EVERYDAY HAPTICS at work | at play | on-the-go 2006 ANNUAL REPORT IMMERSION CORPORATION EVERYDAY HAPTICS With Immersion products and technology, people from every walk of life can experience a new way to interact at work | at play | on-the-go with digital devices. Everyday around the world, doctors, nurses, and technicians train in the fine points of medical procedures and surgeries using our medical simulators with realistic haptic response. In PC and video console gaming, haptics draws players into the action, making game play more fun. And in cars, it can make an ever increasing number of controls more intuitive and safer to use. The Immersion VibeTonz® System in millions of mobile phones brings another dimension to ringtones, games, touchscreen presses, and other everyday uses. And now, TouchSense® technology allows touchscreens to provide unmistakable tactile confirmations. Haptics everyday. For work, play, and everything in between. To Our Valued Shareholders Through focus and execution, Immersion is rapidly approaching our prime objective — widespread, main- stream adoption of our haptic technology leading to significant revenue growth and profitability. Meeting this objective requires creative and dedicated employees, a strong intellectual property (IP) portfolio, and concen- trated focus on a few large markets. Creative and Dedicated Employees Located around the world, our employees continue to invent haptic solutions, extend the limits of our technology and what it can offer, and support our customers in achieving implementations that improve the user experience. As an example, in 2006, we were granted 53 new patents and submitted applications for nearly that many more. Strong Intellectual Property Portfolio Immersion holds more than 600 issued or pending patents in the U.S. and other countries. Protecting and defending our intellectual property is crucial, and we will continue to do so for the benefit of our sharehold- ers and licensees. Recently Immersion and Sony Computer Entertainment (SCE) concluded their patent litigation at the U.S. Court of Appeals for the Federal Circuit. We have received approximately $129.5 million under the judgment and the compulsory license fee orders. We also signed a new business agreement to explore including our TouchSense® technology in Sony PlayStation products. Under the business agreement we will receive at least $22.5 million through December 2009. Concentrated Focus on a Few Large Markets Our haptic technologies make digital devices and controls more familiar, engaging, satisfying, fun, safer, and easier to use. Our strategy is to prioritize and focus on potential growth markets, each of which offers the possibility of significant annual revenue based on technology we have today: Medical Training Simulators In 2006 we expanded and upgraded our medical product line, increased international sales, and pursued and entered into new industry alliances. The result was a 47% increase in revenue. Launched in 2006, our new endovascular simulator can provide training for minimally invasive procedures in more areas of the body. Our agreement with Laerdal Medical A/S involves manufacturing and global selling of a product, the Virtual IV system, which combines technology from both companies. We continue to produce simulation hardware and software for corporate accounts such as Medtronic. This same strategy will continue into 2007. Touchscreen-based Equipment There are many opportunities for our tactile touchscreen products across high-volume markets: automotive, casino gaming, industrial controls, kiosks, and medical equipment. Each of these markets, and many others, have adopted the touchscreen because of its intuitive user interface, software flexibility, space and cost savings, and other benefits. What existing touchscreens do not supply, however, is tactile confirmation — and the loss of that simple quality can be detrimental to user enjoyment, engagement and understanding, completion of commercial transactions, safety, and other factors. Our haptic technology can help solve these problems by supplying tactile confirmation for the touchscreen interface. We are working closely with 3M Touch Systems to begin selling a tactile feedback touchscreen for the casino gaming and bar top amusement markets in 2007, and we believe several more markets will embrace tactile feedback for touchscreen interactions. Mobile Devices Our near-term goal is to significantly increase the number of mobile phones with VibeTonz® capability, improve the user interface, and enhance content, such as ringtones, games, messaging, and other applications. There were 13 VibeTonz-enabled phone models launched and approximately 4 million units shipped worldwide through the end of 2006. In addition, in 2006, we signed a license agreement with LG Electronics, the world’s top manufacturer of CDMA handsets and fourth in the number of phones sold worldwide. We continue to engage other leading manufacturers with the near-term goal of signing additional licensees. The first touchscreen phone with our tactile feedback shipped in the fourth quarter of 2006. In this application, users receive confirming tactile cues in response to touchscreen presses, which helps compensate for glare, noise, small buttons, and distracting environments. Strategy Analytics, a global research and consulting firm, predicts that by 2012 as many as 40% of mobile phones could be using some form of touch-sensitive technology, a large potential opportunity for Immersion. Consumer portable devices of all types, including new multifunctional appliances that combine a mobile phone, contacts, calendar, data services, web browsing, music/video/TV, camera, navigation, games, and more are becoming popular. The experience of using these products can be enhanced with haptics. We are well-positioned to add our solutions to many types of handheld devices and are aggressively pursuing these opportunities. Major Milestones for 2007 Our opportunities are plentiful, and our course is clear. Goals for 2007 include: N Launch our TouchSense technology for touchscreen-based equipment into multiple markets N Substantially increase the number of haptic-enabled mobile devices N Continue expanding our medical product line, international sales, and industry alliances N Achieve profitability We have the employees, IP, and focus needed for continued progress, and I look forward to the exciting year ahead. Victor Viegas President, CEO, and Director UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006 or n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 000-27969 Immersion Corporation (Exact name of registrant as specified in its charter) Delaware 94-3180138 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 801 Fox Lane San Jose, California 95131 (Address of principal executive offices, zip code) (408) 467-1900 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on which Registered Common Stock, $0.001 par value The Nasdaq Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes n No ¥ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes n No ¥ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¥ No n Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large accelerated filer n Accelerated filer ¥ Non-accelerated filer n Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes n No ¥ The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 30, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was $96,354,146 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person whom owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Number of shares of common stock outstanding at February 23, 2007: 25,237,395 DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statements for the