##### 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
  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




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##### 



IMMERSION CORPORATION
 INDEX
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements
    
    
    3Unaudited Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
    
    
    3Unaudited Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2009 and 2008 (Restated)
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Restated)
    
    
    5Unaudited Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    28Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4. Controls and Procedures
    
    
    45PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    47Item 1A. Risk Factors
    
    
    48Item 4. Submission of Matters to a Vote of Security Holders
    
    
    64Item 6. Exhibits
    
    
    65SIGNATURES
    
    
    66EX-31.1EX-31.2EX-32.1EX-32.2
  2




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PART I
FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 IMMERSION CORPORATION


CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 June 30,
    
    
    December 31,2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    25,047
    
    
    $
    64,769Short-term investments
    
    
    48,962
    
    
    
    20,974Accounts receivable (net of allowances for doubtful accounts of: June 30, 2009  $241
and December 31, 2008  $436)
    
    
    4,185
    
    
    
    6,114Inventories net
    
    
    3,672
    
    
    
    3,757Deferred income taxes
    
    
    311
    
    
    
    311Prepaid expenses and other current assets
    
    
    4,012
    
    
    
    4,344Total current assets
    
    
    86,189
    
    
    
    100,269Property and equipment, net
    
    
    3,868
    
    
    
    3,827Intangibles and other assets, net
    
    
    10,329
    
    
    
    9,491Total assets
    
    $
    100,386
    
    
    $
    113,587LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    903
    
    
    $
    2,842Accrued compensation
    
    
    2,052
    
    
    
    2,920Other current liabilities
    
    
    3,731
    
    
    
    3,493Deferred revenue and customer advances
    
    
    7,833
    
    
    
    8,042Total current liabilities
    
    
    14,519
    
    
    
    17,297Long-term deferred revenue
    
    
    18,131
    
    
    
    15,989Deferred income tax liabilities
    
    
    311
    
    
    
    311Other long-term liabilities
    
    
    217
    
    
    
    212Total liabilities
    
    
    33,178
    
    
    
    33,809Contingencies (Note 16)Stockholders equity:Common stock and additional paid-in capital  $0.001 par value; 100,000,000 shares
authorized; shares issued: June 30, 2009  30,779,628 and December 31, 2008 
30,674,045; shares outstanding: June 30, 2009 27,991,759 and
December 31, 2008  27,887,482
    
    
    170,808
    
    
    
    167,870Warrants
    
    
    11
    
    
    
    1,731Accumulated other comprehensive income
    
    
    114
    
    
    
    109Accumulated deficit
    
    
    (85,328
    )
    
    
    (71,543
    )Treasury stock at cost: June 30, 2009  2,787,869 shares and
December 31, 2008  2,786,563 shares
    
    
    (18,397
    )
    
    
    (18,389
    )Total stockholders equity
    
    
    67,208
    
    
    
    79,778Total liabilities and stockholders equity
    
    $
    100,386
    
    
    $
    113,587
  3




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IMMERSION CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(As Restated)(1)
    
    
    
    
    
    
    (As Restated)(1)Revenues:Royalty and license
    
    $
    3,580
    
    
    $
    3,171
    
    
    $
    7,361
    
    
    $
    6,632Product sales
    
    
    2,772
    
    
    
    3,744
    
    
    
    6,051
    
    
    
    6,324Development contracts and other
    
    
    330
    
    
    
    704
    
    
    
    776
    
    
    
    1,503Total revenues
    
    
    6,682
    
    
    
    7,619
    
    
    
    14,188
    
    
    
    14,459Costs and expenses:Cost of product sales (exclusive of amortization and impairment
of intangibles shown separately below)
    
    
    2,312
    
    
    
    2,051
    
    
    
    3,563
    
    
    
    3,735Sales and marketing
    
    
    4,016
    
    
    
    3,846
    
    
    
    8,300
    
    
    
    7,191Research and development
    
    
    3,412
    
    
    
    2,940
    
    
    
    7,341
    
    
    
    6,430General and administrative
    
    
    4,841
    
    
    
    5,111
    
    
    
    9,226
    
    
    
    9,525Amortization and impairment of intangibles
    
    
    224
    
    
    
    202
    
    
    
    439
    
    
    
    472Restructuring costs
    
    
    705
    
    
    
    
    
    
    
    1,351
    
    
    
    Total costs and expenses
    
    
    15,510
    
    
    
    14,150
    
    
    
    30,220
    
    
    
    27,353Operating loss
    
    
    (8,828
    )
    
    
    (6,531
    )
    
    
    (16,032
    )
    
    
    (12,894
    )Change in fair value of warrant liability
    
    
    (136
    )
    
    
    
    
    
    
    344
    
    
    
    Interest and other income
    
    
    207
    
    
    
    973
    
    
    
    510
    
    
    
    2,608Loss from continuing operations before provision for income taxes
    
    
    (8,757
    )
    
    
    (5,558
    )
    
    
    (15,178
    )
    
    
    (10,286
    )Benefit (provision) for income taxes
    
    
    (300
    )
    
    
    1,903
    
    
    
    (391
    )
    
    
    3,157Loss from continuing operations
    
    
    (9,057
    )
    
    
    (3,655
    )
    
    
    (15,569
    )
    
    
    (7,129
    )Discontinued operations (Note 10) :Gain on sales of discontinued operations net of provision for
income taxes of $0
    
    
    20
    
    
    
    
    
    
    
    187
    
    
    
    Gain from discontinued operations, net of provision (benefit) for
income taxes of $(48), $133, $102, and $324
    
    
    166
    
    
    
    210
    
    
    
    401
    
    
    
    536Net loss
    
    $
    (8,871
    )
    
    $
    (3,445
    )
    
    $
    (14,981
    )
    
    $
    (6,593
    )Basic and diluted net loss per shareContinuing operations
    
    
    (0.33
    )
    
    
    (0.12
    )
    
    
    (0.56
    )
    
    
    (0.23
    )Discontinued operations
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.01Total
    
    $
    (0.32
    )
    
    $
    (0.11
    )
    
    $
    (0.54
    )
    
    $
    (0.22
    )Shares used in calculating basic and diluted net loss per share
    
    
    27,968
    
    
    
    30,356
    
    
    
    27,946
    
    
    
    30,417
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IMMERSION CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 (unaudited)
 Six Months EndedJune 30,2009
    
    
    2008As Restated (1)Cash flows from operating activities:Net loss
    
    $
    (14,981
    )
    
    $
    (6,593
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    873
    
    
    
    541Amortization and impairment of intangibles
    
    
    439
    
    
    
    472Stock-based compensation
    
    
    2,651
    
    
    
    2,759Excess tax benefits from stock-based compensation
    
    
    
    
    
    
    (176
    )Realized gain on short-term investments
    
    
    
    
    
    
    (80
    )Change in fair value of warrant liability
    
    
    (344
    )
    
    
    Write off of equipment
    
    
    708
    
    
    
    Gain on sales of discontinued operations
    
    
    (187
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    1,943
    
    
    
    728Inventories
    
    
    (172
    )
    
    
    (822
    )Deferred income taxes
    
    
    
    
    
    
    (623
    )Prepaid expenses and other current assets
    
    
    332
    
    
    
    (1,333
    )Other assets
    
    
    7
    
    
    
    19Accounts payable
    
    
    (1,789
    )
    
    
    290Accrued compensation and other current liabilities
    
    
    (783
    )
    
    
    1,165Income taxes payable
    
    
    4
    
    
    
    (319
    )Deferred revenue and customer advances
    
    
    1,933
    
    
    
    2,478Other long-term liabilities
    
    
    5
    
    
    
    30Net cash used in operating activities
    
    
    (9,361
    )
    
    
    (1,464
    )Cash flows provided by (used in) investing activities:Purchases of short-term investments
    
    
    (48,988
    )
    
    
    (32,144
    )Maturities of short-term investments
    
    
    21,000
    
    
    
    51,979Additions to intangibles
    
    
    (1,543
    )
    
    
    (1,560
    )Purchases of property and equipment
    
    
    (1,288
    )
    
    
    (1,065
    )Proceeds from sales of discontinued operations
    
    
    187
    
    
    
    Net cash provided by (used in) investing activities
    
    
    (30,632
    )
    
    
    17,210Cash flows provided by (used in) financing activities:Issuance of common stock under employee stock purchase plan
    
    
    134
    
    
    
    168Exercise of stock options and warrants
    
    
    144
    
    
    
    1,121Excess tax benefits from stock-based compensation
    
    
    
    
    
    
    176Purchases of treasury stock
    
    
    
    
    
    
    (6,155
    )Tax withholding payment related to vested and released restricted stock units
    
    
    (7
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    271
    
    
    
    (4,690
    )Effect (decrease) of exchange rates on cash and cash equivalents
    
    
    
    
    
    
    (14
    )Net increase (decrease) in cash and cash equivalents
    
    
    (39,722
    )
    
    
    11,042Cash and cash equivalents:Beginning of the period
    
    
    64,769
    
    
    
    86,493End of the period
    
    $
    25,047
    
    
    $
    97,535Supplemental disclosure of cash flow information:Cash paid (received) for taxes
    
    $
    7
    
    
    $
    (731
    )Supplemental disclosure of non-cash investing and financing activities:Shares
issued upon vesting of restricted stock units
    
    $
    22
    
    
    $
    Amounts accrued for property and equipment, and intangibles
    
    $
    434
    
    
    $
    701
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IMMERSION CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2009
 (Unaudited)
  Description of Busines
  Principles of Consolidation and Basis of Presentation
    Revenue Recognition
  Royalty
and license revenue 
 6




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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
 7




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Recent Accounting Pronouncements
       8




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##### Table of Contents



Revenue Transactions
 Side Agreement
  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.
 9




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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 $187,000 and $830,000 for the
first quarter and six
months ended June 30, 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 $64,000 and $192,000 for the second quarter and six months ended
June 30, 2008, respectively. 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. The 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 $27,000 and $62,000 in the
second quarter and six months ended June 30, 2008, respectively.
 Impact of Corrections on Previously Issued Condensed Consolidated Financial Statements
  10




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Detailed Components of Revenue Transaction Adjustments($ in thousands)Total Impact of RevenueRevenue
    
    

Cost of Product Sales
    
    

Commission Expense
    
    

AdjustmentsSix
months ended June 30, 2008Increase (Decrease)
    
    $
    (691)
    (1)
    
    $
    252
    
    
    $
    21
    
    
    $
    (418
    )Three months ended
June 30, 2008Increase (Decrease)
    
    $
    (602)
    (2)
    
    $
    231
    
    
    $
    21
    
    
    $
    (350
    )
 (1)
    
    For the six months ended June 30, 2008 reflects a decrease of $511,000 as discussed in Side
Agreement and a decrease of $194,000 in revenue as discussed in Additional Transactions
Analyzed and an increase of $14,000 in revenue due to warranty adjustments.(2)
    
    For the three months ended June 30, 2008 reflects a decrease of $511,000 as discussed in
Side Agreement and a net decrease of $114,000 in revenue as discussed in Additional
Transactions Analyzed and an increase of $23,000 in revenue due to warranty adjustments. Summary of Impact of Restatement AdjustmentsLoss fromLoss from Continuing Operations Before
    
    
    
    
    
    
    
    
    
    ContinuingProvision for Income Taxes
    
    
    
    
    
    OperationsRevenue
    
    AmortizationTransactions
    
    and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalAdjustments
    
    Impairment
    
    Interest
    
    Stock-based
    
    
    
    
    
    Income Tax
    
    Adjustments(1)
    
    of Intangibles
    
    Income
    
    Compensation
    
    Total
    
    Effect
    
    Net of Tax($ in thousands)Six months ended 
June 30, 2008Increase
(Decrease)
    
    $
    (418
    )
    
    $
    (62
    )
    
    $
    192
    
    
    $
    (830
    )
    
    $
    (1,118
    )
    
    $
    199
    
    
    $
    (919
    )Three months ended 
June 30, 2008Increase (Decrease)
    
    $
    (350
    )
    
    $
    (27
    )
    
    $
    64
    
    
    $
    (187
    )
    
    $
    (500
    )
    
    $
    148
    
    
    $
    (352
    )
    11




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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
 Three Months Ended June 30, 2008As Previously
    
    
    Discontinued
    
    
    Restatement
    
    
    AsReported
    
    
    Operations
    
    
    Adjustments
    
    
    Restated andReclassification
    
    
    
    
    
    
    ReclassifiedRevenues:Royalty and license
    
    $
    3,171
    
    
    $
    -
    
    
    $
    -
    
    
    $
    3,171Product
sales
    
    
    5,386
    
    
    
    (1,040
    )
    
    
    (602
    )
    
    
    3,744Development contracts and other
    
    
    756
    
    
    
    (52
    )
    
    
    -
    
    
    
    704Total revenues
    
    
    9,313
    
    
    
    (1,092
    )
    
    
    (602
    )
    
    
    7,619Costs and expenses:Cost of product sales (exclusive of amortization and impairment of intangibles
shown separately below)
    
    
    2,570
    
    
    
    (301
    )
    
    
    (218
    )
    
    
    2,051Sales and marketing
    
    
    4,258
    
    
    
    (448
    )
    
    
    36
    
    
    
    3,846Research and development
    
    
    2,855
    
    
    
    -
    
    
    
    85
    
    
    
    2,940General and administrative
    
    
    5,084
    
    
    
    -
    
    
    
    27
    
    
    
    5,111Amortization and impairment of intangibles
    
    
    170
    
    
    
    -
    
    
    
    32
    
    
    
    202Total costs and expenses
    
    
    14,937
    
    
    
    (749
    )
    
    
    (38
    )
    
    
    14,150Operating
loss
    
    
    (5,624
    )
    
    
    (343
    )
    
    
    (564
    )
    
    
    (6,531
    )Interest and other income
    
    
    909
    
    
    
    -
    
    
    
    64
    
    
    
    973Loss from continuing operations before provision for income taxes
    
    
    (4,715
    )
    
    
    (343
    )
    
    
    (500
    )
    
    
    (5,558
    )Benefit for income taxes
    
    
    1,624
    
    
    
    131
    
    
    
    148
    
    
    
    1,903Loss from continuing operations
    
    
    (3,091
    )
    
    
    (212
    )
    
    
    (352
    )
    
    
    (3,655
    )Discontinued operations:Gain from discontinued operations, net of provision forincome taxes of $133
    
    
    -
    
    
    
    212
    
    
    
    (2
    )
    
    
    210Net loss
    
    $
    (3,091
    )
    
    $
    -
    
    
    $
    (354
    )
    
    $
    (3,445
    )Basic and diluted net loss per shareContinuing operations
    
    $
    (0.10
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.12
    )Discontinued operations
    
    
    -
    
    
    
    0.01
    
    
    
    (0.00
    )
    
    
    0.01Total
    
    $
    (0.10
    )
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.11
    )Shares used in calculating basic and diluted net loss per share
    
    
    30,356
    
    
    
    -
    
    
    
    -
    
    
    
    30,356
 12




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CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
 Six Months Ended June 30, 2008As Previously
    
    
    Discontinued
    
    
    Restatement
    
    
    AsReported
    
    
    Operations
    
    
    Adjustments
    
    
    Restated andReclassification
    
    
    
    
    
    
    ReclassifiedRevenues:Royalty and license
    
    $
    6,632
    
    
    $
    -
    
    
    $
    -
    
    
    $
    6,632Product
sales
    
    
    9,237
    
    
    
    (2,222
    )
    
    
    (691
    )
    
    
    6,324Development contracts and other
    
    
    1,599
    
    
    
    (96
    )
    
    
    -
    
    
    
    1,503Total revenues
    
    
    17,468
    
    
    
    (2,318
    )
    
    
    (691
    )
    
    
    14,459Costs and expenses:Cost of product sales (exclusive of amortization and impairment of intangibles

shown separately below)
    
    
    4,656
    
    
    
    (704
    )
    
    
    (217
    )
    
    
    3,735Sales and marketing
    
    
    7,700
    
    
    
    (754
    )
    
    
    245
    
    
    
    7,191Research and development
    
    
    6,084
    
    
    
    -
    
    
    
    346
    
    
    
    6,430General and administrative
    
    
    9,347
    
    
    
    -
    
    
    
    178
    
    
    
    9,525Amortization and impairment of intangibles
    
    
    405
    
    
    
    -
    
    
    
    67
    
    
    
    472Total costs and expenses
    
    
    28,192
    
    
    
    (1,458
    )
    
    
    619
    
    
    
    27,353Operating
loss
    
    
    (10,724
    )
    
    
    (860
    )
    
    
    (1,310
    )
    
    
    (12,894
    )Interest and other income
    
    
    2,416
    
    
    
    -
    
    
    
    192
    
    
    
    2,608Loss from continuing operations before provision for income taxes
    
    
    (8,308
    )
    
    
    (860
    )
    
    
    (1,118
    )
    
    
    (10,286
    )Benefit for income taxes
    
    
    2,632
    
    
    
    326
    
    
    
    199
    
    
    
    3,157Loss from continuing operations
    
    
    (5,676
    )
    
    
    (534
    )
    
    
    (919
    )
    
    
    (7,129
    )Discontinued operations:Gain from discontinued operations, net of provision forincome taxes of $324
    
    
    -
    
    
    
    534
    
    
    
    2
    
    
    
    536Net loss
    
    $
    (5,676
    )
    
    $
    -
    
    
    $
    (917
    )
    
    $
    (6,593
    )Basic and diluted net loss per shareContinuing operations
    
    $
    (0.19
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.23
    )Discontinued operations
    
    
    -
    
    
    
    0.01
    
    
    
    0.00
    
    
    
    0.01Total
    
    $
    (0.19
    )
    
    $
    0.00
    
    
    $
    (0.03
    )
    
    $
    (0.22
    )Shares used in calculating basic and diluted net loss per share
    
    
    30,417
    
    
    
    -
    
    
    
    -
    
    
    
    30,417
 13




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
 Six Months Ended June 30, 2008AsPreviously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedCash flows from operating activities:Net
loss
    
    $
    (5,676
    )
    
    $
    (917
    )
    
    $
    (6,593
    )Adjustments to reconcile net loss to net cash provided by (used in)

operating activities:Depreciation and amortization
    
    
    541
    
    
    
    -
    
    
    
    541Amortization and impairment of intangibles
    
    
    405
    
    
    
    67
    
    
    
    472Stock-based compensation
    
    
    1,929
    
    
    
    830
    
    
    
    2,759Excess tax benefits from stock-based compensation
    
    
    (176
    )
    
    
    -
    
    
    
    (176
    )Realized gain on short-term investments
    
    
    (80
    )
    
    
    -
    
    
    
    (80
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    175
    
    
    
    553
    
    
    
    728Inventories
    
    
    (590
    )
    
    
    (232
    )
    
    
    (822
    )Deferred income taxes
    
    
    (475
    )
    
    
    (148
    )
    
    
    (623
    )Prepaid expenses and other current assets
    
    
    (1,164
    )
    
    
    (169
    )
    
    
    (1,333
    )Other
assets
    
    
    19
    
    
    
    -
    
    
    
    19Accounts payable
    
    
    290
    
    
    
    -
    
    
    
    290Accrued compensation and other current liabilities
    
    
    1,186
    
    
    
    (21
    )
    
    
    1,165Income taxes payable
    
    
    (319
    )
    
    
    -
    
    
    
    (319
    )Deferred revenue and customer advances
    
    
    2,436
    
    
    
    42
    
    
    
    2,478Other long-term liabilities
    
    
    30
    
    
    
    -
    
    
    
    30Net cash used in operating activities
    
    
    (1,469
    )
    
    
    5
    
    
    
    (1,464
    )Cash flows provided by (used in) investing activities:Purchases of short-term investments
    
    
    (32,144
    )
    
    
    -
    
    
    
    (32,144
    )Maturities of short-term investments
    
    
    51,979
    
    
    
    -
    
    
    
    51,979Additions to intangibles
    
    
    (1,555
    )
    
    
    (5
    )
    
    
    (1,560
    )Purchases of property and equipment
    
    
    (1,065
    )
    
    
    -
    
    
    
    (1,065
    )Net cash provided by investing activities
    
    
    17,215
    
    
    
    (5
    )
    
    
    17,210Cash flows provided by (used in) financing activities:Issuance of common stock under employee stock purchase plan
    
    
    168
    
    
    
    -
    
    
    
    168Exercise of stock options and warrants
    
    
    1,121
    
    
    
    -
    
    
    
    1,121Excess tax benefits from stock-based compensation
    
    
    176
    
    
    
    -
    
    
    
    176Purchases of treasury stock
    
    
    (6,155
    )
    
    
    -
    
    
    
    (6,155
    )Net cash used in financing activities
    
    
    (4,690
    )
    
    
    -
    
    
    
    (4,690
    )Effect (decrease) of exchange rates on cash and cash equivalents
    
    
    (14
    )
    
    
    -
    
    
    
    (14
    )Net increase in cash and cash equivalents
    
    
    11,042
    
    
    
    -
    
    
    
    11,042Cash and cash equivalents:Beginning of the period
    
    
    86,493
    
    
    
    -
    
    
    
    86,493End of the period
    
    $
    97,535
    
    
    $
    -
    
    
    $
    97,535Supplemental disclosure of cash flow information:Cash received for taxes
    
    $
    (731
    )
    
    $
    -
    
    
    $
    (731
    )Non-cash investing and financing activities:Amounts accrued for property and equipment, and intangibles
    
    $
    701
    
    
    $
    -
    
    
    $
    701
 14




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##### Table of Contents



Cash Equivalents, Short-term Investments, and Warrant Derivative Liabilities
      June 30, 2009Fair value measurements usingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Assets:Corporate commercial paper
    
    $
    
    
    
    $
    9,993
    
    
    $
    
    
    
    $
    9,993U.S. government agency securities
    
    
    39,066
    
    
    
    
    
    
    
    
    
    
    
    39,066Money market accounts
    
    
    22,245
    
    
    
    
    
    
    
    
    
    
    
    22,245Total assets at fair value
    
    $
    61,311
    
    
    $
    9,993
    
    
    $
    
    
    
    $
    71,304Liabilities:Warrant derivative liabilities
    
    $
    
    
    
    $
    
    
    
    $
    173
    
    
    $
    173Total liabilities at fair value
    
    $
    
    
    
    $
    
    
    
    $
    173
    
    
    $
    173
  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
  15




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##### Table of Contents



Three Months Ended June 30, 2009
    
    
    Six Months Ended June 30, 2009Fair Value Measurement Using
    
    
    Fair Value Measurement UsingSignificant Unobservable Inputs
    
    
    Significant Unobservable InputsWarrant Derivative Liability
    

(Level 3)
    
    
    (Level 3)(In thousands)
    
    
    (In thousands)Balances, beginning of the period
    
    $
    37
    
    
    $
    517Change in fair valueIncluded in net loss
    
    
    136
    
    
    
    (344
    )Balances, end of period
    
    $
    173
    
    
    $
    173
  June 30, 2009Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    HoldingCost
    
    
    Gains
    
    
    Losses
    
    

Fair Value(In thousands)Assets:Corporate commercial paper
    
    $
    9,991
    
    
    $
    2
    
    
    $
    
    
    
    $
    9,993U.S. government agency securities
    
    
    38,951
    
    
    
    18
    
    
    
    
    
    
    
    38,969Total
    
    $
    48,942
    
    
    $
    20
    
    
    $
    
    
    
    $
    48,962
 December 31, 2008Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    HoldingCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(In thousands)Assets:Corporate commercial paper
    
    $
    9,980
    
    
    $
    1
    
    
    $
    
    
    
    $
    9,981U.S. government agency securities
    
    
    10,975
    
    
    
    18
    
    
    
    
    
    
    
    10,993Total
    
    $
    20,955
    
    
    $
    19
    
    
    $
    
    
    
    $
    20,974
 16




---



##### Table of Contents



June 30,
    
    
    December 31,2009
    
    
    2008(In thousands)Raw materials and subassemblies
    
    $
    2,680
    
    
    $
    3,119Work in process
    
    
    284
    
    
    
    209Finished goods
    
    
    708
    
    
    
    429Inventories net
    
    $
    3,672
    
    
    $
    3,757
   June 30,
    
    
    December 31,2009
    
    
    2008(In thousands)Computer equipment and purchased software
    
    $
    4,474
    
    
    $
    4,735Machinery and equipment
    
    
    1,710
    
    
    
    3,269Furniture and fixtures
    
    
    1,405
    
    
    
    1,336Leasehold improvements
    
    
    1,457
    
    
    
    1,261Total
    
    
    9,046
    
    
    
    10,601Less accumulated depreciation
    
    
    (5,178
    )
    
    
    (6,774
    )Property and equipment, net
    
    $
    3,868
    
    
    $
    3,827
  17




---



##### Table of Contents



June 30,
    
    
    December 31,2009
    
    
    2008(In thousands)Patents and technology
    
    $
    18,056
    
    
    $
    17,008Other assets
    
    
    148
    
    
    
    156Gross intangibles and other assets
    
    
    18,204
    
    
    
    17,164Accumulated amortization of patents and technology
    
    
    (7,875
    )
    
    
    (7,673
    )Intangibles and other assets, net
    
    $
    10,329
    
    
    $
    9,491
   June 30,
    
    
    December 31,2009
    
    
    2008(In thousands)Accrued legal
    
    $
    392
    
    
    $
    491Income taxes payable
    
    
    40
    
    
    
    36Other current liabilities
    
    
    3,299
    
    
    
    2,966Total other current liabilities
    
    $
    3,731
    
    
    $
    3,493Deferred revenue, current
    
    $
    7,765
    
    
    $
    7,954Customer advances
    
    
    68
    
    
    
    88Total deferred revenue, current and customer advances
    
    $
    7,833
    
    
    $
    8,042
   18




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##### Table of Contents



Stock Options and Awards
  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 $2.10 per share)
    
    
    1,330,183Exercised
    
    
    (71,207
    )Forfeited and cancelled
    
    
    (1,719,756
    )Outstanding at June 30, 2009
    
    
    6,548,887Exercisable at June 30, 2009
    
    
    3,744,748
 Restricted Stock Units
  Numberof SharesBeginning balance at December 31, 2008
    
    
    34,500Awarded
    
    
    292,287Released
    
    
    (4,000
    )Forfeited
    
    
    (37,870
    )Ending Balance at June 30, 2009
    
    
    284,917Expected to Vest (1)
    
    
    194,713
 
 (1)
    
    RSUs expected to vest reflect estimated forfeiture rates. 19




---



##### Table of Contents



Restricted Stock
  Numberof SharesBeginning balance at December 31, 2008
    
    
    Awarded
    
    
    27,000Released
    
    
    Forfeited
    
    
    Ending balance at June 30, 2009
    
    
    27,000
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Options
    
    2009
    
    2008
    
    2009
    
    2008Expected term (in years)
    
    
    5.5
    
    
    
    5.5
    
    
    
    5.5
    
    
    
    5.5Volatility
    
    
    69
    %
    
    
    63
    %
    
    
    69
    %
    
    
    62
    %Interest rate
    
    
    2.3
    %
    
    
    3.4
    %
    
    
    1.8
    %
    
    
    2.9
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Employee Stock Purchase Plan
    
    2009
    
    2008
    
    2009
    
    2008Expected term (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Volatility
    
    
    109
    %
    
    
    73
    %
    
    
    109
    %
    
    
    73
    %Interest rate
    
    
    0.4
    %
    
    
    2.2
    %
    
    
    0.4
    %
    
    
    2.2
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 20




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Income Statement Classifications
    
    (In thousands)
    
    
    (In thousands)Cost of product sales
    
    $
    33
    
    
    $
    65
    
    
    $
    102
    
    
    $
    108Sales and marketing
    
    
    213
    
    
    
    354
    
    
    
    443
    
    
    
    777Research and development
    
    
    240
    
    
    
    268
    
    
    
    713
    
    
    
    814General and administrative
    
    
    761
    
    
    
    437
    
    
    
    1,393
    
    
    
    993Total continuing operations
    
    
    1,247
    
    
    
    1,124
    
    
    
    2,651
    
    
    
    2,692Discontinued operations
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    67Total
    
    $
    1,247
    
    
    $
    1,152
    
    
    $
    2,651
    
    
    $
    2,759
  Stock Repurchase Program
   Warrants
  
 21




---



##### Table of Contents



December 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 30,2008
    
    
    Six Months Ended June 30, 2009
    
    
    2009Restructuring
    
    
    Add
    
    
    Deduct Cash
    
    
    Non-Cash
    
    
    RestructuringReserve
    
    
    Charges
    
    
    Payments
    
    
    Expenses
    
    
    Reserve($ in thousands)Medical workforce reductions
    
    $
    
    
    
    $
    464
    
    
    $
    (310
    )
    
    $
    (14
    )
    
    $
    140Touch workforce reductions
    
    
    142
    
    
    
    542
    
    
    
    (632
    )
    
    
    (2
    )
    
    
    50Medical division location transition
    
    
    
    
    
    
    361
    
    
    
    (285
    )
    
    
    
    
    
    
    76Total
    
    $
    142
    
    
    $
    1,367
    
    
    $
    (1,227
    )
    
    $
    (16
    )
    
    $
    266
 Restructuring Costs
   Results of Discontinued Operations
  22




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##### Table of Contents



23




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30
    
    
    June 302009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Loss from continuing operations
    
    $
    (9,057
    )
    
    $
    (3,655
    )
    
    $
    (15,569
    )
    
    $
    (7,129
    )Gain from discontinued operations
    
    
    186
    
    
    
    210
    
    
    
    588
    
    
    
    536Net loss
    
    $
    (8,871
    )
    
    $
    (3,445
    )
    
    $
    (14,981
    )
    
    $
    (6,593
    )Denominator:Shares used in computation, basic and diluted
(weighted average common shares outstanding)
    
    
    27,968
    
    
    
    30,356
    
    
    
    27,946
    
    
    
    30,417Basic and diluted net loss per share:Continuing operations
    
    $
    (0.33
    )
    
    $
    (0.12
    )
    
    $
    (0.56
    )
    
    $
    (0.23
    )Discontinued operations
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.01Total
    
    $
    (0.32
    )
    
    $
    (0.11
    )
    
    $
    (0.54
    )
    
    $
    (0.22
    )
  June 30,
    
    June 30,2009
    
    2008Outstanding stock options
    
    
    6,548,887
    
    
    
    7,505,995Restricted stock and RSUs
    
    
    311,917
    
    
    
    Warrants
    
    
    428,567
    
    
    
    436,772
 24




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands)
    
    
    (In thousands)Net loss
    
    $
    (8,871
    )
    
    $
    (3,445
    )
    
    $
    (14,981
    )
    
    $
    (6,593
    )Change in unrealized losses on short-term investments
    
    
    2
    
    
    
    (22
    )
    
    
    
    
    
    
    (29
    )Foreign currency translation adjustment
    
    
    72
    
    
    
    (8
    )
    
    
    5
    
    
    
    (20
    )Total comprehensive loss
    
    $
    (8,797
    )
    
    $
    (3,475
    )
    
    $
    (14,976
    )
    
    $
    (6,642
    )
     25




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands)
    
    
    (In thousands)Revenues:Touch
    
    $
    4,187
    
    
    $
    3,920
    
    
    $
    8,661
    
    
    $
    7,882Medical
    
    
    2,495
    
    
    
    3,699
    
    
    
    5,561
    
    
    
    6,618Intersegment eliminations
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    (41
    )Total
    
    $
    6,682
    
    
    $
    7,619
    
    
    $
    14,188
    
    
    $
    14,459Operating loss:Touch
    
    $
    (3,875
    )
    
    $
    (5,688
    )
    
    $
    (8,891
    )
    
    $
    (10,577
    )Medical
    
    
    (4,953
    )
    
    
    (855
    )
    
    
    (7,140
    )
    
    
    (2,312
    )Intersegment eliminations
    
    
    
    
    
    
    12
    
    
    
    (1
    )
    
    
    (5
    )Total
    
    $
    (8,828
    )
    
    $
    (6,531
    )
    
    $
    (16,032
    )
    
    $
    (12,894
    )
 June 30,
    
    
    December 31,2009
    
    
    2008(In thousands)Total Assets:Touch
    
    $
    126,275
    
    
    $
    129,305Medical
    
    
    9,835
    
    
    
    11,471Intersegment eliminations
    
    
    (35,724
    )
    
    
    (27,189
    )Total
    
    $
    100,386
    
    
    $
    113,587
  In re Immersion Corporation Initial Public Offering Securities Litigation
 In re Immersion
Corporation Initial Public Offering Securities Litigation
  26




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##### Table of Contents



Other Contingencies
     In re Immersion Corporation Securities Litigation
   27




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##### Table of Contents



In Re Immersion
Corporation Securities Litigation.
 In re Immersion Corporation Derivative Litigation
  In re Immersion Corporation
Derivative Shaw V. Richardson et. al. Litigation
   
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  28




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##### Table of Contents



Revenue Recognition
  Royalty
and license revenue
 29




---



##### 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
 30




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Stock-based Compensation
  Valuation and amortization method
 Expected term
 Expected volatility
 Risk-free interest rate
 Expected dividend
 Forfeitures
   31




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Accounting for Income Taxes
    Short-term Investments
    32




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Recovery of Accounts Receivable
  Inventory Reserves
  Product Return and Warranty Reserves
  Intangible Assets
  33




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Restructuring Costs
     Overview
  34




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June 30,REVENUES
    
    2009
    
    
    2008
    
    
    Change(In thousands)Three months ended:Royalty and license
    
    $
    3,580
    
    
    $
    3,171
    
    
    
    13
    %Product sales
    
    
    2,772
    
    
    
    3,744
    
    
    
    (26
    )%Development contracts and other
    
    
    330
    
    
    
    704
    
    
    
    (53
    )%Total Revenue
    
    $
    6,682
    
    
    $
    7,619
    
    
    
    (12
    )%Six months ended:Royalty and license
    
    $
    7,361
    
    
    $
    6,632
    
    
    
    11
    %Product sales
    
    
    6,051
    
    
    
    6,324
    
    
    
    (4
    )%Development contracts and other
    
    
    776
    
    
    
    1,503
    
    
    
    (48
    )%Total Revenue
    
    $
    14,188
    
    
    $
    14,459
    
    
    
    (2
    )%
 Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008
 Total Revenue
 Royalty and license revenue
  35




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##### Table of Contents



Product sales
 Development contract and other revenue
  Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
 Total Revenue
 36




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Royalty and license revenue
 Product sales
 Development contract and other revenue
  June 30,
    
    ChangeCOST OF PRODUCT SALES
    
    2009
    
    2008(In thousands)Three months ended:Cost of product sales
    
    $
    2,312
    
    
    $
    2,051
    
    
    
    13
    %% of total product revenue
    
    
    83
    %
    
    
    55
    %Six months ended:Cost of product sales
    
    $
    3,563
    
    
    $
    3,735
    
    
    
    (5
    )%% of total product revenue
    
    
    59
    %
    
    
    59
    %
 Cost of Product Sales
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June 30,
    
    ChangeOPERATING EXPENSES AND OTHER
    
    2009
    
    2008($ In thousands)Three months ended:Sales and marketing
    
    $
    4,016
    
    
    $
    3,846
    
    
    
    4
    %% of total revenue
    
    
    60
    %
    
    
    50
    %Research and development
    
    $
    3,412
    
    
    $
    2,940
    
    
    
    16
    %% of total revenue
    
    
    51
    %
    
    
    39
    %General and administrative
    
    $
    4,841
    
    
    $
    5,111
    
    
    
    (5
    )%% of total revenue
    
    
    72
    %
    
    
    67
    %Amortization and impairment of intangibles
    
    $
    224
    
    
    $
    202
    
    
    
    11
    %% of total revenue
    
    
    3
    %
    
    
    3
    %Restructuring Costs
    
    $
    705
    
    
    $
    
    
    
    
    *
    %% of total revenue
    
    
    11
    %
    
    
    *
    %Six months ended:Sales and marketing
    
    $
    8,300
    
    
    $
    7,191
    
    
    
    15
    %% of total revenue
    
    
    59
    %
    
    
    50
    %Research and development
    
    $
    7,341
    
    
    $
    6,430
    
    
    
    14
    %% of total revenue
    
    
    52
    %
    
    
    44
    %General and administrative
    
    $
    9,226
    
    
    $
    9,525
    
    
    
    (3
    )%% of total revenue
    
    
    65
    %
    
    
    66
    %Amortization and impairment of intangibles
    
    $
    439
    
    
    $
    472
    
    
    
    (7
    )%% of total revenue
    
    
    3
    %
    
    
    3
    %Restructuring Costs
    
    $
    1,351
    
    
    $
    
    
    
    
    *
    %% of total revenue
    
    
    10
    %
    
    
    *
    %
 
 *
    
    Not meaningful Sales and Marketing 
 38




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Research and Development
  General and Administrative
  39




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Amortization and impairment of Intangibles
 Restructuring
  Change in fair value of warrant liability 
 Interest and Other Income
  Provision for Income Taxes
 40




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Discontinued Operations
    41




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands)
    
    
    (In thousands)Revenues:Touch
    
    $
    4,187
    
    
    $
    3,920
    
    
    $
    8,661
    
    
    $
    7,882Medical
    
    
    2,495
    
    
    
    3,699
    
    
    
    5,561
    
    
    
    6,618Intersegment eliminations
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    (41
    )Total
    
    $
    6,682
    
    
    $
    7,619
    
    
    $
    14,188
    
    
    $
    14,459Operating loss:Touch
    
    $
    (3,875
    )
    
    $
    (5,688
    )
    
    $
    (8,891
    )
    
    $
    (10,577
    )Medical
    
    
    (4,953
    )
    
    
    (855
    )
    
    
    (7,140
    )
    
    
    (2,312
    )Intersegment eliminations
    
    
    
    
    
    
    12
    
    
    
    (1
    )
    
    
    (5
    )Total
    
    $
    (8,828
    )
    
    $
    (6,531
    )
    
    $
    (16,032
    )
    
    $
    (12,894
    )
 
 *
    
    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
  Medical segment
 42




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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
  44




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Foreign Currency Exchange Rates
 
 ITEM 4. CONTROLS AND PROCEDURES
      Plans for Remediation
  45




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
    
    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;
 
    
    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.
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
    
    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.
    
    We are in the process of implementing control procedures to ensure capitalization
and tracking of all demonstration and customer loaner equipment.
    
    We are in the process of reviewing our physical inventory management procedures
including cycle counts to ensure proper control of inventory with appropriate review
by operations and finance personnel.
 
 PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 In
re Immersion Corporation Initial Public Offering Securities Litigation
 In re Immersion Corporation
Initial Public Offering Securities Litigation
   47




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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
   48




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
    
    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;
    
    incur costs related to pending litigation;
    
    acquire intellectual property or other assets from third-parties; and
    
    invest in systems and processes to manage our business.
  .
   50




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52




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
    
    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.
    53




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55




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
    
    our pending patent applications may not result in the issuance of patents;
 56




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
    
    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.
      
    
    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.
 57




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59




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.
 
    
    compliance with multiple, conflicting and changing governmental laws and regulations;
    
    laws and business practices favoring local competitors;
 60




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
    
    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.
       61




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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;
    
    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.
   62




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
    
    our board of directors is classified into three classes of directors with staggered three-year terms;
    
    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.
 63




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Number of
    
    Number of
    
    Number ofNominees
    
    Votes For
    
    Votes Against
    
    Votes AbstainedAnne DeGheest
    
    
    19,466,094
    
    
    
    838,348
    
    
    
    1,684,020Jack Saltich
    
    
    15,506,895
    
    
    
    4,792,773
    
    
    
    1,688,793Victor Viegas
    
    
    19,516,222
    
    
    
    986,416
    
    
    
    1,485,824
   Number of
    
    Number of
    
    Number ofVotes For
    
    Votes Against
    
    Votes Abstained20,073,125
    
    455,075
    
    1,460,261
 64




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ITEM 6. EXHIBITS
  ExhibitNumber
    
    Description31.1
    
    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.
 65




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SIGNATURES
   IMMERSION CORPORATIONBy
    /s/ Henry HirvelaHenry HirvelaInterim Chief Financial Officer 66




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EXHIBIT INDEX
 ExhibitNumber
    
    Description
    .31.1
    
    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.
 67