------------------    OPTIONS EXERCISABLE
                                WEIGHTED                ----------------------
                                AVERAGE      WEIGHTED                 WEIGHTED
   RANGE OF                    REMAINING     AVERAGE                  AVERAGE
   EXERCISE       NUMBER      CONTRACTUAL    EXERCISE     NUMBER      EXERCISE
    PRICES      OUTSTANDING   LIFE (YEARS)    PRICE     EXERCISABLE    PRICE
   --------     -----------   ------------   --------   -----------   --------
<S>             <C>           <C>            <C>        <C>           <C>
$0.04 - $ 0.14     857,803        5.40        $0.07        851,078     $0.07
 0.17 -   0.37     966,839        5.27         0.26        943,049      0.26
 0.41 -   1.24     530,341        8.11         0.67        530,341      0.67
 1.36 -   4.02     837,769        8.62         3.50        304,582      3.02
 8.67 -  10.00   1,710,235        9.45         9.34          7,527      9.50
--------------   ---------        ----        -----      ---------     -----
$0.04 - $10.00..  4,902,987       7.63        $3.99      2,636,577     $0.63
==============   =========        ====        =====      =========     =====
</TABLE>

     At December 31, 1999 the Company had 1,465,083 shares, available for future
grants under the option plans.

     Additional Stock Plan Information -- As discussed in Note 1, the Company
accounted for its stock-based awards using the intrinsic value method in
accordance with APB No. 25, Accounting for Stock Issued to Employees and its
related interpretations. SFAS No. 123, Accounting for Stock-Based Compensation
("SFAS 123"), requires the disclosure of pro forma net loss had the Company
adopted the fair value method as of the beginning of fiscal 1996. Under SFAS
123, the fair value of stock-based awards to employees is calculated through the
use of option pricing models, even though these models were developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards. These models also require

                                      F-15
<PAGE>   133
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

subjective assumptions, including future stock price volatility and expected
time to exercise, which greatly affect the calculated values. The Company's
calculations were made using the minimum value method with the following
weighted average assumptions: expected life, 18 months following vesting; risk
free interest rate, 5.4%, 5.3%, and 6.0% in 1999, 1998, and 1997 respectively;
volatility, 50% subsequent to the initial public filing in November, 1999, and
no dividends during the expected term. The Company's fair value calculations on
stock-based awards under the 1999 Employee Stock Purchase Plan were also made
using the option pricing model with the following weighted average assumptions:
expected life, eighteen months; volatility, 50%; risk free interest rate, 5.4%;
and no dividends during the expected term. The Company's calculations are based
on a multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the awards issued in 1999, 1998, and 1997
had been amortized to expense over the vesting periods of the awards, pro forma
net loss would have been $4,984,000 ($.76 net loss per share), $1,885,000 ($0.48
net loss per share) and $545,000 ($0.17 net loss per share) in 1999, 1998, and
1997, respectively.

     The Company had outstanding nonstatutory stock options to consultants to
purchase 203,604, 153,570, and 104,182 shares of common stock at December
31,1999, 1998 and 1997, respectively. Compensation expense of $138,000, $68,000,
and $5,000 was recognized as result of these options in 1999, 1998, and 1997,
respectively. The fair value of the unvested portion of these options is being
amortized over the vesting period. The fair value attributable to the unvested
portion of these options is subject to adjustment based upon the future value of
the Company's common stock. The fair values of these options were determined at
the date of vesting using the methods specified by SFAS 123 with the following
weighted average assumptions during 1999, 1998, and 1997, respectively: expected
life, 10 years; risk free interest rate, 5.2%, 5.3% and 6.0%; volatility, 50%;
and no dividends during the expected term. Forfeitures are recognized as they
occur.

     In addition, the Company granted nonstatutory stock options to purchase
20,175 and 242,100 shares of common stock in 1999 and 1998, respectively, in
connection with licensing of technology and the acquisition of patents (see Note
2). The estimated fair value of these options of $129,000 and $219,000,
respectively, has been recorded as purchased patents and technology. These
options were fully vested at the date of grant. Accordingly, the fair value of
the options was determined at the date of grant using the methods specified by
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), with the
following assumptions during 1999 and 1998, respectively: expected life, 10
years; risk free interest rate, 5.0% and 5.5%; volatility, 50% and 25%; and no
dividends during the expected term.

     Employee Stock Purchase Plan -- Upon the closing of the Company's initial
public offering on November 12, 1999 the company adopted its' 1999 Employee
Stock Purchase Plan ("ESPP"). Under the ESPP, eligible employees may purchase
common stock through payroll deductions at a purchase price of 85% of the lower
of the fair market value of the Company's stock at the beginning of the offering
period or the purchase date. Participants may not purchase more than 1,000
shares in a six-month offering period or stock having a value greater than
$25,000 in any calendar year as measured at the beginning of the offering
period. A total of 500,000 shares of common stock are reserved for the issuance
under the ESPP plus an automatic annual increase on January 1, 2000 and on each
January 1 thereafter through January 1, 2010 by an amount equal to the lesser of
500,000 share per year or number of shares determined by the Board of Directors.
As of December 31, 1999 no shares had been purchased under the plan.

     Deferred Stock Compensation -- In connection with grants of certain stock
options to employees and directors in the twelve months ended December 31, 1999,
the Company recorded $1,473,000 for the difference between the deemed fair value
for accounting purposes and the stock price as determined by the Board of
Directors on the date of grant. This amount has been presented as a reduction of
stockholders' equity and is being amortized to expense over the vesting period
of the related stock options (generally

                                      F-16
<PAGE>   134
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

four years). Amortization of deferred stock compensation for the twelve months
ended December 31, 1999 was $306,000.

8. NET LOSS PER SHARE

     The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands):

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ----------------------------
                                                               1999       1998       1997
                                                              -------    -------    ------
<S>                                                           <C>        <C>        <C>
Numerator:
  Net loss..................................................  $(4,354)   $(1,673)   $ (527)
  Redeemable preferred stock accretion......................        6          6         3
                                                              -------    -------    ------
Net loss applicable to common stockholders..................  $(4,360)   $(1,679)   $ (530)
                                                              =======    =======    ======
Denominator:
  Weighted average common shares outstanding................    6,675      3,970     3,338
  Weighted average common shares held in escrow.............      (76)        --        --
  Weighted average common shares outstanding subject to
     repurchase.............................................       --        (61)     (176)
                                                              -------    -------    ------
  Shares used in computation, basic and diluted.............    6,599      3,909     3,162
                                                              =======    =======    ======
Net loss per share, basic and diluted.......................  $ (0.66)   $ (0.43)   $(0.17)
                                                              =======    =======    ======
</TABLE>

     The Company's computation of net loss per share excludes 88,770 shares held
in escrow as discussed in Note 2, as the conditions required to release these
shares from escrow had not been satisfied as of December 31, 1999.

     For the above-mentioned periods, the Company had securities outstanding
that could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per share in the periods
presented since their effect would have been anti-dilutive. These outstanding
securities consisted of the following:

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                         --------------------------------------
                                                            1999          1998          1997
                                                         ----------    ----------    ----------
<S>                                                      <C>           <C>           <C>
Redeemable convertible preferred stock.................          --       863,771       864,642
Convertible preferred stock............................          --     4,267,329     2,862,159
Shares of common stock subject to repurchase...........          --        23,537       125,813
Outstanding options....................................   4,902,987     2,921,883     3,313,006
Warrants...............................................     425,963       182,854       287,087
                                                         ----------    ----------    ----------
Total..................................................   5,328,950     8,259,374     7,452,707
                                                         ==========    ==========    ==========
Weighted average exercise price of options.............  $     3.99    $     0.36    $     0.16
                                                         ==========    ==========    ==========
Weighted average exercise price of warrants............  $     2.93    $     0.95    $     0.56
                                                         ==========    ==========    ==========
</TABLE>

9. INCOME TAXES

     No provision for federal income taxes was required for the years ended
December 31, 1999, 1998 and 1997 due to the Company's net losses in these
periods.

                                      F-17
<PAGE>   135
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

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

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1999       1998
                                                              -------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Deferred tax assets:
  Net operating loss carryforwards..........................  $ 1,021    $   830
  Deferred revenue..........................................      564         --
  Research and development credits..........................      189        130
  Reserves and accruals recognized in different periods.....      112         75
  Depreciation and amortization.............................       25          2
                                                              -------    -------
Total deferred tax assets...................................    1,911      1,037
Deferred tax liabilities:
  Difference in tax basis of purchased technology...........   (1,139)        --
Valuation reserve...........................................     (772)    (1,037)
                                                              -------    -------
Net deferred tax assets.....................................  $    --    $    --
                                                              =======    =======
</TABLE>

     As discussed in Note 2, a deferred tax liability relating to a difference
in the tax basis for purchased technology was established in 1999. This resulted
in the concurrent $1.4 million reversal of the valuation reserve for deferred
tax assets.

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

<TABLE>
<CAPTION>
                                                              1999     1998     1997
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Federal statutory tax rate..................................  (35.0)%  (35.0)%  (35.0)%
State taxes, net of federal benefit.........................   (6.0)    (6.0)    (6.0)
Stock compensation..........................................    2.3       --       --
Other.......................................................   (0.2)     0.6      0.6
Valuation allowance.........................................   38.9     40.4     40.4
                                                              -----    -----    -----
Effective tax rate..........................................     --%      --%      --%
                                                              =====    =====    =====
</TABLE>

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

     At December 31, 1999, the Company has federal and state net operating loss
carryforwards of approximately $2,706,000 and $1,141,000, respectively, expiring
through 2019 and through 2004, respectively.

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

                                      F-18
<PAGE>   136
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

10. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS

     The Company operates in one business segment, which is the design,
development, production, marketing and licensing of products based on
touch-enabling technology. These devices are used in computer entertainment,
personal computing, medical and other professional computing applications. The
Company operates entirely in North America and does not maintain operations in
other countries. The following is a summary of revenues within geographic areas.
Revenues are broken out geographically by the ship-to location of the customer.

<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                              --------------------------------
                                                                1999        1998        1997
                                                              REVENUES    REVENUES    REVENUES
                                                              --------    --------    --------
                                                                       (IN THOUSANDS)
<S>                                                           <C>         <C>         <C>
North America...............................................   $5,644      $3,363      $3,325
Europe......................................................    1,170         950         648
Far East....................................................    1,108         597         347
Rest of the world...........................................      116         111          12
                                                               ------      ------      ------
  Total.....................................................   $8,038      $5,021      $4,332
                                                               ======      ======      ======
</TABLE>

     Significant Customers

     In 1999, 26% of our total revenues came from two unrelated customers, each
customer accounted for 13% of our total revenues. In 1998, a preferred
stockholder and an unrelated customer accounted for 11% and 10% of total
revenues, respectively. In 1997, one unrelated customer accounted for 24% of
total revenue.

     Receivables due from one unrelated customer was $137,000 at December 31,
1999. Receivables due from a preferred stockholder were $387,000 at December 31,
1998. Receivables due from two unrelated customers were $158,000 and $57,000,
respectively, at December 31, 1997.

11. EMPLOYEE BENEFIT PLAN

     The Company has a 401(k) tax-deferred savings plan under which eligible
employees may elect to have a portion of their salary deferred and contributed
to the 401(k) plan. Contributions may be made by the Company at the discretion
of the Board of Directors. As of December 31, 1999 the Company recorded expenses
of $42,000, none, and none for 1999, 1998 and 1997 respectively.

12. RELATED PARTIES

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

     During July 1997, the Company also entered into an exclusive ten-year
license agreement with MicroScribe LLC (the "Agreement") for the right to
manufacture, market and sell the related MicroScribe technology. Under the terms
of the Agreement, the Company must pay a royalty to

                                      F-19
<PAGE>   137
                             IMMERSION CORPORATION
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

MicroScribe LLC based on a variable percentage of net receipts as defined under
the Agreement. Royalty expense under the Agreement was $132,000, $116,000 and
$49,000 in 1999, 1998 and 1997, respectively.

     As discussed in Note 10, a preferred stockholder accounted for $249,000 of
royalty revenue and $316,000 of development contract revenue in 1998.

13. CONTINGENCIES

     The Company has received claims from third parties asserting that the
Company's technologies, or those of its licensees, infringe on the other
parties' intellectual property rights. Management believes that these claims are
without merit and, with respect to each, has obtained or is in the process of
obtaining written non-infringement and/or patent invalidity opinions from
outside patent counsel. Accordingly, in the opinion of management, the outcome
of such claims will not have a material effect on the financial statements of
the Company.

14. SUBSEQUENT EVENTS

     On March 9, 2000, the Company completed its acquisition of Montreal-based
Haptic Technologies Inc. for approximately $7.0 million, consisting of 141,538
shares of Company's common stock and $338,000 paid in cash. Haptic develops and
markets hardware and software that brings the sense of touch to computing
environments. As a result of the acquisition Haptic becomes a wholly-owned
subsidiary of Immersion and will continue operations in Montreal, Canada. The
acquisition was accounted for using the purchase method. In connection with the
transaction, the Company assumed unvested options of Haptic resulting in
deferred stock compensation of $5.5 million which will be amortized over the
remaining vesting period of approximately four years.

                                      F-20
<PAGE>   138

                             IMMERSION CORPORATION

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

<TABLE>
<CAPTION>
                                                               JUNE 30,      DECEMBER 31,
                                                                 2000          1999(1)
                                                              -----------    ------------
                           ASSETS                             (UNAUDITED)
<S>                                                           <C>            <C>
Current assets:
  Cash and cash equivalents.................................   $ 22,839        $46,527
  Short-term investments....................................     14,886          4,781
  Accounts receivable, net of allowances of $187 and $134
     respectively...........................................      1,716          1,064
  Inventories...............................................        855            660
  Prepaid expenses and other current assets.................      2,401          1,057
                                                               --------        -------
     Total current assets...................................     42,697         54,089
Property and equipment, net.................................      2,435            591
Purchased intangibles and other assets, net.................      9,596          4,758
Other investments...........................................      6,500             --
                                                               --------        -------
     Total assets...........................................   $ 61,228        $59,438
                                                               ========        =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................   $  1,265        $   750
  Accrued compensation......................................        649            180
  Other accrued liabilities and income taxes payable........      1,322            505
  Deferred revenue and customer advances....................        372          1,355
                                                               --------        -------
     Total current liabilities..............................      3,608          2,790
                                                               --------        -------
Stockholders' equity:
  Common stock -- $0.001 par value; 100,000,000 shares
     authorized; shares issued and outstanding: 16,507,518
     and 15,765,211 respectively............................     77,036         65,554
  Warrants..................................................        831            831
  Deferred stock compensation...............................     (6,020)        (1,167)
  Accumulated other comprehensive income (loss).............        (12)            19
  Note receivable from stockholder..........................        (17)           (17)
  Accumulated deficit.......................................    (14,198)        (8,572)
                                                               --------        -------
     Total stockholders' equity.............................     57,620         56,648
                                                               --------        -------
     Total liabilities and stockholders' equity.............   $ 61,228        $59,438
                                                               ========        =======
</TABLE>

-------------------------
(1) The balance sheet at December 31, 1999 has been derived from the audited
    financial statements at that date but does not include all of the
    information and footnotes required by generally accepted accounting
    principles for complete financial statements.

See accompanying Notes to Condensed Consolidated Financial Statements.

                                      F-21
<PAGE>   139

                             IMMERSION CORPORATION

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

<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Revenues:
  Royalty revenue...........................................  $ 1,866    $   622
  Product sales.............................................    2,267      2,133
  Development contracts and other...........................      883        748
                                                              -------    -------
       Total revenues.......................................    5,016      3,503
Costs and expenses:
  Cost of product sales.....................................    1,193        970
  Sales and marketing.......................................    3,891        459
  Research and development..................................    1,544      1,057
  General and administrative................................    2,786      1,548
  Amortization of intangibles and deferred stock
     compensation(*)........................................    1,793        463
  In-process research and development.......................      887      1,190
                                                              -------    -------
       Total costs and expenses.............................   12,094      5,687
Operating loss..............................................   (7,078)    (2,184)
Interest and other income, net..............................    1,451         66
                                                              -------    -------
Net loss....................................................   (5,627)    (2,118)
Redeemable convertible preferred stock accretion............       --          3
                                                              -------    -------
Net loss applicable to common stockholders..................  $(5,627)   $(2,121)
                                                              =======    =======
Basic and diluted net loss per share........................  $ (0.35)   $ (0.43)
                                                              =======    =======
Shares used in calculating basic and diluted net loss per
  share.....................................................   16,006      4,944
                                                              =======    =======
(*) Amortization of intangibles and deferred stock
      compensation
     Amortization of intangibles............................  $ 1,055    $   397
     Deferred stock compensation -- sales and marketing.....       39          1
     Deferred stock compensation -- research and
      development...........................................      510         12
     Deferred stock compensation -- general and
      administrative........................................      189         53
                                                              -------    -------
       Total................................................  $ 1,793    $   463
                                                              =======    =======
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.

                                      F-22
<PAGE>   140

                             IMMERSION CORPORATION

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                              -------------------
                                                                2000       1999
                                                              --------    -------
<S>                                                           <C>         <C>
Cash flows from operating activities:
  Net loss..................................................  $ (5,627)   $(2,118)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization...........................       198         84
    Amortization of intangibles.............................     1,055        397
    Amortization of deferred stock compensation.............       738         66
    In-process research and development.....................       887      1,190
    Stock and options issued for consulting services and
     other..................................................        10        140
    Changes in assets and liabilities:
      Accounts receivable...................................      (586)        17
      Inventories...........................................      (178)      (125)
      Prepaid expenses and other assets.....................      (805)         7
      Accounts payable......................................       159        (16)
      Accrued liabilities and income taxes payable..........       977        150
      Deferred revenue and customer advances................      (983)        13
                                                              --------    -------
         Net cash used in operating activities..............    (4,155)      (195)
                                                              --------    -------
Cash flows from investing activities:
  Purchases of short-term investments.......................   (18,290)        --
  Sales and maturities of short-term investments............     8,144        201
  Purchase of property......................................    (1,955)      (153)
  Purchases of patents and technology.......................        --       (323)
  Acquisitions, net of cash acquired........................      (581)        --
  Other assets..............................................      (750)       (70)
  Other investments.........................................    (6,500)        --
                                                              --------    -------
         Net cash used in investing activities..............   (19,932)      (345)
                                                              --------    -------
Cash flows from financing activities:
  Exercise of stock options.................................       368        151
  Exercise of warrants......................................        --          1
                                                              --------    -------
         Net cash provided by financing activities..........       368        152
                                                              --------    -------
Effect of foreign currency exchange rates on cash and cash
  equivalents...............................................        31         --
                                                              --------    -------
Net decrease in cash and cash equivalents...................   (23,688)      (388)
Cash and cash equivalents:
  Beginning of the period...................................    46,527      2,592
                                                              --------    -------
  End of the period.........................................  $ 22,839    $ 2,204
                                                              ========    =======
Supplemental disclosure of cash flow information:
  Cash paid for taxes.......................................  $      1    $     1
                                                              ========    =======
Noncash activities:
  Change in net unrealized gains (losses) from short-term
    investments.............................................  $    (41)   $    (1)
                                                              ========    =======
  Issuance of equity instruments for patents, technology and
    licenses................................................  $     --    $ 5,221
                                                              ========    =======
  Issuance of equity instruments for acquisition............  $  5,513    $    --
                                                              ========    =======
  Issuance of warrants......................................  $     --    $   808
                                                              ========    =======
  Accretion of redeemable preferred stock...................  $     --    $     3
                                                              ========    =======
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.
                                      F-23
<PAGE>   141

                             IMMERSION CORPORATION

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 2000
                                  (UNAUDITED)

1. SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation -- The accompanying unaudited condensed consolidated
financial statements reflect all the normal recurring adjustments which are, in
the opinion of management, necessary to present fairly the condensed
consolidated financial position, statements of operations and cash flows for the
interim periods presented.

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and footnotes necessary for a complete
presentation of the financial position, results of operations, and cash flows,
in conformity with generally accepted accounting principles. Immersion
Corporation ("Immersion" or the "Company") filed its audited consolidated
financial statements which included all information and footnotes necessary for
such presentation of the financial position, results of operations, and cash
flows in the Company's 1999 Annual Report on Form 10-K.

     The results of operations for the interim period ended June 30, 2000, are
not necessarily indicative of the results to be expected for the full year.

     Reclassifications -- Certain prior year amounts have been reclassified to
conform to the current year presentation. These reclassifications had no effect
on net loss or stockholders' equity.

2. PURCHASED INTANGIBLES AND OTHER ASSETS, NET

     In March 2000, the Company acquired all outstanding shares of
Montreal-based Haptic Technologies Inc. ("Haptic") for approximately $6.8
million, consisting of 141,538 shares of the Company's common stock and $338,000
paid in cash. Haptic develops and markets hardware and software that brings the
sense of touch to computing environments. As a result of the acquisition, Haptic
became a wholly-owned subsidiary of Immersion and will continue operations in
Montreal, Canada. The acquisition was accounted for using the purchase method
and accordingly the acquired assets and liabilities were recorded at their fair
market values at the date of acquisition. Pro forma results of the combined
operations have not been presented as they are not materially different from the
Company's reported results of operations. Haptic operates on a fiscal year
ending on August 31. Accordingly, the Company will consolidate the results of
Haptic based on Haptic's fiscal quarters ended February 28, May 31, August 31,
and November 30 combined with the Company's calendar quarters ended March 31,
June 30, September 30, and December 31, respectively.

     In connection with the transaction, the Company assumed unvested options of
Haptic resulting in deferred stock compensation of $5.5 million, which will be
amortized over the remaining vesting period of approximately four years. The
Haptic option plan was established in February 2000 and under the plan the
Company may grant options to purchase up to 391,238 shares of common stock to
employees, directors, and consultants. The options generally expire ten years
from the date of grant. As of June 30, 2000 there were 391,238 options
outstanding.

                                      F-24
<PAGE>   142
                             IMMERSION CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 JUNE 30, 2000
                                  (UNAUDITED)

     The aggregate purchase price of $6.8 million (including acquisition costs)
has been allocated to the assets and in-process research and development
acquired. The total purchase price was allocated among the assets acquired
(including acquired in-process research and development) as follows (in
thousands):

<TABLE>
<S>                                                           <C>
Purchase price allocation:
Tangible assets...........................................    $  416
In-process research and development.......................       887
Intangible assets:
  Goodwill................................................     3,979
  Core technology.........................................       871
  Developed technology....................................       396
  Workforce...............................................       139
  Pending patents.........................................        65
                                                              ------
                                                              $6,753
                                                              ======
</TABLE>

     The goodwill, core technology and pending patents are being amortized over
their estimated useful lives of 4 years. The developed technology and workforce
are being amortized over their estimated useful lives of 3 and 2 years,
respectively. The allocation of the purchase price to the respective intangibles
was based on management's estimates of the after-tax cash flows and gave
explicit consideration to the Securities and Exchange Commission's views on
purchased in-process research and development as set forth in its September 9,
1998 letter to the American Institute of Certified Public Accountants.
Specifically, the valuation gave consideration to the following: (i) the
employment of a fair market value premise excluding any Company-specific
considerations that could result in estimates of investment value for the
subject assets; (ii) comprehensive due diligence concerning all potential
intangible assets; (iii) the value of existing technology was specifically
addressed, with a view toward ensuring the relative allocations to existing
technology and in-process research and development were consistent with the
relative contributions of each to the final product; and (iv) the allocation to
in-process research and development was based on a calculation that considered
only the efforts completed as of the transaction date, and only the cash flow
associated with these completed efforts for one generation of the products
currently in process.

     As indicated above, the Company recorded a one-time charge of $887,000 upon
the acquisition in March 2000 for purchased in-process research and development
related to three development projects. The charge related to the portion of
these products that had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain.
Management's conclusion that the in-process development effort had no
alternative future use was reached in consultation with the engineering
personnel from both the Company and the seller.

     The first of these projects focuses on providing products for moving
vehicles that use computers in their instrumentation and control panels and
targets both end-user in-vehicle systems and design phase solutions. The product
being developed is a software product to be bundled with a haptic peripheral
device. The software product is designed to provide a touch feedback module for
the peripheral device, which will introduce the sense of touch into the
interface allowing designers to feel the buttons on the screen as they design
the control panel. This product is expected to be released in late FY 2000 and
at the time of the acquisition was approximately 50% complete with estimated
costs to complete the development of $60,000. The second of these projects is
the MilleniumCat technologies, aimed at the multimedia market that will offer a
full high fidelity affordable haptic device. Haptic currently sells the
PenCat/Pro, a stylus based touch-enabled computer interface device. The
MilleniumCat product will be the next generation PenCat/

                                      F-25
<PAGE>   143
                             IMMERSION CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 JUNE 30, 2000
                                  (UNAUDITED)

Pro offering both the hardware device utilizing a mouse and the next generation
multimedia feedback technology associated with Haptic's developed suite of
products that combine audio, graphics, speech, video and other media into one
package solution for customers. This product is expected to be released late FY
2000 and at the time of the acquisition was estimated to be 67% complete with
estimated costs to complete the development at $50,000. The third of these
projects is aimed at the engineering and artistic creation market. Haptic's
current product PenCat/Pro targets 3D designers that have a need for advanced
input technologies. The PenCat/Pro product used by 3D designers will be replaced
by the MilleniumCat product in FY 2001. While this product incorporates much of
the MilleniumCat product, it will require some additional software and a
different user interface and thus at the time of the acquisition was estimated
at 40% complete with estimated costs to complete development of $20,000.

     The Company will begin to benefit from the acquired research and
development of these products once they begin shipping. Failure to reach
successful completion of these projects could result in impairment of the
associated capitalized intangible assets and could require the Company to
accelerate the time period over which the intangibles are being amortized, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Significant assumptions used to determine
the value of in-process research and development, include the following: (i)
forecast of net cash flows that were expected to result from the development
effort using projections prepared by Haptic's management; (ii) the completed
portion of the projects estimated by considering a number of factors, including
the costs invested to date relative to the total cost of the development effort
and the amount of progress completed as of the acquisition date, on a
technological basis, relative to the overall technological achievements required
to achieve the functionality of the eventual product. The technological issues
were addressed by engineering representatives from both the Company and Haptic,
and when estimating the value of the technology, the projected financial results
of the acquired assets were estimated on a stand-alone basis without any
consideration to potential synergistic benefits or "investment value" related to
the acquisition. Accordingly, separate projected cash flows were prepared for
both the existing as well as the in-process projects. These projected results
were based on the number of units sold times the average selling price less the
associated costs. After preparing the estimated cash flows from the products
being developed, a portion of these cash flows were attributed to the developed
and core technology, which was embodied in the in-process product lines and
enabled a quicker and more cost-effective development of these products. When
estimating the value of the developed, core and in-process technologies,
discount rates of 15%, 20%, and 25% were used respectively. The discount rates
considered both the status and risks associated with the cash flows at the
acquisition date. Projected revenues from the developed technologies are
expected to continue through the beginning of FY 2002, while revenue from
in-process technologies are expected to commence late FY 2000 and continue
through a portion of FY 2004.

3. INVENTORIES

<TABLE>
<CAPTION>
                                                         JUNE 30,    DECEMBER 31,
                                                           2000          1999
                                                         --------    ------------
                                                              (IN THOUSANDS)
<S>                                                      <C>         <C>
Raw materials and subassemblies........................    $600          $504
Work in process........................................      44            23
Finished goods.........................................     211           133
                                                           ----          ----
  Total................................................    $855          $660
                                                           ====          ====
</TABLE>

                                      F-26
<PAGE>   144
                             IMMERSION CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 JUNE 30, 2000
                                  (UNAUDITED)

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

<TABLE>
<CAPTION>
                                                         JUNE 30,    DECEMBER 31,
                                                           2000          1999
                                                         --------    ------------
                                                              (IN THOUSANDS)
<S>                                                      <C>         <C>
Cybernet consulting....................................   $  360        $  578
Prepaid royalties......................................      370            --
Prepaid insurance......................................      188           346
Prepaid rent...........................................       62            43
Research and development tax credit due from Canadian
  government...........................................      277            --
Promissory note receivable.............................      750            --
Other prepaids and other assets........................      394            90
                                                          ------        ------
  Total................................................   $2,401        $1,057
                                                          ======        ======
</TABLE>

5. PROPERTY

<TABLE>
<CAPTION>
                                                       JUNE 30,    DECEMBER 31,
                                                         2000          1999
                                                       --------    ------------
                                                            (IN THOUSANDS)
<S>                                                    <C>         <C>
Computer equipment and purchased software............   $1,261        $  573
Machinery and equipment..............................      527           292
Furniture and fixtures...............................      877           180
Leasehold improvements...............................      476            42
                                                        ------        ------
  Total..............................................    3,141         1,087
Less accumulated depreciation........................      706           496
                                                        ------        ------
Property, net........................................   $2,435        $  591
                                                        ======        ======
</TABLE>

6. OTHER INVESTMENTS

     At June 30, 2000, other investments included $6.5 million of equity
investments in privately-held companies accounted for under the cost method. The
Company intends to hold its equity investments for the long term and monitors
whether there have been other-than-temporary declines in value of these
investments based on management's estimates of their net realizable value taking
into account the companies' respective financial condition and ability to raise
third-party financing. During the quarter the Company made a $5 million
strategic investment in Geometrix, Inc. ("Geometrix"), the developer of the
3Scan(TM) product line which enables creation of three-dimensional models
through the use of digital cameras. The $5 million investment is comprised of
$1.45 million to purchase 725,000 shares of Series B Preferred Stock
representing an 8% ownership interest and $3.55 million unsecured convertible
promissory note. The unsecured convertible promissory note has a voluntary
conversion feature which expires August 15, 2000 and an automatic conversion
feature which is triggered when the Company's ownership percentage is reduced to
less than 8% as a result of additional financing raised by Geometrix exceeding
certain minimum amounts. The automatic conversion feature limits the amount of
the promissory note converted such that the Company's ownership interest does
not exceed 8%. The note accrues interest at a rate of 7% per annum and the note
plus accrued interest, if not converted by June 12, 2002, is due in two payments
over a one-year period. The Company also signed a strategic partnership
agreement with Geometrix during the quarter to develop products for the Web 3D
marketplace. Under the agreement,

                                      F-27
<PAGE>   145
                             IMMERSION CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 JUNE 30, 2000
                                  (UNAUDITED)

Geometrix has contracted with Immersion for development work. Revenues under
this contract are recognized based on the cost-to-cost percentage-of-completion
accounting method in accordance with our revenue recognition policy. The
remainder of $1.5 million of investments represents a $1.0 million equity
investment in There, Inc., a technology application developer, and $.5 million
equity investment in EndPoints, Inc., an application specific integrated circuit
design semiconductor company. Both investments represent less than a 5%
ownership interest.

7. NET LOSS PER SHARE

     The following is a reconciliation of the numerators and denominators used
in computing basic and diluted net loss per share (in thousands):

<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Numerator:
  Net loss..................................................  $(5,627)   $(2,118)
  Redeemable preferred stock accretion......................       --          3
                                                              -------    -------
Net loss applicable to common stockholders..................  $(5,627)   $(2,121)
                                                              =======    =======
Denominator:
  Weighted average common shares outstanding................   16,095      5,006
  Weighted average common shares held in escrow.............      (89)       (62)
                                                              -------    -------
  Shares used in computation, basic and diluted.............   16,006      4,944
                                                              =======    =======
Net loss per share, basic and diluted.......................  $ (0.35)   $ (0.43)
                                                              =======    =======
</TABLE>

     In November 1999, the Company's Board of Directors approved a 0.807-for-one
reverse common and Series C and D preferred stock split and a 4.035-for-one
Series A and B preferred stock split. All references to share and per-share data
for all periods presented have been retroactively adjusted to give effect to the
split.

     The Company's computation of net loss per share excludes 88,770 shares held
in escrow. Conditions required to release these shares from escrow had not been
satisfied as of June 30, 2000.

     For the above-mentioned periods, the Company had securities outstanding
that could potentially dilute basic earnings per share in the future, but were
excluded from the computation of diluted net loss per

                                      F-28
<PAGE>   146
                             IMMERSION CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 JUNE 30, 2000
                                  (UNAUDITED)

share in the periods presented since their effect would have been antidilutive.
These outstanding securities consisted of the following:

<TABLE>
<CAPTION>
                                                                  SIX MONTHS ENDED
                                                                      JUNE 30,
                                                              ------------------------
                                                                 2000          1999
                                                              ----------    ----------
<S>                                                           <C>           <C>
Redeemable convertible preferred stock......................          --       863,771
Convertible preferred stock.................................          --     4,267,329
Outstanding options.........................................   5,619,531     3,317,424
Warrants....................................................     425,963       498,593
                                                              ----------    ----------
  Total.....................................................   6,045,494     8,947,117
                                                              ==========    ==========
Weighted average exercise price of options..................  $    12.00    $     1.11
                                                              ==========    ==========
Weighted average exercise price of warrants.................  $     2.93    $     2.72
                                                              ==========    ==========
</TABLE>

8. COMPREHENSIVE LOSS

     The following table sets forth the components of comprehensive loss:

<TABLE>
<CAPTION>
                                                               SIX MONTHS ENDED
                                                                   JUNE 30,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
Net loss:...................................................  $(5,627)   $(2,118)
Redeemable preferred stock accretion........................       --         (3)
Change in unrealized gains (losses) on short-term
  investments...............................................      (41)        (1)
Foreign currency translation adjustments....................       10         --
                                                              -------    -------
  Total comprehensive loss..................................  $(5,658)   $(2,122)
                                                              =======    =======
</TABLE>

9. SEGMENT INFORMATION, OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS

     The Company operates in one business segment, which is the design,
development, production, marketing and licensing of products based on
touch-enabling technology. These devices are used in computer entertainment,
personal computing, medical and other professional computing applications. The
Company operates primarily in the United States and in Canada through its
wholly-owned subsidiary Haptic. The following is a summary of revenues by
geographic areas. Revenues are broken out geographically by the ship-to location
of the customer.

     Geographic revenue as a percentage of total revenue was as follows:

<TABLE>
<CAPTION>
                                                               SIX MONTHS
                                                                 ENDED
                                                                JUNE 30,
                                                              ------------
                     REVENUE BY REGION                        2000    1999
                     -----------------                        ----    ----
<S>                                                           <C>     <C>
North America...............................................   67%     72%
Europe......................................................   21%     13%
Far East....................................................   12%     14%
Rest of the world...........................................    0%      1%
                                                              ---     ---
  Total.....................................................  100%    100%
                                                              ===     ===
</TABLE>

                                      F-29
<PAGE>   147
                             IMMERSION CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 JUNE 30, 2000
                                  (UNAUDITED)

     For the periods presented we derived a significant amount of revenue from
individual countries as follows:

<TABLE>
<CAPTION>
                                                               THREE MONTHS       SIX MONTHS
                                                              ENDED JUNE 30,    ENDED JUNE 30,
                                                              --------------    --------------
                      MAJOR COUNTRIES                         2000     1999     2000     1999
                      ---------------                         -----    -----    -----    -----
<S>                                                           <C>      <C>      <C>      <C>
United States...............................................   59%      77%      65%      71%
Germany.....................................................   14%       *       10%       *
Taiwan......................................................   10%       *        *       11%
</TABLE>

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

SIGNIFICANT CUSTOMERS

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

<TABLE>
<CAPTION>
                                                               THREE MONTHS       SIX MONTHS
                                                              ENDED JUNE 30,    ENDED JUNE 30,
                                                              --------------    --------------
                                                              2000     1999     2000     1999
                                                              -----    -----    -----    -----
<S>                                                           <C>      <C>      <C>      <C>
Customer A..................................................   23%       *       23%       *
Customer B..................................................    *       16%       *       19%
Customer C..................................................    *       18%       *       10%
Customer D..................................................   12%       *        *        *
                                                               --       --       --       --
  Total.....................................................   35%      34%      23%      29%
                                                               ==       ==       ==       ==
</TABLE>

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

     As of June 30, 2000, customer D accounted for 27% of the Company's trade
receivables. As of December 31, 1999, customer B represented 13% of the
Company's trade receivables. The remaining customers accounted for less than 10%
of the Company's trade receivable for the periods presented.

10. CONTINGENCIES

     The Company has received claims from third parties asserting that the
Company's technologies, or those of its licensees, infringe on the other
parties' intellectual property rights. Management believes that these claims are
without merit and, with respect to each, has obtained or is in the process of
obtaining written non-infringement and/or patent invalidity opinions from
outside patent counsel. Accordingly, in the opinion of management, the outcome
of such claims will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.

11. SUBSEQUENT EVENTS

     During the third quarter of 2000 the Company signed definitive agreements
to acquire two privately-held companies, HT Medical Systems, Inc. (HT Medical)
and Virtual Technologies, Inc. (VTI). HT Medical, located in Gaithersburg,
Maryland, has been a leading developer of advanced medical simulation systems
since 1987. It is expected that HT Medical will become a wholly-owned subsidiary
of Immersion and its 50 employees would remain located in Gaithersburg,
Maryland. The HT Medical transaction is intended to be accounted for as a
pooling of interests. VTI, located in Palo Alto, California is a developer of
tactile feedback technologies that are primarily used in 3D graphical
environments for

                                      F-30
<PAGE>   148
                             IMMERSION CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 JUNE 30, 2000
                                  (UNAUDITED)

computer-aided design and computer-based training. It is planned that VTI will
become a wholly-owned subsidiary of Immersion and its 17 employees with remain
in Palo Alto, California. The VTI transaction is intended to be accounted for as
a purchase.

     The closing of the HT Medical acquisition is subject to registration with
the SEC of the Immersion common stock to be issued in the transaction, approval
by the holders of more than two-thirds of HT Medical's capital stock and other
customary closing conditions. The VTI acquisition is subject to approval by a
majority of the shareholders of VTI and other customary closing conditions.
There can be no assurance that the transactions will be completed.

                                      F-31
<PAGE>   149

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
HT Medical Systems, Inc.

     We have audited the accompanying consolidated balance sheets of HT Medical
Systems, Inc. as of May 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the years
then ended. The financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HT Medical
Systems, Inc. at May 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.

     The accompanying consolidated financial statements have been prepared
assuming that HT Medical Systems, Inc. will continue as a going concern. As more
fully described in Note 11, the Company has incurred recurring operating losses
and has a working capital deficiency. These conditions in addition to the
Company's limited capital resources raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are described in Note 11. The consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.

                                          /s/ ERNST & YOUNG LLP

McLean, Virginia
July 21, 2000

                                      F-32
<PAGE>   150

                            HT MEDICAL SYSTEMS, INC.

                          CONSOLIDATED BALANCE SHEETS
             (IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                                   MAY 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $    79    $     3
  Accounts receivable, net of allowance of $39 and $0,
     respectively...........................................      298        622
  Inventory.................................................      289        160
  Prepaids and other current assets.........................      103         67
                                                              -------    -------
     Total current assets...................................      769        852
Property and equipment, net of accumulated depreciation of
  $748 and $593, respectively...............................      725        218
Other.......................................................       55         94
                                                              -------    -------
     Total assets...........................................  $ 1,549    $ 1,164
                                                              =======    =======

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
  Accounts payable and accrued expenses.....................  $   622    $   448
  Accrued wages and payroll taxes...........................      298        150
  Current portion of notes payable..........................      103         44
  Current portion of capital lease obligation...............        7         --
  Note payable to shareholder...............................       --         60
  Deferred revenue..........................................      381        185
                                                              -------    -------
     Total current liabilities..............................    1,411        887
Notes payable, less current portion.........................      752        541
Secured convertible note payable............................    2,896         --
Capital lease obligation, less current portion..............       34         --
Investment agreement........................................       --      1,313
Deferred rent expense.......................................       39         --
                                                              -------    -------
     Total liabilities......................................    5,132      2,741
Commitments and contingencies
Series A convertible preferred stock with a put option,
  $0.01 par value, 25,000 shares issued and outstanding.....      200         --
Stockholders' deficit:
  Series A convertible preferred stock, $0.01 par value,
     1,500,000 shares designated, 215,107 and 0 shares
     issued and outstanding, respectively...................        2         --
  Common stock, $0.01 par value, 6,000,000 shares
     authorized, 2,236,345 and 2,235,345 shares issued and
     outstanding, respectively..............................       22         22
  Additional paid-in capital................................    6,522      2,764
  Deferred stock compensation...............................     (999)      (107)
  Accumulated deficit.......................................   (9,330)    (4,256)
                                                              -------    -------
     Total stockholders' deficit............................   (3,783)    (1,577)
                                                              -------    -------
     Total liabilities and stockholders' deficit............  $ 1,549    $ 1,164
                                                              =======    =======
</TABLE>

See accompanying notes.

                                      F-33
<PAGE>   151

                            HT MEDICAL SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
             (IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED MAY 31,
                                                              ------------------------
                                                                 2000          1999
                                                              ----------    ----------
<S>                                                           <C>           <C>
Revenues:
  Contract revenues.........................................  $    1,445    $    2,935
  Product sales.............................................       1,480           747
                                                              ----------    ----------
                                                                   2,925         3,682
Cost of revenues:
  Contract revenues.........................................         706         1,963
  Product sales.............................................         879           447
                                                              ----------    ----------
                                                                   1,585         2,410
                                                              ----------    ----------
Gross profit................................................       1,340         1,272
Selling, general and administrative expenses................       2,871         1,596
Research and development....................................       2,539         1,388
                                                              ----------    ----------
Loss from operations........................................      (4,070)       (1,712)
Other income (expense)
  Interest expense..........................................      (1,026)         (267)
  Interest income...........................................          22            25
                                                              ----------    ----------
                                                                  (1,004)         (242)
                                                              ----------    ----------
Net loss....................................................  $   (5,074)   $   (1,954)
                                                              ==========    ==========
Basic and diluted net loss per common share.................  $    (2.33)   $    (0.91)
                                                              ==========    ==========
Weighted average shares outstanding.........................   2,235,720     2,152,845
                                                              ==========    ==========
</TABLE>

See accompanying notes.

                                      F-34
<PAGE>   152

                            HT MEDICAL SYSTEMS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                    (IN THOUSANDS EXCEPT SHARE INFORMATION)

<TABLE>
<CAPTION>
                                 SERIES A
                               CONVERTIBLE
                             PREFERRED STOCK       COMMON STOCK      ADDITIONAL     DEFERRED                       TOTAL
                             ----------------   ------------------    PAID-IN        STOCK       ACCUMULATED   STOCKHOLDERS'
                             SHARES    AMOUNT    SHARES     AMOUNT    CAPITAL     COMPENSATION     DEFICIT        DEFICIT
                             -------   ------   ---------   ------   ----------   ------------   -----------   -------------
<S>                          <C>       <C>      <C>         <C>      <C>          <C>            <C>           <C>
Balance at May 31, 1998....                     1,755,345    $18       $1,054       $  (141)       $(2,302)       $(1,371)
  Issuance of common
    stock..................                       472,500      4        1,676            --             --          1,680
  Issuance of common stock
    for services...........                         7,500     --           30            --             --             30
  Issuance of options to
    non-employees..........                            --     --            4            --             --              4
  Amortization of deferred
    stock compensation.....                            --     --           --            34             --             34
  Net loss.................                            --     --           --            --         (1,954)        (1,954)
                             -------     --     ---------    ---       ------       -------        -------        -------
Balance at May 31, 1999....                     2,235,345     22        2,764          (107)        (4,256)        (1,577)
  Issuance of preferred
    stock, net of issuance
    costs..................  215,107     $2            --     --        1,655            --             --          1,657
  Exercise of common stock
    options................       --     --         1,000     --           --                                          --
  Issuance of warrants with
    debt...................       --     --            --     --        1,165            --             --          1,165
  Deferred stock
    compensation for
    variable options.......       --     --            --     --          238          (238)            --             --
  Issuance of compensatory
    stock options..........       --     --            --     --          783          (783)            --             --
  Amortization of deferred
    stock compensation.....       --     --            --     --           --            94             --             94
  Cancellation of
    compensatory stock
    options................       --     --            --     --          (83)           35             --            (48)
  Net loss.................       --     --            --     --           --            --         (5,074)        (5,074)
                             -------     --     ---------    ---       ------       -------        -------        -------
Balance at May 31, 2000....  215,107     $2     2,236,345    $22       $6,522       $  (999)       $(9,330)       $(3,783)
                             =======     ==     =========    ===       ======       =======        =======        =======
</TABLE>

See accompanying notes.

                                      F-35
<PAGE>   153

                            HT MEDICAL SYSTEMS, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              YEAR ENDED MAY 31,
                                                              ------------------
                                                               2000       1999
                                                              -------    -------
<S>                                                           <C>        <C>
OPERATING ACTIVITIES
Net loss....................................................  $(5,074)   $(1,954)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Depreciation..............................................      155        123
  Amortization of discounts on notes payable................      319         --
  Issuance of common stock and options for services.........       --         34
  Non-cash interest expense.................................      411         50
  Amortization of deferred stock compensation...............       46         34
  Changes in operating assets and liabilities
     Accounts receivable....................................      324       (421)
     Inventory..............................................     (129)      (108)
     Prepaids and other assets..............................        3        (88)
     Accounts payable and accrued expenses..................      174        383
     Accrued wages and payroll taxes........................      147         65
     Accrued interest on Medtronic note payable.............      210         --
     Deferred revenue.......................................      196        175
     Deferred rent expense..................................       39         --
                                                              -------    -------
       Net cash used in operating activities................   (3,179)    (1,707)

INVESTING ACTIVITIES
  Purchases of property and equipment.......................     (662)      (165)
                                                              -------    -------
Net cash used in investing activities.......................     (662)      (165)

FINANCING ACTIVITIES
  Net proceeds from capital lease...........................       41         --
  Payments on notes payable.................................      (85)       (39)
  Proceeds from (payments on) note due to stockholder.......      (60)        60
  Proceeds from notes payable...............................    3,887         --
  Net proceeds from issuance of Series A preferred stock....      996         --
  Exercise of stock options.................................       --      1,681
  Payoff of investment agreement............................     (862)        --
                                                              -------    -------
Net cash provided by financing activities...................    3,917      1,702
Net (decrease) increase in cash and cash equivalents........       76       (170)
Cash and cash equivalents at beginning of year..............        3        173
                                                              -------    -------
Cash and cash equivalents at end of year....................  $    79    $     3
                                                              =======    =======

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND
  NON-CASH INVESTING AND FINANCING ACTIVITIES
  Cash paid for interest....................................  $   487    $   217
  Assets purchased under a capital lease....................  $    45    $    --
  Conversion of investment agreement to equity..............  $   862    $    --
</TABLE>

See accompanying notes.

                                      F-36
<PAGE>   154

                            HT MEDICAL SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  MAY 31, 2000

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

     HT Medical Systems, Inc. (the "Company") is a Maryland corporation that
develops virtual reality medical technology and designs, manufacturers, and
markets computer-based medical simulators that allow medical personnel to
practice medical procedures without placing patients at risk.

PRINCIPLES OF CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
and its 70% investment in Sky Fitness, Inc. ("Sky Fitness"). All intercompany
accounts and transactions have been eliminated in consolidation. No recognition
of minority interest in the cumulative loss of Sky Fitness is recorded in the
financial statements, as there is no requirement for the minority stockholders
to reimburse the Company for operating losses.

USE OF ACCOUNTING ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments with initial maturities
of three months or less at the time of purchase to be cash equivalents.

INVENTORY

     Inventory is stated at the lower of cost or market on a standard cost
basis. At May 31, 2000, inventory is stated net of a reserve for obsolescence of
approximately $16,000.

PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost. Purchases made prior to June 1,
1999 are depreciated using accelerated methods over their estimated useful
lives, which range from three to seven years. Property and equipment purchased
on or after June 1, 1999 are depreciated using the straight-line method over
their estimated useful lives, which range from three to ten years. Property and
equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 MAY 31,
                                                             ---------------
                                                              2000     1999
                                                             ------    -----
<S>                                                          <C>       <C>
Furniture and fixtures.....................................  $  385    $  93
Leasehold improvements.....................................     123       --
Equipment..................................................     873      679
Computer software..........................................      47       39
Software held under capital lease..........................      45       --
                                                             ------    -----
                                                              1,473      811
Less accumulated depreciation..............................    (748)    (593)
                                                             ------    -----
                                                             $  725    $ 218
                                                             ======    =====
</TABLE>

                                      F-37
<PAGE>   155
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONTRACT REVENUE AND COSTS

     Revenue from fixed-price contracts is recognized using the
percentage-of-completion method, with costs and estimated profits included in
contract revenue as work is performed. If actual and estimated costs to complete
a contract indicate a loss, provision is made currently for the full loss
anticipated on the contract. Revenue from cost-plus-fixed-fee contracts is
recognized as costs are incurred on the basis of direct costs plus allowable
indirect costs and an allocable portion of the fixed or award fee. Contract
advance payments are recognized as deferred revenue and are amortized into
contract revenue as work is performed and costs are incurred. During fiscal
years 2000 and 1999, approximately 52% and 76% of the Company's contract
revenues were under government grants and 48% and 24% of the contract revenues
were under commercial contracts, respectively.

PRODUCT SALES

     The Company recognizes product sales revenues in accordance with Statement
of Position 97-2, Software Revenue Recognition, as amended by Statement of
Position 98-4, Deferral of the Effective Date of a Provision of SOP 97-2. The
Company develops, markets, licenses and supports computer software products and
interface devices and provides related services. The Company conveys the right
to use the software products to customers under perpetual license agreements,
and conveys the rights to product support and enhancements in annual maintenance
agreements. The Company recognizes revenue upon delivery of the software
directly to the customer. The Company defers and recognizes maintenance and
support services revenue over the term of the contract period, which is
generally one year. The Company recognizes training and consulting services
revenue as the services are provided. The Company generally expenses sales
commissions as the related revenue is recognized and pays sales commissions upon
receipt of a purchase order from the customer.

ADVERTISING

     The Company expenses advertising costs as incurred. The Company incurred
approximately $60,000 and $35,000 in advertising costs in fiscal years 2000 and
1999, respectively.

RESEARCH AND DEVELOPMENT

     The Company expenses its research and development costs as incurred.

PATENTS AND TRADEMARKS

     It is the Company's policy to write off all costs incurred in applying for
patents and trademarks as the costs are incurred.

INCOME TAXES

     The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under
SFAS 109, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted rates expected to be in effect during the year in
which the differences reverse.

                                      F-38
<PAGE>   156
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION

     Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123") allows companies to either expense the
estimated fair value of stock options or to continue to follow the intrinsic
value method set forth in APB Opinion 25, Accounting for Stock Issued to
Employees ("APB 25"), but disclose the pro forma effects on net income (loss)
had the fair value of the options been expensed. The Company has elected to
continue to apply APB 25 in accounting for its stock option incentive plan and,
accordingly, recognizes compensation expense for the difference between the fair
value of the underlying common stock and the grant price of the option at the
date of grant.

     In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB 25 ("FIN 44"). FIN 44 establishes
guidance for the accounting for stock option grants or modifications to existing
stock option awards and is effective for option grants made after June 30, 2000.
FIN 44 also establishes guidance for the repricing of stock options and
determining whether a grantee is an employee, for which the effective date was
December 15, 1998 and modifying a fixed option to add a reload feature, for
which the effective date was January 12, 2000. The Company has adopted FIN 44 in
these financial statements.

FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company considers the recorded costs of its financial assets and
liabilities, which consist primarily of cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities and notes payable to
approximate the fair value of the respective assets and liabilities.

RECLASSIFICATIONS

     Certain amounts in the prior years' financial statements have been
reclassified to conform with the current year presentation.

2. NOTES PAYABLE

     On August 10, 1999, the Company issued a Secured Convertible Promissory
Note (the "Note") to Medtronic Asset Management, Inc. ("Medtronic") in exchange
for $3 million. On March 3, 2000, an additional $500,000 was borrowed under the
Note. The $3.5 million note bears interest at a rate of 8% per annum and is due
on August 10, 2002. Medtronic may elect to convert all or any part of the
outstanding principal plus a pro rata share of accrued interest into shares of
Series A preferred stock, at a conversion price of the lesser of $8.00 per share
or the price per share at which any shares of Series A preferred stock are sold.
The Note may also be converted into any other class of capital stock that the
Company may issue at a per share price equal to the lowest per share price at
which any such shares are issued or sold.

     In connection with the original issuance of the Note and then amended in
connection with the additional borrowing in March 2000, the Company granted
Medtronic a warrant to purchase up to $2 million of Series A preferred stock at
a price per share equal to the lesser of $8.00 per share or the price per share
at which any shares of Series A preferred stock are sold. The warrant may also
be exercised for any other class of capital stock that the Company may issue at
a per share price equal to the lowest per share price at which any such shares
are issued or sold. The warrant expires on the later to occur of November 10,
2000 or six months after the Company completes a sale of capital stock of at
least $6 million. The Company allocated $1,126,849 of the note payable proceeds
to the warrant and will amortize this amount to interest expense using the
effective interest method over the three-year period that

                                      F-39
<PAGE>   157
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

2. NOTES PAYABLE (CONTINUED)
the related debt is expected to be outstanding. The effect of this allocation
results in an effective interest rate of approximately 17%.

     Medtronic was also given the right of first offer for additional
development agreements as well as a sale of all or a substantial portion of the
Company. Under the specific terms of each right of first offer, the Company must
notify Medtronic if it has received a written offer, or if it is seeking to find
a third party to (i) enter a development agreement to develop a simulation
system within a field in which Medtronic is active, or (ii) to sell all or a
substantial portion of the Company. In either case, if Medtronic is interested
in (i) participating in a development agreement or (ii) in a purchase of all or
a substantial portion of the Company, then Medtronic has a 30-day period to
negotiate exclusively with the Company. If an agreement is not reached within
this 30-day period, the Company may enter into an agreement with a third party,
provided that the terms of the agreement are more favorable to the Company than
the offer presented by Medtronic.

     In April 2000, the Company entered into a Master Loan and Security
Agreement with Third Coast Capital. Per the terms of this agreement the Company
may borrow up to $500,000 through April 1, 2001; however the Company must borrow
at least $250,000 prior to October 1, 2000. All borrowings must be for the
purchase of qualifying assets including telecommunication and office equipment
or computers and will be secured by those assets. As the amounts are borrowed,
each individual note has a term of 36 months and an annual interest rate of
10.5%. At the expiration of the term of the first note, HT Medical will also
have to make a lump sum payment equal to 10% of the greater of the asset
valuation financed under that note or the line of credit balance. On April 11,
2000, the Company borrowed $317,050 against this line of credit that is secured
with certain furniture and equipment. In connection with the agreement, the
Company issued ten-year warrants to purchase 3,125 shares of Series A preferred
stock at $8.00 per share. These warrants may be exercised at any time prior to
April 9, 2010. The Company allocated $11,281 of the proceeds to the warrant and
will amortize this amount to interest expense using the effective interest
method over the three-year period that the related debt is expected to be
outstanding.

     On July 31, 1999 the Company entered into a seven-year promissory note in
the amount of $35,000 under the terms of an Economic Development Fund Agreement
dated April 28, 1999 with Montgomery County Maryland. This note bears an
interest rate of 5% per annum and payments of interest and principal due are
deferred until June 15, 2002, when all deferred interest shall be added to the
principal balance due under the note. Quarterly payments of interest and
principal shall be paid commencing July 15, 2002 and ending April 15, 2006. If
the Company achieves certain job creation and maintenance performance criteria
outlined in the Economic Development Fund Agreement, Montgomery County will
permanently forgive all or part of the $35,000 loan principal balance together
with the accrued interest. The Company cannot sell, close or relocate a majority
of its business interests outside of the County for seven years or otherwise
will immediately owe the principal balance plus all accrued interest. The loan
is secured by a lien on personal property of the Company.

     In December 1997, the Company entered into a subordinated note and warrant
purchase agreement with SECA VII, under which the Company was granted a
subordinated promissory note for $500,000 with interest at the rate of 13% per
annum. The note is secured by substantially all of the Company's assets and was
subordinate to the Company's Investment Agreement that was repaid in August 1999
(See Note 3). The note is also secured by a life insurance policy on the
Company's chairman of the board in the amount of $750,000.

     In connection with the note, the Company gave SECA VII a warrant to
purchase 60,000 shares of the Company's common stock at a purchase price of
$2.67 per share. The warrant may be exercised in

                                      F-40
<PAGE>   158
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

2. NOTES PAYABLE (CONTINUED)
increments of 1,500 shares and expires on June 30, 2003. SECA VII has certain
put rights that allow it to have the Company purchase the warrant or, if the
warrant has been exercised, the shares of common stock issued upon exercise of
the warrant, at any time during the six-month period prior to the maturity date
of the subordinated note (or upon earlier acceleration of the note). If the
warrant has been exercised, the purchase price of the put securities would be
the fair market value of one share of common stock multiplied by the number of
shares of common stock issued upon exercise of the warrant. If the warrant has
not been exercised, the purchase price would be the amount by which the fair
market value exceeds the $2.67 purchase price, multiplied by the number of
shares for which the warrant is then exercisable.

     In 1999, two of the stockholders of Sky Fitness executed promissory notes
to Sky Fitness. The notes, totaling $35,000, accrue interest at 10% per annum
and are payable within ten business days of receipt of at least $500,000 in
equity financing by Sky Fitness. In connection with these notes, Sky Fitness
granted warrants to purchase up to 12,600 shares of capital stock at $2.38 per
share. The warrants expire in fiscal year 2005. The Company allocated $27,300 of
the notes payable proceeds to the warrants and will amortize this amount to
interest expense using the effective interest method, resulting in an effective
interest rate of approximately 20%.

     The Company is obligated under its notes payable as follows (in thousands):

<TABLE>
<CAPTION>
                                                                 MAY 31,
                                                              -------------
                                                              2000    1999
                                                              ----    -----
<S>                                                           <C>     <C>
Subordinated note payable to SECA VII; monthly interest
  payments at 13% per annum until December 31, 2002 when all
  principal and unpaid interest are due in full.............  $500    $ 500
Secured promissory note payable to Third Coast Capital; 36
  monthly payments of approximately $10,000 including
  interest at 10.5% commencing on June 30, 2000.............   307       --
Promissory note payable to Montgomery County Maryland;
  quarterly payments of accrued interest and principal begin
  on July 15, 2002 unless certain job creation and
  maintenance criteria have been achieved...................    35       --
Promissory notes payable to Sky Fitness stockholders........    13       --
Note payable to bank, repaid on August 10, 1999.............    --       85
                                                              ----    -----
                                                               855      585
Less current portion........................................  (103)     (44)
                                                              ----    -----
                                                              $752    $ 541
                                                              ====    =====
</TABLE>

     Maturities of notes payable at May 31, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>
                     YEAR ENDED MAY 31,
                     ------------------
<S>                                                           <C>
2001........................................................  $103
2002........................................................   100
2003........................................................   652
                                                              ----
                                                              $855
                                                              ====
</TABLE>

                                      F-41
<PAGE>   159
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

3. INVESTMENT AGREEMENT

     In September 1996 the Company entered into an Investment Agreement with
Maryland Health Care Product Development, COOK, Inc. and the Department of
Business and Economic Development of the State of Maryland, (collectively, the
"Investors") under which the Investors invested a total of $1,050,000 in the
Company. On August 10, 1999, the Company exercised its one-time right to convert
50% of the payment stream payable to the Investors to equity within thirty days
after the Company obtaining additional equity financing through a qualified
private offering. The Company issued the Investors 107,732 shares of Series A
preferred stock based upon the offering price of $8.00 per share, which provided
the Investors an internal rate of return of 25% per annum. The Company also
elected to pay the remaining balance of $861,854 in cash.

4. EQUITY TRANSACTIONS

COMMON STOCK

     In June 1998, the Company completed a 3-for-1 stock split. All references
in the accompanying financial statements to the number of shares of common stock
and per-share amounts have been restated to reflect the split.

     In July 1998, the Company issued 7,500 shares of common stock at $4.00 per
share as compensation to an employee of the Company.

     In August 1998, the Company closed two private placements for a total of
$1,890,000 that gave the Company net proceeds of $1,681,083. Upon closing the
private placements, 472,500 shares of common stock were issued at $4.00 per
share. These financing transactions also included the issuance of warrants to
purchase 47,249 shares of the Company's common stock at an exercise price of
$4.00 per share. The warrants expire in August 2008.

     In fiscal year 2000, two employees exercised options issued under the 1995B
Employee Stock Option Plan to purchase 1,000 shares of common stock at $0.33 per
share.

PREFERRED STOCK

     On June 22, 1999, the Company issued 76,125 shares of Series A preferred
stock at $8.00 per share for a total of $609,000 in cash. The Company also paid
commissions and fees of approximately $45,000 related to this private placement
and issued a warrant to purchase 5,175 shares of Series A preferred stock with
an exercise price of $9.60 per share that expires on June 21, 2009. The Company
is obligated to purchase the warrants at the election of the holders for cash
without the holders having to exercise the warrant, if there is an instance in
which the Series A preferred stockholders receive cash for their shares of
Series A preferred stock. The purchase price would be the price per share that
the shareholders receive for their shares times the number of shares under the
warrant minus the aggregate exercise price of the warrant. The holders of these
warrants also have the right to require the Company to convert the warrants at
any time into shares of Series A preferred stock.

     All outstanding shares of Series A preferred stock are entitled to receive
dividends when and if declared by the board of directors at a rate equal to
$0.80 per annum or, if greater, an amount equal to that paid on outstanding
shares of common stock. The board of directors did not declare any dividends
prior to May 31, 2000, and therefore no dividends have been accrued at that
date. The aggregate and per share amounts of the Company's arrearages in
cumulative preferred dividends were $139,057 and $0.58 per share, respectively,
as of May 31, 2000.

                                      F-42
<PAGE>   160
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

4. EQUITY TRANSACTIONS (CONTINUED)
     In the event of any liquidation of the Company, the holders of Series A
preferred stock are entitled to receive an amount per share for each outstanding
share of Series A preferred stock equal to the sum of $8.00 per share and the
amount equal to all accrued but unpaid dividends on each share. Each holder of
Series A preferred stock is entitled to vote on all matters as if their shares
of Series A preferred stock were converted to voting common stock. The holders
of Series A preferred stock have the right to convert, at the option of the
holder, into such number of shares of common stock as is determined by dividing
the original preferred purchase price by the conversion price at the time in
effect. All outstanding shares of Series A preferred stock have an automatic
conversion feature upon the consummation of a firm commitment underwritten
public offering of at least $10,000,000 at a price of not less than $10.00 per
share.

     On August 10, 1999 the Company issued a total of 107,732 shares of Series A
preferred stock in conjunction with the conversion of the Investment Agreement
(see Note 3.)

     On December 27, 1999, the Company issued 25,000 shares of Series A
preferred stock to MdBio, Inc. under the terms of a Manufacturing Award and
Stock Purchase Agreement for a total of $200,000 in cash. In conjunction with
this investment, the Company promised to continue to incur at least 50% of the
costs of its software manufacturing and systems integration activities within
the State of Maryland and to complete the development of the PICC Software
module for its CathSim training simulator within one year. According to the
agreement, in the event HT Medical does not complete the agreed upon project
within one year, or if the Company chooses to perform the work outside of the
state of Maryland, then MdBio shall have the option to sell the shares back to
the Company for a purchase price of $200,000 plus interest at 15% per annum.

     On March 9, 2000, the Company issued 18,750 shares of Series A preferred
stock to Child Health Investment II, LLC for a total of $150,000 in cash. In
addition, the Company issued warrants to purchase an additional 12,500 shares of
Series A preferred stock at the same price of $8.00 per share on or before
November 10, 2000.

     The Company also issued 12,500 of Series A preferred stock to private
investors for total proceeds of $100,000 in the fourth quarter of fiscal year
2000.

EMPLOYEE STOCK OPTION PLANS

     In August 1995, the Company adopted the 1995B Employee Stock Option Plan
(the "1995B Plan") to reward employees for their past services and as an
incentive for continued service. The 1995B Plan provided for the issuance of
options to purchase a maximum of 600,000 shares of common stock with an exercise
price of $0.33 per share. Options become exercisable over five years commencing
on the date of the grant. The options expire ten years from the date of the
grant.

     In June 1998, the Company adopted the 1998 Stock Option Plan (the "1998
Plan") to encourage and enable certain officers, employees, directors and
consultants to acquire an interest in the Company. A total of 600,000 shares of
common stock are reserved for issuance under the 1998 Plan. The majority of the
options cliff vest on each anniversary date over a five-year period. The Company
granted 24,000 options to members of the board of directors in June 1998 with
quarterly vesting provisions over a two-year period. In connection with an
employment agreement, the Company granted its chief executive officer options
for 4,200 shares of common stock which vested immediately and options for
145,152 shares of common stock that vest upon the completion of a financing of
at least $6 million. Both issuances provide for a cash bonus upon exercise of
the options and therefore the options are accounted for as variable awards. The
1998 Plan

                                      F-43
<PAGE>   161
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

4. EQUITY TRANSACTIONS (CONTINUED)
provides for certain provisions for accelerated vesting upon a change of
control. All of the options expire ten years from the date of the grant.

     Additional information with respect to stock option activity is summarized
as follows:

<TABLE>
<CAPTION>
                                                      YEAR ENDED MAY 31,
                                  ----------------------------------------------------------
                                             2000                           1999
                                  ---------------------------    ---------------------------
                                             WEIGHTED AVERAGE               WEIGHTED AVERAGE
                                  SHARES      EXERCISE PRICE     SHARES      EXERCISE PRICE
                                  -------    ----------------    -------    ----------------
<S>                               <C>        <C>                 <C>        <C>
Outstanding at beginning of
  year..........................  546,331         $1.31          425,925         $0.33
Options granted.................  233,652          4.00          120,406          4.75
Options exercised...............    1,000          0.33               --            --
Options canceled or expired.....  160,875          0.79               --            --
                                  -------                        -------
Outstanding at end of year......  618,108          2.35          546,331          1.31
                                  =======                        =======
Options exercisable at end of
  year..........................  234,811          1.09          193,245          0.33
                                  =======                        =======
</TABLE>

     The following table summarizes information about stock options outstanding
at May 31, 2000:

<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING
                    -------------------------------------------------
                                  WEIGHTED-AVERAGE                           OPTIONS EXERCISABLE
      RANGE OF                       REMAINING                          ------------------------------
      EXERCISE        NUMBER      CONTRACTUAL LIFE   WEIGHTED-AVERAGE     NUMBER      WEIGHTED-AVERAGE
        PRICE       OUTSTANDING      (IN YEARS)       EXERCISE PRICE    EXERCISABLE    EXERCISE PRICE
      --------      -----------   ----------------   ----------------   -----------   ----------------
    <S>             <C>           <C>                <C>                <C>           <C>
    $0.33             274,050           6.00              $0.33           184,830          $0.33
    $0.34 - $2.67..    12,000           7.84               2.67             3,600           2.67
    $2.69 - $4.00..   332,058           9.39               4.00            46,381           4.00
                      -------           ----              -----           -------          -----
    $0.33 - $4.00..   618,108           7.86               2.35           234,811           1.09
                      =======                                             =======
</TABLE>

     The Company applies APB 25 in accounting for its stock option incentive
plan and, accordingly, recognizes compensation expense for the difference
between the fair value of the underlying common stock and the grant price of the
option at the date of grant.

     In fiscal year 1998, the Company recorded deferred compensation expense of
$168,000 related to the issuance of 72,000 options granted with below fair
market value exercise prices. The deferred compensation is being amortized over
the five-year vesting period of the options. In fiscal years 2000 and 1999,
$33,576 and $33,580, respectively, was expensed in connection with the deferred
compensation. In fiscal year 2000, one of the employees with 36,000 of these
options left the Company and exercised 500 of the options. In connection with
his termination, previously recorded expense of $48,347 was reversed and the
remaining deferred compensation balance of $35,658 was written off against
additional paid in capital. At May 31, 2000, the other holders of the
compensatory stock options had 14,400 options that were exercisable.

     In fiscal year 2000, the Company recorded deferred compensation expense of
$782,608 related to the issuance of 195,652 options granted with below fair
market value exercise prices. The deferred compensation is being amortized over
the five-year vesting period of the options. In connection with these issuances
the Company recorded compensation expense of $19,034 in the year ended May 31,
2000.

     On January 31, 2000, the Company's board of directors approved a repricing
of all outstanding stock options that had been granted on or after June 1, 1998
from $8.00 per share to $4.00 per share. A total of
                                      F-44
<PAGE>   162
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

4. EQUITY TRANSACTIONS (CONTINUED)
59,500 options were repriced. In connection with the repricing, the Company
applied variable accounting to these options and recorded deferred compensation
expense of $238,000, which is being amortized over the remaining vesting period
of the options. In the year ended May 31, 2000, the Company recorded $41,189 of
compensation expense for the amortization of the deferred balance.

     Had compensation cost for the Company's stock option plans been determined
based upon the fair value at the grant date for awards under the plans
consistent with the methodology prescribed under SFAS No. 123, the Company's net
loss would have been $2,002,226 and $5,138,631 for the years ended May 31, 1999
and 2000, respectively. The effect of applying SFAS No. 123 on fiscal year 2000
pro forma net loss as stated above is not necessarily representative of the
effects on reported net loss for future years due to, among other things, the
vesting period of the stock options and the fair value of additional stock
options in future years. The weighted-average fair value of the options granted
during fiscal years 1999 and 2000 are estimated at $2.14 per share and $5.80 per
share, respectively, on the date of grant using the minimum value option-pricing
model.

     In 1999, Sky Fitness approved a stock option plan under which only one
option grant has been made. The non-qualified grant on September 9, 1999 for 287
shares was immediately exercisable at $7.14 per share. The option was granted to
a subcontractor and has a ten-year life.

WARRANTS

     In addition to the warrants granted in connection with various debt
agreements in fiscal years 1999 and 2000 (see Note 2) and the private placements
as described above in this footnote, the Company issued warrants to purchase
111,564 shares of common stock at $2.67 per share and 375 shares of common stock
at $4.00 per share. These warrants, which expire on July 1, 2000, were issued in
fiscal year 1998 in connection with a private placement in which the Company
sold approximately 265,000 shares of common stock. The following table
summarizes all common and preferred stock warrant activity:

<TABLE>
<CAPTION>
                                                           YEAR ENDED MAY 31,
                                                           ------------------
                                                            2000       1999
                                                           -------    -------
<S>                                                        <C>        <C>
Outstanding at beginning of year.........................  219,188    171,939
Warrants issued..........................................  270,800     47,249
Warrants exercised.......................................       --         --
                                                           -------    -------
Outstanding at end of year...............................  489,988    219,188
                                                           =======    =======
</TABLE>

5. INCOME TAXES

     The Company had no provision for income taxes for the years ended May 31,
1999 and 2000 due to operating losses. The effective income tax rate varied from
the federal statutory income tax rate as follows:

<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                                MAY 31,
                                                              ------------
                                                              2000    1999
                                                              ----    ----
<S>                                                           <C>     <C>
Statutory rate..............................................   34%     34%
State income taxes, net of federal income tax benefit.......    5       5
Change in deferred tax asset valuation allowance............  (39)    (39)
Tax credits carryforward....................................   --      --
                                                              ---     ---
Tax rate....................................................   --%     --%
                                                              ===     ===
</TABLE>

                                      F-45
<PAGE>   163
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

5. INCOME TAXES (CONTINUED)
     Deferred tax assets/(liabilities) are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                MAY 31,
                                                           ------------------
                                                            2000       1999
                                                           -------    -------
<S>                                                        <C>        <C>
Cash to accrual basis adjustments........................  $   (45)   $   (67)
Accruals and reserves....................................       62          9
Depreciation.............................................       23         15
Amortization of intangibles..............................       57         62
Research and development credit carryforward.............       17         17
Deferred compensation....................................       31         13
Deferred revenue.........................................      149         13
Deferred rent............................................       15         --
Net operating loss carryforward..........................    3,160      1,434
                                                           -------    -------
Net deferred tax asset before valuation allowance........    3,469      1,496
Valuation allowance......................................   (3,469)    (1,496)
                                                           -------    -------
Net deferred tax asset...................................  $    --    $    --
                                                           =======    =======
</TABLE>

     At May 31, 2000 and 1999, the Company had net operating loss carryforwards
of approximately $8.1 million and $3.6 million, respectively. The timing and
manner in which the operating loss carryforwards may be utilized in any year
will be limited by the Company's ability to generate future earnings and certain
provisions of the US tax code. Current net operating loss carryforwards will
expire in the years 2011 through 2020. As the Company has not generated earnings
in recent years and no assurance can be made of future earnings, a valuation
allowance in the amount of the net deferred tax assets has been recorded. The
change in the valuation allowance was $1,973,289 from May 31, 1999 to May 31,
2000.

6. COMMITMENTS AND CONTINGENCIES

     The Company's 70% owned subsidiary, Sky Fitness, has had claims against it
relating to the Sky Fitness mark. The claims allege that the SkyCYCLE infringes
a competitor's mark and that an employee of HT Medical Systems, Inc. violated a
non-compete clause within his employment agreement. The Company believes these
claims are without merit and would vigorously defend itself if these claims were
to progress.

     From time to time, the Company is party to litigation incidental to its
business. Management believes that the outcome of such lawsuits would not have a
material adverse impact on the Company's financial statements.

CAPITAL AND OPERATING LEASES

     The Company has entered into a capital lease for the purchase of software.
The interest rate is approximately 12% per annum.

     The Company leases space in Gaithersburg, Maryland. The Company also has
several operating leases for telephone and computer equipment that expire during
fiscal years 2000 through 2003. The Company incurred rental expense of $420,730
and $175,490 and for the years ended May 31, 2000 and 1999,

                                      F-46
<PAGE>   164
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
respectively. Aggregate future minimum lease payments under operating leases
having terms in excess of one year as of May 31, 2000 are as follows (in
thousands):

<TABLE>
<CAPTION>
               YEAR ENDED MAY 31                  CAPITAL LEASE    OPERATING LEASES
               -----------------                  -------------    ----------------
<S>                                               <C>              <C>
2001............................................       $12              $  400
2002............................................        12                 401
2003............................................        12                 370
2004............................................        12                 377
2005............................................         6                 386
Thereafter......................................        --               1,637
                                                       ---              ------
                                                        54              $3,571
                                                                        ======
Portion representing interest...................        13
                                                       ---
                                                       $41
                                                       ===
</TABLE>

7. RELATED PARTY TRANSACTIONS

     In fiscal year 1995, the Company loaned $4,000 to Biomedical Visualization
International, L.L.C., ("BVI"), which is wholly owned by two of the Company's
stockholders. The terms of the note called for interest to be accrued at a rate
of 10% per annum with principal and interest payable on demand. On April 10,
2000, BVI filed for dissolution and repaid approximately $2,500 of its
indebtedness. The Company wrote off the remaining balance.

     In April 1999, an executive officer loaned the Company $60,000 to meet the
Company's immediate cash needs. The note was not discounted due to the
short-term nature of the borrowing and the fact that the total discount amount
was not material to the Company's financial position or statement of operations.
The note was repaid on August 16, 1999.

     As described in Note 2, two of the Sky Fitness stockholders loaned Sky
Fitness $35,000 in 1999.

8. TAX DEFERRED SAVINGS AND RETIREMENT PLAN

     The Company maintains a tax deferred savings and retirement plan (the
"Plan") to provide retirement benefits to all of its eligible employees. Under
the Plan, employees become eligible to participate after one year of employment.
The participants may elect to contribute up to 15% of their gross earnings and
the Company may make discretionary matching contributions annually to each
participant's account. The participant contributions vest immediately. Rights to
Company provided benefits under the Plan vest as follows: 20% after two years
and 20% each year thereafter until fully vested at the end of six years. The
Company made discretionary contributions to the Plan of $53,309 and $30,742,
during fiscal years 2000 and 1999, respectively.

9. GOVERNMENT AUDITS

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

                                      F-47
<PAGE>   165
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

9. GOVERNMENT AUDITS (CONTINUED)
     As of May 31, 2000, the Company has not reached final settlements on
indirect rates. The Company has negotiated provisional indirect rates for the
years ended May 31, 2000 and 1999. The Company periodically reviews its cost
estimates and experience rates, and any needed adjustments are made and
reflected in the period in which the estimates are revised. In the opinion of
management, redetermination of any cost-based contracts for the open years will
not have a material effect on the Company's financial position or results of
operations.

10. NET LOSS PER COMMON SHARE

     The following table sets forth the computation of basic and diluted net
loss per common share (in thousands except share and per share information):

<TABLE>
<CAPTION>
                                                         YEAR ENDED MAY 31,
                                                      ------------------------
                                                         2000          1999
                                                      ----------    ----------
<S>                                                   <C>           <C>
Numerator:
  Net loss..........................................  $   (5,074)   $   (1,954)
  Less: Deemed dividends on preferred stock.........        (139)           --
                                                      ----------    ----------
Net loss attributable to common stockholders........      (5,213)       (1,954)
                                                      ----------    ----------
Denominator:
  Weighted-average shares outstanding...............   2,235,720     2,152,845
Basic and diluted net loss per common share.........  $    (2.13)   $    (0.91)
                                                      ==========    ==========
</TABLE>

     The following equity instruments were not included in the diluted net loss
per share calculation because their effect would be anti-dilutive:

<TABLE>
<CAPTION>
                                                                MAY 31,
                                                           ------------------
                                                            2000       1999
                                                           -------    -------
<S>                                                        <C>        <C>
Investment agreement.....................................       --    164,160
Convertible note payable.................................  437,500         --
Series A preferred stock.................................  240,107         --
Series A preferred stock warrants........................  270,800         --
Stock options............................................  618,108    546,331
Common stock warrants....................................  219,188    219,188
</TABLE>

11. MANAGEMENT'S PLANS AS TO CONTINUING AS A GOING CONCERN

     The accompanying balance sheet has been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Since inception, the Company has suffered, and
continues to incur, significant losses from operations and, as of May 31, 2000,
the Company has a working capital deficiency of approximately $642,000. These
factors could significantly limit the Company's ability to continue as a going
concern. The balance sheet does not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.

     The Company's ability to continue as a going concern is dependent on its
ability to generate sufficient cash flows to meet its obligations on a timely
basis, to obtain additional financing, and ultimately to attain profitability.
The Company is actively pursuing financing through a private placement of the
Company's

                                      F-48
<PAGE>   166
                            HT MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  MAY 31, 2000

11. MANAGEMENT'S PLANS AS TO CONTINUING AS A GOING CONCERN (CONTINUED)
preferred stock. There is no assurance that the Company will raise capital
sufficient to enable the Company to continue its operations for the next twelve
months.

     In the event the Company is unable to successfully raise capital or to
generate revenues sufficient to cover operating expenses, it is unlikely that
the Company will have sufficient cash flows and liquidity to satisfy its current
liabilities or to finance its business operations as currently contemplated. The
Company would then be required to radically reduce its operations, which would
likely mean reducing general and administrative expenses and delaying software
development projects and marketing campaigns until it is able to obtain
sufficient financing to do so. In this event, the Company may also be required
to seek protection under the United States Bankruptcy Code. The financial
statements do not include any adjustments that might result from this
uncertainty.

12. EVENTS SUBSEQUENT TO AUDITOR'S REPORT (UNAUDITED)

     On June 9, 2000, the Company entered into a non-binding letter of intent
with Immersion Corporation under which Immersion proposes to acquire the
Company. On that same date, HT Medical and Immersion entered into a promissory
note agreement in which Immersion promised to loan the Company the principal sum
of $2 million bearing interest at 15% per annum, with principal and interest to
be repaid on March 9, 2001. The Company has received the $2 million under this
promissory note.

                                      F-49
<PAGE>   167

                                                                      APPENDIX A

                      AGREEMENT AND PLAN OF REORGANIZATION
                                  BY AND AMONG
                             IMMERSION CORPORATION,
                                HT MERGER, INC.,
                            HT MEDICAL SYSTEMS, INC.
                                      AND
                                  GREG MERRIL

                                 JULY 31, 2000
<PAGE>   168

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                   PAGE
                                                                   ----
<S>  <C>                                                           <C>
 1.  DEFINITIONS.................................................   A-2
 2.  THE MERGER..................................................   A-5
     2.1   The Merger............................................   A-5
     2.2   Closing...............................................   A-5
     2.3   Effective Time........................................   A-6
     2.4   Effect of the Merger..................................   A-6
     2.5   Articles of Incorporation; Bylaws.....................   A-6
     2.6   Directors and Officers................................   A-6
     2.7   Further Action After the Effective Time...............   A-6
 3.  CONVERSION OF SHARES........................................   A-6
     3.1   Manner of Conversion..................................   A-6
     3.2   Exchange Ratio........................................   A-7
     3.3   Options, Warrants and Convertible Note................   A-8
     3.4   Escrowed Shares.......................................   A-8
     3.5   Exchange of Certificates..............................   A-8
     3.6   Stock Transfer Books..................................   A-9
 4.  REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............   A-9
     4.1   Organization and Good Standing........................   A-9
     4.2   Subsidiaries; Ownership Interests.....................  A-10
     4.3   Authorization.........................................  A-10
     4.4   Capitalization; Warrants and Options..................  A-10
     4.5   No Breach or Violation................................  A-11
     4.6   Financial Statements; Absence of Liabilities..........  A-12
     4.7   Absence of Certain Changes............................  A-12
     4.8   Tax Matters...........................................  A-13
     4.9   Inventories, Products; Accounts; Etc..................  A-14
     4.10  Leased Facilities.....................................  A-15
     4.11  Tangible Personal Property............................  A-16
     4.12  Insurance.............................................  A-16
     4.13  Intellectual Property.................................  A-16
     4.14  Web Site Domains......................................  A-18
     4.15  Litigation............................................  A-18
     4.16  Contracts.............................................  A-18
     4.17  Compliance With Laws..................................  A-19
     4.18  Environmental Matters.................................  A-19
     4.19  Licenses and Permits..................................  A-20
     4.20  Employees, Agents and Consultants.....................  A-21
     4.21  Benefit Plans.........................................  A-21
     4.22  Acquisitions..........................................  A-22
     4.23  Certain Payments......................................  A-23
     4.24  Conflicts of Interest; Transactions with Subsidiary...  A-23
     4.25  Books and Records.....................................  A-23
     4.26  No Brokers or Finders Fees............................  A-24
     4.27  Suppliers and Customers...............................  A-24
     4.28  Bank and Financial Accounts...........................  A-24
     4.29  Powers of Attorney....................................  A-24
</TABLE>

                                        i
<PAGE>   169

<TABLE>
<CAPTION>
                                                                   PAGE
                                                                   ----
<S>  <C>                                                           <C>
     4.30  Officers and Directors................................  A-24
     4.31  Pooling of Interests..................................  A-24
     4.32  Full Disclosure.......................................  A-24
     4.33  Securities Representation.............................  A-24
     REPRESENTATIONS AND WARRANTIES OF IMMERSION AND MERGER
 5.  SUB.........................................................  A-25
     5.1   Organization and Good Standing........................  A-25
     5.2   Authorization.........................................  A-25
     5.3   Capitalization........................................  A-25
     5.4   Immersion Common Stock................................  A-25
     5.5   No Breach or Violation................................  A-25
     5.6   No Prior Activities...................................  A-26
     5.7   No Brokers or Finders Fees............................  A-26
     5.8   SEC Filings...........................................  A-26
 6.  COVENANTS OF THE COMPANY....................................  A-26
     6.1   Conduct of Business by the Company Pending the
     Merger......................................................  A-26
     6.2   No Solicitation.......................................  A-28
     6.3   Special Stockholders' Meeting.........................  A-28
     6.4   Access to Information.................................  A-28
     6.5   Consents; Approvals...................................  A-29
     6.6   Notification of Certain Matters.......................  A-29
     6.7   Public Announcements..................................  A-29
     6.8   Tax Matters...........................................  A-30
     6.9   Pooling of Interests Accounting; Affiliate
     Agreements..................................................  A-31
     6.10  Transaction Costs.....................................  A-31
     6.11  Amendment of Scream Racing Agreement..................  A-31
     6.12  Medtronic Agreement...................................  A-31
     6.13  Best Efforts..........................................  A-31
 7.  COVENANTS OF IMMERSION......................................  A-31
     7.1   Stock Option Plan.....................................  A-31
     7.2   Notification..........................................  A-32
     7.3   Board Observer Rights.................................  A-32
     7.4   Registration of Immersion Common Stock; Securities
     Act.........................................................  A-32
     7.5   Employment Agreement..................................  A-32
     7.6   Transaction Costs.....................................  A-32
     7.7   Best Efforts..........................................  A-32
     7.8   Tax Matters...........................................  A-32
 8.  CONDITIONS TO OBLIGATION OF IMMERSION AND MERGER SUB........  A-33
     8.1   Stockholder Approval..................................  A-33
     8.2   Representations and Warranties of the Company.........  A-33
     8.3   Covenants of the Company..............................  A-33
     8.4   Delivery of Documents.................................  A-33
     8.5   Opinions of Counsel for the Company and
     Stockholders................................................  A-33
     8.6   Resignations..........................................  A-33
     8.7   Injunctions...........................................  A-33
     8.8   Pooling of Interests..................................  A-34
     8.9   Objecting Stockholders................................  A-34
     8.10  No Material Adverse Change............................  A-34
     8.11  Auditors' Opinion.....................................  A-34
</TABLE>

                                       ii
<PAGE>   170

<TABLE>
<CAPTION>
                                                                   PAGE
                                                                   ----
<S>  <C>                                                           <C>
     8.12  Certificates..........................................  A-34
     8.13  Approval of Documentation.............................  A-34
     8.14  Effectiveness of the S-4..............................  A-34
     8.15  Medtronic Agreement...................................  A-34
 9.  CONDITIONS TO OBLIGATION OF THE COMPANY.....................  A-34
     9.1   Stockholder Approval..................................  A-34
     9.2   Representations and Warranties of Immersion...........  A-34
     9.3   Covenants of Immersion................................  A-34
     9.4   Escrow Agreement......................................  A-34
     9.5   Opinion of Counsel for Immersion......................  A-34
     9.6   Injunction............................................  A-35
     9.7   Certificates..........................................  A-35
     9.8   Approval of Documentation.............................  A-35
     9.9   Registration of Shares of Immersion Common Stock......  A-35
10.  TERMINATION.................................................  A-35
     10.1  Termination Events....................................  A-35
     10.2  Effect of Termination.................................  A-35
11.  SURVIVAL; ESCROW; INDEMNIFICATION...........................  A-36
     11.1  Survival of Representations and Warranties; Rights not
     Affected by Knowledge.......................................  A-36
     11.2  Escrow................................................  A-36
     11.3  Indemnification.......................................  A-36
     11.4  Right to Defend; Certain Other Procedures.............  A-37
     11.5  Time Limitation; Waiver of Conditions.................  A-38
     11.6  Limitations on Amount of Indemnification; Exclusive
     Remedy......................................................  A-38
     11.7  Term..................................................  A-38
     11.8  Appointment of Representative.........................  A-39
     11.9  Replacement of Representative.........................  A-39
     11.10 Communications; Notices...............................  A-39
     11.11 Authority of Representative...........................  A-39
     11.12 Limitation on the Representative's Liability..........  A-40
     11.13 Costs and Expenses of the Representative..............  A-40
12.  MISCELLANEOUS...............................................  A-40
     12.1  Headings..............................................  A-40
     12.2  Governing Law.........................................  A-40
     12.3  Entire Agreement......................................  A-40
     12.4  Assignment............................................  A-40
     12.5  Binding Effect........................................  A-40
     12.6  Parties in Interest...................................  A-40
     12.7  Notices...............................................  A-40
     12.8  Counterparts..........................................  A-41
     12.9  Amendment and Waiver..................................  A-41
     12.10 Severable Provisions..................................  A-42
     12.11 Rules of Construction.................................  A-42
     12.12 Mediation.............................................  A-42
     12.13 Non-Exclusive Consent to Jurisdiction.................  A-42
     12.14 Waiver of Jury Trial..................................  A-42
     12.15 Enforcement...........................................  A-43
     12.16 Attorneys' Fees.......................................  A-43
</TABLE>

                                       iii
<PAGE>   171

<TABLE>
<S>                        <C>
LIST OF EXHIBITS
Exhibit A                  Voting Agreements
Exhibit B                  Indemnification and Joinder Agreement
Exhibit C                  Escrow Agreement
Exhibit D                  Affiliate Agreement
Exhibit E-1                Noncompetition Agreement (Employee and Stockholder Form)
Exhibit E-2                Noncompetition Agreement (Employee Form)
Exhibit F                  Employee Confidentiality and Inventions Agreement
Exhibit G                  Opinion of Duane, Morris & Heckscher LLP
Exhibit H                  Opinion of Heller Ehrman White & McAuliffe LLP
LIST OF SCHEDULES
Disclosure Schedule
Part 4.1                   Organization and Good Standing
Part 4.2                   Subsidiaries; Ownership Interests
Part 4.3                   Authorization
Part 4.4                   Capitalization; Warrants and Options
Part 4.5                   No Breach or Violation
Part 4.6                   Financial Statements; Absence of Liabilities
Part 4.7                   Absence of Certain Changes
Part 4.8                   Tax Matters
Part 4.9                   Inventories, Products, Accounts, Etc.
Part 4.10                  Leased Facilities
Part 4.12                  Insurance
Part 4.13                  Intellectual Property
Part 4.14                  Web Site Domains
Part 4.15                  Litigation
Part 4.16                  Contracts
Part 4.19                  Licenses and Permits
Part 4.20                  Employees, Agents and Consultants
Part 4.21                  Benefit Plans
Part 4.22                  Acquisitions
Part 4.24                  Conflicts of Interest
Part 4.27                  Suppliers and Customers
Part 4.28                  Bank and Financial Accounts
Part 4.30                  Officers and Directors
Schedule 6.12              Amendment to Medtronic Agreement
Schedule 8.5               Stockholder to Provide Opinions of Counsel
</TABLE>

                                       iv
<PAGE>   172

                      AGREEMENT AND PLAN OF REORGANIZATION

     THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of July 31, 2000, by and among Immersion Corporation, a Delaware
corporation ("Immersion"), HT Merger, Inc., a Maryland corporation and a wholly
owned subsidiary of Immersion ("Merger Sub"), HT Medical Systems, Inc., a
Maryland corporation (the "Company"), and Greg Merril as representative of the
stockholders of the Company (the "Representative") with reference to the
following facts:

     A. The Boards of Directors of Immersion, Merger Sub and the Company have
each determined that it is advisable and in their best interests and the best
interests of their stockholders for Immersion to acquire the Company upon the
terms and subject to the conditions provided in this Agreement.

     B. The Boards of Directors of Immersion, Merger Sub and the Company have
each approved this Agreement and the merger of Merger Sub with and into the
Company (the "Merger") in accordance with the applicable provisions of the
Maryland General Corporation Law (the "MGCL") and upon the terms and subject to
the conditions provided in this Agreement.

     C. It is intended that the Merger qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code") for federal income tax purposes, and this Agreement is hereby adopted as
a plan of reorganization for purposes of Section 368 of the Code.

     D. It is intended that the Merger be accounted for as a pooling of
interests for financial reporting purposes.

     E. Concurrently with the execution of this Agreement, and as a condition
and inducement to Immersion's and Merger Sub's willingness to enter into this
Agreement, certain stockholders of the Company are entering into Voting
Agreements, in each case in substantially the form attached hereto as Exhibit A
(the "Voting Agreements").

     F. Concurrently with the execution of this Agreement, and as a condition
and inducement to Immersion's and Merger Sub's willingness to enter into this
Agreement, certain stockholders of the Company are entering into an
Indemnification and Joinder Agreement in substantially the form attached hereto
as Exhibit B (the "Indemnification and Joinder Agreement").

     ACCORDINGLY, in consideration of the foregoing and the following
representations, warranties, covenants and agreements, and intending to be
legally bound hereby, the parties agree as follows:

 1. Definitions

     Unless the context otherwise requires, the terms defined in this Section 1
shall have the meanings specified or referred to for all purposes of this
Agreement, applicable to both the singular and plural forms of any of the terms
herein defined.

     "Acquisition Agreements" -- as defined in Section 4.22.

     "Acquisition Proposal" -- as defined in Section 6.2.

     "Affiliate Agreement" -- as defined in Section 6.9.

     "Agreement" -- as defined in the preamble.

     "Articles of Merger" -- as defined in Section 2.3.

     "Average Closing Price" -- means the average closing price of Immersion
Common Stock quoted on the Nasdaq National Market for the 10 business days
ending two days before the date of this Agreement.

     "Balance Sheet" -- as defined in Section 4.6.

     "Balance Sheet Date" -- as defined in Section 4.6.

     "Best Efforts" -- means commercially reasonable best efforts.

                                       A-2
<PAGE>   173

     "Claim" -- as defined in Section 11.4(a).

     "Closing" -- as defined in Section 2.2.

     "Closing Date" -- the date and time that the Closing takes place.

     "Code" -- means the Internal Revenue Code of 1986, as amended.

     "Company" -- as defined in the preamble.

     "Company Common Stock" -- means the Common Stock, par value $0.01 per
share, of the Company.

     "Company Indemnitors" -- as defined in Section 11.2.

     "Company IP Rights" -- as defined in Section 4.13.

     "Company Preferred Stock" -- means the Series A Preferred Stock, par value
$0.01 per share, of the Company.

     "Contracts" -- as defined in Section 4.16.

     "Convertible Note" -- means the Convertible Note dated March 3, 2000 in the
principal amount of $3,500,000 made by the Company payable to the order of
Medtronic.

     "Damages" -- as defined in Section 11.3.

     "Department" -- means the Maryland Department of Assessments and Taxation.

     "Disclosure Schedule" -- means the Disclosure Schedule referred to in
Section 4, which is signed and delivered to Immersion by the Company
concurrently with this Agreement.

     "Effective Time" -- as defined in Section 2.3.

     "Environmental Law" -- as defined in Section 4.18.

     "ERISA" -- as defined in Section 4.21.

     "Escrow Agent" -- as defined in Section 3.4.

     "Escrow Agreement" -- as defined in Section 3.4.

     "Escrowed Shares" -- as defined in Section 3.4.

     "Escrow Fund" -- as defined in Section 11.2.

     "Exchange Act" -- means the Securities Exchange Act of 1934, as amended.

     "Exchange Ratio" -- as defined in Section 3.2.

     "Financial Statements" -- as defined in Section 4.6.

     "GAAP" -- Generally accepted accounting principles.

     "Hazardous Material" -- as defined in Section 4.18.

     "Immersion" -- as defined in the preamble.

     "Immersion Common Stock" -- means the Common Stock, par value $0.001 per
share, of Immersion.

     "Immersion Indemnitees" -- as defined in Section 11.3.

     "Immersion SEC Reports" -- as defined in Section 5.8.

     "Indemnification and Joinder Agreement" -- as defined in Recital F.

     "Insurance Policies" -- as defined in Section 3.12.

     "Intellectual Property" -- as defined in Section 4.13.

                                       A-3
<PAGE>   174

     "IRS" -- means the Internal Revenue Service.

     "Knowledge of the Company" and similar terms evidencing awareness on the
part of the Company means the actual knowledge of any officer of the Company or
what such officer should have known after conducting a reasonable investigation.

     "Medtronic" -- means Medtronic, Inc., a Minnesota corporation.

     "Medtronic Agreement" -- means the Investment Agreement dated August 10,
1999 between the Company and Medtronic, as amended by the Amendment to
Investment Agreement dated March 3, 2000 between the same parties.

     "Medtronic Option" -- means the option granted by the Company to Medtronic
in the Medtronic Agreement to purchase 250,000 shares of Preferred Stock.

     "Merger" -- as defined in Recital B.

     "Merger Consideration" -- as defined in Section 3.1(e).

     "Merger Sub" -- as defined in the preamble.

     "MGCL" -- as defined in Recital B.

     "Objecting Stockholder" -- as defined in Section 3.1.

     "Option Plans" -- as defined in Section 4.4.

     "Ordinary Course of Business" -- an action taken by the Company will be
deemed to have been taken in the "Ordinary Course of Business" if but only if:

          (a) the action is consistent with the past practices of the Company
     and is taken in the ordinary course of the normal day-to-day operations of
     the Company;

          (b) the action is not required to be authorized by the board of
     directors of the Company or by any Person or group of Persons exercising
     similar authority; and

          (c) the action is similar in nature and magnitude to actions
     customarily taken, without any authorization by the board of directors or
     by any Person or group of Persons exercising similar authority, in the
     ordinary course of the normal day-to-day operations of other entities that
     are in the same line of business as the Company.

     "Organizational Documents" -- means (a) the articles or certificate of
incorporation or association and the bylaws of a corporation; (b) the
partnership agreement and any statement of partnership of a general partnership;
(c) the limited partnership agreement and the certificate of limited partnership
of a limited partnership; (d) the articles of association or certificate of
formation and the bylaws or the limited liability company or operating agreement
of a limited liability company; (e) any charter or similar document adopted or
filed in connection with the creation, formation, or organization of any entity;
and (f) any amendment to any of the foregoing.

     "Permits" -- as defined in Section 4.19.

     "Person" -- an individual, partnership, corporation, business trust,
limited liability company, limited liability partnership, joint stock company,
trust, the executors, administrators or other legal representative of an
individual in such capacity, unincorporated association, joint venture, a
government or any agency or department of any government or other entity.

     "Plans" -- as defined in Section 4.21.

     "Real Property" -- as defined in Section 4.18.

     "Replacement Option" -- as defined in Section 3.3.

     "Replacement Warrant" -- as defined in Section 3.3.

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<PAGE>   175

     "Representative" -- as defined in the preamble.

     "S-4" -- as defined in Section 7.4.

     "SEC" -- means the United States Securities and Exchange Commission.

     "Securities" -- means all of the outstanding Company Common Stock, Company
Preferred Stock, Stock Options, the Medtronic Option and Warrants.

     "Securities Act" -- means the Securities Act of 1933, as amended.

     "Stock Options" -- as defined in Section 4.4.

     "Subsidiary" -- as to any Person, an entity, such as a corporation,
partnership, firm, limited liability company, association, business
organization, enterprise or other entity, in which such Person holds directly or
indirectly (through one or more other Subsidiaries) securities or other
interests conferring the power to elect a majority of the board of directors or
similar governing body, or otherwise conferring the power to direct the business
and policies of such entity.

     "Surviving Corporation" -- as defined in Section 2.1.

     "Tax Agency" -- means any governmental agency dealing with the
administration or the collection of Taxes.

     "Tax Return" -- means any return, estimate, information statement, or
report relating to any and all Taxes, including any amendments of any previously
filed return filed or required to be filed with any Tax Agency.

     "Tax" -- means (a) any United States, foreign, federal, state, and local
taxes, assessments, duties and other similar governmental charges and
impositions, including all customs duties, taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding (whether as a withholding agent or
direct obligee), payroll, recapture, employment, excise and property taxes,
together with all interest, penalties and additions imposed with respect to such
amounts; and (b) any liability for the payment of any amounts of the type
described in clause (a) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period.

     "Transaction Costs" -- means the fees, expenses and disbursements of a
party and its agents, representatives, accountants and counsel incurred by or on
behalf of the party in connection with the subject matter of this Agreement and
any amendment.

     "Transaction Documents" -- means the Indemnification and Joinder Agreement
and the Escrow Agreement.

     "Voting Agreements" -- as defined in Recital E.

     "Warrants" -- as defined in Section 4.4.

 2. The Merger

     2.1  The Merger. At the Effective Time (as defined in Section 2.3), and
subject to and upon the terms and conditions of this Agreement and applicable
provisions of the MGCL, (i) Merger Sub shall be merged with and into the
Company; (ii) the separate corporate existence of Merger Sub shall cease; and
(iii) the Company shall be the surviving corporation (the "Surviving
Corporation").

     2.2  Closing. The delivery of the certificates, agreements, opinions and
other documents and instruments referred to in Sections 8 and 9 (the "Closing")
shall take place at the offices of Duane Morris & Heckscher LLP, One Liberty
Place, Philadelphia, Pennsylvania, at 10:00 a.m., local time, on September 25,
2000, or such later date as all of the conditions in Sections 8 and 9 are
satisfied or as Immersion and the Company shall agree. Subject to Section 10,
the failure to complete the Closing on the

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<PAGE>   176

date and at the time and place determined pursuant to this Section 2.2 will not
result in the termination of this Agreement and will not relieve any party of
any obligation under this Agreement.

     2.3  Effective Time. On the Closing Date, the parties shall cause the
Merger to be consummated by filing articles of merger (the "Articles of Merger")
with the Department, in the forms required by, and executed in accordance with,
the applicable provisions of the MGCL (the time that the Articles of Merger are
accepted for filing by the Department being the "Effective Time").

     2.4  Effect of the Merger. The effect of the Merger shall be as provided in
this Agreement, the Articles of Merger and the applicable provisions of the
MGCL. Without limiting the generality of the foregoing, and subject thereto, at
the Effective Time, all the assets, property, rights, privileges, powers and
franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, obligations, liabilities and duties of the Company
and Merger Sub shall become the debts, liabilities and duties of the Surviving
Corporation.

     2.5  Articles of Incorporation; Bylaws. At the Effective Time, the Articles
of Incorporation and Bylaws of Merger Sub, as in effect immediately before the
Effective Time (except that the corporate name shall be changed to HT Medical
Systems, Inc.), shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation, until amended in accordance with the MGCL and such
Articles of Incorporation and Bylaws.

     2.6  Directors and Officers. The directors and officers of Merger Sub
immediately before the Effective Time shall be the initial directors and
officers of the Surviving Corporation, each to hold office in accordance with
the Articles of Incorporation and Bylaws of the Surviving Corporation and until
their respective successors are duly elected or appointed and qualified.

     2.7  Further Action After the Effective Time. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Merger Sub, the officers and directors of the
Company and Merger Sub immediately before the Effective Time are fully
authorized in the name of their respective corporations or otherwise to take,
and will take, all such lawful and necessary action.

 3. Conversion of Shares

     3.1  Manner of Conversion. At the Effective Time, by virtue of the Merger
and without any action on the part of the Company, Merger Sub or the holders of
any securities of the Company or Merger Sub, the Company Common Stock and
Company Preferred Stock shall be converted into Immersion Common Stock and the
capital stock of Merger Sub will be converted into Company Common Stock in the
following manner:

          (a) Conversion of Company Stock. Each share of Company Common Stock
     and each share of Company Preferred Stock issued and outstanding
     immediately before the Effective Time (other than any shares to be
     cancelled pursuant to Section 3.1(c)) shall be automatically converted into
     the right to receive that fraction of a share of Immersion Common Stock
     equal to the Exchange Ratio, subject, however to adjustment as provided in
     Section 3.1(e).

          (b) Conversion of Merger Sub Stock. Each share of capital stock of
     Merger Sub issued and outstanding immediately before the Effective Time
     shall be converted into one fully paid and nonassessable share of common
     stock of the Surviving Corporation that shall constitute all of the issued
     and outstanding shares of the Surviving Corporation immediately after the
     Effective Time.

          (c) Cancellation. Each share of Company Common Stock held by the
     Company or owned by any direct or indirect wholly owned Subsidiary of the
     Company, immediately prior to the Effective Time shall be automatically
     cancelled and retired and shall cease to exist, without payment of any
     consideration therefor.

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<PAGE>   177

          (d) Cash in Lieu of Fractional Shares. No fraction of a share of
     Immersion Common Stock will be issued in the Merger. Instead, each holder
     of shares of Company Common Stock and Company Preferred Stock who would
     otherwise be entitled to a fraction of a share of Immersion Common Stock
     (after aggregating all fractional shares of Immersion Common Stock to be
     received by such holder) shall receive from the Company an amount of cash
     (without interest) equal to the value (rounded down to the nearest whole
     cent) of such fraction based on the Average Closing Price.

          (e) Adjustment of Merger Consideration. Notwithstanding the provision
     of this Section 3.1, the total number of shares of Immersion Common Stock
     into which shares of Company Common Stock and Company Preferred Stock are
     converted in the Merger (the "Merger Consideration") will be (i) the total
     number of shares of Immersion Common Stock into which shares of Company
     Common Stock and Company Preferred Stock would be converted in the Merger
     determined pursuant to this Section 3.1 without regard to this subsection
     (e), less (ii) the number of shares that would have a value, based on the
     Average Closing Price, equal to the amount, if any, by which the
     Transaction Costs paid or incurred by the Company exceed $240,000. The
     number of shares of Immersion Common Stock to be received by each holder of
     Company Common Stock or Company Preferred Stock will be the same percentage
     of the number of shares of Immersion Common Stock that would be received by
     each holder of Company Common Stock or Company Preferred Stock determined
     pursuant to this Section 3.1 without regard to this subsection (e).

          (f) Objecting Stockholders. Notwithstanding any provision of this
     Agreement relating to conversion of Company Common Stock and Company
     Preferred Stock, exchange of stock certificates or rights by holders of
     Company Common Stock or Company Preferred Stock, Shares of Company Common
     Stock and Company Preferred Stock outstanding immediately before the
     Effective Time whose holder (an "Objecting Stockholder") has objected to
     the Merger, voted against the Merger and demanded payment for such shares
     in accordance with Title 3, Subtitle 2 of the MGCL, shall not be converted
     into the right to receive Immersion Common Stock and cash in lieu of
     fractional shares, unless the Objecting Stockholder fails to perfect,
     effectively withdraws or loses his or her right to demand payment under the
     MGCL. If any such Objecting Stockholder fails to perfect, effectively
     withdraws or loses his or her right to demand payment under the MGCL, his
     or her shares shall thereupon be treated as if they had been converted, as
     of the Effective Time, into the right to receive Immersion Common Stock.
     After the Effective Time and before any such failure to perfect, withdrawal
     or loss of rights, the Objecting Stockholder shall have no rights as to his
     or her shares other than those provided in Title 3, Subtitle 2 of the MGCL.
     The Company shall give Immersion prompt notice of any demands received by
     the Company for payment for shares by an Objecting Stockholder, and
     Immersion shall have the right to participate in all negotiations and
     proceedings with respect to such demands. The Company shall not, except
     with the prior written consent of Immersion, make any payment with respect
     to, or settle or offer to settle, any such demands. Any payments relating
     to Objecting Stockholders shall be made solely by the Surviving Corporation
     and no funds or other property will be provided by Merger Sub, Immersion or
     any of Immersion's other direct or indirect Subsidiaries.

     3.2 Exchange Ratio. The "Exchange Ratio" is a fraction, the numerator of
which is 1,998,433 shares and the denominator of which is (i) the number of
shares of Company Common Stock and Company Preferred Stock outstanding
immediately before the Effective Time, plus (ii) the number of shares of Company
Common Stock subject to outstanding Stock Options that are vested or exercisable
immediately before the Effective Time, plus (iii) the number of shares of
Company Common Stock and Company Preferred Stock subject to the Warrants
outstanding immediately before the Effective Time, plus (iv) the number of
shares of Company Preferred Stock into which the Convertible Note is
convertible, to the extent that it has not been converted at the Effective Time,
plus (v) the number of shares of Company Preferred Stock subject to the
Medtronic Option immediately before the Effective Time.

                                       A-7
<PAGE>   178

     3.3  Options, Warrants and Convertible Note

     (a) Stock Options and Warrants. At the Effective Time, Immersion shall
assume each outstanding Stock Option and Warrant, whether or not exercisable at
the Effective Time, and exchange each Stock Option for an option (a "Replacement
Option") and each Warrant for a warrant (a "Replacement Warrant"), in each case
to purchase that number of shares of Immersion Common Stock determined by
multiplying the number of shares subject to the Stock Option or Warrant, as the
case may be, by the Exchange Ratio, exercisable at a price per share equal to
the exercise price per share of the Stock Option or Warrant, as the case may be,
divided by the Exchange Ratio. Each Replacement Option and each Replacement
Warrant shall otherwise be exercisable on the same terms and conditions as the
Stock Option or Warrant that it replaced was exercisable at the Effective Time.

     (b) Convertible Note and Medtronic Option. After the Effective Time, the
Convertible Note and the Medtronic Option shall be convertible and exercisable,
respectively, on the same terms and conditions as at the Effective Time for that
number of shares of Immersion Common Stock determined by multiplying the number
of shares subject to the Convertible Note or Medtronic Option, as the case may
be, by the Exchange Ratio, exercisable at a price per share equal to the
conversion or exercise price per share of the Convertible Note or Medtronic
Option, as the case may be, divided by the Exchange Ratio.

     3.4  Escrowed Shares. At the Effective Time, Immersion shall deliver
certificates representing ten percent of the shares (the "Escrowed Shares")
comprising the Merger Consideration to U.S. Trust Company, NA (the "Escrow
Agent") for deposit with the Escrow Agent to secure the obligations of the
Company Indemnitors under the Indemnification and Joinder Agreement and to be
held and disbursed in accordance with the terms and conditions of an escrow
agreement to be dated the Closing Date (the "Escrow Agreement") among Immersion,
the Company, the Representative and the Escrow Agent in substantially the form
attached at Exhibit C. The Escrowed Shares shall be contributed to the escrow
pro rata based on the number of shares of Immersion Common Stock that each
holder of Company Common Stock and Company Preferred Stock would have been
entitled to receive but for the creation of such escrow. The adoption of this
Agreement and the approval of the Merger by the Company's stockholders shall
constitute the stockholders' approval of the Escrow Agreement and of all the
arrangements relating thereto, including the appointment of the Representative.

     3.5  Exchange of Certificates.

     (a) Exchange Procedures. After the Effective Time, each holder of a
certificate or certificates which represented shares of Company Common Stock or
Company Preferred Stock immediately before the Effective Time shall, upon
surrender of such certificate(s) accompanied by a properly completed letter of
transmittal in the form provided by Immersion, and such other customary
documents as may be required pursuant to the letter of transmittal, to an
exchange agent selected by Immersion, be entitled to receive in exchange
therefor a certificate evidencing that number of shares of Immersion Common
Stock, less the shares being escrowed, plus any cash in lieu of fractional
shares determined in accordance with this Section 3. Until properly surrendered,
each outstanding certificate that, before the Effective Time, represented shares
of Company Common Stock or Company Preferred Stock will be deemed from and after
the Effective Time, for all corporate purposes, subject to Sections 3.1(f) and
3.5(b), to evidence the right to receive that number of shares of Immersion
Common Stock and that such holder is entitled to receive in the Merger, less the
shares being escrowed, plus any cash in lieu of fractional shares. Shares of
Immersion Common Stock issued in the Merger shall be issued as of and deemed to
be outstanding as of the Effective Time.

     (b) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made with respect to the Immersion Common Stock with a
record date after the Effective Time shall be paid to the holders of any
unsurrendered certificates representing Company Common Stock or Company
Preferred Stock until such holders properly surrender such certificates. Upon a
holder's surrender of any such certificates representing Company Common Stock or
Company Preferred Stock (along with properly completed letters of transmittal
and such other customary documents as may be required in accordance with Section
3.5(a)), there shall be paid to that holder, promptly after such

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<PAGE>   179

surrender, the amount of dividends or other distributions, excluding interest
thereon, declared with a record date after the Effective Time and not paid
because of the failure to properly surrender the certificates representing
Company Common Stock or Company Preferred Stock for exchange.

     (c) No Liability. Neither Immersion, Merger Sub nor the Company shall be
liable to any holder of Company Common Stock or Company Preferred Stock
immediately before the Merger for any shares of Immersion Common Stock or cash
in lieu of fractional shares delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.

     (d) Withholding Rights. Immersion shall be entitled to deduct and withhold
from the Merger Consideration otherwise payable pursuant to this Agreement to
any holder of Company Common Stock or Company Preferred Stock immediately prior
to the Merger such number of shares of Immersion Common Stock valued at the
Average Closing Price as shall equal the amounts Immersion is required to deduct
and withhold with respect to such Merger Consideration under the Code, or any
provision of state, local or foreign tax law. To the extent that amounts are so
withheld by Immersion, such withheld amounts shall be treated for all purposes
as having been paid to the holder of the shares in respect of which such
deduction and withholding was made.

     (e) Lost, Stolen or Destroyed Certificates. In the event any certificate
representing Company Common Stock or Company Preferred Stock shall have been
lost, stolen or destroyed, Immersion shall issue in exchange for such lost,
stolen or destroyed certificates, upon the making of an affidavit of that fact
by the holder thereof, such number of shares of Immersion Common Stock that such
holder is entitled to receive in the Merger, less the shares being escrowed,
plus any cash in lieu of fractional shares all in accordance with this Section
3; provided, however, that Immersion may, in its sole discretion and as a
condition precedent thereof, require the owner of such lost, stolen or destroyed
certificates to indemnify Immersion against any claim that may be made against
Immersion with respect to the certificates alleged to have been lost, stolen or
destroyed.

     3.6  Stock Transfer Books. At the Effective Time, the stock transfer books
of the Company shall be closed, and there shall be no further registration of
transfers of Company Common Stock or Company Preferred Stock thereafter on the
records of the Company.

 4. Representations and Warranties of the Company

     Except as the Disclosure Schedule, delivered by the Company and
acknowledged by Immersion at least 24 hours prior to the execution of this
Agreement, specifically qualifies any of the following representations and
warranties (in which case the specified representation and warranty, but no
other representation or warranty, will be deemed made subject to such
qualification), the Company hereby represents and warrants to Immersion and
Merger Sub that:

     4.1  Organization and Good Standing.

     (a) The Company is duly organized, validly existing and in good standing
under the laws of the State of Maryland, with full power and authority to own,
operate and lease its properties, to carry on its business as that business is
being conducted. The Company has full power and authority to perform all its
obligations under the Contracts. The Company is duly qualified to do business
and is in good standing in each jurisdiction in which the nature of the business
conducted or to be conducted or the assets owned or leased or to be owned or
leased by it requires such qualification, except where the failure to so qualify
would not have a material adverse effect on the financial condition, results of
operations, operations or prospects of the Company. Part 4.1 of the Disclosure
Schedule lists each jurisdiction in which the Company is or has filed to be
qualified to conduct business and jurisdictions in which the Company pays
income, sales or other taxes.

     (b) The Company's Subsidiary is duly organized, validly existing and in
good standing under the laws of the State of Maryland, with full power and
authority to own, operate and lease its properties, to carry on its business as
that business is being conducted. The Company's Subsidiary has full power and
authority to perform all its obligations under the Contracts. The Company's
Subsidiary is duly qualified to

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<PAGE>   180

do business and is in good standing in each jurisdiction in which the nature of
the business conducted or to be conducted or the assets owned or leased or to be
owned or leased by it requires such qualification, except where the failure to
so qualify would not have a material adverse effect on the financial condition,
results of operations, operations or prospects of the Company or its Subsidiary.
Part 4.1 of the Disclosure Schedule lists each jurisdiction in which the
Company's Subsidiary is or has filed to be qualified to conduct business and
jurisdictions in which the Company's Subsidiary pays income, sales or other
taxes.

     4.2  Subsidiaries; Ownership Interests. Except as set forth on Part 4.2 of
the Disclosure Schedule, the Company does not have any Subsidiaries. The Company
does not own or have any right or obligation to acquire directly or indirectly,
any shares, capital stock, securities, memberships or other interests having
voting or other rights to affect the business and policies of, or ownership
interests in, any Person.

     4.3  Authorization. The Company has full power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery by the Company of this Agreement and the consummation
of the transactions contemplated hereby have been duly and validly authorized by
the Board of Directors of the Company. Except for approval of the Merger and
adoption of the Agreement by the stockholders of the Company, no other corporate
or other proceedings on the part of the Company are necessary to authorize this
Agreement and the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by the Company, constitutes a legal, valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the rights of creditors generally or by general equitable principles.
Except as identified in Part 4.3 of the Disclosure Schedule, no filing with, and
no permit, authorization, consent or approval of any public body or authority is
necessary for the consummation by the Company of the transactions contemplated
by this Agreement or to preserve the benefits and rights that the Company has
now or will have at the Effective Time.

     4.4  Capitalization; Warrants and Options.

     (a) The authorized capital stock of the Company consists of (i) 6,000,000
shares of Company Common Stock, of which 2,264,508 shares are issued and
outstanding; and (ii) 1,500,000 shares of Company Preferred Stock, an
unspecified amount being designated Series A Preferred Stock of which 240,107
shares are issued and outstanding. There are, and at the Effective Time there
will be, no other shares of capital stock of the Company outstanding, except for
shares of Company Common Stock or Company Preferred Stock issued on the exercise
of currently outstanding Stock Options, Warrants or the Medtronic Option or on
the conversion of the Convertible Note, all as described in Section 4.4(b),
after the date of this Agreement. There is no other class or type of shares,
capital stock or equity interests of or in the Company authorized for issuance
or outstanding. All of the outstanding shares of capital stock of the Company
are duly authorized and validly issued, fully paid, nonassessable and free of
preemptive rights.

     (b) The Company has reserved capital stock for issuance on the exercise and
conversion of Stock Option, Warrants, the Convertible Note, the Medtronic Option
and the Company Preferred Stock as follows:

          (i) 600,000 shares of Company Common Stock reserved for issuance on
     the exercise of options (the "Stock Options") granted and to be granted to
     employees, directors, consultants and service providers under the Company's
     1998 Stock Option Plan, of which options to purchase 341,058 shares are
     outstanding and 600,000 shares of Company Common Stock reserved for
     issuance's on the exercise of Stock Options granted under the Company's
     1995B Employee Stock Option Plan (collectively with the 1998 Stock Option
     Plan, the "Option Plans"), of which options to purchase 274,050 shares are
     outstanding;

          (ii) 107,246 shares of Company Common Stock and 20,800 shares of
     Company Preferred Stock for issuance on the exercise of outstanding
     warrants (the "Warrants");

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<PAGE>   181

          (iii) 437,500 shares of Company Preferred Stock for issuance on the
     conversion of the Convertible Note;

          (iv) 250,000 shares of Company Preferred Stock for issuance on the
     exercise of the Medtronic Option;

          (v) 240,107 shares of Company Common Stock for issuance on the
     conversion of 240,107 outstanding shares of Company Preferred Stock; and

          (vi) 708,300 shares of Company Common Stock for issuance on the
     conversion of the Company Preferred Stock issuable on the exercise of
     outstanding Warrants to purchase Company Preferred Stock, the conversion of
     the Convertible Note and the exercise of the Medtronic Option.

Part 4.4 of the Disclosure Schedule contains a true and complete list as to each
outstanding Stock Option and Warrant of the name of each holder of the Stock
Option or Warrant, the number of shares subject to the Stock Option or Warrant,
the exercise price per share, the number and class of shares as to which the
Stock Option or Warrant is now exercisable and the times when and amounts as to
which the Stock Option or Warrant will become exercisable.

     (c) Except as set forth in this Section 4.4, there are no outstanding
options, warrants, rights, agreements, convertible securities or other
commitments (contingent or otherwise) pursuant to which the Company is or may
become obligated to issue or sell any shares of capital stock, equity interest
or other securities. Each outstanding Stock Option and Warrant, the Convertible
Note and the Medtronic Option has been duly authorized by the Company's Board of
Directors, and the Option Plan has been duly approved and adopted by the Board
of Directors and stockholders of the Company. None of the outstanding Securities
was issued in violation of the Securities Act or the securities laws of any
other jurisdiction.

     (d) The Company's Subsidiary's authorized capital stock consists of
1,000,000 shares of common stock, of which 423,150 shares are issued and
outstanding. The Company holds 294,000 shares of its Subsidiary's capital stock,
which constitutes 70% of the Company's Subsidiary's issued and outstanding
stock. All of the outstanding shares of the Company's Subsidiary are duly
authorized and validly issued, fully paid, nonassessable and free of preemptive
rights. The Company owns its shares in the Subsidiary free and clear of any
liens, charges, security interests, claims, pledges, options, warrants, rights,
calls, commitments, equities, demands, proxies, voting agreements, restrictions
on transfer and other encumbrances (other than any restrictions under the
Securities Act and applicable state securities laws and regulations). Part
4.4(d) of the Disclosure Schedule is a true and complete list of all of holders
of capital stock or other equity interests in the Company's Subsidiary,
including the number of shares or interests held by each such holder.

     (e) Except as set forth in this Section 4.4, there are no outstanding
options, warrants, rights, agreements, convertible securities or other
commitments (contingent or otherwise) pursuant to which the Company's Subsidiary
is or may become obligated to issue or sell any shares of capital stock, equity
interest or other securities or to which the Company is or may become obligated
to purchase or sell any shares of its Subsidiary's capital stock, equity
interest or other securities.

     4.5  No Breach or Violation. None of the execution and delivery by the
Company of this Agreement, the consummation by the Company of the transactions
contemplated hereby will: (i) violate or conflict with any provision of the
Company's or its Subsidiary's Organizational Documents; (ii) conflict with, or
result in a violation or breach of, or constitute a default under, require any
notice under, or create any rights of termination, cancellation or acceleration
in any Person, require the consent or approval of any third Person, or in the
absence of the consent of any third Person to the change of ownership and
control of the Company contemplated by this Agreement, result in the loss of any
rights or benefits either automatically or at the election of any Person or
result in the creation of any lien or encumbrance upon any of the Securities or
any of the assets of the Company pursuant to the terms or any material contract,
indenture, mortgage, lease, agreement, instrument, commitment or other
arrangement to which the Company or its Subsidiary is a party or by which it or
any of the Securities, or any of the assets of the

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Company or its Subsidiary is bound; (iii) violate any judgment, order, Permit,
injunction, writ, decree or award of any court or any regulatory or governmental
authority against or binding upon the Company or its Subsidiary, any of their
assets or any of the Securities; or (iv) assuming that all filings, permits,
authorizations, consents, and approvals have been duly made or obtained pursuant
to the legal requirements identified in Part 4.5 of the Disclosure Schedule,
constitute a violation by the Company or its Subsidiary of, or either
automatically or at the election of any Person result in the loss of any rights
or benefits under, any statute, law, rule, ordinance or regulation of any
regulatory or governmental authority.

     4.6  Financial Statements; Absence of Liabilities.

     (a) The Company has attached to the Disclosure Schedule the Company's
audited balance sheets at May 31, 1997, 1998 and 1999, and its related audited
statements of operations, shareholders' equity and cash flows for the each of
the three years ended May 31, 1997, 1998 and 1999, accompanied by opinions of
Ernst & Young LLP for 1999 and 1998 and Aronson, Fetridge & Weigle for 1997, the
Company's independent accounting firms, its unaudited balance sheet at May 31,
2000, and its related unaudited statements of operations, shareholders' equity
and cash flows for the year ended May 31, 2000, and its unaudited balance sheets
at June 30, 1999 and June 30, 2000 and its related unaudited statements of
operations, shareholders' equity and cash flows for the one month ended June 30,
1999 and June 30, 2000 (all of which are the "Financial Statements" and the
balance sheet at June 30, 2000 is the "Balance Sheet"). The Financial Statements
(i) have been prepared from the books and records of the Company in accordance
with GAAP applied on a basis consistent with prior periods, and (ii) fairly
present the consolidated results of operations, cash flows and financial
condition of the Company as of and for the dates and periods indicated. The
Company has and at the Effective Time will have no liabilities or obligations,
whether contingent or absolute, direct or indirect, matured or unmatured,
asserted or unasserted, known or unknown, which are not shown or provided for on
its Balance Sheet or the notes thereto, except for those liabilities and
obligations which have arisen or will arise in the Ordinary Course of Business
since June 30, 2000 (the "Balance Sheet Date") and which are not individually or
in the aggregate material in amount. There is no basis for the assertion of any
such liabilities or obligations. Except as set forth in Part 4.6(a) of the
Disclosure Schedule, the Company does not have and at the Effective Time will
not have any indebtedness for borrowed money to any bank, financial institution
or other Person for any money loaned or advanced, letters of credit issued,
assets purchased or leased under leases required by GAAP to be capitalized, or
any forbearance, whether or not represented by notes, credit agreements or other
instruments. The Company does not have and at the Effective Time will not have
any liability or obligation, whether or not required by GAAP to be reflected on
the Balance Sheet, as a guarantor or surety of any obligation of any Person or
as a co-maker or co-signer of any note or other instrument.

     (b) The Company's Subsidiary is inactive and has not engaged in any
business activity since April 2000. The Company's Subsidiary has never prepared
financial statements. Part 4.6(b) of the Disclosure Schedule includes a true and
compete list of all of the Company's Subsidiary's tangible assets and its
Intellectual Property. The Company's Subsidiary has and at the Effective Time
will have no liabilities or obligations, whether contingent or absolute, direct
or indirect, matured or unmatured, asserted or unasserted, known or unknown
except for liabilities and obligations which are not individually or in the
aggregate material in amount to the Subsidiary. There is no basis for the
assertion of any such liabilities or obligations. Except as set forth in Part
4.6(b) of the Disclosure Schedule, the Company's Subsidiary does not have and at
the Effective Time will not have any indebtedness for borrowed money to any
bank, financial institution or other Person for any money loaned or advanced,
letters of credit issued, assets purchased or leased under leases required by
GAAP to be capitalized, or any forbearance, whether or not represented by notes,
credit agreements or other instruments. The Company's Subsidiary does not have
and at the Effective Time will not have any liability or obligation as a
guarantor or surety of any obligation of any Person or as a co-maker or
co-signer of any note or other instrument.

     4.7  Absence of Certain Changes. Since the Balance Sheet Date: (i) there
has not been any change in the condition (financial or otherwise), net worth,
assets, liabilities, business, properties or results of operations of the
Company or its Subsidiary (other than changes made or incurred in the Ordinary
Course

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of Business which are not material and adverse, either individually or in the
aggregate); and (ii) neither the Company nor its Subsidiary has (A) incurred any
obligation or liability or entered into, and the Company, its Subsidiary, their
assets or any Securities have not become bound by, any agreement, contract,
lease or license or series of related agreements, contracts, leases and licenses
(except for this Agreement) other than in the Ordinary Course of Business and
involving obligations and liabilities not in excess of $10,000 individually or
$25,000 in the aggregate; (B) discharged or satisfied any material lien or other
encumbrance, paid any material liability or obligation whether fixed or
contingent (except in the Ordinary Course of Business or as required by the
terms hereof) or accelerated, terminated, modified or canceled any agreement,
contract, lease or license; (C) mortgaged, pledged or subjected to any lien or
other encumbrance any of its assets; (D) sold, assigned, transferred, leased or
otherwise disposed of or agreed to dispose of any of its assets (except for
sales of inventories in the Ordinary Course of Business); (E) waived or released
any material rights; (F) made any capital expenditure or improvement in excess
of $10,000 individually, or $25,000 in the aggregate, or entered into any
commitment therefor; (G) suffered any damage, destruction or loss (whether or
not covered by insurance) adversely affecting its assets or business; (H) except
as set forth on Part 4.7 of the Disclosure Schedule paid or agreed to pay any
bonuses or make or agree to make any increase in the rate of wages, salaries, or
other remuneration of any of its directors, officers or employees; (I) paid or
agreed to pay any pension, retirement allowance or other employee benefit not
required by any existing plan, agreement or arrangement to any of its directors,
officers or employees, whether past or present; or (J) declared or paid any
dividends or made any distributions, either in cash or in kind, repurchased any
of its Securities or other equity interests or made any other payment to or on
behalf of any direct or indirect owner of Securities.

     4.8  Tax Matters.

     (a) The Company and its Subsidiary have filed all income Tax Returns
required to be filed by either or both of them in a timely manner and have paid
all Taxes shown to be due on such returns, and all such Tax Returns are accurate
and correct in all respects. No action or proceeding for the assessment or
collection of any Taxes is pending against the Company or its Subsidiary, and no
notice of any claim for Taxes, whether pending or threatened, has been received;
no deficiency, assessment or other claim for Taxes has been asserted or made
against the Company or its Subsidiary that has not been fully paid or finally
settled; and no issue has been raised by any Tax Agency in connection with an
audit or examination. None of the Tax Returns of the Company or its Subsidiary
for any period (i) are being audited or examined by any taxing authority, or
(ii) have been in any stage of the audit or examination process of any taxing
authority at any time after May 31, 1994. There are no outstanding agreements or
waivers extending the applicable statutory periods of limitation for Taxes of
the Company or its Subsidiary for any period.

     (b) All Taxes that the Company or its Subsidiary has been required to
collect or to withhold have been duly withheld or collected and, to the extent
required, have been paid to the proper taxing authority.

     (c) Neither the Company nor its Subsidiary is or has ever been a party to
any Tax allocation or sharing agreement, except for lease agreements under which
the Company or its Subsidiary, as lessee, is responsible for Taxes, or has
granted any outstanding power of attorney regarding Taxes.

     (d) None of the assets of the Company or its Subsidiary constitutes
tax-exempt bond financed property or tax-exempt use property, within the meaning
of Section 168 of the Code. Neither the Company nor its Subsidiary is a party to
any "safe harbor lease" that is subject to the provisions of Section 168(f)(8)
of the Code as in effect prior to the Tax Reform Act of 1986, or to any "long
term contract" within the meaning of Section 460 of the Code.

     (e) Neither the Company nor its Subsidiary is a "consenting corporation"
within the meaning of Section 341(f)(1) of the Code, or comparable provisions of
any state statutes, and none of the assets of the Company or its Subsidiary is
subject to an election under Section 341(f) of the Code or comparable provisions
of any state statutes.

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     (f) Neither the Company nor its Subsidiary is a party to any joint venture,
partnership or other arrangement that is treated as a partnership for federal
income Tax purposes.

     (g) There are no accounting method changes of the Company or its Subsidiary
that could give rise to an adjustment under Section 481 of the Code for periods
after the Effective Time.

     (h) Neither the Company nor its Subsidiary has been a member of an
affiliated group filing a consolidated federal income Tax Return or has any
liability for the Taxes of another Person (i) under Section 1.1502-6 of the
Treasury regulations (or any similar provision of state, local or foreign law),
(ii) as a transferee or successor, (iii) by contract or (iv) otherwise.

     (i) Neither the Company nor its Subsidiary (i) has agreed to or is required
to make any adjustment pursuant to Section 481(a) of the Code or has any
knowledge that the IRS has proposed in writing any such adjustment or change in
accounting method with respect to the Company and its Subsidiary; or (ii) has
any application pending with the IRS or any other Tax Agency requesting
permission for any change in accounting method.

     (j) Neither the Company nor its Subsidiary has any income reportable for a
period ending after the Effective Time but attributable to a shipment, sale or
other disposition (including an installment sale) of any property, or to the
performance of services, occurring in a period ending on or prior to the
Effective Time and resulting in a deferred reporting of income from such
transaction.

     (k) Part 4.8 of the Disclosure Schedule contains a complete and accurate
list of all Tax Returns filed with respect to the Company or its Subsidiary for
taxable periods ending on or after May 31, 1994, indicates for which
jurisdictions Tax Returns have been filed on the basis of a consolidated or
unitary group, indicates, for each of the Company and its Subsidiary, the most
recent Tax Return for each relevant jurisdiction for which an audit has been
completed or the statute of limitations has lapsed, and indicates all Tax
Returns that currently are the subject of audit.

     (l) Neither the Company nor its Subsidiary is, or has been at any time, a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.

     (m) Neither the Company nor its Subsidiary is a party to any agreement or
arrangement that would result, separately or in the aggregate, in the payment of
any "excess parachute payments" within the meaning of Section 280G of the Code.

     4.9  Inventories, Products; Accounts; Etc.

     (a) Except for defective, damaged, slow moving or obsolete items and items
of below-standard quality, all of which have been written off or written down to
net realizable value on the Balance Sheet, all inventories of the Company
(including raw materials and supplies, manufactured and purchased parts, goods
in process and finished goods) reflected on the Balance Sheet consist of items
of a quality and quantity that are fit, usable and salable in the Ordinary
Course of Business. All such inventories not written off have been priced at the
lower of cost or net realizable value on a standard cost basis. Items of
inventory now on hand that were purchased after the Balance Sheet Date were
purchased in the Ordinary Course of Business at a cost not exceeding market
prices prevailing at the time of purchase and none of such items are defective,
damaged, slow moving, obsolete or of below-standard quality. All items of
inventory reflected on the Balance Sheet or acquired after the Balance Sheet
Date, except those that have been sold in the Ordinary Course of Business, are
owned by the Company. The quantities of each item of inventory are not
excessive, but are reasonable in the present circumstances of the Company.

     (b) All products designed, developed, manufactured, produced, marketed,
serviced, sold or delivered by the Company and its Subsidiary have been in
conformity with all laws, rules and regulations, all contractual commitments,
and all express and implied warranties, applicable to such products. Except as
set forth in Part 4.9(b) of the Disclosure Schedule, no liability (whether
accrued, contingent or otherwise) exists for the replacement of any such
products or for other losses, damages or obligations in connection with the
design, development, manufacture, production, marketing, service, sale or
delivery of such products; and the amounts set up as reserves for any such
liabilities on the Company Financial Statements

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are sufficient for the payment of the liabilities listed Part 4.9(b) of the
Disclosure Schedule. No such products are subject to any guaranty or warranty
other than the Company's standard terms and conditions of sale (true and
complete copies of which have been provided to Immersion).

     (c) Part 4.9(c) of the Disclosure Schedule contains a complete and accurate
list of the Company's and its Subsidiary's accounts receivable as at the Balance
Sheet Date, together with an accurate aging thereof. Said accounts receivable
and all accounts receivable which have arisen since the Balance Sheet Date (i)
are valid and enforceable claims for the sales and services which give rise to
such accounts, and (ii) are subject to no defenses or offsets, subject to
reserves and trade provisions reflected in the Balance Sheet that are reasonable
and appropriate under the circumstances and are in accordance with GAAP.

     (d) The Balance Sheet presents fairly the prepaid items, accounts payable
and accrued liabilities of the Company and its Subsidiary as at the Balance
Sheet Date. All prepaid items, accounts payable and accrued liabilities incurred
after the Balance Sheet Date were incurred in the Ordinary Course of Business
and are usual and normal in amount, both individually and in the aggregate. The
Company and its Subsidiary have and at the Effective Time will have no accounts
payable other than those not yet due in the Ordinary Course of Business in
accordance with the terms on which the Company and its Subsidiary customarily do
business with their vendors of goods and service providers.

     4.10  Leased Facilities.

     (a) Part 4.10 of the Disclosure Schedule includes a list of real property
used or otherwise occupied by the Company and its Subsidiary (including a
description of such property, its ownership and location). Neither the Company
nor its Subsidiary own any real property. All real property used or occupied by
the Company and its Subsidiary is leased or rented by the Company or its
Subsidiary free and clear of all mortgages, security interests, pledges,
charges, liens, encumbrances, liabilities, claims, debts, obligations,
restrictions on transfer or other defects in title of any kind or nature other
than (i) liens for taxes, assessments and charges or other governmental levies
either not yet due and payable that are not material, (ii) mechanics' or
materialmen's liens that have been incurred in the ordinary course of business
and are not material, (iii) installments of special assessments that are not
material and are not yet due and payable, (iv) covenants, conditions and
restrictions to title of record to real property that are not violated by
existing uses or improvements, do not interfere with the existing use of the
real property and do not adversely affect the marketability of title to the real
property and (v) other than title defects that do not interfere with the
existing use of any real property and do not adversely affect the marketability
of title thereto. All leases with respect to such real property pursuant to
which the Company or its Subsidiary uses or occupies real property are in full
force and effect and are enforceable against the Company and its Subsidiary and,
to the Knowledge of the Company, against the other parties thereto, in each case
in accordance with their terms, subject to bankruptcy, insolvency,
reorganization, moratorium, or other laws of general application affecting the
rights and remedies of creditors, and general principles of equity. Neither the
Company, its Subsidiary, nor, to the Knowledge of the Company, any other party
thereto is in breach or default under any material provision of any such lease.
No event has occurred which with notice or the lapse of time, or both, could
constitute a breach or default by the Company or its Subsidiary or, to the
Knowledge of the Company, any other party thereto under any material provision
of any such lease or could accelerate any obligation or create any lien or
encumbrance under any such lease. Except as contemplated by this Agreement, the
Company and its Subsidiary have not assigned any interest in any such lease or
sublet, or granted other rights of occupancy of any portion of the premises
covered by any such lease. No claim has been asserted or, to the Knowledge of
the Company, exists that is adverse to the Company's or its Subsidiary's right
to the continued possession of the premises under any such lease.

     (b) The real property used or occupied by the Company and its Subsidiary is
in good operating condition and repair, normal wear and tear excepted and is
sufficient for the continued conduct by the Company and its Subsidiary after the
Effective Time, in substantially the same manner as conducted now and at the
Effective Time, of the businesses now conducted by the Company and its
Subsidiary.

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<PAGE>   186

     4.11  Tangible Personal Property.

     (a) All tangible personal property used by the Company and its Subsidiary
is owned or leased by the Company or its Subsidiary free and clear of all
material liens, claims, charges, pledges, security interests, encumbrances,
liabilities, debts, obligations, restrictions on transfer or other defects in
title of any kind or nature. All leases pursuant to which the Company or its
Subsidiary holds any item of tangible personal property are in full force and
effect and are enforceable in accordance with their terms, subject to
bankruptcy, insolvency, reorganization, moratorium, or other laws of general
application affecting the rights and remedies of creditors, and general
principles of equity. Neither the Company, its Subsidiary, nor, to the Knowledge
of the Company, any other party thereto is in breach or default under any such
leases. No event has occurred which with notice or the lapse of time, or both,
could constitute a breach or default by the Company, its Subsidiary, or, to the
Knowledge of the Company, any other party thereto under any such leases or could
accelerate any obligation or create any lien or encumbrance under any such
leases. Except as contemplated by this Agreement, the Company and its Subsidiary
have not assigned any interest in any such leases. No claim has been asserted
or, to the Knowledge of the Company, exists that is adverse to the Company's or
its Subsidiary's right to the continued possession of the leased property under
any such leases.

     (b) All items of tangible personal property owned or leased by the Company
and its Subsidiary are in good operating condition and repair, normal wear and
tear excepted, and are sufficient for the continued conduct by the Company and
its Subsidiary after the Effective Time, in substantially the same manner as
conducted now and at the Effective Time, of the businesses now conducted by the
Company and its Subsidiary.

     4.12  Insurance.

     (a) Part 4.12 of the Disclosure Schedule includes a list of life, fire,
casualty, liability and all other insurance policies maintained by the Company
and its Subsidiary with respect to any assets or business of the Company or its
Subsidiary (collectively, the "Insurance Policies"). All such Insurance Policies
are: (i) in full force and effect; (ii) are issued by an insurer that is
financially sound and reputable; (iii) taken together, provide insurance
coverage for the assets and the operations of the Company and its Subsidiary for
all risks to which the Company and its Subsidiary are normally exposed
consistent with industry standards; (iv) are sufficient for compliance with all
applicable laws, statutes, ordinance, rules and regulations to which the Company
and its Subsidiary are subject and with the Contracts; and (v) do not provide
for any retrospective premium adjustment or other experienced-based liability on
the part of the Company or its Subsidiary.

     (b) Part 4.12 of the Disclosure Schedule includes a list and a brief
description of all claims made by the Company or its Subsidiary for coverage
under any Insurance Policy. The Company and its Subsidiary have not received:
(i) any refusal of coverage or any notice that a defense will be afforded with
reservation of rights; or (ii) any notice of cancellation or any other
indication that any Insurance Policy is no longer in full force or effect or
will not be renewed or that the issuer of any Insurance Policy is not willing or
able to perform its obligations thereunder.

     (c) All premiums due have been paid and all of the other respective
obligations of the Company and its Subsidiary have been performed under each
Insurance Policy that provides coverage to the Company, its Subsidiary or any of
its directors or officers.

     (d) The Company and its Subsidiary have given notice to the insurer of all
material claims that may be insured thereby.

     4.13  Intellectual Property.

     (a) Part 4.13(a)(i) of the Disclosure Schedule sets forth an accurate and
complete list of all patents, patent applications, patent rights, trademarks,
trademark applications, trade names, service marks, service mark applications,
licenses, copyrights, computer programs and other computer software (including
source and object code relating thereto and contained within the Company's and
its Subsidiary's document and

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<PAGE>   187

source code control systems), and inventions, owned or used by the Company and
its Subsidiary in the operation of their business (the "Intellectual Property").
True and complete copies of all such materials (other than standard,
commercially available software developed or produced by others) have been
provided to Immersion.

     (b) The Company and its Subsidiary own or have the right to use all
Intellectual Property (such Intellectual Property and the rights thereto are
collectively referred to in this Agreement as the "Company IP Rights"). No
royalties or other payments are payable to any Person with respect to
commercialization of any products presently sold or under development by the
Company or its Subsidiary. The Company believes that it has taken all steps
necessary or appropriate to maintain and fully protect all Company IP Rights,
and has no Knowledge of any actual, pending or threatened misuse, infringement,
misappropriation or other violation of any Company IP Rights by any other
Person. The Company and its Subsidiary have not entered into any agreement,
commitment or arrangement (whether written or oral) to license or otherwise
permit the use or exploitation of any Company IP Rights by any other Person
(including that which would prevent, restrict or otherwise inhibit Immersion's
freedom to use and exploit any Company IP Rights).

     (c) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
breach of any instrument or agreement governing any Company IP Rights and will
not (i) cause the modification of any terms of any licenses or agreements
relating to any Company IP Rights (including the modification of the effective
rate of any royalties or other payments provided for in any such license or
agreement), (ii) cause the forfeiture or termination of any Company IP Rights,
(iii) give rise to a right of forfeiture or termination of any Company IP Rights
or (iv) materially impair the right of the Company, its Subsidiary, the
Surviving Corporation or Immersion to use, sell or license any Company IP Rights
or portion thereof.

     (d) To the knowledge of the Company, none of the manufacture, marketing,
license, sale or intended use of any past or current product or technology
licensed or sold or under development by the Company or its Subsidiary (i)
violates any license or agreement between the Company or its Subsidiary and any
other Person or (ii) infringes any patents, trademarks, service marks, trade
names, copyrights, logos, corporate names or identifying marks and styles of any
other Person, or otherwise violates or infringes upon any intellectual property,
trade secret or other confidential or proprietary information of any other
Person. There is no pending or, to the Knowledge of the Company, threatened
claim or litigation contesting the validity, ownership or right to use, sell,
license or dispose of any Company IP Rights, nor has the Company or its
Subsidiary received any notice asserting that any Company IP Rights or the
proposed use, sale, license or disposition thereof conflicts or will conflict
with the rights of any Person.

     (e) The Company is not aware and has no reason to believe that any of its
or its Subsidiary's employees, or consultants or third Persons with access to
proprietary information of the Company and its Subsidiary, is obligated under
any contract, covenant or other agreement or commitment of any nature, or
subject to any judgment, decree or order of any court or administrative agency,
that would interfere with the use of such employee's, consultant's or third
Person's Best Efforts to promote the interests of the Company and its Subsidiary
or that would conflict with the Company's or its Subsidiary's business as
presently conducted or proposed to be conducted. The Company and its Subsidiary
have not entered into any agreement to indemnify any other Person, including any
of such employees, consultants or third Persons, against any charge of
infringement, misappropriation or misuse of any intellectual property, other
than indemnification provisions contained in purchase orders or customer
agreements arising in the Ordinary Course of Business. All such current and
former employees, consultants and other third Persons have signed written
assignments to the Company or its Subsidiary of any and all rights or claims in
any intellectual property that any such employees, consultants or third Persons
have or may have by reason of any contribution, participation or other role in
the development, conception, creation, reduction to practice or authorship of
any invention, innovation, development or work of authorship or any other
intellectual property that is used in the business of the Company and its
Subsidiary, and the Company or its Subsidiary possesses original signed copies
of all such written assignments in its files and has provided copies of same to
Immersion.

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     (f) The Company and its Subsidiary completed, or caused to be completed,
prior to December 31, 1999 all reprogramming required to permit the proper
functioning, in and following the year 2000, of the Company's and its
Subsidiary's (i) computer systems and (ii) equipment containing embedded
microchips (including systems and equipment supplied by others) and the testing
of all such systems and equipment as so reprogrammed.

     4.14  Web Site Domains. The Company and its Subsidiary own or have valid
licenses to use all of the content (including, without limitation, the domain
names) and software relating to the World Wide Web domains set forth on Part
4.14 of the Disclosure Schedule.

     4.15  Litigation. Except as set forth and briefly described in Part 4.15 of
the Disclosure Schedule, there is no suit, action or legal, administrative,
arbitration or other proceeding pending, filed or initiated by, against or
specifically affecting the Company, its Subsidiary or any of their assets or
securities. To the Knowledge of the Company, there is no claim, suit, action or
legal, administrative, arbitration or other proceeding or investigation
threatened by, against or specifically affecting the Company, its Subsidiary,
their assets or Securities or, with respect to matters arising out of their
business, pending or threatened by, against or affecting any of the officers,
directors or stockholders of the Company or its Subsidiary. The Company has no
Knowledge of any event of circumstance which could form the basis of any such
claim, suit, action or legal, administrative, arbitration or other proceeding or
investigation.

     4.16  Contracts.

     (a) Part 4.16 of the Disclosure Schedule contains a complete list of, and
the Company has furnished Immersion with true and complete copies of, all of the
contracts, agreements, leases and other commitments, whether written or oral
(the "Contracts"), to which the Company and its Subsidiary are a party, which
are related to their business, or by which any of their respective assets,
properties, or any Securities is bound. The Contracts comprise all: (i)
contracts with employees, agents, consultants and advisors; (ii) contracts with
suppliers or manufacturers of products sold by the Company and its Subsidiary in
the Ordinary Course of Business for amounts in excess of $10,000; (iii)
contracts with providers of services; (iv) bonus, deferred or incentive
compensation, group insurance or other employee benefit plans; (v) collective
bargaining agreements; (vi) leases and subleases as lessor, sublessor, lessee or
sublessee of real or personal property; (vii) contracts for advertising or
public relations; (viii) conditional sales contracts, security agreements,
pledge agreements, trust receipts or any other agreements or arrangements
whereby any of the Company's or its Subsidiary's properties is subject to a
lien, encumbrance, charge or other restriction; (ix) mortgages, indentures,
notes or other instruments for or relating to any borrowing of money, the
extension of credit (other than payables and receivables in the Ordinary Course
of Business and in accordance with normal trade terms) or the deferred purchase
of property; (x) guarantees of any obligations for the borrowing of money or
otherwise, or any other agreements of guarantee or indemnification (other than
endorsements made for collection in the Ordinary Course of Business); (xi)
agreements or arrangements for the purchase or sale of any assets other than in
the Ordinary Course of Business; (xii) continuing contracts for future purchase
of materials, supplies or equipment for amounts in excess of $10,000; (xiii)
agreements, contracts or commitments relating to the acquisition or disposition
of capital stock, ownership interests or material assets of any business
enterprise, other than inventory sold or acquired in the Ordinary Course of
Business; (xiv) agreements, contracts, or commitments with any officer, director
or stockholder of the Company or its Subsidiary; (xv) contracts restricting the
Company's or its Subsidiary's right to conduct business in any areas or in any
way limiting the Company's or its Subsidiary's right to compete; and (xvi) other
contracts not made in the Ordinary Course of Business and involving obligations
of any party thereto in excess of $10,000.

     (b) Each of the Contracts is in full force and effect and enforceable
against the Company, its Subsidiary and, to the Knowledge of the Company,
against the other parties thereto, in each case in accordance with its terms,
subject to bankruptcy, insolvency, reorganization, moratorium, or other laws of
general application affecting the rights and remedies of creditors, and general
principles of equity. Neither the Company, its Subsidiary nor, to the Knowledge
of the Company, any other party thereto, is in breach or default under any
Contract and, to the knowledge of the Company, no event has occurred which with

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<PAGE>   189

notice or the lapse of time, or both, could constitute a breach or default under
any Contract or would accelerate any obligation or create any lien or
encumbrance under any Contract. The Company and its Subsidiary have not assigned
any of their interest in any Contract. No claim has been asserted in writing
that is adverse to the Company's or its Subsidiary's rights under any Contract.
The Company and its Subsidiary have received no formal notice, written or oral,
that the Company, its Subsidiary or any other party thereto is in breach or
default under any material provision of any Contract. To the Knowledge of the
Company, no Person (i) has threatened to claim any such breach or default or
(ii) has threatened to terminate or not renew any Contract.

     4.17  Compliance With Laws. The Company and its Subsidiary have duly
complied in all respects with all applicable laws, statutes, ordinances, rules
and regulations of all applicable authorities relating to the operation of their
business and the ownership, possession, use, maintenance and operation of their
properties and assets, except for violations that could not, individually or in
the aggregate, be material. The Company and its Subsidiary are not in violation
or breach of, or in default under, any term or provision of their Organizational
Documents, or of any order, judgment, writ, injunction or decree of any court or
any governmental or regulatory authority entered against the Company or its
Subsidiary or affecting their business or assets or of any Permit, or subject to
any restriction of any kind or character that is uncommon in connection with the
business, form of business organization or jurisdiction of organization of the
Company or its Subsidiary, which in any such case might materially and adversely
affect the business, prospects or any of the assets of the Company or its
Subsidiary. To the knowledge of the Company, there are no laws, statutes,
ordinances, rules or regulations requiring any work, repairs, construction or
capital expenditures with respect to any of the assets of the Company or its
Subsidiary, nor has the Company or its Subsidiary received any notice of any
such requirement.

     4.18  Environmental Matters. During any period in which the Company or its
Subsidiary has operated, leased, rented or occupied any real property (the "Real
Property") except for the responsible use and disposal of ordinary office
supplies, there has been no storage, use, manufacture, generation, disposal,
treatment or release of any Hazardous Materials (as defined below) on, under or
about the Real Property or transport of Hazardous Materials to or from the Real
Property. For the purposes of this Agreement, the term "Hazardous Materials"
shall mean (i) petroleum or petroleum products (including crude oil or any
fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or
synthetic gas usable for fuel, or any mixture thereof), polychlorinated
biphenyls (PCBs), asbestos or asbestos containing materials, urea formaldehyde
foam insulation, and radon gas; (ii) any substance defined as or included in the
definition of "hazardous substance," "hazardous waste," "hazardous material,"
"extremely hazardous waste," "restricted hazardous waste," "waste," "special
waste," "toxic substance," "toxic pollutant," "contaminant" or "pollutant," or
words of similar import, under any applicable Environmental Law (as defined
below); (iii) infectious materials and other regulated medical wastes; (iv) any
substance which is toxic, explosive, corrosive, flammable, radioactive,
carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by
any governmental agency; and (v) any other substance, material or waste the
presence of which requires investigation or remediation under any Environmental
Law. For the purposes of this Section 4.18, the term "Environmental Law" shall
mean any foreign, federal, state or local statute, law, rule, regulation,
ordinance, treaty, code, policy or rule of common law now or from time to time
in effect and in each case as amended, and any judicial or administrative
interpretation thereof, including any judicial or administrative order, consent
decree or judgment, relating to the environment, natural resources, health,
safety or Hazardous Materials, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended; the Resource
Conservation and Recovery Act, as amended; the Hazardous Materials
Transportation Act, as amended; the Clean Water Act, as amended; the Toxic
Substances Control Act, as amended; the Clean Air Act, as amended; the Safe
Drinking Water Act, as amended; the Atomic Energy Act, as amended; the Federal
Insecticide, Fungicide and Rodenticide Act, as amended; and the Occupational
Safety and Health Act, as amended. To Knowledge of the Company, the use of the
Real Property by the Company has been and is in compliance with all
Environmental Laws.

                                      A-19
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Without limiting the generality of the foregoing, the Company and its Subsidiary
have not, and to the Knowledge of the Company no third Person has, with respect
to the Real Property:

          (a) Received any notice from the Environmental Protection Agency, the
     Occupational Safety and Health Administration, or any other federal, state
     or local governmental or regulatory agency or regional office with
     responsibility for health, environmental protection, waste disposal, toxic
     materials, underground tanks, water quality, sanitation, public works or
     industrial hygiene of any violation or potential violation of any
     Environmental Law; or

          (b) Been the subject of an enforcement, cleanup, removal, closure,
     quarantine or other governmental or regulatory action instituted, completed
     or, to the Knowledge of the Company threatened, with respect to any
     Hazardous Materials; or

          (c) Received or, to the Knowledge of the Company, been threatened with
     a claim by a third Person relating to damage, contribution, cost recovery
     compensation, loss or injury resulting from any Hazardous Materials; or

          (d) Imposed or had imposed on the Real Property, at any time for any
     period of time, a condition to or restriction on the use, ownership,
     occupancy or transferability of the Real Property or any part thereof,
     including a closure or limitation of access, due to the use, manufacture,
     storage, disposal or transport of Hazardous Materials on, under, about or
     across the Real Property; or

          (e) Conducted, or learned of the conduct by a third Person or
     governmental body of, any environmental audit or other investigation into
     the presence or condition of Hazardous Materials at a site to which the
     Company or its Subsidiary sent waste of any kind for disposal or on, under,
     about, neighboring or affecting the Real Property, which audit or
     investigation concluded, directly or indirectly, that there existed actual
     or potential liability or obligation under any Environmental Law to remove,
     repair, clean-up, detoxify, quarantine, or otherwise remedy a condition
     involving Hazardous Materials on the Real Property; or

          (f) Received any information regarding any of the properties bordering
     or surrounding the Real Property, or any of the properties containing water
     or other materials used in connection with the Company's or its
     Subsidiary's business, that any of the events described in items (a)
     through (e) has occurred with respect to those properties; or

          (g) Failed to timely file any reports required to be filed by it under
     applicable Environmental Laws with respect to the Company, its Subsidiary
     or their business or failed to timely generate or maintain all data,
     documentation and records required to be generated or maintained by it
     under any applicable Environmental Laws with respect thereto.

     4.19  Licenses and Permits. Part 4.19 of the Disclosure Schedule includes a
list of all licenses, notices, permits, orders, concurrences, approvals and
authorizations of all governmental, regulatory and public authorities issued to
or held by the Company or its Subsidiary and relating to their business as
conducted and as proposed to be conducted (collectively, the "Permits"). The
Permits comprise all licenses, notices, permits, orders, concurrences, approvals
and authorizations of all governmental, regulatory and public authorities which
are necessary or advisable for the conduct of the Company's and its Subsidiary's
business as presently conducted, except where the failure to obtain a Permit
would not be material. All such Permits are presently in full force and effect,
the Company and its Subsidiary are in compliance with the requirements thereof,
no limitation, suspension or cancellation of any of them is threatened to the
Knowledge of the Company. To the Knowledge of the Company, there is no fact or
circumstance relating to any Permit which could significantly prevent, limit or
restrict the continued conduct by the Surviving Corporation after the Effective
Time, in substantially the same manner as conducted now and at the Effective
Time, of the business now conducted by the Company and its Subsidiary.

                                      A-20
<PAGE>   191

     4.20  Employees, Agents and Consultants.

     (a) Part 4.20 of the Disclosure Schedule includes a list of, and the
Company has provided Immersion with true and complete copies of, all employment
and consulting agreements, executive compensation plans, bonus plans, incentive
compensation plans, deferred compensation agreements, employee pension plans or
other post-retirement benefit plans, employee profit sharing plans, and group
life insurance, hospitalization insurance, severance payment policies or other
plans or arrangements providing benefits for the employees of the Company and
its Subsidiary, and a list of the names and current annual compensation rates of
all present directors, officers, employees and consultants of the Company and
its Subsidiary, including bonuses, incentive compensation and deferred
compensation. The Company and its Subsidiary have paid in full to all past and
present employees, agents and consultants all wages, salaries, commissions,
bonuses and other direct compensation for all services performed by them, except
for such payments as are not yet due and have been accrued on the books of the
Company or its Subsidiary. The Company and its Subsidiary are in compliance with
all laws, statutes, ordinances, rules and regulations respecting employment and
employment practices, terms and conditions of employment, wages and hours and
taxes (including withholding taxes) relating to employment and to personal
services provided to the Company or its Subsidiary, except where the failure to
comply would not be material. No employee, agent or consultant of the Company or
its Subsidiary is in material violation of any employment agreement, consulting
agreement, proprietary information nondisclosure agreement or any other contract
or agreement with the Company or its Subsidiary. The Surviving Corporation will
not incur any liability to any employee for any severance payment, change of
control payment or wrongful termination in connection with or as a result of the
transactions contemplated by this Agreement. The Company has no Knowledge or
information to the effect that any of its or its Subsidiary's employees,
independent contractors, consultants or agents intends to terminate his or her
relationship with the Company or its Subsidiary. There are no agreements,
commitments or other obligations of the Company or its Subsidiary, whether oral
or written, which would prevent or obstruct the dismissal of any the Company's
or its Subsidiary's employees, independent contractors, agents or consultants.
All of the Company's and its Subsidiary's past and present employees,
independent contractors, agents and consultants have been or are employed or
served or serve at the will of the Company or its Subsidiary and may be
terminated without liability for severance or termination pay or other damages,
either compensatory or punitive.

     (b) Neither the Company nor its Subsidiary is a party to any collective
bargaining agreements, and neither of them is aware of any intention of the
Company's or its Subsidiary's employees to seek union representation. Neither
the Company nor its Subsidiary has ever experienced any labor strike or material
labor disputes, slowdown or stoppage, nor, to the Knowledge of the Company, is
any threatened. Relations between the Company and its Subsidiary and their
employees, independent contractors, agents and consultants are good. No union
action or unfair labor practice claim has ever been filed nor, to the Knowledge
of the Company, is any threatened against the Company or its Subsidiary.

     4.21  Benefit Plans.

     (a) The Part 4.21 of the Disclosure Schedule contains a true and complete
list of: (i) all employee benefit plans (within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all
bonus, stock option, stock purchase, restricted stock, incentive, deferred
compensation, executive compensation, retiree medical or life insurance,
supplemental retirement, severance or other benefit plans, programs or
arrangements, to which the Company or its Subsidiary is a party, with respect to
which the Company or its Subsidiary has any obligation or which are maintained,
contributed to or sponsored by the Company or its Subsidiary for the benefit of
any current or former employee, officer, or director of the Company or its
Subsidiary and (ii) each employee benefit plan for which the Company or its
Subsidiary could incur material liability under Section 4069 of ERISA, in the
event such plan were terminated, or under Section 4212(c) of ERISA, or in
respect of which the Company or its Subsidiary remains secondarily liable under
Section 4204 of ERISA (collectively, the "Plans"). The Company has provided
Immersion with a true and complete copy of each written Plan or a description of
and a true and complete copy of each material document prepared in connection
with each such Plan, including, without limitation: (i) a copy of each trust or
other funding arrangement; (ii) each

                                      A-21
<PAGE>   192

summary plan description and summary of material modifications; (iii) the most
recently filed IRS Form 5500; (iv) the most recently received IRS determination
letter for each such Plan; and (v) the most recently prepared actuarial report
and financial statement in connection with each such Plan. Neither the Company
nor its Subsidiary has any legally enforceable agreement: (i) to create, incur
liability with respect to or cause to exist any other employee benefit plan,
program or arrangement; (ii) to enter into any contract or agreement to provide
compensation or benefits to any current or former director, officer or employee
of the Company or its Subsidiary; or (iii) to modify any Plan to increase
benefits under any Plan.

     (b) None of the Plans is a multiemployer plan, within the meaning of
Section 3(37) or 4001(a)(3) of ERISA, or a single employer pension plan, within
the meaning of Section 4001(a)(15) of ERISA, for which the Company or its
Subsidiary could incur liability under Section 4063 or 4064 of ERISA. Other than
as specifically disclosed in Part 4.21 of the Disclosure Schedule, none of the
Plans: (i) provides for the payment of separation, severance, termination or
similar-type benefits to any Person; (ii) obligates the Company or its
Subsidiary to pay or accrue separation, severance, termination or other benefits
as a result of any transaction contemplated by this Agreement; or (iii)
obligates the Company or its Subsidiary to make any payment or provide any
benefit that could be subject to a tax under Section 4999 of the Code. None of
the Plans provides for or promises retiree medical, disability or life insurance
benefits to any current or former employee, officer or director of the Company
or its Subsidiary, it being understood that employees are entitled to
continuation of health care benefits under COBRA.

     (c) Each Plan which is intended to be qualified under Section 401(a) of the
Code has received a favorable determination letter from the IRS that such Plan
is so qualified, and each trust established in connection with any Plan which is
intended to be exempt from federal income taxation under Section 501(a) of the
Code has received a determination letter from the IRS that such trust is so
exempt. No fact or event has occurred since the date of any such determination
letter from the IRS that could adversely affect the qualified status of any such
Plan or the exempt status of any such trust.

     (d) There has been no prohibited transaction (within the meaning of Section
406 of ERISA or Section 4975 of the Code) with respect to any Plan, for which an
exemption exists under Section 408 of ERISA or Section 4975(d) of the Code which
could result in the imposition of any liability on any Plan or the Company.
Neither the Company nor its Subsidiary is either currently liable or has
previously incurred any liability for any tax or penalty arising under Section
4971, 4972, 4979, 4980 or 4980B of the Code or Section 502(c) of ERISA, and no
fact or event exists that could give rise to any such liability. Neither the
Company nor its Subsidiary has incurred any liability under, arising out of or
by operation of Title IV of ERISA (other than liability for Plan contributions
or premiums to the Pension Benefit Guaranty Corporation arising in the Ordinary
Course of Business) and no fact or event exists which could give rise to any
such liability. No asset of the Company or its Subsidiary is the subject of any
lien arising under Section 302(f) of ERISA or Section 412(n) of the Code;
neither the Company nor its Subsidiary has been required to post any security
under Section 307 of ERISA or Section 401(a)(29) of the Code; and no fact or
event exists which could give rise to any such lien or requirement to post any
such security.

     (e) Each Plan is now and has been operated in all material respects in
accordance with the requirements of all applicable laws, including, without
limitation, ERISA and the Code, and the Company and its Subsidiary have
performed all obligations required to be performed by them under, are not in any
respect in material default under or in violation of, and, to the Company's
Knowledge, there is no material default or violation by any party to, any Plan.
The Financial Statements reflect an accrual of all amounts of employer
contributions and premiums accrued but unpaid with respect to the Plans.

     4.22  Acquisitions. Part 4.22 of the Disclosure Schedule includes a list of
all stock purchase, merger, asset purchase and other similar agreements pursuant
to which the Company or its Subsidiary purchased or acquired the shares or other
ownership interests in, merged, consolidated or otherwise effected a business
combination with, or purchased or acquired the business and assets of any Person
(collectively, the "Acquisition Agreements"). No party to any Acquisition
Agreement has asserted any claims against any other party in connection with any
of the transactions completed pursuant to such Acquisition

                                      A-22
<PAGE>   193

Agreement, including any claims for breach or inaccuracy of any representations,
warranties or covenants or for indemnification, reimbursement or set-off. To the
Knowledge of the Company, there is no event or circumstance that could form the
basis for any such claim.

     4.23  Certain Payments. Since July 31, 1995, none of the Company, its
Subsidiary or any predecessor, director, officer, agent, or employee of the
Company or its Subsidiary, or any predecessor or any other Person associated
with or acting for or on behalf of the Company, its Subsidiary or any
predecessor, has directly or indirectly (i) made any contribution, gift, bribe,
rebate, payoff, influence payment, kickback, or other payment to any Person,
private or public, regardless of form, whether in money, property, or services
(A) to obtain favorable treatment in securing business, (B) to pay for favorable
treatment for business secured, (C) to obtain special concessions or for special
concessions already obtained, for or in respect of the Company, its Subsidiary
or any predecessor, or any affiliate of the Company, its Subsidiary or any
predecessor, or (D) in violation of any law; or (ii) established or maintained
any fund or asset that has not been recorded in the books and records of the
Company or its Subsidiary.

     4.24  Conflicts of Interest; Transactions with Subsidiary.

     (a) No director, officer, employee or stockholder of the Company or its
Subsidiary, entity controlled by any director, officer, employee or stockholder
of the Company or its Subsidiary, or relative of any director, officer, employee
or stockholder of the Company or its Subsidiary (i) owns, directly or
indirectly, any interest in excess of three percent in, or is an employee or
representative of or consultant to, any corporation, firm, association or other
business entity or organization which is, or is engaged in business as, a
supplier of products or services to the Company or its Subsidiary, a competitor
of the Company or its Subsidiary or to whom the Company or its Subsidiary sells
or provides goods or services; (ii) owns, directly or indirectly, in whole or in
part any tangible or intangible property which the Company or its Subsidiary is
using or the use of which is necessary for the conduct of their business; or
(iii) has any cause of action or other claim whatsoever against, or owes any
amount to, the Company or its Subsidiary.

     (b) Part 4.24(b) of the Disclosure Schedule contains a complete and
accurate description of all past and present transactions, agreements,
contracts, loans, guarantees and other commitments by the Company or its
Subsidiary with or for the benefit of any director, officer, employee or
stockholder of the Company or its Subsidiary, entity controlled by any director,
officer, employee or stockholder of the Company or its Subsidiary, or relative
of any director, officer, employee or stockholder of the Company or its
Subsidiary. All such transactions, agreements, contracts, loans, guarantees and
other commitments were made in the Ordinary Course of Business and contained
only such terms as would have been agreed to by unaffiliated Persons in an arms'
length transaction.

     (c) Part 4.24(c) of the Disclosure Schedule contains a complete and
accurate description of all past and present transactions, agreements,
contracts, loans, guarantees and other commitments by and between the Company
and its Subsidiary. All such transactions, agreements, contracts, loans,
guarantees and other commitments were made in the Ordinary Course of Business
and contained only such terms as would have been agreed to by unaffiliated
Persons in an arms' length transaction. No claim has been asserted to the effect
that the Company has dealt with its Subsidiary on other than an arms' length
basis, that the Company, its directors and officers or the directors and
officers of its Subsidiary have in any way breached their respective duties,
fiduciary or otherwise, to the Subsidiary, its creditors or its minority
stockholders or in other way abused the authority or power of the Company in
dealing with its Subsidiary, and there is no basis for any such claim.

     4.25  Books and Records. The books and records of the Company and its
Subsidiary, including the books of account, minute books, stock books and stock
ledgers, are complete and correct and accurately reflect in all respects the
conduct of the business and affairs of the Company and its Subsidiary. The
Company has provided Immersion with true and complete copies of all those minute
books and stock books.

                                      A-23
<PAGE>   194

     4.26  No Brokers or Finders Fees. None of the Company, its Subsidiary, its
stockholders or any officer or director of the Company or its Subsidiary has
incurred any obligation or liability for any investment banker fees, brokerage
fees, commissions, finders' fees or other similar payments in connection with
any of the transactions contemplated by this Agreement.

     4.27  Suppliers and Customers. No single supplier who accounted for more
than five percent of the Company's or its Subsidiary's purchases, or customer
who accounted for more than five percent of the Company's or its Subsidiary's
sales, during its most recent complete fiscal year, or the current fiscal year
to date, nor any supplier who is a material source of supply of any goods
essential to the Company or its Subsidiary, has (i) canceled or otherwise
terminated, or threatened to cancel or otherwise terminate, its relationship
with the Company or its Subsidiary, or (ii) materially decreased its sale of
services or supplies to the Company or its Subsidiary or its purchase of
products therefrom or threatened with respect thereto. The Company has no reason
to believe that after the Effective Time any of its customers or suppliers will
refuse to deal with the Surviving Corporation, or will deal with the Surviving
Corporation on a smaller scale than with the Company currently. Part 4.27 of the
Disclosure Schedules contains a true and complete list of the Company's and its
Subsidiary's customers and suppliers.

     4.28  Bank and Financial Accounts. Part 4.28 of the Disclosure Schedules
contains is a true and complete list of: (i) names and locations of all banks
and other financial institutions at which the Company or its Subsidiary
maintains accounts, the account number of each such account, and the names of
all Persons authorized to make withdrawals therefrom; (ii) the names and
locations of all banks and other financial institutions that have issued
certificates of the deposit or similar financial instruments held by the Company
and its Subsidiary and the principal amount and maturity dates of such
certificates of deposit or other instruments; and (iii) the names and locations
of all banks or other entities in which the Company or its Subsidiary rents,
holds or has access to a safety deposit box or similar secure storage device or
facility and the names of all Persons authorized to open such boxes, devices or
facilities.

     4.29  Powers of Attorney. There is no Person holding a power of attorney on
behalf of the Company or its Subsidiary.

     4.30  Officers and Directors. The Company's and its Subsidiary's officers
and directors are as set forth on Part 4.30 of the Disclosure Schedules.

     4.31  Pooling of Interests. The Company and its Subsidiary have not taken
any action or failed to take any action which action or failure would prevent
the treatment of the Merger as a pooling of interests for accounting purposes.

     4.32  Full Disclosure. No representation or warranty of the Company or its
Subsidiary in this Agreement and no statement in the Disclosure Schedule omits
to state a material fact necessary to make any of the statements herein or
therein, in light of the circumstances in which they were made, not misleading.
No notice given pursuant to Section 6.6 will contain any untrue statement or
omit to state a material fact necessary to make the statements therein or in
this Agreement, in light of the circumstances in which they were made, not
misleading. To the Knowledge of the Company, there is no fact that has specific
application to the Company or its Subsidiary, their business or any of their
assets or securities (other than general economic or industry conditions) and
that materially adversely affects or, as far as the Company may reasonably
foresee, materially threatens the assets, business, prospects, financial
condition or results of operations of the Company or its Subsidiary that has not
been set forth in this Agreement or the Disclosure Schedule.

     4.33  Securities Representation. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the S-4
(as defined in Section 7.4) will, at the time the S-4 becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.

                                      A-24
<PAGE>   195

 5. Representations and Warranties of Immersion and Merger Sub

     Immersion and Merger Sub hereby jointly and severally represent and warrant
to the Company that:

     5.1  Organization and Good Standing. Each of Immersion and its
Subsidiaries, including Merger Sub, is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation, with full
power and authority to own, operate and lease its properties, to carry on its
business as that business is being conducted. Each of Immersion and its
Subsidiaries, including Merger Sub, is duly qualified to do business and is in
good standing in each jurisdiction in which the nature of the business conducted
or to be conducted or the assets owned or leased or to be owned or leased by it
requires such qualification, except where the failure to so qualify would not
have a material adverse effect on the financial condition, results of
operations, operations or prospects of Immersion and its Subsidiaries, including
Merger Sub, taken as a whole.

     5.2  Authorization. Each of Immersion and Merger Sub has full right, power
and authority to execute and deliver this Agreement and the Transaction
Documents to be entered into by Immersion or Merger Sub, as the case may be, and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery by Immersion and Merger Sub of this Agreement and the Transaction
Documents and the consummation of the transactions contemplated hereby and
thereby have been duly and validly authorized by Immersion's and Merger Sub's
Board of Directors (and, in the case of Merger Sub, Merger Sub's stockholder).
No other corporate or other proceedings on the part of Immersion or Merger Sub
are necessary to authorize this Agreement and the Transaction Documents and the
transactions contemplated hereby and thereby. This Agreement has been duly and
validly executed and delivered by Immersion and Merger Sub, constitutes a legal,
valid and binding agreement of Immersion and Merger Sub, enforceable against
each of them in accordance with its terms, and, when executed and delivered by
Immersion or Merger Sub, as the case may be, pursuant to the terms of this
Agreement, each Transaction Document will be duly and validly executed and
delivered by Immersion or Merger Sub, as the case may be, and will constitute a
legal, valid and binding agreement of Immersion or Merger Sub, as the case may
be, enforceable against Immersion or Merger Sub, as the case may be, in
accordance with its terms, except in each case as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the rights of creditors generally or by general equitable
principles.

     5.3  Capitalization. The authorized capital stock of Immersion consists of
(i) 100,000,000 shares of common stock, $0.001 par value per share, of which
16,507,518 shares were issued and outstanding as of June 30, 2000; and (ii)
5,000,000 shares preferred stock, $0.001 par value per share, of which no shares
are issued and outstanding. The authorized capital stock of Merger Sub consists
of 100 shares of capital stock, of which 100 shares of capital stock are issued
and outstanding and are held of record by Immersion.

     5.4  Immersion Common Stock. The Immersion Common Stock into which the
Company Common Stock will be converted in the Merger shall, when issued at the
Effective Time of the Merger in accordance with the terms of this Agreement, be
validly issued, fully paid and nonassessable.

     5.5  No Breach or Violation. None of the execution and delivery by
Immersion or Merger Sub of this Agreement or either of the Transaction Documents
or the consummation of the transactions contemplated hereby and thereby, will
(i) violate or conflict with any provision of Immersion's Certificate of
Incorporation or Bylaws or Merger Sub's Articles of Incorporation or Bylaws;
(ii) conflict with, or result in a violation or breach of, or constitute a
default under, require any notice under, or create any rights of termination,
cancellation or acceleration in any Person or entity, require the consent or
approval of any Person, or result in the creation of any lien or encumbrance
upon any of Immersion's or Merger Sub's securities or assets pursuant to the
terms of any contract, indenture, mortgage, lease, agreement, instrument,
commitment or other arrangement to which Immersion or Merger Sub is a party or
by which they or any of their securities or assets is bound; or (iii) violate
any judgment, order, permit, injunction, writ, decree or award of any court or
any regulatory or governmental authority against or binding upon Immersion or
Merger Sub or any of their securities or assets.

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<PAGE>   196

     5.6  No Prior Activities. Merger Sub was formed for the purpose of
consummating the Merger, has no material assets or liabilities except as
necessary for such purpose and has not conducted any business.

     5.7  No Brokers or Finders Fees. None of Immersion, Merger Sub, Immersion's
stockholders or any officer or director of Immersion or Merger Sub has incurred
any obligation or liability for any investment banker fees, brokerage fees,
commissions, finders' fees or other similar payments in connection with any of
the transactions contemplated by this Agreement, other than fees payable to
Alliant Partners, for financial consulting services.

     5.8  SEC Filings.

     (a) The Purchaser has filed all forms, reports and documents required to be
filed by it with the SEC since November 12, 1999 (collectively, the "Immersion
SEC Reports"). As of their respective dates, the Immersion SEC Reports (i)
complied as to form in all material respects with the applicable requirements of
the Securities Act, the Exchange Act, and the rules and regulations thereunder
and (ii) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading. The representation in clause (ii) of the preceding
sentence shall not apply to any misstatement or omission in any Immersion SEC
Report filed prior to the date of this Agreement that was superseded by a
subsequent Immersion SEC Report filed prior to the date of this Agreement that
specifically corrected such misstatements or omission in the applicable
Immersion SEC Report.

     (b) Each of the consolidated balance sheets included in or incorporated by
reference into the Immersion SEC Reports (including the related notes and
schedules) fairly presents the consolidated financial position of Immersion and
its subsidiaries as of its date, and each of the consolidated statements of
income, retained earnings and cash flows included or incorporated by reference
into the Immersion SEC Reports (including any related notes and schedules)
fairly presents the results of operations, retained earnings or cash flows, as
the case may be, of Immersion and its subsidiaries for the periods set forth
therein (subject, in the case of unaudited statements, to normal year-end audit
adjustments that would not be material in amount or effect), in each case in
accordance with GAAP consistently applied during the periods involved, except
(i) as may be noted therein and (ii) that unaudited interim statements may not
include complete footnotes.

 6. Covenants of the Company

     6.1  Conduct of Business by the Company Pending the Merger. The Company
covenants and agrees that, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, unless Immersion shall otherwise agree in writing, the Company
shall and shall cause its Subsidiary to conduct their business only in, and
shall not take any action except in, the Ordinary Course of Business, other than
actions taken by the Company or the Subsidiary as contemplated by this
Agreement; and the Company shall and shall cause its Subsidiary to use their
Best Efforts to preserve substantially intact the business organization of the
Company and its Subsidiary, to keep available the services of the present
officers, employees and consultants of the Company and its Subsidiary and to
preserve the present relationships of the Company and its Subsidiary with
customers, suppliers and other Persons with which the Company or its Subsidiary
has significant business relations. By way of amplification and not limitation,
except as contemplated by this Agreement, the Company shall not, nor shall it
permit its Subsidiary, during the period from the date of this Agreement and
continuing until the earlier of the termination of this Agreement or the
Effective Time, directly or indirectly do, or propose to do, any of the
following without the prior written consent of Immersion:

          (a) Amend or otherwise change its or its Subsidiary's Organizational
     Documents;

          (b) Issue, sell, pledge, dispose of or encumber, or authorize the
     issuance, sale, pledge, disposition or encumbrance of, any shares of
     capital stock of any class, or any options, warrants, convertible
     securities or other rights of any kind to acquire any shares of capital
     stock, or any other ownership interest (including any phantom interest) in
     the Company, its Subsidiary or any of their affiliates,

                                      A-26
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     except for the issuance of shares of Company Common Stock issuable pursuant
     to: (i) Stock Options or Warrants that are now outstanding and are now, or
     before the Effective become, exercisable in accordance with their term (ii)
     the Convertible Note; or (iii) the Medtronic Option);

          (c) Sell, pledge, dispose of or encumber any assets of the Company or
     its Subsidiary, except for: (i) sales of inventories in the Ordinary Course
     of Business; (ii) dispositions of obsolete or worthless assets and; (iii)
     sales of immaterial assets not in excess of $5,000 in the aggregate;

          (d) (i) Declare, set aside, make or pay any dividend or other
     distribution (whether in cash, stock or property or any combination
     thereof) in respect of any of its or its Subsidiary's capital stock, (ii)
     split, combine or reclassify any of its or its Subsidiary's capital stock
     or issue or authorize or propose the issuance of any other securities in
     respect of, in lieu of or in substitution for shares of its or its
     Subsidiary's capital stock, or (iii) amend the terms or change the period
     of exercisability of, purchase, repurchase, redeem or otherwise acquire any
     of its or its Subsidiary's securities, shares of Company Common Stock,
     Company Preferred Stock or its Subsidiary's capital stock or any option or
     right, directly or indirectly, to acquire shares of Company Common Stock,
     Company Preferred Stock or its Subsidiary's capital stock;

          (e) (i) Acquire (by merger, consolidation, acquisition of stock or
     assets or otherwise) any corporation, partnership or other business
     organization or division thereof (including the creation of any
     Subsidiary); (ii) incur any indebtedness for borrowed money or issue any
     debt securities or assume, guarantee or endorse or otherwise become
     responsible whether directly, indirectly, contingently or otherwise for the
     obligations of any Person or, except in the Ordinary Course of Business,
     make any loans or advances; (iii) enter into or amend any material
     Contract; or (iv) authorize any capital expenditures or purchase of fixed
     assets which are, in the aggregate, in excess of $25,000;

          (f) Increase the compensation payable or to become payable or pay or
     agree to pay any bonuses to its or its Subsidiary's officers, employees,
     consultants or agents, or grant any severance or termination pay to, or
     enter into any employment or severance agreement with any director, officer
     or other employee of the Company or its Subsidiary, or establish, adopt,
     enter into or amend any collective bargaining, bonus, profit sharing,
     thrift, compensation, stock option, restricted stock, pension, retirement,
     deferred compensation, employment, termination, severance or other plan,
     agreement, trust, fund, policy or arrangement for the benefit of any
     current or former directors, officers or employees, except, in each case,
     as may be required by law;

          (g) Take any action to change accounting policies or procedures
     (including procedures with respect to revenue recognition, payments of
     accounts payable and collection of accounts receivable);

          (h) Make any material tax election inconsistent with past practice or
     settle or compromise any material federal, state, local or foreign tax
     liability or agree to an extension of a statute of limitations;

          (i) Pay, discharge or satisfy any claims, liabilities or obligations
     (whether absolute, accrued, asserted or unasserted, contingent or
     otherwise), other than the payment, discharge or satisfaction in the
     Ordinary Course of Business;

          (j) Have combined Company and Subsidiary operating expenses (excluding
     cost of goods sold) in excess of $750,000 per month from the date of the
     execution of this Agreement through the Effective Time, excluding costs
     related to the transactions contemplated by this Agreement;

          (k) Make any loans or advances to officers, directors, employees,
     consultants, stockholders or agents of the Company or its Subsidiary, or
     any member of the families of any of them, except for advances to employees
     for reasonable business expenses in the Ordinary Course of Business;

          (l) Cancel or materially amend any insurance policy except in exchange
     for a new policy with at least the same coverage;

          (m) Fail to comply in all respects with all applicable laws, rules and
     regulations;

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          (n) Enter into any transaction or series of transactions which would
     in any significant respect change the character of the Company's or its
     Subsidiary's business;

          (o) Take, or agree in writing or otherwise to take, any of the actions
     described in subsections (a) through (n) of this Section 6.1, or any action
     which would make any of the representations or warranties of the Company or
     its Subsidiary contained in this Agreement untrue or incorrect or prevent
     the Company from performing or cause the Company not to perform its
     covenants hereunder.

     6.2  No Solicitation. The Company shall not, directly or indirectly, nor
shall it authorize or permit any of its directors, officers, stockholders,
employees or agents or any investment banker, financial advisor, accountant,
attorney or other representative, directly or indirectly, to (i) solicit,
initiate, encourage or induce the making, submission or announcement of any
offer or proposal (other than the transactions contemplated by this Agreement)
contemplating or otherwise relating to any Acquisition Transaction (as defined
below) (an "Acquisition Proposal"), or take any action that could reasonably be
expected to lead to an Acquisition Proposal; (ii) furnish any non-public or
confidential information regarding the Company or its stockholders to any Person
or entity (other than Immersion or Merger Sub or their representatives) in
connection with, or in response to, an Acquisition Proposal; (iii) engage in
discussions or negotiations with any Person or entity (other than Immersion or
Merger Sub or their representatives) with respect to any Acquisition Proposal;
(iv) approve, endorse or recommend any Acquisition Proposal; or (v) enter into
any letter of intent or similar document or any agreement or commitment
contemplating or otherwise relating to any Acquisition Transaction. The Company
further agrees that it will immediately notify Immersion of, and cause to be
terminated, any and all solicitations, submissions, announcements, discussions,
offers, proposals or other actions constituting, or that might reasonably be
expected to lead to, or be deemed to be, an Acquisition Proposal. Such
notification obligation will include disclosure of the identity of the Person or
entity making the Acquisition Proposal, the terms and conditions of such
Acquisition Proposal and any material financing terms. As of the date of this
Agreement, the Company will immediately cause to be terminated any existing
discussions or negotiations that relate in any way to any Acquisition Proposal
(other than the transaction contemplated by this Agreement). The term
"Acquisition Transaction" means any transaction or series of transactions (other
than those contemplated by this Agreement) involving: (i) any merger,
consolidation, share exchange, business combination, issuance of securities,
acquisition of securities, tender offer, exchange offer or other similar
transaction in which (A) the Company is a constituent corporation, (B) a Person
or "group" (as defined in the Exchange Act and the rules promulgated thereunder)
of Persons, directly or indirectly acquires the Company or more than 50% of the
Company's business or, directly or indirectly, acquires beneficial or record
ownership of securities representing more than 50% of the outstanding securities
of any class of the Company's voting securities or (C) in which the Company
issues securities representing more than 50% of the outstanding securities of
any class of the Company's voting securities; or (ii) any sale, lease, exchange,
transfer, encumbrance, license or disposition of more than 50% of the Company's
assets, net of liabilities, carried at book value.

     6.3  Special Stockholders' Meeting. The Company shall call and hold a
special meeting of the Company's stockholders as promptly as practicable and in
accordance with applicable laws for the purpose of voting upon the approval of
the Merger. The Company shall use its Best Efforts to solicit from its
stockholders proxies in favor of adoption of this Agreement and approval of the
transactions contemplated hereby (including the Merger) and shall take all other
action reasonably necessary or advisable to secure the vote or consent of
stockholders to obtain such approvals. The notice of special meeting or any
proxy materials to be given to stockholders in connection with the meeting shall
be reasonably acceptable to Immersion and shall include the recommendation of
the Board of Directors of the Company in favor of the Merger.

     6.4  Access to Information. Upon reasonable notice and subject to
restrictions contained in confidentiality agreements to which the Company is
subject (from which the Company shall use reasonable efforts to be released),
the Company shall and shall cause its Subsidiary to each afford to Immersion and
its officers, employees, accountants, counsel and other representatives,
reasonable access, during the period prior to the Effective Time, to all their
properties, books, contracts, commitments and
                                      A-28
<PAGE>   199

records and, during such period, the Company shall and shall cause its
Subsidiary to furnish promptly to Immersion all information concerning the
Company's and its Subsidiary's businesses, properties and personnel as Immersion
may reasonably request, and the Company shall make available to Immersion the
appropriate individuals (including attorneys, accountants and other
professionals) for discussion of the Company's business, properties and
personnel as Immersion may reasonably request. To the extent that any material
provided includes material that is subject to the attorney-client privilege,
work product doctrine or any other applicable privilege concerning pending or
threatened legal proceedings or governmental investigations, the parties
understand and agree that they have a commonality of interest with respect to
such matters and it is their desire, intention and mutual understanding that the
sharing of such material is not intended to, and shall not, waive or diminish in
any way the confidentiality of such material or its continued protection under
the attorney-client privilege, work product doctrine or other applicable
privilege. All such material that is entitled to protection under such
attorney-client privilege, work product doctrine or other applicable privilege
shall remain entitled to such protection under such privilege, this Agreement
and the joint defense doctrine.

     6.5  Consents; Approvals. The Company shall and shall cause its Subsidiary
to use their Best Efforts to give all notices and obtain all consents, waivers,
approvals, authorizations or orders that are identified or required to be
identified in Parts 4.3 or 4.5 of the Disclosure Schedule, and the Company shall
make all filings required in connection with the authorization, execution and
delivery of this Agreement by the Company and the consummation by it of the
transactions contemplated hereby, in each case as promptly as practicable. The
Company shall furnish promptly all information required to be included in any
application or other filing to be made pursuant to this Section 6.5 in
connection with the transactions contemplated by this Agreement.

     6.6  Notification of Certain Matters. Between the date of this Agreement
and the Closing Date, the Company shall promptly notify Immersion in writing if
(i) the Company has or acquires Knowledge of any event, fact or condition that
causes or constitutes a breach of any of the Company's representations and
warranties set forth in this Agreement or (ii) if the Company has or acquires
Knowledge or becomes aware of the occurrence, nonoccurrence or existence after
the date of this Agreement of any event, fact or condition that would cause or
constitute a breach of any such representation or warranty had such
representation or warranty been made as of the time of occurrence,
nonoccurrence, existence or discovery of such event, fact or condition. Should
any such fact or condition that is not cured before Closing require any change
in the Disclosure Schedule if the Disclosure Schedule were dated the date of the
occurrence, nonoccurrence, existence or discovery of such event, fact or
condition, the Company shall deliver to Immersion prior to the Closing Date, a
supplement to the Disclosure Schedule describing such fact or condition. During
the same period, the Company shall promptly notify Immersion of the occurrence
of any material breach of any covenant of the Company in this Agreement or of
the occurrence, nonoccurrence or existence of any event, fact or condition that
would be reasonably expected to make the satisfaction of any of the conditions
in Section 8 or 9 impossible or unlikely. The delivery of any notice or
supplement to the Disclosure Schedule pursuant to this Section shall not limit
or otherwise affect the remedies available Immersion under this Agreement.

     6.7  Public Announcements.

     (a) The Company will not make or release any public or private
announcement, statement or disclosure relating to this Agreement and the Merger
without the prior knowledge and consent of Immersion, except to the extent that
disclosure to the Company's officers, directors, lawyers and accountants is
required to facilitate the Merger and to the Company's stockholder to solicit
their votes to approve this Agreement and the Merger, provided that the Persons
to whom such disclosure is made acknowledge their obligations to hold the
information disclosed in confidence. Any public announcement will be made by
Immersion and at such times as it shall determine is appropriate or required by
law or the Nasdaq Stock Market.

     (b) The Company acknowledges and agrees that it and its directors, officers
and those of its employees, agents and representatives that have or will have
knowledge of the transactions contemplated

                                      A-29
<PAGE>   200

by this Agreement are aware of the restrictions imposed by the federal
securities laws and other applicable laws on a Person possessing material
non-public information about a public company and that the Company and its
directors, officers and such employees, agents and representatives will comply
with such laws.

     (c) The Company shall consult with Immersion concerning the means by which
and when employees, consultants, vendors, service providers and other having
dealings with the Company will be informed of the merger, and the Company will
not inform such Persons of the Merger without Immersion's consent. Immersion
shall have the right to have its representatives present for any such
communications.

     6.8  Tax Matters.

     (a) The Company shall prepare, execute and timely file, or cause to be
prepared, executed and timely filed, all Tax Returns of the Company and its
Subsidiary due prior to the Closing Date. Such Tax Returns shall be prepared on
a basis consistent with past practice. The Company shall be responsible for the
payment of all amounts shown as payable on such Tax Returns. The Surviving
Corporation shall prepare, or cause to be prepared, all Tax Returns of the
Company and its Subsidiary for all taxable periods beginning before the Closing
Date other than those Tax Returns described in the first sentence of this
Section 6.8(a). Such Tax Returns shall be prepared on a basis consistent with
past practice. The Company shall be responsible for the payment of all amounts
shown as payable on such other Tax Returns to the extent they were not reserved
for on the Financial Statements; provided, however, that as to any such Tax
Return covering a taxable period ending after the Closing Date, the Company
shall not be responsible for the payment of any amount in excess of the portion
of the amount shown as payable on such Tax Return that is attributable to the
portion of the taxable period on or before the Closing Date. The Surviving
Corporation shall be responsible for the payment of all amounts shown as payable
on such other Tax Returns to the extent the Company is not responsible for
payment under this Section 6.8(a). Immersion and the Surviving Corporation shall
be responsible for the preparation of all Tax Returns of the Company and its
Subsidiary for all taxable periods beginning on or after the Closing Date.
Immersion and the Surviving Corporation shall be responsible for the payment of
all amounts shown as payable on such Tax Returns.

     (b) The Representative shall have responsibility for the conduct and
control of any audit or examination of the Company or its Subsidiary for any
taxable period ending on or prior to the Closing Date if a claim with respect to
any liability that could result from such audit could be made under the
Indemnification and Joinder Agreement. If Immersion or the Surviving Corporation
wishes to participate in any such audit, then it may do so at its own cost and
expense. Notwithstanding any indication in this Agreement to the contrary, the
Company shall cause the Representative and the stockholders of the Company to
refrain from agreeing to an adjustment in a federal or state income Tax audit,
appeals procedure or judicial proceeding that will have an adverse effect on the
Surviving Corporation or its Subsidiary for any taxable period ending after the
Closing Date without the prior written consent of the Surviving Corporation,
which consent shall not be unreasonably withheld.

     (c) The Company will cooperate, and will cause its Subsidiary to cooperate,
with Immersion in the preparation, execution and filing of all returns,
questionnaires, applications or other documents regarding any real property
transfer or gains, sales, use, transfer, value added, stock transfer and stamp
taxes, any transfer, recording, registration and other fees, and any similar
taxes which become payable in connection with the transactions contemplated
hereby that are required or permitted to be filed at or before the Effective
Time.

     (d) Immersion shall provide reasonable cooperation and cause the Surviving
Corporation and its Subsidiary to provide reasonable cooperation, and the
Company shall cause the Representative and the stockholders of the Company to
provide reasonable cooperation, to one another in connection with (i) the
preparation and filing of any Tax Return for any taxable period ending on or
before the Closing Date, and (ii) any audit, examination or other proceeding in
respect of Taxes of the Company or its Subsidiary for any taxable period ending
on or before the Closing Date. Such cooperation shall include (i) making
                                      A-30
<PAGE>   201

available, on a reasonable basis, employees of the Company (or the Surviving
Corporation or its Subsidiary), (ii) promptly forwarding to the Representative
or to the Surviving Corporation or its Subsidiary all related correspondence and
other documents received from taxing authorities by Immersion, the Surviving
Corporation or its Subsidiary or by the Representative or any of the
stockholders of the Company, respectively, (iii) executing powers of attorney
and other authorizing documents with respect to a matter so as to permit the
party assigned in Section 6.8(b) to control such matter, (iv) signing Tax
Returns so as to permit the party responsible for their filing to timely file
such Tax Returns and (v) providing access, on a reasonable basis, to relevant
records and other information in the possession or under the control of the
party. The Company and its Subsidiary and the Surviving Corporation will
preserve all information, records or documents relating to the liability for
Taxes of the Company or its Subsidiary until the expiration of any applicable
statute of limitations or extensions thereof.

     6.9  Pooling of Interests Accounting; Affiliate Agreements.

     (a) The Company shall use its Best Efforts to cause the business
combination to be effected by the Merger to be accounted for as a pooling of
interests. The Company shall use its Best Efforts to cause its "affiliates" not
to take any action that would prevent Immersion from accounting for the business
combination to be effected by the Merger as a pooling of interests. The Company
shall provide all such information and assurances reasonably required by
Immersion's independent auditors to enable such auditors to determine the
appropriateness of pooling of interests accounting for the Merger if consummated
in accordance with this Agreement.

     (b) Concurrently with the execution and delivery of this Agreement, the
Company shall deliver to Immersion a list (reasonably satisfactory to Immersion
and its counsel), identifying the names of all Persons who are expected to be,
at the Effective Time, in the Company's reasonable judgment, "affiliates" of the
Company under applicable SEC accounting releases with respect to pooling of
interests accounting treatment. The Company shall furnish such information and
documents as Immersion may reasonably request for the purpose of reviewing such
list. The Company shall use its Best Efforts to cause each Person who is
identified as an "affiliate" to deliver to Immersion, prior to the Effective
Time, a written agreement (an "Affiliate Agreement"), the form attached as
Exhibit D to this Agreement.

     6.10  Transaction Costs. Whether or not the transactions contemplated by
this Agreement are consummated, the Company shall be responsible for and shall
pay, all of its Transaction Costs.

     6.11  Amendment of Scream Racing Agreement. The Company will use its Best
Efforts to cause the Advertising Agreement, dated January 6, 2000, between the
Company and Scream Racing to be amended on or before the Closing Date at no cost
to the Company or Immersion to provide that it shall terminate on December 31,
2000, unless Immersion and Scream Racing negotiate and agree to the terms of an
extension to said Advertising Agreement.

     6.12  Medtronic Agreement. The Company shall, at the request of Immersion,
enter into any amendment of the Medtronic Agreement specified by Immersion for
the purpose of amending Section 3 of the Medtronic Agreement, provided that said
Section 3, as amended by the amendment, is no less favorable to the Company than
the draft of said Section 3 set forth in Schedule 6.12. The parties contemplate
that the amendment may include other changes to the Medtronic Agreement, which
changes will be reasonably satisfactory to both Immersion and the Company.

     6.13  Best Efforts. Between the date of this Agreement and the Closing
Date, the Company shall use its Best Efforts to cause the conditions in Sections
8 and 9 to be satisfied.

 7. Covenants of Immersion

     7.1  Stock Option Plan. On or before the Closing Date, Immersion shall
adopt a nonqualified stock option plan authorizing the issuance of up to 550,000
shares of Immersion Common Stock plus that number of shares covered by
Replacement Options exchanged for those vested or exercisable Stock Options
described in clause (ii) of Section 3.2(a) and containing such other terms as
are customary and consistent with Immersion's existing stock option plans, for
the purpose of granting the Replacement
                                      A-31
<PAGE>   202

Options and granting additional options to provide incentive to the Company's
employees. The Company's employees immediately after the Effective Time shall be
eligible to participate in such plan. Options, other than Replacement Options,
to be granted under such plan will be granted to such employees, in such amounts
and at such times as determined by a committee consisting of Greg Merril, Rod
Hilton, Stuart Mitchell, and Vic Viegas. The exercise price of any options,
other than Replacement Options, shall be the fair market value of Immersion
Common Stock on the date of Grant.

     7.2  Notification. Immersion shall promptly notify the Company of any
breach of any covenant of Immersion in this Agreement or of the occurrence of
any event that would be reasonably expected to make the satisfaction of any of
the conditions in Sections 8 or 9 impossible or unlikely.

     7.3  Board Observer Rights. Until the sooner of one year from the Effective
Time or the time at which Greg Merril is the beneficial owner (within the
meaning of that term as defined in Rule 13d-3 under the Exchange Act) of less
than 80% of the Immersion Common Stock that he received in the Merger, Immersion
will give notice to Greg Merril of all meetings of its Board of Directors and
permit him to attend such meetings as an observer without voting rights,
provided, however, that the Immersion Board of Directors shall have the right to
exclude him from any portion of a meeting at which information that may be
subject to attorney-client privilege is discussed if Immersion's counsel or
other counsel advising the Board of Directors advises that Merril's presence
creates a risk of the loss of the privilege.

     7.4  Registration of Immersion Common Stock; Securities Act.

     (a) Upon the execution of this Agreement, Immersion shall use all
commercially reasonable efforts to file and cause to be declared effective a
registration statement under the Securities Act on Form S-4 (the "S-4") covering
the shares of Immersion Common Stock to be issued in connection with the Merger.

     (b) It is a condition precedent to the obligation of Immersion to take any
action pursuant to this Section 7.4 with respect to the shares of Immersion
Common Stock to be issued to the stockholders of the Company in connection with
the transactions contemplated hereby that the Company shall furnish to Immersion
such information regarding the Company, the stockholders of the Company, the
Immersion Common Stock held by such stockholders and the intended method of
disposition of such securities as shall be required to effect the registration
of the shares of Immersion Common Stock to be issued to the stockholders of the
Company in connection with the transaction contemplated hereby and as may be
required from time to time to keep such registration current.

     7.5  Employment Agreement. After the Effective Time, Immersion will cause
the Company to continue to comply with the Employment Agreement dated September
22, 1999, as amended, between the Company and Rodney G. Hilton, subject to its
terms.

     7.6  Transaction Costs. Whether or not the transactions contemplated by
this Agreement are consummated, Immersion shall be responsible for and shall pay
all of its Transaction Costs.

     7.7  Best Efforts. Between the date of this Agreement and the Closing Date,
Immersion shall use its Best Efforts to cause the conditions in Sections 8 and 9
to be satisfied and between the date of this Agreement and the Closing Date
shall cooperate with the Company in obtaining consents of all third Persons that
are identified or required to be identified in Part 4.5 of the Disclosure
Schedule.

     7.8  Tax Matters.

     (a) Immersion will take all actions required by it pursuant to Section
6.8(a), Section 6.8(b) or Section 6.8(d).

     (b) Immersion will cooperate with the Company in the preparation, execution
and filing of all returns, questionnaires, applications or other documents
regarding any real property transfer or gains, sales, use, transfer, value
added, stock transfer and stamp taxes, any transfer, recording, registration and
other fees, and any similar taxes which become payable in connection with the
transactions contemplated hereby that are required or permitted to be filed at
or before the Effective Time.

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<PAGE>   203

     (c) Neither Immersion nor any of its affiliates shall take any action, or
fail to take any action, that would disqualify the Merger as a reorganization
within the meaning of Section 368(a) of the Code.

 8. Conditions to Obligation of Immersion and Merger Sub

     The obligation of Immersion and Merger Sub to complete the Merger is
subject to the satisfaction on or before the Closing of each of the following
conditions, any of which may be waived by Immersion, in whole or in part, in its
sole discretion:

     8.1  Stockholder Approval. This Agreement and the Merger shall have been
approved by the requisite votes of the Stockholders of the Company.

     8.2  Representations and Warranties of the Company. All representations and
warranties of the Company in this Agreement and the information in the
Disclosure Schedule shall be true and correct in all material respects on the
Closing Date with the same effect as though made at such date without giving
effect to any supplement to the Disclosure Schedule.

     8.3  Covenants of the Company. The Company shall have performed in all
material respects all covenants required by this Agreement to be performed by it
on or before the Closing Date.

     8.4  Delivery of Documents.

     (a) Immersion shall have received, all third Person consents to the
transactions contemplated by this Agreement duly executed by such third Persons,
that are identified or required to be identified in Parts 4.3 and 4.5 of the
Disclosure Schedule.

     (b) The Escrow Agreement shall have been duly executed and delivered by the
Company, the Representative and the Escrow Agent.

     (c) Greg Merril and Richard Cunningham shall execute and deliver
Noncompetition Agreements in the form attached as Exhibit E-1. Richard Stacy,
Rodney G. Hilton, Joseph L. Tasto, MD, MS and Philip G. Feldman shall execute
and deliver Noncompetition Agreements in the form attached as Exhibit E-2.

     (d) Immersion shall have received Employee Confidentiality and Inventions
Agreements in the form attached as Exhibit F duly executed by each employee of
the Company.

     (e) Holders of at least 97% of the Company Common Stock and Company
Preferred Stock, shall have executed and delivered to Immersion the
Indemnification and Joinder Agreement.

     (f) Immersion shall have received evidence that the Advertising Agreement,
dated January 6, 2000, between the Company and Scream Racing has been amended as
provided in Section 6.11 at no cost to the Company or Immersion.

     8.5  Opinions of Counsel for the Company and Stockholders. Immersion shall
have received from Duane, Morris & Heckscher LLP, counsel to the Company, and
from counsel to the stockholders of the Company listed on Schedule 8.5, opinions
dated the Closing Date in form and substance reasonably satisfactory to the
Immersion and its counsel as to the matters described in Exhibit G. In
furnishing such opinions, counsel may rely, to the extent counsel reasonably
deems necessary or appropriate, upon certificates of public officials, the
Company and officers of the Company.

     8.6  Resignations. Immersion shall have received written resignations,
effective as of the Closing, from such officers and directors of the Company as
Immersion shall have requested at least three business days in writing before
the Closing Date.

     8.7  Injunctions. None of Immersion, the Company or any of their affiliates
shall be subject to any order, decree or injunction of any court or agency of
competent jurisdiction which prevents or delays the consummation of any of the
transactions contemplated by this Agreement.

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     8.8  Pooling of Interests. Deloitte & Touche, on behalf of Immersion, and
Ernst & Young LLP, on behalf of the Company, shall have delivered to Immersion
letters, dated the Closing Date to the effect that pooling of interests
accounting for the Merger is appropriate if the Merger is consummated in
accordance with this Agreement.

     8.9  Objecting Stockholders. Holders of no more than three percent of the
outstanding shares of Company Common Stock and Company Preferred Stock shall be
eligible to exercise rights of objecting Stockholders under Title 3, Subtitle 2
of the MGCL.

     8.10  No Material Adverse Change. There shall have been no material adverse
change, either individually or in the aggregate, in the condition (financial or
otherwise), net worth, assets, liabilities, business, properties, prospects or
results of operations of the Company.

     8.11  Auditors' Opinion. The Company shall have furnished Immersion with
its audited balance sheet at May 31, 2000, and its related audited statements of
operations, shareholders' equity and cash flows for the year ended May 31, 2000
accompanied by opinions of Ernst & Young LLP which statements shall reflect no
changes (other than those changes identified in Part 4.6 of the Disclosure
Schedule) from the unaudited balance sheet at May 31, 2000, and its related
unaudited statements of operations, shareholders' equity and cash flows for the
year ended May 31, 2000 referenced in Section 4.6.

     8.12  Certificates. The Company shall have furnished Immersion with
certificates of its officers, public officials or others and such other
documents to evidence fulfillment of the conditions set forth in this Section 8
as Immersion may reasonably request.

     8.13  Approval of Documentation. The form and substance of all opinions,
certificates and other documents to be furnished to Immersion in connection with
this Agreement shall be satisfactory in all reasonable respects to Immersion and
its counsel.

     8.14  Effectiveness of the S-4. The S-4 shall have been declared effective
by the SEC under the Securities Act and shall not be the subject of any stop
order or proceeding by the SEC seeking a stop order.

     8.15  Medtronic Agreement. The Company and Medtronic shall have entered
into an amendment to the Medtronic Agreement that amends Section 3 of the
Medtronic Agreement in a manner that is no less favorable to the Company than
the draft of said Section 3 set forth in Schedule 6.12.

 9. Conditions to Obligation of the Company

     The obligation of the Company to complete the Merger are subject to
satisfaction on or before the Closing of the following conditions, any of which
may be waived by the Company, in whole or in part, in its sole discretion.

     9.1  Stockholder Approval. This Agreement and the Merger shall have been
approved by the requisite votes of the Stockholders of the Company.

     9.2  Representations and Warranties of Immersion. All representations and
warranties of Immersion in this Agreement shall be true in all material respects
on the Closing Date with the same effect as though made at such date.

     9.3  Covenants of Immersion. Immersion shall have performed in all material
respects all of its covenants required by this Agreement to be performed by
Immersion on or before the Closing Date.

     9.4  Escrow Agreement. The Escrow Agreement shall have been duly executed
and delivered by Immersion and the Escrow Agent.

     9.5  Opinion of Counsel for Immersion. The Company shall have received the
opinion of Heller Ehrman White & McAuliffe LLP, counsel to Immersion and Merger
Sub, dated the Closing Date, as to the matters set forth in Exhibit H to this
Agreement. In furnishing such opinions, counsel may rely, to the

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extent counsel reasonably deems necessary or appropriate, upon certificates of
public officials, the Company and officers of the Company.

     9.6  Injunction. None of Immersion, the Company or any of their affiliates
shall be subject to any order, decree or injunction of a court or agency of
competent jurisdiction which prevents or delays the consummation of any of the
transactions contemplated by this Agreement.

     9.7  Certificates. Immersion shall have furnished the Company with
certificates of its officers or others, public officials and such other
documents to evidence fulfillment of the conditions set forth in this Section 9
as the Company may reasonably request.

     9.8  Approval of Documentation. The form and substance of all opinions,
certificates and other documents to be furnished to the Company in connection
with this Agreement shall be satisfactory in all reasonable respects to the
Company and its counsel.

     9.9  Registration of Shares of Immersion Common Stock. Immersion shall have
filed the S-4 covering the shares of Immersion Common Stock to be issued in
connection with the Merger, and the S-4 shall have been declared effective by
the SEC under the Securities Act and shall not be the subject of any stop order
or proceeding by the SEC seeking a stop order.

 10. Termination

     10.1  Termination Events. This Agreement may be terminated by written
notice given before the Effective Time:

          (a) by Immersion, if a material breach of any provision of this
     Agreement has been committed by The Company and such breach has not been
     waived or, if such breach is curable, cured within seven days of written
     notice of such breach;

          (b) by the Company, if a material breach of any provision of this
     Agreement has been committed by Immersion or Merger Sub and such breach has
     not been waived or, if such breach is curable, cured within seven days of
     written notice of such breach;

          (c) by either Immersion or the Company if the condition in Section
     8.15 is not satisfied by 11:59 PM August 14, 2000;

          (d) by mutual consent of Immersion and the Company;

          (e) by Immersion, if the Closing has not occurred (other than because
     a representation or warranty made by Immersion and Merger Sub was untrue
     when made or because Immersion or Merger Sub have not complied fully with
     their obligations under this Agreement) on or before October 27, 2000.

          (f) by the Company, if the Closing has not occurred (other than
     because a representation or warranty made by the Company was untrue when
     made or because the Company has not complied fully with their obligations
     under this Agreement) on or before October 27, 2000.

     10.2  Effect of Termination. Immersion's or the Company's right of
termination under Section 10.2 is in addition to any other rights any party may
have under this Agreement or otherwise, and the exercise of a right of
termination will not be an election of remedies. If this Agreement is terminated
pursuant to Section 10.1, all further obligations of the parties under this
Agreement will terminate, except that the obligations in Sections 6.7, 6.10,
7.5, 10, 11 and 12 and the Indemnification and Joinder Agreement will survive.
However, if this Agreement is terminated by a party because of a breach of the
Agreement by another party or because one or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied because a
representation and warranty of another party was untrue when made or because
another party failed to comply with its obligations under this Agreement, the
terminating party's right to pursue all legal remedies will survive such
termination unimpaired.

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 11. Survival; Escrow; Indemnification

     11.1  Survival of Representations and Warranties; Rights not Affected by
Knowledge. All representations, warranties, covenants, and obligations in this
Agreement, the Disclosure Schedule, as supplemented in accordance with Section
6.6, and any certificate or document delivered pursuant to this Agreement will
survive the completion of the Merger for the period set forth in Section 11.5(a)
and will not be affected by any investigation conducted with respect thereto,
any knowledge acquired (or capable of being acquired) at any time, whether
before or after the execution and delivery of this Agreement or the completion
of the Merger, or the information in any supplements to the Disclosure Schedule
delivered after the execution and delivery of this Agreement, with respect to
the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant, or obligation.

     11.2  Escrow. It is a condition to the obligations of the parties to
consummate the Merger that Immersion, the Company and the Representative enter
into the Escrow Agreement with the Escrow Agent. Under the Escrow Agreement, the
Escrow Agent will hold in escrow the Escrowed Shares and any other assets or
property received by the Escrow Agent (the "Escrow Fund"), all in accordance
with the terms and conditions of this Section 11 and the Escrow Agreement. At
the Effective Time, the stockholders of the Company (the "Company Indemnitors")
will be deemed to have received and deposited with the Escrow Agent the Escrowed
Shares, without any act of the Company Indemnitors. The Escrow Fund will be
available during the term of the Escrow Agreement for the recovery by the
Immersion Indemnitees of Damages for which the Immersion Indemnitees (as defined
below) are entitled indemnification pursuant to this Section 11. Notwithstanding
that, at the Effective Time, the Company Indemnitors will be deemed to have
received the Escrowed Shares as part of the Merger Consideration and deposited
them with the Escrow Agent, the disposition of the Escrowed Shares shall be
governed by the terms of this Agreement and the Escrow Agreement without regard
to whether or not any Company Indemnitor executes and delivers an
Indemnification and Joinder Agreement.

     11.3  Indemnification. Each Company Indemnitor shall jointly and severally
indemnify Immersion, Merger Sub, the Company and their affiliates, officers,
directors, shareholders, agents, representatives, advisors, successors and
assigns (collectively, the "Immersion Indemnitees"), and hold them harmless
against and in respect of any and all claims, losses, damages (including
incidental and consequential damages), expenses (including court costs, the
costs of any investigation, expert witnesses and preparation, and attorneys'
fees), obligations and liabilities, whether or not involving third Person claims
in each case net of any proceeds from insurance or any other collateral source
received and retained by the person to be indemnified and net of any associated
tax benefits (collectively, "Damages"), which, directly or indirectly, arise or
result from or are incident or related to:

          (i) the breach or inaccuracy of any representation or warranty of the
     Company under the Merger Agreement, the Disclosure Schedule or the other
     agreements to be entered into or schedules to be delivered by the Company
     in connection with the Merger Agreement; or

          (ii) any default or failure of the Company's commitments or
     obligations under the Merger Agreement or such other agreements; or

          (iii) any act or omission of the Company which otherwise constitutes a
     breach of the Merger Agreement or such other agreements.

Consummation of the Merger will not be deemed or construed to be a waiver of any
right or remedy of the Immersion Indemnitees, nor will this Section or any other
provision of this Agreement be deemed or construed to be a waiver of any ground
of defense by the Company Indemnitors. Any amounts, excluding any award of
interest, to which an Immersion Indemnitee may be entitled under this Section
11.3 will bear interest at an annual rate of the lesser of 12% or the maximum
legal rate permitted under applicable law from the later of the Closing Date (as
defined in the Merger Agreement) and the date on which the Damages giving rise
to such Immersion Indemnitees' indemnification rights are determined to have
been incurred through the date on which such amounts are paid. Such interest
will be paid from the Escrow Fund. For purposes of this Section 11.3, any
Damages suffered or sustained by the Company or to which

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the Company may be subject will be deemed to be suffered or sustained by the
Immersion Indemnitees. The Company Indemnitors will not be entitled to
contribution from, or recovery against, the Company with respect to any
liability of the Company Indemnitors for Damages under this Agreement or the
Escrow Agreement.

     11.4  Right to Defend; Certain Other Procedures.

     (a) The Immersion Indemnitees will promptly notify the Representative, on
behalf of all Company Indemnitors, of the existence of any claim, demand, cause
of action or other matter (collectively, a "Claim") involving Damages, or
potential Damages, for which the Immersion Indemnitees may be entitled to
indemnification and give the Representative 30 days (or such shorter period as
required by the exigencies of such Claim) in which to elect to defend the same
at the Company Indemnitors' own expense and with counsel of the Representative's
selection (who will be approved by the Immersion Indemnitees, which approval
will not be unreasonably withheld); provided, however, that the Immersion
Indemnitees will at all times also have the right to fully participate in the
defense at their own expense. If, within such 30-day (or shorter) period, the
Representative, on behalf of the Company Indemnitors, fails to defend such
Claim, or if, at any time after assuming defense of such Claim, the
Representative, on behalf of the Company Indemnitors, fails to continue to
defend it vigorously and in good faith, then the Immersion Indemnitees shall
have the right, but not the obligation, to undertake the defense of, and to
compromise or settle (exercising reasonable business judgment) such Claim on
behalf, for the account, and at the risk and expense of the Company Indemnitors.
Notwithstanding the foregoing, if such Claim might have an adverse effect on the
ongoing business or assets of the Company or the relationship of the Company
with its customers, suppliers, employees, agents or others having business
dealings with it or may exceed the then amount of the Escrow Fund, the Immersion
Indemnitees shall have first right to defend the same on the basis set forth in
the preceding sentence. Except as provided in the preceding two sentences, the
Immersion Indemnitees will not compromise or settle the claim, demand, cause of
action or other matter without the written consent of the Representative, such
consent not to be unreasonably withheld or delayed. If such Claim is one that
cannot by its nature effectively be defended solely by the Company Indemnitors,
the Immersion Indemnitees will make available all information and assistance
that the Representative reasonably requests, provided that any associated
expenses are paid in advance by the Company Indemnitors. The Immersion
Indemnitees will use their Best Efforts to notify the Representative, on behalf
of all Company Indemnitors, within 30 days of the date that Immersion's senior
management receives actual notice of a Claim; provided, however, the failure to
give any notice required by this Section 11.4(a) shall not relieve the Company
Indemnitors of their obligations under this Agreement, unless the Representative
demonstrates that such failure resulted in actual, irreparable detriment to the
Company Indemnitors.

     (b) Notwithstanding anything in Section 11.4(a) to the contrary, if the
Immersion Indemnitees have any Claim involving Damages, or potential Damages,
for which the Immersion Indemnitees may be entitled to indemnification that does
not involve liability or potential liability to any third Person, the
Representative has 30 days, after having been given written notice from the
Immersion Indemnitees describing the existence and general nature of such Claim
to dispute such. If the Representative does send written notice to the Immersion
Indemnitees within such 30-day period that disputes such Claim, the amount of
such Claim will be conclusively deemed a liability of the Company Indemnitors.

     (c) Nothing in this Agreement will prevent an Immersion Indemnitee from
making a Claim under this Agreement or the Escrow Agreement for any potential or
contingent Claim, provided that it notifies the Representative, setting forth
the general basis for any such potential or contingent Claim and the estimated
amount thereof to the extent then feasible, and provided further that, if a
potential or contingent Claim involves potential liability to a third Person,
such Immersion Indemnitee has reasonable grounds to believe that such Claim will
be made.

     (d) In the event that the Representative objects to any Claim made by an
Immersion Indemnitee, the Representative and the Immersion Indemnitee will
attempt, in good faith, to agree on the rights of the Company Indemnitors and
the Immersion Indemnitee with respect to each such Claim. If the

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<PAGE>   208

Representative and the Immersion Indemnitee do so agree, and such agreement
includes the distribution of some or all of the Escrow Fund to the Immersion
Indemnitee, then the Representative and the Immersion Indemnitee will each sign
joint written instructions to Escrow Agent so instructing Escrow Agent, and
Escrow Agent will be entitled to rely on such instructions and make a
distribution from the Escrow Fund in accordance with the terms of such
instructions. If no agreement can be reached after good faith negotiation, or in
any event at any time after 30 days from the date the Representative is notified
of the Claim, either the Immersion Indemnitee or the Representative may commence
litigation or take other action with respect to such Claim.

     (e) No Immersion Indemnitee will be required to exhaust any remedy against
any other person or source (for example, under an insurance policy) as a
condition to pursuing or obtaining any indemnification under this Agreement.

     11.5  Time Limitation; Waiver of Conditions.

     (a) If the Closing occurs, the Company Indemnitors will have no liability
with respect to any representation or warranty unless an Immersion Indemnitee
notifies the Representative of a Claim no later than the earlier of (i) the date
of Immersion's first issuance of audited financial statements after the
Effective Time and (ii) March 31, 2001.

     (b) The waiver of any condition to the consummation of the Merger Agreement
by Immersion or Merger Sub will not affect the Immersion Indemnitees' rights to
indemnification, payment of Damages or other remedies based on such
representations, warranties, covenants and agreements.

     (c) Nothing in this Section 11 will affect the obligations and indemnities
of the parties with respect to the covenants and agreements that are contained
in this Agreement or the Escrow Agreement that are permitted or required to be
performed, in whole or in part, after the Effective Time (as defined in the
Merger Agreement).

     11.6  Limitations on Amount of Indemnification; Exclusive
Remedy. Notwithstanding anything in Section 11.3 to the contrary, the rights of
the Immersion Indemnitees to be indemnified and held harmless under Section 11.3
will be limited as follows:

          (a) Subject to Section 11.6(c), the Immersion Indemnitees will have no
     right to recover for any Damages, until the total aggregate dollar amount
     of all Damages exceeds the sum of $50,000, in which event the Immersion
     Indemnitees will have the right to recover all such Damages (including the
     first $50,000 of such Damages).

          (b) If the Merger becomes effective, after the Effective Time, the
     Immersion Indemnitees' sole and exclusive remedy with respect to any and
     all claims for Damages related to the subject matter of the Merger
     Agreement or the Transaction Documents shall be to receive, pursuant to the
     indemnification provisions set forth in this Agreement, the appropriate
     amount of the Escrow Fund from the Escrow Agent as provided in the Escrow
     Agreement. In furtherance of the foregoing, Immersion (on behalf of itself
     and the other Immersion Indemnitees) hereby waives and agrees, in each case
     effective upon and subject to the effectiveness of the Merger, not to
     assert in any action of proceeding of any kind, any and all rights, claims
     and causes of action for Damages it may now or hereafter have against any
     Company Indemnitor relating to or arising from the Merger Agreement and the
     transactions contemplated thereby, other than claims for indemnification
     asserted as permitted by and in accordance with this Agreement and the
     Escrow Agreement.

          (c) The limitations of Sections 11.6(a) and (b) will not apply to any
     Damages or indemnification obligations that arise or result from or are
     incident or related to any fraud or deceit on the part of the Company or
     any Company Indemnitor.

     11.7  Term. The rights and obligations of the Immersion Indemnitees, the
Representative and the Company Indemnitors under this Section 11, will expire
and be of no further force or effect on the later of (i) such time as no Claims
may be timely made by any Immersion Indemnitee under this Section 11; and (ii)
such time as all Claims timely made under Section 11 are either settled by the
parties or resolved by
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a final non-appealable order of a court of competent jurisdiction and all
amounts due Immersion Indemnitees under this Agreement are paid in full.

     11.8  Appointment of Representative.

     (a) Greg Merril is hereby designated and appointed the agent and
Representative of all the Company Indemnitors, for purposes of this Agreement
and the Escrow Agreement, and through whom all actions on behalf of the Company
Indemnitors relating to this Agreement, the Indemnification and Joinder
Agreement and the Escrow Agreement (including those actions as are required,
authorized or contemplated by this Section 11 with respect to indemnification
and the escrow) will be made or directed, and the Representative will be the
only Person authorized to take any action so required on behalf of the Company
Indemnitors. The Company Indemnitors will be bound by any and all actions taken
on their behalf by the Representative. The adoption of this Agreement and the
approval of the Merger by the stockholders of the Company shall constitute the
Company Indemnitors' approval of the appointment of the Representative and his
authorization to take all action contemplated by this Agreement on behalf of the
Company Indemnitors.

     (b) By signing this Agreement, Greg Merril hereby accepts and acknowledges
his appointment as the "Representative" and agrees to perform the duties
required of the Representative under this Agreement and the Escrow Agreement.
The parties agree that Greg Merril's signature on this Agreement relates solely
to his acceptance of his appointment and his duties as the Representative.

     11.9  Replacement of Representative. The appointment of the Representative
is irrevocable, except that a successor to the Representative may be appointed
by a written instrument signed by a majority in percentage interest of the
Company Indemnitors. Upon such appointment of any such successor, such successor
will immediately give written notice of his or her appointment to Immersion and
Escrow Agent (along with a certified copy of the written instrument showing such
successor's appointment) and thereafter (i) such successor will be deemed to the
Representative for purposes of this Agreement and the Escrow Agreement, and (ii)
all of the terms, provisions and obligations of this Agreement and the Escrow
Agreement will automatically (without any action on the part of such successor
or further notice to any party) be binding upon and inure to the benefit of such
successor. The choice of a successor Representative appointed in any manner
permitted above is final and binding upon all the Company Indemnitors.

     11.10  Communications; Notices. Immersion is entitled to rely upon any
communication or writings given or executed by the Representative as binding all
the Company Indemnitors and their successors, assigns, heirs, legal
representatives and spouses and will not be bound or put on notice by any
communications from any Company Indemnitor or other person (other than the
Representative acting as such). All notices to be sent to the Company
Indemnitors pursuant to this Agreement or the Escrow Agreement will be addressed
to the Representative. Any notice so sent will be deemed notice to all of the
Company Indemnitors. The Representative is authorized to accept notice on behalf
of the Company Indemnitors pursuant hereto.

     11.11  Authority of Representative. Without giving notice to the Company
Indemnitors, the Representative shall have full and irrevocable authority on
behalf of the Company Indemnitors (a) to deal with the other parties to this
Agreement and the Escrow Agreement, (b) to accept and give notices and other
communications relating to this Agreement and the Escrow Agreement, (c) to
settle any dispute relating to the terms of this Agreement and the Escrow
Agreement, (d) to waive any condition to the obligations of the Company
Indemnitors found in this Agreement, the Escrow Agreement or the Merger
Agreement, (e) to modify or amend this Agreement and the Escrow Agreement, (f)
to execute any instrument or document that the Representative may determine is
necessary or desirable in the exercise of his authority under this Section 11,
and (g) to act in connection with all matters arising out of, based upon, or in
connection with this Agreement, the Escrow Agreement and the Merger Agreement
and the transactions contemplated hereby.

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     11.12  Limitation on the Representative's Liability. The Representative
will not be liable to the other Company Indemnitors for any action taken,
suffered or omitted by the Representative in good faith and reasonably believed
by the Representative to be authorized or within the discretion of the rights or
powers conferred upon the Representative by this Agreement or the Escrow
Agreement, except to the extent of the Representative's own gross negligence,
recklessness or willful misconduct. The Representative may consult with
competent and responsible legal counsel selected by him, and he will not be
liable for any action taken or omitted by him in good faith in accordance with
the advice of such counsel.

     11.13  Costs and Expenses of the Representative. The Company Indemnitors
will bear all expenses incurred by the Representative in connection with his
duties hereunder and will indemnify him against and save him harmless from any
and all claims, liabilities, costs, payments and expenses, including fees of
counsel (who may be selected by the Representative), for anything done by him in
the performance of this Agreement or the Escrow Agreement, except as a result of
his own gross negligence, recklessness or willful misconduct.

12. Miscellaneous

     12.1  Headings. Section and other headings in this Agreement are included
solely for convenience and reference and shall not affect in any way the meaning
of interpretation of this Agreement.

     12.2  Governing Law. The validity, construction and interpretation of this
Agreement, all disputes among the parties arising out of this Agreement or the
transactions contemplated hereby, and all matters related to but not covered by
this Agreement shall be governed by the law of the State of New York.

     12.3  Entire Agreement. This Agreement, including the exhibits, schedules
and the certificates delivered and to be delivered pursuant to this Agreement
(which are incorporated into this Agreement by this reference and are made a
part hereof), the Confidentiality Agreement dated May 1, 2000 between Immersion
and the Company and the Transaction Documents embody the entire agreement and
understanding between and among the parties pertaining to their subject matter,
and supersede all prior and contemporaneous agreements, understandings,
negotiations, representations and discussions, whether written or oral,
pertaining to their subject matter.

     12.4  Assignment. Neither this Agreement nor any rights or obligations
under this Agreement may be assigned, hypothecated or otherwise transferred by
any party without the prior written consent of the Company before the Effective
Time or the Representative after the Effective Time, for an assignment by
Immersion, or Immersion, for any assignment by the Company, provided that
Immersion may assign this Agreement or any rights under this Agreement to
another entity that is controlled by, controls or is under common control with
Immersion if Immersion remains obligated under this Agreement.

     12.5  Binding Effect. The provisions of this Agreement shall bind and inure
to the benefit of the parties and their respective successors and permitted
assigns.

     12.6  Parties in Interest. Nothing in this Agreement, expressed or implied,
is intended to confer on any Person other than the parties to this Agreement,
the Immersion Indemnitees any right or remedy under or by reason of this
Agreement.

     12.7  Notices. Any notice or communication required or permitted by this
Agreement shall be deemed sufficiently given if in writing and, if delivered
personally, when it is delivered or, if delivered in another manner, the earlier
of when it is actually received by the Person to which it is directed, or when
the period set forth below expires (whether or not it is actually received):

          (a) if transmitted by telecopier or facsimile transmission ("fax"), 24
     hours after (i) transmission to the Person's fax number set forth below,
     with the Person's name and address set forth below clearly shown on the
     page first transmitted, and (ii) receipt by the transmitting Person of
     written confirmation of successful transmission, which confirmation may be
     produced by the transmitting Person's equipment;

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          (b) if deposited with the U.S. Postal Service as certified or
     registered mail, postage prepaid, and addressed to the Person to receive it
     as set forth below, 48 hours after such deposit;

          (c) if sent by Federal Express, or a similar delivery service in
     general usage for delivery to the address of the Person to receive it as
     set forth below, 24 hours after the delivery time promised by the delivery
     service:

        If to Immersion or any Immersion Indemnitee:
        Immersion Corporation
        801 Fox Lane
        San Jose, California 95131
        Attention: Louis Rosenberg, Chief Executive Officer
        Fax No. (408) 467-1901
        With a copy to:
        Heller Ehrman White & McAuliffe LLP
        601 South Figueroa Street, 40th Floor
        Los Angeles, CA 90017-5758
        Attention: Stephen E. Newton, Esq.
        Fax No. (213) 614-1868
        If to the Company:
        HT Medical Systems, Inc.
        55 W. Watkins Mill Road
        Gaithersburg, MD 20878
        Attention: Rodney G. Hilton
        Fax No. (301) 984-2014
        With a copy to:
        Duane, Morris & Heckscher LLP
        One Liberty Place
        Philadelphia, PA 19103-7396
        Attention: Kathleen M. Shay
        Fax No. (215) 979-1020
        If to the Representative or any Company Indemnitor, in care of the
        Representative:
        Gregory Merril
        55 W. Watkins Mill Road
        Gaithersburg, MD 20878
        Fax No. (301) 984-2014
        With a copy to:
        Duane, Morris & Heckscher LLP
        One Liberty Place
        Philadelphia, PA 19103-7396
        Attention: Kathleen M. Shay
        Fax No. (215) 979-1020

or to such other address as a Person to whom notice is to be given has furnished
to the other Persons listed above in the manner provided above.

     12.8  Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together will constitute a single agreement.

     12.9  Amendment and Waiver. This Agreement may not be amended except by an
instrument in writing signed on behalf of all parties. At any time before the
Closing: (i) Immersion may extend the time
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for the performance of any of the obligations or other acts of the Company or
waive compliance with any of the agreements of the Company or with any
conditions to its own obligations; (ii) the Company may extend the time for the
performance of any of the obligations or other acts of Immersion or Merger Sub
or waive compliance with any of the agreements of Immersion or Merger Sub or
with any conditions to the Company's obligations. Any agreement on the part of a
party to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. No waiver of any provision
of this Agreement shall be deemed or shall constitute a waiver of any other
provisions (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided, nor shall any forbearance
by a party to seek a remedy for noncompliance or breach by another party be
construed as a waiver of any right or remedy with respect to such noncompliance
or breach.

     12.10  Severable Provisions. If any provision of this Agreement is
determined to be illegal or otherwise unenforceable, in whole or in part, the
remaining provisions, and any partially enforceable provisions to the extent
enforceable, shall nevertheless be binding and enforceable.

     12.11  Rules of Construction. This Agreement has been negotiated by the
parties and is to be interpreted according to its fair meaning as if the parties
had prepared it together and not strictly for or against any party. All
references in this Agreement to "parties" refer to parties to this Agreement
unless expressly indicated otherwise. References in this Agreement to Sections,
Schedules and Exhibits are to Sections, Schedules and Exhibits of or to this
Agreement unless expressly indicated otherwise. At each place in this Agreement
where the context so requires, the masculine, feminine or neuter gender includes
the others and the singular or plural number includes the other. "Including"
means "including without limitation."

     12.12  Mediation. If a dispute arises out of or relates to (A) this
Agreement and the Transaction Documents, including the validity construction and
interpretation hereof and thereof and the rights and remedies of the parties
hereunder and thereunder; (B) any of the transactions contemplated by this
Agreement and the Transaction Documents; and (C) any matters related to but not
covered hereby or thereby, or the breach thereof, and if the dispute cannot be
settled through negotiation, the parties agree first to try in good faith to
settle the dispute by mediation in New York, New York under the Commercial
Mediation Rules of the American Arbitration Association then in effect before
resorting to litigation, arbitration or some other dispute resolution
procedures; provided, however, that Immersion may, in its discretion, apply for
a preliminary injunction, attachment, or other provisional judicial relief is
such action is necessary to avoid irreparable damage or to preserve the status
quo. Despite such action the parties will continue to participate in good faith
in the mediation specified in this section. Notwithstanding this Section 12.12,
a party shall not be required to mediate or continue to mediate if its rights
would be prejudiced by a delay in commencing litigation whether as a result of
applicable statutes of limitation or otherwise.

     12.13  Non-Exclusive Consent to Jurisdiction. Each of the parties hereto:
(i) consents to submit itself to the personal jurisdiction of the United States
District Court for the Southern District of New York or the courts of the State
of New York located in the County of New York with respect to any and all
disputes arising out of: (A) this Agreement and the Transaction Documents,
including the validity construction and interpretation hereof and thereof and
the rights and remedies of the parties hereunder and thereunder; (B) any of the
transactions contemplated by this Agreement and the Transaction Documents; and
(C) any matters related to but not covered hereby or thereby, in each case to
the extent such court would have subject matter jurisdiction with respect to
such dispute; (ii) agrees that it will not attempt to deny or defeat such
personal jurisdiction or venue by motion or other request for leave from any
such court; (iii) agrees that service of process in any such suit, action or
proceeding may be effected by notice by any of the means provided in Section
11.7 and, in the case of service of process on or any Company Indemnitor, by
notice to the Representative; and (iv) agrees that nothing herein shall affect
the right to effect service of process in any other manner permitted by laws.

     12.14  Waiver of Jury Trial. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW
THAT CANNOT BE WAIVED, EACH PARTY TO THIS AGREEMENT HEREBY WAIVES, AND

                                      A-42
<PAGE>   213

COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR
OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM WITH RESPECT TO ANY ISSUE,
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS
AGREEMENT, THE TRANSACTION DOCUMENTS OR THE SUBJECT MATTER HEREOF, WHETHER NOW
EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN TORT OR CONTRACT OR
OTHERWISE.

     12.15  Enforcement. The Company acknowledges that, in view of the
uniqueness of the subject matter of this Agreement, Immersion may not have an
adequate remedy at law for money damages if this Agreement is not performed in
accordance with its terms. Accordingly, the Company agrees that, in addition to
any other right or remedy to which Immersion may be entitled, at law or in
equity, it shall be entitled to enforce this Agreement by a decree of specific
performance against the Company and to temporary, preliminary and permanent
injunctive relief to prevent breaches or threatened breaches of this Agreement,
without posting any bond or other undertaking.

     12.16  Attorneys' Fees. The prevailing party shall be entitled to recover
all costs and expenses, including reasonable attorneys' fees, expert witness
fees, court costs and all other costs and expenses incurred in any action or
proceeding arising out of this Agreement or as to any matters related to but not
covered by this Agreement. "Prevailing party" for purposes of this Section 12.16
includes a party who agrees to dismiss an action or proceeding upon the other's
payment of the sums allegedly due or for performance of the covenants,
undertakings or agreements allegedly breached, or who obtains substantially the
relief it sought.

                                      A-43
<PAGE>   214

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

IMMERSION:                                IMMERSION CORPORATION

                                          By /s/ LOUIS ROSENBERG
                                            ------------------------------------
                                             Name: Louis Rosenberg
                                             Title:  Chief Executive Officer

MERGER SUB:                               HT MERGER, INC.

                                          By /s/ LOUIS ROSENBERG
                                            ------------------------------------
                                             Name: Louis Rosenberg
                                             Title:  President, Secretary and
                                             Treasurer

THE COMPANY:                              HT MEDICAL SYSTEMS, INC.

                                          By /s/ GREG MERRIL
                                            ------------------------------------
                                             Title:  President, Chairman of the
                                             Board
                                             and Treasurer

THE REPRESENTATIVE:
                                          /s/ GREG MERRIL
                                          --------------------------------------
                                          GREG MERRIL

                                      A-44
<PAGE>   215

                                                                      APPENDIX B

                                ESCROW AGREEMENT

     THIS ESCROW AGREEMENT (this "Agreement") is made as of
            , 2000, by and among Immersion Corporation, a Delaware corporation
("Immersion"), HT Medical Systems, Inc., a Maryland corporation (the "Company"),
Greg Merril (the "Representative") and U.S. Trust Company, NA ("Escrow Agent").

                                    RECITALS

     A. Immersion, the Company, HT Merger, Inc., a Maryland corporation ("Merger
Sub"), and the Representative are parties to an Agreement and Plan of
Reorganization dated as of July 31, 2000 (the "Merger Agreement"), pursuant to
which Merger Sub is merging into the Company, which is becoming a wholly-owned
subsidiary of Immersion, and the stockholders of the Company (the
"Stockholders") will be entitled to receive Immersion Common Stock.

     B. Immersion and the stockholders of the Company have entered into an
Indemnification and Joinder Agreement dated July 31, 2000 (the "Indemnification
Agreement"), pursuant to which they have agreed to indemnify and hold harmless
the Immersion Indemnitees against Damages and have appointed the Representative
to act on their behalf with respect to all matters arising under or relating to
the Indemnification Agreement and this Agreement.

     C. The parties are entering into this Escrow Agreement pursuant to Section
3.4 of the Merger Agreement to establish an escrow to facilitate the recovery by
the Immersion Indemnitees of amounts to which they may in certain circumstances
become entitled pursuant to Section 1 of the Indemnification Agreement.

     D. The Company and its stockholders have agreed that the Escrowed Shares
shall be deposited with the Escrow Agent to be held and disbursed as provided in
this Escrow Agreement.

     NOW, THEREFORE, for and in consideration of matters referenced in the above
recitals and the mutual agreements contained in this Escrow Agreement, the
parties hereto agree (i) that terms that appear with initial capitals in this
Agreement that are not otherwise defined in this Agreement have the definitions
ascribed to them in the Merger Agreement and/or the Indemnification Agreement
and (ii) as follows:

 1. Establishment of Escrow Fund

     Escrow Agent is hereby appointed depository and agent for Immersion and the
Representative, with respect to the Escrowed Shares deposited with Escrow Agent.
Immersion hereby delivers to Escrow Agent certificates representing the Escrowed
Shares. (As increased by any distributions thereon and as reduced by any
disbursements, amounts paid or withdrawn under Sections 4 and 5, or losses on
investments, the Escrowed Shares and any other property or cash held by Escrow
Agent at any time are referred to as the "Escrow Fund".) Escrow Agent agrees to
hold and administer the Escrow Fund pursuant to the terms and conditions of this
Agreement.

 2. Investment of Escrow Fund; Dividends and Voting

     (a) In the event that the Escrow Fund includes any cash, the Escrow Agent
shall invest and reinvest the Escrow Fund as instructed by the Representative in
short-term U.S. Treasury Bills and Notes or other direct obligations of the
United States. Income from any such investment shall be held by Escrow Agent and
shall be reinvested in accordance with this Section 2. Escrow Agent shall have
the right to liquidate any investments held, in order to provide funds necessary
to make required payments under this Agreement. Escrow Agent in its capacity as
escrow agent hereunder shall not have any liability for any loss sustained as a
result of any investment made pursuant to the instructions of the Representative
that

                                       B-1
<PAGE>   216

comply with this Section 2 or as a result of any liquidation of any investment
prior to its maturity or for the failure of the Representative to give Escrow
Agent instructions to invest or reinvest the Escrow Fund or any earnings thereon
except to the extent arising from Escrow Agent's breach, gross negligence or
willful misconduct.

     (b) Any cash dividends declared and paid by Immersion on the Escrowed
Shares will be delivered to Escrow Agent as the record holder of the Escrowed
Shares. As soon as reasonably practicable after such receipt, Escrow Agent will
pay such dividends to the Representative on behalf of the Stockholders (and the
Representative will distribute such dividends to the Stockholders entitled
thereto). At any time, during which Escrowed Shares are being held in escrow,
that the stockholders of Immersion are entitled to vote on any matter, Escrow
Agent will vote the Escrowed Shares as instructed in writing by the
Representative as agent for the Stockholders.

 3. Notice of Claims

     The Immersion Indemnitees are entitled to make claims for indemnification
to be paid from the Escrow Fund for Damages incurred, or reasonably anticipated
to be incurred, by them pursuant to the provisions of Section 1 of the
Indemnification Agreement. If a Buyer Indemnitee asserts any claim for
indemnification against the Escrow Fund, it shall deliver to Escrow Agent and
the Representative a written notice thereof (a "Notice of Claim") setting forth:
(a) a demand for payment of a specified amount from the Escrow Fund and the
basis of calculation of such amount or, if such amount cannot be specified, the
basis upon which the amount would be determined and the amount of the Escrow
Fund that should be retained as security for such claim pending determination of
the actual amount of the claim (a "Security Reserve"), and (b) a description of
the asserted claim and the basis thereof.

 4. Payment of Claims

     (a) If the Representative gives notice to the Immersion Indemnitee and
Escrow Agent disputing any claim (a "Counter Notice") within 30 days following
receipt by Escrow Agent of the Notice of Claim regarding such claim, such claim
shall be resolved as provided in Section 4(b). If no Counter Notice is received
by Escrow Agent within such 30-day period, then the dollar amount of Damages
specified by the Immersion Indemnitee in its Notice of Claim shall be deemed
established for purposes of this Escrow Agreement and the Indemnification
Agreement and, at the end of such 30-day period, Escrow Agent shall deliver to
the Immersion Indemnitee the amount claimed in the Notice of Claim from the
Escrow Fund. Escrow Agent shall not inquire or be required to inquire into or
consider whether a claim complies with the requirements of the Merger Agreement.

     (b) If the Representative gives a Counter Notice with respect to a claim
within the time specified in Section 4(a), Escrow Agent shall distribute from
the Escrow Fund with respect thereto only upon receipt of and in accordance
with: (i) joint written instructions of the Immersion Indemnitee and the
Representative or (ii) a final non-appealable order of a court of competent
jurisdiction or a final arbitration award. Escrow Agent shall act on such court
order or arbitration award without further question.

     (c) If an Immersion Indemnitee delivers a Notice of Claim pursuant to
Section 3 for a Security Reserve, Escrow Agent shall hold the Security Reserve
until the Immersion Indemnitee gives Escrow Agent and the Representative notice
of the actual amount of the claim underlying the Security Reserve, and
thereafter the claim shall be resolved as contemplated by Sections 4(a) and (b);

     (d) Any reference in this Agreement to any amount to be distributed or paid
by Escrow Agent or retained or held by Escrow Agent as a Security Reserve shall
mean such number of Escrowed Shares and/or cash or other property in the Escrow
Fund as shall have a value equal to the amount to be so distributed, paid,
retained or held, such value being based on the Average Closing Price, in the
case of Escrowed Shares, or the fair market value of other property as
determined in good faith by the Board of Directors of Immersion, in the case of
other property.

                                       B-2
<PAGE>   217

 5. Other Payments By Escrow Agent; Termination

     (a) On the date 30 days after the date that claims may no longer be filed
pursuant to Section 13 of the Indemnification Agreement, Escrow Agent shall
distribute to the Representative an amount equal to the then remaining amount of
the Escrow Fund, if any, less the total of all claims (including Security
Reserves) that have not been both: (i) resolved as provided in Section 4(a) or
(b) and (ii) paid to the Immersion Indemnitee, if the resolution requires a
payment to an Immersion Indemnitee. After the date specified above in this
Section 5(a), upon the final resolution of each claim, on a claim-by-claim
basis, for which Escrow Agent has received a Notice of Claim within the time
required by Section 1.3 of the Indemnification Agreement, Escrow Agent shall
distribute to the appropriate Immersion Indemnitee the amount, if any, that it
is entitled to receive pursuant to Section 4(a) or (b), and to the
Representative the balance less the total amount of all other claims including
any remaining Security Reserves that have not been both: (i) resolved as
provided in Section 4(a) or (b) and (ii) paid to the Immersion Indemnitee, if
the resolution requires a payment to a Buyer Indemnitee.

     (b) This Agreement shall terminate and Escrow Agent shall have no further
responsibilities hereunder once the entire Escrow Fund has been distributed by
Escrow Agent and its fees and expenses have been paid.

 6. Responsibility

     (a) Escrow Agent may act upon any instrument or other writing believed by
Escrow Agent in good faith to be genuine and to have been signed (with an
original signature or signature by facsimile transmission) and presented by the
proper Person (including the signature of any Person purporting to be an officer
or authorized representative of a corporate party) and shall not be liable to
any party hereto in connection with the performance of Escrow Agent's duties
hereunder, except for Escrow Agent's own breach, gross negligence or willful
misconduct. Escrow Agent shall not incur any liability for following the
instructions herein contained or expressly provided for, or written instructions
given by the parties hereto in accordance with this Agreement. Escrow Agent's
duties shall be determined only with reference to this Agreement and applicable
laws and Escrow Agent is not charged with knowledge of, or any duties or
responsibilities in connection with, any other document or agreement. If in
doubt as to its duties and responsibilities hereunder, Escrow Agent may consult
with counsel of its choice, and shall be protected in any action taken or
omitted in connection with the reasonable advice or opinion of such counsel.

     (b) In the event that Escrow Agent shall be uncertain as to its duties or
rights hereunder or shall receive instructions, claims or demands from any party
hereto which, in its opinion, conflict with any of the provisions of this
Agreement, it shall be entitled to refrain from taking any action and its sole
obligation shall be to keep safely all property held in escrow until it shall be
directed otherwise in writing by joint written instructions, or an order or
award and legal opinion as referred to in Section 4(b).

     (c) Escrow Agent is to act as a depository agent only and is hereby
relieved of any liability in connection with any representations, promises or
agreements made by the other parties to this Agreement. Escrow Agent shall not
be responsible for and shall not be under a duty to examine any other agreement
or to determine if parties have performed under any other agreement.

     (d) Escrow Agent shall send to the Representative with a copy to Immersion,
statements detailing receipts, disbursements and balances of the Escrow Fund on
a monthly basis.

 7. Indemnification and Fees

     (a) In consideration of Escrow Agent's acceptance of this Agreement,
Immersion and the Representative shall severally and not jointly indemnify and
hold Escrow Agent harmless as to any liability, incurred by it to any other
Person by reason of accepting the same or in carrying out any of the terms
hereof, and shall (except as provided otherwise in Section 7(b)) reimburse
Escrow Agent for 50% of all out-of-pocket expenses, including, among other
things, reasonable attorneys' fees and court costs, incurred by reason of its
position hereunder or actions taken pursuant hereto, except in the event of

                                       B-3
<PAGE>   218

Escrow Agent's breach, gross negligence or willful misconduct. Immersion and the
Representative shall (except as provided otherwise in Section 7(b)) each pay 50%
of any amount owed to the Escrow Agent under this Section 7(a). Immersion and
the Representative hereby agree to indemnify and hold each other harmless for
any amount paid by either of them, to the Escrow Agent pursuant to this Section
7(a), to the extent (except as provided otherwise in Section 7(b)) such payment
exceeds 50% of the total amount owed to the Escrow Agent pursuant to this
Section 7(a). The parties hereto acknowledge that the foregoing indemnities
shall survive the resignation or removal of Escrow Agent or the termination of
this Agreement. The fees and charges set forth below for Escrow Agent's services
will be considered compensation for its ordinary services as contemplated by
this Agreement. If Escrow Agent renders any service not provided for in this
Agreement or there is any assignment of any interest in the subject matter of
this escrow or modification of any interest or if any controversy arises in
connection with it, Escrow Agent will be reasonably compensated for such
extraordinary services, and will be reimbursed for all reasonable costs,
attorneys' fees and expenses occasioned thereby, which compensation, costs, fees
and expenses shall be payable to Escrow Agent by Immersion and the
Representative.

     (b) Escrow Agent shall receive fees and charges for its services hereunder
in accordance with Schedule A hereto. Immersion shall pay up to $25,000 of
Escrow Agent's fees and expenses, and any fees and expenses hereunder in excess
of $25,000 shall be shared equally with 50% paid by Immersion and 50% paid by
the Representative. The amount of any such fees and expenses to be paid by the
Representative shall be paid from the Escrow Fund.

 8. Notices

     Any notice or communication required or permitted by this Agreement shall
be deemed sufficiently given if in writing and, if delivered personally, when it
is delivered or, if delivered in another manner, the earlier of when it is
actually received by the party to which it is directed, or when the period set
forth below expires (whether or not it is actually received):

          (a) if transmitted by telecopier, telex or facsimile transmission
     ("fax"), 24 hours after (i) transmission to the party's telecopier number
     set forth below, with the party's name and address set forth below clearly
     shown on the page first transmitted, and (ii) receipt by the transmitting
     party of written confirmation of successful transmission, which
     confirmation may be produced by the transmitting party's equipment;

          (b) if deposited with the U.S. Postal Service as certified or
     registered mail, postage prepaid, and addressed to the Person to receive it
     as set forth below, 48 hours after such deposit; or

          (c) if sent by Federal Express, or a similar delivery service in
     general usage for delivery to the address of the party to receive it as set
     forth below, 24 hours after the delivery time confirmed by the delivery
     service:

<TABLE>
<S>                                    <C>
If to Immersion or any                 Immersion Corporation
other Immersion                        801 Fox Lane
Indemnitee:                            San Jose, CA 95131
                                       Attention: Louis Rosenberg, Chief
                                       Executive Officer
                                       Fax No. (408) 467-1901

With a copy to:                        Heller Ehrman White & McAuliffe LLP
                                       601 South Figueroa Street, 40th Floor
                                       Los Angeles, CA 90017-5758
                                       Attention: Stephen E. Newton, Esq.
                                       Fax No. (213) 614-1868
</TABLE>

                                       B-4
<PAGE>   219
<TABLE>
<S>                                    <C>
If to the Representative:              Greg Merril
                                       55 W. Watkins Mill Road
                                       Gaithersburg, MD 20878
                                       Fax No. (301) 984-2014

With a copy to:                        Duane, Morris & Heckscher LLP
                                       One Liberty Place
                                       Philadelphia, PA 19103-7396
                                       Attention: Kathleen M. Shay
                                       Fax No. (215) 979-1020

If to Escrow Agent:                    U.S. Trust Company, NA
                                       -------------------------------
                                       -------------------------------
                                       Attention: ________________
                                       Fax No. __________________
</TABLE>

or to such other address as a party to whom notice is to be given has furnished
to the other parties in the manner provided above. Distributions by Escrow Agent
from the Escrow Fund shall be sent by mail in the manner set forth above,
addressed to Immersion or any other Immersion Indemnitee or the Representative
at the respective addresses set forth above or such other address as either
Immersion, in the case of payments to an Immersion Indemnitee, or the
representative, in the case of payments to the Representative, notifies Escrow
Agent in writing.

 9. Resignation

     Escrow Agent may resign and be discharged from its duties hereunder at any
time by giving not less than 60 days' prior written notice of such resignation
to Immersion and the Representative, which notice shall specify the date when
such resignation shall take effect. Upon such notice, Immersion and the
Representative shall appoint a successor escrow agent. If Immersion and the
Representative do not agree upon a successor escrow agent within 30 days after
such notice,                shall be appointed successor. Escrow Agent shall
continue to serve until its successor delivers to Immersion and the
Representative a duly executed instrument of acceptance of the terms and
conditions of this Agreement and receives the Escrow Fund, at which time Escrow
Agent shall have no further duties or responsibilities hereunder.

10. Miscellaneous

     10.1  Governing Law. The validity, construction and interpretation of this
Agreement, all disputes among the parties arising out of this Agreement or the
transactions contemplated hereby, and all matters related to but not covered by
this Agreement shall be governed by the internal laws of the State of New York
applicable to contracts executed and fully performed within the State of New
York, without regard to any principles of conflicts or choice of laws.

      10.2  Assignment. Neither this Agreement nor any rights or obligations
under this Agreement may be assigned, hypothecated or otherwise transferred by
any party without the prior written consent of the Representative, for an
assignment by an Immersion Indemnitee, or Immersion, for any assignment by the
Representative, provided that Immersion may assign this Agreement or any rights
under this Agreement or any right under Agreement to another entity to whom
Immersion has assigned any of its rights under the Merger Agreement or the
Indemnification Agreement as permitted thereby.

      10.3  Binding Effect; Parties in Interest. This Agreement will be binding
upon and inure to the benefit of the respective successors and permitted assigns
of the parties hereto. The provisions of this Agreement are for the sole benefit
of the parties hereto, the Immersion Indemnitees and the Representative and
their successors and permitted assigns and they shall not be construed as
conferring any rights on any other Persons.

                                       B-5
<PAGE>   220

      10.4  Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original instrument and all of
which together will constitute one and the same instrument. The exchange of
copies of this Agreement and of signature pages by facsimile transmission shall
constitute effective execution and delivery of this Agreement as to the parties
and may be used in lieu of the original for all purposes. Signatures of parties
transmitted by facsimile shall be deemed to be their original signatures for any
purpose whatsoever.

      10.5  Amendment and Waiver. Neither this Agreement nor any provision
hereof may be amended, modified, waived, discharged or terminated orally, but
only by an instrument signed by the party against whom enforcement of such
amendment, modification, waiver, discharge or termination is sought.

     10.6  Severability. Any provision of this Agreement which is invalid or
unenforceable shall be ineffective to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
provisions hereof, and such invalidity or unenforceability shall not invalidate
or render unenforceable such provision.

     10.7  Force Majeure. In the event that any party to this Agreement is
unable to perform its obligations under the terms of this Agreement because of
acts of God, strikes, equipment or transmission failure or damage reasonably
beyond its control, or other cause reasonably beyond its control, such party
shall not be liable for damages to the other parties for any unforeseeable
damages resulting from such failure to perform or otherwise from such causes.
Performance under this Agreement shall resume when the affected party is able to
perform substantially that party's duties.

     10.8  Consent to Jurisdiction. Each of the parties hereto: (i) consents to
submit itself to the personal jurisdiction of the United States District Court
for the Southern District of New York or the courts of the State of New York
located in the County of New York with respect to any and all disputes arising
out of: (A) this Agreement, including the validity construction and
interpretation hereof and thereof and the rights and remedies of the parties
hereunder and thereunder; (B) any of the transactions contemplated by this
Agreement; and (C) any matters related to but not covered hereby or thereby, in
each case to the extent such court would have subject matter jurisdiction with
respect to such dispute; (ii) agrees that it will not attempt to deny or defeat
such personal jurisdiction or venue by motion or other request for leave from
any such court; (iii) agrees that service of process in any such suit, action or
proceeding may be effected by notice by any of the means provided in Section 8;
and (iv) agrees that nothing herein shall affect the right to effect service of
process in any other manner permitted by law.

     10.9  Construction. The headings of Sections in this Agreement are provided
for convenience only and will not affect its construction or interpretation.
References herein to Sections are, unless otherwise indicated, to Sections of
this Agreement. All words used in this Agreement will be construed to be of such
gender or number as the context requires. Unless otherwise expressly provided,
use of the words "including" and "include" is not limiting and use of the word
"or" is in the inclusive sense. All references herein to a "party" or "parties"
refer to a party or parties to this Agreement unless expressly indicated
otherwise. This Agreement has been negotiated by the parties and is to be
interpreted according to its fair meaning as if the parties had prepared it
together and not strictly for or against any party.

                                       B-6
<PAGE>   221

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

                                          IMMERSION:

                                          By:
                                          --------------------------------------

                                          Name:
                                          --------------------------------------

                                          Title:
                                          --------------------------------------

                                          THE REPRESENTATIVE:

                                          --------------------------------------
                                          Greg Merril

                                          ESCROW AGENT:

                                          By:
                                          --------------------------------------

                                          Name:
                                          --------------------------------------

                                          Title:
                                          --------------------------------------

                                       B-7
<PAGE>   222

SCHEDULE A

                           ESCROW AGENT FEE SCHEDULE

                                       B-8
<PAGE>   223

                                                                      APPENDIX C

                          INDEMNIFICATION AND JOINDER
                                   AGREEMENT

     THIS INDEMNIFICATION AND JOINDER AGREEMENT (this "Agreement") is made and
entered into as of July 31, 2000, by and among Immersion Corporation, a Delaware
corporation ("Immersion"), and the stockholders (each, a "Company Indemnitor,"
and collectively, the "Company Indemnitors," all of whom are listed on the
signature pages to this Agreement) of HT Medical Systems, Inc., a Maryland
corporation (the "Company"), with reference to the following facts:

     A. Immersion, Immersion's wholly-owned subsidiary, HT Merger, Inc. ("Merger
Sub"), the Company and Greg Merril are entering into an Agreement and Plan of
Reorganization (the "Merger Agreement"), pursuant to which Merger Sub will be
merged (the "Merger") with and into the Company, which will become a
wholly-owned subsidiary of Immersion, and the Company Indemnitors will be
entitled to receive Immersion Common Stock.

     B. As a material inducement to Immersion and Merger Sub to enter into the
Merger Agreement, the Company Indemnitors wish to enter into this Agreement and
agree to all the terms and provisions hereof.

     C. The parties are entering into an Escrow Agreement pursuant to Section
3.4 of the Merger Agreement to establish an escrow to facilitate the recovery by
the Immersion Indemnitees of amounts to which they may in certain circumstances
become entitled as a result of indemnification for Damages pursuant to Section 1
of this Agreement.

     ACCORDINGLY, in consideration of the foregoing, and intending to be legally
bound hereby, each of the parties hereby agrees (i) that terms that appear with
initial capitals in this Agreement that are not otherwise defined in this
Agreement have the definitions ascribed to them in the Merger Agreement and/or
the Escrow Agreement (as defined in Section 1.2) and (ii) as follows:

 1. Indemnification and Escrow

     1.1. Approval; Joinder. By signing this Agreement, each Company Indemnitor,
on behalf of the Company Indemnitor and his spouse, heirs, affiliates, legal
representatives, successors and assigns, hereby (i) approves and accepts all of
the terms and conditions of the Merger Agreement and the Escrow Agreement and
agrees to be bound thereby as if the Company Indemnitor were a party thereto;
and (ii) agrees to promptly comply with all of the terms of this Agreement, the
Merger Agreement (including the indemnification provisions of Section 11 of the
Merger Agreement) and the Escrow Agreement.

     1.2. The Escrow. It is a condition to the obligations of the parties to the
Merger Agreement to consummate the Merger that Immersion, the Company and the
Representative enter into an Escrow Agreement (substantially in the form
attached as EXHIBIT B to the Merger Agreement) (the "Escrow Agreement") with
U.S. Trust Company, NA, as Escrow Agent ("Escrow Agent"). Under the Escrow
Agreement, Escrow Agent will hold in escrow the Escrow Fund, all in accordance
with the terms and conditions of the Escrow Agreement. At the Effective Time,
the Company Indemnitors will be deemed to have received and deposited with
Escrow Agent the Escrow Fund, without any act of the Company Indemnitors. The
Escrow Fund will be available to the Immersion Indemnitees during the term of
the Escrow Agreement for the recovery of Damages. At the Immersion Indemnitees'
option, the Immersion Indemnitees may proceed against either or both (i) the
Escrow Fund or (ii) one or more of the Company Indemnitors under this Agreement;
provided that any payment in respect of any Damages will first be satisfied by
the Escrow Fund. By signing this Agreement, each Company Indemnitor hereby
agrees to promptly pay any amount of cash that may become due and payable to any
Immersion Indemnitee by such Company Indemnitor under the terms of this
Agreement and further approves and accepts the terms and conditions of the
Escrow Agreement.

     1.3. Term. This Agreement, and the rights and obligations of the parties
under this Agreement, will expire and be of no further force or effect on the
later of (i) such time as no Claims may be timely made
                                       C-1
<PAGE>   224

by any Immersion Indemnitee under Section 11 of the Merger Agreement; and (ii)
such time as all Claims timely made under Section 11 of the Merger Agreement are
either settled by the parties or resolved by a final non-appealable order of a
court of competent jurisdiction and all amounts due Immersion Indemnitees under
this Agreement are paid in full.

 2. Appointment of Representative

     2.1. Appointment of Representative.

     (a) By signing this Agreement, each Company Indemnitor hereby designates
and appoints Greg Merril the agent and representative (the "Representative") of
all the Company Indemnitors, for purposes of this Agreement and the Escrow
Agreement, and through whom all actions on behalf of the Company Indemnitors
relating to this Agreement and the Escrow Agreement (including those actions as
are required, authorized or contemplated by Section 1 with respect to
indemnification and the escrow) will be made or directed, and hereby
acknowledges that the Representative will be the only person authorized to take
any action so required on behalf of the Company Indemnitors. The Company
Indemnitors will be bound by any and all actions taken on their behalf by the
Representative.

     (b) By signing this Agreement, Greg Merril hereby also accepts and
acknowledges his appointment as the "Representative" and agrees to perform the
duties required of the Representative under this Agreement and the Escrow
Agreement.

     2.2. Replacement of Representative. The appointment of the Representative
is irrevocable by the Company Indemnitors, except that a successor to the
Representative may be appointed by a written instrument signed by a majority in
percentage interest of the Company Indemnitors. Upon such appointment of any
such successor, such successor will immediately give written notice of his or
her appointment to Immersion and Escrow Agent (along with a certified copy of
the written instrument showing such successor's appointment) and thereafter (i)
such successor will be deemed to the Representative for purposes of this
Agreement and the Escrow Agreement, and (ii) all of the terms, provisions and
obligations of this Agreement and the Escrow Agreement will automatically
(without any action on the part of such successor or further notice to any
party) be binding upon and inure to the benefit of such successor. The choice of
a successor Representative appointed in any manner permitted above is final and
binding upon all the Company Indemnitors.

     2.3. Communications; Notices. Immersion is entitled to rely upon any
communication or writings given or executed by the Representative as binding all
the Company Indemnitors and their successors, assigns, heirs, legal
representatives and spouses and will not be bound or put on notice by any
communications from any Company Indemnitor or other person (other than the
Representative acting as such). All notices to be sent to the Company
Indemnitors pursuant to this Agreement or the Escrow Agreement will be addressed
to the Representative. Any notice so sent will be deemed notice to all of the
Company Indemnitors. The Company Indemnitors hereby consent and agree that the
Representative is authorized to accept notice on behalf of the Company
Indemnitors pursuant hereto.

     2.4. Agent for Service of Process. Each Company Indemnitor hereby
irrevocably appoints the Representative as the lawful agent of such Company
Indemnitor and his or her successors, assigns, heirs, legal representatives and
spouse to receive and forward on their behalf service of all necessary processes
in any action, suit, or proceeding arising under or in any way relating to this
Agreement, the Merger Agreement, the Escrow Agreement or any related document,
any of the transactions contemplated hereby or thereby or any of the subject
matter hereof and that may be brought against any Company Indemnitor or his or
her successors, assigns, heirs, legal representatives or spouse in any court.
Such service of process or notice received by the Representative will have the
same force and effect as if served upon the Company Indemnitors or their
respective successors, assigns, heirs, legal representative or spouses.

     2.5. Power of Attorney. Each Company Indemnitor hereby appoints and
constitutes the Representative the true and lawful attorney-in-fact of such
Company Indemnitor and his or her successors, assigns, heirs, legal
representatives or spouse, with full power in such Company Indemnitor's (or
successors',

                                       C-2
<PAGE>   225

assigns', heirs', legal representatives' or spouse's) name and on the Company
Indemnitor's (or the successors', assigns', heirs', legal representatives' or
spouse's) behalf to act according to the terms of this Agreement and the Escrow
Agreement in the absolute discretion of the Representative, and in general to do
all things and to perform all acts, including executing and delivering the
Escrow Agreement and all other agreements, certificates, receipts, instructions
and other instruments contemplated by or deemed advisable in connection with
this Agreement. This power of attorney and all authority hereby conferred is
granted subject to the interest of the other Company Indemnitors hereunder and
in consideration of the mutual covenants and agreements made herein, and is
irrevocable and will not be terminated by any act of any Company Indemnitor or
by operation of law, whether by death or any other event. Without giving notice
to the Company Indemnitors, the Representative shall have full and irrevocable
authority on behalf of the Company Indemnitors (a) to deal with the other
parties to this Agreement and the Escrow Agreement, (b) to accept and give
notices and other communications relating to this Agreement and the Escrow
Agreement, (c) to settle any dispute relating to the terms of this Agreement and
the Escrow Agreement, (d) to waive any condition to the obligations of the
Company Indemnitors found in this Agreement, the Escrow Agreement or the Merger
Agreement, (e) to modify or amend this Agreement and the Escrow Agreement, (f)
to execute any instrument or document that the Representative may determine is
necessary or desirable in the exercise of his authority under this Section 2,
and (g) to act in connection with all matters arising out of, based upon, or in
connection with this Agreement, the Escrow Agreement and the Merger Agreement
and the transactions contemplated hereby.

     2.6. Limitation on the Representative's Liability. The Representative will
not be liable to the other Company Indemnitors for any action taken, suffered or
omitted by the Representative in good faith and reasonably believed by the
Representative to be authorized or within the discretion of the rights or powers
conferred upon the Representative by this Agreement or the Escrow Agreement,
except to the extent of the Representative's own gross negligence, recklessness
or willful misconduct. The Representative may consult with competent and
responsible legal counsel selected by him, and he will not be liable for any
action taken or omitted by him in good faith in accordance with the advice of
such counsel.

     2.7. Costs and Expenses of the Representative. The Company Indemnitors will
bear all expenses incurred by the Representative in connection with his duties
hereunder and will indemnify him against and save him harmless from any and all
claims, liabilities, costs, payments and expenses, including fees of counsel
(who may be selected by the Representative), for anything done by him in the
performance of this Agreement or the Escrow Agreement, except as a result of his
own gross negligence, recklessness or willful misconduct.

 3. Miscellaneous

     3.1. Tax Consequences to the Company Indemnitors, Etc. Each Company
Indemnitor hereby acknowledges and agrees that Immersion, Merger Sub and the
Company have not given the Company Indemnitor any tax advice in connection with
the Merger or otherwise, and have no responsibility for any tax consequences to
the Company Indemnitor arising from or related to the Merger or otherwise. Each
Company Indemnitor further acknowledges and agrees that the Company Indemnitor
has had an opportunity to consult with his or her personal tax advisors as to
the actual tax consequences to the Company Indemnitor arising from or related to
the Merger or otherwise.

     3.2. Notices. Any notice or communication required or permitted by this
Agreement shall be deemed sufficiently given if in writing and, if delivered
personally, when it is delivered or, if delivered in another manner, the earlier
of when it is actually received by the Person to which it is directed, or when
the period set forth below expires (whether or not it is actually received):

          (a) if transmitted by telecopier or facsimile transmission ("fax"), 24
     hours after (i) transmission to the Person's fax number set forth below,
     with the Person's name and address set forth below clearly shown on the
     page first transmitted, and (ii) receipt by the transmitting Person of
     written confirmation of successful transmission, which confirmation may be
     produced by the transmitting Person's equipment;

                                       C-3
<PAGE>   226

          (b) if deposited with the U.S. Postal Service as certified or
     registered mail, postage prepaid, and addressed to the Person to receive it
     as set forth below, 48 hours after such deposit;

          (c) if sent by Federal Express, or a similar delivery service in
     general usage for delivery to the address of the Person to receive it as
     set forth below, 24 hours after the delivery time promised by the delivery
     service:

          If to the Company Indemnitors or the Representative:

          Greg Merril
          55 W. Watkins Mill Road
          Gaithersburg, MD 20878
          Fax No. (301) 984-2014

          With a copy to:

          Duane, Morris & Heckscher LLP
          One Liberty Place
          Philadelphia, PA 19103-7396
          Attention: Kathleen M. Shay
          Fax No. (215) 979-1020

          If to Immersion or Immersion Indemnitees:

          Immersion Corporation
          801 Fox Lane
          San Jose, California 95131
          Attention: Louis Rosenberg, Chief Executive Officer
          Fax No. (408) 467-1901

          With a copy to:

          Heller Ehrman White & McAuliffe LLP
          601 South Figueroa Street, 40th Floor
          Los Angeles, CA 90017-5758
          Attention: Stephen E. Newton, Esq.
          Fax No. (213) 614-1868

or to such other address as a Person to whom notice is to be given has furnished
to the other Persons listed above in the manner provided above.

     3.3. Amendment. This Agreement may not be amended, modified, supplemented,
cancelled or discharged except in a writing signed by Immersion and a majority
in percentage interest of the Company Indemnitors.

     3.4. Headings. The Section and subsection headings contained in this
Agreement are for reference purposes only and will not affect in any way the
meaning or interpretation of this Agreement.

     3.5. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other terms and provisions of this Agreement will nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, Immersion and the Representative will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the fullest extent
possible.

     3.6. Governing Law. This Agreement will be governed by, and construed in
accordance with, the internal laws of the State of New York applicable to
contracts executed and fully performed within the State of New York, without
regard to any principles of conflicts or choice of laws.

                                       C-4
<PAGE>   227

     3.7. Interpretation; Rules of Construction. This Agreement has been
negotiated and is to be interpreted according to its fair meaning and not
strictly for or against any party. The parties waive any rule of law or judicial
precedent that provides that contractual ambiguities are to be construed against
the party who drafted the contractual provision in question. All references in
this Agreement to "parties" refer to the parties to this Agreement unless
expressly indicated otherwise. References in this Agreement to Sections or
subsections are to Sections and subsections of this Agreement unless expressly
indicated otherwise. At each place in this Agreement where the context so
requires, the masculine, feminine or neuter gender includes the others and the
singular or plural number includes the other. "Including" means "including
without limitation" and "or" is used in the inclusive sense of "and/or."

     3.8. Entire Agreement. This Agreement, and the Merger Agreement and the
Escrow Agreement, which are hereby incorporated into this Agreement by this
reference and are made a part hereof, together with all other agreements and
documents executed and delivered concurrently herewith or therewith, constitute
the entire understanding and agreement between the parties with regard to the
subject matter hereof, and supersede all prior agreements, understandings,
negotiations, representations and discussions, whether written or oral,
pertaining to that subject matter, which will continue in full force and effect.

     3.9. Waiver. Either Immersion or the Representative (on his behalf and
behalf of the Company Indemnitors) may extend the time for the performance of
any of the obligations or other acts of the other party or waive compliance with
any of the agreements of the other party. No waiver of any breach or default
hereunder will be considered valid unless in writing and signed by the party
(either Immersion or the Representative) giving such waiver, and no such waiver
will be deemed a waiver of any subsequent breach or default of the same or
similar nature.

     3.10. Parties in Interest. Except for the Immersion Indemnitees , who are
third party beneficiaries of this Agreement, nothing in this Agreement,
expressed or implied, is intended to confer upon any person or entity other than
the parties any rights or remedies under or by reason of this Agreement.

     3.11. Successors and Assigns. This Agreement inures to the benefit of and
is binding upon the successors and assigns of the parties. Notwithstanding the
foregoing, except as set forth in Section 2.2, neither this Agreement nor any
rights or obligations hereunder may be assigned, pledged, hypothecated or
otherwise transferred by the Representative or the Company Indemnitors without
the prior written consent of Immersion, which consent may be withheld in the
sole discretion of Immersion.

     3.12. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. The exchange of copies of
this Agreement and of signature pages by telecopier transmission will constitute
effective execution and delivery of this Agreement as to the parties and may be
used in lieu of the original for all purposes. Signatures of the parties
transmitted by telecopier are deemed to be their original signatures for any
purpose whatsoever.

     3.13. Consent to Jurisdiction. Each of the parties hereto (i) consents to
submit himself, herself or itself to the personal jurisdiction of the United
States District Court for the Southern District of New York or the courts of the
State of New York located in the County of New York with respect to any and all
disputes arising out of (A) this Agreement, including the validity construction
and interpretation hereof and thereof and the rights and remedies of the parties
hereunder and thereunder; (B) any of the transactions contemplated by this
Agreement; and (C) any matters related to but not covered hereby or thereby, in
each case to the extent such court would have subject matter jurisdiction with
respect to such dispute; (ii) agrees that he, she or it will not attempt to deny
or defeat such personal jurisdiction or venue by motion or other request for
leave from any such court; (iii) agrees that service of process in any such
suit, action or proceeding may be effected by notice by any of the means
provided in Section 3.1; and (iv) agrees that nothing herein will affect the
right to effect service of process in any other manner permitted by law.

                                       C-5
<PAGE>   228

     IN WITNESS WHEREOF, the parties have caused this Indemnification and
Joinder Agreement to be duly executed as of the date first above written.

                                          IMMERSION:

                                          IMMERSION CORPORATION

                                          By:
                                            ------------------------------------
                                          Name: Louis Rosenberg
                                          Its: Chief Executive Officer

                                          REPRESENTATIVE:

                                          --------------------------------------
                                          Greg Merril

                                          THE STOCKHOLDERS:

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

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

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

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

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

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

                                       C-6
<PAGE>   229

                                                                      APPENDIX D

                            HT MEDICAL SYSTEMS, INC.
                                VOTING AGREEMENT

     THIS VOTING AGREEMENT (this "Agreement") is made and entered into as of
                           , 2000, by and between Immersion Corporation, a
Delaware corporation ("Immersion"), and the undersigned stockholder
("Stockholder") of HT Medical Systems, Inc., a Maryland corporation (the
"Company"), with reference to the following facts:

     A. Immersion, Immersion's wholly owned subsidiary, HT Merger, Inc. ("Merger
Sub"), the Company and Greg Merril are entering into an Agreement and Plan of
Reorganization (the "Merger Agreement"), pursuant to which, among other things,
Merger Sub will be merged (the "Merger") with and into the Company, which will
be the surviving corporation in the Merger, and the Company's stockholders will
be entitled to receive shares of common stock of Immersion, all in accordance
with the terms, and subject to the conditions, of the Merger Agreement.

     B. Stockholder is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) of that number of shares (the "Shares") of the outstanding capital stock
of the Company as indicated on the signature page to this Agreement.

     C. To induce Immersion and Merger Sub to enter into the Merger Agreement,
Stockholder is willing to agree to vote the Shares and any other such shares of
capital stock of Company so as to facilitate consummation of the Merger.

     ACCORDINGLY, in consideration of the foregoing, and intending to be legally
bound hereby, the parties hereby agrees as follows:

 1. Acquisitions of Shares. Stockholder agrees that any and all shares of
capital stock of Company that Stockholder purchases or with respect to which
Stockholder otherwise acquires beneficial ownership (as such term is defined in
Rule 13d-3 under the Exchange Act) (including any and all shares or securities
issued or issuable in respect of any Shares or later purchased or acquired
shares) after the execution of this Agreement and prior to the Expiration Date
("New Shares") will be subject to the terms and conditions of this Agreement to
the same extent as if they constituted Shares.

     2. Agreement to Vote Shares. At every meeting of the stockholders of the
Company called with respect to, and at every adjournment thereof, and on every
action or approval by written consent of the stockholders of the Company with
respect to, approval of the Merger Agreement and the Merger and any matter that
could reasonably be expected to facilitate the Merger, Stockholder will vote the
Shares and any New Shares in favor of approval of the Merger Agreement and the
Merger and any matter that could reasonably be expected to facilitate the
Merger. Stockholder agrees not to take any actions contrary to Stockholder's
obligations under this Agreement.

     3. Irrevocable Proxy. Concurrently with the execution and delivery of this
Agreement, Stockholder is executing and delivering to Immersion and Merger Sub a
proxy, (the "Proxy") in the form attached as ANNEX 1 to this Agreement, which is
irrevocable, with respect to the all of the Shares (including any later acquired
New Shares).

     4. Representations, Warranties and Covenants of Stockholder. Stockholder
hereby represents, warrants and covenants to Immersion that Stockholder (i) is
the beneficial owner of the Shares, which at the date hereof and at all times up
until the Expiration Date will be free and clear of any liens, claims, options,
charges or other encumbrances; (ii) does not beneficially own any shares of
capital stock of the Company other than the Shares; and (iii) has the full legal
capacity, right, power and authority to make, enter into and carry out the terms
of this Agreement and the Proxy.

                                       D-1
<PAGE>   230

     5. Additional Documents; Further Action. Stockholder hereby covenants and
agrees to execute and deliver any such additional documents, and take any such
further action, as may be necessary or desirable, in the reasonable opinion of
Immersion, to carry out the intent and purpose of this Agreement.

     6. Consent and Waiver. Stockholder hereby gives any consents or waivers
that are reasonably required for the consummation of the Merger under the terms
of any agreements to which Stockholder is a party or pursuant to any rights
Stockholder may have.

     7. Termination. This Agreement and the Proxy delivered in connection
herewith will terminate and will have no further force or effect on the
Expiration Date.

     8. Miscellaneous.

     (a) Notices. Any notices, consents, waivers or other communications
required or permitted under this Agreement will be given in writing and will be
deemed to have been duly given when delivered personally, or if delivered in
another manner, the earlier of when it is actually received by the party to whom
it is directed, or when the following period expires (whether or not it is
actually received) (i) if transmitted by telecopier, 24 hours following
transmission to the party's telecopier number set forth below, with the party's
name and address clearly shown on the first page and confirmation of
transmission produced by the transmitting party's equipment; (ii) if deposited
in the mail, postage prepaid, and addressed to the party to receive it as set
forth below, 72 hours following such deposit,; or (iii) if accepted by Federal
Express, or similar delivery service in general usage, for delivery to the
address of the party to receive it as set forth below, 24 hours following the
delivery time promised by the delivery service; provided that, if any such
transmission, mailing or express delivery is made on a day immediately preceding
a Saturday, Sunday or national holiday, then the subject transmission, mailing
or express delivery, as the case may be, will be deemed to be made at the
beginning of the next succeeding day that is not a Saturday, Sunday or national
holiday:

        If to Immersion:

        Immersion Corporation
        801 Fox Lane
        San Jose, California 95131
        Attention: Louis Rosenberg, Chief Executive Officer
        Telecopier no.: (408) 467-1901

        With a copy to:

        Stephen E. Newton, Esq.
        Heller Ehrman White & McAuliffe LLP
        601 South Figueroa Street, 40th Floor
        Los Angeles, California 90017-5758
        Telecopier no.: (213) 614-1868

        If to Stockholder:

        At the address provided
        on the signature page hereof

        With a copy to:

        Kathleen M. Shay, Esq.
        Duane, Morris & Heckscher LLP
        One Liberty Place
        Philadelphia, Pennsylvania 19103-7396
        Telecopier no.: (215) 979-1020

or to such other address or telecopier number as the party to whom notice is to
be given has furnished to the other party in the manner provided above, provided
that notice of such change has actually been received by the party to whom it is
directed.

                                       D-2
<PAGE>   231

     (b) Amendment; Waiver. This Agreement may not be amended, modified,
supplemented, cancelled or discharged except in a writing signed by Immersion
and Stockholder. Either Immersion or Stockholder may extend the time for the
performance of any of the obligations or other acts of the other party or waive
compliance with any of the agreements of the other party. No waiver of any
breach or default hereunder will be considered valid unless in writing and
signed by the party giving such waiver, and no such waiver will be deemed a
waiver of any subsequent breach or default of the same or similar nature.

     (c) Headings. The Section and subsection headings contained in this
Agreement are for reference purposes only and will not affect in any way the
meaning or interpretation of this Agreement.

     (d) Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other terms and provisions of this Agreement will nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, Immersion and Stockholder will negotiate
in good faith to modify this Agreement so as to effect the original intent of
the parties as closely as possible in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the fullest extent possible.

     (e) Governing Law. This Agreement will be governed by, and construed in
accordance with, the internal laws of the State of New York applicable to
contracts executed and fully performed within the State of New York, without
regard to any principles of conflicts or choice of laws.

     (f) Interpretation; Rules of Construction. This Agreement has been
negotiated and is to be interpreted according to its fair meaning and not
strictly for or against any party. The parties waive any rule of law or judicial
precedent that provides that contractual ambiguities are to be construed against
the party who drafted the contractual provision in question. All references in
this Agreement to "parties" refer to the parties to this Agreement unless
expressly indicated otherwise. References in this Agreement to Sections or
subsections are to Sections and subsections of this Agreement unless expressly
indicated otherwise. At each place in this Agreement where the context so
requires, the masculine, feminine or neuter gender includes the others and the
singular or plural number includes the other. "Including" means "including
without limitation" and "or" is used in the inclusive sense of "and/or."

     (g) Parties in Interest. Nothing in this Agreement, expressed or implied,
is intended to confer upon any person or entity other than the parties any
rights or remedies under or by reason of this Agreement.

     (h) Successors and Assigns. This Agreement will inure to the benefit of and
be binding upon the spouse, heirs, personal representatives, successors and
assigns of the parties. Notwithstanding the foregoing, neither this Agreement
nor any rights or obligations hereunder may be assigned, pledged, hypothecated
or otherwise transferred by Stockholder without the prior written consent of
Immersion, which consent may be withheld in the sole discretion of Immersion.

     (i) Consent to Jurisdiction. Each of the parties hereto (i) consents to
submit itself to the personal jurisdiction of the United States District Court
for the Southern District of New York or the courts of the State of New York
located in the County of New York with respect to any and all disputes arising
out of (A) this Agreement, including the validity construction and
interpretation hereof and thereof and the rights and remedies of the parties
hereunder and thereunder; (B) any of the transactions contemplated by this
Agreement; and (C) any matters related to but not covered hereby or thereby, in
each case to the extent such court would have subject matter jurisdiction with
respect to such dispute; (ii) agrees that it will not attempt to deny or defeat
such personal jurisdiction or venue by motion or other request for leave from
any such court; (iii) agrees that service of process in any such suit, action or
proceeding may be effected by notice by any of the means provided in Section
8(a); and (iv) agrees that nothing herein will affect the right to effect
service of process in any other manner permitted by law.

     (j) Entire Agreement. This Agreement, and the Annex hereto, and the Merger
Agreement, which are hereby incorporated into this Agreement by this reference
and are made a part hereof, together with all other agreements and documents
executed and delivered concurrently herewith or therewith, constitute
                                       D-3
<PAGE>   232

the entire understanding and agreement between the parties with regard to the
subject matter hereof, and supersede all prior agreements, understandings,
negotiations, representations and discussions, whether written or oral,
pertaining to that subject matter.

     (k) Enforcement. Stockholder acknowledges that, in view of the uniqueness
of the subject matter of this Agreement, Immersion may not have an adequate
remedy at law for money damages if this Agreement is not performed in accordance
with its terms. Accordingly, Stockholder agrees that, in addition to any other
right or remedy to which Immersion may be entitled, at law or in equity, it will
be entitled to enforce this Agreement by a decree of specific performance
against Stockholder and to temporary, preliminary and permanent injunctive
relief to prevent breaches or threatened breaches of this Agreement, without
posting any bond or other undertaking.

     (l) Attorneys' Fees. The prevailing party will be entitled to recover all
costs and expenses, including reasonable attorneys' fees, expert witness fees,
court costs and all other costs and expenses incurred in any action or
proceeding arising out of this Agreement or as to any matters related to but not
covered by this Agreement. "Prevailing party" for purposes of this Section 8(l)
includes a party who agrees to dismiss an action or proceeding upon the other's
payment of the sums allegedly due or for performance of the covenants,
undertakings or agreements allegedly breached, or who obtains substantially the
relief it sought.

     (m) Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. The exchange of copies of
this Agreement and of signature pages by telecopier transmission will constitute
effective execution and delivery of this Agreement as to the parties and may be
used in lieu of the original for all purposes. Signatures of the parties
transmitted by telecopier will be deemed to be their original signatures for any
purpose whatsoever.

                [BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       D-4
<PAGE>   233

     IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be
duly executed on the date first above written.

                                          IMMERSION:

                                          IMMERSION CORPORATION

                                          By
                                            ------------------------------------
                                             Its:
                                              ----------------------------------

                                          STOCKHOLDER:

                                          --------------------------------------
                                          Stockholder's Address for Notice:

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

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

                                          --------------------------------------
                                          Number of Shares Beneficially Owned:

                                                    shares of Common Stock

                                                    shares of Preferred Stock

                                       D-5
<PAGE>   234

                                    ANNEX 1

                           FORM OF IRREVOCABLE PROXY

     The undersigned Stockholder of HT Medical Systems, Inc., a Maryland
corporation (the "Company"), hereby irrevocably appoints Louis Rosenberg, Victor
Viegas, Stuart Mitchell and Craig Factor, officers of Immersion Corporation, a
Delaware corporation ("Immersion"), and each of them, as the sole and exclusive
attorneys and proxies of the undersigned, each with full power of substitution
and resubstitution, to the full extent of the undersigned Stockholder's rights
with respect to the shares of capital stock of the Company beneficially owned by
the undersigned Stockholder, which shares are listed on the final page of this
Irrevocable Proxy, and any and all shares of capital stock of Company that the
undersigned Stockholder purchases or with respect to which the undersigned
Stockholder otherwise acquires beneficial ownership (as such term is defined in
Rule 13d-3 under the Exchange Act) (including any and all shares or securities
issued or issuable in respect of any Shares or the later purchased or acquired
shares) after the execution of this Agreement and prior to the Expiration Date
(collectively, the "Shares"), until the earlier to occur of (i) such date and
time as the Agreement and Plan of Reorganization, dated as of July   , 2000 (the
"Merger Agreement"), by and among Immersion, Immersion's wholly owned
subsidiary, HT Merger, Inc., and the Company, is terminated in accordance with
its terms, and (ii) such date and time as the Merger (as defined in the Merger
Agreement) is effective in accordance with the terms and conditions of the
Merger Agreement (the "Expiration Date"). Upon the execution of this proxy, all
prior proxies given by the undersigned Stockholder with respect to the Shares
(including any and all other shares or securities issued or issuable in respect
thereof) are hereby revoked and no subsequent proxies will be given.

     This proxy is irrevocable, is granted pursuant to the Voting Agreement
dated as of July   , 2000 (the "Voting Agreement"), by and between Immersion and
the undersigned Stockholder, and is granted in consideration of Immersion and
Merger Sub entering into the Merger Agreement. Immersion and the undersigned
Stockholder agree and acknowledge that the grant of this irrevocable proxy is a
material inducement for Immersion and Merger Sub to enter into the Merger
Agreement and is therefore coupled with an interest and irrevocable. The
attorneys and proxies named above will be empowered at any time prior to the
Expiration Date to exercise all voting and other rights (including the power to
execute and deliver written consents with respect to the Shares) of the
undersigned Stockholder at every annual, special or adjourned meeting of
Company's stockholders, and in every written consent in lieu of such a meeting,
or otherwise, in favor of approval of the Merger and the Merger Agreement and
any matter that could reasonably be expected to facilitate the Merger.

     The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to the Expiration Date at every
annual, special or adjourned meeting of the Company's stockholders, and in every
written consent in lieu of such meeting, in favor of approval of the Merger and
the Merger Agreement and any matter that could reasonably be expected to
facilitate the Merger, and may not exercise this proxy on any other matter. The
undersigned Stockholder may vote the Shares on all other matters.

     If any term or other provision of this Proxy is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
terms and provisions of this Proxy will nevertheless remain in full force and
effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, Immersion and the undersigned Stockholder will
negotiate in good faith to modify this Proxy so as to effect the original intent
of the parties as closely as possible in an acceptable manner to the end that
the transactions contemplated hereby are fulfilled to the fullest extent
possible.

                                       D-6
<PAGE>   235

     Any obligation of the undersigned Stockholder hereunder will be binding
upon the spouse, heirs, personal representatives, successors and assigns of the
undersigned Stockholder. "Including" means "including without limitation" and
"or" is used in the inclusive sense of "and/or."

Dated: July   , 2000

                                          STOCKHOLDER:

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

                                          Number of Shares Beneficially Owned:

                                                      shares of Common Stock

                                                      shares of Preferred Stock

                                       D-7
<PAGE>   236

                                                                      APPENDIX E

                            NONCOMPETITION AGREEMENT

     THIS NONCOMPETITION AGREEMENT (this "Agreement") is made and entered into
as of                  , 2000, by and between Immersion Corporation, a Delaware
corporation ("Immersion"), and                (the "Selling Stockholder"), with
reference to the following facts:

     A. Immersion is acquiring HT Medical Systems, Inc., a Maryland corporation
("HT") through the merger (the "Merger") of Immersion's wholly-owned subsidiary,
HT Merger, Inc. ("Merger Sub"), with and into HT, which will survive the Merger,
pursuant to the terms and conditions of an Agreement and Plan of Reorganization
dated as of July 31, 2000 (the "Merger Agreement").

     B. The Selling Stockholder is a stockholder and an employee of HT. The
Selling Stockholder will receive common stock of Immersion upon the conversion
of his HT stock in the Merger.

     C. The Selling Stockholder will continue to be employed by HT after the
Merger.

     D. It is a condition precedent to the obligation of Immersion and Merger
Sub to consummate the transactions contemplated by the Merger Agreement that the
Selling Stockholder execute and deliver this Agreement.

     E. As a material inducement to Immersion and Merger Sub to consummate the
Merger Agreement, the Selling Stockholder wishes to enter into this Agreement
and agree to all the terms and provisions hereof.

     ACCORDINGLY, in consideration of the foregoing, and intending to be legally
bound hereby, each of the parties hereby agrees as follows:

                                   ARTICLE I

           REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDER

     The Selling Stockholder hereby represents and warrants to Immersion as
follows:

     1.1  The delivery and execution of this Agreement to Immersion by the
Selling Stockholder is to protect the legitimate business interests of Immersion
with respect to its acquisition of HT.

     1.2  The time periods and geographic areas specified in Section 2.6 of this
Agreement are appropriate and reasonable in all respects in light of the
business conducted by HT and the legitimate need of Immersion to protect its
investment in HT following its acquisition of HT.

     1.3  The execution and delivery of this Agreement, the performance by the
Selling Stockholder of the covenants and agreements contained herein and the
enforcement by Immersion of the provisions contained herein, will cause no undue
hardship to the Selling Stockholder.

                                   ARTICLE II

                             RESTRICTIVE COVENANTS

     In order to induce Immersion and Merger Sub to consummate the Merger
Agreement, and to enable Immersion to obtain the full benefit of its acquisition
of HT, the Selling Stockholder acknowledges that Immersion has a legitimate
business interest in protecting the goodwill, confidential information,
advantageous business relationships, trade secrets, business methods and other
valuable and confidential aspects of HT. In order to protect Immersion's
legitimate business interests, the Selling Stockholder agrees as follows:

     2.1  Competition. During the Restricted Period (as defined below) and
within the Restricted Area (as defined below), other than in his capacity as an
employee of HT, Immersion or any of their affiliates,

                                       E-1
<PAGE>   237

the Selling Stockholder will not, individually or in conjunction with others,
directly or indirectly, enter into or engage in any business which competes with
the business of HT, on the Selling Stockholder's own behalf or in the service or
on behalf of others as principal, partner, officer, director, manager, employee
or Stockholder (other than as the holder of less than 5% of the outstanding
capital stock of a publicly traded corporation, provided such investment does
not give the Selling Stockholder the right or ability to control or
significantly influence the policy decisions of such business). For this
purpose, the business of HT is the design, marketing and selling of (i) medical
procedure simulation software and devices and (ii) software and devices
employing feel simulation (also known as force feedback, haptic feedback or
force reflection) technologies.

     2.2  Solicitation. During the Restricted Period, the Selling Stockholder,
on his own behalf or on behalf of any other person, partnership, corporation or
other entity, will not, directly or indirectly, solicit or intentionally induce
or otherwise influence (i) any employee, agent or consultant to terminate his or
her relationship with HT, Immersion or any of their affiliates, or (ii) any
person, partnership, corporation or other entity which has a business
relationship with HT, Immersion or their affiliates to discontinue or reduce the
extent of such relationship with HT, Immersion or their affiliates.

     2.3  Nondisclosure of Confidential Information. The Selling Stockholder
acknowledges and agrees that the Confidential Information (as defined below) is
a valuable, special and unique asset of HT's business. Accordingly, the Selling
Stockholder will not at any time disclose, directly or indirectly, to any
person, firm, corporation, partnership, association or other entity, any
proprietary or confidential information relating to HT or any information
concerning HT's financial condition or prospects, HT's customers, the design,
development, manufacture, marketing or sale of HT's products or HT's method of
operating its business (collectively "Confidential Information"). Confidential
Information will not include information which, at the time of disclosure, is
known or available to the general public by publication or otherwise through no
act or failure to act on the part of the Selling Stockholder.

     2.4  Construction. It is agreed by the parties hereto that if any portion
of the above restrictive covenants are held to be unreasonable, arbitrary,
against public policy, or for any other reason unenforceable, the covenants
herein will be considered diminishable both as to time and geographic area; and
each month for the specified period will be deemed a separate period of time,
and the restrictive covenants will remain effective so long as the same is not
unreasonable, arbitrary or against public policy, but in no event longer than
the Restricted Period. The parties hereto agree that in the event any court
determines the specified time period or the specified geographic area to be
unreasonable, arbitrary or against public policy, a lesser period or geographic
area which is determined to be reasonable, non-arbitrary and not against public
policy will be enforced against the Selling Stockholder.

     2.5  Calculation of Time. The time period covered by the restrictive
covenants contained in this Article II will not include any period(s) of
violation of any restrictive covenant or any period(s) of time required for
litigation brought by Immersion to enforce any covenant.

     2.6  Definitions. As used in this Article II:

          (a) Subject to Section 2.5, the "Restricted Period" commences on the
     date of this Agreement and terminates on the second anniversary of date on
     which the Selling Stockholder's employment with HT, Immersion or any of
     their affiliates terminates.

          (b) The "Restricted Area" is (i) the State of Maryland; (ii) the
     United States (including its territories and possessions); (iii) Canada;
     (iv) the United Kingdom; (v) Japan; (vi) Germany; and (vii) any other
     locations outside the United States (including its territories and
     possessions) where HT has conducted business.

     2.7  Independent Covenants. The covenants set forth in this Article II will
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any potential or alleged claim or cause of
action of the Selling Stockholder against Immersion or HT, whether predicated on
this Agreement or otherwise, will not constitute a defense to the enforcement by
Immersion of the

                                       E-2
<PAGE>   238

covenants contained herein. An alleged or actual breach of this Agreement by
Immersion will not be a defense to enforcement of the provisions of this Article
II.

     2.8  Injunction; Specific Performance. The Selling Stockholder acknowledges
that if it were to breach any of the provisions of this Article II, it would
result in an immediate and irreparable injury to the legitimate business
interests of Immersion which cannot be adequately or reasonably compensated at
law. Therefore, the Selling Stockholder agrees that Immersion will be entitled,
if any such breach occurs, if it so elects, to a decree of specific performance
and to a temporary and permanent injunction enjoining and restraining such
breach, and that such right to injunction will be cumulative to whatever other
remedies for actual damages Immersion may possess. If any action is brought by
Immersion pursuant to this Article II, the prevailing party will be entitled to
recover costs and reasonable attorneys' fees incurred in such action, the amount
of such reasonable attorneys' fees to be determined by the court and not a jury.

     2.9  Certain Other Agreements Regarding the Restrictive Covenants. The
parties have not independently bargained with respect to the quantitative value
of the restrictive covenants included in this Article II (the "Restrictive
Covenants"). The Restrictive Covenants are inseparable from, and are intended to
protect, the goodwill and going concern value being acquired by Immersion
pursuant to the Merger Agreement. Accordingly, no part of the consideration to
be paid by Immersion in the Merger is being allocated to the Restrictive
Covenants, and the parties agree that for federal and state income tax reporting
purposes they will not allocate to the Restrictive Covenants any portion of the
Merger Consideration (as defined in the Merger Agreement) contemplated by the
Merger Agreement.

                                  ARTICLE III

                                 MISCELLANEOUS

     3.1  Notices. Any notices, consents, waivers or other communications
required or permitted under this Agreement will be given in writing and will be
deemed to have been duly given when delivered personally, or if delivered in
another manner, the earlier of when it is actually received by the party to whom
it is directed, or when the following period expires (whether or not it is
actually received): (i) if transmitted by telecopier, 24 hours following
transmission to the party's telecopier number set forth below, with the party's
name and address clearly shown on the first page and confirmation of
transmission produced by the transmitting party's equipment, (ii) if deposited
in the mail, postage prepaid, and addressed to the party to receive it as set
forth below, 72 hours following such deposit, or (iii) if accepted by Federal
Express, or similar delivery service in general usage, for delivery to the
address of the party to receive it as set forth below, 24 hours following the
delivery time promised by the delivery service; provided that, if any such
transmission, mailing or express delivery is made on a day immediately preceding
a Saturday, Sunday or national holiday, then the subject transmission, mailing
or express delivery, as the case may be, will be deemed to be made at the
beginning of the next succeeding day that is not a Saturday, Sunday or national
holiday:

          If to the Selling Stockholder:

          Confidential
        --------------------------------
        --------------------------------
        --------------------------------
          Telecopier no.: (     )      -

          With a copy to:

          Kathleen M. Shay, Esq.
          Duane, Morris & Heckscher LLP
          One Liberty Place
          Philadelphia, Pennsylvania 19103-7396
          Telecopier no.: (215) 979-1020

                                       E-3
<PAGE>   239

          If to Immersion:

          Immersion Corporation
          801 Fox Lane
          San Jose, California 95131
          Attention: Louis Rosenberg, Chief Executive Officer
          Telecopier no.: (408) 467-1901

          With a copy to:

          Stephen E. Newton, Esq.
          Heller Ehrman White & McAuliffe LLP
          601 South Figueroa Street, 40th Floor
          Los Angeles, California 90017-5758
          Telecopier no.: (213) 614-1868

or to such other address or telecopier number as the party to whom notice is to
be given has furnished to the other party in the manner provided above, provided
that notice of such change has actually been received by the party to whom it is
directed.

     3.3  Amendment. This Agreement may not be amended, modified, supplemented,
cancelled or discharged except in a writing signed by Immersion and the Selling
Stockholder.

     3.4  Headings. The Article, Section and subsection headings contained in
this Agreement are for reference purposes only and will not affect in any way
the meaning or interpretation of this Agreement.

     3.5  Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other terms and provisions of this Agreement will nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, Immersion and the Selling Stockholder
will negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that the transactions contemplated hereby are fulfilled to the fullest
extent possible.

     3.6  Governing Law. This Agreement will be governed by, and construed in
accordance with, the internal laws of the State of Maryland applicable to
contracts executed and fully performed within the State of Maryland, without
regard to any principles of conflicts or choice of laws.

     3.7  Interpretation. This Agreement has been negotiated and is to be
interpreted according to its fair meaning and not strictly for or against any
party. The parties waive any rule of law or judicial precedent that provides
that contractual ambiguities are to be construed against the party who drafted
the contractual provision in question. All references in this Agreement to
"parties" refer to the parties to this Agreement unless expressly indicated
otherwise. References in this Agreement to Sections or subsections are to
Sections and subsections of this Agreement unless expressly indicated otherwise.
At each place in this Agreement where the context so requires, the masculine,
feminine or neuter gender includes the others and the singular or plural number
includes the other. "Including" means "including without limitation" and "or" is
used in the inclusive sense of "and/or."

     3.8  Entire Agreement. This Agreement constitutes the entire understanding
and agreement between the parties with regard to the subject matter hereof, and
supersedes all prior agreements, understandings, negotiations, representations
and discussions, whether written or oral, pertaining to that subject matter,
which will continue in full force and effect.

     3.9  Waiver. Either Immersion or the Selling Stockholder may extend the
time for the performance of any of the obligations or other acts of the other
party or waive compliance with any of the agreements of the other party. No
waiver of any breach or default hereunder will be considered valid unless in
writing

                                       E-4
<PAGE>   240

and signed by the party giving such waiver, and no such waiver will be deemed a
waiver of any subsequent breach or default of the same or similar nature.

     3.10  Parties in Interest. Except for HT, who is third party beneficiary of
this Agreement, nothing in this Agreement, expressed or implied, is intended to
confer upon any person or entity other than the parties any rights or remedies
under or by reason of this Agreement.

     3.11  Successors and Assigns. This Agreement inures to the benefit of and
is binding upon the successors and assigns of the parties. Notwithstanding the
foregoing, neither this Agreement nor any rights or obligations hereunder may be
assigned, pledged, hypothecated or otherwise transferred by the Selling
Stockholder without the prior written consent of Immersion, which consent may be
withheld in the sole discretion of Immersion.

     3.12  Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. The exchange of copies of
this Agreement and of signature pages by telecopier transmission will constitute
effective execution and delivery of this Agreement as to the parties and may be
used in lieu of the original for all purposes. Signatures of the parties
transmitted by telecopier will be deemed to be their original signatures for any
purpose whatsoever.

     3.13  Consent to Jurisdiction. Each of the parties hereto (i) consents to
submit himself, herself or itself to the personal jurisdiction of the United
States District Court of the District of Maryland or the courts of the State of
Maryland located in the County of Montgomery with respect to any and all
disputes arising out of (A) this Agreement, the Merger Agreement or the Escrow
Agreement, including the validity construction and interpretation hereof and
thereof and the rights and remedies of the parties hereunder and thereunder; (B)
any of the transactions contemplated by this Agreement, the Merger Agreement and
the Escrow Agreement; and (C) any matters related to but not covered hereby or
thereby, in each case to the extent such court would have subject matter
jurisdiction with respect to such dispute; (ii) agrees that he, she or it will
not attempt to deny or defeat such personal jurisdiction or venue by motion or
other request for leave from any such court; and (iii) agrees that nothing
herein will affect the right to effect service of process in any manner
permitted by law.

     3.14  Holidays. If any date on which action is to be taken under this
Agreement occurs, or if any period during which action is to be taken under this
Agreement ends, on a Saturday, Sunday or national holiday, the date or period
will be extended to the next succeeding day which is not a Saturday, Sunday or
national holiday.

     3.15  Survival. The representations, warranties, covenants and agreements
of the parties contained in or made pursuant to this Agreement will survive the
consummation of the transactions contemplated by this Agreement and will in no
way be affected by any investigation of the subject matter thereof made by or on
behalf of the parties.

     3.16  Attorneys' Fees. The prevailing party will be entitled to recover all
costs and expenses, including reasonable attorneys' fees, expert witness fees,
court costs and all other costs and expenses incurred in any action or
proceeding arising out of this Agreement or as to any matters related to but not
covered by this Agreement. "Prevailing party" for purposes of this Section 3.16
includes a party who agrees to dismiss an action or proceeding upon the other's
payment of the sums allegedly due or for performance of the covenants,
undertakings or agreements allegedly breached, or who obtains substantially the
relief it sought.

                [BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       E-5
<PAGE>   241

     IN WITNESS WHEREOF, the parties have caused this Noncompetition Agreement
to be duly executed as of the date first above written.

                                          IMMERSION:

                                          IMMERSION CORPORATION

                                          By
                                            ------------------------------------
                                             Its:
                                            ------------------------------------

                                          THE SELLING STOCKHOLDER:

                                       E-6
<PAGE>   242

                                                                      APPENDIX F

                            NONCOMPETITION AGREEMENT

     THIS NONCOMPETITION AGREEMENT (this "Agreement") is made and entered into
as of                , 2000, by and between Immersion Corporation, a Delaware
corporation ("Immersion"), and                (the "Employee"), with reference
to the following facts:

     A. Immersion is acquiring HT Medical Systems, Inc., a Maryland corporation
("HT") through the merger (the "Merger") of Immersion's wholly-owned subsidiary,
HT Merger, Inc. ("Merger Sub"), with and into HT, which will survive the Merger,
pursuant to the terms and conditions of an Agreement and Plan of Reorganization
dated as of July 31, 2000 (the "Merger Agreement").

     B. The Employee is currently employed by HT.

     C. The Employee will continue to be employed by HT after the Merger.

     D. It is a condition precedent to the obligation of Immersion and Merger
Sub to consummate the transactions contemplated by the Merger Agreement that the
Employee execute and deliver this Agreement.

     E. As a material inducement to Immersion and Merger Sub to consummate the
Merger Agreement, the Employee wishes to enter into this Agreement and agree to
all the terms and provisions hereof.

     ACCORDINGLY, in consideration of the foregoing, and intending to be legally
bound hereby, each of the parties hereby agrees as follows:

                                   ARTICLE I

                 REPRESENTATIONS AND WARRANTIES OF THE EMPLOYEE

     The Employee hereby represents and warrants to Immersion as follows:

     1.1  The delivery and execution of this Agreement to Immersion by the
Employee is to protect the legitimate business interests of Immersion with
respect to its acquisition of HT.

     1.2  The time periods and geographic areas specified in Section 2.6 of this
Agreement are appropriate and reasonable in all respects in light of the
business conducted by HT and the legitimate need of Immersion to protect its
investment in HT following its acquisition of HT.

     1.3  The execution and delivery of this Agreement, the performance by the
Employee of the covenants and agreements contained herein and the enforcement by
Immersion of the provisions contained herein, will cause no undue hardship to
the Employee.

                                   ARTICLE II

                             RESTRICTIVE COVENANTS

     In order to induce Immersion and Merger Sub to consummate the Merger
Agreement, and to enable Immersion to obtain the full benefit of its acquisition
of HT, the Employee acknowledges that Immersion has a legitimate business
interest in protecting the goodwill, confidential information, advantageous
business relationships, trade secrets, business methods and other valuable and
confidential aspects of HT. In order to protect Immersion's legitimate business
interests, the Employee agrees as follows:

     2.1  Competition. During the Restricted Period (as defined below) and
within the Restricted Area (as defined below), other than in his capacity as an
employee of HT, Immersion or any of their affiliates, the Employee will not,
individually or in conjunction with others, directly or indirectly, enter into
or engage in any business which competes with the business of HT, on the
Employee's own behalf or in the service or on behalf of others as principal,
partner, officer, director, manager, employee or Stockholder

                                       F-1
<PAGE>   243

(other than as the holder of less than 5% of the outstanding capital stock of a
publicly traded corporation, provided such investment does not give the Employee
the right or ability to control or significantly influence the policy decisions
of such business). For this purpose, the business of HT is the design, marketing
and selling of (i) medical procedure simulation software and devices and (ii)
software and devices employing feel simulation (also known as force feedback,
haptic feedback or force reflection) technologies.

     2.2  Solicitation. During the Restricted Period, the Employee, on his own
behalf or on behalf of any other person, partnership, corporation or other
entity, will not, directly or indirectly, solicit or intentionally induce or
otherwise influence (i) any employee, agent or consultant to terminate his or
her relationship with HT, Immersion or any of their affiliates, or (ii) any
person, partnership, corporation or other entity which has a business
relationship with HT, Immersion or their affiliates to discontinue or reduce the
extent of such relationship with HT, Immersion or their affiliates.

     2.3  Nondisclosure of Confidential Information. The Employee acknowledges
and agrees that the Confidential Information (as defined below) is a valuable,
special and unique asset of HT's business. Accordingly, the Employee will not at
any time disclose, directly or indirectly, to any person, firm, corporation,
partnership, association or other entity, any proprietary or confidential
information relating to HT or any information concerning HT's financial
condition or prospects, HT's customers, the design, development, manufacture,
marketing or sale of HT's products or HT's method of operating its business
(collectively "Confidential Information"). Confidential Information will not
include information which, at the time of disclosure, is known or available to
the general public by publication or otherwise through no act or failure to act
on the part of the Employee.

     2.4  Construction. It is agreed by the parties hereto that if any portion
of the above restrictive covenants are held to be unreasonable, arbitrary,
against public policy, or for any other reason unenforceable, the covenants
herein will be considered diminishable both as to time and geographic area; and
each month for the specified period will be deemed a separate period of time,
and the restrictive covenants will remain effective so long as the same is not
unreasonable, arbitrary or against public policy, but in no event longer than
the Restricted Period. The parties hereto agree that in the event any court
determines the specified time period or the specified geographic area to be
unreasonable, arbitrary or against public policy, a lesser period or geographic
area which is determined to be reasonable, non-arbitrary and not against public
policy will be enforced against the Employee.

     2.5  Calculation of Time. The time period covered by the restrictive
covenants contained in this Article II will not include any period(s) of
violation of any restrictive covenant or any period(s) of time required for
litigation brought by Immersion to enforce any covenant.

     2.6  Definitions. As used in this Article II:

          (a) Subject to Section 2.5, the "Restricted Period" commences on the
     date of this Agreement and terminates on the second anniversary of date on
     which the Employee's employment with HT, Immersion or any of their
     affiliates terminates.

          (b) The "Restricted Area" is (i) the State of Maryland; (ii) the
     United States (including its territories and possessions); (iii) Canada;
     (iv) the United Kingdom; (v) Japan; (vi) Germany; and (vii) any other
     locations outside the United States (including its territories and
     possessions) where HT has conducted business.

     2.7  Independent Covenants. The covenants set forth in this Article II will
be construed as an agreement independent of any other provision in this
Agreement, and the existence of any potential or alleged claim or cause of
action of the Employee against Immersion or HT, whether predicated on this
Agreement or otherwise, will not constitute a defense to the enforcement by
Immersion of the covenants contained herein. An alleged or actual breach of this
Agreement by Immersion will not be a defense to enforcement of the provisions of
this Article II.

                                       F-2
<PAGE>   244

     2.8  Injunction; Specific Performance. The Employee acknowledges that if it
were to breach any of the provisions of this Article II, it would result in an
immediate and irreparable injury to the legitimate business interests of
Immersion which cannot be adequately or reasonably compensated at law.
Therefore, the Employee agrees that Immersion will be entitled, if any such
breach occurs, if it so elects, to a decree of specific performance and to a
temporary and permanent injunction enjoining and restraining such breach, and
that such right to injunction will be cumulative to whatever other remedies for
actual damages Immersion may possess. If any action is brought by Immersion
pursuant to this Article II, the prevailing party will be entitled to recover
costs and reasonable attorneys' fees incurred in such action, the amount of such
reasonable attorneys' fees to be determined by the court and not a jury.

     2.9  Certain Other Agreements Regarding the Restrictive Covenants. The
parties have not independently bargained with respect to the quantitative value
of the restrictive covenants included in this Article II (the "Restrictive
Covenants"). The Restrictive Covenants are inseparable from, and are intended to
protect, the goodwill and going concern value being acquired by Immersion
pursuant to the Merger Agreement. Accordingly, no part of the consideration to
be paid by Immersion in the Merger is being allocated to the Restrictive
Covenants, and the parties agree that for federal and state income tax reporting
purposes they will not allocate to the Restrictive Covenants any portion of the
Merger Consideration (as defined in the Merger Agreement) contemplated by the
Merger Agreement.

                                  ARTICLE III

                                 MISCELLANEOUS

     3.1  Notices. Any notices, consents, waivers or other communications
required or permitted under this Agreement will be given in writing and will be
deemed to have been duly given when delivered personally, or if delivered in
another manner, the earlier of when it is actually received by the party to whom
it is directed, or when the following period expires (whether or not it is
actually received): (i) if transmitted by telecopier, 24 hours following
transmission to the party's telecopier number set forth below, with the party's
name and address clearly shown on the first page and confirmation of
transmission produced by the transmitting party's equipment, (ii) if deposited
in the mail, postage prepaid, and addressed to the party to receive it as set
forth below, 72 hours following such deposit, or (iii) if accepted by Federal
Express, or similar delivery service in general usage, for delivery to the
address of the party to receive it as set forth below, 24 hours following the
delivery time promised by the delivery service; provided that, if any such
transmission, mailing or express delivery is made on a day immediately preceding
a Saturday, Sunday or national holiday, then the subject transmission, mailing
or express delivery, as the case may be, will be deemed to be made at the
beginning of the next succeeding day that is not a Saturday, Sunday or national
holiday:

         If to the Employee:

         Confidential

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

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

         ---------------------------------------
         Telecopier no.: (   )   -

         With a copy to:

         Kathleen M. Shay, Esq.
         Duane, Morris & Heckscher LLP
         One Liberty Place
         Philadelphia, Pennsylvania 19103-7396
         Telecopier no.: (215) 979-1020

                                       F-3
<PAGE>   245

         If to Immersion:

         Immersion Corporation
         801 Fox Lane
         San Jose, California 95131
         Attention: Louis Rosenberg, Chief Executive Officer
         Telecopier no.: (408) 467-1901

         With a copy to:

         Stephen E. Newton, Esq.
         Heller Ehrman White & McAuliffe LLP
         601 South Figueroa Street, 40th Floor
         Los Angeles, California 90017-5758
         Telecopier no.: (213) 614-1868

or to such other address or telecopier number as the party to whom notice is to
be given has furnished to the other party in the manner provided above, provided
that notice of such change has actually been received by the party to whom it is
directed.

     3.3  Amendment. This Agreement may not be amended, modified, supplemented,
cancelled or discharged except in a writing signed by Immersion and the
Employee.

     3.4  Headings. The Article, Section and subsection headings contained in
this Agreement are for reference purposes only and will not affect in any way
the meaning or interpretation of this Agreement.

     3.5  Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other terms and provisions of this Agreement will nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, Immersion and the Employee will
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that the transactions contemplated hereby are fulfilled to the fullest extent
possible.

     3.6  Governing Law. This Agreement will be governed by, and construed in
accordance with, the internal laws of the State of Maryland applicable to
contracts executed and fully performed within the State of Maryland, without
regard to any principles of conflicts or choice of laws.

     3.7  Interpretation. This Agreement has been negotiated and is to be
interpreted according to its fair meaning and not strictly for or against any
party. The parties waive any rule of law or judicial precedent that provides
that contractual ambiguities are to be construed against the party who drafted
the contractual provision in question. All references in this Agreement to
"parties" refer to the parties to this Agreement unless expressly indicated
otherwise. References in this Agreement to Sections or subsections are to
Sections and subsections of this Agreement unless expressly indicated otherwise.
At each place in this Agreement where the context so requires, the masculine,
feminine or neuter gender includes the others and the singular or plural number
includes the other. "Including" means "including without limitation" and "or" is
used in the inclusive sense of "and/or."

     3.8  Entire Agreement. This Agreement constitutes the entire understanding
and agreement between the parties with regard to the subject matter hereof, and
supersedes all prior agreements, understandings, negotiations, representations
and discussions, whether written or oral, pertaining to that subject matter,
which will continue in full force and effect.

     3.9  Waiver. Either Immersion or the Employee may extend the time for the
performance of any of the obligations or other acts of the other party or waive
compliance with any of the agreements of the other party. No waiver of any
breach or default hereunder will be considered valid unless in writing and

                                       F-4
<PAGE>   246

signed by the party giving such waiver, and no such waiver will be deemed a
waiver of any subsequent breach or default of the same or similar nature.

     3.10  Parties in Interest. Except for HT, who is third party beneficiary of
this Agreement, nothing in this Agreement, expressed or implied, is intended to
confer upon any person or entity other than the parties any rights or remedies
under or by reason of this Agreement.

     3.11  Successors and Assigns. This Agreement inures to the benefit of and
is binding upon the successors and assigns of the parties. Notwithstanding the
foregoing, neither this Agreement nor any rights or obligations hereunder may be
assigned, pledged, hypothecated or otherwise transferred by the Employee without
the prior written consent of Immersion, which consent may be withheld in the
sole discretion of Immersion.

     3.12  Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. The exchange of copies of
this Agreement and of signature pages by telecopier transmission will constitute
effective execution and delivery of this Agreement as to the parties and may be
used in lieu of the original for all purposes. Signatures of the parties
transmitted by telecopier will be deemed to be their original signatures for any
purpose whatsoever.

     3.13  Consent to Jurisdiction. Each of the parties hereto (i) consents to
submit himself, herself or itself to the personal jurisdiction of the United
States District Court of the District of Maryland or the courts of the State of
Maryland located in the County of Montgomery with respect to any and all
disputes arising out of (A) this Agreement, the Merger Agreement or the Escrow
Agreement, including the validity construction and interpretation hereof and
thereof and the rights and remedies of the parties hereunder and thereunder; (B)
any of the transactions contemplated by this Agreement, the Merger Agreement and
the Escrow Agreement; and (C) any matters related to but not covered hereby or
thereby, in each case to the extent such court would have subject matter
jurisdiction with respect to such dispute; (ii) agrees that he, she or it will
not attempt to deny or defeat such personal jurisdiction or venue by motion or
other request for leave from any such court; and (iii) agrees that nothing
herein will affect the right to effect service of process in any manner
permitted by law.

     3.14  Holidays. If any date on which action is to be taken under this
Agreement occurs, or if any period during which action is to be taken under this
Agreement ends, on a Saturday, Sunday or national holiday, the date or period
will be extended to the next succeeding day which is not a Saturday, Sunday or
national holiday.

     3.15  Survival. The representations, warranties, covenants and agreements
of the parties contained in or made pursuant to this Agreement will survive the
consummation of the transactions contemplated by this Agreement and will in no
way be affected by any investigation of the subject matter thereof made by or on
behalf of the parties.

     3.16  Attorneys' Fees. The prevailing party will be entitled to recover all
costs and expenses, including reasonable attorneys' fees, expert witness fees,
court costs and all other costs and expenses incurred in any action or
proceeding arising out of this Agreement or as to any matters related to but not
covered by this Agreement. "Prevailing party" for purposes of this Section 3.16
includes a party who agrees to dismiss an action or proceeding upon the other's
payment of the sums allegedly due or for performance of the covenants,
undertakings or agreements allegedly breached, or who obtains substantially the
relief it sought.

                [BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                       F-5
<PAGE>   247

     IN WITNESS WHEREOF, the parties have caused this Noncompetition Agreement
to be duly executed as of the date first above written.

                                          IMMERSION:

                                          IMMERSION CORPORATION

                                          By
                                            ------------------------------------
                                             Its:
                                            ------------------------------------

                                          THE EMPLOYEE:

                                       F-6
<PAGE>   248

                                                                      APPENDIX G

                                           , 2000

Immersion Corporation
2158 Paragon Drive
San Jose, California 95131

                              AFFILIATE AGREEMENT

Ladies and Gentlemen:

     Reference is made to the Agreement and Plan of Reorganization, dated as of
July 31, 2000 (the "Agreement"), by and among Immersion Corporation, a Delaware
corporation ("Immersion"), HT Merger, Inc., a Maryland corporation and a wholly
owned subsidiary of Immersion ("Merger Sub"), HT Medical Systems, Inc., a
Maryland corporation (the "Company"), and Greg Merril pursuant to which Merger
Sub would be merged (the "Merger") with and into the Company, which would be the
surviving corporation in the Merger (the "Surviving Corporation"), and the
stockholders of the Company would be entitled to receive shares of common stock
of Immersion, all in accordance with the terms and conditions of the Merger
Agreement.

     As an inducement and a condition for Immersion and Merger Sub to enter into
the Merger Agreement, the undersigned stockholder of the Company (the
"Stockholder") is entering into this letter agreement.

     The Stockholder has been informed that the shares of Immersion Common Stock
which the Stockholder will acquire in connection with the Merger will be issued
pursuant to an exemption from registration under the Securities Act of 1933, as
amended (the "Securities Act"); that the Merger will be accounted for using the
"pooling-of-interests" method and is intended to be a tax-free "reorganization"
for federal income tax purposes; and that, accordingly, the shares of Immersion
Common Stock which the Stockholder will acquire in connection with the Merger
may only be disposed of in conformity with the Securities Act and the other
limitations described herein. The Stockholder has also been informed that the
treatment of the Merger as a pooling-of-interests for financial accounting
purposes is dependent upon the accuracy of certain of the representations and
warranties and the compliance with certain of the agreements set forth herein.

     The Stockholder represents, warrants and agrees as follows:

     1. Ownership of Company Shares.

     (a) The Stockholder has full power to execute this letter agreement and to
make the representations, warranties and agreements herein and to perform the
Stockholder's obligations hereunder. The Stockholder is the beneficial owner of
all of the shares of Company Common Stock, Company Preferred Stock and Company
securities convertible into Company Common Stock listed on Appendix A attached
hereto (the "Company Shares"), as to which the Stockholder has sole or shared
voting or investment power.

     (b) For purposes of this Agreement, the term "beneficially own" or
"beneficial ownership" with respect to any securities shall mean having
"beneficial ownership" of such securities (as determined pursuant to Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
including pursuant to any agreement, arrangement or understanding, whether or
not in writing; without duplicative counting of the same securities by the same
holder, securities beneficially owned by a Person shall include securities
beneficially owned by all other Persons with whom such Person would constitute a
"group" within the meaning of Section 13(d)(3) of the Exchange Act.

     (c) For purposes of this Agreement, the term "Person" shall mean an
individual, corporation, partnership, limited liability company, joint venture,
association, trust, unincorporated organization or other entity.

                                       G-1
<PAGE>   249

     2. Provisions Concerning Pooling of Interests. Notwithstanding any other
provision of this letter agreement to the contrary, none of the securities of
the Company that the Stockholder beneficially owns has been or will be sold,
transferred or disposed of, and Stockholder will not in any way reduce
Stockholder's risk of ownership or investment in any securities of the Company,
in the 30-day period prior to the effective time of the Merger (the "Effective
Time"). Further, notwithstanding any other provision of this Agreement to the
contrary, (1) none of the Company Shares, (2) no option, right or other interest
with respect to any Company Shares, and (3) no other securities of Immersion
that Stockholder owns or obtains pursuant to the Merger, will be sold,
transferred or otherwise disposed of, and Stockholder will not in any other way
reduce Stockholder's risk of ownership or investment in any of such securities,
until a financial report including the combined sales and net income of
Immersion and the Company covering a period of at least 30 days of combined
operations following the Effective Time has been publicly released by Immersion.

     3. The Stockholder also understands that, following the Merger, stop
transfer instructions will be given to Immersion's transfer agent with respect
to certificates evidencing shares of Immersion Common Stock issued upon exchange
of the Company Shares in accordance with the Merger and that there will be
placed on the certificates evidencing those shares of Immersion Common Stock a
legend stating in substance:

     THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
     RESTRICTIONS SET FORTH IN AN AGREEMENT BETWEEN THE REGISTERED HOLDER
     THEREOF AND IMMERSION CORPORATION. THE AGREEMENT PROVIDES THAT THE SHARES
     MAY NOT BE SOLD, TRANSFERRED OR DISPOSED OF UNTIL A FINANCIAL REPORT
     INCLUDING THE COMBINED SALES AND NET INCOME OF IMMERSION CORPORATION AND HT
     MEDICAL SYSTEMS, INC. COVERING A PERIOD OF AT LEAST 30 DAYS OF COMBINED
     OPERATIONS FOLLOWING THE MERGER OF HT MEDICAL SYSTEMS, INC. WITH A WHOLLY
     OWNED SUBSIDIARY OF IMMERSION CORPORATION HAS BEEN PUBLICLY RELEASED BY
     IMMERSION CORPORATION. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL
     OFFICES OF IMMERSION CORPORATION.

     By countersigning below, Immersion agrees that such stop transfer
instruction and legend will be removed promptly if the provisions of this letter
are complied with; provided, however, that Immersion reserves the right to
impose reasonable stop transfer instructions and legends on certificates to
insure compliance with Rule 144 and Rule 145 under the Securities Act.

     4. Once countersigned by Immersion, this letter shall be binding upon and
enforceable against the Stockholder and Stockholder's administrators, executors,
representatives, heirs, legatees and devisees.

                                       G-2
<PAGE>   250

     5. The Stockholder has carefully read this letter and has discussed its
requirements and other applicable limitations upon the sale, transfer, or other
disposition of the Company Shares and other securities owned by the Stockholder
with the Stockholder's counsel to the extent the Stockholder felt necessary.

                                          Very truly yours,

                                          "Stockholder"

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

AGREED AND ACCEPTED:

IMMERSION CORPORATION

By:
------------------------------------------------------ Dated
-------------------- , 2000
    Name:
    Title:

                                       G-3
<PAGE>   251

                                   APPENDIX A
                                       TO
                              AFFILIATE AGREEMENT

<TABLE>
<CAPTION>
                                                                  NUMBER OF
                                                                COMPANY SHARES
                    NAME OF RECORD OWNER                      BENEFICIALLY OWNED
                    --------------------                      ------------------
<S>                                                           <C>
</TABLE>

                                       G-4
<PAGE>   252

                                                                      APPENDIX H

                  SUBTITLE 2. RIGHTS OF OBJECTING STOCKHOLDERS

     sec. 3-201  Definition. (a) In this subtitle, except as provided in
subsection (b) of this section, "successor" includes a corporation which amends
its charter in a way which alters the contract rights, as expressly set forth in
the charter, of any outstanding stock, unless the right to do so is reserved by
the charter of the corporation.

     (b) When used with reference to a share exchange, "successor" means the
corporation the stock of which was acquired in the share exchange.

     sec. 3-202  Right to Fair Value of Stock (a) Except as provided in
subsection (c) of this section, a stockholder of a Maryland corporation has the
right to demand and receive payment of the fair value of the stockholder's stock
from the successor if:

          (1) The corporation consolidates or merges with another corporation;

          (2) The stockholder's stock is to be acquired in a share exchange;

          (3) The corporation transfers its assets in a manner requiring action
     under Section 3-105(e) of this title; 1

          (4) The corporation amends its charter in a way which alters the
     contract rights, as expressly set forth in the charter, of any outstanding
     stock and substantially adversely affects the stockholder's rights, unless
     the right to do so is reserved by the charter of the corporation; or

          (5) The transaction is governed by Section 3-602 of this title or
     exempted by Section 3-603(b) of this title.

     (b)(1) Fair value is determined as of the close of business:

          (i) With respect to a merger under Section 3-106 of this title of a 90
     percent or more owned subsidiary with or into its parent corporation, on
     the day notice is given or waived under Section 3-106; or

          (ii) With respect to any other transaction, on the day the
     stockholders voted on tile transaction objected to.

     (2) Except as provided in paragraph (3) of this subsection, fair value may
not include any appreciation or depreciation which directly or indirectly
results from the transaction objected to or from its proposal.

     (3) In any transaction governed by Section 3-602 of this title or exempted
by Section 3-603(b) of this title, fair value shall be value determined in
accordance with the requirements of Section 3-603(b) of this title.

     (c) Unless the transaction is governed by Section 3-602 of this title or is
exempted by Section 3-603(b) of this title, a stockholder may not demand the
fair value of the stockholder's stock and is bound by the terms of the
transaction if.

          (1) The stock is listed on a national securities exchange or is
     designated as a national market system security on an interdealer quotation
     system by the National Association of Securities Dealers, Inc.

             (i)  With respect to a merger under Section 3-106 of this title of
        a 90 percent or more owned subsidiary with or into its parent
        corporation, on the date notice is given or waived under Section 3-106;
        or

             (ii) With respect to any other transaction, on the record date for
        determining stockholders entitled to vote on the transaction objected
        to;

                                       H-1
<PAGE>   253

          (2) The stock is that of the successor in a merger; unless:

             (i)  The merger alters the contract rights of the stock as
        expressly set forth in the charter, and the charter does not reserve the
        right to do so; or

             (ii) The stock is to be changed or converted in whole or in part in
        the merger into something other than either stock in the successor or
        cash, scrip, or other rights or interests arising out of provisions for
        the treatment of fractional shares of stock in the successor; or

          (3) The stock is that of an open-end investment company registered
     with the Securities and Exchange Commission under the Investment Company
     Act of 1940 and the value placed on the stock in the transaction is its net
     asset value.

     Section 3-203  Procedure by Stockholder.

     (a) A stockholder of a corporation who desires to receive payment of the
fair value of the stockholder's stock under this subtitle:

          (1) Shall file with the corporation a written objection to the
     proposed transaction:

             (i)  With respect to a merger under Section 3-106 of this title of
        a 90 percent or more owned subsidiary with or into its parent
        corporation, within 30 days after notice is given or waived under
        Section 3-106; or

             (ii) With respect to any other transaction, at or before the
        stockholders' meeting at which the transaction will be considered;

          (2) May not vote in favor of the transaction; and

          (3) Within 20 days after the Department accepts the articles for
     record, shall make a written demand on the successor for payment for his
     stock, stating the number and class of shares for which he demands payment.

     (b) A stockholder who fails to comply with this section is bound by the
terms of the consolidation, merger, share exchange, transfer of assets, or
charter amendment.

     Section 3-204  Effect of Demand on Dividend and Other Rights.

     A stockholder who demands payment for his stock under this subtitle:

          (1) Has no right to receive any dividends or distributions payable to
     holders of record of that stock on a record date after the close of
     business on the day as at which fair value is to be determined under
     sec. 3-202 of this subtitle; and

          (2) Ceases to have any rights of a stockholder with respect to that
     stock, except the right to receive payment of its fair value.

     Section 3-205  Withdrawal of Demand.

     A demand for payment may be withdrawn only with the consent of the
successor.

     Section 3-206  Restoration of Dividend and Other Rights.

     (a) The rights of a stockholder who demands payment are restored in full,
if:

          (1) The demand for payment is withdrawn;

          (2) A petition for an appraisal is not filed within the time required
     by this subtitle;

          (3) A court determines that the stockholder is not entitled to relief,
     or

          (4) The transaction objected to is abandoned or rescinded.

                                       H-2
<PAGE>   254

     (b) The restoration of a stockholder's rights entitles him to receive the
dividends, distributions, and other rights he would have received if he had not
demanded payment for his stock. However, the restoration does not prejudice any
corporate proceedings taken before the restoration.

     Section 3-207  Procedure by Successor.

     (a)(1) The successor promptly shall notify each objecting stockholder in
writing of the date the articles are accepted for record by the Department.

     (2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each offer
shall be accompanied by the following information relating to the corporation
which issued the stock:

          (i) A balance sheet as of a date not more than six months before the
     date of the offer;

          (ii) A profit and loss statement for the 12 months ending on the date
     of the balance sheet; and

          (iii) Any other information the successor considers pertinent.

     (b) The successor shall deliver the notice and offer to each objecting
stockholder personally or mail them to him by registered mail at the address he
gives the successor in writing, or, if none, at his address as it appears on the
records of the corporation which issued the stock.

     Section 3-208  Petition for Appraisal; Consolidation of Proceedings;
Joinder of Objectors.

     (a) Within 50 days after the Department accepts the articles for record,
the successor or an objecting stockholder who has not received payment for his
stock may petition a court of equity in the county where the principal office of
the successor is located or, if it does not have a principal office in this
State, where the resident agent of the successor is located, for an appraisal to
determine the fair value of the stock.

     (b)(1) If more than one appraisal proceeding is instituted, the court shall
direct the consolidation of all the proceedings on terms and conditions it
considers proper.

     (2) Two or more objecting stockholders may join or be joined in an
appraisal proceeding.

     Section 3-209  Certificate May be Noted.

     (a) At any time after a petition for appraisal is filed, the court may
require the objecting stockholders parties to the proceeding to submit their
stock certificates to the clerk of the court for notation on them that the
appraisal proceeding is pending. If a stockholder fails to comply with the
order, the court may dismiss the proceeding as to him or grant other appropriate
relief.

     (b) If any stock represented by a certificate which bears a notation is
subsequently transferred, the new certificate issued for the stock shall bear a
similar notation and the name of the original objecting stockholder. The
transferee of this stock does not acquire rights of any character with respect
to the stock other than the rights of the original objecting stockholder.

     Section 3-210  Appraisal of Fair Value.

     (a) If the court finds that the objecting stockholder is entitled to an
appraisal of his stock, it shall appoint three disinterested appraisers to
determine the fair value of the stock on terms and conditions the court
considers proper. Each appraiser shall take an oath to discharge his duties
honestly and faithfully.

     (b) Within 60 days after their appointment, unless the court sets a longer
time, the appraisers shall determine the fair value of the stock as of the
appropriate date and file a report stating the conclusion of the majority as to
the fair value of the stock.

     (c) The report shall state the reasons for the conclusion and shall include
a transcript of all testimony and exhibits offered.

                                       H-3
<PAGE>   255

     (d)(1) On the same day that the report is filed, the appraisers shall mail
a copy of it to each party to the proceedings.

     (2) Within 15 days after the report is filed, any party may object to it
and request a hearing.

     Section 3-211  Consideration by Court of Appraisers' Report.

     (a) The court shall consider the report and, on motion of any party to the
proceeding, enter an order which:

          (1) Confirms, modifies, or rejects it; and

          (2) If appropriate, sets the time for payment to the stockholder.

     (b)(1) If the appraisers' report is confirmed or modified by the order,
judgment shall be entered against the successor and in favor of each objecting
stockholder party to the proceeding for the appraised fair value of his stock.

     (2) If the appraisers' report is rejected, the court may:

          (i) Determine the fair value of the stock and enter judgment for the
     stockholder; or

          (ii) Remit the proceedings to the same or other appraisers on terms
     and conditions it considers proper.

     (c)(1) Except as provided in paragraph (2) of this subsection, a judgment
for the stockholder shall award the value of the stock and interest from the
date I as to which fair value is to be determined under Section 3-202 of this
subtitle.

     (2) The court may not allow interest if it finds that the failure of the
stockholder to accept an offer for the stock made under Section 3-207 of this
subtitle was arbitrary and vexatious or not in good faith. In making this
finding, the court shall consider:

          (i) The price which the successor offered for the stock;

          (ii) The financial statements and other information furnished to the
     stockholder; and

          (iii) Any other circumstances it considers relevant.

     (d)(1) The costs of the proceedings, including reasonable compensation and
expenses of the appraisers, shall be set by the court and assessed against the
successor. However, the court may direct the costs to be apportioned and
assessed against any objecting stockholder if the court finds that the failure
of the stockholder to accept an offer for the stock made under Section 3-207 of
this subtitle was arbitrary and vexatious or not in good faith. In making this
finding, the court shall consider:

          (i) The price which the successor offered for the stock;

          (ii) The financial statements and other information furnished to the
     stockholder; and

          (iii) Any other circumstances it considers relevant.

     (2) Costs may not include attorney's fees or expenses. The reasonable fees
and expenses of experts may be included only if:

          (i) The successor did not make an offer for the stock under
     Section 3-207 of this subtitle; or

          (ii) The value of the stock determined in the proceeding materially
     exceeds the amount offered by the successor.

     (e) The judgment is final and conclusive on all parties and has the same
force and effect as other decrees in equity. The judgment constitutes a lien on
the assets of the successor with priority over any mortgage or other lien
attaching on or after the effective date of the consolidation, merger, transfer,
or charter amendment.

                                       H-4
<PAGE>   256

     Section 3-212  Surrender of Stock.

     The successor is not required to pay for the stock of an objecting
stockholder or to pay a judgment rendered against it in a proceeding for an
appraisal unless, simultaneously with payment:

          (1) The certificates representing the stock are surrendered to it,
     indorsed in blank, and in proper form for transfer; or

          (2) Satisfactory evidence of the loss or destruction of the
     certificates and sufficient indemnity bond are furnished.

     Section 3-213  Rights of Successor with Respect to Stock.

     (a) A successor which acquires the stock of an objecting stockholder is
entitled to any dividends or distributions payable to holders of record of that
stock on a record date after the close of business on the day as at which fair
value is to be determined under Section 3-202 of this subtitle.

     (b) After acquiring the stock of an objecting stockholder, a successor in a
transfer of assets may exercise all the rights of an owner of the stock.

     (c) Unless the articles provide otherwise stock in the successor of a
consolidation 4 merger, or share exchange otherwise deliverable in exchange for
the stock of an objecting stockholder has the status of authorized but unissued
stock of the successor. However, a proceeding for reduction of the capital of
the successor is not necessary to retire the stock or to reduce the capital of
the successor represented by the stock.

                                       H-5
<PAGE>   257

                                                                      APPENDIX I

                            HT MEDICAL SYSTEMS, INC.

                 PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS
                         TO BE HELD             , 2000
          THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

    The undersigned hereby appoints Gregory L. Merril and Rodney G. Hilton, and
each of them, the attorneys, agents and proxies of the undersigned, with full
powers of substitution to each, to attend and act as proxy or proxies of the
undersigned at the Special Meeting of Shareholders (the "Special Meeting") of HT
Medical Systems, Inc. (the "Company") to be held at 55 W. Watkins Mill Road,
Gaithersburg, MD 20878, on            , 2000 at              a.m. and any
adjournment thereof, and to vote as specified herein the number of shares of
Common Stock and Series A Preferred Stock that the undersigned, if personally
present, would be entitled to vote.

    1. APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION. To approve the
Agreement and Plan of Reorganization providing for the merger of a subsidiary of
Immersion Corporation with the Company.

          FOR [ ]          AGAINST [ ]          ABSTAIN [ ]

          THE BOARD OF DIRECTORS RECOMMENDS VOTING FOR PROPOSAL NO. 1.

    2. OTHER BUSINESS. In their discretion, the proxies are authorized to vote
upon such other business as may come before the Special Meeting and any and all
adjournments thereof. The Board of Directors at present knows of no other
business to be presented by or on behalf of the Company or the Board of
Directors at the Special Meeting.

    IMPORTANT -- PLEASE SIGN AND DATE ON REVERSE SIDE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.

    This proxy, when properly executed, will be voted as specified. If no
instruction is specified, the shares represented by this proxy will be voted
"FOR" the approval of the Agreement and Plan of Reorganization. If any other
business is presented at the meeting, this proxy confers authority to and shall
be voted in accordance with the recommendations of the Board of Directors. This
proxy is solicited on behalf of the Board of Directors and may be revoked prior
to its exercise by filing with the Secretary of the Company a duly executed
proxy bearing a later date or an instrument revoking this proxy, or by attending
the meeting and electing to vote in person.

                                          --------------------------------------
                                          (Please print your name)

                                          --------------------------------------
                                          (Signature of Shareholder)

                                          Dated: , 2000

                                          --------------------------------------
                                          (Please print your name)

                                          --------------------------------------
                                          (Signature of Shareholder)

                                          Dated: , 2000

                                          (Please date this and sign your name
                                          as it appears on your stock
                                          certificates. Executors,
                                          administrators, trustees, etc., should
                                          give their full title. All joint
                                          owners should sign.)

 PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
                                   ENVELOPE.
</TEXT>
</DOCUMENT>