##### 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)
 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
 o o
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer   o
(Do not check if a smaller
 reporting company)
    
    Smaller Reporting Company o
  o þ




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##### 



IMMERSION CORPORATION
 INDEX
 PagePART IFINANCIAL INFORMATIONItem 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets as of March 31, 2010 and
December 31, 2009
    
    
        3Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2010 and 2009
    
    
        4Unaudited Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2010 and 2009
    
    
        5Unaudited Notes to Condensed Consolidated Financial Statements
    
    
        6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
        22Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
        33Item 4. Controls and Procedures
    
    
        34PART IIOTHER INFORMATIONItem 1. Legal Proceedings
    
    
        36Item 1A. Risk Factors
    
    
        38Item 6. Exhibits
    
    
        53SIGNATURES
    
    
        54EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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PART I
 
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 IMMERSION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)
 March 31,
    
    
    December 31,2010
    
    
    2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    20,705
    
    
    $
    19,828Short-term investments
    
    
    43,926
    
    
    
    43,900Accounts
receivable (net of allowances for doubtful accounts as of: March 31, 2010  $99
and December 31, 2009  $207)
    
    
    2,299
    
    
    
    2,988Inventories
    
    
    644
    
    
    
    2,001Deferred income taxes
    
    
    250
    
    
    
    248Prepaid expenses and other current assets
    
    
    4,174
    
    
    
    4,474Total current assets
    
    
    71,998
    
    
    
    73,439Property and equipment, net
    
    
    2,734
    
    
    
    3,498Intangibles and other assets, net
    
    
    11,309
    
    
    
    10,897Total assets
    
    $
    86,041
    
    
    $
    87,834LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,283
    
    
    $
    1,382Accrued compensation
    
    
    1,292
    
    
    
    1,387Other current liabilities
    
    
    2,811
    
    
    
    3,087Deferred revenue and customer advances
    
    
    6,928
    
    
    
    6,578Total current liabilities
    
    
    12,314
    
    
    
    12,434Long-term deferred revenue
    
    
    19,172
    
    
    
    18,851Deferred income tax liabilities
    
    
    250
    
    
    
    248Other long-term liabilities
    
    
    586
    
    
    
    560Total liabilities
    
    
    32,322
    
    
    
    32,093Contingencies (Note 15)Stockholders equity:Common stock and additional paid-in capital  $0.001 par value; 100,000,000 shares
authorized; shares issued: March 31, 2010  30,876,698 and December 31, 2009
30,786,156; shares outstanding: March 31, 2010 28,090,135
and December 31, 2009  27,999,593
    
    
    173,275
    
    
    
    172,679Warrants
    
    
    
    
    
    
    11Accumulated other comprehensive income
    
    
    113
    
    
    
    66Accumulated deficit
    
    
    (101,280
    )
    
    
    (98,626
    )Treasury stock at cost: March 31, 2010 and December 31, 2009  2,786,563
    
    
    (18,389
    )
    
    
    (18,389
    )Total stockholders equity
    
    
    53,719
    
    
    
    55,741Total liabilities and stockholders equity
    
    $
    86,041
    
    
    $
    87,834
  3




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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 Three Months Ended March 31,2010
    
    
    2009Revenues:Royalty and license
    
    $
    6,403
    
    
    $
    3,781Product sales
    
    
    2,968
    
    
    
    3,279Development contracts and other
    
    
    338
    
    
    
    446Total revenues
    
    
    9,709
    
    
    
    7,506Costs and expenses:Cost of product sales (exclusive of amortization and impairment of
intangibles
shown separately below)
    
    
    1,369
    
    
    
    1,251Sales and marketing
    
    
    2,353
    
    
    
    4,284Research and development
    
    
    2,461
    
    
    
    3,929General and administrative
    
    
    5,716
    
    
    
    4,384Amortization and impairment of intangibles
    
    
    235
    
    
    
    215Restructuring costs
    
    
    
    
    
    
    646Total costs and expenses
    
    
    12,134
    
    
    
    14,709Operating loss
    
    
    (2,425
    )
    
    
    (7,203
    )Change in fair value of warrant liability
    
    
    
    
    
    
    480Interest and other income
    
    
    79
    
    
    
    302Loss from continuing operations before provision for income taxes
    
    
    (2,346
    )
    
    
    (6,421
    )Provision for income taxes
    
    
    (339
    )
    
    
    (91
    )Loss from continuing operations
    
    
    (2,685
    )
    
    
    (6,512
    )Discontinued operations (Note 9):Gain on sales of discontinued operations net of provision for
income taxes of $0
    
    
    30
    
    
    
    167Gain from discontinued operations, net of provision for income taxes of
$1 and $150 as of March 31, 2010 and 2009, respectively
    
    
    1
    
    
    
    235Net loss
    
    $
    (2,654
    )
    
    $
    (6,110
    )Basic and diluted net loss per shareContinuing operations
    
    $
    (0.10
    )
    
    $
    (0.23
    )Discontinued operations
    
    
    0.01
    
    
    
    0.01Total
    
    $
    (0.09
    )
    
    $
    (0.22
    )Shares used in calculating basic and diluted net loss per share
    
    
    28,022
    
    
    
    27,924
  4




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IMMERSION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (unaudited)
 Three Months EndedMarch 31,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (2,654
    )
    
    $
    (6,110
    )Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    296
    
    
    
    390Amortization and impairment of intangibles
    
    
    235
    
    
    
    215Stock-based compensation
    
    
    596
    
    
    
    1,404Change in fair market value of warrant liability
    
    
    
    
    
    
    (480
    )Allowance for doubtful accounts
    
    
    (108
    )
    
    
    (156
    )Loss on disposal of equipment
    
    
    49
    
    
    
    2Loss on divestiture
    
    
    45
    
    
    
    Gain on sales of discontinued operations
    
    
    (30
    )
    
    
    (167
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    796
    
    
    
    2,241Inventories
    
    
    385
    
    
    
    (818
    )Prepaid expenses and other assets
    
    
    221
    
    
    
    44Accounts payable
    
    
    (97
    )
    
    
    (469
    )Accrued compensation and other current liabilities
    
    
    (420
    )
    
    
    (1,295
    )Deferred revenue and customer advances
    
    
    783
    
    
    
    1,187Other long-term liabilities
    
    
    145
    
    
    
    5Net cash provided by (used in) operating activities
    
    
    242
    
    
    
    (4,007
    )Cash flows provided by (used in) investing activities:Purchases of short-term investments
    
    
    (14,978
    )
    
    
    (33,962
    )Maturities of short-term investments
    
    
    15,000
    
    
    
    11,000Net proceeds from divestiture
    
    
    1,434
    
    
    
    Additions to intangibles
    
    
    (680
    )
    
    
    (542
    )Proceeds from sale of property and equipment
    
    
    70
    
    
    
    Purchases of property and equipment
    
    
    (241
    )
    
    
    (580
    )Proceeds from sales of discontinued operations
    
    
    30
    
    
    
    167Net cash provided by (used in) investing activities
    
    
    635
    
    
    
    (23,917
    )Cash flows provided by financing activities:Issuance of common stock under employee stock purchase plan
    
    
    
    
    
    
    134Exercise of stock options and warrants
    
    
    
    
    
    
    70Net cash provided by financing activities
    
    
    
    
    
    
    204Effect of exchange rates on cash and cash equivalents
    
    
    
    
    
    
    (52
    )Net increase (decrease) in cash and cash equivalents
    
    
    877
    
    
    
    (27,772
    )Cash and cash equivalents:Beginning of the period
    
    
    19,828
    
    
    
    64,769End of the period
    
    $
    20,705
    
    
    $
    36,997Supplemental disclosure of cash flow information:Cash paid for taxes
    
    $
    7
    
    
    $
    Supplemental disclosure of non-cash investing and financing activities:Amounts accrued for property and equipment, and intangibles
    
    $
    89
    
    
    $
    1,090Accrued divestiture transaction costs
    
    $
    389
    
    
    $
    Shares issued under company stock plan
    
    $
    413
    
    
    $
    22
  5




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IMMERSION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
  Description
of Business
  Principles of Consolidation and Basis of Presentation
    Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists: For a license arrangement, the
Company requires a written contract, signed by both the customer and the Company.
For a stand-alone product sale, the Company requires a purchase order or other form
of written agreement with the customer.
    
    Delivery has occurred. The Company delivers software and product to customers
physically and delivers software also electronically. For physical deliveries not
related to software, the transfer terms typically include transfer of title and risk
of loss at the
 6




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Companys shipping location. For electronic deliveries, delivery occurs when the
Company provides the customer access codes or keys that allow the customer to take
immediate possession of the software.
 
    
    The fee is fixed or determinable. The Companys arrangement fee is based on the
use of standard payment terms which are those that are generally extended to the
majority of customers. For transactions involving extended payment terms, the Company
deems these fees not to be fixed or determinable for revenue recognition purposes and
revenue is deferred until the fees become due and payable.
    
    Collectibility is probable.To recognize revenue, the Company must judge
collectibility of the arrangement fees, which is done on a customer-by-customer basis
pursuant to the credit review policy. The Company typically sells to customers with
whom there is a history of successful collection. For new customers, the Company
evaluates the customers financial condition and ability to pay. If it is determined
that collectibility is not probable based upon the credit review process or the
customers payment history, revenue is recognized when payment is received.
 Royalty and license revenue
 Product sales
 Development contracts and other revenue
 Multiple element arrangements 
  7




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Recent Accounting Pronouncements
     Cash Equivalents, Short-term Investments, and Warrant Derivative Liabilities
     8




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March 31, 2010Fair value measurements usingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Assets:U.S. government agency securities
    
    $
    43,926
    
    
    $
    
    
    
    $
    
    
    
    $
    43,926Money market accounts
    
    
    15,080
    
    
    
    
    
    
    
    
    
    
    
    15,080Total assets at fair value
    
    $
    59,006
    
    
    $
    
    
    
    $
    
    
    
    $
    59,006
  December 31, 2009Fair value measurements usingLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(In thousands)Assets:U.S. government agency securities
    
    $
    49,071
    
    
    $
    
    
    
    $
    
    
    
    $
    49,071Money market accounts
    
    
    11,546
    
    
    
    
    
    
    
    
    
    
    
    11,546Total assets at fair value
    
    $
    60,617
    
    
    $
    
    
    
    $
    
    
    
    $
    60,617
  Short-term Investments
 March 31, 2010Gross
    
    
    GrossUnrealized
    
    
    UnrealizedHolding
    
    
    HoldingAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(In thousands)U.S. government agency securities
    
    $
    43,914
    
    
    $
    12
    
    
    $
    
    
    
    $
    43,926Total
    
    $
    43,914
    
    
    $
    12
    
    
    $
    
    
    
    $
    43,926
 9




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December 31, 2009Gross
    
    
    GrossUnrealized
    
    
    UnrealizedHolding
    
    
    HoldingAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(In thousands)U.S. government agency securities
    
    $
    43,935
    
    
    $
    2
    
    
    $
    (37
    )
    
    $
    43,900Total
    
    $
    43,935
    
    
    $
    2
    
    
    $
    (37
    )
    
    $
    43,900
   March 31,
    
    
    December 31,2010
    
    
    2009(In thousands)Raw materials and subassemblies
    
    $
    340
    
    
    $
    1,653Work in process
    
    
    3
    
    
    
    45Finished goods
    
    
    301
    
    
    
    303Inventories
    
    $
    644
    
    
    $
    2,001
  March 31,
    
    
    December 31,2009
    
    
    2009(In thousands)Computer equipment and purchased software
    
    $
    4,289
    
    
    $
    4,458Machinery and equipment
    
    
    1,345
    
    
    
    1,909Furniture and fixtures
    
    
    1,253
    
    
    
    1,407Leasehold improvements
    
    
    1,460
    
    
    
    1,458Total
    
    
    8,347
    
    
    
    9,232Less accumulated depreciation
    
    
    (5,613
    )
    
    
    (5,734
    )Property and equipment, net
    
    $
    2,734
    
    
    $
    3,498
  10




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March 31,
    
    
    December 31,2010
    
    
    2009(In thousands)Patents,
technology and trademarks
    
    $
    19,561
    
    
    $
    19,018Other assets
    
    
    223
    
    
    
    145Gross intangibles and other assets
    
    
    19,784
    
    
    
    19,163Accumulated amortization of patents and technology
    
    
    (8,475
    )
    
    
    (8,266
    )Intangibles and other assets, net
    
    $
    11,309
    
    
    $
    10,897
   March 31,
    
    
    December 31,2010
    
    
    2009(In thousands)Accrued legal
    
    $
    874
    
    
    $
    509Income taxes payable
    
    
    39
    
    
    
    40Other current liabilities
    
    
    1,898
    
    
    
    2,538Total other current liabilities
    
    $
    2,811
    
    
    $
    3,087Deferred revenue
    
    $
    6,850
    
    
    $
    6,336Customer advances
    
    
    78
    
    
    
    242Total deferred revenue and customer advances
    
    $
    6,928
    
    
    $
    6,578
    Stock Options and Awards
  11




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General Stock Option Information
  Numberof SharesOutstanding at December 31, 2009 (3,247,607 exercisable at a
weighted average price of $9.25 per share)
    
    
    5,041,235Granted (weighted average fair value of $2.40 per share)
    
    
    2,250Exercised
    
    
    (3,000
    )Forfeited and cancelled
    
    
    (364,431
    )Outstanding at March 31, 2010
    
    
    4,676,054Exercisable at March 31, 2010
    
    
    3,299,061
 Restricted Stock Units
  Numberof SharesBeginning balance at December 31, 2009
    
    
    198,055Awarded
    
    
    4,000Released
    
    
    (60,542
    )Forfeited
    
    
    (36,458
    )Outstanding balance at March 31, 2010
    
    
    105,055Expected to vest (1)
    
    
    74,194
 
 (1)
    
    RSUs expected to vest reflect estimated forfeiture rates. Restricted Stock
  12




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Numberof SharesBeginning balance at December 31, 2009
    
    
    27,000Awarded
    
    
    Released
    
    
    (27,000
    )Forfeited
    
    
    Ending balance at March 31, 2010
    
    
    
  Three Months EndedMarch 31,Options
    
    2010
    
    2009Expected term (in years)
    
    
    4.9
    
    
    
    5.5Volatility
    
    
    68
    %
    
    
    69
    %Interest rate
    
    
    2.4
    %
    
    
    1.8
    %Dividend yield
    
    
    
    
    
    
    
 Three Months EndedMarch 31,Employee Stock Purchase Plan
    
    2010
    
    2009Expected term (in years)
    
    
    
    
    
    
    0.5Volatility
    
    
    
    
    
    
    109
    %Interest rate
    
    
    
    
    
    
    0.4
    %Dividend yield
    
    
    
    
    
    
    
  13




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Three Months EndedMarch 31,2010
    
    
    2009Income Statement Classifications
    
    (In thousands)Cost of product sales
    
    $
    10
    
    
    $
    69Sales and marketing
    
    
    166
    
    
    
    230Research and development
    
    
    196
    
    
    
    473General and administrative
    
    
    224
    
    
    
    632Total
    
    $
    596
    
    
    $
    1,404
  Stock Repurchase Program
   Divestiture
  14




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Restructuring Costs
   Results of Discontinued Operations
     15




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16




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Three Months Ended,March 31,2010
    
    
    2009Numerator:Loss from continuing operations
    
    $
    (2,685
    )
    
    $
    (6,512
    )Gain from discontinued operations
    
    
    31
    
    
    
    402Net loss
    
    $
    (2,654
    )
    
    $
    (6,110
    )Denominator:Shares used in computation, basic and diluted (weighted average common shares outstanding)
    
    
    28,022
    
    
    
    27,924Basic and diluted net loss per share:Continuing operations
    
    $
    (0.10
    )
    
    $
    (0.23
    )Discontinued operations
    
    
    0.01
    
    
    
    0.01Total
    
    $
    (0.09
    )
    
    $
    (0.22
    )
  March 31,
    
    March 31,2010
    
    2009Outstanding stock options
    
    
    4,676,054
    
    
    
    7,325,914Restricted stock and RSUs
    
    
    105,055
    
    
    
    287,787Warrants
    
    
    
    
    
    
    431,243
   17




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Three Months EndedMarch 31,2010
    
    
    2009(In thousands)Net loss
    
    $
    (2,654
    )
    
    $
    (6,110
    )Change in unrealized losses on short-term
investments
    
    
    47
    
    
    
    (2
    )Foreign currency translation adjustment
    
    
    
    
    
    
    (67
    )Total comprehensive loss
    
    $
    (2,607
    )
    
    $
    (6,179
    )
      18




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Three Months EndedMarch 31,2010
    
    
    2009(In thousands)Revenues:Touch
    
    $
    6,843
    
    
    $
    4,475Medical
    
    
    2,876
    
    
    
    3,066Intersegment eliminations
    
    
    (10
    )
    
    
    (35
    )Total
    
    $
    9,709
    
    
    $
    7,506Operating Loss:Touch
    
    $
    (1,021
    )
    
    $
    (5,016
    )Medical
    
    
    (1,399
    )
    
    
    (2,186
    )Intersegment eliminations
    
    
    (5
    )
    
    
    (1
    )Total
    
    $
    (2,425
    )
    
    $
    (7,203
    )
 March 31,
    
    
    December 31,2010
    
    
    2009(In thousands)Total Assets:Touch
    
    $
    124,134
    
    
    $
    122,548Medical
    
    
    3,728
    
    
    
    6,294Intersegment eliminations
    
    
    (41,821
    )
    
    
    (41,008
    )Total
    
    $
    86,041
    
    
    $
    87,834
  In re Immersion Corporation Initial Public Offering Securities Litigation
   19




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Immersion Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp., and Simbionix Ltd.
  In re Immersion Corporation Securities Litigation
    20




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In re Immersion Corporation Derivative Litigation
   Shaw V. Richardson et al.
   Other Contingencies
    21




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
         22




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Revenue Recognition
  
    
    Persuasive evidence of an arrangement exists: For a license arrangement, we
require a written contract, signed by both the customer and us. For a stand-alone
product sale, we require a purchase order or other form of written agreement with the
customer.
    
    Delivery has occurred. We deliver software and product to our customers
physically and deliver software also electronically. For physical deliveries not
related to software, our transfer terms typically include transfer of title and risk
of loss at our shipping location. For electronic deliveries, delivery occurs when we
provide the customer access codes or keys that allow the customer to take immediate
possession of the software.
    
    The fee is fixed or determinable. Our arrangement fee is based on the use of
standard payment terms which are those that are generally extended to the majority of
customers. For transactions involving extended payment terms, we deem these fees not
to be fixed or determinable for revenue recognition purposes and revenue is deferred
until the fees become due and payable.
    
    Collectibility is probable. To recognize revenue, we must judge collectibility of
the arrangement fees, which we do on a customer-by-customer basis pursuant to our
credit review policy. We typically sell to customers with whom we have a history of
successful collection. For new customers, we evaluate the
customers financial condition and ability to pay. If we determined that collectibility is not probable
based upon our credit review process or the customers payment history, we recognize
revenue when payment is received.
 Royalty and license revenue 
 Product sales 
 23




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Development contracts and other revenue 
 Multiple element arrangements 
  Stock-based Compensation 
 Valuation and amortization method 
   24




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Accounting for Income Taxes
    Short-term Investments
      Recovery of Accounts Receivable
  Inventory Valuation
 25




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Intangible Assets
  Restructuring Costs
     Overview
  26




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Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
 March 31,
    
    
    ChangeREVENUES
    
    2010
    
    
    2009($ In thousands)Three months ended:Royalty and license
    
    $
    6,403
    
    
    $
    3,781
    
    
    
    69
    %Product sales
    
    
    2,968
    
    
    
    3,279
    
    
    
    (9
    )%Development contracts and other
    
    
    338
    
    
    
    446
    
    
    
    (24
    )%Total Revenue
    
    $
    9,709
    
    
    $
    7,506
    
    
    
    29
    %
 Total Revenue 
 Royalty and license revenue 
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Product sales 
 Development contract and other revenue 
  March 31,
    
    ChangeCOST OF PRODUCT SALES
    
    2010
    
    2009($ In thousands)Three months ended:Cost of product sales
    
    $
    1,369
    
    
    $
    1,251
    
    
    
    9
    %% of total product revenue
    
    
    46
    %
    
    
    38
    %
 Cost of Product Sales 
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March 31,
    
    ChangeOPERATING EXPENSES AND OTHER
    
    2010
    
    2009($ In thousands)Three months ended:Sales and marketing
    
    $
    2,353
    
    
    $
    4,284
    
    
    
    (45
    )%% of total revenue
    
    
    24
    %
    
    
    57
    %Research and development
    
    $
    2,461
    
    
    $
    3,929
    
    
    
    (37
    )%% of total revenue
    
    
    25
    %
    
    
    52
    %General and administrative
    
    $
    5,716
    
    
    $
    4,384
    
    
    
    30
    %% of total revenue
    
    
    59
    %
    
    
    58
    %Amortization of intangibles
    
    $
    235
    
    
    $
    215
    
    
    
    9
    %% of total revenue
    
    
    2
    %
    
    
    3
    %Restructuring costs
    
    $
    
    
    
    $
    646
    
    
    
    *
    %% of total revenue
    
    
    *
    %
    
    
    9
    %
 
 *
    
    Not meaningful Sales and Marketing 
 Research and Development 
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General and Administrative 
 Amortization and impairment of Intangibles 
 Restructuring 
 Change in fair value of warrant liability 
 Interest and Other Income 
 Provision for Income Taxes 
 Discontinued Operations 
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Three Months EndedMarch 31,2010
    
    
    2009(In thousands)Revenues:Touch
    
    $
    6,843
    
    
    $
    4,475Medical
    
    
    2,876
    
    
    
    3,066Intersegment eliminations
    
    
    (10
    )
    
    
    (35
    )Total
    
    $
    9,709
    
    
    $
    7,506Operating loss:Touch
    
    $
    (1,021
    )
    
    $
    (5,016
    )Medical
    
    
    (1,399
    )
    
    
    (2,186
    )Intersegment eliminations
    
    
    (5
    )
    
    
    (1
    )Total
    
    $
    (2,425
    )
    
    $
    (7,203
    )
 
 *
    
    Note: Segment information may not be indicative of the financial position or
results of operations that would have been achieved had these segments operated as
unaffiliated entities. Touch segment 
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Medical segment 
        32




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Less Than
    
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    

    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsOperating Leases
    
    $
    3,266
    
    
    $
    737
    
    
    $
    2,036
    
    
    $
    493
    
    
    $
    
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Cash Equivalents and Short-term Investments 
  Foreign Currency Exchange Rates 
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ITEM 4. CONTROLS AND PROCEDURES
      Plans for Remediation
   
    
    We have hired consultants to assist with the preparation of our quarterly and
annual tax calculations and the related financial disclosures including the rationale
for recognizing the benefits of certain tax positions in the financial statements with
oversight responsibility remaining with the Corporate Controller. We continue to
evaluate additional steps to remediate this material weakness.
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
    
    We improved our documentation of existing revenue recognition policies, including
policies involving non-standard terms and conditions, multiple element arrangements,
modifications to shipping terms and requests for pre-release products;
    
    We have restructured our finance department such that the individuals responsible
for the recognition of revenue are all located at our headquarters and report directly
to the Interim CFO with clearly delineated responsibilities;
    
    We have held training sessions on revenue recognition policies with the sales
personnel and will continue to implement training and oversight of executive, finance,
sales and operational personnel and new hires to ensure compliance with revenue
recognition policies;
    
    We have redesigned the quarterly sub-certification process to cover a wider variety
of topics that could affect the financial statements and added more employees to this
certification process;
    
    We have implemented a process of obtaining quarterly certifications from all sales
personnel certifying that they are not aware of any side agreements modifying our
standard terms of contracts;
    
    We have implemented a process of obtaining, on an annual basis, signed
acknowledgments from each employee that he or she has read and is in compliance with
our code of ethics and employee handbook;
    
    We have improved our legal and financial review process of all sales order packages
for all terms and conditions prior to shipment; and
    
    We are in the process of automating the approval process for the release of all
products in development to production. The approval process now requires the approval
of finance personnel.
   
    
    We have added a control procedure to test the calculation of the
third-party stock-based compensation reports on a quarterly basis, and upon upgrading
to new versions of the software, and to ensure timely review of the technical updates
to the software;
    
    We have added a control procedure to test the review and implementation of
all applicable new accounting pronouncements with the appropriate review by finance
personnel to ensure compliance;
    
    We are in the process of implementing control procedures to ensure capitalization
and tracking of all demonstration and customer loaner equipment; and
    
    We are in the process of reviewing our physical inventory management procedures
including cycle counts to ensure proper control of inventory with appropriate review
by operations and finance personnel.
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PART II
 
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 In re Immersion Corporation Initial Public Offering Securities Litigation
 In re Immersion Corporation
Initial Public Offering Securities Litigation
    Immersion Corporation v. Mentice AB, Mentice SA, Simbionix USA Corp., and Simbionix Ltd.
  36




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##### Table of Contents



In re Immersion Corporation Securities Litigation
   In Re Immersion
Corporation Securities Litigation.
 In re Immersion Corporation Derivative Litigation
  In re Immersion Corporation Derivative Litigation
 Shaw v. Richardson et al.
   37




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ITEM 1A. RISK FACTORS


Company Risks


38




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
    
    continue to develop our technologies;
    
    increase our sales and marketing efforts;
    
    attempt to expand the market for touch-enabled technologies and products and change our
business;
    
    protect and enforce our intellectual property;
    
    pursue strategic relationships;
    
    incur costs related to pending litigation;
    
    acquire intellectual property or other assets from third-parties; and
    
    invest in systems and processes to manage our business.
  39




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40




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41




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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;
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
    
    difficulties in obtaining new licensees for yet-to-be commercialized technology because
their suppliers may not be ready to meet stringent quality and parts availability requirements;
    
    inability to sign new gaming licenses if the video console makers choose not to license
third parties to make peripherals for their new consoles; and
    
    reluctance of content developers, mobile phone manufacturers, and service providers to sign
license agreements without a critical mass of other such inter-dependent supporters of the mobile
phone industry also having a license, or without enough phones in the market that incorporate our
technologies.
      43




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44




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45




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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, particularly in Asia, in
which we or
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our licensees do business.
  
    
    laws and contractual restrictions may not be sufficient to prevent misappropriation of our
technologies or deter others from developing similar technologies; and
    
    policing unauthorized use of our patented technologies, trademarks, and other proprietary
rights would be difficult, expensive, and time-consuming, within and particularly outside of the
United States of America.
      
    
    we fail to develop new technologies or products;
    
    the technologies we develop infringe on third-party patents or other third-party rights;
    
    our new technologies fail to gain market acceptance; or
    
    our current products become obsolete or no longer meet new regulatory requirements.
   47




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49




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
    
    compliance with multiple, conflicting and changing governmental laws and regulations;
    
    laws and business practices favoring local competitors;
    
    foreign exchange and currency risks;
    
    difficulty in collecting accounts receivable or longer payment cycles;
    
    import and export restrictions and tariffs;
    
    difficulties staffing and managing foreign operations;
    
    difficulties and expense in enforcing intellectual property rights;
    
    business risks, including fluctuations in demand for our products and the cost and effort to
conduct international operations and travel abroad to promote international distribution and
overall global economic conditions;
    
    multiple conflicting tax laws and regulations; and
    
    political and economic instability.
       50




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Investment Risks
    
    
    the establishment or loss of licensing relationships;
    
    the timing and recognition of payments under fixed and/or up-front license agreements;
    
    the timing of work performed under development agreements;
    
    the timing of our expenses, including costs related to litigation, stock-based awards,
acquisitions of technologies, or businesses;
    
    the timing of introductions and market acceptance of new products and product enhancements
by us, our licensees, our competitors, or their competitors;
    
    our ability to develop and improve our technologies;
    
    our ability to attract, integrate, and retain qualified personnel;
    
    seasonality in the demand for our products or our licensees products; and
    
    our ability to build or ship products on a timely basis.
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
    
    our board of directors is classified into three classes of directors with staggered
three-year terms;
    
    only our chairperson of the board of directors, a majority of our board of directors or 10%
or greater stockholders are authorized to call a special meeting of stockholders;
    
    our stockholders can only take action at a meeting of stockholders and not by written
consent;
    
    vacancies on our board of directors can be filled only by our board of directors and not by
our stockholders;
    
    our restated certificate of incorporation authorizes undesignated preferred stock, the terms
of which may be established and shares of which may be issued without stockholder approval; and
    
    advance notice procedures apply for stockholders to nominate candidates for election as
directors or to bring matters before an annual meeting of stockholders.
      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;
    
    difficulties in assimilation of acquired personnel or operations
    
    failure to realize the anticipated benefits of acquired intellectual property or
other assets;
    
    charges associated with amortization of acquired assets or potential charges for write-down
of assets associated with unsuccessful acquisitions;
    
    potential intellectual property infringement claims related to newly-acquired product
lines; and
    
    potential costs associated with failed acquisition efforts.
    
 ITEM 6. EXHIBITS
  ExhibitNumber
    
    Description10.1
    
    Form of 2010 Executive Incentive Plan.31.1
    
    Certification of Victor Viegas, Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
 53




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ExhibitNumber
    
    Description31.2
    
    Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Victor Viegas, Chief Executive Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 SIGNATURES
   IMMERSION CORPORATIONBy
    /s/ Henry HirvelaHenry HirvelaInterim Chief Financial Officer 54




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EXHIBIT INDEX
 ExhibitNumber
    
    Description10.1
    
    Form of 2010 Executive Incentive Plan.31.1
    
    Certification of Victor Viegas, Chief Executive Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Victor Viegas, Chief Executive Officer, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Henry Hirvela, Interim Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 55