<PAGE>

                                                                    Exhibit 10.4

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.

                                LICENSE AGREEMENT

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

                                    RECITALS

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

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

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

                                    AGREEMENT

1.       DEFINITIONS.

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

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

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

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

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

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

         G.       [****].

         H.       [****].
<PAGE>
                            PROVIDED UNDER RULE 408

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

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

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

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

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

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

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

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

2.       LICENSE RIGHTS.

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

                                       2
<PAGE>
                            PROVIDED UNDER RULE 408

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

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

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

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

                  (IV)     [****].

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

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

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

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

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

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

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

                                       3
<PAGE>
                            PROVIDED UNDER RULE 408

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

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

4.       ADDITIONAL RIGHTS, OBLIGATIONS/RESTRICTIONS.

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

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

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

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

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

                                       4
<PAGE>
                            PROVIDED UNDER RULE 408

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

6.       WARRANTIES.

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

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

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

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

                  (IV)     [****];

                  (V)      [****];

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

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

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

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

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

                                       5
<PAGE>
                            PROVIDED UNDER RULE 408

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

7.       TERM; TERMINATION.

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

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

8.       LIMITATION OF LIABILITIES.

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

                                       6
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                            PROVIDED UNDER RULE 408

9.       GENERAL.

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

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

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

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

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

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

                                       7
<PAGE>
                            PROVIDED UNDER RULE 408

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

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

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

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       8
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                   -------------------------------------------

                              SIGNATURE PAGE TO THE
                                LICENSE AGREEMENT

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

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

                                    IMMERSION CORPORATION

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

                                    MICROSOFT CORPORATION

                                    By:   ______________________________________
                                          Name:
                                          Title:


                                    By:   ______________________________________
                                          Name:
                                          Title:


                                    By:   ______________________________________
                                          Name:
                                          Title:


                                    By:   ______________________________________
                                          Name:
                                          Title: