EXHIBIT 99.1

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

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

This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The forward-looking statements
involve risks and uncertainties. Forward-looking statements are identified by
words such as "anticipates," "believes," "expects," "intends," "may," "will" and
other similar expressions. However, these words are not the only way we identify
forward-looking statements. In addition, any statements, which refer to
expectations, projections or other characterizations of future events or
circumstances, are forward-looking statements. Actual results could differ
materially from those projected in the forward-looking statements as a result of
a number of factors, including those described in our other reports filed with
the SEC. We caution you not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report, and we undertake no
obligation to release the results of any revisions to these forward-looking
statements which could occur after the filing of this report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States ("GAAP"). The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to revenue recognition, bad
debts, warranty obligations, patents and intangible assets, inventories,
contingencies, and litigation. We base our estimates on historical experience
and on various other factors that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.

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

We recognize revenues in accordance with applicable accounting
standards including Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition," Emerging Issues Task Force ("EITF") Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables" and the American Institute
of Certified Public Accountants' (the "AICPA") Statement of Position ("SOP")
97-2, "Software Revenue Recognition," as amended. Revenue is recognized when
persuasive evidence of an arrangement exists, delivery has occurred or service
has been rendered, the fee is fixed and determinable, and collectibility is
probable. We derive our revenues from three principle sources: royalty and
license fees, product sales, and development contracts. We recognize royalty and
license revenue based on royalty reports or related information received from
the licensee as well as time-based licenses of our intellectual property
portfolio. Up-front payments under license agreements are deferred and
recognized as revenue based on either the royalty reports received or amortized
over the license period depending on the nature of the agreement. Advance
payments under license agreements that also require us to provide future
services to the licensee are deferred and recognized over the service period
when vendor specific objective evidence related to the value of the services
does not exist. Examples of our typical license models are as follows:

LICENSE REVENUE MODEL REVENUE RECOGNITION
--------------------- -------------------

Perpetual license of intellectual property Based on royalty reports received from
portfolio based on per unit royalties, no licensees. No further obligations to
services contracted licensee exist.

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

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

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

We generally license and recognize revenue from our licensees under the
above license models or a combination thereof. Individual contracts may have
characteristics that do not fall within a specific license model or may have
characteristics of a combination of license models. Under those circumstances,
we recognize revenue in accordance with SAB No. 104, EITF No. 00-21 and SOP
97-2, as amended, to guide the accounting treatment for each individual
contract. If the information received from our licensees regarding royalties is
incorrect or inaccurate, it could adversely affect revenue in future periods. To
date all information received from our licensees has caused no material
reduction in future period revenues. We recognize revenues from product sales
when the product is shipped provided collection is determined to be probable and
no significant obligation remains. We sell the majority of our products with
warranties ranging from three to twenty-four months. We record the estimated
warranty costs during the quarter the revenue is recognized. Historically,
warranty-related costs and related accruals have not been significant. We offer
a general right of return on the MicroScribe G2 product line for 14 days after
purchase. We recognize revenue at the time of shipment of a MicroScribe system
and provide an accrual for potential returns based on historical experience. No
other general right of return is offered on our products. Development contract
revenues are recognized under the cost-to-cost percentage-of-completion
accounting method based on physical completion of the work to be performed.
Losses on contracts are recognized when determined. Revisions in estimates are
reflected in the period in which the conditions become known. Our revenue
recognition policies are significant because our revenue is a key component of
our results of operations. In addition, our revenue recognition determines the
timing of certain expenses, such as commissions and royalties. Revenue results
are difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause our operating results to vary significantly from quarter to
quarter and could result in greater or future operating losses.

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

We maintain allowances for doubtful accounts for estimated losses
resulting from our review and assessment of our customers' ability to make
required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances might be required. To date such estimated losses have been
within our expectations.

We provide for estimated costs of future anticipated product returns
and warranty obligations based on historical experience when related revenues
are recognized and defer warranty related revenue over the related warranty
term.

We have acquired patents and other intangibles. Our business
acquisitions typically result in goodwill and other intangible assets. In
addition, we capitalize the external legal and filing fees associated with
patents and trademarks. We assess the recoverability of our goodwill and other
intangible assets and we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets
that affect our consolidated financial statements. If these estimates or related
assumptions change in the future, we may be required to record impairment
charges for these assets. We amortize our intangible assets related to patents
and

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

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

RESULTS OF OPERATIONS

OVERVIEW OF 2003

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

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

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

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

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

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

During 2003 we experienced a decline in medical product sales mainly
due to the cautious economic environment and its impact on our customer's
ability to secure capital funding for such purchases. Furthermore, our royalty
and license revenues were negatively impacted by the decline in the PC gaming
market, in part due to the trend away from PC gaming towards console gaming.
During 2003, we continued to pursue our litigation against Sony Computer
Entertainment which diverted, and is likely to continue to divert, the efforts
and attention of some of our key management and personnel. We incurred
significant costs, $7.0 million associated with the litigation during the year,
as our litigation expenses increased by $5.1 million from 2002. We anticipate
that the litigation will continue to be costly, and there can be no assurance
that we will be able to recover the costs we incur in connection with the
litigation. The case is scheduled to go to trial in April 2004.

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

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

YEARS ENDED
DECEMBER 31,
--------------------------
2003 2002 2001
------ ------ ------

Revenues:
Royalty and license ............................................... 30.1% 25.9% 27.9%
Product sales ..................................................... 46.8 53.0 53.9
Development contracts and other ................................... 23.1 21.1 18.2
----- ----- -----
Total revenues ................................................ 100.0 100.0 100.0
----- ----- ------

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

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

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

Revenues

2003 % Change 2002 % Change 2001
---- -------- ---- -------- ----

Royalty and license .................... $ 6,088 16% $ 5,231 (2)% $ 5,362
Product sales .......................... 9,455 (12)% 10,723 4% 10,360
Development contracts and other ........ 4,680 9% 4,281 22% 3,510
------- --- ------- -- -------
Total revenue ....................... $20,223 -% $20,235 5% $19,232
======= === ======= == =======

FISCAL 2003 COMPARED TO FISCAL 2002

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

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

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

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

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

FISCAL 2002 COMPARED TO FISCAL 2001

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

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

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

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

COST OF PRODUCT SALES

2003 % Change 2002 % Change 2001
---- -------- ---- -------- ----

Cost of product sales.. $5,276 (10)% $5,881 (3)% $6,074
% of product sales .... 56% 55% 59%

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

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

EXPENSES

2003 % Change 2002 % Change 2001
---- -------- ---- -------- ----

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

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

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

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

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

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

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

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

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

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

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

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

INTEREST AND OTHER

2003 % Change 2002 % Change 2001
---- -------- ---- -------- ----

Interest and other income .... $ 126 (59)% $ 306 (72)% $1,088
Interest expense ............. 50 (91)% 582 (32)% 859
Other expense ................ 2,046 68% 1,219 (73)% 4,547

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

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

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

PROVISION FOR TAXES

2003 % Change 2002 % Change 2001
---- -------- ---- -------- ----

Provision for income taxes ... $154 N/A - -% -

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

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

The Company has two operating and reportable segments. Immersion
Computing, Entertainment and Industrial develops and markets TouchSense and
force-feedback technology that enables software and hardware developers to bring
realism into their computing and entertainment experience and industrial
applications. The second segment, Immersion Medical develops, manufactures, and
markets medical simulators that recreate realistic healthcare environments.

2003 % CHANGE 2002 % CHANGE 2001
---- -------- ---- -------- ----

Revenues:

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

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

FISCAL 2003 COMPARED TO FISCAL 2002

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

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

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

FISCAL 2002 COMPARED TO FISCAL 2001

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

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

LIQUIDITY AND CAPITAL RESOURCES

Our cash, cash equivalents, and short-term investments consist
primarily of money market funds and highly liquid debt instruments. All of our
cash equivalents and short-term investments are classified as available-for-sale
under the provisions of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The securities are stated at market value with
unrealized gains and losses reported as a component of accumulated other
comprehensive income (loss) within stockholders' equity (deficit).

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

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

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

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

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

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

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

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

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

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

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

SUMMARY DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

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

LESS THAN 1 - 3 4 - 5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
- ----------------------- ----- --------- ----- ----- ------

Long-Term Debt ......................... $ 26 $ 10 $ 16 $ - $ -
Capital Lease Obligations .............. 24 24 - - -
Operating Leases ....................... 3,208 1,255 1,137 672 144
--------------------------------------------
Total Contractual Cash Obligations ..... $3,258 $1,289 $1,153 $ 672 $ 144
============================================

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

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