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

                              SETTLEMENT AGREEMENT
                               AND MUTUAL RELEASE

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

                                    RECITALS

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

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

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

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

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

                                      TERMS

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

      2. PAYMENT AMOUNT. Within five (5) days after the Effective Date,
Microsoft shall pay Immersion by cashier's check, wire transfer or other
immediately available funds the sum of money set forth in the License Agreement.
<PAGE>
                              PROVIDED UNDER RULE 408

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

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