##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  
 IMMERSION CORPORATION
  Delaware
    
    94-3180138(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 801 Fox Lane, San Jose, California 95131
 
 (Address of principal executive offices)(Zip Code)
 (408) 467-1900
 
 (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
  o þ




---



##### 



IMMERSION CORPORATION
 INDEX
  
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets (Unaudited) as of March 31, 2008 and
December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended
March 31, 2008 and 2007 (Restated)
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2008 and 2007 (Restated)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    35PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    37Item 6. Exhibits
    
    
    51SIGNATURES
    
    
    52EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



PART I
 
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 IMMERSION CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 (Unaudited)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    137,981
    
    
    $
    86,493Short-term investments
    
    
    2,034
    
    
    
    51,619Accounts receivable (net of allowances for doubtful accounts of: March 31, 2008  $73
and December 31, 2007  $85)
    
    
    3,281
    
    
    
    5,494Inventories, net
    
    
    4,042
    
    
    
    3,674Deferred income taxes
    
    
    3,620
    
    
    
    3,351Prepaid expenses and other current assets
    
    
    4,271
    
    
    
    3,036Total current assets
    
    
    155,229
    
    
    
    153,667Property and equipment, net
    
    
    2,124
    
    
    
    2,112Deferred income tax assets, net
    
    
    4,013
    
    
    
    4,031Intangibles and other assets, net
    
    
    8,834
    
    
    
    8,558Total assets
    
    $
    170,200
    
    
    $
    168,368LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,196
    
    
    $
    1,657Accrued compensation
    
    
    2,151
    
    
    
    1,828Other current liabilities
    
    
    2,300
    
    
    
    2,629Deferred revenue and customer advances
    
    
    5,773
    
    
    
    4,478Total current liabilities
    
    
    12,420
    
    
    
    10,592Long-term deferred revenue, less current portion
    
    
    14,966
    
    
    
    14,269Other long-term liabilities
    
    
    1,732
    
    
    
    1,720Total liabilities
    
    
    29,118
    
    
    
    26,581Contingencies (Note 14)Stockholders equity:Common stock and additional paid-in capital  $0.001 par value; 100,000,000 shares
authorized; shares issued and outstanding: March 31, 2008  30,516,169 and
December 31, 2007  30,389,850
    
    
    162,046
    
    
    
    160,147Warrants
    
    
    1,731
    
    
    
    1,731Accumulated other comprehensive income
    
    
    118
    
    
    
    137Accumulated deficit
    
    
    (22,813
    )
    
    
    (20,228
    )Total stockholders equity
    
    
    141,082
    
    
    
    141,787Total liabilities and stockholders equity
    
    $
    170,200
    
    
    $
    168,368
  3




---



##### Table of Contents



IMMERSION CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007(As restated, see Note 15)Revenues:Royalty and license
    
    $
    3,461
    
    
    $
    2,211Product sales
    
    
    3,851
    
    
    
    3,590Development contracts and other
    
    
    843
    
    
    
    613Total revenues
    
    
    8,155
    
    
    
    6,414Costs and expenses:Cost of product sales (exclusive of amortization of intangibles
shown separately below)
    
    
    2,086
    
    
    
    1,543Sales and marketing
    
    
    3,442
    
    
    
    2,703Research and development
    
    
    3,229
    
    
    
    2,543General and administrative
    
    
    4,263
    
    
    
    3,259Amortization of intangibles
    
    
    235
    
    
    
    254Litigation conclusions and patent license
    
    
    
    
    
    
    (134,900
    )Total costs and expenses
    
    
    13,255
    
    
    
    (124,598
    )Operating income (loss)
    
    
    (5,100
    )
    
    
    131,012Interest and other income
    
    
    1,507
    
    
    
    361Interest expense
    
    
    
    
    
    
    (406
    )Income (loss) before benefit (provision) for income taxes
    
    
    (3,593
    )
    
    
    130,967Benefit (provision) for income taxes
    
    
    1,008
    
    
    
    (15,129
    )Net income (loss)
    
    $
    (2,585
    )
    
    $
    115,838Basic net income (loss) per share
    
    $
    (0.08
    )
    
    $
    4.57Shares used in calculating basic net income (loss) per share
    
    
    30,478
    
    
    
    25,343Diluted net income (loss) per share
    
    $
    (0.08
    )
    
    $
    3.91Shares used in calculating diluted net income (loss) per share
    
    
    30,478
    
    
    
    29,677
  4




---



##### Table of Contents



IMMERSION CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007(As restated, 
see Note 15)Cash flows from operating activities:Net income (loss)
    
    $
    (2,585
    )
    
    $
    115,838Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    260
    
    
    
    213Amortization of intangibles
    
    
    235
    
    
    
    254Stock-based compensation
    
    
    964
    
    
    
    634Excess tax benefits from stock-based compensation
    
    
    (107
    )
    
    
    (10,304
    )Realized gain on short-term investments
    
    
    (81
    )
    
    
    Interest expense  accretion on 5% Convertible Debenture
    
    
    
    
    
    
    158Fair value adjustment of Put Option and Registration Rights
    
    
    
    
    
    
    (1
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    2,208
    
    
    
    1,894Inventories
    
    
    (369
    )
    
    
    (648
    )Deferred income taxes
    
    
    (251
    )
    
    
    (5,767
    )Prepaid expenses and other current assets
    
    
    (1,234
    )
    
    
    110Other assets
    
    
    (3
    )
    
    
    Accounts payable
    
    
    541
    
    
    
    (1,082
    )Accrued compensation and other current liabilities
    
    
    521
    
    
    
    528Income taxes payable
    
    
    (412
    )
    
    
    20,202Deferred revenue and customer advances
    
    
    1,991
    
    
    
    (31,481
    )Other long-term liabilities
    
    
    12
    
    
    
    637Net cash provided by operating activities
    
    
    1,690
    
    
    
    91,185Cash flows provided by (used in) investing activities:Maturities or sales of short-term investments
    
    
    49,657
    
    
    
    Intangibles and other assets
    
    
    (508
    )
    
    
    (386
    )Purchases of property and equipment
    
    
    (280
    )
    
    
    (163
    )Net cash provided by (used in) investing activities
    
    
    48,869
    
    
    
    (549
    )Cash flows from financing activities:Issuance of common stock under employee stock purchase plan
    
    
    168
    
    
    
    147Exercise of stock options and warrants
    
    
    659
    
    
    
    4,389Excess tax benefits from stock-based compensation
    
    
    107
    
    
    
    10,304Net cash provided by financing activities
    
    
    934
    
    
    
    14,840Effect of exchange rates on cash and cash equivalents
    
    
    (5
    )
    
    
    98Net increase in cash and cash equivalents
    
    
    51,488
    
    
    
    105,574Cash and cash equivalents:Beginning of the period
    
    
    86,493
    
    
    
    32,012End of the period
    
    $
    137,981
    
    
    $
    137,586Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    761
    
    
    $
    10Cash paid for interest
    
    $
    
    
    
    $
    250
  5




---



##### Table of Contents



IMMERSION CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2008
 (Unaudited)
  Description of Busines
  Principles of Consolidation and Basis of Presentation
    Short-term Investments
    6




---



##### Table of Contents



Revenue Recognition
  Royalty and license revenue 
  License revenue model
    
    Revenue recognitionPerpetual license of intellectual
property portfolio based on per unit
royalties, no services contracted.
    
    Based on royalty reports received
from licensees. No further
obligations to licensee exist.Time-based license of intellectual
property portfolio with up-front
payments and/or annual minimum
royalty requirements, no services
contracted. Licensees have certain
rights to updates to the intellectual
property portfolio during the
contract period.
    
    Based on straight-line amortization
of annual minimum/up-front payment
recognized over contract period or
annual minimum period.Perpetual license of intellectual
property portfolio or technology
license along with contract for
development work.
    
    Based on cost-to-cost
percentage-of-completion accounting
method over the service period or
completed contract method.
Obligation to licensee exists until
development work is complete.License of software or technology, no
modification necessary, no services
contracted.
    
    Up-front revenue recognition based
on SOP 97-2 criteria or EITF No.
00-21, as applicable.
 7




---



##### Table of Contents



Product sales 
 Development contracts and other revenue
 Multiple
element arrangements
  Recent Accounting Pronouncements
   8




---



##### Table of Contents



Short-term Investments
 March 31, 2008Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Commercial paper
    
    $
    2,000
    
    
    $
    
    
    
    $
    
    
    
    $
    2,000Government agency securities
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    34Total
    
    $
    2,034
    
    
    $
    
    
    
    $
    
    
    
    $
    2,034
 December 31, 2007Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Commercial paper
    
    $
    41,740
    
    
    $
    
    
    
    $
    (34
    )
    
    $
    41,706Government agency securities
    
    
    9,871
    
    
    
    42
    
    
    
    
    
    
    
    9,913Total
    
    $
    51,611
    
    
    $
    42
    
    
    $
    (34
    )
    
    $
    51,619
  Cash Equivalents and Short-term Investments
     Fair value measurement using
    
    
    Assets atLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    fair value(In thousands)Commercial paper
    
    $
    
    
    
    $
    25,927
    
    
    $
    
    
    
    $
    25,927Government agency securities
    
    
    42,294
    
    
    
    
    
    
    
    
    
    
    
    42,294Money market accounts
    
    
    69,487
    
    
    
    
    
    
    
    
    
    
    
    68,487Total
    
    $
    111,781
    
    
    $
    25,927
    
    
    $
    
    
    
    $
    137,708
 9




---



##### Table of Contents



March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Raw materials and subassemblies
    
    $
    3,117
    
    
    $
    2,843Work in process
    
    
    169
    
    
    
    179Finished goods
    
    
    756
    
    
    
    652Inventories, net
    
    $
    4,042
    
    
    $
    3,674
  March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Computer equipment and purchased software
    
    $
    3,249
    
    
    $
    3,195Machinery and equipment
    
    
    2,715
    
    
    
    2,532Furniture and fixtures
    
    
    1,243
    
    
    
    1,212Leasehold improvements
    
    
    1,237
    
    
    
    1,267Total
    
    
    8,444
    
    
    
    8,206Less accumulated depreciation
    
    
    (6,320
    )
    
    
    (6,094
    )Property and equipment, net
    
    $
    2,124
    
    
    $
    2,112
  March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Patents and technology
    
    $
    15,613
    
    
    $
    15,105Accumulated amortization of patents and technology
    
    
    (6,950
    )
    
    
    (6,714
    )Intangibles, net
    
    
    8,663
    
    
    
    8,391Other assets
    
    
    171
    
    
    
    167Intangibles and other assets, net
    
    $
    8,834
    
    
    $
    8,558
  10




---



##### Table of Contents



March 31,
    
    
    December 31,2008
    
    
    2007(In thousands)Accrued legal
    
    $
    751
    
    
    $
    417Income taxes payable
    
    
    15
    
    
    
    534Other current liabilities
    
    
    1,534
    
    
    
    1,678Total other current liabilities
    
    $
    2,300
    
    
    $
    2,629Deferred revenue, current portion
    
    $
    5,663
    
    
    $
    4,352Customer advances
    
    
    110
    
    
    
    126Total current deferred revenue, and customer advances
    
    $
    5,773
    
    
    $
    4,478
    Stock Options and Awards
   Employee Stock Purchase Plan
   11




---



##### Table of Contents



General Stock Option Information
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Average
    
    
    Contractual
    
    
    Intrinsicof Shares
    
    
    Exercise Price
    
    
    Term
    
    
    Value(In years)Outstanding at December 31, 2007
(3,774,245 exercisable at a
weighted average price of $9.11 per share)
    
    
    6,014,370
    
    
    $
    9.11Granted (weighted average fair value of
$4.86 per share)
    
    
    1,113,425
    
    
    
    8.66Exercised
    
    
    (106,149
    )
    
    
    6.21Cancelled
    
    
    (180,728
    )
    
    
    10.30Outstanding at March 31, 2008
    
    
    6,840,918
    
    
    $
    9.05
    
    
    
    6.20
    
    
    $3.6 millionExercisable at March 31, 2008
    
    
    4,071,397
    
    
    $
    9.05
    
    
    
    4.44
    
    
    $3.4 million
    Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRange of

    
    
    
    
    
    Remaining
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrices
    
    Outstanding
    
    
    Life (Years)
    
    
    Price
    
    
    Exercisable
    
    
    Price$
    1.20  -

    $5.95
    
    
    692,474
    
    
    
    4.90
    
    
    $
    2.93
    
    
    
    638,919
    
    
    $
    2.746.00  -
    
    6.79
    
    
    749,230
    
    
    
    5.75
    
    
    
    6.34
    
    
    
    559,807
    
    
    
    6.306.81  -
    
    6.98
    
    
    840,643
    
    
    
    7.25
    
    
    
    6.96
    
    
    
    457,438
    
    
    
    6.967.00  -
    
    8.09
    
    
    775,896
    
    
    
    5.53
    
    
    
    7.26
    
    
    
    660,633
    
    
    
    7.278.34  -
    
    8.34
    
    
    49,375
    
    
    
    6.01
    
    
    
    8.34
    
    
    
    48,333
    
    
    
    8.348.61  -
    
    8.61
    
    
    815,725
    
    
    
    9.60
    
    
    
    8.61
    
    
    
    
    
    
    
    8.67  -
    
    9.01
    
    
    805,178
    
    
    
    3.81
    
    
    
    8.98
    
    
    
    575,313
    
    
    
    8.979.04  -
    
    9.04
    
    
    823,112
    
    
    
    8.35
    
    
    
    9.04
    
    
    
    226,919
    
    
    
    9.049.11  -
    
    15.12
    
    
    707,040
    
    
    
    5.58
    
    
    
    10.84
    
    
    
    471,790
    
    
    
    9.8015.50  -
    
    43.25
    
    
    582,245
    
    
    
    4.03
    
    
    
    23.82
    
    
    
    432,245
    
    
    
    26.26$
    1.20  -
    
    $43.25
    
    
    6,840,918
    
    
    
    6.20
    
    
    $
    9.05
    
    
    
    4,071,397
    
    
    $
    9.05
 Stock-based Compensation
 Valuation
and amortization method
 12




---



##### Table of Contents



Expected term
 Expected volatility
 Risk-free interest rate
 Expected dividend
 Forfeitures
  Options
    
    Employee Stock Purchase PlanThree Months Ended
    
    Three Months EndedMarch 31,
    
    March 31,2008
    
    2007
    
    2008
    
    2007Expected life (in years)
    
    
    5.5
    
    
    
    6.25
    
    
    
    0.5
    
    
    
    0.5Interest rate
    
    
    2.5
    %
    
    
    4.6
    %
    
    
    2.2
    %
    
    
    5.2
    %Volatility
    
    
    62
    %
    
    
    60
    %
    
    
    73
    %
    
    
    45
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Three Months EndedMarch 31,2008
    
    
    2007Income Statement Classifications
    
    (In thousands)Cost of product sales
    
    $
    20
    
    
    $
    20Sales and marketing
    
    
    249
    
    
    
    160Research and development
    
    
    286
    
    
    
    186General and administrative
    
    
    409
    
    
    
    268Total
    
    $
    964
    
    
    $
    634
  13




---



##### Table of Contents



Warrants
  Stock Repurchase Program
    Immersion Corporation v. Sony Computer Entertainment of America, Inc., Sony
Computer Entertainment Inc. and
 14




---



##### Table of Contents



Microsoft Corporation
       15




---



##### Table of Contents



Three Months EndedMarch 31,2008
    
    
    2007Numerator:Net income (loss) used in computing basic net income (loss) per share
    
    $
    (2,585
    )
    
    $
    115,838Interest on 5% Convertible Debentures
    
    
    
    
    
    
    152Net income (loss) used in computing diluted net income (loss) per share
    
    $
    (2,585
    )
    
    $
    115,990Denominator:Shares used in computation of basic net income (loss) per share
(weighted average common shares outstanding)
    
    
    30,478
    
    
    
    25,343Dilutive potential common shares:Stock options
    
    
    
    
    
    
    1,254Warrants
    
    
    
    
    
    
    2345% Convertible Debentures
    
    
    
    
    
    
    2,846Shares used in computation of diluted net income (loss) per share
    
    
    30,478
    
    
    
    29,677Basic net income (loss) per share
    
    $
    (0.08
    )
    
    $
    4.57Diluted net income (loss) per share
    
    $
    (0.08
    )
    
    $
    3.91
  March 31,2008Outstanding stock options
    
    
    6,840,918Warrants
    
    
    436,772
    March 31,2008
    
    
    2007(In thousands)Net income (loss)
    
    $
    (2,585
    )
    
    $
    115,838Change in unrealized losses on short-term investments
    
    
    (7
    )
    
    
    Foreign currency translation adjustment
    
    
    (12
    )
    
    
    Total comprehensive income (loss)
    
    $
    (2,604
    )
    
    $
    115,838
 16




---



##### Table of Contents



Three Months EndedMarch 31,2008
    
    
    2007(In thousands)(restated)Revenues:Immersion Computing, Entertainment, and Industrial
    
    $
    5,188
    
    
    $
    3,758Immersion Medical
    
    
    3,008
    
    
    
    2,657Intersegment eliminations
    
    
    (41
    )
    
    
    (1
    )Total
    
    $
    8,155
    
    
    $
    6,414Net Income (Loss):Immersion Computing, Entertainment, and Industrial
    
    $
    (1,409
    )
    
    $
    116,695Immersion Medical
    
    
    (1,159
    )
    
    
    (862
    )Intersegment eliminations
    
    
    (17
    )
    
    
    5Total
    
    $
    (2,585
    )
    
    $
    115,838
 March 31
    
    
    December 312008
    
    
    2007(In thousands)Total Assets:Immersion Computing, Entertainment, and Industrial
    
    $
    184,012
    
    
    $
    181,860Immersion Medical
    
    
    6,328
    
    
    
    6,552Intersegment eliminations
    
    
    (20,140
    )
    
    
    (20,044
    )Total
    
    $
    170,200
    
    
    $
    168,368
 17




---



##### Table of Contents



Revenue
by Product Lines
 Three Months EndedMarch 31,2008
    
    
    2007(In thousands)Revenues:Consumer, Computing, and Entertainment
    
    $
    3,051
    
    
    $
    1,7743D
    
    
    1,226
    
    
    
    991Touch Interface Products
    
    
    870
    
    
    
    992Subtotal Immersion Computing, Entertainment, and Industrial
    
    
    5,147
    
    
    
    3,757Immersion Medical
    
    
    3,008
    
    
    
    2,657Total
    
    $
    8,155
    
    
    $
    6,414
 Revenue by Region
 Three Months EndedMarch 31,2008
    
    2007North America
    
    
    59
    %
    
    
    67
    %Europe
    
    
    24
    %
    
    
    17
    %Far East
    
    
    12
    %
    
    
    14
    %Rest of the world
    
    
    5
    %
    
    
    2
    %Total
    
    
    100
    %
    
    
    100
    %
   18




---



##### Table of Contents



Significant
Customers
 Three Months EndedMarch 31,2008
    
    2007Customer A
    
    
    11
    %
    
    
    12
    %Customer B
    
    
    *
    %
    
    
    *
    %Customer C
    
    
    *
    %
    
    
    10
    %Total
    
    
    11
    %
    
    
    22
    %
 
 *
    
    Revenue derived from customer represented less than 10% for the period.   In re Immersion Corporation
    Miles v. Merrill Lynch & Co. (In re Initial Public Offering Securities Litigation)
 19




---



##### Table of Contents



Internet Services LLC Litigation
       Microsoft Corporation v. Immersion Corporation
  20




---



##### Table of Contents



Other Contingencies
    21




---



##### Table of Contents



Three Months EndedMarch 31, 2007As Previously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    Restated(In thousandsexcept per share amounts)Total revenues
    
    $
    6,414
    
    
    $
    
    
    
    $
    6,414Income before provision for income taxes
    
    $
    130,967
    
    
    $
    
    
    
    $
    130,967Provision for income taxes
    
    
    (8,534
    )
    
    
    (6,595
    )
    
    
    (15,129
    )Net income
    
    $
    122,433
    
    
    $
    (6,595
    )
    
    $
    115,838Basic net income per share
    
    $
    4.83
    
    
    $
    (0.26
    )
    
    $
    4.57Shares used in calculating basic net income per share
    
    
    25,343
    
    
    
    
    
    
    
    25,343Diluted net income per share
    
    $
    4.13
    
    
    $
    (0.22
    )
    
    $
    3.91Shares used in calculating diluted net income per share
    
    
    29,683
    
    
    
    (6
    )
    
    
    29,677Changes to cash flows from operating activities:Net income
    
    $
    122,433
    
    
    $
    (6,595
    )
    
    $
    115,838Excess tax benefits from stock-based compensation
    
    
    (2,940
    )
    
    
    (7,364
    )
    
    
    (10,304
    )Deferred income taxes
    
    
    (5,508
    )
    
    
    (259
    )
    
    
    (5,767
    )Income taxes payable
    
    
    13,975
    
    
    
    6,227
    
    
    
    20,202Other long-term liabilities
    
    
    10
    
    
    
    627
    
    
    
    637Net cash
provided by operating activities
    
    
    98,599
    
    
    
    (7,364
    )
    
    
    91,185Changes to cash flows from financing activities:Excess tax benefits from stock-based compensation
    
    $
    2,940
    
    
    $
    7,364
    
    
    $
    10,304Net cash
provided by financing activities
    
    
    7,476
    
    
    
    7,364
    
    
    
    14,840
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    22




---



##### Table of Contents



Revenue Recognition
  Royalty
and license revenue
  License revenue model
    
    Revenue recognitionPerpetual license of intellectual
property portfolio based on per unit
royalties, no services contracted.
    
    Based on royalty reports received
from licensees. No further
obligations to licensee exist.Time-based license of intellectual
property portfolio with up-front
payments and/or annual minimum
royalty requirements, no services
contracted. Licensees have certain
rights to updates to the intellectual
property portfolio during the
contract period.
    
    Based on straight-line amortization
of annual minimum/up-front payment
recognized over contract period or
annual minimum period.Perpetual license of intellectual
property portfolio or technology
license along with contract for
development work.
    
    Based on cost-to-cost
percentage-of-completion accounting
method over the service period or
completed contract method.
Obligation to licensee exists until
development work is complete.License of software or technology, no
modification necessary, no services
contracted.
    
    Up-front revenue recognition based
on SOP 97-2 criteria or EITF No.
00-21, as applicable.
 23




---



##### Table of Contents



Product
sales
 Development
contracts and other revenue
 Multiple
element arrangements
  Stock-based Compensation
  Valuation and amortization method 
 Expected term 
 Expected volatility 
 24




---



##### Table of Contents



Risk-free interest rate 
 Expected dividend 
 Forfeitures 
    Accounting for Income Taxes
    Litigation Conclusions and Patent License
  25




---



##### Table of Contents



Short-term Investments
           Recovery of Accounts Receivable
  26




---



##### Table of Contents



Inventory Reserves
  Product Return and Warranty Reserves
  Intangible Assets
     Overview
   March 31,
    
    
    ChangeREVENUES
    
    2008
    
    
    2007($ In thousands)Three months ended:Royalty and license
    
    $
    3,461
    
    
    $
    2,211
    
    
    
    57
    %Product sales
    
    
    3,851
    
    
    
    3,590
    
    
    
    7
    %Development contracts and other
    
    
    843
    
    
    
    613
    
    
    
    38
    %Total Revenue
    
    $
    8,155
    
    
    $
    6,414
    
    
    
    27
    %
 27




---



##### Table of Contents



Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
 Total Revenue 
 Royalty and license revenue 
     Product
sales
 28




---



##### Table of Contents



Development contract and other revenue
  March 31,
    
    ChangeCOST OF PRODUCT SALES
    
    2008
    
    2007($ In thousands)Three months ended:Cost of product sales
    
    $
    2,086
    
    
    $
    1,543
    
    
    
    35
    %% of total product revenue
    
    
    54
    %
    
    
    43
    %
 Cost of Product Sales
 29




---



##### Table of Contents



March 31,
    
    ChangeOPERATING EXPENSES AND OTHER
    
    2008
    
    2007($ In thousands)Three months ended:Sales and marketing
    
    $
    3,442
    
    
    $
    2,703
    
    
    
    27
    %% of total revenue
    
    
    42
    %
    
    
    42
    %Research and development
    
    $
    3,229
    
    
    $
    2,543
    
    
    
    27
    %% of total revenue
    
    
    40
    %
    
    
    40
    %General and administrative
    
    $
    4,263
    
    
    $
    3,259
    
    
    
    31
    %% of total revenue
    
    
    52
    %
    
    
    51
    %Amortization of intangibles
    
    $
    235
    
    
    $
    254
    
    
    
    (7
    )%% of total revenue
    
    
    3
    %
    
    
    4
    %Litigation conclusions and patent license
    
    $
    
    
    
    $
    (134,900
    )
    
    
    *
    %% of total revenue
    
    
    
    %
    
    
    *
    %
 
 *
    -
    Not meaningful Sales and Marketing
 Research and Development
 General and Administrative
 30




---



##### Table of Contents



Amortization of Intangibles
 Litigation Conclusions and Patent License
  Immersion Corporation v. Sony Computer Entertainment of America,
Inc., Sony Computer Entertainment Inc. and Microsoft Corporation
 Interest and Other Income
 31




---



##### Table of Contents



Interest Expense
 Provision for Income Taxes
   Three Months EndedMarch 31,2008
    
    
    2007(In thousands)(restated)Revenues:Immersion Computing, Entertainment, and Industrial
    
    $
    5,188
    
    
    $
    3,758Immersion Medical
    
    
    3,008
    
    
    
    2,657Intersegment eliminations
    
    
    (41
    )
    
    
    (1
    )Total
    
    $
    8,155
    
    
    $
    6,414Net Income (Loss)*:Immersion Computing, Entertainment, and Industrial
    
    $
    (1,409
    )
    
    $
    116,695Immersion Medical
    
    
    (1,159
    )
    
    
    (862
    )Intersegment eliminations
    
    
    (17
    )
    
    
    5Total
    
    $
    (2,585
    )
    
    $
    115,838
 
 *
    
    Segment assets and expenses relating to our corporate operations are not allocated but are
included in Immersion Computing, Entertainment, and Industrial as that is how they are
considered for management evaluation purposes. As a result the segment information may not be
indicative of the financial position or results of operations that would have been achieved
had these segments operated as unaffiliated entities. Immersion Computing, Entertainment, and Industrial segment
 32




---



##### Table of Contents



Immersion Medical segment
        33




---



##### Table of Contents



2009 and
    
    2011 andContractual Obligations
    
    Total
    
    2008
    
    2010
    
    2012(In thousands)Operating leases
    
    $
    2,300
    
    
    $
    1,100
    
    
    $
    1,191
    
    
    $
    9
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Cash Equivalents and Short-term Investments
  34




---



##### Table of Contents



Foreign Currency Exchange Rates
 
 ITEM 4. CONTROLS AND PROCEDURES
       35




---



##### Table of Contents



PART II
 
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 In re Immersion Corporation
      Internet Services LLC Litigation
     36




---



##### Table of Contents



Microsoft Corporation v. Immersion Corporation
  Immersion Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp., and Simbionix Ltd.
  
 ITEM 1A. RISK FACTORS
 Company Risks
   

    continue to develop our technologies;
 37




---



##### Table of Contents





    increase our sales and marketing efforts;

   attempt to expand the market for touch-enabled technologies and products;

    protect and enforce our intellectual property;

    pursue strategic relationships;

   acquire intellectual property or other assets from third-parties;
    invest in systems and processes to manage our business; and
   expand international facilities.
          38




---



##### Table of Contents



39




---



##### Table of Contents



40




---



##### Table of Contents



Industry and Technology Risks
       41




---



##### Table of Contents



42




---



##### Table of Contents



43




---



##### Table of Contents





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

   the competition we may face with the internal design teams of existing and potential licensees;

   difficulties in persuading product manufacturers to work with us, to rely on us for critical
technology, and to disclose to us proprietary product development and other strategies;

   difficulties with persuading potential licensees who may have developed their own intellectual
property or licensed intellectual property from other parties in areas related to ours to
license our technology versus continuing to develop their own or license from other parties;

    challenges in demonstrating the compelling value of our technologies in new applications like
mobile phones, portable devices, and touchscreens;

   difficulties in persuading existing and potential licensees to bear the development costs and
risks necessary to incorporate our technologies into their products;

   difficulties in obtaining new automotive licensees for yet-to-be commercialized technology
because their suppliers may not be ready to meet stringent quality and parts availability
requirements;

   inability to sign new gaming licenses if the video console makers choose not to license third
parties to make peripherals for their new consoles; and
 44




---



##### Table of Contents




   

    reluctance of content developers, mobile phone manufacturers, and service providers to sign
license agreements without a critical mass of other such inter-dependent supporters of the
mobile phone industry also having a license, or without enough phones in the market that
incorporate our technologies.
   
    

   our pending patent applications may not result in the issuance of patents;
    

   our patents may not be broad enough to protect our proprietary rights; and
    

   effective patent protection may not be available in every country in which we or our licensees do business.
  
    

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

   policing unauthorized use of our patented technologies, trademarks,
and other proprietary rights would be difficult, expensive, and
time-consuming, within and particularly outside of the United States
of America.
     45




---



##### Table of Contents





   we fail to develop new technologies or products;

   the technologies we develop infringe on third-party patents or other third-party rights;

   our new technologies fail to gain market acceptance; or

   our current products become obsolete or no longer meet new regulatory requirements.
       46




---



##### Table of Contents



47




---



##### Table of Contents



Investment Risks
    
    
    the establishment or loss of licensing relationships;
    
    the timing and recognition of payments under fixed and/or up-front license agreements;
    
    the timing of work performed under development agreements;
    
    the timing of our expenses, including costs related to litigation, stock-based
awards, acquisitions of technologies, or businesses;
    
    litigation or claims regarding our restatement, internal controls, or other matters;
    
    the timing of introductions and market acceptance of new products and product
enhancements by us, our licensees, our competitors, or their competitors;
    
    our ability to develop and improve our technologies;
 48




---



##### Table of Contents




    
    our ability to attract, integrate, and retain qualified personnel;
    
    seasonality in the demand for our products or our licensees products; and
    
    our ability to build or ship products on a timely basis.
           49




---



##### Table of Contents




    
    unanticipated costs associated with the acquisitions;
    
    use of substantial portions of our available cash to consummate the acquisitions;
    
    diversion of managements attention from other business concerns;
    
    difficulties in assimilation of acquired personnel or operations;
    
    failure to realize the anticipated benefits of acquired intellectual property or other assets;
    
    charges for write-down of assets associated with unsuccessful acquisitions; and
    
    potential intellectual property infringement claims related to newly acquired product lines.
     Controls and Procedures
 50




---



##### Table of Contents



ITEM 6. EXHIBITS
  ExhibitNumber
    
    Description31.1
    
    Certification of Clent Richardson, President, Chief Executive Officer, and Director,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Stephen Ambler, Chief Financial Officer and Vice President,
Finance, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Clent Richardson, President, Chief Executive Officer, and Director,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Stephen Ambler, Chief Financial Officer and Vice President,
Finance, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 51




---



##### Table of Contents



SIGNATURES
   IMMERSION CORPORATIONBy
    /s/ Stephen AmblerStephen AmblerChief Financial Officer and Vice President,Finance 52




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description
    .31.1
    
    Certification of Clent Richardson, President, Chief Executive Officer, and Director,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Stephen Ambler, Chief Financial Officer and Vice President,
Finance, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Clent Richardson, President, Chief Executive Officer, and Director,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Stephen Ambler, Chief Financial Officer and Vice President,
Finance, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 53