##### 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
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 01 Fox Lane, San Jose, California 95131
 (Address of principal executive offices)(Zip Code)
 (408) 467-1900
 (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
  o þ




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##### 



IMMERSION CORPORATION
 INDEX
 PagePART IFINANCIAL
INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets (Unaudited) as of September 30, 2008 and December 31, 2007
    
    
    3Condensed Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2008 and 2007 (Restated)
    
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 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
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4. Controls and Procedures
    
    
    45PART IIOTHER INFORMATION
    
    
    46Item 1. Legal Proceedings
    
    
    46Item 1A. Risk Factors
    
    
    48Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    63Item 6. Exhibits
    
    
    63SIGNATURES
    
    
    64EX-10.44EX-10.45EX-31.1EX-31.2EX-32.1EX-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)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    102,083
    
    
    $
    86,493Short-term investments
    
    
    16,976
    
    
    
    51,619Accounts receivable (net of allowances for doubtful accounts of: September 30, 2008  $353
and December 31, 2007  $85)
    
    
    5,276
    
    
    
    5,494Inventories, net
    
    
    4,892
    
    
    
    3,674Deferred income taxes
    
    
    211
    
    
    
    3,351Prepaid expenses and other current assets
    
    
    4,830
    
    
    
    3,036Total current assets
    
    
    134,268
    
    
    
    153,667Property and equipment, net
    
    
    3,202
    
    
    
    2,112Deferred income tax assets, net
    
    
    
    
    
    
    4,031Intangibles, net and other assets
    
    
    10,062
    
    
    
    8,558Total assets
    
    $
    147,532
    
    
    $
    168,368LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,213
    
    
    $
    1,657Accrued compensation
    
    
    3,041
    
    
    
    1,828Other current liabilities
    
    
    25,184
    
    
    
    2,629Deferred
revenue and customer advances (Note 6)
    
    
    4,653
    
    
    
    4,478Total current liabilities
    
    
    35,091
    
    
    
    10,592Long-term deferred revenue, less current portion
    
    
    16,546
    
    
    
    14,269Deferred income tax liabilities
    
    
    211
    
    
    
    Other long-term liabilities
    
    
    651
    
    
    
    1,720Total liabilities
    
    
    52,499
    
    
    
    26,581Contingencies (Note 14)Stockholders equity:Common stock and additional paid-in capital  $0.001 par value; 100,000,000 shares
authorized; shares issued: September 30, 2008  30,641,899 and December 31, 2007 
30,389,850; shares outstanding: September 30, 2008  28,815,336 and
December 31, 2007  30,389,850
    
    
    164,720
    
    
    
    160,147Warrants
    
    
    1,731
    
    
    
    1,731Accumulated other comprehensive income
    
    
    135
    
    
    
    137Accumulated deficit
    
    
    (58,202
    )
    
    
    (20,228
    )Treasury stock at cost: September 30, 2008  1,826,563 shares and
December 31, 2007   0 shares
    
    
    (13,351
    )
    
    
    Total stockholders equity
    
    
    95,033
    
    
    
    141,787Total liabilities and stockholders equity
    
    $
    147,532
    
    
    $
    168,368
  3




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IMMERSION CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(As restated,see Note 15)Revenues:Royalty and license
    
    $
    4,761
    
    
    $
    2,904
    
    
    $
    11,393
    
    
    $
    7,862Product sales
    
    
    4,755
    
    
    
    5,420
    
    
    
    13,992
    
    
    
    14,299Development contracts and other
    
    
    565
    
    
    
    1,479
    
    
    
    2,164
    
    
    
    2,651Total revenues
    
    
    10,081
    
    
    
    9,803
    
    
    
    27,549
    
    
    
    24,812Costs and expenses:Cost of product sales (exclusive of amortization of intangibles
shown separately below)
    
    
    2,951
    
    
    
    2,563
    
    
    
    7,607
    
    
    
    6,533Sales and marketing
    
    
    4,296
    
    
    
    2,825
    
    
    
    11,996
    
    
    
    8,558Research and development
    
    
    3,155
    
    
    
    2,482
    
    
    
    9,239
    
    
    
    7,538General and administrative
    
    
    4,774
    
    
    
    2,781
    
    
    
    14,121
    
    
    
    9,162Amortization of intangibles
    
    
    179
    
    
    
    243
    
    
    
    584
    
    
    
    739Litigation settlement, conclusions, and patent license
    
    
    20,750
    
    
    
    
    
    
    
    20,750
    
    
    
    (134,900
    )Total costs and expenses
    
    
    36,105
    
    
    
    10,894
    
    
    
    64,297
    
    
    
    (102,370
    )Operating income (loss)
    
    
    (26,024
    )
    
    
    (1,091
    )
    
    
    (36,748
    )
    
    
    127,182Interest and other income
    
    
    988
    
    
    
    1,856
    
    
    
    3,404
    
    
    
    4,037Interest expense
    
    
    
    
    
    
    (211
    )
    
    
    
    
    
    
    (1,024
    )Income (loss) before provision for income taxes
    
    
    (25,036
    )
    
    
    554
    
    
    
    (33,344
    )
    
    
    130,195Provision for income taxes
    
    
    (7,262
    )
    
    
    (61
    )
    
    
    (4,630
    )
    
    
    (13,688
    )Net income (loss)
    
    $
    (32,298
    )
    
    $
    493
    
    
    $
    (37,974
    )
    
    $
    116,507Basic net income (loss) per share
    
    $
    (1.10
    )
    
    $
    0.02
    
    
    $
    (1.26
    )
    
    $
    4.35Shares used in calculating basic net income (loss) per share
    
    
    29,448
    
    
    
    28,630
    
    
    
    30,092
    
    
    
    26,768Diluted net income (loss) per share
    
    $
    (1.10
    )
    
    $
    0.02
    
    
    $
    (1.26
    )
    
    $
    3.73Shares used in calculating diluted net income (loss) per share
    
    
    29,448
    
    
    
    31,399
    
    
    
    30,092
    
    
    
    31,315
  4




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IMMERSION CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007(As restated,see Note 15)Cash flows from operating activities:Net income (loss)
    
    $
    (37,974
    )
    
    $
    116,507Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    844
    
    
    
    661Amortization of intangibles
    
    
    584
    
    
    
    739Stock-based compensation
    
    
    2,968
    
    
    
    1,942Excess tax benefits from stock-based compensation
    
    
    (194
    )
    
    
    (10,579
    )Realized gain on short-term investments
    
    
    (81
    )
    
    
    Allowance
for doubtful accounts
    
    
    269
    
    
    
    (53
    )Interest expense  accretion on 5% Convertible Debenture
    
    
    
    
    
    
    535Fair value adjustment of Put Option and Registration Rights
    
    
    
    
    
    
    (15
    )Loss on disposal of equipment
    
    
    
    
    
    
    28Changes in operating assets and liabilities:Accounts receivable
    
    
    (61
    )
    
    
    (51
    )Inventories
    
    
    (1,136
    )
    
    
    (412
    )Deferred income taxes
    
    
    7,382
    
    
    
    (5,610
    )Prepaid expenses and other current assets
    
    
    (1,795
    )
    
    
    397Other assets
    
    
    12
    
    
    
    Accounts payable
    
    
    609
    
    
    
    (2,255
    )Accrued compensation and other current liabilities
    
    
    23,207
    
    
    
    699Income taxes payable
    
    
    (170
    )
    
    
    12,498Deferred revenue and customer advances
    
    
    2,453
    
    
    
    (29,624
    )Other long-term liabilities
    
    
    (1,069
    )
    
    
    657Net cash provided by (used in) operating activities
    
    
    (4,152
    )
    
    
    86,064Cash flows provided by (used in) investing activities:Purchases of short-term investments
    
    
    (44,221
    )
    
    
    (31,777
    )Maturities of short-term investments
    
    
    78,978
    
    
    
    Intangibles and other assets
    
    
    (2,219
    )
    
    
    (1,444
    )Purchases of property and equipment
    
    
    (1,821
    )
    
    
    (1,169
    )Net cash provided by (used in) investing activities
    
    
    30,717
    
    
    
    (34,390
    )Cash flows provided by (used in) financing activities:Issuance of common stock under employee stock purchase plan
    
    
    330
    
    
    
    317Exercise of stock options and warrants
    
    
    1,168
    
    
    
    10,817Excess tax benefits from stock-based compensation
    
    
    194
    
    
    
    10,579Payments on long-term debt
    
    
    
    
    
    
    (1,400
    )Purchases of treasury stock
    
    
    (12,643
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (10,951
    )
    
    
    20,313Effect of exchange rates on cash and cash equivalents
    
    
    (24
    )
    
    
    1,460Net increase in cash and cash equivalents
    
    
    15,590
    
    
    
    73,447Cash and cash equivalents:Beginning of the period
    
    
    86,493
    
    
    
    32,012End of the period
    
    $
    102,083
    
    
    $
    105,459Supplemental disclosure of cash flow information:Cash paid (received) for taxes
    
    $
    (731
    )
    
    $
    6,032Cash paid for interest
    
    $
    
    
    
    $
    572Non-cash investing and financing activities:Amounts accrued for property and equipment, and intangibles
    
    $
    848
    
    
    $
    Amounts accrued for purchase of treasury stock
    
    $
    709
    
    
    $
    
  5




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IMMERSION CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 September 30, 2008
 (Unaudited)
  Description of Business
  Principles of Consolidation and Basis of Presentation
    Short-term Investments
   6




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Revenue Recognition
  Royalty and license revenue 
 7




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##### 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 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.
  Product sales  ®
 8




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##### Table of Contents



Development contracts and other revenue 
 Multiple element arrangements 
  Recent Accounting Pronouncements
   9




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##### Table of Contents



Short-term Investments
 September 30, 2008Gross
    
    
    GrossUnrealized
    
    
    UnrealizedAmortized

    
    
    Holding
    
    
    Holding
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(In thousands)U.S. government agency securities
    
    $
    16,934
    
    
    $
    42
    
    
    $
    
    
    
    $
    16,976
 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
    10




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##### Table of Contents



Fair value measurement using
    
    
    Assets atLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    fair value(In thousands)Corporate commercial paper
    
    $
    
    
    
    $
    19,961
    
    
    $
    
    
    
    $
    19,961U.S. Government agency securities
    
    
    28,869
    
    
    
    
    
    
    
    
    
    
    
    28,869Money market accounts
    
    
    67,146
    
    
    
    
    
    
    
    
    
    
    
    67,146Total
    
    $
    96,015
    
    
    $
    19,961
    
    
    $
    
    
    
    $
    115,976
   September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Raw materials and subassemblies
    
    $
    3,768
    
    
    $
    2,843Work in process
    
    
    364
    
    
    
    179Finished goods
    
    
    760
    
    
    
    652Inventories, net
    
    $
    4,892
    
    
    $
    3,674
  September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Computer equipment and purchased software
    
    $
    4,262
    
    
    $
    3,195Machinery and equipment
    
    
    2,982
    
    
    
    2,532Furniture and fixtures
    
    
    1,229
    
    
    
    1,212Leasehold improvements
    
    
    1,248
    
    
    
    1,267Total
    
    
    9,721
    
    
    
    8,206Less accumulated depreciation
    
    
    (6,519
    )
    
    
    (6,094
    )Property and equipment, net
    
    $
    3,202
    
    
    $
    2,112
 11




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##### Table of Contents



September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Patents and technology
    
    $
    16,955
    
    
    $
    15,105Accumulated amortization of patents and technology
    
    
    (7,298
    )
    
    
    (6,714
    )Intangibles, net
    
    
    9,657
    
    
    
    8,391Other assets
    
    
    405
    
    
    
    167Intangibles and other assets, net
    
    $
    10,062
    
    
    $
    8,558
   September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Accrued legal
    
    $
    367
    
    
    $
    417Income taxes payable
    
    
    255
    
    
    
    534Other current liabilities
    
    
    3,812
    
    
    
    1,678Amount due
to Microsoft Corporation (Note 9)
    
    
    20,750
    
    
    
    Total other current liabilities
    
    $
    25,184
    
    
    $
    2,629Deferred revenue, current portion
    
    $
    4,574
    
    
    $
    4,352Customer advances
    
    
    79
    
    
    
    126Total current deferred revenue, and customer advances
    
    $
    4,653
    
    
    $
    4,478
    Stock Options and Awards
  12




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Employee Stock Purchase Plan
   13




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##### Table of Contents



General Stock Option Information
  WeightedAverageWeighted
    
    
    Remaining
    
    
    AggregateNumber
    
    
    Average
    
    
    Contractual
    
    
    Intrinsicof Shares
    
    
    Exercise Price
    
    
    Term
    
    
    Value(In years)Outstanding at December 31, 2007 (3,774,245 exercisable at a
weighted average price of $9.11 per share)
    
    
    6,014,370
    
    
    $
    9.11Granted (weighted average fair value of $5.02 per share)
    
    
    2,179,925
    
    
    
    8.76Exercised
    
    
    (204,891
    )
    
    
    5.71Forfeited and Cancelled
    
    
    (737,934
    )
    
    
    8.84Outstanding at September 30, 2008
    
    
    7,251,470
    
    
    $
    9.13
    
    
    
    5.68
    
    
    $1.87 millionExercisable at September 30, 2008
    
    
    4,265,859
    
    
    $
    9.14
    
    
    
    3.51
    
    
    $1.85 million
    Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRange of

    
    
    
    
    
    
    
    
    Remaining
    
    Average
    
    
    
    
    
    AverageExercise

    
    
    
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExercisePrices

    
    
    
    
    Outstanding
    
    Life (Years)
    
    Price
    
    Exercisable
    
    Price$
    1.20
    -
    $ 6.02
    
    
    
    
    
    728,823
    
    
    
    5.03
    
    
    $
    3.26
    
    
    
    642,198
    
    
    $
    2.956.03
    -
    6.79
    
    
    
    
    
    730,204
    
    
    
    4.56
    
    
    
    6.35
    
    
    
    591,711
    
    
    
    6.346.81
    -
    6.98
    
    
    
    
    
    748,524
    
    
    
    5.77
    
    
    
    6.96
    
    
    
    541,680
    
    
    
    6.967.00
    -
    7.53
    
    
    
    
    
    725,096
    
    
    
    6.42
    
    
    
    7.16
    
    
    
    500,329
    
    
    
    7.067.60
    -
    8.61
    
    
    
    
    
    953,766
    
    
    
    7.28
    
    
    
    8.47
    
    
    
    185,045
    
    
    
    8.118.67
    -
    9.01
    
    
    
    
    
    788,778
    
    
    
    3.22
    
    
    
    8.99
    
    
    
    570,155
    
    
    
    8.989.04
    -
    9.24
    
    
    
    
    
    821,794
    
    
    
    5.81
    
    
    
    9.09
    
    
    
    455,241
    
    
    
    9.139.47
    -
    10.00
    
    
    
    
    
    881,790
    
    
    
    7.94
    
    
    
    9.84
    
    
    
    167,790
    
    
    
    10.0010.13
    -
    31.88
    
    
    
    
    
    835,009
    
    
    
    4.63
    
    
    
    19.12
    
    
    
    574,024
    
    
    
    21.0533.50
    -
    43.25
    
    
    
    
    
    37,686
    
    
    
    1.54
    
    
    
    39.95
    
    
    
    37,686
    
    
    
    39.95$
    1.20
    -
    $43.25
    
    
    
    
    
    7,251,470
    
    
    
    5.68
    
    
    $
    9.13
    
    
    
    4,265,859
    
    
    $
    9.14
 14




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##### Table of Contents



Restricted Stock Units
  Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateNumber
    
    
    Grant Date
    
    
    Remaining
    
    
    Intrinsicof Shares
    
    
    Fair Value
    
    
    Contractual Life
    
    
    ValueOutstanding at December 31, 2007Granted
    
    
    20,500
    
    
    $
    5.58Vested
    
    
    Forfeited
    
    
    Outstanding at September 30, 2008
    
    
    20,500
    
    
    $
    5.58
    
    
    
    1.91
    
    
    $
    119,310Expected to Vest
    
    
    15,726
    
    
    $
    5.58
    
    
    
    1.91
    
    
    $
    92,523
  Stock-based Compensation
 Valuation and amortization method 
 Expected term 
 Expected volatility 
 Risk-free interest rate 
 Expected dividend 
 15




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##### Table of Contents



Forfeitures 
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Options
    
    2008
    
    2007
    
    2008
    
    2007Expected term (in years)
    
    
    5.5
    
    
    
    6.25
    
    
    
    5.5
    
    
    
    6.25Volatility
    
    
    64
    %
    
    
    60
    %
    
    
    62
    %
    
    
    60
    %Interest rate
    
    
    3.1
    %
    
    
    4.4
    %
    
    
    2.9
    %
    
    
    4.6
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Employee Stock Purchase Plan
    
    2008
    
    2007
    
    2008
    
    2007Expected term (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5Volatility
    
    
    83
    %
    
    
    58
    %
    
    
    80
    %
    
    
    50
    %Interest rate
    
    
    1.9
    %
    
    
    5.0
    %
    
    
    2.0
    %
    
    
    5.1
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Income Statement Classifications
    
    (In thousands)
    
    
    (In thousands)Cost of product sales
    
    $
    42
    
    
    $
    32
    
    
    $
    114
    
    
    $
    78Sales and marketing
    
    
    286
    
    
    
    297
    
    
    
    864
    
    
    
    674Research and development
    
    
    211
    
    
    
    152
    
    
    
    680
    
    
    
    467General and administrative
    
    
    501
    
    
    
    218
    
    
    
    1,310
    
    
    
    723Total
    
    $
    1,040
    
    
    $
    699
    
    
    $
    2,968
    
    
    $
    1,942
   16




---



##### Table of Contents



Warrants
  Stock Repurchase Program
    Immersion Corporation v. Sony Computer Entertainment of America, Inc., Sony
Computer Entertainment Inc. and Microsoft Corporation
 17




---



##### Table of Contents



18




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##### Table of Contents



19




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Restated)Numerator:Net income (loss) used in computing basic net income (loss) per share
    
    $
    (32,298
    )
    
    $
    493
    
    
    $
    (37,974
    )
    
    $
    116,507Interest on 5% Convertible Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    348Net income (loss) used in computing diluted net income (loss) per share
    
    $
    (32,298
    )
    
    $
    493
    
    
    $
    (37,974
    )
    
    $
    116,855Denominator:Shares used in computation of basic net income (loss) per share(weighted average common shares outstanding)
    
    
    29,448
    
    
    
    28,630
    
    
    
    30,092
    
    
    
    26,768Dilutive potential common shares:Stock options
    
    
    
    
    
    
    2,523
    
    
    
    
    
    
    
    1,937Warrants
    
    
    
    
    
    
    246
    
    
    
    
    
    
    
    3225% Convertible Debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,288Shares used in computation of diluted net income (loss) per share
    
    
    29,448
    
    
    
    31,399
    
    
    
    30,092
    
    
    
    31,315Basic net income (loss) per share
    
    $
    (1.10
    )
    
    $
    0.02
    
    
    $
    (1.26
    )
    
    $
    4.35Diluted net income (loss) per share
    
    $
    (1.10
    )
    
    $
    0.02
    
    
    $
    (1.26
    )
    
    $
    3.73
 20




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##### Table of Contents



Outstanding stock options
    
    
    7,251,470Restricted Stock Units
    
    
    20,500Warrants
    
    
    436,772
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)
    
    
    (In thousands)(Restated)Net income (loss)
    
    $
    (32,298
    )
    
    $
    493
    
    
    $
    (37,974
    )
    
    $
    116,507Change in unrealized losses on short-term investments
    
    
    42
    
    
    
    
    
    
    
    13
    
    
    
    (25
    )Foreign currency translation adjustment
    
    
    5
    
    
    
    46
    
    
    
    (15
    )
    
    
    79Total comprehensive income (loss)
    
    $
    (32,251
    )
    
    $
    539
    
    
    $
    (37,976
    )
    
    $
    116,561
    21




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)
    
    
    (In thousands)(restated)Revenues:Immersion Computing, Entertainment, and Industrial
    
    $
    6,909
    
    
    $
    4,578
    
    
    $
    17,109
    
    
    $
    12,810Immersion Medical
    
    
    3,221
    
    
    
    5,240
    
    
    
    10,530
    
    
    
    12,044Intersegment eliminations
    
    
    (49
    )
    
    
    (15
    )
    
    
    (90
    )
    
    
    (42
    )Total
    
    $
    10,081
    
    
    $
    9,803
    
    
    $
    27,549
    
    
    $
    24,812Net Income (Loss):Immersion Computing, Entertainment, and Industrial
    
    $
    (29,977
    )
    
    $
    (810
    )
    
    $
    (34,032
    )
    
    $
    116,037Immersion Medical
    
    
    (2,282
    )
    
    
    1,305
    
    
    
    (3,897
    )
    
    
    466Intersegment eliminations
    
    
    (39
    )
    
    
    (2
    )
    
    
    (45
    )
    
    
    4Total
    
    $
    (32,298
    )
    
    $
    493
    
    
    $
    (37,974
    )
    
    $
    116,507
 September 30,
    
    
    December 31,2008
    
    
    2007(In thousands)Total Assets:Immersion Computing, Entertainment, and Industrial
    
    $
    162,378
    
    
    $
    181,860Immersion Medical
    
    
    7,913
    
    
    
    6,552Intersegment eliminations
    
    
    (22,759
    )
    
    
    (20,044
    )Total
    
    $
    147,532
    
    
    $
    168,368
   22




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##### Table of Contents



Revenue by Product Lines 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)
    
    
    (In thousands)Revenues:Consumer, Computing, and Entertainment
    
    $
    4,684
    
    
    $
    2,567
    
    
    $
    10,648
    
    
    $
    6,0573D
    
    
    1,204
    
    
    
    1,035
    
    
    
    3,522
    
    
    
    3,123Touch Interface Products
    
    
    972
    
    
    
    961
    
    
    
    2,849
    
    
    
    3,588Subtotal Immersion Computing,
Entertainment, and Industrial
    
    
    6,860
    
    
    
    4,563
    
    
    
    17,019
    
    
    
    12,768Immersion Medical
    
    
    3,221
    
    
    
    5,240
    
    
    
    10,530
    
    
    
    12,044Total
    
    $
    10,081
    
    
    $
    9,803
    
    
    $
    27,549
    
    
    $
    24,812
 Revenue by Region 
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007North America
    
    
    56
    %
    
    
    73
    %
    
    
    58
    %
    
    
    67
    %Europe
    
    
    18
    %
    
    
    19
    %
    
    
    20
    %
    
    
    18
    %Far East
    
    
    26
    %
    
    
    7
    %
    
    
    19
    %
    
    
    12
    %Rest of the world
    
    
    0
    %
    
    
    1
    %
    
    
    3
    %
    
    
    3
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   23




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##### Table of Contents



Significant Customers 
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Customer A
    
    
    10
    %
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %Customer B
    
    
    10
    %
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %Customer C
    
    
    *
    %
    
    
    12
    %
    
    
    *
    %
    
    
    12
    %Customer D
    
    
    *
    %
    
    
    14
    %
    
    
    *
    %
    
    
    11
    %Customer E
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %
    
    
    *
    %Total
    
    
    20
    %
    
    
    26
    %
    
    
    0
    %
    
    
    23
    %
 
   In re Immersion Corporation
 In re Immersion
Corporation Initial Public Offering Securities Litigation
   24




---



##### Table of Contents



Miles v. Merrill Lynch & Co. (In re Initial Public
Offering Securities Litigation)
  Other Contingencies
    25




---



##### Table of Contents



15.
    
    RESTATEMENT OF PREVIOUSLY ISSUED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
  Nine Months EndedSeptember 30, 2007As Previously
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    Restated(In thousandsexcept per share amounts)Total revenues
    
    $
    24,812
    
    
    $
    
    
    
    $
    24,812Income before provision for income taxes
    
    $
    130,195
    
    
    $
    
    
    
    $
    130,195Provision for income taxes
    
    
    (7,093
    )
    
    
    (6,595
    )
    
    
    (13,688
    )Net income
    
    $
    123,102
    
    
    $
    (6,595
    )
    
    $
    116,507Basic net income per share
    
    $
    4.60
    
    
    $
    (0.25
    )
    
    $
    4.35Shares used in calculating basic net income per share
    
    
    26,768
    
    
    
    
    
    
    
    26,768Diluted net income per share
    
    $
    3.93
    
    
    $
    (0.20
    )
    
    $
    3.73Shares used in calculating diluted net income per share
    
    
    31,408
    
    
    
    (93
    )
    
    
    31,315Changes to cash flows from operating activities:Net income
    
    $
    123,102
    
    
    $
    (6,595
    )
    
    $
    116,507Excess tax benefits from stock-based compensation
    
    
    (3,215
    )
    
    
    (7,364
    )
    
    
    (10,579
    )Deferred income taxes
    
    
    (5,351
    )
    
    
    (259
    )
    
    
    (5,610
    )Income taxes payable
    
    
    6,271
    
    
    
    6,227
    
    
    
    12,498Other long-term liabilities
    
    
    30
    
    
    
    627
    
    
    
    657Net cash provided by operating activities
    
    
    93,428
    
    
    
    (7,364
    )
    
    
    86,064Changes to cash flows from financing activities:Excess tax benefits from stock-based compensation
    
    $
    3,215
    
    
    $
    7,364
    
    
    $
    10,579Net cash provided by financing activities
    
    
    12,949
    
    
    
    7,364
    
    
    
    20,313
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  26




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Revenue Recognition
 
 27




---



##### Table of Contents



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.
  Product sales 
 28




---



##### Table of Contents



Development contracts and other revenue 
 Multiple element arrangements 
  Stock-based Compensation
  Valuation and amortization method 
 Expected term 
 Expected volatility 
 Risk-free interest rate 
 Expected dividend 
 Forfeitures 
 29




---



##### Table of Contents



Accounting for Income Taxes
    Litigation Conclusions and Patent License
  30




---



##### Table of Contents



Short-term Investments
          31




---



##### Table of Contents



Recovery of Accounts Receivable
  Inventory Reserves
  Product Return and Warranty Reserves
  Intangible Assets
     Overview
  32




---



##### Table of Contents



September 30,REVENUES
    
    2008
    
    
    2007
    
    
    Change($ In thousands)Three months ended:Royalty and license
    
    $
    4,761
    
    
    $
    2,904
    
    
    
    64
    %Product sales
    
    
    4,755
    
    
    
    5,420
    
    
    
    (12
    )%Development contracts and other
    
    
    565
    
    
    
    1,479
    
    
    
    (62
    )%Total Revenue
    
    $
    10,081
    
    
    $
    9,803
    
    
    
    3
    %Nine months ended:Royalty and license
    
    $
    11,393
    
    
    $
    7,862
    
    
    
    45
    %Product sales
    
    
    13,992
    
    
    
    14,299
    
    
    
    (2
    )%Development contracts and other
    
    
    2,164
    
    
    
    2,651
    
    
    
    (18
    )%Total Revenue
    
    $
    27,549
    
    
    $
    24,812
    
    
    
    11
    %
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 Total Revenue 
 Royalty and license revenue 
 33




---



##### Table of Contents



Product sales 
 34




---



##### Table of Contents



® ®
 Development contract and other revenue
  Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
 Total Revenue
 Royalty and license revenue
  Product sales
 35




---



##### Table of Contents



Development contract and other revenue
  September 30,
    
    ChangeCOST OF PRODUCT SALES
    
    2008
    
    2007($ In thousands)Three months ended:Cost of product sales
    
    $
    2,951
    
    
    $
    2,563
    
    
    
    15
    %% of total product revenue
    
    
    62
    %
    
    
    47
    %Nine months ended:Cost of product sales
    
    $
    7,607
    
    
    $
    6,533
    
    
    
    16
    %% of total product revenue
    
    
    54
    %
    
    
    46
    %
 Cost of Product Sales
  36




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##### Table of Contents



September 30,
    
    ChangeOPERATING EXPENSES AND OTHER
    
    2008
    
    2007($ In thousands)Three months ended:Sales and marketing
    
    $
    4,296
    
    
    $
    2,825
    
    
    
    52
    %% of total revenue
    
    
    43
    %
    
    
    29
    %Research and development
    
    $
    3,155
    
    
    $
    2,482
    
    
    
    27
    %% of total revenue
    
    
    31
    %
    
    
    25
    %General and administrative
    
    $
    4,774
    
    
    $
    2,781
    
    
    
    72
    %% of total revenue
    
    
    47
    %
    
    
    28
    %Amortization of intangibles
    
    $
    179
    
    
    $
    243
    
    
    
    (26
    )%% of total revenue
    
    
    2
    %
    
    
    2
    %Litigation settlements, conclusions, and patent license
    
    $
    20,750
    
    
    $
    
    
    
    
    *
    %% of total revenue
    
    
    *
    %
    
    
    *
    %Nine months ended:Sales and marketing
    
    $
    11,996
    
    
    $
    8,558
    
    
    
    40
    %% of total revenue
    
    
    44
    %
    
    
    34
    %Research and development
    
    $
    9,239
    
    
    $
    7,538
    
    
    
    23
    %% of total revenue
    
    
    34
    %
    
    
    30
    %General and administrative
    
    $
    14,121
    
    
    $
    9,162
    
    
    
    54
    %% of total revenue
    
    
    51
    %
    
    
    37
    %Amortization of intangibles
    
    $
    584
    
    
    $
    739
    
    
    
    (21
    )%% of total revenue
    
    
    2
    %
    
    
    3
    %Litigation settlements, conclusions, and patent license
    
    $
    20,750
    
    
    $
    (134,900
    )
    
    
    *
    %% of total revenue
    
    
    *
    %
    
    
    *
    %
 Sales and Marketing
 37




---



##### Table of Contents



Research and Development
  General and Administrative
  38




---



##### Table of Contents



Amortization of Intangibles
 Litigation Settlements, Conclusions, and Patent License
  Immersion Corporation v. Sony
Computer Entertainment of America,
Inc., Sony Computer
 39




---



##### Table of Contents



Entertainment Inc. and Microsoft Corporation
 Interest and Other Income
  Interest Expense
 Provision for Income Taxes
    40




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)
    
    
    (In thousands)Revenues:Immersion Computing, Entertainment, and Industrial
    
    $
    6,909
    
    
    $
    4,578
    
    
    $
    17,109
    
    
    $
    12,810Immersion Medical
    
    
    3,221
    
    
    
    5,240
    
    
    
    10,530
    
    
    
    12,044Intersegment eliminations
    
    
    (49
    )
    
    
    (15
    )
    
    
    (90
    )
    
    
    (42
    )Total
    
    $
    10,081
    
    
    $
    9,803
    
    
    $
    27,549
    
    
    $
    24,812Net Income (Loss):Immersion Computing, Entertainment, and Industrial
    
    $
    (29,977
    )
    
    $
    (810
    )
    
    $
    (34,032
    )
    
    $
    116,037Immersion Medical
    
    
    (2,282
    )
    
    
    1,305
    
    
    
    (3,897
    )
    
    
    466Intersegment eliminations
    
    
    (39
    )
    
    
    (2
    )
    
    
    (45
    )
    
    
    4Total
    
    $
    (32,298
    )
    
    $
    493
    
    
    $
    (37,974
    )
    
    $
    116,507
 
 *
    
    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
 41




---



##### Table of Contents



Immersion Medical segment
  42




---



##### Table of Contents



43




---



##### Table of Contents



2009 and
    
    
    2011 andContractual Obligations
    
    Total
    
    
    2008
    
    
    2010
    
    
    2012(In thousands)Operating leases
    
    $
    2,300
    
    
    $
    1,100
    
    
    $
    1,191
    
    
    $
    9
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Cash Equivalents and Short-term Investments
  44




---



##### Table of Contents



Foreign Currency Exchange Rates
 
 ITEM 4. CONTROLS AND PROCEDURES
         45




---



##### Table of Contents



PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 In re Immersion Corporation
 In re Immersion Corporation
Initial Public Offering Securities Litigation
    46




---



##### Table of Contents



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)
 47




---



##### Table of Contents



Immersion Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp., and Simbionix Ltd.
   
 ITEM 1A. RISK FACTORS
 Company Risks
     
 
 
 
 
 
 
 
 48




---



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49




---



##### Table of Contents



50




---



##### Table of Contents



Industry and Technology Risks
   51




---



##### Table of Contents



52




---



##### Table of Contents



53




---



##### Table of Contents



54




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##### Table of Contents




    
    the lengthy and expensive process of building a relationship with potential licensees;
    
    the competition we may face with the internal design teams of existing and potential licensees;
    
    difficulties in persuading product manufacturers to work with us, to rely on us for critical
technology, and to disclose to us proprietary product development and other strategies;
    
    difficulties with persuading potential licensees who may have developed their own intellectual
property or licensed intellectual property from other parties in
areas related to ours to license our technology versus continuing to develop their own or license from other parties;
    
    challenges in demonstrating the compelling value of our technologies in new applications like
mobile phones, portable devices, and touchscreens;
    
    difficulties in persuading existing and potential licensees to bear the development costs and
risks necessary to incorporate our technologies into their products;
    
    difficulties in obtaining new automotive licensees for yet-to-be commercialized technology
because their suppliers may not be ready to meet stringent quality and parts availability
requirements;
    
    inability to sign new gaming licenses if the video console makers choose not to license third
parties to make peripherals for their new consoles; and
    
    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.
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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.
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
  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.
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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;
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
    
    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.
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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;
    
    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.
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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
June 30, 2008
    
    
    
    
    
    
    
    
    
    $
    43,845,097July 1 - July 31, 2008
    
    
    440,000
    
    
    $
    6.78August 1 - August 31, 2008
    
    
    40,000
    
    
    $
    6.12September 1 - September 30, 2008
    
    
    627,880
    
    
    $
    6.32Total shares repurchased
    
    
    1,107,880
    
    
    $
    6.50
    
    
    
    7,196,408Ending approximate dollar value that may be repurchased under
the Program as of September 30, 2008
    
    
    
    
    
    
    
    
    
    $
    36,648,689
 
 (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 6. EXHIBITS
  ExhibitNumber
    
    Description10.44
    
    Executive Incentive Plan dated August 7, 2008 by and between Immersion
Corporation and Clent Richardson.10.45
    
    Settlement Agreement dated August 25, 2008 by and between Microsoft Corporation
and Immersion Corporation.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
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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.44
    
    Executive Incentive Plan dated August 7, 2008 by and between Immersion
Corporation and Clent Richardson10.45
    
    Settlement Agreement dated August 25, 2008 by and between Microsoft Corporation
and Immersion Corporation.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.
 65