SECURITIES
  AND EXCHANGE COMMISSIONWashington, DC 20549

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FORM
  10-Q

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

                                                                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period ended June 30, 2004

OR

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

For the
  transition period from ___ to ___

Commission
  file number 0-020992

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INSIGHTFUL CORPORATION(Exact name of registrant as specified in its charter)

|Delaware                                                             |  |  | 04-2842217                                
|-------------------------------------------------------------------- |  |  | ------------------------------------------
|(State or other
      jurisdiction of incorporation or organization) |  |  | (I.R.S. employer
      identification no.)

1700
  Westlake Avenue North, Suite 500, Seattle, Washington 98109-3044(Address of principal
  executive offices) (Zip code)

(206)
  283-8802Registrants telephone number, including area code

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Securities
  registered pursuant to Section 12(g) of the Act:

Common
  Stock, $0.01 par value(Title of class)

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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
  þNO o

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).YES
  oNO
  þ

The
  number of shares outstanding of the Registrants Common Stock, $0.01 par
  value, was 12,311,475 shares as of September 7, 2004.

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TABLE
  OF CONTENTS

|                                                                                                          |  |  | Page |   
|--------------------------------------------------------------------------------------------------------- |  |  | ---- | --
|                                                                                                          |  |  |      |   
|PART
      I. FINANCIAL INFORMATION                                                                       |  |  |      |   
|                                                                                                          |  | 
|ITEM
      1.  Consolidated Financial Statements (Unaudited)                                              |  | 
|                                                                                                          |  |  |      |   
|Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003                           |  |  |      | 2 
|                                                                                                          |  |  |      |   
|Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003 |  |  |      | 3 
|                                                                                                          |  |  |      |   
|Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003           |  |  |      | 4 
|                                                                                                          |  |  |      |   
|Notes
      to Condensed Consolidated Financial Statements                                                |  |  |      | 5 
|                                                                                                          |  |  |      |   
|ITEM
      2. Managements Discussion and Analysis of Financial Condition and
      Results of Operations |  |  |      | 9 
|                                                                                                          |  |  |      |   
|ITEM
      3. Quantitative and Qualitative Disclosures about Market Risk                                  |  |  |      | 24
|                                                                                                          |  |  |      |   
|ITEM
      4. Controls and Procedures                                                                     |  |  |      | 24
|                                                                                                          |  | 
|PART
      II. OTHER INFORMATION                                                                          |  | 
|                                                                                                          |  |  |      |   
|ITEM
      1. Legal Proceedings                                                                           |  |  |      | 26
|                                                                                                          |  |  |      |   
|ITEM
      4. Submission of Matters to a Vote of Security Holders                                         |  |  |      | 26
|                                                                                                          |  |  |      |   
|ITEM
      6. Exhibits and Reports on Form 8-K                                                            |  |  |      | 26
|                                                                                                          |  |  |      |   
|SIGNATURES                                                                                                |  |  |      | 27
|                                                                                                          |  |  |      |   
|CERTIFICATIONS                                                                                            |  |  |      | 29

Trademarks

Insightful,
Insightful Corporation, the Insightful logo, Insightful intelligence from data, S-PLUS,
S-PLUS Analytic Server, StatServer and InFact are registered trademarks  of Insightful
Corporation.  S, SpatialStats, FinMetrics, GARCH, SeqTrial, Anatolytics, ArrayAnalyzer,
and Human-like Intelligence, are trademarks of Insightful  Corporation.  All
other brand names, trademarks or service marks referred to in the report are the property
of their owners.

i

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TABLE
  OF CONTENTS

|PART
      I. FINANCIAL INFORMATION                                                                      
|---------------------------------------------------------------------------------------------------------
|                                                                                                         
|ITEM
      1.  Consolidated Financial Statements (Unaudited)                                             
|                                                                                                         
|Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003                          
|                                                                                                         
|Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2003
|                                                                                                         
|Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003          
|                                                                                                         
|Notes
      to Condensed Consolidated Financial Statements                                               
|                                                                                                         
|ITEM
      2. Managements Discussion and Analysis of Financial Condition and
      Results of Operations
|                                                                                                         
|ITEM
      3. Quantitative and Qualitative Disclosures about Market Risk                                 
|                                                                                                         
|ITEM
      4. Controls and Procedures                                                                    
|                                                                                                         
|PART
      II. OTHER INFORMATION                                                                         
|                                                                                                         
|ITEM
      1. Legal Proceedings                                                                          
|                                                                                                         
|ITEM
      4. Submission of Matters to a Vote of Security Holders                                        
|                                                                                                         
|ITEM
      6. Exhibits and Reports on Form 8-K                                                           
|                                                                                                         
|SIGNATURES                                                                                               
|                                                                                                         
|CERTIFICATIONS                                                                                           
|                                                                                                         
|31.1                                                                                                     
|                                                                                                         
|31.2                                                                                                     
|                                                                                                         
|32.1                                                                                                     
|                                                                                                         
|32.2                                                                                                     



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PART
  I. FINANCIAL INFORMATION

ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS

INSIGHTFUL
  CORPORATION AND SUBSIDIARIES

CONDENSED
  CONSOLIDATED BALANCE SHEETS
  (In thousands, except share data)
  (Unaudited)

|                                                                                                                                          |  |  | June
      30,
      2004 |         | December
      31,
      2003 |  
|----------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------------------- | ------- | ----------------------------- | -
|                                                                                                                                          |  |  |                           |         |                               |  
|ASSETS                                                                                                                                    |  |  |                           |         |                               |  
|Current
      Assets:                                                                                                                     |  | 
|Cash
      and cash equivalents                                                                                                           |  |  | $                         | 8,552   |                               | $
|Trade
      accounts receivable, net                                                                                                      |  |  |                           | 2,276   |                               |  
|Other
      receivables                                                                                                                   |  |  |                           | 622     |                               |  
|Prepaid
      expenses and other current assets                                                                                           |  |  |                           | 444     |                               |  
|                                                                                                                                          |  |  |                           |         |                               |  
|Total
      current assets                                                                                                                |  |  |                           | 11,894  |                               |  
|                                                                                                                                         
|Property
      and equipment, net                                                                                                         |  |  |                           | 669     |                               |  
|Purchased
      technology, net                                                                                                           |  |  |                           | 1,520   |                               |  
|Goodwill                                                                                                                                  |  |  |                           | 800     |                               |  
|Other
      assets                                                                                                                        |  |  |                           | 54      |                               |  
|                                                                                                                                          |  |  |                           |         |                               |  
|                                                                                                                                          |  |  | $                         | 14,937  |                               | $
|                                                                                                                                          |  |  |                           |         |                               |  
|                                                                                                                                         
|LIABILITIES
      AND STOCKHOLDERS EQUITY                                                                                                |  | 
|Current
      Liabilities:                                                                                                                |  | 
|Current
      portion of long-term debt                                                                                                   |  |  | $                         | 129     |                               | $
|Accounts
      payable                                                                                                                    |  |  |                           | 1,228   |                               |  
|Accrued
      payroll and payroll-related items                                                                                           |  |  |                           | 1,187   |                               |  
|Accrued
      expenses and other current liabilities                                                                                      |  |  |                           | 669     |                               |  
|Deferred
      revenue                                                                                                                    |  |  |                           | 5,346   |                               |  
|                                                                                                                                          |  |  |                           |         |                               |  
|Total
      current liabilities                                                                                                           |  |  |                           | 8,559   |                               |  
|                                                                                                                                         
|Long-term
      debt, less current portion                                                                                                |  |  |                           | 96      |                               |  
|                                                                                                                                         
|Commitments
      and contingencies                                                                                                       |  | 
|                                                                                                                                         
|Stockholders
      equity:                                                                                                               |  | 
|Preferred
      stock, $0.01 par value                                                                                                   |  | 
|Authorized1,000,000
      shares                                                                                                         |  | 
|Issued
      and outstandingnone                                                                                                         |  |  |                           |        |                               |  
|Common
      stock, $0.01 par value                                                                                                      |  | 
|Authorized20,000,000
      shares                                                                                                        |  | 
|Issued
      and outstanding12,311,475 and 11,474,444, shares at June 30, 2004
      and 
               December 31, 2003, respectively |  |  |                           | 123     |                               |  
|Additional
      paid-in capital                                                                                                          |  |  |                           | 36,170  |                               |  
|Accumulated
      deficit                                                                                                                 |  |  |                           | (29,929 | )                             |  
|Other
      accumulated comprehensive loss- cumulative translation adjustment                                                             |  |  |                           | (82     | )                             |  
|                                                                                                                                          |  |  |                           |         |                               |  
|                                                                                                                                          |  |  |                           |         |                              
|Total
      stockholders equity                                                                                                          |  |  |                           | 6,282   |                               |  
|                                                                                                                                          |  |  |                           |         |                               |  
|                                                                                                                                         
|                                                                                                                                          |  |  | $                         | 14,937  |                               | $
|                                                                                                                                          |  |  |                           |         |                               |  

The
  accompanying notes are an integral part of these consolidated financial statements.

2

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INSIGHTFUL
  CORPORATION AND SUBSIDIARIES

CONDENSED
  CONSOLIDATED STATEMENTS OF OPERATIONS
  (In thousands, except per share data)
  (Unaudited)

|                                                                            |  |  | Three
      Months Ended
      June 30, |        | Six
      Months Ended
      June 30, |  
|--------------------------------------------------------------------------- |  |  | --------------------------------------- | ------ | ------------------------------------- | -
|                                                                            |  |  |                                         |        |                                       |  
|                                                                            |  |  | 2004                                    |        | 2003                                  |  
|                                                                            |  |  |                                         |        |                                       |  
|Revenues:                                                                   |  |  |                                         |        |                                       |  
|Software
      licenses                                                     |  |  | $                                       | 1,851  |                                       | $
|Software
      maintenance                                                  |  |  |                                         | 1,621  |                                       |  
|Professional
      services and other                                       |  |  |                                         | 1,005  |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Total
      revenues                                                        |  |  |                                         | 4,477  |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Cost
      of revenues:                                                     |  | 
|Software
      related                                                      |  |  |                                         | 448    |                                       |  
|Professional
      services and other                                       |  |  |                                         | 572    |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Total
      cost of revenues                                                |  |  |                                         | 1,020  |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Gross
      profit                                                          |  |  |                                         | 3,457  |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Operating
      expenses:                                                   |  | 
|Sales
      and marketing                                                   |  |  |                                         | 1,659  |                                       |  
|Research
      and development                                              |  |  |                                         | 1,241  |                                       |  
|LessFunded
      research                                                  |  |  |                                         | (777   | )                                     |  
|                                                                            |  |  |                                         |        |                                       |  
|Research
      and development, net                                         |  |  |                                         | 464    |                                       |  
|General
      and administrative                                            |  |  |                                         | 1,019  |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Total
      operating expenses                                              |  |  |                                         | 3,142  |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Income
      (loss) from operations                                         |  |  |                                         | 315    |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Other
      income (expense), net                                           |  |  |                                         | 2      |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Income
      (loss) before income taxes                                     |  |  |                                         | 317    |                                       |  
|Income
      tax expense                                                    |  |  |                                         | (17    | )                                     |  
|                                                                            |  |  |                                         |        |                                       |  
|Income
      (loss) from continuing operations                              |  |  |                                         | 300    |                                       |  
|Loss
      from discontinued operations, net of tax                         |  |  |                                         |       |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Net
      income (loss)                                                     |  |  | $                                       | 300    |                                       | $
|                                                                            |  |  |                                         |        |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Basic
      and diluted net income (loss) per share  continuing operations |  |  | $                                       | 0.02   |                                       | $
|                                                                            |  |  |                                         |        |                                       |  
|                                                                            |  | 
|Basic
      and diluted net loss per share  discontinued operations        |  |  | $                                       |       |                                       | $
|                                                                            |  |  |                                         |        |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Basic
      and diluted net income (loss) per share                         |  |  | $                                       | 0.02   |                                       | $
|                                                                            |  |  |                                         |        |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Weighted
      average common shares outstanding                            |  |  |                                         | 12,238 |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|                                                                            |  |  |                                         |        |                                       |  
|Weighted
      average common shares assuming dilution                      |  |  |                                         | 13,207 |                                       |  
|                                                                            |  |  |                                         |        |                                       |  

The
  accompanying notes are an integral part of these consolidated financial statements.

3

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INSIGHTFUL
  CORPORATION AND SUBSIDIARIES

CONDENSED
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  (In thousands)
  (Unaudited)

|                                                                                                                    |  |  | Six
      Months Ended
      June 30, |       
|------------------------------------------------------------------------------------------------------------------- |  |  | ------------------------------------- | ------
|                                                                                                                    |  |  |                                       |       
|                                                                                                                    |  |  | 2003                                  |       
|                                                                                                                    |  |  |                                       |       
|Operating
      activities:                                                                                         |  |  |                                       |       
|Net income
      (loss)                                                                                             |  |  | $                                     | 525   
|LessLoss
      from discontinued operations                                                                        |  |  |                                       |      
|                                                                                                                    |  |  |                                       |       
|Loss
      from continuing operations                                                                               |  |  |                                       | 525   
|Adjustments
      to reconcile net income (loss) from continuing operations to net cash provided
      by (used in) |  | 
|operating
      activities:                                                                                         |  | 
|Depreciation,
      amortization and other non-cash charges                                                         |  |  |                                       | 705   
|Changes
      in current assets and liabilities:                                                                    |  | 
|Trade
      and other accounts receivable                                                                           |  |  |                                       | 1,084 
|Prepaid
      expenses and other assets                                                                             |  |  |                                       | (23   
|Accounts
      payable                                                                                              |  |  |                                       | (194  
|Accrued
      expenses, payroll and other current liabilities                                                       |  |  |                                       | (919  
|Deferred
      revenue                                                                                              |  |  |                                       | (343  
|                                                                                                                    |  |  |                                       |       
|Net
      cash provided by (used in) operating activities                                                           |  |  |                                       | 835   
|                                                                                                                    |  |  |                                       |       
|Investing
      activities:                                                                                         |  | 
|Purchases
      of property and equipment                                                                           |  |  |                                       | (63   
|Purchase
      of technology                                                                                        |  |  |                                       | (1,265
|                                                                                                                    |  |  |                                       |       
|Net
      cash used in investing activities                                                                         |  |  |                                       | (1,328
|                                                                                                                    |  |  |                                       |       
|Financing
      activities:                                                                                         |  | 
|Payments
      on long-term debt                                                                                    |  |  |                                       | (65   
|Proceeds
      from exercise of stock options and employee stock                                                    |  | 
|purchase
      plan                                                                                                 |  |  |                                       | 1,864 
|                                                                                                                    |  |  |                                       |       
|Net
      cash provided by (used in) financing activities                                                           |  |  |                                       | 1,799 
|                                                                                                                    |  |  |                                       |       
|Effect
      of exchange rate changes on cash and cash equivalents                                                  |  |  |                                       | 107   
|                                                                                                                    |  |  |                                       |       
|Net cash
      used in continuing operations                                                                        |  |  |                                       | 1,413 
|                                                                                                                    |  |  |                                       |       
|Net cash
      used in discontinued operations                                                                      |  |  |                                       |      
|                                                                                                                    |  |  |                                       |       
|Net increase
      (decrease) in cash and cash equivalents                                                          |  |  |                                       | 1,413 
|Cash
      and cash equivalents, beginning of period                                                                |  |  |                                       | 7,139 
|                                                                                                                    |  |  |                                       |       
|Cash
      and cash equivalents, end of period                                                                      |  |  | $                                     | 8,552 
|                                                                                                                    |  |  |                                       |       
|Supplemental
      disclosure of cash flow information:                                                             |  | 
|Cash
      paid for:                                                                                                |  | 
|Interest                                                                                                            |  |  | $                                     | 21    
|                                                                                                                    |  |  |                                       |       
|Income
      taxes (refund)                                                                                         |  |  | $                                     | (7    
|                                                                                                                    |  |  |                                       |       
|Supplemental
      disclosure of non-cash investing information  portion of                                        |  | 
|purchased
      technology financed through accounts payable                                                        |  |  | $                                     | 500   
|                                                                                                                    |  |  |                                       |       

The
accompanying notes are an integral part of these consolidated financial statements

4

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**INSIGHTFUL
  CORPORATION AND SUBSIDIARIES
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Unaudited)
  June 30, 2004**

**(1)
  DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION**

**a)
  Description of Business**

Insightful
Corporation and its wholly owned subsidiaries ("Insightful" or "the
Company") provide enterprises with scalable  data analysis solutions designed to
drive better decisions faster by revealing patterns, trends and relationships in data.
Insightful is a supplier of software and services for the statistical data mining,
business analytics, knowledge management,  and information retrieval industry segments
enabling customers to gain intelligence from numerical data and text.

Insightful's
products include InFact®, Insightful Miner, S-PLUS®, StatServer®, and S-PLUS
Analytic Server®.  Insightful's  consulting services provide specialized expertise and
proven processes for the design, development and deployment of  analytical solutions.

Insightful
has been delivering data analysis solutions for 18 years to companies in financial
services, pharmaceuticals,  biotechnology, telecommunications and manufacturing, as well
as government and research institutions.

Headquartered
in Seattle, Washington, Insightful has North American offices in New York City and North
Carolina.  Insightful's international offices are located in France, Switzerland, and the
United Kingdom, with distributors around the  world.

**(b)
  Unaudited Interim Financial Information**

The
accompanying unaudited condensed consolidated financial statements have been prepared by
Insightful pursuant to  accounting principles generally accepted in the United States and
the rules and regulations of the Securities and Exchange  Commission regarding interim
financial reporting.  Accordingly, they do not include all of the information and
footnotes  required by generally accepted accounting principles for complete financial
statements. The balance sheet at December 31, 2003  has been derived from audited
financial statements at that date, but does not include all disclosures required by
generally  accepted accounting principles for complete financial statements. These
condensed financial statements should be read in  conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 2003 included in
Insightful's Annual Report on Form 10-K.  The accompanying consolidated financial
statements reflect all adjustments  (consisting solely of normal, recurring adjustments),
which, in the opinion of management, are necessary for a fair  presentation of results
for the interim periods presented.  The results of operations for the three and six month
periods  ended June 30, 2004 are not necessarily indicative of the results to be expected
for the entire fiscal year or future years.

**(2)
  SIGNIFICANT ACCOUNTING POLICIES**

**(a)
  Principles of Consolidation**

The
accompanying consolidated financial statements include the accounts of Insightful and its
wholly owned subsidiaries.  All significant intercompany accounts and transactions have
been eliminated in consolidation.

**(b)
  Revenue Recognition**

Insightful
  offers a variety of scalable data analysis software solutions, maintenance contracts,
  training and consulting services to its customers. Insightful records revenue
  in accordance with Statement of Position (SOP) No. 97-2, *Software Revenue
  Recognition*, as amended by SOP No. 98-9, Modification of 97-2, *Software
  Revenue Recognition, with Respect to Certain Transactions* and related interpretations
  including Technical Practice Aids. License revenue consists principally of software
  license fees earned from sales of perpetual or fixed term software licenses.
  Perpetual software license fees are generally recognized upon delivery of the
  software after receipt of a definitive purchase order, if collection of the
  resulting receivable is probable, the fee is fixed or determinable, and vendor-specific
  objective evidence ("VSOE") of fair value exists for all undelivered
  elements if sold in a bundled arrangement.

Revenue
from fixed-term licenses is recognized on a straight-line basis over the license term if
all other aspects of SOP  97-2 are satisfied. Revenues under arrangements that include
several different software products and services sold together  are allocated based on
the residual method in accordance with SOP No. 98-9. Under the residual method, the fair
value of the  undelivered non-essential elements is deferred and subsequently recognized
when earned. Insightful has established VSOE of  fair value for

5

---



professional
services and training services. In addition, the Company has established VSOE for
maintenance  related to most of its products.  For software products sold with
maintenance where VSOE for the maintenance element has not  been established, all revenue
under the arrangement is recognized over the maintenance term provided all other revenue
recognition criteria have been met.  VSOE is based on the price charged when an element
is sold separately or, in case of an  element not yet sold separately, the price
established by authorized management, if it is probable that the price, once
established, will not change before market introduction. Standard terms for license
agreements typically call for payment  within 30 to 45 days. Probability of collection is
based upon the assessment of the customer's financial condition through  review of their
current financial statements or credit reports. For existing customers, prior payment
history is also used to  evaluate probability of collection. Insightful has an
unconditional 30-day return policy and provides for estimated returns at  the time of
sale based on historical experience.

Maintenance
revenue is recognized ratably over the term of the related contracts, which generally
span one year or less.  The initial one-year maintenance contract is bundled into the
license fees on most of the Company's products.  Maintenance  services, which include
unspecified product upgrades on a when-and-if available basis, are generally priced based
on a  percentage of the current list price of the licensed software products. Maintenance
renewals are optional.

Consulting
revenues typically include deployment assistance, project management, integration with
existing customer  applications and related services performed on a time-and-materials
basis under separate service arrangements. Training  consists of fee based courses
offered on a per attendee or a per group rate.  Revenues from consulting and training
services  are generally recognized as services are performed. Standard terms for renewal
of maintenance contracts, consulting services  and training call for payment within 30 to
45 days.

Fees
from licenses sold together with consulting are generally recognized upon shipment of the
software, provided that the  above residual method criteria are met, payment of the
license fees are not dependent upon the performance of the services,  and the consulting
services are not essential to the functionality of the licensed software. If the services
are essential to  the functionality of the software, or payment of the license fees is
dependent upon the performance of the services, both the  software license and consulting
fees are recognized under the percentage of completion method of contract accounting.
All  sales made through indirect channels including value added resellers, or VARs, and
distributors are accounted for using the  sell-through method.

If
the fee is not fixed or determinable, revenue is recognized as payments become due from
the customer. If an acceptance  period is required, revenues are recognized upon the
earlier of customer acceptance or the expiration of the acceptance  period.

Cash
payments received in advance of revenue recognition are recorded as deferred revenue on
the accompanying consolidated  balance sheets.

The
Company provides an estimated reserve for return rights at the time of sale based on
historical returns experience and  the Company's judgment of the likelihood of future
returns.

**(c)
  Reclassification of Amounts**

Certain
prior year amounts have been reclassified to conform to the current year presentation.
Specifically, shipping fee  revenue of approximately $16,000 and $29,000 for the three
and six months ended June 30,2003, respectively, which was offset  against
software-related costs in the statements of operations in the second quarter 2003 Form
10-Q, was reclassified to  software license revenues in the accompanying consolidated
statements of operations.

**(3)
  PURCHASED TECHNOLOGY**

In January 2004
the Company acquired title to the software code underlying the "S" programming
language from Lucent  Technologies Inc. for $2.0 million. The $2.0 million payment
included settlement in full for all royalties owed by the Company  to Lucent at the date
of the acquisition. The Company recorded the amount payable to Lucent, less the amounts
owed for  royalties, as purchased technology and is amortizing it to cost of revenues -
software related over a 3-year estimated life.  During the three and six months ended
June 30, 2004 the Company recognized $146,000 and $245,000, respectively, in
amortization expense included in cost of revenues - software related. Under the
agreement, $1.5 million of the purchase price  (less  was paid in the first quarter of
2004 with the remaining $0.5 million to be paid in the first quarter of 2005. Prior to
this agreement, the Company was a worldwide licensee of the "S" programming
language in exchange for payment of royalties,  with a minimum exclusivity fee of
$450,000 per year and variable royalties of 3% to 6% of revenues.  Programming related
royalty costs were $13,000 for the three and six months ended June 30, 2004 and were
$269,000 and $478,000 for the three and  six months ended and June 30, 2003, respectively.

**(4)
  FINANCING ARRANGEMENTS**

In March 2004,
the Company renewed a working capital revolving line of credit and security agreement
with Silicon Valley Bank,  or SVB, and modified the terms to provide for up to $3.0
million in borrowing availability through December 26, 2004. This  facility

6

---



is secured by
the Company's accounts receivable and allows it to borrow up to the lesser of (a) 75% of
its eligible  accounts receivable or (b) $3.0 million and bears interest at the prime
rate, which was 4% as of June 30, 2004, plus 1%.  At  June 30, 2004, no amounts had been
borrowed and $966,000 was available for future borrowings under the line of credit
facility.

In March 2004,
the Company also renewed and modified the terms of a term loan and security agreement
with SVB. This facility  allows it to take advances on the cost of eligible equipment and
software less than 90 days old and is secured by the  underlying assets. The Company had
borrowed $450,000 under this facility in 2002 and the remaining outstanding balance was
$225,000 at June 30, 2004. Through December 26, 2004, the Company may draw up to an
additional $500,000 under this agreement,  no more than $250,000 of which may be for
software. These term loan advances bear interest at the prime rate plus 1%.  Advances are
repaid over a 36 or 24-month period.

These credit
facilities contain covenants that limit the Company's net losses and restrict the amount
of capital expenditures  not financed through the equipment term loan. In addition, the
Company is prohibited under these facilities from paying  dividends. The Company was in
compliance with these covenants as of June 30, 2004.

Future
maturities of debt as of June 30, 2004 are:

|                          |  |  | Six
      Months Ending
      December 31, |        | Year
      Ending December 31, |  |         |  |      |       
|------------------------- |  |  | ------------------------------------------ | ------ | ------------------------------ |  | ------- |  | ---- | ------
|                          |  |  |                                            |        |                                |  |         |  |      |       
|                          |  |  | 2004                                       |        | 2005                           |  | 2006    |  | 2007 |       
|                          |  |  |                                            |        |                                |  |         |  |      |       
|Equipment
      term loan |  |  | $                                          | 64,000 |                                |  | 129,000 |  |      | 32,000

**(5)
  NET INCOME (LOSS) PER SHARE**

Basic net
income (loss) per share is calculated using the weighted-average number of shares of
common stock outstanding. Stock  issued and subject to restrictions is excluded from the
calculation. Diluted net income (loss) per share reflects the effect  of common stock
equivalents, unless their effect on earnings per share is anti-dilutive.

|                                                                   |  |  | Three
      Months Ended
      June 30, |            | Six
      Months Ended 
      June 30, | 
|------------------------------------------------------------------ |  |  | --------------------------------------- | ---------- | -------------------------------------- | 
|                                                                   |  |  |                                         |            |                                        | 
|                                                                   |  |  | 2004                                    |            | 2003                                   | 
|                                                                   |  |  |                                         |            |                                        | 
|Weighted
      average common shares outstanding                   |  |  |                                         | 12,238,000 |                                        | 
|Effect
      of dilutive stock options                             |  |  |                                         | 969,000    |                                        | 
|                                                                   |  |  |                                         |            |                                        | 
|Weighted
      average common shares outstanding assuming dilution |  |  |                                         | 13,207,000 |                                        | 
|                                                                   |  |  |                                         |            |                                        | 

Stock options
outstanding totaling 456,000 and 424,000 for the three and six months ended June 30,
2004, respectively, and  1,782,687 and 1,902,000 for the three and six months ended June
30, 2003, respectively, were not included in the computation  of diluted earnings per
share because their effect would be anti-dilutive.

**(6)
  OTHER COMPREHENSIVE INCOME (LOSS)**

SFAS No. 130,
Reporting Comprehensive Income, establishes standards for reporting and display of
comprehensive income and its  components in the financial statements. The only item of
other comprehensive income (loss) is foreign currency translation  adjustments. Total
comprehensive income (loss) is as follows:

|                                                  |  |  | Three
      Months Ended
      June 30, |         | Six
      Months Ended 
      June 30, |  
|------------------------------------------------- |  |  | --------------------------------------- | ------- | -------------------------------------- | -
|                                                  |  |  |                                         |         |                                        |  
|                                                  |  |  | 2004                                    |         | 2003                                   |  
|                                                  |  |  |                                         |         |                                        |  
|Net income
      (loss)                           |  |  | $                                       | 300,000 |                                        | $
|Change
      in cumulative translation adjustment |  |  |                                         | (5,000  | )                                      |  
|                                                  |  |  |                                         |         |                                        |  
|Comprehensive
      income (loss)                 |  |  | $                                       | 295,000 |                                        | $
|                                                  |  |  |                                         |         |                                        |  

**(7)
  SEGMENT REPORTING**

SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information,"
establishes standards for reporting  information about operating segments in annual
financial statements. It also establishes standards for related disclosures  about

7

---



products,
services, geographical areas and major customers.  In the third quarter of 2003,
management defined the  Company's segments to correspond with the way the Company is now
organized and managed.  Accordingly, continuing business  segment information includes
the segments of Domestic Data Analysis, International Data Analysis and Domestic Text
Analysis.  Segment information for the three and six months ended June 30, 2004 and 2003
has been presented in accordance with the  current segment definitions.  The Company
measures segment performance based on their revenues and income or loss from  operations.
Assets are not allocated to segments for internal reporting presentations.  Corporate
overhead costs are included  in the Domestic Data Analysis segment and are not allocated
to the other individual segments.  Intercompany transactions have  been eliminated from
the segment information and are not significant between segments.

|Domestic
      Data Analysis        |  |  | Three
      Months Ended
      June 30, |       | Six
      Months Ended 
      June 30, |  
|----------------------------------- |  |  | --------------------------------------- | ----- | -------------------------------------- | -
|                                    |  |  |                                         |       |                                        |  
|                                    |  |  | 2004                                    |       | 2003                                   |  
|                                    |  |  |                                         |       |                                        |  
|Revenues                            |  |  | $                                       | 2,770 |                                        | $
|Income
      (loss) from operations |  |  | $                                       | 46    |                                        | $
|                                    |  |  |                                         |       |                                        |  
|                                   
|International
      Data Analysis   |  |  | Three
      Months Ended
      June 30, |       | Six
      Months Ended 
      June 30, |  
|                                    |  |  |                                         |       |                                        |  
|                                    |  |  | 2004                                    |       | 2003                                   |  
|                                    |  |  |                                         |       |                                        |  
|Revenues                            |  |  | $                                       | 1,559 |                                        | $
|Income
      from operations        |  |  | $                                       | 145   |                                        | $
|                                    |  |  |                                         |       |                                        |  
|                                    |  |  |                                         |       |                                        |  
|Domestic
      Text Analysis        |  |  | Three
      Months Ended
      June 30, |       | Six
      Months Ended 
      June 30, |  
|                                    |  |  |                                         |       |                                        |  
|                                    |  |  | 2004                                    |       | 2003                                   |  
|                                    |  |  |                                         |       |                                        |  
|Revenues                            |  |  | $                                       | 148   |                                        | $
|Income
      (loss) from operations |  |  | $                                       | 124   |                                        | $
|                                    |  |  |                                         |       |                                        |  

Non-operating
income and expenses are not tracked by segment.

**(8)
  STOCK-BASED COMPENSATION**

A
reconciliation of net income (loss) as reported to pro-forma net loss that includes
stock-based employee compensation  cost as if the fair value method had been applied to
all option awards is as follows:

|                                                                |  |  | Three
      Months Ended
      June 30, |          | Six
      Months Ended 
      June 30, |  
|--------------------------------------------------------------- |  |  | --------------------------------------- | -------- | -------------------------------------- | -
|                                                                |  |  |                                         |          |                                        |  
|                                                                |  |  | 2004                                    |          | 2003                                   |  
|                                                                |  |  |                                         |          |                                        |  
|Net
      income (loss)                                         |  |  | $                                       | 300,000  |                                        | $
|                                                                |  |  |                                         |          |                                        |  
|Employee
      stock-based compensation, as reported            |  |  |                                         |         |                                        |  
|Employee
      stock-based compensation determined              |  | 
|under
      the fair value method                               |  |  |                                         | (357,000 | )                                      |  
|                                                                |  |  |                                         |          |                                        |  
|Pro forma
      loss                                            |  |  | $                                       | (57,000  | )                                      | $
|                                                                |  |  |                                         |          |                                        |  
|Basic
      and diluted net income (loss) per share as reported |  |  | $                                       | 0.02     |                                        | $
|Pro forma
      basic and diluted net loss per share            |  |  | $                                       | (0.00    | )                                      | $

**(9)
  BUSINESS RESTRUCTURING**

During the
second and third quarter of 2003, the Company reduced its headcount by 18%, or 23
employees.  The reduction  included employees from all functional areas of the Company,
35% of which were in Europe.  In addition, as part of this  restructuring, the Company
combined its German operations with its Swiss subsidiary headquartered in Basel,
Switzerland. The  Company evaluated the goodwill acquired in the acquisition of its
German business for impairment and determined no impairment  occurred in the third
quarter.  On September 30, 2003, Shawn Javid, President and CEO, resigned from the
company.  The  restructuring charges, including charges associated with the resignation
of Shawn Javid, totaled $911,000 and consisted  primarily of employee severance and
termination payments and lease termination costs, as well as a $176,000 non-cash
compensation charge related to a modification of stock options upon termination of Mr.
Javid.

8

---



During
the six months ended June 30, 2004, the Company paid $134,000 in restructuring costs and
termination benefits.  As of June 30, 2004, $211,000 in termination benefits remained to
be paid. All termination benefits will be paid by March 31,  2005. No additional expenses
are expected to be incurred in connection with this restructuring.

**(10)
  COMMITMENTS AND CONTINGENCIES**

In
  certain of its licensing agreements, the Company provides intellectual property
  infringement indemnifications. These indemnifications are excluded from the
  initial recognition and measurement requirements of FASB Interpretation No.
  45, *Guarantor's Accounting and Disclosure Requirements for Guarantees. Including
  Indirect Guarantees of Indebtedness of Others*. The Company's policy is
  to record any obligation under such indemnification when a required payment
  under such indemnification is probable and the amount of the future loss is
  estimable. At June 30, 2004 and 2003 there were no such indemnifications for
  which a required payment was deemed to be probable or estimable; therefore,
  no accrual has been made for potential losses associated with these indemnifications.

In
December 2002, a former Insightful employee filed a complaint against the Company in the
Superior Court for King  County, Washington.  The former employee alleged that his
employment was wrongfully terminated, and he sought an unspecified  amount of damages.
Specifically, he alleged that the Company improperly recognized services revenues in the
fourth quarter of  2001 and that the Company terminated him in violation of public
policy.  On December 5, 2003, a judge for the Superior Court  for King County granted
summary judgment in the Company's favor and dismissed the case.  The plaintiff has
appealed the  decision, and if his appeal is successful the Company will likely resume
litigation in the Superior Court for King County.  The Company continues to believe his
lawsuit is without merit and it denies his claims.  An evaluation of the likelihood of an
adverse outcome cannot be expressed with sufficient certainty at this time. An
unfavorable outcome could have a materially  adverse effect on the Company's financial
position, results of operations, and cash flows.

|**ITEM
      2.** |  | **MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS**
|----------------- |  | -------------------------------------------------------------------------------------------------

**Forward-Looking
  Statements**

Our
disclosure and analysis in this report contain  forward-looking  statements,  which
provide our current  expectations or  forecasts of future events. Forward-looking
statements in this report include, without limitation:

- information  concerning possible
or assumed future results of operations,  trends in financial results and business plans,
including those relating to earnings growth and revenue growth;
- statements  about  the  level of
our costs  and  operating  expenses  relative  to our  revenues,  and about the  expected
composition of our revenues;
- statements about expected future
sales trends for our products;
- Statements  about  the  long-term
potential  of the data  analysis  market;
- statements  about our future
capital  requirements  and the  sufficiency of our cash,  cash  equivalents,  investments
and  available bank borrowings to meet these requirements;
- information  about  the
anticipated  release  dates  of  new  products;
- other statements about our plans,
objectives,  expectations and intentions;  and
- other  statements  that are not
historical  facts.

Words
such as "believes,"  "anticipates"  and "intends" may
identify  forward-looking  statements,  but the absence of these  words does not
necessarily  mean that a statement is not  forward-looking.  Forward-looking  statements
are subject to known and  unknown risks and  uncertainties and are based on potentially
inaccurate  assumptions that could cause actual results to differ  materially from those
expected or implied by the  forward-looking  statements.  Our actual results could differ
materially from  those anticipated in the  forward-looking  statements for many reasons,
including the factors described in the section entitled  Important  Factors  That May
Affect Our  Business,  Our  Operating  Results and Our Stock Price in this  report.
Other  factors  besides those described in this report

9

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could also
affect actual results.  You should  carefully  consider the factors  described  in the
section  entitled  Important  Factors  That May  Affect Our  Business,  Our  Operating
Results  and Our Stock  Price in  evaluating our forward-looking statements.

You
should  not  unduly  rely on these  forward-looking  statements,  which  speak  only as
of the date of this  report.  We  undertake no obligation to publicly revise any
forward-looking  statement to reflect  circumstances or events after the date of  this
report, or to reflect the occurrence of unanticipated events.

**Description
  of the Company**

We
provide enterprises with scalable data analysis solutions designed to facilitate
decision-making by revealing patterns,  trends and  relationships.  We are a leading
supplier of software and services for the  statistical  analysis,  data mining and
knowledge access industry segments enabling customers to gain intelligence from numerical
data and text.

Our  products
include  S-PLUS®,  StatServer®,  S-PLUS  Analytic  Server®,  Insightful  Miner and
InFact®.  Our  consulting  services provide specialized expertise and processes for the
design, development and deployment of analytical solutions.

We
have been  delivering  data  analysis  solutions  for 18 years to  companies  in
financial  services,  pharmaceuticals,  biotechnology, telecommunications and
manufacturing as well as government and research institutions.

We
originally  incorporated  in  Massachusetts  in 1984 and  reincorporated  in Delaware in
2001.  Our  headquarters  and  principal  executive  offices are located at 1700
Westlake  Ave. N, Suite 500,  Seattle,  Washington  98109,  and our telephone  number is
(206) 283-8802.  Our Internet  address is  http://www.insightful.com.  We also have North
American offices in New York  and North Carolina. Our international subsidiaries are
located in France, Switzerland, and the United Kingdom.

**Products**

**Data
  Analysis Products**

*S-PLUS*®

S-PLUS
is our flagship  product for statistical  data analysis.  The software offers  technical
professionals a flexible,  extensible and productive  platform for data analysis and
visualization.  S-PLUS is based on our award-winning  object-oriented  "S"
programming  language,  to which we acquired the rights from Lucent  Technologies  Inc.
in January 2004.  Prior to that, we  licensed  the  rights  on an  exclusive  worldwide
basis.  S-PLUS  offers  a wide  range of  analytic  methods  for  extracting
intelligence  from large  data sets,  and allows its users to create  customized
analytical  applications  that  operate in the  Windows and UNIX environments.

*Insightful
  Miner*

Insightful
Miner is a highly scalable data analysis  workbench for predictive  modeling,  data
mining and statistical data  analysis.  Insightful  Miner  provides  data miners,
business  analysts and data  analysis  professionals  with a full suite of  scalable
components for data access,  management and modeling,  and its unique pipeline
architecture allows the user to process  very large data sets.  Insightful Miner is an
open and extensible tool that offers full integration with the S-PLUS  programming
language.  Insightful  Miner offers  deployment  capabilities  via batch mode,
predictive  model  markup  language  (PMML),  or  generated C code.  Insightful Miner has
a low cost of ownership compared to its competitors,  with a desktop entry-level version
and multiple server versions offered under perpetual licenses rather than annual rental
agreements.

*Verticalized
  Toolkits*

To
complement  S-PLUS and Insightful  Miner, we offer toolkits for the financial  services
and  pharmaceutical  markets to  allow users to perform specialized data analysis.

*Server
  Products*®

Insightful's
S-Plus Server products enable our customers to deploy statistical data analysis
throughout an organization,  leveraging  existing  Web-based or  client/server
technologies  using server  computers  running  Windows® and UNIX® operating
systems.  Our server products are data  warehouse-independent  and integrate seamlessly
with standard database and file formats.  With our server  products,  a wide range of
statistical  models and data  visualization  capabilities  are built and stored in a
central server for access by  non-technical  users,  who can apply these  analytical
techniques using a simple and familiar Web  browser interface,  or dedicated  graphical
user interfaces written using Java technology.  Our server products enable end-users  to
analyze and understand technical or business information without requiring expertise in
statistics or statistical tools.

10

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**Text
  Analysis Products**

*InFact*®

We
launched our text  analysis  product,  InFact,  in April 2002 to provide text analysis
for  knowledge  workers.  InFact  combines  statistical  text mining methods with
linguistic  techniques  that apply natural  language  processing,  such as full  sentence
deep  syntactic  parsing,  to text search and  analysis.  Researchers  are able to
utilize  InFact's  natural  language  question and answer and tabular  exploratory search
interfaces to efficiently  uncover information for which they are searching.  InFact thus
is designed to enable  researchers to experience higher levels of productivity,  and to
improve the quality of their  research. InFact has been initially targeted at the
defense/intelligence and pharmaceutical markets.

**Services**

We
deliver support for our data analysis products through our maintenance, consulting, and
training services.

We
offer  unspecified  product  updates and product  upgrades and customer  support
services under an annual  maintenance  agreement.  Our consulting and training
organization  provides fee-based services,  including  deployment  assistance,  project
management,  integration with existing  customer  applications and related services to
our customers.  We also offer a series of  fee-based  training courses to our customers.
Courses can be taken at Insightful  offices,  at the customer's site, or at other
prearranged sites for larger customer groups.

**Critical
  Accounting Policies and Estimates**

We
have based our discussion and analysis of our financial condition and results of
operations upon our consolidated  financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United  States. The
preparation of these financial statements requires us to make estimates and judgments
that affect the reported  amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an  on-going basis, we
evaluate our critical accounting policies and estimates, including those related to
revenue recognition,  bad debts, intangible assets, restructuring, and contingencies and
litigation. We base our estimates on historical experience  and on various other
assumptions that we believe to be reasonable under the circumstances, the results of
which form the basis  for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.  Actual results may differ
from these estimates under different assumptions or conditions. We believe the following
critical  accounting policies affect the more significant judgments and estimates used in
the preparation of our consolidated financial  statements.

*Revenue
  Recognition*

Our
revenue  recognition  policy is significant  because our revenues are a key component of
our results of  operations.  We  follow very  specific and detailed  guidelines,
discussed in Note 2 of the  condensed  consolidated  financial  statements,  in
measuring revenues.

We
derive our revenues  primarily from three sources:  license revenues,  which consist of
perpetual and fixed term software  license fees,  maintenance revenues,  consisting of
fees for maintenance and support, and professional services revenues,  which  are
comprised of fees for  consulting  and  training.  The revenue  recognition  rules for
software  companies  are complex and  require our  management  to exercise  judgment  and
make a number of  estimates.  For  example,  many of our  contracts  contain  multiple
element  arrangements,  which require us to make  assumptions and judgments in order to
allocate the total price among  the various  elements we must deliver,  to determine
whether vendor specific  objective  evidence of fair value exists for each  element,  to
determine if undelivered  elements are deemed  essential,  and to determine  whether and
when each element has been  delivered. We also evaluate whether there is any material
risk of customer non-payment or product returns.

If
we were to change any of these  assumptions or judgments,  which are made based upon all
of the information  available to  us at the time, it could cause a material  increase or
decrease in the amount of revenue that we report in a particular  period.  Deferred
revenue is recognized over time as the applicable revenue recognition criteria are
satisfied.

*Sales
  Returns*

We
provide an estimated reserve for return rights at the time of sale.  We offer our
customers a 30-day return policy  on all of our products.  Refunds are provided to
customers upon return to us of the complete product package, including all  original
materials, CD-ROM or other media.  Our provision for sales returns is estimated based on
historical returns  experience and our judgment of the likelihood of future returns.

11

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*Bad
  Debts*

A
considerable amount of judgment is required when we assess the ultimate realization of
receivables including assessing  the aging of the amounts and reviewing the current
credit-worthiness of each customer. Customer credit worthiness is subject  to many
business and finance risks facing each customer and is subject to sudden changes.

*Impairment
  of Goodwill and Other Long Lived Assets*

We
evaluate goodwill arising from acquired businesses for potential impairment on an annual
basis. This evaluation  requires significant judgment and estimation.  In addition,
throughout the year we consider whether there are impairment  indicators that would
require an immediate evaluation of impairment.  Our judgments regarding the existence of
impairment  indicators are based on legal factors, market conditions and operational
performance of our acquired businesses. Future events  could cause us to conclude that
impairment indicators exist and that goodwill associated with our acquired business is
impaired.

Impairment
losses, if any, will be charged to earnings in the period in which they are identified.

*Contingencies*

We
are engaged in legal actions arising in the ordinary course of business.  We are required
to assess the likelihood of  any adverse judgments or outcomes to these matters as well
as potential ranges of possible losses.  A determination of the  amount of reserves
required, if any, for these contingencies are made after careful analysis of each
individual matter.  The  required reserves if any, may change in the future due to new
developments in each matter or changes in approach, such as a  change in settlement
strategy for a particular matter.

**Results
  of Operations for the Three and Six Months Ended June 30, 2004 and 2003**

**Revenues
  by Type**

|                                      |  |  | Three
      Months Ended June 30, |       | Six
      Months Ended June 30, | 
|------------------------------------- |  |  | --------------------------------- | ----- | ------------------------------- | 
|                                      |  |  |                                   |       |                                 | 
|                                      |  |  | 2004                              |       | 2003                            | 
|                                      |  |  |                                   |       |                                 | 
|                                      |  |  | (Dollars
      in thousands)     
|                                      |  |  |                                   |       |                                 | 
|Software
      Licenses               |  |  | $                                 | 1,851 |                                 | 
|Software
      Maintenance            |  |  |                                   | 1,621 |                                 | 
|Professional
      Services and Other |  |  |                                   | 1,005 |                                 | 
|                                      |  |  |                                   |       |                                 | 
|                                      |  |  |                                   |       |                                 | 
|Total
      revenues                  |  |  | $                                 | 4,477 |                                 | 
|                                      |  |  |                                   |       |                                 | 



|                                      |  |  | Three
      Months Ended June 30,      |     | Six
      Months Ended June 30, | 
|------------------------------------- |  |  | -------------------------------------- | --- | ------------------------------- | 
|                                      |  |  | 2004                                   |     | 2003                            | 
|                                      |  |  |                                        |     |                                 | 
|                                      |  |  | (As
      a percent of total revenues)
|                                      |  |  |                                        |     |                                 | 
|Software
      Licenses               |  |  |                                        | 41  | %                               | 
|Software
      Maintenance            |  |  |                                        | 36  | %                               | 
|Professional
      Services and Other |  |  |                                        | 23  | %                               | 
|                                      |  |  |                                        |     |                                 | 
|Total
      revenues                  |  |  |                                        | 100 | %                               | 
|                                      |  |  |                                        |     |                                 | 

Software
license revenues, consisting of software licenses and subscriptions decreased slightly
for the three months  ended June 30, 2004 compared to the three months ended June 30,
2003 due primarily to a lower average deal size and the  positive effect on revenues for
the three months ended June 30, 2003 of a pre-announcement prior to June 30, 2003 of a
product  price increase that took place on July 1, 2003.  Software license revenues
increased for the six months ended June 30, 2004  compared to the six months ended June
30, 2003 primarily due to a first quarter 2004 increase in revenues for S-Plus and
Insightful Miner when compared to the first quarter of 2003.

Software
maintenance revenues decreased for the three and six months ended June 30, 2004 compared
to the three and six  months ended June 30, 2003.  This decrease was attributable to a
decrease in maintenance renewals during the second and third  quarters of 2003.

The
increase in professional services and other revenues for the three months ended June 30,
2004 compared to the three  months ended June 30, 2003 relates to a better emphasis on
training and consulting to existing customers.  Revenues remained  consistent for the
six-month periods ended June 30, 2004 and 2003 because the increase during the three
months ended June 2004  compared to the three months ended June 30, 2003 was offset by a
decrease in revenues for the three months ended March 31,  2004

12

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compared to the
three months ended March 31, 2003.  This decrease during the first quarter was primarily
due to a  decrease in North American consulting revenues resulting from a smaller
pipeline of projects than in the prior year period.  We expect professional services
revenue to represent a lower percentage of total revenues in the future than the 23% of
total  revenues it represented for the three months ended June 30, 2004.

**Revenues
  by Segment and Geography**

We
operate in three segments:  Domestic Data Analysis, International Data Analysis, and
Domestic Text Analysis and we  have international operations primarily in Europe and
Asia.  Revenues by segment and geography are as  follows:

|                                  |  |  | Three
      Months Ended June 30, |       | Six
      Months Ended June 30, | 
|--------------------------------- |  |  | --------------------------------- | ----- | ------------------------------- | 
|                                  |  |  |                                   |       |                                 | 
|                                  |  |  | 2004                              |       | 2003                            | 
|                                  |  |  |                                   |       |                                 | 
|                                  |  |  | (Dollars
      in thousands)     
|                                  |  |  |                                   |       |                                 | 
|Domestic
      Data Analysis      |  |  | $                                 | 2,770 |                                 | 
|International
      Data Analysis |  |  |                                   | 1,559 |                                 | 
|Domestic
      Text Analysis      |  |  |                                   | 148   |                                 | 
|                                  |  |  |                                   |       |                                 | 
|Total
      revenues              |  |  | $                                 | 4,477 |                                 | 
|                                  |  |  |                                   |       |                                 | 



|                                  |  |  | Three
      Months Ended June 30,      |     | Six
      Months Ended June 30, | 
|--------------------------------- |  |  | -------------------------------------- | --- | ------------------------------- | 
|                                  |  |  | 2004                                   |     | 2003                            | 
|                                  |  |  |                                        |     |                                 | 
|                                  |  |  | (As
      a percent of total revenues)
|                                  |  |  |                                        |     |                                 | 
|Domestic
      Data Analysis      |  |  |                                        | 62  | %                               | 
|International
      Data Analysis |  |  |                                        | 35  | %                               | 
|Domestic
      Text Analysis      |  |  |                                        | 3   | %                               | 
|                                  |  |  |                                        |     |                                 | 
|Total
      revenues              |  |  |                                        | 100 | %                               | 
|                                  |  |  |                                        |     |                                 | 

The
decrease in domestic data analysis revenues for the three months ended June 30, 2004
compared to the three months  ended June 30, 2003 is due primarily to a lower average
deal size and the positive effect on revenues for the three months  ended June 30, 2003
of a pre-announcement prior to June 30, 2003 of a product price increase that took place
on July 1, 2003.  The decrease in domestic data analysis revenues for the six months
ended June 30, 2004 compared to the six months ended June  30, 2003 is due to the lower
average deal size and price increase described above as well as lower professional
services and  other revenues resulting from a smaller pipeline of projects partially
offset by an increase in revenues for S-Plus and  Insightful Miner during the first
quarter 2004 when compared to the first quarter of 2003.

The
increase in international data analysis revenues for the three and six month periods
ended June 30, 2004 when compared to  the three and six months ended June 30, 2003 is
primarily attributable to increased professional services and other revenues  resulting
from a better emphasis on training and consulting to existing customers as well as
increased software license sales.

**Cost
  of Revenues**

|                                                         |  |  | Three
      Months Ended June 30, |       | Six
      Months Ended June 30, | 
|-------------------------------------------------------- |  |  | --------------------------------- | ----- | ------------------------------- | 
|                                                         |  |  |                                   |       |                                 | 
|                                                         |  |  | 2004                              |       | 2003                            | 
|                                                         |  |  |                                   |       |                                 | 
|                                                         |  |  | (Dollars
      in thousands)     
|                                                         |  |  |                                   |       |                                 | 
|Software
      Related                                   |  |  | $                                 | 448   |                                 | 
|Professional
      Services and Other                    |  |  |                                   | 572   |                                 | 
|                                                         |  |  |                                   |       |                                 | 
|Total
      revenues                                     |  |  | $                                 | 1,020 |                                 | 
|                                                         |  |  |                                   |       |                                 | 
|Software
      related as a percentage of software       |  | 
|license
      and maintenance revenue                    |  |  |                                   | 13    | %                               | 
|Professional
      services and other as a percentage of |  | 
|professional
      services and other revenue            |  |  |                                   | 57    | %                               | 

Cost
of software-related revenue, which consists of royalties for third-party software,
product media, product  duplication, manuals and maintenance costs decreased for the
three and six months

13

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ended June 30,
2004 compared to the three  and six months ended June 30, 2003 due primarily to a
reduction in royalty costs resulting from the January 2004 acquisition  of the copyrights
to the software code underlying the "S" Programming language.  Our
"S" programming related royalty costs in  the three and six months ended June
30, 2003 were $269,000 and $478,000, respectively.  Amortization of the "S"
Programming  acquisition cost was $146,000 and $245,000 during the three and six months
ended June 30, 2004, respectively.  We expect the  cost of software-related revenue to
remain at the current levels as a percentage of revenues for the remainder of 2004.

Cost
of professional services and other consists primarily of salaries and other operating
costs of employees who provide  consulting services and training. Cost of professional
services decreased for the three and six months ended June 30, 2004  compared to the
three and six months ended June 30, 2003 primarily due to cost saving measures
implemented in July 2003 as  part of a corporate restructuring.  The decrease in cost of
professional services and other as a percentage of related revenue  for the three and six
months ended June 30, 2004 compared to the three and six months ended June 30, 2003
decreased primarily  due to improved utilization and billable productivity of
professional staff during the second quarter of 2004.  We expect the  cost of
professional services to remain flat for the remainder of 2004.

**Operating
  Expenses**

**Sales
  and Marketing**

|                                        |  |  | Three
      Months Ended June 30, |       | Six
      Months Ended June 30, | 
|--------------------------------------- |  |  | --------------------------------- | ----- | ------------------------------- | 
|                                        |  |  |                                   |       |                                 | 
|                                        |  |  | 2004                              |       | 2003                            | 
|                                        |  |  |                                   |       |                                 | 
|                                        |  |  | (Dollars
      in thousands)     
|                                        |  |  |                                   |       |                                 | 
|Sales
      and Marketing               |  |  | $                                 | 1,659 |                                 | 
|As a
      percentage of total revenues |  |  |                                   | 37    | %                               | 

Sales
and marketing expenses consist primarily of salaries, travel, facilities costs for sales
and marketing personnel,  promotional activities, and costs of advertising and trade
shows. The decrease in sales and marketing expenses for the three  and six months ended
June 30, 2004 compared to the three and six months ended June 30, 2003 primarily relates
to a reduction  of headcount in our Swiss office, the closing of our German office as
part of our business restructuring that began in July  2003 and reduced usage of outside
consultants.

**Research
  and Development, Net**

|                                        |  |  | Three
      Months Ended June 30, |       | Six
      Months Ended June 30, | 
|--------------------------------------- |  |  | --------------------------------- | ----- | ------------------------------- | 
|                                        |  |  |                                   |       |                                 | 
|                                        |  |  | 2004                              |       | 2003                            | 
|                                        |  |  |                                   |       |                                 | 
|                                        |  |  | (Dollars
      in thousands)     
|                                        |  |  |                                   |       |                                 | 
|Research
      and Development          |  |  | $                                 | 1,241 |                                 | 
|Less-
      Funded Research             |  |  |                                   | (777  | )                               | 
|                                        |  |  |                                   |       |                                 | 
|Research
      and development, net     |  |  | $                                 | 464   |                                 | 
|                                        |  |  |                                   |       |                                 | 
|As a
      percentage of total revenues |  |  |                                   | 10    | %                               | 

Net
research and development expenses consist primarily of salaries and related benefits,
equipment for software  developers, facility costs, and payments to outside contractors,
less funded research. The decrease in research and  development expenses for the three
and six months ended June 30, 2004 compared to the three and six months ended June 30,
2003  relates primarily to the business restructuring begun in July 2003. Funded
research, which consists primarily of government  grants for research projects, decreased
for the three months and six months ended June 30, 2004 compared to the three and six
months ended June 30, 2003 due to our narrowing our research efforts on technology that
is more closely aligned with our  product lines.  We expect our gross and net research
and development expenses to increase for the remainder of 2004 as we add  to our
development staffing and continue to narrow our funded research focus.

14

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**General
  and Administrative**

|                                        |  |  | Three
      Months Ended June 30, |       | Six
      Months Ended June 30, | 
|--------------------------------------- |  |  | --------------------------------- | ----- | ------------------------------- | 
|                                        |  |  |                                   |       |                                 | 
|                                        |  |  | 2004                              |       | 2003                            | 
|                                        |  |  |                                   |       |                                 | 
|                                        |  |  | (Dollars
      in thousands)     
|                                        |  |  |                                   |       |                                 | 
|General
      and Administrative        |  |  | $                                 | 1,019 |                                 | 
|As a
      percentage of total revenues |  |  |                                   | 23    | %                               | 

General and
administrative expenses consist primarily of salaries and related costs associated with
finance, accounting,  legal, corporate governance, investor relations, administration and
facilities.  The increase for the three months ended June  30, 2004 compared to the three
months ended June 30, 2003 are primarily attributable to the cost of our independent
investigation of issues related to our 2003 audit..  The increase for the six months
ended June 30, 2004 compared to the six  months ended June 30, 2003 relate to second
quarter 2004 independent investigation costs, and first quarter 2004 legal fees in  the
amount of $250,000 incurred in resolving a dispute with Lucent Technology and increased
insurance, compliance and audit  expenses.

**Other
  Income, Net**

Total
other income and (expense), net changed from $10,000 of income for the three months ended
June 30, 2003 to $2,000 of  income for the three months ended June 30, 2004.  Total other
income and (expense), net changed from $20,000 of income for the  six months ended June
30, 2003 to $35,000 of expense for the six months ended June 30, 2004.  The change for
the six months  ended June 30, 2004 compared to the six months ended June 30, 2003 was
primarily attributable to an exchange loss of  $45,000  during the quarter ended March
31, 2004 related to foreign currency transactions.

**Income
  Tax Provision**

The
decrease in the tax provision from $20,000 and $92,000 for the respective three and six
months ended June 30, 2003 to  $17,000 and $28,000 for the respective three and six
months ended June 30, 2004 relates to a decrease in taxes owed for our  international
operations.

**Loss
  from Discontinued Operations, net of tax**

Discontinued
Operations consisted of our sale of the operations of our Engineering and Education
Products Division (EEPD)  in January 2001.  The loss from discontinued operations, net of
tax of $137,000 for the three and six months ended June 30,  2003 resulted from the
recording of additional accrued expenses for third party contractual commitments based on
an analysis  of the liabilities related to EEPD.  We had no discontinued operations for
the three and six months ended June 30, 2004.

**Net
  Income (Loss)**

Net
income for the three months ended June 30, 2004 was $300,000 compared to a net loss of
$(437,000) for the three months  ended June 30, 2003.  Net income for the six months
ended June 30, 2004 was $525,000 compared to a net loss of $(792,000) for  the six months
ended June 30, 2003.  The changes in net income (loss) are due to the changes in
revenues, costs of revenues,  expenses, other income, net, income tax provision, and loss
from discontinued operations described above.

**Liquidity
  and Capital Resources**

Cash
and cash equivalents increased from $7,139,000 at December 31, 2003 to $8,552,000 at June
30, 2004.  We generated  $835,000 from operating activities for the six months ended June
30, 2004 compared to the use of  $494,000 from operating  activities for the six months
ended June 30, 2003.  The increase in operating cash inflows primarily relates to an
increase in  profitability as well as a reduction of trade and other accounts receivable,
partially offset by decreases in current  liabilities.

Investing
activities resulted in net cash outflows of $1,328,000 for the six months ended June 30,
2004 compared to  $108,000 for the six months ended June 30, 2003.  The increase in cash
outflows from investing activities primarily relates to  the purchase of the
"S" programming language from Lucent Technologies.

Financing
activities resulted in net cash inflows of $1,799,000 for the six months ended June 30,
2004 compared to net  cash outflows of $43,000 for the six months ended June 30, 2003.
The increase in cash inflows from financing activities  relates to our receipt proceeds
from the  exercise of employee stock options and contributions to our employee stock
purchase.

In
March 2004, the Company renewed a working capital revolving line of credit and security
agreement with Silicon Valley  Bank, or SVB, and modified the terms to provide for up to
$3.0 million in borrowing availability through December 26, 2004.  This

15

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facility is
secured by our accounts receivable and allows us to borrow up to the lesser of (a) 75% of
our eligible  accounts receivable or (b) $3.0 million and bears interest at the prime
rate, which was 4% as of June 30, 2004, plus 1%.  At  June 30, 2004, no amounts had been
borrowed and $966,000 was available for future borrowings under the line of credit
facility.

In
March 2004, we also renewed and modified the terms of a term loan and security agreement
with SVB. This facility  allows us to take advances on the cost of eligible equipment and
software less than 90 days old and is secured by the  underlying assets. We had borrowed
$450,000 under this facility in 2002 and the remaining outstanding balance was $225,000
at  June 30, 2004. Through December 26, 2004, we may draw up to an additional $500,000
under this agreement, no more than $250,000  of which may be for software. These term
loan advances bear interest at the prime rate, which was plus 1%.  Advances are  repaid
over a 36 or 24-month period.

These
credit facilities contain covenants that limit our net losses and restrict the amount of
capital expenditures not  financed through the equipment term loan. In addition, we are
prohibited under these facilities from paying dividends. We were  in compliance with
these covenants as of June 30, 2004.

The
following are our contractual commitments associated with our operating lease and
equipment financings:

|                          |  |  | Six
      Months Ending
      December 31, |         | Year
      Ending December 31, |   |         |  |      |        
|------------------------- |  |  | ------------------------------------------ | ------- | ------------------------------ | - | ------- |  | ---- | -------
|                          |  |  |                                            |         |                                |   |         |  |      |        
|                          |  |  | 2004                                       |         | 2005                           |   | 2006    |  | 2007 |        
|                          |  |  |                                            |         |                                |   |         |  |      |        
|Commitments:              |  |  |                                            |         |                                |   |         |  |      |        
|Equipment
      term loan |  |  | $                                          | 64,000  |                                | $ | 129,000 |  | $    | 32,000 
|Operating
      leases    |  |  |                                            | 330,000 |                                |   | 605,000 |  |      | 581,000
|                          |  |  |                                            |         |                                |   |         |  |      |        
|Total
      commitments   |  |  | $                                          | 394,000 |                                | $ | 734,000 |  | $    | 613,000
|                          |  |  |                                            |         |                                |   |         |  |      |        

As
of June 30, 2004 we had tax net operating loss carryforwards of approximately $22 million
and research and development  tax credit carryforwards of approximately $2 million. The
net operating loss and credit carryforwards will expire at various  dates beginning 2004
through 2021, if not used. Under the provisions of the Internal Revenue Code, substantial
changes in our  ownership may limit the amount of net operating loss carryforwards that
could be utilized annually in the future to offset  taxable income. A full valuation
allowance has been established in our financial statements to reflect the uncertainty of
our  ability to use available tax loss carryforwards and other deferred tax assets.

We
believe that our existing cash and cash equivalents and available bank borrowings will be
sufficient to meet our  capital requirements for at least the next 12 months. However, if
during that time, we choose to increase our investment in  current or new product and
marketing initiatives, market conditions worsen, or if other unforeseen events should
occur, we  could deem it necessary to seek additional funds through public or private
equity financing or from other sources in order to  fund our operations and pursue our
growth strategy. Any financing we obtain may contain covenants that restrict our freedom
to  operate our business or may require us to issue securities that have rights,
preferences or privileges senior to our common  stock and may dilute stockholder
ownership interest in Insightful.

**Important
  Factors That May Affect Our Business, Our Operating Results and Our Stock Price**

In
addition to the other information contained in this quarterly report, you should
carefully read and consider the  following risk factors.  If any of these risks actually
occur, our business, financial condition or operating results could be  adversely
affected and the trading price of our common stock could decline.

***Our
  operating results fluctuate and could fall below expectations of securities
  analysts and investors, resulting in a decrease in our stock price.***

Our
operating results have varied widely in the past, and we expect that they could continue
to fluctuate in the future.  Our stock price could decrease if our operating results for
a particular quarter or year fall below the expectations of  securities analysts and
investors.  Some of the factors that could affect the amount and timing of our revenues
and related  expenses and cause our operating results to fluctuate include:

16

---



- our primary reliance on one
product family;
- our ability to penetrate new
markets;
- our ability to develop, introduce
and market new products on a timely basis;
- market acceptance of our products;
- our ability to compete in the
highly competitive statistics, data mining and knowledge access markets;
- our ability to obtain government
contracts and research grants;
- our ability to expand our sales
and support infrastructure;
- our ability to maintain our
relationships with key partners;
- our ability to successfully
expand our international operations;
- our ability to maintain
third-party licenses;
- our inability to protect our
intellectual property rights;
- integration of our new key
management team members;
- unanticipated legal costs;
- uncertain  costs  associated
with being a public  company,  such as the cost of being complaint with the provisions of
Sarbanes Oxley;
- our ability to attract and retain
key employees or management team members; and
- general economic conditions,
which may affect our customers' purchasing decisions.

***Because
  we cannot predict our revenues and expenses with certainty, our expectations
  of future profits or losses may differ from actual results.***

It
is particularly difficult to predict the timing or amount of our license revenues because:

- our sales cycles are lengthy and
variable,  typically  ranging  between two and eight months from our initial  contact
with a potential customer;
- a substantial  portion of our
sales are completed at the end of the quarter and, as a result, a substantial  portion of
our license revenues are recognized in the last days of a quarter;
- the amount of unfulfilled orders
for our products is typically small ;  and
- delay of new product  releases
can result in a customer's  decision to delay  execution of a contract or, for contracts
that include the new release as an element of the contract,  will result in deferral of
revenue  recognition until such  release.

Even
though our revenues are difficult to predict with certainty, we base our decisions
regarding many of our operating  expenses on anticipated revenue trends.  Many of our
expenses are relatively fixed, and we cannot quickly reduce spending if  our revenues are
lower than expected.  As a result, revenue shortfalls could result in significantly lower
income or greater  loss than anticipated for any given period, which could result in a
decrease in our stock price.

***If
  potential customers do not continue to purchase the S-PLUS product family, our
  revenues and operating results will be adversely affected.***

License
revenues from the S-PLUS product and add-on modules account for nearly all of our license
revenues.  Our newest  products, In Fact and Insightful Miner, have not contributed
consistent revenues to date.  We expect license revenues from the  S-PLUS product family
to continue to account for a substantial majority of our future revenues.  As a result,
factors  adversely

17

---



affecting the
pricing of or demand for the S-PLUS product family, such as competition or technological
change, could  dramatically affect our operating results.  If we are unable to
successfully deploy current versions of the S-PLUS product  family and to develop,
introduce and establish customer acceptance of new and enhanced versions of the S-PLUS
product family,  our revenues and operating results will be adversely affected.

***If
  we are unable to penetrate new end-user markets with our current and future
  products, the growth of our business will be limited.***

We
focus our statistics business on two vertical markets: financial services and
pharmaceuticals.  In order to grow our  business, we will need to expand into new
end-user markets within these two vertical markets for our statistics software, and  we
must simultaneously develop and sell new products that address these and other markets.
We will need to simultaneously  invest in the scalability and deployability of our
statistics product offerings and in the further development and enhancement  of our data
mining and knowledge access products.  These simultaneous investments may strain our
financial resources and  diffuse management's time and attention.  If any of these
initiatives fails, our business will not grow and could fail.

***Many
  potential customers are not yet aware of the benefits of knowledge access solutions
  utilizing relationship search capabilities, and our products may not achieve
  market acceptance.***

One
of our newest products, In Fact, targets the knowledge access market.  This product has
not contributed substantial  revenues to date.  The market for knowledge access solutions
is still emerging and any growth in demand for and acceptance of  these solutions remains
uncertain.  Even if this market grows, businesses may purchase our competitors' solutions
or develop  their own.  If In Fact does not achieve market acceptance, our results will
suffer.

***If
  we are unable to compete successfully in the statistics, data mining and knowledge
  access markets, our business will fail.***

Our
S-PLUS product suite targets the statistics and data analysis market.  This market is
highly competitive, fragmented  and mature.  We face competition in the statistics and
data analysis market primarily from large enterprise software vendors  and our potential
customers' information technology departments.  These departments may seek to develop
data analysis  solutions that utilize R, an open-source software package that performs
operations similar to the "S" language that forms the  core of our S-PLUS
product.  The dominant competitor in our industry is SAS Institute.  Other companies with
which we compete  include, but are not limited to, SPSS, Inc., StatSoft Inc., Mathworks
and Minitab, Inc.  In addition to competition from other  statistical software companies,
we face competition from providers of software for specific statistical applications .

In
the data mining and knowledge access market, we face competition from many companies,
including SAS Institute, SPSS,  IBM, NCR, Autonomy, Verity, Inxight, ClearForest and
Iphrase, many of which are much larger than we are.

In
addition, as we develop other new products, or attempt to expand our sales into new
vertical and end-user markets, we  may begin competing with companies with whom we have
not previously competed.  It is also possible that new competitors will  enter the
market.  An increase in competitive pressures in our market or our failure to compete
effectively may result in  pricing reductions, reduced gross margins and loss of market
share.  Many of our competitors have longer operating histories,  greater name
recognition, larger customer bases and significantly greater financial, technical,
marketing and other resources  than we do.  We could also experience competition from
companies in other sectors of the broader market for business  intelligence software,
like providers of on-line analytical processing, or OLAP, business intelligence and
analytical  application software, as well as from companies in other sectors.

***Our
  business is sensitive to the risks associated with government funding decisions.***

We
regularly apply for and are granted research contracts from a variety of government
agencies and funding programs.  Over the last three fiscal years, these contracts have
generated from $4.3 to $4.8 million annually in offsets to our research  and development
expenses.  We may not receive new funded research contracts or any renewals of
government-funded projects  currently in process, and we may decide to cancel or reassign
certain ongoing projects that are not aligned with our core  business needs.  The
personnel and other costs associated with these programs are relatively fixed in the
short run, and a  sudden cancellation or non-renewal of a major funding program or
multiple smaller programs would be harmful to our annual  results.  A substantial portion
of the research grant money we receive is granted to us based on our status as a small
business, the definition of which varies depending on the individual contract terms.  If
the number of our employees or the  amount of our revenues ever grows beyond the limits
prescribed in any of these contracts, we will no longer be eligible for  such research
contracts and we will have to incur certain research and development expenses without the
benefit of offsets.

We
are working to align our research and development efforts to ensure that we only pursue
projects that directly support  our business strategy.  Through this alignment, we expect
to apply for and receive fewer government research contracts, which  could reduce the
offsets to our research and development expenses and thereby harm our operating results.

Furthermore,
a significant portion of our license revenues come from United States government
entities, as well as  institutions,

18

---



healthcare
organizations and private businesses that contract with or are funded by government
entities.  Government appropriations processes are often slow and unpredictable and may
be affected by factors outside of our control.  Reductions in government expenditures and
termination or renegotiation of government-funded programs or contracts could  adversely
affect our revenue and operating results.

***We
  may be unable to expand our sales organization, which could harm our ability
  to expand our business.***

To
date, we have sold our desktop products primarily through our telesales department while
we have relied on our field  sales force to sell our server-based solutions and place
orders for multiple desktop licenses.  We believe our future revenue  growth will depend
in large part on recruiting, training and retaining both telesales and direct sales
personnel.  Competition  for such personnel in the software industry is intense.  Our
growth will further depend on expanding our indirect distribution  channels.  These
indirect channels include value added resellers, or VARs, distributors, original
equipment manufacturer, or  OEM, partners, system integrators and consultants.  If we
experience difficulty in recruiting and retaining qualified  telesales and direct sales
personnel and in establishing third-party relationships with VARs, distributors, OEM
partners and  systems integrators and consultants, our sales could be reduced or our
sales growth limited.  Even if we successfully expand  our sales force and other
distribution channels, the expansion may not result in expected revenue growth.

***If
  we are unable to develop and maintain effective long-term relationships with
  our key partners, or if our key partners fail to perform, our ability to sell
  our solution will be limited.***

We
rely on our existing relationships with a number of key partners, including system
integrators, VARs, distributors and  third-party technology vendors  that are important
to worldwide sales and marketing of our solutions.  In addition, to be  successful and to
more effectively sell our products to larger customers, we must develop successful new
relationships with  other key partners.  These key partners often provide enterprise
software, consulting, implementation and customer support  services, and endorse our
solution during the competitive evaluation stage of the sales cycle.  Although we seek to
maintain  relationships with our key partners, and to develop relationships with new
partners, many of these existing and potential key  partners have similar, and often more
established, relationships with our competitors.  These existing and potential partners,
many of which have significantly greater resources than we have, may in the future market
software products that compete with  our solution or reduce or discontinue their
relationships with us or their support of our solution.

***Our
  sales cycle is variable, and sales delays could cause our operating results
  to fluctuate, which could cause a decline in our stock price.***

An
enterprise's decision to purchase statistics, data mining and knowledge access software
and services is discretionary,  involves a significant commitment of its resources and is
influenced by its budget cycles.  Our sales cycles are long and  variable, typically
ranging between two and eight months from our initial contact with a potential customer
to the issuance of  a purchase order or signing of a license or services agreement,
although the amount of time varies substantially from customer  to customer and
occasionally sales require substantially more time.  When economic conditions weaken,
sales cycles for  software products and related services tend to lengthen, and as a
result, we experienced longer sales cycles in 2002, 2003 and  the first six months of
2004 and we expect to continue to experience longer sales cycles at least through the
remainder of  2004.  Sales delays could cause our operating results to fall below the
expectations of securities analysts or investors,  which could result in a decrease in
our stock price.

***We
  have incurred losses in recent periods, and may continue to do so, which could
  cause a decrease in our stock price.***

Until
the fourth quarter of 2003, we had posted net losses for each fiscal quarter since the
fourth quarter of 2001.  As  of June 30, 2004, we had an accumulated deficit of over $30
million.  We achieved only slight profits in recent quarters, and  a small shortfall in
revenue or unexpected increase in expenses, could again cause us to suffer a quarterly
net loss.  We may  experience losses and negative cash flows in the near term, even if
sales of our products and services continue to grow.

We
believe that we may need to significantly increase our product development and
professional services personnel costs  to expand our market position and further increase
acceptance of our products .  We may not be able to increase our revenues  sufficiently
to keep pace with these growing expenditures, if at all, and as a result may be unable to
achieve or maintain  profitability in the future.  In addition, if we are unable to grow
our revenues, we may be forced to discontinue certain  research and/or development
projects, which could limit our future product development opportunities.

***If
  we are unable to comply with the requirements for quotation on the NASDAQ Stock
  Market and we lose our quotation on NASDAQ, the liquidity and market price of
  our common stock would likely decline.***

On
August  17,  2004,  we  received  a NASDAQ  Staff  Determination  indicating  that we
failed to comply  with the  filing  requirements for continued  listing set forth in
Marketplace Rule  4310(c)(14),  and that our common stock is therefore  subject  to
removal from  quotation on the NASDAQ Stock Market.  The Staff  Determination  relates to
our failure to file this  quarterly  report

19

---



before  the
applicable  filing  deadline.  We  intend  to  appeal  the  Staff  Determination  to  the
NASDAQ  Listing  Qualifications  Panel and have  scheduled  a hearing  for  September
17,  2004.  Even  though we now have filed this  quarterly  report, Nasdaq may delist our
common stock after the September 17 hearing.

If
we lose our quotation on NASDAQ, our common stock would probably be quoted on the OTC
Bulletin Board or the National  Quotation Service Bureau (the "Pink Sheets")
for unsolicited trading.  If we lose our quotation on the NASDAQ Stock Market, it  could
impair the liquidity of our common stock and likely would result in a decline in the
market price of our common stock.

***If
  we fail to maintain effective internal financial and managerial systems, controls
  and procedures, our results of operations may be adversely affected.***

We
face the risk that our systems, procedures and controls might not be adequate to support
our operations, maintain  accountability for our assets or ensure proper identification
of, and proper accounting treatment for, our activities.  Our  failure to maintain and
implement such adequate systems, procedures and controls could adversely  impact our
business,  financial condition and results of operations. In the completion of our
year-end audit, our former independent auditors  advised us that they observed
significant deficiencies in the design or operation of our internal controls that, in
their  judgment, could adversely affect our ability to record, process, summarize and
report financial data consistent with the  assertions of management in the consolidated
financial statements. Specifically, our former auditors communicated to us the  following
reportable conditions:

- that our close  process,  both
domestically  and  internationally  was not performed on a timely basis  resulting in a
large number of adjustments generated by both us and the our former independent auditors;
- there was a lack of adequate
detailed review resulting in errors requiring adjusting entries during audit fieldwork;
- our accounting department was
understaffed.
- we had a lack of segregation of
duties surrounding the purchasing, receiving and authorization functions.

As
a result of these deficiencies our former independent auditors made the following
recommendations:

- that we review all significant
processes involved in the financial  reporting and operating  activities of the company
for potential  segregation-of-duties  issues;  review and test our expense and purchasing
approval  functions;  and, as  necessary, revise our processes and procedures around
internal investigations.
- that  we  perform  a  detailed
critique  of  our  financial  statement  close  process,  domestically  as  well  as
internationally including implementing and documenting recurring close procedures and
assessing our staffing levels.

We
have  implemented  efforts to address  these  internal  control  deficiencies,  but they
might not prove  adequate.  We  continue to evaluate our operational,  financial and
accounting systems and our managerial  controls and procedures to determine  what
additional  changes,  if any,  might help us to manage  our  current  operations  better.
We expect to incur  significant  expenditures to enhance our information  technology
resources to improve our financial and managerial systems.  Even with these  additional
expenditures, we might not be able to sufficiently enhance our systems, procedures and
controls.

***If
  we do not expand our international operations and successfully overcome the
  risks inherent in international business activities, the growth of our business
  will be limited.***

To
be successful, we must continue to expand our international operations and enter new
international markets. This  expansion may be delayed as a result of operating expense
reduction measures and general economic conditions.  If we do expand  internationally, it
will require significant management attention and financial resources to successfully
translate and  localize our software products to various languages and to develop direct
and indirect international sales and support  channels. Even if we successfully translate
our software and develop new channels, we may not be able to maintain or increase
international market demand for our solutions.  We, or our VARs or distributors, may be
unable to sustain or increase  international revenues from licenses or from consulting
and customer support.  In addition, our international sales are  subject to the risks
inherent in international business activities, including :

- costs of customizing  products
for foreign countries;
- export and import restrictions,
tariffs and other trade barriers;

20

---



- the need to comply with multiple,
conflicting and changing laws and regulations;
- reduced protection of
intellectual property rights and increased liability exposure; and
- regional economic,  cultural and
political conditions,  including the direct and indirect effects of terrorist activity
and armed conflict in countries in which we do business.

Our foreign
subsidiaries operate primarily in local currencies, and their results are translated into
U.S. dollars. We do not  currently engage in currency hedging activities, but we may do
so in the future.  Changes in the value of the U.S. dollar  relative to foreign
currencies increased both our European revenues and expenses in 2003 [and the first six
months of 2004].  Our operating results could be materially harmed if we enter into
license or service agreements providing for significant  amounts of foreign currencies
with extended payment terms or extended implementation timeframes if the values of those
currencies fall in relation to the U.S. dollar over the payment period of the agreement.

***Delivery
  of our solution may be delayed if we cannot continue to license third-party
  technology that is important to the functionality of our solution.***

We
incorporate into our products software that is licensed to us by third-party software
developers.  The third-party  software currently offered in conjunction with our solution
may become obsolete or incompatible with future versions of our  products.  Further,
numerous individual and institutional licensors have contributed software code to S-PLUS
in exchange for  little or no consideration, and some of these third parties may choose
to revise or revoke their licensing terms with us.  A  significant interruption in the
supply of this technology could delay our sales until we can find, license and integrate
equivalent technology.  This could take a significant amount of time, perhaps several
months, which would cause our operating  results to fall below the expectations of
securities analysts or investors and result in a decrease in our stock price.

***We
  may be unable to obtain funding that may be necessary to support the expansion
  of our business.***

Our
future revenues may be insufficient to support the expenses of our operations and the
expansion of our business.  We  may therefore need additional equity or debt capital to
finance our operations.  If we are unable to generate sufficient cash  flow from
operations or to obtain funds through additional financing, we may have to reduce some or
all of our development and  sales and marketing efforts and limit the expansion of our
business or cease operations.

We
believe that our existing cash and cash equivalents and available bank borrowings will be
sufficient to meet the  capital requirements of our core business for at least the next
twelve months.  However, if during that time the market for  our products worsens, or if
other unforeseen events should occur, we may need additional funds through public or
private  equity financing or from other sources in order to fund our operations and
pursue our growth strategy.  If our newer products  require substantial investment in
order to make them commercially viable, we may need to seek additional funding or we may
be  forced to discontinue further investment in them.  We have no commitment for
additional financing, and, if funding does become  necessary, we may experience
difficulty in obtaining it on favorable terms, if at all.  If our common stock is
delisted from  Nasdaq, it will be much more difficult for us to obtain funds through any
equity financing.

Our
credit line and equipment term loan with Silicon Valley Bank contain covenants that
require us to maintain a certain  level of net income.  Any additional financing we
obtain may contain covenants that restrict our freedom to operate our  business or may
require us to issue securities that have rights, preferences or privileges senior to our
common stock and may  dilute your ownership interest in us.

***Global
  economic conditions could adversely affect our revenue growth and ability to
  forecast revenue.***

Our
revenue growth and potential for profitability depend on the overall demand for
statistics and data analysis, data  mining and knowledge access software and services.
Because our sales are primarily to corporate customers, our business also  depends on
general economic and business conditions.  Continued soft demand for computer software
caused by a weakened  economy, both domestic and international, may affect our sales and
may continue to result in decreased revenues.  As a result  of inconsistent and weakened
economic conditions, we may experience difficulties in collecting outstanding receivables
from  our customers.

***Privacy
  and security concerns may limit the effectiveness of and reduce the demand for
  our solution.***

The
effectiveness of our solution relies on the storage and use of data collected from
various sources, including  personal information.  The collection and use of such data by
our customers for customer profiling may raise privacy and  security concerns, especially
in pharmaceutical markets where companies are subject to the strict privacy requirement
of the  Health Insurance Portability and Privacy Act of 1996.  Our customers generally
have implemented security measures to protect  customer data from disclosure or
interception by third parties.  However, the security measures may not be effective
against  all potential security threats.  If a well-publicized breach of customer data
security were to occur, our products and  solutions may be perceived as less desirable,
which could limit our revenue growth.

21

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In
addition, due to privacy concerns, some Internet commentators, consumer advocates and
governmental or legislative  bodies have suggested legislation to limit the use of
customer profiling technologies.  The European Union and some European  countries have
already adopted some restrictions on the use of customer profiling data.  If major
countries or regions adopt  legislation or other restrictions on the use of customer
profiling data, our solution would be less useful to customers, and  our sales could
decrease.

***If
  we do not retain our key employees or management team our ability to execute
  our business strategy will be limited.***

Our
future performance will depend largely on the efforts and abilities of our key technical,
sales, customer support and  managerial personnel and on our ability to attract and
retain them.  In addition, our ability to execute our business strategy  will depend on
our ability to recruit additional experienced senior managers and to retain our existing
executive officers.  In addition, departures of key executives could adversely impact our
reputation. We may be unable to attract and retain such  personnel in the future.  In
addition, due to competition for qualified employees, we may be required to increase the
level of  compensation paid to existing and new employees, which could materially
increase our operating expenses.  The market price of  our common stock has declined in
2004.  Consequently, potential employees may perceive our equity incentives such as stock
options as less attractive, and current employees whose options are no longer priced
below market value may choose not to  remain employed by us.  In that case, our ability
to attract or retain employees will be adversely affected.  Our key  employees are not
obligated to continue their employment with us and could leave at any time.

***Integration
  of our new directives and management team could disrupt our business and the
  execution of our strategy.***

Substantially
all of our executive  leadership  team has been replaced in the last twelve months.
Since January 2004, we  hired a new Chief  Executive  Officer and Chief  Financial
Officer.  We also currently in the process of replacing our recently  departed  Senior
Vice  President of Marketing and Vice  President of Research and  Development.  Finally,
we have appointed two  new members to our board of directors and audit committee.  The
restructuring of our senior  management and finance  leadership  and the integration of
these key employees and directors may result in some disruption in our business.

***Rapid
  changes in technology could render our products obsolete or unmarketable, and
  we may be unable to introduce new products and services successfully and in
  a timely manner.***

The
business software market is characterized by rapid change due to changing customer needs,
rapid technological  developments and advances introduced by competitors.  Existing
products can become obsolete and unmarketable when products  using new technologies are
introduced and new industry standards emerge.  New technologies, including the rapid
growth of the  Internet and commercial acceptance of open source software, such as R,
could change the way software is sold or delivered.  We  may also need to modify our
products when third parties change software that we integrate into our products.  As a
result, the  life cycles of our products are difficult to estimate.

To
be successful, we must continue to enhance our current product line and develop new
products that successfully respond  to changing customer needs, technological
developments and competitive product offerings.  We may not be able to successfully
develop or license the applications necessary to respond to these changes, or to
integrate new applications with our existing  products.  Past or future reductions in our
research and development personnel may harm our ability to innovate and compete.  We may
not be able to introduce enhancements or new products successfully or in a timely manner
in the future.  If we delay  release of our products and product enhancements, or if they
fail to achieve market acceptance when released, it could harm  our reputation and our
ability to attract and retain customers, and our revenues may decline. In addition,
customers may defer  or forego purchases of our products if we, our competitors or major
hardware, systems or software vendors introduce or  announce new products or product
enhancements.  Finally, delays in any new research or development efforts could cause
delays  in our general product development schedule, including causing delays in the
release of new product versions, which could  materially harm our maintenance revenues.

***We
  may be unable to adequately protect our proprietary rights, which may limit
  our ability to compete effectively.***

Our
success depends in part on our ability to protect our proprietary rights, including our
"S" programming language  purchased from Lucent Technologies in January 2004.
To protect our proprietary rights, we rely primarily on a combination of  patent,
copyright, trade secret and trademark laws, confidentiality agreements with employees and
third parties and protective  contractual provisions such as those contained in license
agreements with consultants, vendors and customers, although we have  not signed these
agreements in every case.  Despite our efforts to protect our proprietary rights,
unauthorized parties may  copy aspects of our products and obtain and use information
that we regard as proprietary.  Generally, our products are not  physically
copy-protected.  In order to retain exclusive ownership rights to all software developed
by us, we license all  software and provide it in executable code only, with contractual
restrictions on copying, disclosure and transferability.  As  is customary in the
industry, we generally license our products to end-users by use of a `shrink-wrap'
license.  Certain  specialized products may utilize a written, signed license agreement
with the customer.  The source code for most of our  products is protected as a trade
secret and as unpublished copyrighted work.  Other parties may breach confidentiality
agreements and other protective contracts we have entered into, and we

22

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may not become
aware of, or have adequate remedies in  the event of, a breach.  We face additional risk
when conducting business in countries that have poorly developed or  inadequately
enforced intellectual property laws.  While we are unable to determine the extent to
which piracy of our software  products exists, we expect piracy to be a continuing
concern, particularly in international markets and as a result of the  growing use of the
Internet.  In any event, competitors may independently develop similar or superior
technologies or  duplicate the technologies we have developed, which could substantially
limit the value of our intellectual property.

***Intellectual
  property claims and litigation could subject us to significant liability for
  damages and result in invalidation of our proprietary rights.***

In
the future, we may have to resort to litigation to protect our intellectual property
rights, to protect our trade  secrets or to determine the validity and scope of the
proprietary rights of others. Any litigation, regardless of its success,  would probably
be costly and require significant time and attention of our key management and technical
personnel.  Although  we have not been sued for intellectual property infringement, we
may face infringement claims from third parties in the  future.  The software industry
has seen frequent litigation over intellectual property rights, and we expect that
participants  in the industry will be increasingly subject to infringement claims as the
number of products, services and competitors grows  and the functionality of products and
services overlap.  Infringement litigation could also force us to:

- stop or delay selling,
incorporating or using products that incorporate the challenged intellectual property;
- pay damages;
- enter into licensing or royalty
agreements, which may be unavailable on acceptable terms; or
- redesign  products  or  services
that  incorporate  infringing  technology,  which  we  might  not be able to do at an
acceptable price, in a timely fashion or at all.

***Our
  products may suffer from defects or errors, which could result in loss of revenues,
  delayed or limited market acceptance of our products, increased costs and reputational
  damage.***

Software
products as complex as ours frequently contain errors or defects, especially when first
introduced or when new  versions are released.  Our customers are particularly sensitive
to such defects and errors because of the importance of  accuracy in software used in
analyzing data.  We have had to delay commercial release of past versions of our products
until  software problems were corrected, and in some cases have provided product updates
to correct errors in released products.  Our  new products or releases may not be free
from errors after commercial shipments have begun.  Any errors that are discovered  after
commercial release could result in loss of revenues or delay in market acceptance,
diversion of development resources,  damage to our reputation, increased service and
warranty costs or claims against us.

In
addition, the operation of our products could be compromised as a result of errors in the
third-party software we  incorporate into our software.  It may be difficult for us to
correct errors in third-party software because that software is  not in our control.

***Our
  stock price may be volatile.***

The
price of our common stock has been volatile over the past 12 months.  Our common stock
reached a high of $4.97 per  share on May 5, 2004 and traded as low as $1.09 per share on
May 19, 2003.  As a result of fluctuations in the price of our  common stock, you may be
unable to sell your shares at or above the price you paid for them.  The trading price of
our common  stock could be subject to fluctuations for a number of reasons, including

- the potential delisting of our
common stock by Nasdaq;
- future announcements concerning
us or our competitors;
- actual or anticipated quarterly
variations in operating results;
- changes in analysts' earnings
projections or recommendations;
- announcements of technological
innovations;
- the introduction of new products;
- changes in product pricing
policies by us or our competitors;
- loss of key personnel;
- proprietary rights litigation or
other litigation; or
- changes in accounting standards
that adversely affect our revenues and earnings.

23

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In
addition, stock prices for many technology companies fluctuate widely for reasons that
may be unrelated to operating  results of these companies.  These fluctuations, as well
as general economic, market and political conditions, such as  national or international
currency and stock market volatility, recessions or military conflicts, may materially
and adversely  affect the market price of our common stock, regardless of our operating
performance and may expose us to class action  securities litigation which, even if
unsuccessful, would be costly to defend and distracting to management.  In the past,
following periods of volatility in the market price of a company's securities, securities
class action litigation has often  been instituted against these companies.  Litigation
brought against us could result in substantial costs and a diversion of  management's
attention and resources, which could have a material adverse effect on our business,
financial condition and  operating results.

|**ITEM
      3.** |  | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**
|----------------- |  | ---------------------------------------------------------------

We
develop  products in the United States and sell them worldwide.  As a result,  our
financial  results could be affected  by factors such as changes in foreign  currency
exchange rates or weak economic  conditions in foreign  markets.  We operate in  the
United  Kingdom,  Germany,  France and  Switzerland  and incur  expenses and generate
billings  denominated  in those local  currencies.  Interest  income and expense are
sensitive to changes in the general  level of U.S.  interest  rates,  particularly  since
our investments are in short-term  instruments.  Based on the short-term  nature and
current levels of our investments and  debt, however, we do not believe that there is any
material market risk or exposure.

Our
general  investing  policy is to limit the risk of principal  loss and ensure the safety
of invested funds by limiting  credit and market risk.  We  currently  invest in highly
liquid  money market  accounts.  All highly  liquid  investments  with  original
maturities of three months or less are considered to be cash equivalents.

|**ITEM
      4.** |  | **CONTROLS
        AND PROCEDURES**
|----------------- |  | -----------------------------------

**Disclosure
  Controls and Procedures**

The
term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange  Act of 1934, or the Exchange Act. These rules refer
to the controls and other procedures of a company that are designed to  ensure that the
information required to be disclosed by a company in the reports that it files or submits
under the Exchange  Act is recorded, processed, summarized and reported within required
time periods.  Disclosure controls and procedures include,  without limitation, controls
and procedures designed to ensure that information required to be disclosed in our
Exchange Act  reports is accumulated and communicated to management, including our chief
executive officer and chief financial officer, as  appropriate to allow timely decisions
regarding required disclosure.

Our
chief executive officer and our chief financial officer have evaluated the effectiveness
of our disclosure controls  and procedures as of the end of the period covered by this
quarterly report, and they have concluded that, as of that date,  our disclosure controls
and procedures were effective.

**Internal
  Controls over Financial Reporting**

During
our audit for the year ended  December 31,  2003,  our former  independent  auditors
advised us that they  observed  significant  deficiencies in the design or operation of
our internal  controls that, in their judgment,  could adversely  affect  our ability to
record,  process,  summarize  and report  financial  data  consistent  with the
assertions  of management in the  consolidated financial statements. Specifically, our
former auditors communicated to us the following reportable conditions:

- that our close process, both
domestically and internationally was not performed on a timely basis resulting in a
large number of adjustments generated by both us and the our former independent auditors;
- there was a lack of adequate
detailed review resulting in errors requiring adjusting entries during audit fieldwork;
- our accounting department was
understaffed; and
- we had a lack of segregation of
duties surrounding the purchasing, receiving and authorization functions.

24

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Since
that time, we have performed a critique of our close process and redefined close
procedures and documented a close  calendar.  The close procedures include detailed and
documented reviews.  In addition, we assessed our staffing levels  worldwide and have
hired new accounting personnel both domestically and internationally.  We hired a new
Chief Financial  Officer and appointed a new Audit Committee Chairman, both with strong
backgrounds in accounting and public company financial  reporting.  Finally, we
segregated the duties surrounding the purchasing, receiving and authorization functions.

**Limitations
  of Disclosure Controls and Procedures and Internal Control over Financial Reporting**

Our
management, including our chief executive officer and chief financial officer, does not
expect that our disclosure  controls or internal control over financial reporting will
prevent all errors or all instances of fraud. A control system, no  matter how well
designed and operated, can provide only reasonable, not absolute, assurance that the
control system's  objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and  the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any,  within our company have been detected. These inherent
limitations include the realities that judgments in decision-making can  be faulty, and
that breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the  individual acts of some persons, by collusion of two or more people,
or by management override of the controls. The design of  any system of controls is based
in part upon certain assumptions about the likelihood of future events, and any design
may not  succeed in achieving its stated goals under all potential future conditions.
Over time, controls may become inadequate because  of changes in conditions or
deterioration in the degree of compliance with policies or procedures. Because of the
inherent  limitation of a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.

25

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|**PART
      II.** |  | **OTHER
        INFORMATION**
|------------------ |  | -----------------------------

|**ITEM
      1.** |  | **Legal
        Proceedings**
|----------------- |  | -----------------------------

In
December 2002, a former Insightful employee filed a complaint against us in the Superior
Court for King  County, Washington.  The former employee alleged that his employment was
wrongfully terminated, and he sought an  unspecified amount of damages.  Specifically, he
alleged that we improperly recognized services revenues in the  fourth quarter of 2001
and that we terminated him in violation of public policy.  On December 5, 2003, a judge
for the Superior Court for King County granted summary judgment in our favor and
dismissed the case.  The  plaintiff has appealed the decision, and if his appeal is
successful we will likely resume litigation in the  Superior Court for King County.  We
continue to believe his lawsuit is without merit and we deny his claims.  An  evaluation
of the likelihood of an adverse outcome cannot be expressed with sufficient certainty at
this time.  An unfavorable outcome could have a materially adverse effect on our
financial position, results of operations,  and cash flows.

|**ITEM
      4.** |  | **Submission
        of Matters to a Vote of Security Holders**
|----------------- |  | ---------------------------------------------------------------

We
held our 2004 annual meeting of stockholders on June 11, 2004 at the offices of Orrick,
Herrington & Sutcliffe LLP in  Seattle, Washington.  A total of 11,152,005 shares of
common stock (representing 91% of the outstanding shares of common  stock) were present
at the meeting, either in person or represented by proxy, which constituted a quorum for
purposes of the  meeting.  At the annual meeting, Jeffrey E. Coombs and Samuel R.
Meshberg were each elected to serve as Class II directors,  each to hold office for a
three-year term or until his successor is elected and qualified.  Each of the incumbent
Class II  directors who stood for reelection was elected with the following voting
results:

|Nominee                  |  |  |  | Votes
      for |  |  | Votes
      Withheld | 
|------------------------ |  |  |  | --------------- |  |  | -------------------- | 
|                         |  |  |  |                 |  |  |                      | 
|Jeffrey
      E. Coombs  |  |  |  | 11,050,547      |  |  | 101,458              | 
|Samuel
      R. Meshberg |  |  |  | 11,137,680      |  |  | 14,325               | 



|**ITEM
      6.** |  | **Exhibits
        and Reports on Form 8-K**
|----------------- |  | --------------------------------------------

|(a) |  | See
Index to Exhibits.
|--- |  | ----------------------

|(b) |  | Reports
filed on Form 8-K.
|--- |  | --------------------------

On
April 14, 2004, we filed a current report on Form 8-K, announcing the filing of our
annual report on Form 10-K  following the completion of our investigation related to the
audit for the year ended December 31, 2003.

On
May 15, 2004, we furnished a current report Form 8-K announcing our financial results for
the quarter ended March 31,  2004.

On
June 10, 2004, we filed a current report on Form 8-K, reporting the resignation of Ernst & Young
LLP as our independent  auditors and the resignation of Fred Schapelhouman as our Chief
Financial Officer.

26

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**SIGNATURES**

Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the registrant
has duly caused this  report to be signed on its behalf by the undersigned, thereunto
duly authorized.

September 10, 2004

| |  | INSIGHTFUL
      CORPORATION
| |  | ----------------------------
| |  |                             
| |  | By:                         
| |  |                             
| |  |                             
| |  |                             

September 10, 2004

| |  | INSIGHTFUL
      CORPORATION
| |  | ----------------------------
| |  |                             
| |  | By:                         
| |  |                             
| |  |                             
| |  |                             

27

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**EXHIBIT
  INDEX**

|ExhibitNumber |  | Description
|------------- |  | -----------

|3.1 |  | Amended and
      Restated Certificate of Incorporation of the Registrant (Exhibit 3.1) (A)
|--- |  | -------------------------------------------------------------------------------------------

|3.2 |  | Amended and
      Restated Bylaws of the Registrant (Exhibit
      3.2) (A)
|--- |  | ---------------------------------------------------------------------------

|31.1 |  | Certification
      of Chief Executive Officer of Insightful Corporation as Required by Section
      302 of Sarbanes-Oxley Act of 2002 (B)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|31.2 |  | Certification
      of Chief Financial Officer of Insightful Corporation as Required by Section
      302 of Sarbanes-Oxley Act of 2002 (B)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|32.1 |  | Certification
      of Financial Statements by Chief Executive Officer Insightful Corporation
      as Required by Section 906 of Sarbanes-Oxley Act of 2002
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 |  | Certification
      of Financial Statements by Chief Financial Officer of Insightful Corporation
      as Required by Section 906 of Sarbanes-Oxley Act of 2002
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

28

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(A) Incorporated by reference
  to the designated exhibit included in the Registrants Quarterly Report on Form
  10-Q for the quarter ended September 30, 2001 (SEC File No. 0-20992), filed
  on November 14, 2001.