##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 IMMERSION
CORPORATION
  Delaware
    
    94-3180138(State or other jurisdiction of 
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)
 þ o
  Large accelerated filer oAccelerated filer þNon-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 StatementsCondensed Consolidated Balance Sheets (Unaudited) as of June 30, 2008 and
December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the Three Months and
Six Months Ended June 30, 2008 and 2007 (Restated)
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 2008 and 2007 (Restated)
    
    
    5Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37PART II
OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    55Item 4. Submission of Matters to a Vote of Security Holders
    
    
    55Item 6. Exhibits
    
    
    56SIGNATURES
    
    
    57EXHIBIT 10.36EXHIBIT 10.37EXHIBIT 10.38EXHIBIT 10.39EXHIBIT 10.40EXHIBIT 10.41EXHIBIT 10.42EXHIBIT 10.43EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### 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)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    97,535
    
    
    $
    86,493Short-term investments
    
    
    31,835
    
    
    
    51,619Accounts receivable (net of allowances for doubtful accounts of: June 30, 2008  $165
and December 31, 2007  $85)
    
    
    5,315
    
    
    
    5,494Inventories, net
    
    
    4,328
    
    
    
    3,674Deferred income taxes
    
    
    3,857
    
    
    
    3,351Prepaid expenses and other current assets
    
    
    4,200
    
    
    
    3,036Total current assets
    
    
    147,070
    
    
    
    153,667Property and equipment, net
    
    
    2,636
    
    
    
    2,112Deferred income tax assets, net
    
    
    3,999
    
    
    
    4,031Intangibles, net and other assets
    
    
    9,560
    
    
    
    8,558Total assets
    
    $
    163,265
    
    
    $
    168,368LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,647
    
    
    $
    1,657Accrued compensation
    
    
    2,900
    
    
    
    1,828Other current liabilities
    
    
    2,479
    
    
    
    2,629Deferred revenue and customer advances
    
    
    5,439
    
    
    
    4,478Total current liabilities
    
    
    12,465
    
    
    
    10,592Long-term deferred revenue, less current portion
    
    
    15,744
    
    
    
    14,269Other long-term liabilities
    
    
    1,750
    
    
    
    1,720Total liabilities
    
    
    29,959
    
    
    
    26,581Contingencies (Note 14)Stockholders equity:Common stock and additional paid-in capital  $0.001 par value; 100,000,000 shares
authorized; shares issued: June 30, 2008  30,599,524 and December 31, 2007  30,389,850;
shares outstanding: June 30, 2008  29,880,841 and December 31, 2007  30,389,850
    
    
    163,546
    
    
    
    160,147Warrants
    
    
    1,731
    
    
    
    1,731Accumulated other comprehensive income
    
    
    88
    
    
    
    137Accumulated deficit
    
    
    (25,904
    )
    
    
    (20,228
    )Treasury stock at cost: June 30, 2008  718,683 shares and December 31, 2007  0 shares
    
    
    (6,155
    )
    
    
    Total stockholders equity
    
    
    133,306
    
    
    
    141,787Total liabilities and stockholders equity
    
    $
    163,265
    
    
    $
    168,368
  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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(As restated,see Note 15)Revenues:Royalty and license
    
    $
    3,171
    
    
    $
    2,747
    
    
    $
    6,632
    
    
    $
    4,958Product sales
    
    
    5,386
    
    
    
    5,289
    
    
    
    9,237
    
    
    
    8,879Development contracts and other
    
    
    756
    
    
    
    559
    
    
    
    1,599
    
    
    
    1,172Total revenues
    
    
    9,313
    
    
    
    8,595
    
    
    
    17,468
    
    
    
    15,009Costs and expenses:Cost of product sales (exclusive of amortization of intangibles
shown separately below)
    
    
    2,570
    
    
    
    2,427
    
    
    
    4,656
    
    
    
    3,970Sales and marketing
    
    
    4,258
    
    
    
    3,030
    
    
    
    7,700
    
    
    
    5,733Research and development
    
    
    2,855
    
    
    
    2,513
    
    
    
    6,084
    
    
    
    5,056General and administrative
    
    
    5,084
    
    
    
    3,122
    
    
    
    9,347
    
    
    
    6,381Amortization of intangibles
    
    
    170
    
    
    
    242
    
    
    
    405
    
    
    
    496Litigation conclusions and patent license
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (134,900
    )Total costs and expenses
    
    
    14,937
    
    
    
    11,334
    
    
    
    28,192
    
    
    
    (113,264
    )Operating income (loss)
    
    
    (5,624
    )
    
    
    (2,739
    )
    
    
    (10,724
    )
    
    
    128,273Interest and other income
    
    
    909
    
    
    
    1,820
    
    
    
    2,416
    
    
    
    2,181Interest expense
    
    
    
    
    
    
    (407
    )
    
    
    
    
    
    
    (813
    )Income (loss) before benefit (provision) for income taxes
    
    
    (4,715
    )
    
    
    (1,326
    )
    
    
    (8,308
    )
    
    
    129,641Benefit (provision) for income taxes
    
    
    1,624
    
    
    
    1,502
    
    
    
    2,632
    
    
    
    (13,627
    )Net income (loss)
    
    $
    (3,091
    )
    
    $
    176
    
    
    $
    (5,676
    )
    
    $
    116,014Basic net income (loss) per share
    
    $
    (0.10
    )
    
    $
    0.01
    
    
    $
    (0.19
    )
    
    $
    4.49Shares used in calculating basic net income (loss) per share
    
    
    30,356
    
    
    
    26,297
    
    
    
    30,417
    
    
    
    25,822Diluted net income (loss) per share
    
    $
    (0.10
    )
    
    $
    0.01
    
    
    $
    (0.19
    )
    
    $
    3.81Shares used in calculating diluted net income (loss) per share
    
    
    30,356
    
    
    
    28,619
    
    
    
    30,417
    
    
    
    30,566
  4




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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months EndedJune 30,2008
    
    
    2007(As restated,see Note 15)Cash flows from operating activities:Net income (loss)
    
    $
    (5,676
    )
    
    $
    116,014Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    541
    
    
    
    430Amortization of intangibles
    
    
    405
    
    
    
    496Stock-based compensation
    
    
    1,929
    
    
    
    1,243Excess tax benefits from stock-based compensation
    
    
    (176
    )
    
    
    (9,240
    )Realized gain on short-term investments
    
    
    (80
    )
    
    
    Interest expense  accretion on 5% Convertible Debenture
    
    
    
    
    
    
    316Fair value adjustment of Put Option and Registration Rights
    
    
    
    
    
    
    (2
    )Loss on disposal of equipment
    
    
    
    
    
    
    6Changes in operating assets and liabilities:Accounts receivable
    
    
    175
    
    
    
    (1,520
    )Inventories
    
    
    (590
    )
    
    
    (425
    )Deferred income taxes
    
    
    (475
    )
    
    
    (5,668
    )Prepaid expenses and other current assets
    
    
    (1,164
    )
    
    
    269Other assets
    
    
    19
    
    
    
    Accounts payable
    
    
    290
    
    
    
    (1,188
    )Accrued compensation and other current liabilities
    
    
    1,186
    
    
    
    464Income taxes payable
    
    
    (319
    )
    
    
    13,515Deferred revenue and customer advances
    
    
    2,436
    
    
    
    (28,877
    )Other long-term liabilities
    
    
    30
    
    
    
    647Net cash provided by (used in) operating activities
    
    
    (1,469
    )
    
    
    86,480Cash flows provided by (used in) investing activities:Purchases of short-term investments
    
    
    (32,144
    )
    
    
    (24,913
    )Maturities of short-term investments
    
    
    51,979
    
    
    
    Intangibles and other assets
    
    
    (1,555
    )
    
    
    (833
    )Purchases of property and equipment
    
    
    (1,065
    )
    
    
    (656
    )Net cash provided by (used in) investing activities
    
    
    17,215
    
    
    
    (26,402
    )Cash flows provided by (used in) financing activities:Issuance of common stock under employee stock purchase plan
    
    
    168
    
    
    
    147Exercise of stock options and warrants
    
    
    1,121
    
    
    
    8,322Excess tax benefits from stock-based compensation
    
    
    176
    
    
    
    9,240Purchases of treasury stock
    
    
    (6,155
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (4,690
    )
    
    
    17,709Effect of exchange rates on cash and cash equivalents
    
    
    (14
    )
    
    
    831Net increase in cash and cash equivalents
    
    
    11,042
    
    
    
    78,618Cash and cash equivalents:Beginning of the period
    
    
    86,493
    
    
    
    32,012End of the period
    
    $
    97,535
    
    
    $
    110,630Supplemental disclosure of cash flow information:Cash paid
(received) for taxes
    
    $
    (731
    )
    
    $
    5,032Cash paid for interest
    
    $
    
    
    
    $
    500Non-cash
investing and financing activities:Amounts
accrued for property and equipment and intangibles
    
    $
    701
    
    
    $
    632
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IMMERSION CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)
  Description of Busines
  Principles of Consolidation and Basis of Presentation
    Short-term Investments
    6




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




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




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2.
    
    CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
 Short-term Investments
 June 30, 2008Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Corporate commercial paper
    
    $
    14,936
    
    
    $
    
    
    
    $
    (23
    )
    
    $
    14,913U.S. Government agency securities
    
    
    16,920
    
    
    
    2
    
    
    
    
    
    
    
    16,922Total
    
    $
    31,856
    
    
    $
    2
    
    
    $
    (23
    )
    
    $
    31,835
 December
31, 2007Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized
    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)Corporate commercial paper
    
    $
    41,740
    
    
    $
    
    
    
    $
    (34
    )
    
    $
    41,706U.S. Government agency securities
    
    
    9,871
    
    
    
    42
    
    
    
    
    
    
    
    9,913Total
    
    $
    51,611
    
    
    $
    42
    
    
    $
    (34
    )
    
    $
    51,619
  Cash Equivalents and Short-term Investments
     Fair value measurement using
    
    
    Assets atLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    fair value(In thousands)Corporate commercial paper
    
    $
    
    
    
    $
    24,885
    
    
    $
    
    
    
    $
    24,885U.S. Government agency securities
    
    
    43,551
    
    
    
    
    
    
    
    
    
    
    
    43,551Money market accounts
    
    
    59,804
    
    
    
    
    
    
    
    
    
    
    
    59,804Total
    
    $
    103,355
    
    
    $
    24,885
    
    
    $
    
    
    
    $
    128,240
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June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Raw materials and subassemblies
    
    $
    3,340
    
    
    $
    2,843Work in process
    
    
    182
    
    
    
    179Finished goods
    
    
    806
    
    
    
    652Inventories, net
    
    $
    4,328
    
    
    $
    3,674
  June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Computer equipment and purchased software
    
    $
    3,655
    
    
    $
    3,195Machinery and equipment
    
    
    2,907
    
    
    
    2,532Furniture and fixtures
    
    
    1,248
    
    
    
    1,212Leasehold improvements
    
    
    1,239
    
    
    
    1,267Total
    
    
    9,049
    
    
    
    8,206Less accumulated depreciation
    
    
    (6,413
    )
    
    
    (6,094
    )Property and equipment, net
    
    $
    2,636
    
    
    $
    2,112
  June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Patents and technology
    
    $
    16,281
    
    
    $
    15,105Accumulated amortization of patents and technology
    
    
    (7,119
    )
    
    
    (6,714
    )Intangibles, net
    
    
    9,162
    
    
    
    8,391Other assets
    
    
    398
    
    
    
    167Intangibles and other assets, net
    
    $
    9,560
    
    
    $
    8,558
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June 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Accrued legal
    
    $
    783
    
    
    $
    417Income taxes payable
    
    
    33
    
    
    
    534Other current liabilities
    
    
    1,663
    
    
    
    1,678Total other current liabilities
    
    $
    2,479
    
    
    $
    2,629Deferred revenue, current portion
    
    $
    5,348
    
    
    $
    4,352Customer advances
    
    
    91
    
    
    
    126Total current deferred revenue, and customer advances
    
    $
    5,439
    
    
    $
    4,478
    Stock Options and Awards
    Employee Stock Purchase Plan
  11




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General Stock Option Information
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Average
    
    
    Contractual
    
    
    Intrinsicof Shares
    
    
    Exercise Price
    
    
    Term
    
    
    Value(In years)Outstanding at December 31, 2007 (3,774,245 exercisable at a
weighted average price of $9.11 per share)
    
    
    6,014,370
    
    
    $
    9.11Granted (weighted average fair value of $5.10 per share)
    
    
    2,035,925
    
    
    
    8.94Exercised
    
    
    (189,504
    )
    
    
    5.91Cancelled
    
    
    (354,796
    )
    
    
    9.60Outstanding at June 30, 2008
    
    
    7,505,995
    
    
    $
    9.12
    
    
    
    5.96
    
    
    $2.88 millionExercisable at June 30, 2008
    
    
    4,180,829
    
    
    $
    9.06
    
    
    
    3.88
    
    
    $2.79 million
    Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    
    
    
    
    Remaining
    
    Average
    
    
    
    
    
    AverageExercise
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExercisePrices
    
    Outstanding
    
    Life (Years)
    
    Price
    
    Exercisable
    
    Price$1.20 - $6.03
    
    
    839,975
    
    
    
    4.29
    
    
    $
    3.61
    
    
    
    806,397
    
    
    $
    3.536.07 - 6.95
    
    
    1,052,097
    
    
    
    6.51
    
    
    
    6.69
    
    
    
    670,585
    
    
    
    6.646.96 - 7.02
    
    
    763,089
    
    
    
    5.63
    
    
    
    6.99
    
    
    
    669,117
    
    
    
    6.997.03 - 8.34
    
    
    564,804
    
    
    
    5.80
    
    
    
    7.71
    
    
    
    268,787
    
    
    
    7.908.61 - 8.61
    
    
    757,837
    
    
    
    9.33
    
    
    
    8.61
    
    
    
    
    
    
    8.67 - 9.01
    
    
    795,106
    
    
    
    3.44
    
    
    
    8.98
    
    
    
    576,318
    
    
    
    8.979.04 - 9.04
    
    
    754,102
    
    
    
    6.89
    
    
    
    9.04
    
    
    
    262,205
    
    
    
    9.049.11 - 9.81
    
    
    938,500
    
    
    
    7.79
    
    
    
    9.67
    
    
    
    207,144
    
    
    
    9.2410.00 -17.15
    
    
    751,051
    
    
    
    4.96
    
    
    
    13.41
    
    
    
    449,592
    
    
    
    12.4217.27 -43.25
    
    
    289,434
    
    
    
    2.32
    
    
    
    31.34
    
    
    
    270,684
    
    
    
    32.32$1.20-$43.25
    
    
    7,505,995
    
    
    
    5.96
    
    
    $
    9.12
    
    
    
    4,180,829
    
    
    $
    9.06
 12




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Stock-based Compensation
 Valuation and amortization method
 Expected term
 Expected volatility
 Risk-free interest rate
 Expected dividend
 Forfeitures
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Options
    
    2008
    
    2007
    
    2008
    
    2007Expected term (in years)
    
    
    5.5
    
    
    
    6.25
    
    
    
    5.5
    
    
    
    6.25Volatility
    
    
    63
    %
    
    
    59
    %
    
    
    62
    %
    
    
    60
    %Interest rate
    
    
    3.4
    %
    
    
    5.0
    %
    
    
    2.9
    %
    
    
    4.6
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Employee Stock PurchasePlan
    
    2008
    
    2007
    
    2008
    
    2007Expected term (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Volatility
    
    
    73
    %
    
    
    45
    %
    
    
    73
    %
    
    
    45
    %Interest rate
    
    
    2.2
    %
    
    
    5.2
    %
    
    
    2.2
    %
    
    
    5.2
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 13




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Total stock-based compensation recognized in the consolidated statements of operations is as
follows:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    

2007
    
    

2008
    
    
    2007Income Statement Classifications
    
    (In thousands)
    
    
    (In thousands)Cost of product sales
    
    $
    52
    
    
    $
    26
    
    
    $
    75
    
    
    $
    46Sales and marketing
    
    
    326
    
    
    
    217
    
    
    
    580
    
    
    
    377Research and development
    
    
    183
    
    
    
    128
    
    
    
    465
    
    
    
    314General and administrative
    
    
    404
    
    
    
    238
    
    
    
    809
    
    
    
    506Total
    
    $
    965
    
    
    $
    609
    
    
    $
    1,929
    
    
    $
    1,243
    Warrants
  Stock Repurchase Program
    14




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Immersion Corporation v. Sony Computer Entertainment of America, Inc., Sony
Computer Entertainment Inc. and Microsoft Corporation
     15




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##### Table of Contents



11.
    
    NET INCOME (LOSS) PER SHARE
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(restated)Numerator:Net income (loss) used in computing basic net income (loss) per share
    
    $
    (3,091
    )
    
    $
    176
    
    
    $
    (5,676
    )
    
    $
    116,014Interest on 5% Convertible Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304Net income (loss) used in computing diluted net income (loss) per share
    
    $
    (3,091
    )
    
    $
    176
    
    
    $
    (5,676
    )
    
    $
    116,318Denominator:Shares used in computation of basic net income (loss) per share(weighted average common shares outstanding)
    
    
    30,356
    
    
    
    26,297
    
    
    
    30,417
    
    
    
    25,822Dilutive potential common shares:Stock options
    
    
    
    
    
    
    1,933
    
    
    
    
    
    
    
    1,553Warrants
    
    
    
    
    
    
    389
    
    
    
    
    
    
    
    3455% Convertible Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,846Shares used in computation of diluted net income (loss) per share
    
    
    30,356
    
    
    
    28,619
    
    
    
    30,417
    
    
    
    30,566Basic net income (loss) per share
    
    $
    (0.10
    )
    
    $
    0.01
    
    
    $
    (0.19
    )
    
    $
    4.49Diluted net income (loss) per share
    
    $
    (0.10
    )
    
    $
    0.01
    
    
    $
    (0.19
    )
    
    $
    3.81
  June 30,2008Outstanding stock options
    
    
    7,505,995Warrants
    
    
    436,772
 16




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)
    
    
    (In thousands)(restated)Net income (loss)
    
    $
    (3,091
    )
    
    $
    176
    
    
    $
    (5,676
    )
    
    $
    116,014Change in unrealized losses on
short-term investments
    
    
    (21
    )
    
    
    (25
    )
    
    
    (29
    )
    
    
    (25
    )Foreign currency translation adjustment
    
    
    (8
    )
    
    
    32
    
    
    
    (20
    )
    
    
    32Total comprehensive income (loss)
    
    $
    (3,120
    )
    
    $
    183
    
    
    $
    (5,725
    )
    
    $
    116,021
     17




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)
    
    
    (In thousands)(restated)Revenues:Immersion Computing,
Entertainment, and
Industrial
    
    $
    5,012
    
    
    $
    4,474
    
    
    $
    10,200
    
    
    $
    8,232Immersion Medical
    
    
    4,301
    
    
    
    4,147
    
    
    
    7,309
    
    
    
    6,804Intersegment eliminations
    
    
    
    
    
    
    (26
    )
    
    
    (41
    )
    
    
    (27
    )Total
    
    $
    9,313
    
    
    $
    8,595
    
    
    $
    17,468
    
    
    $
    15,009Net Income (Loss):Immersion Computing, Entertainment, and Industrial
    
    $
    (2,647
    )
    
    $
    152
    
    
    $
    (4,056
    )
    
    $
    116,847Immersion Medical
    
    
    (456
    )
    
    
    23
    
    
    
    (1,615
    )
    
    
    (839
    )Intersegment eliminations
    
    
    12
    
    
    
    1
    
    
    
    (5
    )
    
    
    6Total
    
    $
    (3,091
    )
    
    $
    176
    
    
    $
    (5,676
    )
    
    $
    116,014
 June 30
    
    
    December 312008
    
    
    2007(In thousands)Total Assets:Immersion Computing, Entertainment, and Industrial
    
    $
    177,222
    
    
    $
    181,860Immersion Medical
    
    
    7,668
    
    
    
    6,552Intersegment eliminations
    
    
    (21,625
    )
    
    
    (20,044
    )Total
    
    $
    163,265
    
    
    $
    168,368
   18




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##### Table of Contents



Revenue by Product Lines
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)
    
    
    (In thousands)Revenues:Consumer, Computing, and Entertainment
    
    $
    2,913
    
    
    $
    1,716
    
    
    $
    5,964
    
    
    $
    3,4903D
    
    
    1,092
    
    
    
    1,097
    
    
    
    2,318
    
    
    
    2,088Touch Interface Products
    
    
    1,007
    
    
    
    1,635
    
    
    
    1,877
    
    
    
    2,627Subtotal Immersion Computing, Entertainment, and Industrial
    
    
    5,012
    
    
    
    4,448
    
    
    
    10,159
    
    
    
    8,205Immersion Medical
    
    
    4,301
    
    
    
    4,147
    
    
    
    7,309
    
    
    
    6,804Total
    
    $
    9,313
    
    
    $
    8,595
    
    
    $
    17,468
    
    
    $
    15,009
 Revenue by Region
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007North America
    
    
    59
    %
    
    
    60
    %
    
    
    59
    %
    
    
    63
    %Europe
    
    
    18
    %
    
    
    18
    %
    
    
    20
    %
    
    
    17
    %Far East
    
    
    18
    %
    
    
    17
    %
    
    
    16
    %
    
    
    16
    %Rest of the world
    
    
    5
    %
    
    
    5
    %
    
    
    5
    %
    
    
    4
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   Significant Customers
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Customer A
    
    
    13
    %
    
    
    12
    %
    
    
    12
    %
    
    
    12
    %Customer B
    
    
    *
    %
    
    
    11
    %
    
    
    *
    %
    
    
    *
    %Total
    
    
    13
    %
    
    
    23
    %
    
    
    12
    %
    
    
    12
    %
 
 *
    
    Revenue derived from customer represented less than 10% for the period. 19




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##### Table of Contents



In re Immersion Corporation
 In re Immersion
Corporation Initial Public Offering Securities Litigation
   Miles v. Merrill Lynch & Co. (In re Initial Public
Offering Securities Litigation)
 Internet Services LLC Litigation
          Microsoft Corporation v. Immersion Corporation
 Immersion
Corporation v. Microsoft Corporation, Sony Computer Entertainment Inc. and Sony Computer
Entertainment America, Inc., United States District Court for the Northern District of California,
Case No. 02-0710-CW
 20




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Other Contingencies
      21




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##### Table of Contents



Six Months EndedJune 30, 2007As Previously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    Restated(In thousandsexcept per share amounts)Total revenues
    
    $
    15,009
    
    
    $
    
    
    
    $
    15,009Income before provision for income taxes
    
    $
    129,641
    
    
    $
    
    
    
    $
    129,641Provision for income taxes
    
    
    (7,032
    )
    
    
    (6,595
    )
    
    
    (13,627
    )Net income
    
    $
    122,609
    
    
    $
    (6,595
    )
    
    $
    116,014Basic net income per share
    
    $
    4.75
    
    
    $
    (0.26
    )
    
    $
    4.49Shares used in calculating basic net income per share
    
    
    25,822
    
    
    
    
    
    
    
    25,822Diluted net income per share
    
    $
    4.03
    
    
    $
    (0.22
    )
    
    $
    3.81Shares used in calculating diluted net income per share
    
    
    30,530
    
    
    
    36
    
    
    
    30,566Changes to cash flows from operating activities:Net income
    
    $
    122,609
    
    
    $
    (6,595
    )
    
    $
    116,014Excess tax benefits from stock-based compensation
    
    
    (1,876
    )
    
    
    (7,364
    )
    
    
    (9,240
    )Deferred income taxes
    
    
    (5,409
    )
    
    
    (259
    )
    
    
    (5,668
    )Income taxes payable
    
    
    7,288
    
    
    
    6,227
    
    
    
    13,515Other long-term liabilities
    
    
    20
    
    
    
    627
    
    
    
    647Net cash provided by operating activities
    
    
    93,844
    
    
    
    (7,364
    )
    
    
    86,480Changes to cash flows from financing activities:Excess tax benefits from stock-based compensation
    
    $
    1,876
    
    
    $
    7,364
    
    
    $
    9,240Net cash provided by financing activities
    
    
    10,345
    
    
    
    7,364
    
    
    
    17,709
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  22




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




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




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




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Short-term Investments
           Recovery of Accounts Receivable
  26




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Inventory Reserves
  Product Return and Warranty Reserves
  Intangible Assets
     Overview
   27




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##### Table of Contents



June 30,
    
    
    ChangeREVENUES
    
    2008
    
    
    2007($ In thousands)Three months ended:Royalty and license
    
    $
    3,171
    
    
    $
    2,747
    
    
    
    15
    %Product sales
    
    
    5,386
    
    
    
    5,289
    
    
    
    2
    %Development contracts and other
    
    
    756
    
    
    
    559
    
    
    
    35
    %Total Revenue
    
    $
    9,313
    
    
    $
    8,595
    
    
    
    8
    %Six months ended:Royalty and license
    
    $
    6,632
    
    
    $
    4,958
    
    
    
    34
    %Product sales
    
    
    9,237
    
    
    
    8,879
    
    
    
    4
    %Development contracts and other
    
    
    1,599
    
    
    
    1,172
    
    
    
    36
    %Total Revenue
    
    $
    17,468
    
    
    $
    15,009
    
    
    
    16
    %
 Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
 Total Revenue
 Royalty and license revenue
    28




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Product sales
 Development contract and other revenue
  Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
 Total Revenue
 Royalty and license revenue
  Product sales ® ® ®
 29




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##### Table of Contents



Development contract and other revenue
  June 30,
    
    ChangeCOST OF PRODUCT SALES
    
    2008
    
    2007($ In thousands)Three months ended:Cost of product sales
    
    $
    2,570
    
    
    $
    2,427
    
    
    
    6
    %% of total product revenue
    
    
    48
    %
    
    
    46
    %Six months ended:Cost of product sales
    
    $
    4,656
    
    
    $
    3,970
    
    
    
    17
    %% of total product revenue
    
    
    50
    %
    
    
    45
    %
 Cost of Product Sales
  30




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June 30,
    
    
    ChangeOPERATING EXPENSES AND OTHER
    
    2008
    
    
    2007($ In thousands)Three months ended:Sales and marketing
    
    $
    4,258
    
    
    $
    3,030
    
    
    
    41
    %% of total revenue
    
    
    46
    %
    
    
    35
    %Research and development
    
    $
    2,855
    
    
    $
    2,513
    
    
    
    14
    %% of total revenue
    
    
    31
    %
    
    
    29
    %General and administrative
    
    $
    5,084
    
    
    $
    3,122
    
    
    
    63
    %% of total revenue
    
    
    55
    %
    
    
    36
    %Amortization of intangibles
    
    $
    170
    
    
    $
    242
    
    
    
    (30
    )%% of total revenue
    
    
    2
    %
    
    
    3
    %Six months ended:Sales and marketing
    
    $
    7,700
    
    
    $
    5,733
    
    
    
    34
    %% of total revenue
    
    
    44
    %
    
    
    38
    %Research and development
    
    $
    6,084
    
    
    $
    5,056
    
    
    
    20
    %% of total revenue
    
    
    35
    %
    
    
    34
    %General and administrative
    
    $
    9,347
    
    
    $
    6,381
    
    
    
    46
    %% of total revenue
    
    
    54
    %
    
    
    43
    %Amortization of intangibles
    
    $
    405
    
    
    $
    496
    
    
    
    (18
    )%% of total revenue
    
    
    2
    %
    
    
    3
    %Litigation conclusions and patent license
    
    $
    
    
    
    $
    (134,900
    )
    
    
    *
    %% of total revenue
    
    
    
    %
    
    
    *
    %
 
 *
    -
    Not meaningful Sales and Marketing 
 31




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Research and Development
  General and Administrative 
  Amortization of Intangibles
 Litigation Conclusions and Patent License
  32




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##### Table of Contents



Immersion Corporation v. Sony Computer Entertainment of America,
Inc., Sony Computer Entertainment Inc. and Microsoft Corporation
 Interest and Other Income
  Interest Expense
 Provision for Income Taxes
 33




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)
    
    
    (In thousands)Revenues:Immersion Computing, Entertainment, and Industrial
    
    $
    5,012
    
    
    $
    4,474
    
    
    $
    10,200
    
    
    $
    8,232Immersion Medical
    
    
    4,301
    
    
    
    4,147
    
    
    
    7,309
    
    
    
    6,804Intersegment eliminations
    
    
    
    
    
    
    (26
    )
    
    
    (41
    )
    
    
    (27
    )Total
    
    $
    9,313
    
    
    $
    8,595
    
    
    $
    17,468
    
    
    $
    15,009Net Income (Loss):Immersion Computing, Entertainment, and Industrial
    
    $
    (2,647
    )
    
    $
    152
    
    
    $
    (4,056
    )
    
    $
    116,847Immersion Medical
    
    
    (456
    )
    
    
    23
    
    
    
    (1,615
    )
    
    
    (839
    )Intersegment eliminations
    
    
    12
    
    
    
    1
    
    
    
    (5
    )
    
    
    6Total
    
    $
    (3,091
    )
    
    $
    176
    
    
    $
    (5,676
    )
    
    $
    116,014
 
 *
    
    Segment assets and expenses relating to our corporate operations are not allocated but are
included in Immersion Computing, Entertainment, and Industrial as that is how they are
considered for management evaluation purposes. As a result the segment information may not be
indicative of the financial position or results of operations that would have been achieved had
these segments operated as unaffiliated entities. Immersion Computing, Entertainment, and Industrial segment
 34




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Immersion Medical segment
      35




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2009 and
    
    2011 andContractual Obligations
    
    Total
    
    2008
    
    2010
    
    2012(In thousands)Operating leases
    
    $
    2,300
    
    
    $
    1,100
    
    
    $
    1,191
    
    
    $
    9
  36




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Cash Equivalents and Short-term Investments
  Foreign Currency Exchange Rates
 
 ITEM 4. CONTROLS AND PROCEDURES
     37




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PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 In re Immersion Corporation
 In re Immersion Corporation
Initial Public Offering Securities Litigation
    38




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Internet Services LLC Litigation
       39




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##### Table of Contents



Microsoft Corporation v. Immersion Corporation
 Immersion Corporation v. Microsoft
Corporation, Sony Computer Entertainment Inc. and Sony Computer Entertainment America, Inc., United
States District Court for the Northern District of California, Case No. 02-0710-CW)
    Immersion Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp., and Simbionix Ltd.
  40




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ITEM 1A. RISK FACTORS
 Company Risks
   
    continue to develop our technologies;
    increase our sales and marketing efforts;
    attempt to expand the market for touch-enabled technologies and products;
    protect and enforce our intellectual property;
    pursue strategic relationships;

    acquire intellectual property or other assets from third-parties;
    invest in systems and processes to manage our business; and
    expand international facilities.
    41




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43




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Industry and Technology Risks
      44




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45




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47




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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 automotive licensees for yet-to-be commercialized technology
because their suppliers may not be ready to meet stringent quality and parts availability
requirements;
    inability to sign new gaming licenses if the video console makers choose not to license third
parties to make peripherals for their new consoles; and
    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.
   48




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
    
    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.
       
    
    we fail to develop new technologies or products;
    
    the technologies we develop infringe on third-party patents or other third-party rights;
 49




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
    
    our new technologies fail to gain market acceptance; or
    
    our current products become obsolete or no longer meet new regulatory requirements.
           50




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51




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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;
    
    litigation or claims regarding our restatement, internal controls, or other matters;
    
    the timing of introductions and market acceptance of new products and product
enhancements by us, our licensees, our competitors, or their competitors;
    
    our ability to develop and improve our technologies;
    
    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.
   52




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
    
    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;
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
    
    difficulties in assimilation of acquired personnel or operations;
    
    failure to realize the anticipated benefits of acquired intellectual property or other assets;
    
    charges for write-down of assets associated with unsuccessful acquisitions; and
    
    potential intellectual property infringement claims related to newly acquired product lines.
     Controls and Procedures
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Approximate DollarAverage
    
    
    Value that MayShares
    
    
    Price Per
    
    
    Yet Be PurchasedProgram/Period (1)
    
    Repurchased (2)
    
    
    Share
    
    
    Under the ProgramBeginning approximate dollar value available to be
repurchased as of March 31, 2008
    
    
    
    
    
    
    
    
    
    $
    50,000,000May 1 - May 31, 2008
    
    
    298,683
    
    
    $
    9.46June 1 - June 30, 2008
    
    
    420,000
    
    
    $
    7.93Total shares repurchased
    
    
    718,683
    
    
    $
    8.56
    
    
    
    6,154,903Ending approximate dollar value that may be
repurchased under the Program as of June 30, 2008
    
    
    
    
    
    
    
    
    
    $
    43,845,097
 
 (1)
    
    On November 1, 2007, our Board of Directors authorized a share
repurchase program of up to $50,000,000. This share repurchase
authorization has no expiration date and does not require us to
repurchase a specific number of shares. The timing and amount of any
share repurchase will depend on the share price, corporate and
regulatory requirements, economic and market conditions, and other
factors. The repurchase authorization may be modified, suspended, or
discontinued at any time.(2)
    
    All shares were repurchased on the open market as part of the plan
publicly announced on November 1, 2007. The repurchases were effected
by a single broker in market transactions at prevailing market prices
pursuant to a trading plan designed to satisfy the conditions of Rule
10b5-1 under the Securities and Exchange Act of 1934, as amended. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   Number of
    
    WithheldNominees
    
    Votes For
    
    AuthorityJohn Hodgman
    
    
    22,607,255
    
    
    
    1,670,937Emily Liggett
    
    
    22,926,268
    
    
    
    1,351,924
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Number of
    
    Number of
    
    Number ofVotes For
    
    Votes Against
    
    Votes Abstained23,949,357
    

    183,798
    
    

    145,037
 
 ITEM 6. EXHIBITS
  ExhibitNumber
    
    Description10.36
    
    Executive Incentive Plan dated April 21, 2008 by and between Immersion Corporation and
Stephen Ambler.10.37
    
    Executive Incentive Plan dated April 21, 2008 by and between Immersion Corporation and
Victor Viegas.10.38
    
    The Immersion Corporation 2008 Employment Inducement Award Plan dated April 30, 2008.10.39
    
    Form of Stock Option Agreement for Immersion Corporation 2008 Employment Inducement Award
Plan dated April 30, 2008.10.40
    
    Resignation agreement and general release of claims dated April 28, 2008 by and between
Immersion Corporation and Victor Viegas.10.41
    
    Retention and ownership change event agreement dated April 17, 2008 by and between Immersion
Corporation and Clent Richardson.10.42
    
    Restated Offer of Employment with Immersion Corporation effective April 28, 2008 by and
between Immersion Corporation and Clent Richardson.10.43
    
    Executive Incentive Plan dated
May 23, 2008 by and between Immersion Corporation and
Richard Vogel.31.1
    
    Certification of Clent Richardson, President, Chief Executive Officer, and Director,
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Stephen Ambler, Chief Financial Officer and Vice President,
Finance, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Clent Richardson, President, Chief Executive Officer, and Director,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Stephen Ambler, Chief Financial Officer and Vice President,
Finance, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
   IMMERSION CORPORATIONBy
    /s/ Stephen AmblerStephen AmblerChief Financial Officer and Vice President, Finance 57




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EXHIBIT INDEX
 ExhibitNumber
    
    Description
    .10.36
    
    Executive Incentive Plan dated April 21, 2008 by and between Immersion Corporation and Stephen Ambler.10.37
    
    Executive Incentive Plan dated April 21, 2008 by and between Immersion Corporation and Victor Viegas.10.38
    
    The Immersion Corporation 2008 Employment Inducement Award Plan dated April 30, 2008.10.39
    
    Form of Stock Option Agreement for Immersion Corporation 2008 Employment Inducement Award
Plan dated April 30, 2008.10.40
    
    Resignation agreement and general release of claims dated April 28, 2008 by and between
Immersion Corporation and Victor Viegas.10.41
    
    Retention and ownership change event agreement dated April 17, 2008 by and between Immersion
Corporation and Clent Richardson.10.42
    
    Restated Offer of Employment with Immersion Corporation effective April 28, 2008 by and
between Immersion Corporation and Clent Richardson.10.43
    
    Executive Incentive Plan dated
May 23, 2008 by and between Immersion Corporation and
Richard Vogel.31.1
    
    Certification of Clent Richardson, President and Chief Executive Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Stephen Ambler, Chief Financial Officer and Vice President,
Finance, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Clent Richardson, President and Chief Executive Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Stephen Ambler, Chief Financial Officer and Vice President,
Finance, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 58