##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q/A
 Amendment No. 1
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  OR
 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 
incorporation or organization)
    
    (I.R.S. Employer 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)
 o þ
 o o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller
 reporting company)
    
    Smaller Reporting Company o
  o þ




---



##### 



IMMERSION CORPORATION
 INDEX
 PageExplanatory Note Regarding RestatementPART IFINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets (Restated) as of March 31, 2009 and December 31, 2008
    
    
    10Unaudited Condensed Consolidated Statements of Operations (Restated) for the Three Months Ended March 31, 2009 and 2008
    
    
    11Unaudited Condensed Consolidated Statements of Cash Flows (Restated) for the Three Months Ended March 31, 2009 and 2008
    
    
    12Unaudited Notes to Condensed Consolidated Financial Statements
    
    
    13Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    38Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    51Item 4. Controls and Procedures
    
    
    52PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
    54Item 1A. Risk Factors
    
    
    55Item 6. Exhibits
    
    
    71SIGNATURES
    
    
    72EX-31.1EX-31.2EX-32.1EX-32.2
  2




---



##### Table of Contents



EXPLANATORY NOTE REGARDING RESTATEMENT
      3




---



##### Table of Contents



Background of the Restatements
 Revenue Recognition in Medical Line of Business
     Restatement of Stock-Based Compensation Expense
  4




---



##### Table of Contents



Accounting for Interest Income
   Other Corrections
   Findings and Recommendations Related to Revenue Recognition in the Medical Line of Business
 Side Agreement
  5




---



##### Table of Contents



Commitment of Deliverables that are Unavailable or Lacked Functionality
  Additional Transactions Analyzed
  
    
    Premature recognition of revenue for products sold with FOB Destination or other
similar shipping terms, or for incomplete shipment of products or storage of products
following shipment;
    
    Non-standard terms and conditions that prevented recognition of revenue upon
shipment, including rights of return, extended payment terms, product replacement
commitments, potential free upgrades and other non-standard commitments, that
prevented recognition of revenue upon shipment; and
    
    Lack of probable collectability at the time revenue was recognized.
  Other Impact of Revenue Adjustments
  Other Errors in Condensed Consolidated Financial Statements
  
    
    Stock-Based Compensation Expense.As described above, we identified a
software-based error in our calculated stock-based compensation expense. The previous
version of software used to calculate stock-based compensation expense incorrectly
continued to apply a weighted average forfeiture rate to the vested portion of stock
option awards until the grants final vest date, rather than reflecting actual
forfeitures as awards vested. This error resulted in an understatement of stock-based
compensation expense in certain periods prior to the grants final vest date. We
recorded additional stock-based compensation expense of $163,000 and $643,000 for the
first quarter of 2009 and 2008, respectively.
 6




---



##### Table of Contents




    
    Interest Income.As described above, we identified an error in the accounting
relating to the timing of the recognition of interest income with respect to our
patent license with Sony Computer Entertainment. Accordingly, we recorded additional
interest income of approximately $128,000 in the first quarter of 2008 and a reduction
in interest income of approximately $128,000 in the first quarter of 2009. This
accounting error related to the timing of the recognition of interest income but does
not change the overall interest income to be recognized.
    
    Amortization and Impairment of Intangibles.We identified instances where we had
not commenced amortization of patents in the periods the patents were granted. In
addition, we identified certain patent applications that were abandoned but had not
been previously identified as such and have corrected this error by increasing
amortization and impairment of intangibles by $19,000 and $35,000 in the quarters
March 31, 2009 and 2008, respectively. Finally we identified that a change in the way
we were amortizing our patents implemented in the first quarter of 2009 should not
have been recorded; as a result we have decreased amortization of intangibles by
$180,000 for the first quarter of 2009.
    
    Warrants. As further described under the heading Warrants in Note 2 of the Notes
to the Condensed Consolidated Financial Statements for the period ended March 31, 2009
we should have adopted Emerging Issues Task Force (EITF) Issue No. 07-5,
Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own
Stock(EITF 07-5), as codified in FASB ASC topic 815, Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stockeffective
January 1, 2009. EITF 07-5 provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instruments contingent exercise
and settlement provisions. Therefore, warrants to purchase 426,951 shares of our
common stock issued in 2004 that were previously classified as Warrants have been
corrected for the adoption of EITF 07-5 and classified to Other Current Liabilities
and Retained Earnings effective January 1, 2009 due to the presence of a warrant
adjustment feature that allows for a change in the number of shares subject to
issuance and a change in the exercise price of the warrant under certain
circumstances, including the issuance of stock for cash in a secondary offering. The
warrants expire on December 23, 2009 and the fair value balance of the remaining
liability will be marked to market and recognized at each balance sheet date in
non-operating income. As compared to amounts previously reported, we corrected the
condensed consolidated financial statements to reflect the adoption of EITF 07-5 and
recorded a decrease of $1.7 million to Warrants, an addition of $517,000 to Other
Current Liabilities and $1.2 million to Retained Earnings as a cumulative effect of a
change in accounting principle to our balance sheet as of January 1, 2009. We
estimated the fair value of these warrant derivative liabilities using a Black-Scholes
model as of March 31, 2009 to be $37,000 and recorded a credit of $480,000 in our
condensed consolidated statement of operations in non-operating income for the quarter
ended March 31, 2009.
 7




---



##### Table of Contents



Impact of Corrections on Previously Issued Condensed Consolidated Financial Statements
  Detailed Components of Revenue Transaction Adjustments($ in thousands)Total Impact of RevenueRevenue
    
    
    
    
    
    
    Cost of Product Sales
    
    
    Bad Debt Expense
    
    
    Commission Expense
    
    
    AdjustmentsThree months ended March 31, 2009Increase (Decrease)
    
    $
    528
    
    
    
    (1
    )
    
    $
    (118
    )
    
    $
    675
    
    
    $
    (86
    )
    
    $
    999Three months ended March 31, 2008Increase (Decrease)
    
    $
    (89
    )
    
    
    (2
    )
    
    $
    21
    
    
    $
    -
    
    
    $
    -
    
    
    $
    (68
    )
   Summary of Impact of Restatement AdjustmentsLoss FromContinuingLoss from Continuing Operations Before Provision for Income Taxes
    
    
    OperationsRevenueTransaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    Income
    
    
    TotalAdjustments
    
    
    Interest
    
    
    Stock-based
    
    
    Warrant
    
    
    and Impairment
    
    
    
    
    
    
    Tax
    
    
    Adjustments(1)
    
    
    Income
    
    
    Compensation
    
    
    Liability
    
    
    of Intangibles
    
    
    Total
    
    
    Effect
    
    
    Net of Tax($ in thousands)Three months ended March 31, 2009Increase (Decrease)
    
    $
    999
    
    
    $
    (128
    )
    
    $
    (163
    )
    
    $
    480
    
    
    $
    161
    
    
    $
    1,349
    
    
    $
    -
    
    
    $
    1,349Three months ended March 31, 2008Increase (Decrease)
    
    $
    (68
    )
    
    $
    128
    
    
    $
    (643
    )
    
    $
    -
    
    
    $
    (35
    )
    
    $
    (618
    )
    
    $
    51
    
    
    $
    (567
    )
 
 (1)
    
    See table above 8




---



##### Table of Contents



Internal Control Deficiencies
         For convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its
entirety, as amended by, and to reflect the Restatement. We have not modified or updated
disclosures presented in our original quarterly report on Form 10-Q, except as required to reflect
the effects of this Restatement. Accordingly, this Form 10-Q/A does not reflect events occurring
after the Original Filing and does not modify or update those disclosures affected by subsequent
events, except specifically referenced herein. Information not affected by the Restatement is
unchanged and reflects the disclosures made at the time of the Original Filing on May 6, 2009.
References to the quarterly report on Form 10-Q herein shall refer to the quarterly report on Form
10-Q originally filed on May 6, 2009.
 9




---



##### 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 31,2009
    
    
    2008As Restated (1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    36,997
    
    
    $
    64,769Short-term investments
    
    
    43,933
    
    
    
    20,974Accounts receivable (net of allowances for doubtful accounts of: March 31,
2009  $279 and December 31, 2008  $436
    
    
    4,025
    
    
    
    6,114Inventories, net
    
    
    4,431
    
    
    
    3,757Deferred income taxes
    
    
    311
    
    
    
    311Prepaid expenses and other current assets
    
    
    4,301
    
    
    
    4,344Total current assets
    
    
    93,998
    
    
    
    100,269Property and equipment, net
    
    
    4,379
    
    
    
    3,827Intangibles and other assets, net
    
    
    10,064
    
    
    
    9,491Total assets
    
    $
    108,441
    
    
    $
    113,587LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,460
    
    
    $
    2,842Accrued compensation
    
    
    2,242
    
    
    
    2,920Other current liabilities
    
    
    3,310
    
    
    
    3,493Deferred revenue and customer advances
    
    
    8,303
    
    
    
    8,042Total current liabilities
    
    
    16,315
    
    
    
    17,297Long-term deferred revenue
    
    
    16,916
    
    
    
    15,989Deferred income tax liabilities
    
    
    311
    
    
    
    311Other long-term liabilities
    
    
    217
    
    
    
    212Total liabilities
    
    
    33,759
    
    
    
    33,809Contingencies (Note 16)Stockholders equity:Common stock and additional paid-in capital  $0.001 par value; 100,000,000 shares
authorized; shares issued: March 31, 2009  30,733,728 and December 31, 2008 
30,674,045; shares outstanding: March 31, 2009  27,945,859 and
December 31, 2008  27,887,482
    
    
    169,485
    
    
    
    167,870Warrants
    
    
    11
    
    
    
    1,731Accumulated other comprehensive income
    
    
    40
    
    
    
    109Accumulated deficit
    
    
    (76,457
    )
    
    
    (71,543
    )Treasury stock at cost: March 31, 2009  2,787,869 shares and
December 31, 2008  2,786,563 shares
    
    
    (18,397
    )
    
    
    (18,389
    )Total stockholders equity
    
    
    74,682
    
    
    
    79,778Total liabilities and stockholders equity
    
    $
    108,441
    
    
    $
    113,587
 
 (1)
    
    See Note 2 Restatement of the Condensed Consolidated Financial Statements
of Notes to Condensed Consolidated Financial Statements.  10




---



##### Table of Contents



IMMERSION CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended March 31,2009
    
    
    2008As Restated (1)
    
    
    As Restated (1)Revenues:Royalty and license
    
    $
    3,781
    
    
    $
    3,461Product sales
    
    
    3,279
    
    
    
    2,580Development contracts and other
    
    
    446
    
    
    
    799Total revenues
    
    
    7,506
    
    
    
    6,840Costs and expenses:Cost of product sales (exclusive of amortization and impairment of intangibles
shown separately below)
    
    
    1,251
    
    
    
    1,684Sales and marketing
    
    
    4,284
    
    
    
    3,345Research and development
    
    
    3,929
    
    
    
    3,490General and administrative
    
    
    4,384
    
    
    
    4,414Amortization and impairment of intangibles
    
    
    215
    
    
    
    270Restructuring costs
    
    
    646
    
    
    
    Total costs and expenses
    
    
    14,709
    
    
    
    13,203Operating loss
    
    
    (7,204
    )
    
    
    (6,363
    )Change in fair value of warrant liability
    
    
    480
    
    
    
    Interest and other income
    
    
    302
    
    
    
    1,635Loss from continuing operations before provision for income taxes
    
    
    (6,421
    )
    
    
    (4,728
    )Benefit (provision) for income taxes
    
    
    (91
    )
    
    
    1,254Loss from continuing operations
    
    
    (6,512
    )
    
    
    (3,474
    )Discontinued operations (Note 10):Gain on sales of discontinued operations net of provision for income taxes of $0
    
    
    167
    
    
    
    Gain from discontinued operations, net of provision for income taxes of
$150 and $192 as of March 31, 2009 and 2008, respectively
    
    
    235
    
    
    
    326Net loss
    
    $
    (6,110
    )
    
    $
    (3,148
    )Basic and diluted net loss per shareContinuing operations
    
    $
    (0.23
    )
    
    $
    (0.11
    )Discontinued operations
    
    
    0.01
    
    
    
    0.01Total
    
    $
    (0.22
    )
    
    $
    (0.10
    )Shares used in calculating basic and diluted net loss per share
    
    
    27,924
    
    
    
    30,478
 
 (1)
    
    See Note 2 Restatement of the Condensed Consolidated Financial Statements
of Notes to Condensed Consolidated Financial Statements.  11




---



##### Table of Contents



IMMERSION CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (unaudited)
 Three Months Ended March 31,2009
    
    
    2008As Restated (1)
    
    
    As Restated (1)Cash flows from operating activities:Net loss
    
    $
    (6,110
    )
    
    $
    (3,148
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    390
    
    
    
    260Amortization and impairment of intangibles
    
    
    215
    
    
    
    270Stock-based compensation
    
    
    1,404
    
    
    
    1,607Excess tax benefits from stock-based compensation
    
    
    
    
    
    
    (107
    )Realized gain on short-term investments
    
    
    
    
    
    
    (81
    )Change in fair value of warrant liability
    
    
    (480
    )
    
    
    Allowance for doubtful accounts
    
    
    (156
    )
    
    
    (12
    )Loss on disposal of equipment
    
    
    2
    
    
    
    Gain on sales of discontinued operations
    
    
    (167
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    2,241
    
    
    
    2,300Inventories
    
    
    (818
    )
    
    
    (390
    )Deferred income taxes
    
    
    
    
    
    
    (306
    )Prepaid expenses and other current assets
    
    
    44
    
    
    
    (1,233
    )Other assets
    
    
    
    
    
    
    (3
    )Accounts payable
    
    
    (469
    )
    
    
    541Accrued compensation and other current liabilities
    
    
    (1,297
    )
    
    
    521Income taxes payable
    
    
    2
    
    
    
    (412
    )Deferred revenue and customer advances
    
    
    1,187
    
    
    
    1,871Other long-term liabilities
    
    
    5
    
    
    
    12Net cash provided by (used in) operating activities
    
    
    (4,007
    )
    
    
    1,690Cash flows provided by (used in) investing activities:Purchases of short-term investments
    
    
    (33,962
    )
    
    
    Maturities of short-term investments
    
    
    11,000
    
    
    
    49,657Additions to intangibles
    
    
    (542
    )
    
    
    (508
    )Purchases of property and equipment
    
    
    (580
    )
    
    
    (280
    )Proceeds from sales of discontinued operations
    
    
    167
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (23,917
    )
    
    
    48,869Cash flows provided by financing activities:Issuance of common stock under employee stock purchase plan
    
    
    134
    
    
    
    168Exercise of stock options and warrants
    
    
    70
    
    
    
    659Excess tax benefits from stock-based compensation
    
    
    
    
    
    
    107Net cash provided by financing activities
    
    
    204
    
    
    
    934Effect (decreases) of exchange rates on cash and cash equivalents
    
    
    (52
    )
    
    
    (5
    )Net increase in cash and cash equivalents
    
    
    (27,772
    )
    
    
    51,488Cash and cash equivalents:Beginning of the period
    
    
    64,769
    
    
    
    86,493End of the period
    
    $
    36,997
    
    
    $
    137,981Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    
    
    
    $
    761Supplemental disclosure of non-cash investing and financing activities:Amounts accrued for property and equipment, and intangibles
    
    $
    1,090
    
    
    $
    Shares issued upon vesting of restricted stock units
    
    $
    22
    
    
    $
    
 
 (1)
    
    See Note 2 Restatement of the Condensed Consolidated Financial Statements
of Notes to Condensed Consolidated Financial Statements.  12




---



##### Table of Contents



IMMERSION CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2009
 (Unaudited)
  Description of Business
  Principles of Consolidation and Basis of Presentation
    Revenue Recognition
  Royalty and license revenue 
 13




---



##### Table of Contents



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 proportional performance
method over the service period or
completed performance method.License of software or
technology, no modification
necessary, no services
contracted.
    
    Up-front revenue recognition based
on SOP No. 97-2 criteria or SAB No.
104, as applicable.
  Product sales  ®
 Development contracts and other revenue
 14




---



##### Table of Contents



Multiple element arrangements
 Warrants
 Recent Accounting Pronouncements
     15




---



##### Table of Contents



2.
    
    RESTATEMENT OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Revenue Transactions
 Side Agreement
  Commitment of Deliverables that were Unavailable or Lack Functionality
  16




---



##### Table of Contents



Additional Transactions Analyzed
  
    
    Premature recognition of revenue for products sold with FOB Destination or other
similar shipping terms, or for incomplete shipment of products or storage of products
following shipment;
 
    
    Non-standard terms and conditions that prevented recognition of revenue upon
shipment, including rights of return, extended payment terms, product replacement
commitments, potential free upgrades and other non-standard commitments, that
prevented recognition of revenue upon shipment; and
 
    
    Lack of probable collectability at the time revenue was recognized.
  Other Impact of Revenue Adjustments
  Other Errors in Condensed Consolidated Financial Statements
  
    
    Stock-Based Compensation Expense.The Company identified a software-based error in
its calculated stock-based compensation expense. The previous version of software used
to calculate stock-based compensation expense incorrectly continued to apply a
weighted average forfeiture rate to the vested portion of stock option awards until
the grants final vest date, rather than reflecting actual forfeitures as awards
vested. This error resulted in an understatement of stock-based compensation expense
in certain periods prior to the grants final vest date. The Company recorded
additional stock-based compensation expense of $163,000 and $643,000 for the first
quarter of 2009 and 2008, respectively.
 
    
    Interest Income.The Company identified an error in the accounting relating to the
timing of the recognition of interest income with respect to its patent license with
Sony Computer Entertainment. Accordingly, the Company recorded additional interest
income of approximately $128,000 in the first quarter of 2008 and a reduction in
interest income of approximately $128,000 in the first quarter of 2009. This
accounting error related to the timing of the recognition of interest income but does
not change the overall interest income to be recognized.
 17




---



##### Table of Contents




    
    Amortization and Impairment of IntangiblesThe Company identified instances where
it had not commenced amortization of patents in the periods the patents were granted.
In addition, the Company identified certain patent applications that were abandoned
but had not been previously identified as such and has corrected this error by
increasing amortization and impairment of intangibles by $19,000 and $35,000 in the
quarters ended March 31, 2009 and 2008, respectively. Finally, we identified that a
change in the way the Company was amortizing its patents implemented in the first
quarter of 2009 should have not been recorded; as a result, the Company has decreased
amortization of intangibles by $180,000 for the first quarter of 2009.
 
    
    Warrants. The Company should have adopted Emerging Issues Task Force (EITF)
Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to
an Entitys Own Stock(EITF 07-5), as codified in FASB ASC topic 815, Determining
Whether an Instrument (or Embedded Feature) Is Indexed to an Entitys Own Stock
effective January 1, 2009. EITF 07-5 provides that an entity should use a two step
approach to evaluate whether an equity-linked financial instrument is indexed to its
own stock, including evaluating the instruments contingent exercise and settlement
provisions. Therefore, warrants to purchase 426,951 shares of the Companys common
stock issued in 2004 that were previously classified as Warrants have been corrected
for the adoption of EITF 07-5 and classified to Other Current Liabilities and Retained
Earnings effective January 1, 2009 due to the presence of a warrant adjustment feature
that allows for a change in the number of shares subject to issuance and a change in
the exercise price of the warrant under certain circumstances, including the issuance
of stock for cash in a secondary offering. The warrants expire on December 23, 2009
and the fair value balance of the remaining liability will be marked to market and
recognized at each balance sheet date in non-operating income through the end of 2009.
As compared to amounts previously reported, the Company corrected the condensed
consolidated financial statements to reflect the adoption of EITF 07-5 and recorded a
decrease of $1.7 million to Warrants, an addition of $517,000 to Other Current
Liabilities and $1.2 million to Retained Earnings as a cumulative effect of a change
in accounting principle to its balance sheet as of January 1, 2009. The Company
estimated the fair value of these warrant derivative liabilities using a Black-Scholes
model as of March 31, 2009 to be $37,000 and recorded a credit of $480,000 in its
condensed consolidated statement of operations in non-operating income for the quarter
ended March 31, 2009.
 Impact of Corrections on Previously Issued Condensed Consolidated Financial Statements
  18




---



##### Table of Contents



Detailed Components of Revenue Transaction Adjustments($ in thousands)Total Imapact of RevenueRevenue
    
    
    Cost of Product Sales
    
    
    Bad Debt Expense
    
    
    Commission Expense
    
    
    AdjustmentsThree months ended March 31, 2009Increase (Decrease)
    
    $
    528
    (1)
    
    $
    (118
    )
    
    $
    675
    
    
    $
    (86
    )
    
    $
    999Three months ended March 31, 2008Increase (Decrease)
    
    $
    (89)
    (2)
    
    $
    21
    
    
    $
    -
    
    
    $
    -
    
    
    $
    (68
    )(1) For three months ended March 31, 2009, reflects increase of $468,000 in revenue as discussed in
Commitment of Deliverables that are Unavailable or Lacked Functionality, a net increase in
revenue of $67,000 as discussed in Additional Transactions Analyzed and decrease of $7,000 in
revenue due to warranty adjustment.
(2) For three months ended March 31, 2008, reflects decrease of $80,000 in revenue as discussed in
Additional Transactions Analyzed and a net decrease of $9,000 in revenue due to warranty adjustment.
 Summary of Impact of Restatement AdjustmentsLoss FromContinuingLoss from Continuing Operations Before Provision for Income Taxes
    
    
    OperationsRevenueTransaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    
    
    
    
    Income
    
    
    TotalAdjustments
    
    
    Interest
    
    
    Stock-based
    
    
    Warrant
    
    
    and Impairment
    
    
    
    
    
    
    Tax
    
    
    Adjustments(1)
    
    
    Income
    
    
    Compensation
    
    
    Liability
    
    
    of Intangibles
    
    
    Total
    
    
    Effect
    
    
    Net of Tax($ in thousands)Three months ended 
March 31, 2009Increase (Decrease)
    
    $
    999
    
    
    $
    (128
    )
    
    $
    (163
    )
    
    $
    480
    
    
    $
    161
    
    
    $
    1,349
    
    
    $
    -
    
    
    $
    1,349Three months ended 
March 31, 2008Increase (Decrease)
    
    $
    (68
    )
    
    $
    128
    
    
    $
    (643
    )
    
    $
    -
    
    
    $
    (35
    )
    
    $
    (618
    )
    
    $
    51
    
    
    $
    (567
    )
 
 (1)
    
    See table above 19




---



##### Table of Contents



CONDENSED CONSOLIDATED BALANCE SHEET
 (In thousands)
 As of March 31, 2009AsPreviously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    36,997
    
    
    $
    -
    
    
    $
    36,997Short-term investments
    
    
    43,933
    
    
    
    -
    
    
    
    43,933Accounts receivable, net
    
    
    4,064
    
    
    
    (39
    )
    
    
    4,025Inventories, net
    
    
    4,136
    
    
    
    295
    
    
    
    4,431Deferred income taxes
    
    
    226
    
    
    
    85
    
    
    
    311Prepaid expenses and other current assets
    
    
    3,205
    
    
    
    1,096
    
    
    
    4,301Total current assets
    
    
    92,561
    
    
    
    1,437
    
    
    
    93,998Property and equipment, net
    
    
    4,379
    
    
    
    -
    
    
    
    4,379Intangibles, net and other assets
    
    
    10,358
    
    
    
    (294
    )
    
    
    10,064Total assets
    
    $
    107,298
    
    
    $
    1,143
    
    
    $
    108,441LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,460
    
    
    $
    -
    
    
    $
    2,460Accrued compensation
    
    
    2,248
    
    
    
    (6
    )
    
    
    2,242Other current liabilities
    
    
    3,247
    
    
    
    63
    
    
    
    3,310Deferred revenue and customer advances
    
    
    5,883
    
    
    
    2,420
    
    
    
    8,303Total current liabilities
    
    
    13,838
    
    
    
    2,477
    
    
    
    16,315Long-term deferred revenue
    
    
    17,685
    
    
    
    (769
    )
    
    
    16,916Deferred income tax liabilities
    
    
    226
    
    
    
    85
    
    
    
    311Other long-term liabilities
    
    
    217
    
    
    
    -
    
    
    
    217Total liabilities
    
    
    31,966
    
    
    
    1,793
    
    
    
    33,759Stockholders equity:Common stock and additional paid-in capital
    
    
    167,337
    
    
    
    2,148
    
    
    
    169,485Warrants
    
    
    1,724
    
    
    
    (1,713
    )
    
    
    11Accumulated other comprehensive income
    
    
    40
    
    
    
    -
    
    
    
    40Accumulated deficit
    
    
    (75,372
    )
    
    
    (1,085
    )
    
    
    (76,457
    )Treasury stock at cost
    
    
    (18,397
    )
    
    
    -
    
    
    
    (18,397
    )Total stockholders equity
    
    
    75,332
    
    
    
    (650
    )
    
    
    74,682Total liabilities and stockholders equity
    
    $
    107,298
    
    
    $
    1,143
    
    
    $
    108,441
 20




---



##### Table of Contents



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (In thousands, except for per share amounts)
 Three Months Ended March 31, 2009As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedRevenues:Royalty and license
    
    $
    3,781
    
    
    $
    -
    
    
    $
    3,781Product sales
    
    
    2,751
    
    
    
    528
    
    
    
    3,279Development contracts and other
    
    
    446
    
    
    
    -
    
    
    
    446Total revenues
    
    
    6,978
    
    
    
    528
    
    
    
    7,506Costs and expenses:Cost of product sales (exclusive of amortization and impairment of intangibles
shown separately below)
    
    
    1,126
    
    
    
    125
    
    
    
    1,251Sales and marketing
    
    
    4,760
    
    
    
    (476
    )
    
    
    4,284Research and development
    
    
    3,904
    
    
    
    25
    
    
    
    3,929General and administrative
    
    
    4,366
    
    
    
    18
    
    
    
    4,384Amortization and impairment of intangibles
    
    
    376
    
    
    
    (161
    )
    
    
    215Restructuring costs
    
    
    646
    
    
    
    -
    
    
    
    646Total costs and expenses
    
    
    15,178
    
    
    
    (469
    )
    
    
    14,709Operating loss
    
    
    (8,200
    )
    
    
    997
    
    
    
    (7,203
    )Change in fair value of warrant liability
    
    
    -
    
    
    
    480
    
    
    
    480Interest and other income
    
    
    430
    
    
    
    (128
    )
    
    
    302Loss from continuing operations before provision for income taxes
    
    
    (7,770
    )
    
    
    1,349
    
    
    
    (6,421
    )Provision for income taxes
    
    
    (91
    )
    
    
    -
    
    
    
    (91
    )Loss from continuing operations
    
    
    (7,861
    )
    
    
    1,349
    
    
    
    (6,512
    )Discontinued operations:Gain on sales of discontinued operations net of provision for income
taxes of $0
    
    
    167
    
    
    
    -
    
    
    
    167Gain from discontinued operations, net of provision for
income taxes of $150
    
    
    235
    
    
    
    -
    
    
    
    235Net loss
    
    $
    (7,459
    )
    
    $
    1,349
    
    
    $
    (6,110
    )Basic and diluted net loss per shareContinuing operations
    
    $
    (0.28
    )
    
    $
    0.05
    
    
    $
    (0.23
    )Discontinued operations
    
    
    0.01
    
    
    
    -
    
    
    
    0.01Total
    
    $
    (0.27
    )
    
    $
    0.05
    
    
    $
    (0.22
    )Shares used in calculating basic and diluted net loss per share
    
    
    27,924
    
    
    
    -
    
    
    
    27,924
 21




---



##### Table of Contents



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 (In thousands)
 Three Months ended March 31, 2009AsPreviously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedCash flows from operating activities:Net loss
    
    $
    (7,459
    )
    
    $
    1,349
    
    
    $
    (6,110
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation and amortization
    
    
    390
    
    
    
    -
    
    
    
    390Amortization and impairment of intangibles
    
    
    376
    
    
    
    (161
    )
    
    
    215Stock-based compensation
    
    
    1,241
    
    
    
    163
    
    
    
    1,404Change in fair value of warrant liability
    
    
    -
    
    
    
    (480
    )
    
    
    (480
    )Allowance for doubtful accounts
    
    
    519
    
    
    
    (675
    )
    
    
    (156
    )Loss on disposal of equipment
    
    
    2
    
    
    
    -
    
    
    
    2Gain on sales of discontinued operations
    
    
    -
    
    
    
    (167
    )
    
    
    (167
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    2,242
    
    
    
    (1
    )
    
    
    2,241Inventories
    
    
    (884
    )
    
    
    66
    
    
    
    (818
    )Prepaid expenses and other current assets
    
    
    20
    
    
    
    24
    
    
    
    44Accounts payable
    
    
    (469
    )
    
    
    -
    
    
    
    (469
    )Accrued compensation and other current liabilities
    
    
    (1,382
    )
    
    
    85
    
    
    
    (1,297
    )Income taxes payable
    
    
    2
    
    
    
    -
    
    
    
    2Deferred revenue and customer advances
    
    
    1,557
    
    
    
    (370
    )
    
    
    1,187Other long-term liabilities
    
    
    5
    
    
    
    -
    
    
    
    5Net cash used in operating activities
    
    
    (3,840
    )
    
    
    (167
    )
    
    
    (4,007
    )Cash flows used in investing activities:Purchases of short-term investments
    
    
    (33,962
    )
    
    
    -
    
    
    
    (33,962
    )Maturities of short-term investments
    
    
    11,000
    
    
    
    -
    
    
    
    11,000Additions to Intangibles
    
    
    (542
    )
    
    
    -
    
    
    
    (542
    )Purchases of property and equipment
    
    
    (580
    )
    
    
    -
    
    
    
    (580
    )Proceeds from sales of discontinued operations
    
    
    -
    
    
    
    167
    
    
    
    167Net cash used in investing activities
    
    
    (24,084
    )
    
    
    167
    
    
    
    (23,917
    )Cash flows provided by financing activities:Issuance of common stock under employee stock purchase plan
    
    
    134
    
    
    
    -
    
    
    
    134Exercise of stock options and warrants
    
    
    70
    
    
    
    -
    
    
    
    70Net cash provided by financing activities
    
    
    204
    
    
    
    -
    
    
    
    204Effect (decrease) of exchange rates on cash and cash equivalents
    
    
    (52
    )
    
    
    -
    
    
    
    (52
    )Net decrease in cash and cash equivalents
    
    
    (27,772
    )
    
    
    -
    
    
    
    (27,772
    )Cash and cash equivalents:Beginning of the period
    
    
    64,769
    
    
    
    -
    
    
    
    64,769End of the period
    
    $
    36,997
    
    
    $
    -
    
    
    $
    36,997Supplemental disclosure of non-cash investing and financing activities:Amounts accrued for property and equipment, and intangibles
    
    $
    1,090
    
    
    $
    -
    
    
    $
    1,090Shares issued upon vesting of restricted stock units
    
    $
    22
    
    
    $
    -
    
    
    $
    22
 22




---



##### Table of Contents



CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (In thousands, except per share amounts)
 Three Months Ended March 31, 2008As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedRevenues:Royalty and license
    
    $
    3,461
    
    
    $
    -
    
    
    $
    3,461Product sales
    
    
    2,669
    
    
    
    (89
    )
    
    
    2,580Development contracts and other
    
    
    799
    
    
    
    -
    
    
    
    799Total revenues
    
    
    6,929
    
    
    
    (89
    )
    
    
    6,840Costs and expenses:Cost of product sales (exclusive of amortization and impairment of intangibles
shown separately below)
    
    
    1,683
    
    
    
    1
    
    
    
    1,684Sales and marketing
    
    
    3,136
    
    
    
    209
    
    
    
    3,345Research and development
    
    
    3,229
    
    
    
    261
    
    
    
    3,490General and administrative
    
    
    4,263
    
    
    
    151
    
    
    
    4,414Amortization and impairment of intangibles
    
    
    235
    
    
    
    35
    
    
    
    270Total costs and expenses
    
    
    12,546
    
    
    
    657
    
    
    
    13,203Operating loss
    
    
    (5,617
    )
    
    
    (746
    )
    
    
    (6,363
    )Interest and other income
    
    
    1,507
    
    
    
    128
    
    
    
    1,635Loss from continuing operations before provision for income taxes
    
    
    (4,110
    )
    
    
    (618
    )
    
    
    (4,728
    )Benefit for income taxes
    
    
    1,203
    
    
    
    51
    
    
    
    1,254Loss from continuing operations
    
    
    (2,907
    )
    
    
    (567
    )
    
    
    (3,474
    )Discontinued operations:Gain from discontinued operations, net of provision for income taxes of $192
    
    
    322
    
    
    
    4
    
    
    
    326Net loss
    
    $
    (2,585
    )
    
    $
    (563
    )
    
    $
    (3,148
    )Basic and diluted net loss per shareContinuing operations
    
    $
    (0.09
    )
    
    $
    (0.02
    )
    
    $
    (0.11
    )Discontinued operations
    
    
    0.01
    
    
    
    -
    
    
    
    0.01Total
    
    $
    (0.08
    )
    
    $
    (0.02
    )
    
    $
    (0.10
    )Shares used in calculating basic and diluted net loss per share
    
    
    30,478
    
    
    
    -
    
    
    
    30,478
 23




---



##### Table of Contents



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 (In thousands)
 Three Months ended March 31, 2008AsPreviously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedCash flows from operating activities:Net loss
    
    $
    (2,585
    )
    
    $
    (563
    )
    
    $
    (3,148
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation and amortization
    
    
    260
    
    
    
    -
    
    
    
    260Amortization and impairment of intangibles
    
    
    235
    
    
    
    35
    
    
    
    270Stock-based compensation
    
    
    964
    
    
    
    643
    
    
    
    1,607Excess tax benefits from stock-based compensation
    
    
    (107
    )
    
    
    -
    
    
    
    (107
    )Realized gain on short-term investments
    
    
    (81
    )
    
    
    -
    
    
    
    (81
    )Allowance for doubtful accounts
    
    
    (12
    )
    
    
    -
    
    
    
    (12
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    2,220
    
    
    
    80
    
    
    
    2,300Inventories
    
    
    (369
    )
    
    
    (21
    )
    
    
    (390
    )Deferred income taxes
    
    
    (251
    )
    
    
    (55
    )
    
    
    (306
    )Prepaid expenses and other current assets
    
    
    (1,234
    )
    
    
    1
    
    
    
    (1,233
    )Other assets
    
    
    (3
    )
    
    
    -
    
    
    
    (3
    )Accounts payable
    
    
    541
    
    
    
    -
    
    
    
    541Accrued compensation and other current liabilities
    
    
    521
    
    
    
    -
    
    
    
    521Income taxes payable
    
    
    (412
    )
    
    
    -
    
    
    
    (412
    )Deferred revenue and customer advances
    
    
    1,991
    
    
    
    (120
    )
    
    
    1,871Other long-term liabilities
    
    
    12
    
    
    
    -
    
    
    
    12Net cash provided by operating activities
    
    
    1,690
    
    
    
    -
    
    
    
    1,690Cash flows provided by investing activities:Maturities of short-term investments
    
    
    49,657
    
    
    
    -
    
    
    
    49,657Additions to intangibles
    
    
    (508
    )
    
    
    -
    
    
    
    (508
    )Purchases of property and equipment
    
    
    (280
    )
    
    
    -
    
    
    
    (280
    )Net cash provided by investing activities
    
    
    48,869
    
    
    
    -
    
    
    
    48,869Cash flows provided by financing activities:Issuance of common stock under employee stock purchase plan
    
    
    168
    
    
    
    -
    
    
    
    168Exercise of stock options and warrants
    
    
    659
    
    
    
    -
    
    
    
    659Excess tax benefits from stock-based compensation
    
    
    107
    
    
    
    -
    
    
    
    107Net cash provided by financing activities
    
    
    934
    
    
    
    -
    
    
    
    934Effect (decrease) of exchange rates on cash and cash equivalents
    
    
    (5
    )
    
    
    -
    
    
    
    (5
    )Net decrease in cash and cash equivalents
    
    
    51,488
    
    
    
    -
    
    
    
    51,488Cash and cash equivalents:Beginning of the period
    
    
    86,493
    
    
    
    -
    
    
    
    86,493End of the period
    
    $
    137,981
    
    
    $
    -
    
    
    $
    137,981Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    761
    
    
    $
    -
    
    
    $
    761
 24




---



##### Table of Contents



Cash Equivalents, Short-term Investments, and Warrant Derivative Liabilities
      March 31, 2009Fair value measurements usingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Assets:Corporate commercial
paper
    
    $
    
    
    
    $
    14,987
    
    
    $
    
    
    
    $
    14,987U.S. government agency
securities
    
    
    34,017
    
    
    
    
    
    
    
    
    
    
    
    34,017Money market
accounts
    
    
    29,481
    
    
    
    
    
    
    
    
    
    
    
    29,481Total assets at fair
value
    
    $
    63,498
    
    
    $
    14,987
    
    
    $
    
    
    
    $
    78,485Liabilities:Warrant derivative
liabilities
    
    $
    
    
    
    $
    
    
    
    $
    37
    
    
    $
    37Total liabilities at fair
value
    
    $
    
    
    
    $
    
    
    
    $
    37
    
    
    $
    37
  25




---



##### Table of Contents



December 31, 2008Fair value measurement usingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Corporate commercial paper
    
    $
    
    
    
    $
    24,971
    
    
    $
    
    
    
    $
    24,971U.S. government agency securities
    
    
    23,978
    
    
    
    
    
    
    
    
    
    
    
    23,978Money market accounts
    
    
    34,429
    
    
    
    
    
    
    
    
    
    
    
    34,429Total
    
    $
    58,407
    
    
    $
    24,971
    
    
    $
    
    
    
    $
    83,378
   March 31, 2009Fair Value Measurement UsingSignificant Unobservable InputsWarrant Derivative Liability
    
    (Level 3)(In thousands)Balances, beginning of the period
    
    $
    517Change in fair value
included in net loss
    
    
    (480
    )Balances, end of period
    
    $
    37
 Short
Term Investments
 March 31, 2009Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    HoldingAssets:
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(In thousands)Corporate commercial paper
    
    $
    9,986
    
    
    $
    1
    
    
    $
    
    
    
    $
    9,987U.S. government agency securities
    
    
    33,930
    
    
    
    16
    
    
    
    
    
    
    
    33,946Total
    
    $
    43,916
    
    
    $
    17
    
    
    $
    
    
    
    $
    43,933
 26




---



##### Table of Contents



December 31, 2008Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    HoldingCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(In thousands)Corporate commercial paper
    
    $
    9,980
    
    
    $
    1
    
    
    $
    
    
    
    $
    9,981U.S. government agency securities
    
    
    10,975
    
    
    
    18
    
    
    
    
    
    
    
    10,993Total
    
    $
    20,955
    
    
    $
    19
    
    
    $
    
    
    
    $
    20,974
   March 31,
    
    
    December 31,2009
    
    
    2008(In thousands)Raw materials and subassemblies
    
    $
    3,276
    
    
    $
    3,119Work in
process
    
    
    565
    
    
    
    209Finished
goods
    
    
    590
    
    
    
    429Inventories,
net
    
    $
    4,431
    
    
    $
    3,757
  March 31,
    
    
    December 31,2009
    
    
    2008(In thousands)Computer equipment and purchased software
    
    $
    4,832
    
    
    $
    4,735Machinery and equipment
    
    
    3,518
    
    
    
    3,269Furniture and fixtures
    
    
    1,443
    
    
    
    1,336Leasehold improvements
    
    
    1,631
    
    
    
    1,261Total
    
    
    11,424
    
    
    
    10,601Less accumulated depreciation
    
    
    (7,045
    )
    
    
    (6,774
    )Property and equipment, net
    
    $
    4,379
    
    
    $
    3,827
  27




---



##### Table of Contents



March 31,
    
    
    December 31,2009
    
    
    2008(In thousands)Patents and technology
    
    $
    17,560
    
    
    $
    17,008Other
assets
    
    
    156
    
    
    
    156Gross intangibles and other assets
    
    
    17,716
    
    
    
    17,164Accumulated amortization of patents and technology
    
    
    (7,652
    )
    
    
    (7,673
    )Intangibles and other assets, net
    
    $
    10,064
    
    
    $
    9,491
   March 31,
    
    
    December 31,2009
    
    
    2008(In thousands)Accrued
legal
    
    $
    447
    
    
    $
    491Income taxes payable
    
    
    38
    
    
    
    36Other current
liabilities
    
    
    2,825
    
    
    
    2,966Total other current liabilities
    
    $
    3,310
    
    
    $
    3,493Deferred revenue, current
    
    $
    8,207
    
    
    $
    7,954Customer advances
    
    
    96
    
    
    
    88Total deferred revenue, current and customer advances
    
    $
    8,303
    
    
    $
    8,042
    Stock Options and Awards
 28




---



##### Table of Contents



General Stock Option Information
  Numberof SharesOutstanding at December 31, 2008 (4,055,180 exercisable at a
weighted average price of $9.35 per share)
    
    
    7,009,667Granted (weighted average fair value of $2.09 per share)
    
    
    1,195,433Exercised
    
    
    (25,307
    )Forfeited and cancelled
    
    
    (853,879
    )Outstanding at March 31, 2009
    
    
    7,325,914Exercisable at March 31, 2009
    
    
    3,980,188
 Restricted Stock Units
  NumberBeginning balance at December 31, 2008
    
    
    34,500Awarded
    
    
    246,287Released
    
    
    (4,000
    )Forfeited
    
    
    (16,000
    )Ending Balance at March 31, 2009
    
    
    260,787Expected to Vest (1)
    
    
    171,362
 
 (1)
    
    RSUs expected to vest reflect estimated forfeiture rates. Restricted Stock
  29




---



##### Table of Contents



Numberof SharesBeginning balance at December 31, 2008
    
    
    Awarded
    
    
    27,000Released
    
    
    Forfeited
    
    
    Ending Balance at March 31, 2009
    
    
    27,000
  Options
    
    Employee Stock Purchase PlanThree Months Ended
    
    Three Months EndedMarch 31,
    
    March 31,2009
    
    2008
    
    2009
    
    2008Expected term (in years)
    
    
    5.5
    
    
    
    5.5
    
    
    
    0.5
    
    
    
    0.5Interest rate
    
    
    1.8
    %
    
    
    2.5
    %
    
    
    0.4
    %
    
    
    2.2
    %Volatility
    
    
    68.6
    %
    
    
    62.0
    %
    
    
    109.0
    %
    
    
    73.0
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Three Months EndedMarch 31,2009
    
    
    2008Income Statement Classifications
    
    (In thousands)Cost of product sales
    
    $
    69
    
    
    $
    43Sales and marketing
    
    
    230
    
    
    
    423Research and development
    
    
    473
    
    
    
    546General and administrative
    
    
    632
    
    
    
    556Total continuing operations
    
    
    1,404
    
    
    
    1,568Discontinued operations
    
    
    
    
    
    
    39Total
    
    $
    1,404
    
    
    $
    1,607
  30




---



##### Table of Contents



Stock Repurchase Program
  Warrants
  
   31




---



##### Table of Contents



December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    March 31,2008
    
    
    Quarter Ended March 31, 2009
    
    
    2009Restructuring
    
    
    Add
    
    
    Deduct Cash
    
    
    Non-Cash
    
    
    RestructuringReserve
    
    
    Charges
    
    
    Payments
    
    
    Expenses
    
    
    Reserve(In thousands)Medical workforce reductions
    
    $
    
    
    
    $
    166
    
    
    $
    
    
    
    $
    
    
    
    $
    166Touch workforce reductions
    
    
    142
    
    
    
    480
    
    
    
    (212
    )
    
    
    
    
    
    
    410Total
    
    $
    142
    
    
    $
    646
    
    
    $
    (212
    )
    
    $
    
    
    
    $
    576
 Restructuring Costs
   Results of Discontinued Operations
  32




---



##### Table of Contents



33




---



##### Table of Contents



Three Months EndedMarch 31,2009
    
    
    2008Numerator:Loss from continuing operations
    
    $
    (6,512
    )
    
    $
    (3,474
    )Gains from discontinued operations
    
    
    402
    
    
    
    326Net loss
    
    $
    (6,110
    )
    
    $
    (3,148
    )Denominator:Shares used in computation, basic and diluted
(weighted average common shares outstanding)
    
    
    27,924
    
    
    
    30,478Basic and diluted net loss per share:Continuing operations
    
    $
    (0.23
    )
    
    $
    (0.11
    )Discontinued operations
    
    
    0.01
    
    
    
    0.01Total
    
    $
    (0.22
    )
    
    $
    (0.10
    )
  March 31,
    
    March 31,2009
    
    2008Outstanding stock options
    
    
    7,325,914
    
    
    
    6,840,918Restricted stock and RSUs
    
    
    287,787
    
    
    
    Warrants
    
    
    431,243
    
    
    
    436,772
 34




---



##### Table of Contents



Three Months EndedMarch 31,2009
    
    
    2008(In thousands)Net loss
    
    $
    (6,110
    )
    
    $
    (3,148
    )Change in unrealized losses on short-term investments, net of tax
    
    
    (2
    )
    
    
    (7
    )Foreign currency translation adjustment
    
    
    (67
    )
    
    
    (12
    )Total comprehensive loss
    
    $
    (6,179
    )
    
    $
    (3,167
    )
     35




---



##### Table of Contents



Three Months EndedMarch 31,2009
    
    
    2008(In thousands)Revenues:Touch
    
    $
    4,475
    
    
    $
    3,962Medical
    
    
    3,066
    
    
    
    2,919Intersegment eliminations
    
    
    (35
    )
    
    
    (41
    )Total
    
    $
    7,506
    
    
    $
    6,840Operating Loss:Touch
    
    $
    (5,016
    )
    
    $
    (4,888
    )Medical
    
    
    (2,187
    )
    
    
    (1,458
    )Intersegment eliminations
    
    
    (1
    )
    
    
    (17
    )Total
    
    $
    (7,204
    )
    
    $
    (6,363
    )
 March 31,
    
    
    December 31,2009
    
    
    2008(In thousands)Total Assets:Touch
    
    $
    128,870
    
    
    $
    129,305Medical
    
    
    10,575
    
    
    
    11,471Intersegment eliminations
    
    
    (31,004
    )
    
    
    (27,189
    )Total
    
    $
    108,441
    
    
    $
    113,587
  In re Immersion Corporation
 In re Immersion
Corporation Initial Public Offering Securities Litigation
 36




---



##### Table of Contents



Other Contingencies
    37




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
        38




---



##### Table of Contents



Revenue Recognition
  Royalty and license revenue
 39




---



##### Table of Contents



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 proportional performance
method over the service period or
completed performance method.License of software or
technology, no modification
necessary, no services
contracted.
    
    Up-front revenue recognition based
on SOP No. 97-2 criteria or SAB No.
104, as applicable.
  Product sales
 Development contracts and other revenue
 Multiple element arrangements
 40




---



##### Table of Contents



Stock-based Compensation
  Valuation and amortization method
 Expected term
 Expected volatility
 Risk-free interest rate
 Expected dividend
 Forfeitures
   41




---



##### Table of Contents



Accounting for Income Taxes
    Short-term Investments
    42




---



##### Table of Contents



Recovery of Accounts Receivable
  Inventory Reserves
  Product Return and Warranty Reserves
  Intangible Assets
  43




---



##### Table of Contents



Restructuring Costs
     Overview
   44




---



##### Table of Contents



March 31,REVENUES
    
    2009
    
    
    2008
    
    
    Change($ In thousands)Three months ended:Royalty and
license
    
    $
    3,781
    
    
    $
    3,461
    
    
    
    9
    %Product
sales
    
    
    3,279
    
    
    
    2,580
    
    
    
    27
    %Development contracts and other
    
    
    446
    
    
    
    799
    
    
    
    (44
    )%Total
Revenue
    
    $
    7,506
    
    
    $
    6,840
    
    
    
    10
    %
 Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
 Total Revenue
 Royalty and license revenue
    45




---



##### Table of Contents



Product sales
 Development contract and other revenue
  March 31,
    
 ChangeCOST OF PRODUCT SALES
    
    2009
    
    2008($ In thousands)Three months ended:Cost of product
sales
    
    $
    1,251
    
    
    $
    1,684
    
    
    
    (26
    )%% of total product
revenue
    
    
    38
    %
    
    
    65
    %
 Cost of Product Sales
 46




---



##### Table of Contents



March 31,
    
 ChangeOPERATING EXPENSES AND OTHER
    
    2009
    
    2008($ In thousands)Three months ended:Sales and
marketing
    
    $
    4,284
    
    
    $
    3,345
    
    
    
    28
    %% of total
revenue
    
    
    57
    %
    
    
    49
    %Research and
development
    
    $
    3,929
    
    
    $
    3,490
    
    
    
    13
    %% of total
revenue
    
    
    52
    %
    
    
    51
    %General and
administrative
    
    $
    4,385
    
    
    $
    4,414
    
    
    
    (1
    )%% of total
revenue
    
    
    58
    %
    
    
    65
    %Amortization of
intangibles
    
    $
    215
    
    
    $
    270
    
    
    
    (20
    )%% of total
revenue
    
    
    3
    %
    
    
    4
    %Restructuring
costs
    
    $
    646
    
    
    $
    
    
    
    
    *
    %% of total
revenue
    
    
    9
    %
    
    
    *
    %
 
 *
    
    Not meaningful Sales and Marketing
 Research and Development
 47




---



##### Table of Contents



General and Administrative
 Amortization and impairment of Intangibles
 Restructuring
 Change in fair value of warrant liability 
 Interest and Other Income 
 48




---



##### Table of Contents



Provision for Income Taxes
 Discontinued Operations
   Three Months EndedMarch 31,2009
    
    
    2008(In thousands)Revenues:Touch
    
    $
    4,475
    
    
    $
    3,962Medical
    
    
    3,066
    
    
    
    2,919Intersegment eliminations
    
    
    (35
    )
    
    
    (41
    )Total
    
    $
    7,506
    
    
    $
    6,840Operating Loss:Touch
    
    $
    (5,016
    )
    
    $
    (4,888
    )Medical
    
    
    (2,187
    )
    
    
    (1,458
    )Intersegment eliminations
    
    
    (1
    )
    
    
    (17
    )Total
    
    $
    (7,204
    )
    
    $
    (6,363
    )
 
 *
    
    Note: 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. Touch segment 
 49




---



##### Table of Contents



Medical segment 
       50




---



##### Table of Contents



2010 and
    
    
    2012 andContractual Obligations
    
    Total
    
    
    2009
    
    
    2011
    
    
    2013
    
    
    2014(In thousands)Operating leases
    
    $
    3,555
    
    
    $
    928
    
    
    $
    1,250
    
    
    $
    1,094
    
    
    $
    283
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Cash Equivalents and Short-term Investments 
  51




---



##### Table of Contents



Foreign Currency Exchange Rates 
 
 ITEM 4. CONTROLS AND PROCEDURES
    
 52




---



##### Table of Contents



Plans for Remediation
   
    
    During the first quarter of fiscal 2008, we engaged outside consultants to advise
us in areas of complex tax accounting and to design and implement controls to ensure
proper communication with our personnel to obtain the needed advice and review of tax
related accounting and reporting documentation.
    
    In November 2008, we hired a senior tax manager who had responsibility to consider
and apply proper accounting for income taxes, design and implement controls to ensure
that the rationale for positions taken on certain tax matters would be adequately
documented and appropriately communicated to all internal and external members of our
tax team, and design and implement controls over the adjustment of the income tax
accounts based on the preparation and filing of income tax returns. In June 2009, the
senior tax manager departed the Company and we outsourced the preparation of the
Companys quarterly and annual tax calculations and the related financial disclosures
including the rationale for recognizing the benefits of certain tax positions in the
financial statements to an external provider with oversight responsibility remaining
with the corporate controller. We continue to evaluate additional steps to remediate
this material weakness.
  
    
    We are in the process of improving our documentation of our existing revenue
recognition policies, including policies involving non-standard terms and conditions,
multiple element arrangements, modifications to shipping terms and requests for
pre-release products;
    
    We have restructured our finance department such that the individuals responsible
for the recognition of revenue are all located at our headquarters and report directly
to the Interim CFO with clearly delineated responsibilities;
    
    We have held training sessions on revenue recognition policies with the sales
personnel and will continue to implement training and oversight of executive, finance,
sales and operational personnel and new hires to ensure compliance with revenue
recognition policies;
    
    We have redesigned the quarterly sub-certification process to cover a wider variety
of topics that could affect the financial statements and added more employees to this
certification process;
 53




---



##### Table of Contents




    
    We have implemented a process of obtaining quarterly certifications from all sales
personnel certifying that they are not aware of any side agreements modifying our
standard terms of contracts;
    
    We have implemented a process of obtaining, on an annual basis, signed
acknowledgments from each employee that he or she has read and is in compliance with
our code of ethics and employee handbook;
    
    We have improved our legal and financial review process of all sales order packages
for all terms and conditions prior to shipment; and
    
    We are in the process of automating the approval process for the release of all
products in development to production, which approval process requires the approval of
finance personnel.
   
    
    We are in the process of adding a control procedure to test the calculation of the
third-party stock-based compensation reports on a quarterly basis, including upon
upgrades to new versions of the software, and to ensure timely review of the technical
updates to the software.
    
    We are in the process of adding a control procedure to test the review and
implementation of all applicable new accounting pronouncements with the appropriate
review by finance personnel to ensure compliance.
 
 PART II
 
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 In re Immersion Corporation
 In re Immersion Corporation
Initial Public Offering Securities Litigation
  54




---



##### Table of Contents



Immersion Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp., and Simbionix Ltd.
  
 ITEM 1A. RISK FACTORS
 You should carefully consider the following risks and uncertainties, as well as other
information in this report and our other SEC filings, in considering our business and prospects. If
any of the following risks or uncertainties actually occur, our business, financial condition, or
results of operations could be materially adversely affected. The following risks and uncertainties
are not the only ones facing us. Additional risks and uncertainties of which we are unaware or that
we currently believe are immaterial could also materially adversely affect our business, financial
condition, or results of operations. In any case, the trading price of our common stock could
decline, and you could lose all or part of your investment. See also the Forward-looking Statements
discussion in Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations.
 Company Risks
   55




---



##### Table of Contents




    
    continue to develop our technologies;
    
    increase our sales and marketing efforts;
    
    attempt to expand the market for touch-enabled technologies and products and change our business;
    
    protect and enforce our intellectual property;
    
    pursue strategic relationships;
    
    acquire intellectual property or other assets from third-parties; and
    
    invest in systems and processes to manage our business.
  .
     56




---



##### Table of Contents



57




---



##### 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 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
    
    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.
   58




---



##### Table of Contents



59




---



##### Table of Contents



60




---



##### Table of Contents



61




---



##### Table of Contents




    
    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.
   62




---



##### 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.
       63




---



##### Table of Contents



64




---



##### Table of Contents



65




---



##### Table of Contents




    
    compliance with multiple, conflicting and changing governmental laws and regulations;
    
    laws and business practices favoring local competitors;
    
    foreign exchange and currency risks;
    
    difficulty in collecting accounts receivable or longer payment cycles;
    
    import and export restrictions and tariffs;
    
    difficulties staffing and managing foreign operations;
    
    difficulties and expense in enforcing intellectual property rights;
    
    business risks, including fluctuations in demand for our products and
the cost and effort to conduct international operations and travel
abroad to promote international distribution and overall global
economic conditions;
    
    multiple conflicting tax laws and regulations; and
    
    political and economic instability.
  66




---



##### Table of Contents



67




---



##### 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, dispositions and restructurings;
    
    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;
    
    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.
     
    
    our board of directors is classified into three classes of directors with staggered
three-year terms;
 68




---



##### Table of Contents




    
    only our chairperson of the board of directors, a majority of our board of directors,
or 10% or greater stockholders are authorized to call a special meeting of stockholders;
    
    our stockholders can only take action at a meeting of stockholders and not by written
consent;
    
    vacancies on our board of directors can be filled only by our board of directors and
not by our stockholders;
    
    our restated certificate of incorporation authorizes undesignated preferred stock, the
terms of which may be established and shares of which may be issued without stockholder
approval; and
    
    advance notice procedures apply for stockholders to nominate candidates for election as
directors or to bring matters before an annual meeting of stockholders.
     
    
    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 associated with amortization of acquired assets or potential charges for write-down of
assets associated with unsuccessful acquisitions;
    
    potential intellectual property infringement claims related to newly-acquired product lines; and
    
    potential costs associated with failed acquisition efforts.
    69




---



##### Table of Contents



70




---



##### Table of Contents



ITEM 6. EXHIBITS
  ExhibitNumber
    
    Description10.37*
    
    Form of 2009 Executive Incentive Plan10.38*
    
    Amended and Restated Retention and Ownership Agreement dated April 20, 2009
between Immersion Corporation and Clent Richardson10.39*
    
    Amended and Restated Retention and Ownership Agreement dated April 23, 2009
between Immersion Corporation and Stephen Ambler31.1
    
    Certification of Victor Viegas, Interim Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Victor Viegas, Interim Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.99.01*
    
    Form of Restricted Stock Agreement99.02*
    
    Form of Notice of Grant of Restricted Stock* Filed previously with the
Form 10-Q for the quarter ended March 31, 2009.
 71




---



##### Table of Contents



SIGNATURES
   IMMERSION CORPORATIONBy
    /s/ Henry HirvelaHenry HirvelaInterim Chief Financial Officer 72




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description10.37*
    
    Form of 2009 Executive Incentive Plan10.38*
    
    Amended and Restated Retention and Ownership Agreement dated April 20, 2009
between Immersion Corporation and Clent Richardson10.39*
    
    Amended and Restated Retention and Ownership Agreement dated April 23, 2009
between Immersion Corporation and Stephen Ambler31.1
    
    Certification of Victor Viegas, Interim Chief Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Victor Viegas, Interim Chief Executive Officer, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.99.01*
    
    Form of Restricted Stock Agreement99.02*
    
    Form of Notice of Grant of Restricted Stock* Filed previously with the
Form 10-Q for the quarter ended March 31, 2009.
 73