1058811--3/17/2008--IMMERSION

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Factors That May Affect Future Results We had an accumulated deficit of $20 million as of December 31, 2007, have a history of losses, may experience losses in the future, and may not achieve or maintain profitability in the future. Microsoft Corporation ( Microsoft ) disputes our assessment that we are not obligated to make any payment under our agreement with them relating to the conclusion of our litigation with Sony Computer Entertainment. Defending our position may be expensive, disruptive, and time consuming, and regardless of whether we are successful, could adversely affect our business. Our current litigation undertakings are expensive, disruptive, and time consuming, and will continue to be, until resolved, and regardless of whether we are ultimately successful, could adversely affect our business. Litigation regarding intellectual property rights could be expensive, disruptive, and time consuming; could result in the impairment or loss of portions of our intellectual property; and could adversely affect our business. We are subject to the risk of additional litigation in connection with the restatement of our consolidated financial statements and the potential liability from any such litigation could materially and adversely affect our business. The terms in our agreements may be construed by our licensees in a manner that is inconsistent with the rights that we have granted to other licensees, or in a manner that may require us to incur substantial costs to resolve conflicts over license terms. Product liability claims could be time-consuming and costly to defend and could expose us to loss. If our facilities were to experience catastrophic loss, our operations would be seriously harmed. We have little or no control or influence on our licensees design, manufacturing, promotion, distribution, or pricing of their products incorporating our touch-enabling technologies, upon which we generate royalty revenue. Because we have a fixed payment license with Microsoft, our royalty revenue from licensing in the gaming market and other consumer markets has declined and may further do so if Microsoft increases its volume of sales of touch-enabled gaming products and consumer products at the expense of our other licensees. We generate revenues from touch-enabling components that are sold and incorporated into third-party products. We have little or no control or influence over the design, manufacture, promotion, distribution, or pricing of those third-party products. Laerdal Medical Corporation ( Laerdal ) accounts for a significant portion of our revenues and a reduction in sales to Laerdal may reduce our total revenue. Medtronic accounts for a significant portion of our revenues and a reduction in sales to Medtronic, or a reduction in development work for Medtronic, may reduce our total revenue. Touch interface product royalties will be reduced if BMW were to abandon its iDrive system or remove our technology from the iDrive. We depend on third-party suppliers, and our revenue and/or results of operations could suffer if we fail to manage supplier issues properly. Compliance with new directives that restrict the use of certain materials may increase our costs and limit our revenue opportunities. Because personal computer peripheral products that incorporate our touch-enabling technologies currently must work with Microsoft s operating system software, our costs could increase and our revenues could decline if Microsoft modifies its operating system software. Reduced spending by corporate or university research and development departments may adversely affect sales of our three-dimensional products. Competition between our products and our licensees products may reduce our revenue. The market for certain touch-enabling technologies and touch-enabled products is at an early stage and if market demand does not develop, we may not achieve or sustain revenue growth. If we fail to increase sales of our medical simulation devices, our financial condition and operations may suffer. If we are unable to enter into new licensing arrangements with our existing licensees, and with additional third-party manufacturers for our touch-enabling technologies, our royalty revenue may not grow. If we fail to protect and enforce our intellectual property rights, our ability to license our technologies and generate revenues would be impaired. Certain terms or rights granted in our license agreements or our development contracts may limit our future revenue opportunities. If we are unable to continually improve and reduce the cost of our technologies, companies may not incorporate our technologies into their products, which could impair our revenue growth. If we fail to develop new or enhanced technologies for new applications and platforms, we may not be able to create a market for our technologies or our technologies may become obsolete, and our ability to grow and our results of operations might be harmed. We have limited engineering, customer service, quality assurance and manufacturing resources to design and fulfill favorable product delivery schedules and sufficient levels of quality in support of our different product areas. Products and services may not be delivered in a timely way, with sufficient levels of quality, or at all, which may reduce our revenue. The higher cost of products incorporating our touch-enabling technologies may inhibit or prevent their widespread adoption. Third-party validation studies may not demonstrate all the benefits of our medical training simulators, which could affect customer motivation to buy. Medical licensing and certification authorities may not recommend or require use of our technologies for training and/or testing purposes, significantly slowing or inhibiting the market penetration of our medical simulation technologies. We have limited distribution channels and resources to market and sell our medical simulators, touch interface products, and three-dimensional simulation and digitizing products, and if we are unsuccessful in marketing and selling these products, we may not achieve or sustain product revenue growth. Competition in the medical market may reduce our revenue. Competition in the mobility or touchscreen markets may increase our costs and reduce our revenue. Automobiles incorporating our touch-enabling technologies are subject to lengthy product development periods, making it difficult to predict when and whether we will receive automotive royalties. We have experienced significant change in our business, and our failure to manage the complexities associated with the changing economic environment and technology landscape could harm our business. We might be unable to retain or recruit necessary personnel, which could slow the development and deployment of our technologies. Our quarterly revenues and operating results are volatile, and if our future results are below the expectations of public market analysts or investors, the price of our common stock is likely to decline. Issuance of the shares of common stock upon exercise of stock options and exercise of warrants will dilute the ownership interest of existing stockholders and could adversely affect the market price of our common stock. Our stock price may fluctuate regardless of our performance. Our stock repurchase program could affect our stock price and add volatility. Our president and chief executive officer has announced his intent to transition to the role of chairman of the board, and our ability to recruit a replacement president and chief executive officer may negatively impact our future success. Our major stockholders retain significant control over us, which may lead to conflicts with other stockholders over corporate governance matters and could also affect the volatility of our stock price. Provisions in our charter documents and Delaware law could prevent or delay a change in control, which could reduce the market price of our common stock. We may engage in acquisitions that could dilute stockholders interests, divert management attention, or cause integration problems. Failure to maintain effective internal controls in accordance with section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price. We have determined that our internal controls relating to income taxes are currently ineffective. We have identified a material weakness in our internal controls related to the accounting for income taxes as of December 31, 2007 that, if not properly remediated, could result in material misstatements in our financial statements in future periods. Legislative actions, higher insurance cost, and potential new accounting pronouncements are likely to impact our future financial position and results of operations.

Full 10-K form ▸

1058811--3/17/2008--IMMERSION_CORP