(MARK ONE)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number 000-27969

(Exact name of registrant as specified in its charter)

Delaware		94-3180138
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No þ

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

     Number of shares of common stock outstanding at April 30, 2009: 27,957,359

 

 

IMMERSION CORPORATION

INDEX

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

EXPLANATORY NOTE REGARDING RESTATEMENT

     Immersion Corporation is filing this Amendment No. 1 on Form 10-Q/A (the “Amendment”) to its Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, originally filed May 6, 2009 (the “Original Filing”) to amend and restate the following previously-filed condensed consolidated financial statements (and related disclosures) (the “Restatement”): (1) our condensed consolidated balance sheet as of March 31, 2009 and the related condensed consolidated statements of operations and cash flows for each of the fiscal quarters ended March 31, 2009 and 2008 contained in Part I Item 1 of this Amendment; and (2) management’s discussion and analysis of our financial condition and results of operations as of and for our fiscal quarters ended March 31, 2009 and 2008 contained in Part I, Item 2 of this Amendment. The Restatement results from our management’s determination subsequent to the issuance of our financial statements for the quarter ended March 31, 2009 that there were errors in 1) the recording of revenue transactions from our Medical line of business; 2) the recording of stock-based compensation expense; 3) the recording of interest income arising from future installments due from Sony Computer Entertainment determined under the interest method; (4) the recording of amortization and impairment of patents; all of which affected the quarters ended March 31, 2009 and 2008; and (5) The Company’s accounting of certain warrants to purchase company common stock subsequent to the adoption of a new accounting standard in the quarter ended March 31, 2009; and therefore our unaudited condensed consolidated financial statements required restatement. In addition, as part of the Restatement, we have corrected other errors that were not significant individually or in the aggregate. Refer to Note 2 to the condensed consolidated financial statements included in Item 1 for further discussion of the Restatement.

     Financial information related to the interim periods ended March 31, 2009 and 2008 included in the reports on Form 10-K, Form 10-Q and Form 8-K previously filed by us and all related earnings press releases and similar communications issued by us related to these periods, should not be relied upon and in the event there are discrepancies between this Amendment and previous reports, press releases and similar communications, the information in this Amendment shall control.

     As announced on July 1, 2009, the Audit Committee of our Board of Directors, assisted by legal counsel and independent forensic accountants, commenced and has now completed, an independent investigation into certain previous revenue transactions in our Medical line of business to determine whether revenue recognition was proper, and whether our internal controls relating to revenue recognition are sufficient. On August 10, 2009, we announced that the Audit Committee determined that we would restate our financial statements for the fiscal year ended December 31, 2008, and the interim periods therein and for the first quarter of fiscal 2009, ended March 31, 2009, as a result of errors in those financial statements.

     Subsequently, on November 17, 2009, we announced that we would restate our financial statements for the fiscal year ended December 31, 2007, as a result of an error in our accounting for stock-based compensation expense which was identified after we upgraded to a new version of the equity program administration software that we license from a third-party provider as well as an error in the way interest income was being recognized for installment payments receivable under a license with Sony Computer Entertainment that was granted at the conclusion of the patent infringement litigation with Sony.

     During the course of the investigation and preparation of the restatement, we also identified additional transactions in the fiscal years ended December 31, 2007 and 2006 for which revenue should have been reversed and recognized in future periods as a result of premature recognition of revenue for products sold with FOB Destination or other similar shipping terms. In addition, we also identified certain errors in the amortization and impairment of patents for the years ended December 31, 2008, 2007, 2006 and prior years and have corrected these amounts in this Amendment. Finally, we identified errors in the accounting of warrants to purchase company common stock related to the adoption of a new accounting standard in the first quarter of 2009.

     Background of the Restatements

     Revenue Recognition in Medical Line of Business

     In June 2009, management notified the Audit Committee that it had become aware of an apparent side agreement that contained modifications to our standard terms of contract. Specifically, a vice president of international sales for the Medical line of business may have committed us to provide a customer with certain exclusivity rights that neither the employee nor we had the power to grant as well as extended payment terms for certain transactions. In response, the Audit Committee, with the assistance of outside legal counsel and a forensic accounting firm, initiated an internal investigation to review all of the transactions with this customer to evaluate whether revenue was recognized appropriately. During the course of the investigation and after reviewing the electronic and hard copy files of the same vice president of international sales for the Medical line of business, certain transactions with other customers were identified for further investigation.

     While the investigation was ongoing, management notified the Audit Committee that it had learned that certain sales personnel in our Medical line of business had made commitments to customers in connection with a sale for a product that was not available at the time revenue was originally recognized and promised products that lacked sufficient functionality to permit recognition of revenue at the time revenue was originally recognized. In response, the Audit Committee expanded the scope of the investigation to include these transactions as well as other transactions in which the same products were promised or otherwise ultimately delivered.

     The investigation included review of revenue recorded in the Medical line of business in fiscal 2008 and the first quarter of fiscal 2009. During the course of the investigation, the investigation team under the supervision of Audit Committee collected and reviewed more than 15,000 pages of hard copy documents from individual custodians, department files and central files, and also collected and searched more than 1.2 million electronically stored files. The investigation team under the supervision of the Audit Committee conducted interviews of 17 current and former employees and third-party providers. The information obtained through this investigation was analyzed in conjunction with accounting records. From this and other information, certain transactions were identified and tested for compliance with our revenue recognition policies. Testing procedures included review of customer contracts, customer correspondence and emails, sales quotes, customer purchase orders, shipping documentation, invoices, and cash receipts.

     On August 10, 2009, we concluded that as a result of the errors indentified in the investigation, we would restate our financial statements for fiscal year 2008 and the interim periods therein and the first quarter of 2009, and that our previously filed financial statements for these periods should not be relied on. Also on August 10, 2009, we filed a Current Report on Form 8-K with the SEC disclosing the restatement and the non-reliance on our previously published financial information for fiscal year 2008 and the interim periods therein and the first quarter of 2009.

     Restatement of Stock-Based Compensation Expense

     In September 2009, we upgraded to a new version of the software that automates the administration of our employee equity programs and calculates our stock-based compensation expense. Following the upgrade, we identified differences in the stock-based compensation expense of prior periods and, after reviewing such differences, identified an error in our accounting for stock-based compensation expense. Specifically, the prior version of the software incorrectly calculated stock-based compensation expense by continuing to apply a weighted average forfeiture rate to the vested portion of stock option awards until the grant’s final vest date, rather than reflecting actual forfeitures as awards vested, resulting in an understatement of stock-based compensation expense in certain periods prior to the grant’s final vest date. The accounting error relates to the timing of the recognition of the stock-based compensation, but does not change the aggregate amount of stock-based compensation expense to be recognized.

     Accounting for Interest Income

     In October 2009, we reviewed the accounting of the interest income recognition for a license agreement entered into in March 2007 between us and Sony Computer Entertainment as part of the conclusion of the patent infringement action that we had asserted against Sony. Under the license agreement, we granted Sony Computer Entertainment and certain of its affiliates a worldwide, non-transferable, non-exclusive license under our patents that have issued, may issue, or claim a priority date before March 2017 for the going forward use, development, manufacture, sale, lease, importation, and distribution of Sony’s current and past PlayStation and related products in exchange for certain covenants not to sue and the payment of twelve quarterly installments of $1.875 million (for a total of $22.5 million) beginning on March 31, 2007 and ending on December 31, 2009, as well as certain other fees and royalty amounts. We accounted for future payments in accordance with Accounting Principles Board Opinion No. 21 Interest on Receivables and Payables (“APB No. 21”). Under APB No. 21, we determined the present value of the $22.5 million future payments was $20.2 million. We accounted for the difference of $2.3 million as interest income as each $1.875 million quarterly payment installment became due. Following the review, we identified an error in the way interest income was being recognized as future installments were being recorded. This accounting error relates to the timing of the recognition of interest income but does not change the overall interest income to be recognized for the Sony license.

     On November 13, 2009, we concluded that as a result of the errors in accounting for stock compensation expense and the recognition of interest income, we would restate our financial statements for fiscal year 2007, and that previously filed financial statements for these periods should not be relied on. On November 17, 2009, we filed a Current Report on Form 8-K with the SEC disclosing the restatement and the non-reliance on our previously published financial information for these periods.

     Other Corrections

     As discussed above, we have also made other corrections that were not significant individually or in the aggregate.

     On February 8, 2010, we filed Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2008 and this Form 10-Q/A. We also issued a press release and filed a Current Report on Form 8-K to announce the final restated financial information and conclusions of the Audit Committee’s investigation.

     Findings and Recommendations Related to Revenue Recognition in the Medical Line of Business

     Side Agreement

     As discussed above, the Audit Committee determined that a vice president of international sales for the Medical line of business may have made certain commitments to a customer in the form of an undisclosed apparent side agreement dated in the fourth quarter of fiscal 2008. The customer and we had previously executed a distribution agreement in May 2008, and the customer entered into various sales transactions with us, both before and after the date of the apparent side agreement, each of which was reviewed during the investigation. As more fully described in Amendment No. 1 to the Annual Report on Form 10-K filed on February 8, 2010, the Company concluded that revenue had not been appropriately recognized on certain transactions resulting in restatement adjustments to revenue in various reporting periods. Revenue in the quarters ended March 31, 2008 and 2009 were not impacted by these findings. Bad debt expense and allowance for doubtful accounts of $623,000 previously recorded in the quarter ended March 31, 2009 relating to revenues that had been inappropriately recorded in earlier periods were reversed.

     Commitment of Deliverables that are Unavailable or Lacked Functionality

     In reviewing the transactions where sales personnel in our Medical line of business had made commitments by us to provide products that were not available or products that included components that were not fully developed at the time of sale, we concluded that revenue was not appropriately recognized. Accordingly, a total of $468,000 recorded in fiscal 2008 has been deferred and recognized in the first quarter of 2009.

     Additional Transactions Analyzed

     During the investigation and subsequent preparation of the Restatement, we also discovered additional transactions in our Medical line of business where revenue was not properly recognized due to one or more of the following reasons:

	•		Premature recognition of revenue for products sold with FOB Destination or other similar shipping terms, or for incomplete shipment of products or storage of products following shipment;
	•		Non-standard terms and conditions that prevented recognition of revenue upon shipment, including rights of return, extended payment terms, product replacement commitments, potential free upgrades and other non-standard commitments, that prevented recognition of revenue upon shipment; and
	•		Lack of probable collectability at the time revenue was recognized.

     As a result, a net increase in revenue in the amount of $67,000 was recorded in the first quarter of 2009. This represents an increase of revenue of approximately $536,000 originally recorded in earlier periods that has been recorded in the first quarter of 2009 and a decrease of $469,000 of revenue originally recorded in the first quarter of 2009 that has been reversed and is expected to be recognized in future periods. Bad debt and allowance for doubtful accounts originally recorded in the first quarter of 2009 in the amount of $52,000 were also reversed. Approximately $80,000 of revenue recorded in the first quarter of 2008 was reversed and is to be recorded in subsequent periods.

     Other Impact of Revenue Adjustments

     As a result of the adjustments to revenues discussed above, cost of product sales increased by $118,000 for the quarter ended March 31, 2009 and commission expense increased by $86,000 for the quarter ended March 31, 2009. Also, as a result of the deferral of certain revenues, we recorded deferred cost of goods sold in the amount of $1.1 million at March 31, 2009 which is reported as prepaid expenses and other current assets on the balance sheet. As a result of the adjustment to revenues discussed above, cost of product sales decreased by $21,000 for the quarter ended March 31, 2008. There was no other impact on these accounts for the quarter ended March 31, 2008.

     Other Errors in Condensed Consolidated Financial Statements

     We also corrected the condensed consolidated financial statements for the following items:

•

Stock-Based Compensation Expense. As described above, we identified a software-based error in our calculated stock-based compensation expense. The previous version of software used to calculate stock-based compensation expense incorrectly continued to apply a weighted average forfeiture rate to the vested portion of stock option awards until the grant’s final vest date, rather than reflecting actual forfeitures as awards vested. This error resulted in an understatement of stock-based compensation expense in certain periods prior to the grant’s final vest date. We recorded additional stock-based compensation expense of $163,000 and $643,000 for the first quarter of 2009 and 2008, respectively.

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

     Impact of Corrections on Previously Issued Condensed Consolidated Financial Statements

     Our accompanying condensed consolidated financial statements have been restated resulting from the restatement adjustments described above, as follows:

		Detailed Components of Revenue Transaction Adjustments
		($ in thousands)
																						Total Impact of Revenue
		Revenue								Cost of Product Sales				Bad Debt Expense				Commission Expense				Adjustments
Three months ended March 31, 2009
Increase (Decrease)		$	528				(1	)		$	(118	)		$	675			$	(86	)		$	999
Three months ended March 31, 2008
Increase (Decrease)		$	(89	)			(2	)		$	21			$	-			$	-			$	(68	)

(1) For three months ended March 31, 2009, reflects increase of $468,000 in revenue as discussed in “Commitment of Deliverables that are Unavailable or Lacked Functionality,” a net increase in revenue of $67,000 as discussed in “Additional Transactions Analyzed” and decrease of $7,000 in revenue due to insignificant warranty adjustment.

(2) For three months ended March 31, 2008, reflects decrease of $80,000 in revenue as discussed in “Additional Transactions Analyzed” and a net decrease of $9,000 in revenue due to warranty adjustment.

		Summary of Impact of Restatement Adjustments
																														Loss From
																														Continuing
		Loss from Continuing Operations Before Provision for Income Taxes																												Operations
		Revenue
		Transaction																Amortization								Income				Total
		Adjustments				Interest				Stock-based				Warrant				and Impairment								Tax				Adjustments
		(1)				Income				Compensation				Liability				of Intangibles				Total				Effect				Net of Tax
		($ in thousands)
Three months ended March 31, 2009
Increase (Decrease)		$	999			$	(128	)		$	(163	)		$	480			$	161			$	1,349			$	-			$	1,349
Three months ended March 31, 2008
Increase (Decrease)		$	(68	)		$	128			$	(643	)		$	-			$	(35	)		$	(618	)		$	51			$	(567	)

Internal Control Deficiencies

          As further discussed in Part II, Item 9 of our Form 10-K/A for the year ended December 31, 2008 under the caption “Controls and Procedures,” during the course of its investigation, the Audit Committee identified internal control deficiencies relating primarily to the failure to communicate complete information regarding certain sales transactions containing non-standard terms among sales, finance, accounting, legal and members of senior management.

As a result of its investigation, our Audit Committee has made recommendations to the Board of Directors and management and those recommendations have been approved. These recommendations include: (i) enhancing policies and procedures relating to revenue recognition, including updating and distributing existing revenue recognition policies, more formalized delineation of roles and responsibilities for employees involved in revenue recognition, quarterly reviews to include reviews of a larger percentage of sales transactions, more robust documentation of quarterly review findings and more formalized processes requiring sales organization to notify finance and obtain corporate approval of non-standard terms; (ii) enhanced policies and procedures relating to product development, including quarterly meetings between finance, R&D and sales to discuss product development roadmap and timing of new product releases; and (iii) enhanced training and oversight, including annual revenue recognition training for all executive, finance, sales and operational personnel, new hire and recurring training held annually, code of ethics training, review of existing commission and bonus plans to recommend changes consistent with findings of the investigation and the creation of an internal audit function. Management has provided the Audit Committee with a formal remediation plan based on the foregoing that the Audit Committee has approved and management is currently implementing. Further, management identified other material weaknesses as a result of their review of the internal controls over financial reporting which are more fully described in Item 4. The following items in this report have been amended as a result of the Restatement:

Part I:

     Item 1: Financial Statements

     Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Item 4: Controls and Procedures

Part II:

     Item 1A: Risk Factors

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

PART I

FINANCIAL INFORMATION

IMMERSION CORPORATION

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

See accompanying Notes to Condensed Consolidated Financial Statements.

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

See accompanying Notes to Condensed Consolidated Financial Statements.

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

See accompanying Notes to Condensed Consolidated Financial Statements.

IMMERSION CORPORATION

1. SIGNIFICANT ACCOUNTING POLICIES

     Description of Business

     Immersion Corporation (the “Company”) was incorporated in 1993 in California and reincorporated in Delaware in 1999 and develops, manufactures, licenses, and supports a wide range of hardware and software technologies and products that enhance digital devices with touch interaction.

     Principles of Consolidation and Basis of Presentation

     The condensed consolidated financial statements include the accounts of Immersion Corporation and its majority-owned subsidiaries. All intercompany accounts, transactions, and balances have been eliminated in consolidation.

     The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and footnotes necessary for a complete presentation of the financial position, results of operations, and cash flows, in conformity with accounting principles generally accepted in the United States of America. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Amendment No. 1 to Annual Report on Form 10-K/A for the fiscal year ended December 31, 2008. In the opinion of management, all adjustments consisting of only normal and recurring items necessary for the fair presentation of the financial position and results of operations for the interim period have been included.

     The results of operations for the interim periods ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year.

     Revenue Recognition

     The Company recognizes revenues in accordance with applicable accounting standards, including Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (“SAB No. 104”); Emerging Issues Task Force (“EITF”) No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”); and American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” (“SOP No. 97-2”), as amended. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or service has been rendered, the fee is fixed and determinable, and collectability is probable. The Company derives its revenues from three principal sources: royalty and license fees, product sales, and development contracts.

     Royalty and license revenue — The Company recognizes royalty and license revenue based on royalty reports or related information received from the licensee as well as time-based licenses of its intellectual property portfolio. Up-front payments under license agreements are deferred and recognized as revenue either based on the royalty reports received or amortized over the license period depending on the nature of the agreement. Advance payments under license agreements that also require the Company to provide future services to the licensee are deferred and recognized over the service period once services commence when vendor-specific objective evidence (“VSOE”) related to the value of the services does not exist.

     The Company generally recognizes revenue from its licensees under one or a combination of the following models:

License revenue model		Revenue recognition
Perpetual license of intellectual property portfolio based on per unit royalties, no services contracted.		Based on royalty reports received from licensees. No further obligations to licensee exist.
Time-based license of intellectual property portfolio with up-front payments and/or annual minimum royalty requirements, no services contracted. Licensees have certain rights to updates to the intellectual property portfolio during the contract period.		Based on straight-line amortization of annual minimum/up-front payment recognized over contract period or annual minimum period.
Perpetual license of intellectual property portfolio or technology license along with contract for development work.		Based on proportional performance method over the service period or completed performance method.
License of software or technology, no modification necessary, no services contracted.		Up-front revenue recognition based on SOP No. 97-2 criteria or SAB No. 104, as applicable.

     Individual contracts may have characteristics that do not fall within a specific license model or may have characteristics of a combination of license models. Under those circumstances, the Company recognizes revenue in accordance with SAB No. 104, EITF No. 00-21 and SOP No. 97-2, as amended, to guide the accounting treatment for each individual contract. See also the discussion regarding “Multiple element arrangements” below.

          Product sales — The Company generally recognizes revenues from product sales when the product is shipped, provided the other revenue recognition criteria are met, including that collection is determined to be probable and no significant obligation remains. The Company sells the majority of its products with warranties ranging from three to sixty months. The Company records the estimated warranty costs during the quarter the revenue is recognized. Historically, warranty-related costs and related accruals have not been significant. The Company offers a general right of return on the MicroScribe^® product line for 14 days after purchase. The Company recognizes revenue at the time of shipment of a MicroScribe digitizer and provides an accrual for potential returns based on historical experience. The Company offers no other general right of return on its products.

          Development contracts and other revenue — Development contracts and other revenue is comprised of professional services (consulting services and/or development contracts), customer support, and extended warranty contracts. Development contract revenues are recognized under the proportional performance accounting method based on physical completion of the work to be performed or completed performance method. Losses on contracts are recognized when determined. Revisions in estimates are reflected in the period in which the conditions become known. Customer support and extended warranty contract revenue is recognized ratably over the contractual period.

          Multiple element arrangements — The Company enters into revenue arrangements in which the customer purchases a combination of patent, technology, and/or software licenses, products, professional services, support, and extended warranties (multiple element arrangements). The Company allocates revenue to each element based on the relative fair value of each of the elements. If vendor specific objective evidence of fair value does not exist, the revenue is generally recorded over the term of the contract or upon delivery of all elements for which vendor specific evidence of fair value does not exist.

          Warrants — In June 2008, EITF No. 07-5, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock” was issued. EITF 07-5 specifies a procedure to determine if an instrument is indexed to a company’s own common stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. Under EITF 07-5, the Company recalculates the fair value of certain warrants using the Black-Scholes option pricing model, and establishes a related derivative liability with an offset to common stock on the balance sheet with the cumulative effect of the change in accounting principle recognized as an adjustment to the opening balance of retained earnings. See Note 2 for disclosure of the cumulative effect of adoption. Subsequent adjustments to the fair value of the derivative liability are accounted for as other income.

     Recent Accounting Pronouncements

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007) (“SFAS No. 141(R)”), “Business Combinations,” which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141(R) is effective for the Company beginning January 1, 2009 and will be applied prospectively to business combinations completed on or after that date. The impact of the adoption of SFAS No. 141(R) will depend on the nature and extent of any business combinations occurring on or after January 1, 2009.

     In April 2008, the FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. FAS 142-3”). FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

     In April 2009, the FASB issued FSP No. FAS 115-2 and FAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. FAS 115-2 and FAS No. 124-2”). This FSP amends the other-than temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments in the financial statements. The most significant change the FSP brings is a revision to the amount of other-than-temporary loss of a debt security recorded in earnings. FSP No. FAS 115-2 and FAS No. 124-2 is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not believe that the implementation of this standard will have a material impact on its condensed consolidated financial statements.

     In April 2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP No. FAS 157-4”). This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that

is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP No. FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and is applied prospectively. The Company does not believe that the implementation of this standard will have a material impact on its condensed consolidated financial statements.

     In April 2009, the FASB issued FSP No. FAS 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP No. FAS 107-1 and APB 28-1”). This FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim and annual reporting periods ending after June 15, 2009. The Company does not believe that the implementation of this standard will have a material impact on its consolidated financial statements.

2.		RESTATEMENT OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     Subsequent to the issuance of the Company’s unaudited condensed consolidated financial statements for the quarter ended March 31, 2009, the Company’s management determined that errors existed in its previously issued financial statements. As a result, the accompanying condensed consolidated financial statements for the quarters ended March 31, 2009 and 2008 have been restated from amounts previously reported. The following summarizes the nature of the errors and the effects on the condensed consolidated financial statements.

     Revenue Transactions

     Side Agreement

     The Company determined that certain commitments may have been made to a customer of its Medical line of business in the form of an undisclosed apparent side agreement dated in the fourth quarter of fiscal 2008. The customer and the Company had previously executed a distribution agreement in May 2008, and the customer entered into various sales transactions with the Company, both before and after the date of the apparent side agreement. The Company concluded that revenue should not have been recognized on certain transactions resulting in restatement adjustments to revenue in various reporting periods for the following reasons: (i) in certain circumstances, the product remained in a third-party warehouse and was not shipped to the customer until after the quarter in which revenue was recognized; (ii) a previously undisclosed apparent side agreement caused the terms of earlier transactions to be deemed not final until the distribution agreement between the customer and the Company was terminated; (iii) in certain circumstances, the Company had conflicting exclusivity arrangements in effect during the quarters when the Company was recognizing revenue for transactions with such customer; and (iv) concessions related to extended payment terms caused the amount to not be fixed and determinable. Although revenue in the quarters ended March 31, 2008 and 2009 were not impacted by these findings, the Company recorded a restatement adjustment to reverse the bad debt expense and allowance for doubtful accounts of $623,000 previously recorded in the quarter ended March 31, 2009 relating to revenues that had been inappropriately recorded in earlier periods.

     Commitment of Deliverables that were Unavailable or Lack Functionality

     Certain sales in the Medical line of business included commitments by the Company to provide products that were not available or products that included components that were not fully developed at the time of sale. As a result, the Company concluded that revenue was not appropriately recognized. Accordingly, certain revenues of $468,000 recorded in fiscal 2008 should have been deferred and has been recognized in the first quarter of 2009.

     Additional Transactions Analyzed

     The Company also discovered additional transactions in its Medical line of business where revenue was not properly recognized due to one or more of the following reasons:

•

Premature recognition of revenue for products sold with FOB Destination or other similar shipping terms, or for incomplete shipment of products or storage of products following shipment;

•

Non-standard terms and conditions that prevented recognition of revenue upon shipment, including rights of return, extended payment terms, product replacement commitments, potential free upgrades and other non-standard commitments, that prevented recognition of revenue upon shipment; and

•

Lack of probable collectability at the time revenue was recognized.

     As a result, a net increase in revenue in the amount of $67,000 was recorded in the first quarter of 2009. This included an increase in revenue of approximately $536,000 originally recorded in earlier periods that has been recorded in the first quarter of 2009 and a decrease of $469,000 of revenue originally recorded in the first quarter of 2009 that has been reversed and is expected to be recognized in future periods. Bad debt and allowance for doubtful accounts originally recorded in the first quarter of 2009 in the amount of $52,000 were also reversed. Approximately $80,000 of revenue recorded in the first quarter of 2008 was reversed and will be recorded in subsequent periods.

     Other Impact of Revenue Adjustments

     As a result of the adjustments to revenues discussed above, cost of product sales increased by $118,000 for the quarter ended March 31, 2009 and commission expense increased by $86,000 for the quarter ended March 31, 2009. Also, as a result of the deferral of certain revenues, the Company recorded deferred cost of goods sold in the amount of $1.1 million at March 31, 2009 which is reported as prepaid expenses and other current assets on the balance sheet. As a result of the adjustment to revenues discussed above, cost of product sales decreased by $21,000 for the quarter ended March 31, 2008. There was no other impact on these accounts for the quarter ended March 31, 2008.

     Other Errors in Condensed Consolidated Financial Statements

     The Company also corrected the condensed consolidated financial statements for the following items:

•

Stock-Based Compensation Expense. The Company identified a software-based error in its calculated stock-based compensation expense. The previous version of software used to calculate stock-based compensation expense incorrectly continued to apply a weighted average forfeiture rate to the vested portion of stock option awards until the grant’s final vest date, rather than reflecting actual forfeitures as awards vested. This error resulted in an understatement of stock-based compensation expense in certain periods prior to the grant’s final vest date. The Company recorded additional stock-based compensation expense of $163,000 and $643,000 for the first quarter of 2009 and 2008, respectively.

•

Interest Income. The Company identified an error in the accounting relating to the timing of the recognition of interest income with respect to its patent license with Sony Computer Entertainment. Accordingly, the Company recorded additional interest income of approximately $128,000 in the first quarter of 2008 and a reduction in interest income of approximately $128,000 in the first quarter of 2009. This accounting error related to the timing of the recognition of interest income but does not change the overall interest income to be recognized.

•

Amortization and Impairment of Intangibles The Company identified instances where it had not commenced amortization of patents in the periods the patents were granted. In addition, the Company identified certain patent applications that were abandoned but had not been previously identified as such and has corrected this error by increasing amortization and impairment of intangibles by $19,000 and $35,000 in the quarters ended March 31, 2009 and 2008, respectively. Finally, we identified that a change in the way the Company was amortizing its patents implemented in the first quarter of 2009 should have not been recorded; as a result, the Company has decreased amortization of intangibles by $180,000 for the first quarter of 2009.

•

Warrants. The Company should have adopted Emerging Issues Task Force (“EITF”) Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (EITF 07-5), as codified in FASB ASC topic 815, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” effective January 1, 2009. EITF 07-5 provides that an entity should use a two step approach to evaluate whether an equity-linked financial instrument is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. Therefore, warrants to purchase 426,951 shares of the Company’s common stock issued in 2004 that were previously classified as Warrants have been corrected for the adoption of EITF 07-5 and classified to Other Current Liabilities and Retained Earnings effective January 1, 2009 due to the presence of a warrant adjustment feature that allows for a change in the number of shares subject to issuance and a change in the exercise price of the warrant under certain circumstances, including the issuance of stock for cash in a secondary offering. The warrants expire on December 23, 2009 and the fair value balance of the remaining liability will be marked to market and recognized at each balance sheet date in non-operating income through the end of 2009. As compared to amounts previously reported, the Company corrected the condensed consolidated financial statements to reflect the adoption of EITF 07-5 and recorded a decrease of $1.7 million to Warrants, an addition of $517,000 to Other Current Liabilities and $1.2 million to Retained Earnings as a cumulative effect of a change in accounting principle to its balance sheet as of January 1, 2009. The Company estimated the fair value of these warrant derivative liabilities using a Black-Scholes model as of March 31, 2009 to be $37,000 and recorded a credit of $480,000 in its condensed consolidated statement of operations in non-operating income for the quarter ended March 31, 2009.

     Impact of Corrections on Previously Issued Condensed Consolidated Financial Statements

     The Company’s accompanying condensed consolidated financial statements have been restated resulting from the restatement adjustments described above, as follows:

						Detailed Components of Revenue Transaction Adjustments
						($ in thousands)
																		Total Imapact of Revenue
		Revenue				Cost of Product Sales				Bad Debt Expense				Commission Expense				Adjustments
Three months ended March 31, 2009
Increase (Decrease)		$	528	(1)		$	(118	)		$	675			$	(86	)		$	999
Three months ended March 31, 2008
Increase (Decrease)		$	(89)	(2)		$	21			$	-			$	-			$	(68	)
(1) For three months ended March 31, 2009, reflects increase of $468,000 in revenue as discussed in “Commitment of Deliverables that are Unavailable or Lacked Functionality,” a net increase in revenue of $67,000 as discussed in “Additional Transactions Analyzed” and decrease of $7,000 in revenue due to warranty adjustment. (2) For three months ended March 31, 2008, reflects decrease of $80,000 in revenue as discussed in “Additional Transactions Analyzed” and a net decrease of $9,000 in revenue due to warranty adjustment.

		Summary of Impact of Restatement Adjustments
																														Loss From
																														Continuing
		Loss from Continuing Operations Before Provision for Income Taxes																												Operations
		Revenue
		Transaction																Amortization								Income				Total
		Adjustments				Interest				Stock-based				Warrant				and Impairment								Tax				Adjustments
		(1)				Income				Compensation				Liability				of Intangibles				Total				Effect				Net of Tax
		($ in thousands)
Three months ended March 31, 2009
Increase (Decrease)		$	999			$	(128	)		$	(163	)		$	480			$	161			$	1,349			$	-			$	1,349
Three months ended March 31, 2008
Increase (Decrease)		$	(68	)		$	128			$	(643	)		$	-			$	(35	)		$	(618	)		$	51			$	(567	)

     The following tables present the impact of the restatement on the Company’s previously issued condensed consolidated balance sheet as of March 31, 2009 and its condensed consolidated statements of operations and cash flows for the quarters ended March 31, 2009 and 2008.

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

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

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

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

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

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

3. FAIR VALUE MEASUREMENTS

     Cash Equivalents, Short-term Investments, and Warrant Derivative Liabilities

     The financial instruments of the Company measured at fair value on a recurring basis are cash equivalents, short-term investments, and warrant derivative liabilities. The Company’s cash equivalents and short-term investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The Company’s warrant derivative liabilities are generally classified within Level 3 of the fair value hierarchy because they are valued using unobservable inputs which reflect the reporting entity’s own assumptions that market participants would use in pricing the liability. Unobservable inputs are developed based on the best information available in the circumstances and also include the Company’s own data.

     The types of instruments valued based on quoted market prices in active markets include most U.S. government agency securities and most money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.

     The types of instruments valued based on quoted prices in markets that are less active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency and include most investment-grade corporate commercial papers. Such instruments are generally classified within Level 2 of the fair value hierarchy.

     The types of instruments valued based on unobservable inputs which reflect the reporting entity’s own assumptions that market participants would use in pricing the liability include the warrant derivative liability. Such instruments are generally classified within Level 3 of the fair value hierarchy.

     Financial instruments measured at fair value on a recurring basis as of March 31, 2009 and December 31, 2008 are classified based on the valuation technique in the table below:

		March 31, 2009
		Fair value measurements using
		Level 1				Level 2				Level 3				Total
		(In thousands)
Assets:
Corporate commercial paper		$	—			$	14,987			$	—			$	14,987
U.S. government agency securities			34,017				—				—				34,017
Money market accounts			29,481				—				—				29,481
Total assets at fair value		$	63,498			$	14,987			$	—			$	78,485
Liabilities:
Warrant derivative liabilities		$	—			$	—			$	37			$	37
Total liabilities at fair value		$	—			$	—			$	37			$	37