**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**








**FORM
      10-QSB**





**x**  **QUARTERLY REPORT UNDER SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**




**For
      the Quarterly Period ended June 30, 2005**




**OR**




**o**  **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**For
      the transition period from ___ to ___**





**Commission
      file number 0-020992**







**INSIGHTFUL
      CORPORATION**


**(Exact
      name of small business issuer 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)
      283-8802** ****


**Issuer’s** **telephone number, including area code**









Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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 x **** **** NO o





The
      number of shares outstanding of the Issuer’s Common
      Stock, $0.01 par value, was 12,488,651 as of August 5, 2005.





Transitional
      Small Business Disclosure Format (Check one) YES o NO x














**TABLE
      OF CONTENTS**




**Page****PART
                I. FINANCIAL INFORMATION**ITEM
                1.Consolidated
                Financial Statements (Unaudited)Condensed
                Consolidated Balance Sheets as of June 30, 2005 and December 31,
                2004
            2Condensed
                Consolidated Statements of Operations for the three and six months
                ended
                June 30, 2005 and 2004
            3Condensed
                Consolidated Statements of Cash Flows for the six months ended June
                30,
                2005 and 2004
            4Notes
                to Condensed Consolidated Financial Statements
            5ITEM
                2.Management’s
                Discussion and Analysis or Plan of Operations
            9ITEM
                3.Controls
                and Procedures
            21**PART
                II. OTHER INFORMATION**ITEM
                1.Legal
                Proceedings
            22ITEM
                4.Submission
                of Matters to a Vote of Security Holders
            22ITEM
                6.Exhibits
            22SIGNATURES
            23EXHIBIT
              INDEX
            24




Table
          of Contents




**PART
                  I.**
              **FINANCIAL
                  INFORMATION**


**ITEM
                1.**
            **CONSOLIDATED
                FINANCIAL STATEMENTS**





**INSIGHTFUL
      CORPORATION AND SUBSIDIARIES**





**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(In
      thousands, except share and per share data)**





**June
                30,****2005**
            
            
            **December
                31,****2004****(unaudited)****ASSETS**Current
                Assets:Cash
                and cash equivalents
            
            
            $9,644
            
            
            $9,650Trade
                accounts receivable, net
            
            
            3,027
            
            
            4,157Other
                receivables
            
            
            625
            
            
            501Prepaid
                expenses and other current assets
            
            
            661
            
            
            453Total
                current assets
            
            
            13,957
            
            
            14,761Property
                and equipment, net
            
            
            972
            
            
            966Purchased
                technology, net
            
            
            932
            
            
            1,226Goodwill
            
            
            800
            
            
            800Other
                assets
            
            
            46
            
            
            60$16,707
            
            
            $17,813**LIABILITIES
                AND STOCKHOLDERS’
                EQUITY**Current
                Liabilities:Current
                portion of long-term debt
            
            
            $96
            
            
            $129Accounts
                payable
            
            
            620
            
            
            1,644Accrued
                payroll-related liabilities
            
            
            1,201
            
            
            1,358Accrued
                expenses and other current liabilities
            
            
            405
            
            
            554Deferred
                revenue
            
            
            5,730
            
            
            6,318Total
                current liabilities
            
            
            8,052
            
            
            10,003Long-term
                debt, less current portion
            
            
            -
            
            
            32Commitments
                and contingenciesStockholders’
                Equity:Preferred
                stock, $0.01 par value-Authorized-1,000,000
                sharesIssued
                and outstanding-none
            
            
            -
            
            
            -Common
                stock, $0.01 par value-Authorized-30,000,000
                sharesand20,000,000
                sharesat
                June 30, 2005 andDecember
              31, 2004, respectivelyIssued
                and outstanding-12,484,113 and 12,393,950, sharesat
                June 30, 2005 and December 31, 2004, respectively
            
            
            125
            
            
            124Additional
                paid-in capital
            
            
            36,495
            
            
            36,329Accumulated
                deficit
            
            
            (27,715
            )
            
            (28,383
            )Other
                accumulated comprehensive loss-cumulative translation
                adjustment
            
            
            (250
            )
            
            (292
            )Total
                stockholders’ equity
            
            
            8,655
            
            
            7,778$16,707
            
            
            $17,813





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




2
 Table
          of Contents




**INSIGHTFUL
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF INCOME**




**(In
      thousands, except per share data)**


**(unaudited)**








**Three
                Months Ended June 30**,
            
            **Six
                Months Ended June 30**,**2005**
            
            **2004**
            
            **2005**
            
            **2004**Revenues:Software
                licenses
            
            $
            2,140
            
            $
            1,851
            
            $
            4,667
            
            $
            4,019Software
                maintenance
            
            
            1,705
            
            
            1,621
            
            
            3,314
            
            
            3,253Professional
                services and other
            
            
            1,265
            
            
            1,005
            
            
            2,387
            
            
            1,540Total
                revenues
            
            
            5,110
            
            
            4,477
            
            
            10,368
            
            
            8,812Cost
                of revenues:Software
                related
            
            
            437
            
            
            448
            
            
            841
            
            
            865Professional
                services and other
            
            
            673
            
            
            572
            
            
            1,435
            
            
            1,108Total
                cost of revenues
            
            
            1,110
            
            
            1,020
            
            
            2,276
            
            
            1,973Gross
                profit
            
            
            4,000
            
            
            3,457
            
            
            8,092
            
            
            6,839Operating
                expenses:Sales
                and marketing
            
            
            2,035
            
            
            1,659
            
            
            3,900
            
            
            3,152Research
                and development
            
            
            1,462
            
            
            1,241
            
            
            2,714
            
            
            2,650Less-funded
                research
            
            
            (649
            )
            
            (777
            )
            
            (1,175
            )
            
            (1,789
            )Research
                and development, net
            
            
            813
            
            
            464
            
            
            1,539
            
            
            861General
                and administrative
            
            
            817
            
            
            1,019
            
            
            1,891
            
            
            2,238Total
                operating expenses
            
            
            3,665
            
            
            3,142
            
            
            7,330
            
            
            6,251Income
                from operations
            
            
            335
            
            
            315
            
            
            762
            
            
            588Other
                income (expense), net
            
            
            5
            
            
            2
            
            
            (69
            )
            
            (35
            )Income
                before income taxes
            
            
            340
            
            
            317
            
            
            693
            
            
            553Income
                tax expense
            
            
            6
            
            
            17
            
            
            25
            
            
            28Net
                income
            
            $
            334
            
            $
            300
            
            $
            668
            
            $
            525Basic
                and diluted net income per share
            
            $
            0.03
            
            $
            0.02
            
            $
            0.05
            
            $
            0.04Weighted
                average common shares outstanding
            
            
            12,445
            
            
            12,238
            
            
            12,405
            
            
            11,946Weighted
                average common shares assuming dilution
            
            
            13,182
            
            
            13,207
            
            
            13,040
            
            
            12,564








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





3
 Table
            of Contents




**INSIGHTFUL
      CORPORATION AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(In
      thousands)**


**(unaudited)**




**Six
                Months Ended June 30,****2005**
            
            **2004**Operating
                activities:Net
                income
            
            $
            668
            
            $
            525Adjustments
                to reconcile net income from operations to net cash provided by (used
                in)
                operating activities:Depreciation,
                amortization and other non-cash charges
            
            
            601
            
            
            705Changes
                in current assets and liabilities:Trade
                and other accounts receivable
            
            
            803
            
            
            1,084Prepaid
                expenses and other assets
            
            
            (210
            )
            
            (23
            )Accounts
                payable
            
            
            (494
            )
            
            (194
            )Accrued
                payroll-related liabilities and other accrued expenses
            
            
            (256
            )
            
            (919
            )Deferred
                revenue
            
            
            (384
            )
            
            (343
            )Net
                cash provided by operating activities
            
            
            728
            
            
            835Investing
                activities:Purchases
                of property and equipment
            
            
            (339
            )
            
            (63
            )Payment
                made for purchase of technology
            
            
            (500
            )
            
            (1,265
            )Net
                cash used in investing activities
            
            
            (839
            )
            
            (1,328
            )Financing
                activities:Payments
                on debt
            
            
            (65
            )
            
            (65
            )Proceeds
                from exercise of stock options and employee stock purchase
                plan
            
            
            167
            
            
            1,864Net
                cash provided by financing activities
            
            
            102
            
            
            1,799Effect
                of exchange rate changes on cash and cash equivalents
            
            
            3
            
            
            107Net
                increase (decrease) in cash and cash equivalents
            
            
            (6
            )
            
            1,413Cash
                and cash equivalents, beginning of period
            
            
            9,650
            
            
            7,139Cash
                and cash equivalents, end of period
            
            $
            9,644
            
            $
            8,552Supplemental
                disclosure of cash flow information:Cash
                paid for:Interest
            
            $
            6
            
            $
            21Income
                taxes (refund)
            
            $
            9
            
            $
            (7
            )Supplemental
                disclosure of non-cash investing information - portion of purchased
                technology accrued in accounts payable
            
            $
            -
            
            $
            500




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




4
 Table
            of Contents





**INSIGHTFUL
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(unaudited)**


**June
      30** **,
      2005**





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





**a)
      Description of Business**





Insightful
      provides enterprises with scalable data analysis solutions designed to drive
      better decisions faster by revealing patterns, trends and relationships in
      data.
      The Company 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 S-PLUS ® and
      S-PLUS Server, Insightful MinerTM, InFact® and various verticalized S-PLUS
      toolkits such as S+ArrayAnalyzer ® and
      S+FinMetrics TM .
      Insightful’s consulting services and training provide specialized expertise and
      processes for the design, development and deployment of analytical solutions.





The
      Company’s customers include primarily companies in financial services,
      pharmaceuticals, biotechnology, telecommunications and manufacturing, as well
      as
      government and research institutions.





Headquartered
      in Seattle, Washington, Insightful also has a North American office in North
      Carolina and international offices 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, 2004 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
      consolidated financial statements should be read in conjunction with the
      consolidated financial statements and notes thereto for the year ended December
      31, 2004 included in Insightful's Annual Report on Form 10-K. The accompanying
      condensed 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, 2005 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 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, such as InFact, 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 in North America typically
      call for payment within 30 to 45 days, while standard terms in other areas
      of
      the world may be longer. 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
      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 maintenance
      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.




5
 Table
            of Contents




Consulting
      revenues typically include providing customers assistance in developing complex
      software models or data and text analysis techniques. In addition, they 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 or accounts receivable due in advance of revenue recognition
      are recorded as deferred revenue on the accompanying consolidated balance
      sheets.





**(c)** **Stock-Based
      Compensation**





The
      Company accounts for its employee stock-based compensation plans using the
      intrinsic value method, as prescribed by APB No. 25 "Accounting for Stock Issued
      to Employees". Accordingly, the Company records deferred compensation costs
      related to its employee stock options when the market price of the underlying
      stock on the date of grant exceeds the exercise price of the stock option on
      the
      date of grant. Deferred compensation is expensed on a straight-line basis over
      the vesting period of the related stock option, which is generally five years.
      The Company did not grant any stock options at exercise prices below the fair
      market value of the Company's common stock on the date of grant during any
      period presented.





An
      alternative to the intrinsic value method of accounting for stock-based
      compensation is the fair value approach prescribed by SFAS No. 123 "Accounting
      for Stock-Based Compensation," as amended by SFAS No. 148 "Accounting for
      Stock-Based Compensation - Transition and Disclosure" (collectively referred
      to
      as "SFAS 123"). If the Company followed the fair value approach, the Company
      would record deferred compensation based on the fair value of the stock option
      at the date of grant. The fair value of the stock option is required to be
      computed using an option-pricing model, such as the Black-Scholes option
      valuation model, at the date of the stock option grant. The deferred
      compensation calculated under the fair value method would then be amortized
      over
      the respective vesting period of the stock option.





In
      December 2004, the FASB reissued SFAS No. 123 as SFAS No. 123R, “Share Based
      Compensation.” Under SFAS No. 123R, public entities will be required to measure
      the cost of employee services received in exchange for an award of equity
      instruments based on the grant-date fair value of the award and recognize the
      cost over the period during which an employee is required to render services
      in
      exchange for the award. Additionally, SFAS No. 123R will require entities to
      record compensation expense for employee stock purchase plans that may not
      have
      previously been considered compensatory under the existing rules. On April
      14,
      2005, the effective date of SFAS No. 123R was extended and will now be effective
      for the Company at the beginning of its 2006 fiscal year. The Company has not
      yet determined the impact that adopting SFAS No. 123R will have on its results
      of operations.





As
      required by SFAS 123, summarized below are the pro forma effects on net income
      and net income per share, as if the Company had elected to use the fair value
      approach prescribed by SFAS 123 to account for its employee stock-based
      compensation plans (in thousands, except per share data):





**Three
                Months Ended**
              **June
                30,**
            
            **Six
                Months Ended**
              **June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Net
                income, as reported
            
            $
            334
            
            $
            300
            
            $
            668
            
            $
            525Employee
                stock-based compensation, as reported
            
            
            -
            
            
            -
            
            
            -
            
            
            -Less:
                Employee stock-based compensation determined under the fair value
                method
            
            
            322
            
            
            357
            
            
            821
            
            
            828Pro
                forma net income (loss)
            
            $
            12
            
            $
            (57
            )
            $
            (153
            )
            $
            (303
            )Basic
                and diluted net income (loss) per share, as reported
            
            $
            0.03
            
            $
            0.02
            
            $
            0.05
            
            $
            0.04Pro
                forma basic and diluted net income (loss) loss per share
            
            $
            -
            
            $
            -
            
            $
            (0.01
            )
            $
            (0.03
            )





**(d)
      Reclassification of Amounts**





Certain
      prior year amounts have been reclassified to conform to the current year
      presentation.





**(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 purchase price included settlement in full for all royalties owed by
      the
      Company to Lucent at the date of the acquisition in the amount of $235,000.
      As a
      result of this transaction, $1,765,000 was capitalized as purchased technology.
      This amount is being amortized to cost of revenues - software related over
      a
      3-year estimated life. During each of the three months ended June 30, 2005
      and
      2004, the Company recorded $147,000 in amortization expense related to this
      technology. Amortization recorded for the six months ended June 30, 2005 and
      2004 was $294,000 and $246,000, respectively. Under the agreement, $1,500,000
      of
      the purchase price was paid in the first quarter of 2004; the remaining $500,000
      was paid in the first quarter of 2005.




6
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            of Contents





**(4)
      FINANCING ARRANGEMENTS**





In
      March
      2005, the Company renewed a working capital revolving line of credit and
      security agreement with Silicon Valley Bank. The terms provide for up to $3.0
      million in borrowing availability through March 25, 2006. This facility is
      secured by the Company’s accounts receivable and allows it to borrow up to the
      lesser of 75% of its eligible accounts receivable or $3.0 million and bears
      interest at the prime rate, which was 6.25% as of June 30, 2005, plus 1%. At
      June 30, 2005, no amounts had been borrowed under the line of credit
      facility.




At
      June
      30, 2005, the Company also had an outstanding balance on the equipment loan
      with
      Silicon Valley Bank, secured by the underlying assets. The Company borrowed
      $450,000 under this facility in 2002 and the remaining outstanding balance
      was
      $96,000 at June 30, 2005. This loan bears interest at the prime rate plus 1%
      and
      is being repaid over a 42-month period, ending in March of 2006.




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, 2005.





Future
      maturities of debt as of June 30, 2005 are $64,000 before December 31, 2005
      and
      $32,000 for the year ending December 31, 2006.





**(5)
      NET INCOME PER SHARE**





The
      following is a reconciliation of the number of shares used in the basic and
      diluted net income per share computations for the periods presented (in
      thousands):





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Shares
                used in basic net income per share computation
            
            
            12,445
            
            
            12,238
            
            
            12,405
            
            
            11,946Effect
                of dilutive potential common shares resulting from stock
                options
            
            
            737
            
            
            969
            
            
            635
            
            
            618Shares
                used in diluted net income per share computation
            
            
            13,182
            
            
            13,207
            
            
            13,040
            
            
            12,564





The
      dilutive impact of the Company's stock options is calculated using the treasury
      stock method, based on the average share price of the Company's common stock.
      Under the treasury stock method, the proceeds that would be hypothetically
      received from the exercise of all stock options with exercise prices below
      the
      average share price of the Company's common stock are assumed to be used to
      repurchase shares of the Company's common stock.





The
      Company excludes all potentially dilutive securities from its diluted net income
      per share computation when their effect would be anti-dilutive. The following
      common stock equivalents were excluded from the earnings per share computation
      because the exercise prices of the stock options and rights were greater than
      or
      equal to the average price of the common shares, and therefore their inclusion
      would have been anti-dilutive (in thousands):





**Three
                Months EndedJune 30,**
            
            **Six
                Months Ended June 30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Stock
                options excluded from the computation of diluted net income
                (loss)
            
            
            314
            
            
            456
            
            
            426
            
            
            424





**(6)
      OTHER COMPREHENSIVE INCOME**





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 is foreign currency translation adjustments. Total comprehensive income
      is as follows (in thousands):





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Net
                income
            
            $
            334
            
            $
            300
            
            $
            668
            
            $
            525Change
                in cumulative translation adjustment
            
            
            12
            
            
            (5
            )
            
            42
            
            
            41Comprehensive
                income
            
            $
            346
            
            $
            295
            
            $
            710
            
            $
            566





**(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 products, services, geographical areas and major customers.
      Business segment information includes the segments of North American Data
      Analysis, International Data Analysis and Text Analysis. The Company measures
      segment performance based on their revenues and contribution margin, which
      is a
      measure of profitability that allocates only direct and controllable costs
      to a
      segment. Depreciation expense is not allocated by segment. Assets are not
      allocated to segments for internal reporting presentations. Intercompany
      transactions have been eliminated from the segment information. Non-operating
      income and expenses are not tracked by segment. Segment information is provided
      below (in thousands):





7
 Table
            of Contents




**North
                American Data Analysis**
            
            **International**
              **Data
                Analysis**
            
            **Text
                Analysis**
            
            **Total****Three
                months ended June 30, 2005**Revenues
            
            $
            2,835
            
            
            1,983
            
            
            292
            
            $
            5,110Contribution
                margin
            
            
            1,261
            
            
            764
            
            
            (10
            )
            
            2,015Unallocated
                costs and expenses
            
            
            
            
            
            
            
            
            
            
            
            (1,680
            )Income
                from operations
            
            
            
            
            
            
            
            
            
            
            $
            335**Three
                months ended June 30, 2004**Revenues
            
            $
            2,770
            
            
            1,559
            
            
            148
            
            $
            4,477Contribution
                margin
            
            
            1,332
            
            
            524
            
            
            (60
            )
            
            1,796Unallocated
                costs and expenses
            
            
            
            
            
            
            
            
            
            
            
            (1,481
            )Income
                from operations
            
            
            
            
            
            
            
            
            
            
            $
            315




**North
                    American Data Analysis**
                
                **International**
                  **Data
                    Analysis**
                
                **Text
                    Analysis**
                
                **Total****Six
                    months ended June 30, 2005**Revenues
                
                $
                5,632
                
                
                3,909
                
                
                827
                
                $
                10,368Contribution
                    margin
                
                
                2,654
                
                
                1,414
                
                
                251
                
                
                4,319Unallocated
                    costs and expenses
                
                
                
                
                
                
                
                
                
                
                
                (3,558
                )Income
                    from operations
                
                
                
                
                
                
                
                
                
                
                $
                761**Six
                    months ended June 30, 2004**Revenues
                
                $
                5,552
                
                
                2,948
                
                
                312
                
                $
                8,812Contribution
                    margin
                
                
                2,763
                
                
                991
                
                
                (19
                )
                
                3,735Unallocated
                    costs and expenses
                
                
                
                
                
                
                
                
                
                
                
                (3,147
                )Income
                    from operations
                
                
                
                
                
                
                
                
                
                
                $
                588


**(8)
      BUSINESS RESTRUCTURING**





On
      September 30, 2003, Shawn Javid, President and CEO, resigned from the company.
      Termination benefits associated with the resignation of Mr. Javid were included
      in restructuring expenses recorded in 2003. During
      the three and six months ended June 30, 2005, the Company paid $52,000 and
      $60,000, respectively, associated with Mr. Javid’s termination benefits. As of
      June 30, 2005, no termination benefits remained to be paid. No additional
      expenses are expected to be incurred in connection with the 2003 restructuring
      or Mr. Javid’s termination.





**(9)
      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, 2005, 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.




On
      December 13, 2002, Wajih Alaiyan, a former employee, filed a complaint against
      the Company in the Superior Court for King County, Washington. Mr. Alaiyan
      alleged that his employment was wrongfully terminated. On December 5, 2003,
      the
      court granted summary judgment in the Company’s favor, dismissing the complaint.
      On June 13, 2005, the Court of Appeals for the State of Washington issued an
      unpublished opinion upholding the lower court’s decision. On July 12, 2005, Mr.
      Alaiyan filed a petition with the Supreme Court of Washington seeking
      review of the Court of Appeals Court’s' decision. If this
      petition is granted and the Court of Appeals' decision is modified or reversed, the
      Company will likely resume litigation in the lower court, where it expects
      to
      continue to vigorously defend itself against the employee’s claim, which the
      Company denies. The Company is unable to evaluate the likelihood of an adverse
      outcome.





**(10)
      REVENUE CONCENTRATION**




For
      the
      three months ended June 30, 2005, the Company earned revenue of $546,000 from
      a
      single customer, or 11% of its total revenues for the period. No customers
      accounted for 10% or more of revenues for the six months ended June 30, 2005,
      or
      for the three and six month period ended June 30, 2004.




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            of Contents





**ITEM
                2.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATIONS**





*The
      following discussion and analysis should be read in conjunction with our
      Consolidated Financial Statements included elsewhere in this
      report.*





**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 trends for sales of our products and
                services;





·
            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 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 drive
      better decisions faster by revealing patterns, trends and relationships in
      data.
      We are 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.





Our
      products include S-PLUS® and S-PLUS Server, Insightful MinerTM, InFact® and
      various S-PLUS toolkits for vertical market categories such as S+ArrayAnalyzer®
for the life sciences sector and S+FinMetricsTM for the financial services
      sector. Our consulting services and training provide specialized expertise
      and
      processes for the design, development and deployment of analytical solutions.





Our
      customers include primarily companies in financial services, pharmaceuticals,
      biotechnology, telecommunications and manufacturing, as well as government
      and
      research institutions.





Headquartered
      in Seattle, Washington, we also have a North American office in North Carolina
      and international offices in France, Switzerland, and the United Kingdom, with
      distributors around the world. At June 30, 2005, we had 116 employees, 93
      of which were located in the United States and 23 of which were in our
      international locations.





We
      originally incorporated in Massachusetts in 1984 as Mathsoft, Inc. and
      reincorporated in Delaware in 2001. Our 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.





**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 object-oriented “S”
programming language, which we licensed on an exclusive worldwide basis from
      Lucent Technologies Inc. until we acquired the rights to “S” in January 2004.
      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.




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*Insightful
      MinerTM*





Insightful
      Miner is a scalable data analysis workbench for predictive modeling, data mining
      and statistical data analysis. It has a drag-and-drop interface intended to
      make
      it easy to create self-documenting visual workmaps. Insightful Miner provides
      data miners, business analysts and data analysis professionals with a suite
      of
      scalable components for data access, management and modeling, and its pipeline
      architecture allows the user to process 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.





*Toolkits
      for Vertical Markets*





To
      complement S-PLUS and Insightful Miner, we offer toolkits for the financial
      services and life sciences markets to allow users to perform specialized data
      analysis. For example, S+FinMetricsTM is designed to provide the financial
      services market with comprehensive software for modeling, analyzing and
      visualizing financial market data, offering a modern and flexible analytic
      environment for reliable and robust predictive econometric modeling.
      S+ArrayAnalyzer® is designed to enable pharmaceutical companies to obtain
      statistically rigorous information from microarray technology, shortening
      time-to-discovery for competitive advantage.





*Server
      Products*





Our
      S-PLUS Server products are designed to 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 designed to be data
      warehouse-independent and integrate with standard database and file formats.
      With our server products, 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 Web browser interface or dedicated
      graphical user interfaces written using Java® technology. Our server products
      are designed to enable end-users to analyze and understand technical or business
      information without requiring expertise in statistics or statistical tools.





***Text
      Analysis Products*** **





*InFact®*




We
      launched our text analysis and search product, InFact, in April 2002 to provide
      text analysis and relationship search 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
      tabular exploratory search interfaces and text query language to efficiently
      uncover information for which they are searching. InFact 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.





***Maintenance
      and Support*** **





We
      provide product updates and unspecified product upgrades and customer support
      services under an annual maintenance agreement for most of our Data Analysis
      products and under the annual term based license agreement for InFact. The
      initial one-year maintenance contract is bundled into the license fees on most
      of our Data Analysis products.





Technical
      support for our products is provided by a staff of engineers located in Seattle
      and other direct offices in Europe. Support is only available to customers
      who
      purchase our annual maintenance service. International customers who purchase
      products from distributors receive first-line technical support from their
      respective local distributors, with further support and escalation provided
      by
      our direct offices.





***Services*** **





Our
      consulting and training organization provides fee-based services, including
      providing assistance in developing complex statistical models or data or text
      analysis techniques. In addition, they include 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.





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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.





***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 our customers. 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, during the fourth quarter. 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.





**Results
      of Operations for the Three and Six Months Ended June 30, 2005 and
      2004**




***Revenues
      by Type***




**Three
                Months Ended June 30,**
            
            
            
            **Six
                Months Ended June 30,****2005**
            
            **2004**
            
            **Percent**
                  **Increase**
            
            **2005**
            
            **2004**
            
            **Percent**
                    **Increase****Revenues
                (in thousands):**Software
                licenses
            
            $
            2,140
            
            $
            1,851
            
            
            16
            %
            $
            4,667
            
            $
            4,019
            
            
            16
            %Software
                maintenance
            
            
            1,705
            
            
            1,621
            
            
            5
            %
            
            3,314
            
            
            3,253
            
            
            2
            %Professional
                services and other
            
            
            1,265
            
            
            1,005
            
            
            26
            %
            
            2,387
            
            
            1,540
            
            
            55
            %Total
            
            $
            5,110
            
            $
            4,477
            
            
            14
            %
            $
            10,368
            
            $
            8,812
            
            
            18
            %**Revenues
                by type (as % of total revenues):**Software
                licenses
            
            
            42
            %
            
            41
            %
            
            
            
            
            45
            %
            
            46
            %Software
                maintenance
            
            
            33
            %
            
            36
            %
            
            
            
            
            32
            %
            
            37
            %Professional
                services and other
            
            
            25
            %
            
            23
            %
            
            
            
            
            23
            %
            
            17
            %Total
            
            
            100
            %
            
            100
            %
            
            
            
            
            100
            %
            
            100
            %





Software
      license revenues, consisting of software licenses and subscriptions, increased
      for the three and six months ended June 30, 2005, as compared to the
      corresponding periods of 2004, due primarily to increases in sales from all
      of
      our business segments. Increased sales of our data analysis products were driven
      primarily by upgrades to our recently released desktop version of our software,
      S-PLUS 7.0 Enterprise Developer.





The
      slight increase in software maintenance revenues for the three and six months
      ended June 30, 2005, is largely related to the increase in sales of data
      analysis products internationally in these periods, as compared to the
      corresponding periods of 2004, as well as to steadily increasing sales of data
      analysis products overall, since early 2004. Maintenance contracts are generally
      sold with data analysis products, and the related revenue is typically
      recognized as revenue ratably over the contractual maintenance period, which
      is
      generally one year following the sale.





Professional
      services revenue is generated from consulting and training activities. The
      increase in professional services and other revenues for the three and six
      months ended June 30, 2005, as compared to the corresponding periods of 2004,
      relates primarily to a large European consulting project that began in the
      first
      quarter of 2005 and was still in progress as of June 30, 2005. Professional
      services revenues from this project for the three months ended June 30, 2005
      were $526,000 and for the six
      months ended June 30, 2005 were $ 625,000 .
      In
      addition, professional services revenue for the three and six months ended
      June
      30, 2005 includes $40,000 and for
      the
      six months ended June 30, 2005 included $220,000 in
      revenues generated by our Text Analysis segment, compared to $5,000
      for corresponding periods of 2004.




11
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            of Contents




***Revenues
      by Segment***





We
      have
      three reporting segments: North American Data Analysis, International Data Analysis and Text Analysis.
      We have
      international operations primarily in Europe and Asia. Revenues by segment
      are
      as follows:





**Three
                Months Ended****June
                30,**
            
            
            
            **Six
                Months Ended****June
                30,****2005**
            
            **2004**
            
            **Percent**
                  **Increase**
            
            **2005**
            
            **2004**
            
            **Percent**
                **Increase****Revenues
                (in thousands):**North
                American Data Analysis
            
            $
            2,835
            
            $
            2,770
            
            
            2
            %
            $
            5,632
            
            $
            5,552
            
            
            1
            %International
                Data Analysis
            
            
            1,983
            
            
            1,559
            
            
            27
            %
            
            3,909
            
            
            2,948
            
            
            33
            %Text
                Analysis
            
            
            292
            
            
            148
            
            
            97
            %
            
            827
            
            
            312
            
            
            165
            %Total
            
            $
            5,110
            
            $
            4,477
            
            
            14
            %
            $
            10,368
            
            $
            8,812
            
            
            18
            %**Revenues
                (as % of total revenues):**North
                American Data Analysis
            
            
            55
            %
            
            62
            %
            
            
            
            
            54
            %
            
            63
            %International
                Data Analysis
            
            
            39
            %
            
            35
            %
            
            
            
            
            38
            %
            
            34
            %Text
                Analysis
            
            
            6
            %
            
            3
            %
            
            
            
            
            8
            %
            
            3
            %Total
            
            
            100
            %
            
            100
            %
            
            
            
            
            100
            %
            
            100
            %





The
      slight increase in North American Data Analysis revenues for the three months
      ended June 30, 2005, as compared to the corresponding period of 2004, is due
      primarily to an increase in software license revenues of approximately $125,000,
      offset in part by a decline in professional services revenues of approximately
      $64,000. In contrast, the marginal increase in North American Data Analysis
      revenues for the six months ended June 30, 2005, as compared to the
      corresponding period of 2004, is due primarily to an increase in professional
      services revenues of approximately $151,000, offset in part by a decline in
      software license revenues of approximately $61,000.





The
      increase in International Data Analysis revenues for the three and six months
      ended June 30, 2005, as compared to the corresponding periods of 2004, is
      primarily attributable to revenues generated from a large customer in Europe.
      Total revenues from this customer, which include license, maintenance, and
      professional services, were $546,000 for
      the three months ended June 30, 2005 and
      $811,000 for the six months ended June 30, 2005.





The
      increase in Text Analysis revenues recognized for the three and six months
      ended
      June 30, 2005, as compared to the corresponding periods of 2004, relates largely
      to increases in subscription license revenues, which are recognized ratably
      over
      the subscription period, generally one year. Bookings of InFact subscription
      licenses in the periods immediately preceding the three and six month periods
      ending June 30, 2005 were greater than bookings in the corresponding periods
      in 2004, thereby resulting in increased revenues in the 2005 periods reported.
      Also contributing to the increase in revenues for the Text Analysis segment
      for
      the three and six months ended June 30, 2005, is an increase in professional
      services revenue, which, for the three months ended June 30, 2005, was $40,000
      and for
      the
      six months ended June 30, 2005 was  $220,000,
      compared to $5,000 for each of
      the
      corresponding periods in 2004.




***Cost
      of Revenues***





**Three
                Months Ended****June
                30,**
            
            **Percent**
            
            **Six
                Months Ended****June
                30,**
            
            **Percent****Increase**
            
            
            
            
            
            **Increase****2005**
            
            **2004**
            
            **(Decrease)**
            
            **2005**
            
            **2004**
            
            **(Decrease)****Cost
                of revenues (in thousands):**Software
                related
            
            $
            437
            
            $
            448
            
            
            (2
            )%
            $
            841
            
            $
            865
            
            
            (3
            )%Professional
                services and other
            
            
            673
            
            
            572
            
            
            18
            %
            
            1,435
            
            
            1,108
            
            
            30
            %Total
            
            $
            1,110
            
            $
            1,020
            
            
            9
            %
            $
            2,276
            
            $
            1,973
            
            
            15
            %Cost
                of software related revenues as a % of software related
                revenues
            
            
            11
            %
            
            13
            %
            
            
            
            
            11
            %
            
            12
            %Cost
                of professional services and other revenues as a % of professional
                services and other revenues
            
            
            53
            %
            
            57
            %
            
            
            
            
            60
            %
            
            72
            %Total
            
            
            22
            %
            
            23
            %
            
            
            
            
            22
            %
            
            22
            %





Cost
      of
      software-related revenues consists of royalties for third-party software,
      product media, product duplication, manuals and maintenance and technical
      support costs, and amortization of the costs of the software code underlying
      the
      "S" programming language purchased from Lucent Technologies Inc.




Cost
      of
      software related revenues fluctuates from period to period depending on the
      mix
      of revenues and depending on whether a particular quarter includes the cost
      of a
      license upgrade to existing maintenance customers. Significant components of
      software related cost of revenues are fixed, including amortization of the
      software code purchased from Lucent and costs associated with technical support;
      and therefore the decrease in cost of software related revenues as a percentage
      of software related revenues for the three and six months ended June 30, 2005,
      as compared to the corresponding periods in 2004, largely results
      from an
      increase in software related revenues.





Cost
      of
      professional services and other revenues consists primarily of salaries and
      other labor related costs of employees or contractors who provide consulting
      services and training. The increase in cost of professional services and other
      revenues for the three and six months ended June 30, 2005, as compared to the
      corresponding periods of 2004, is due primarily to the redeployment of team
      members from our Text Analysis group and our research and development team,
      who
      were previously utilized primarily for government grant-funded research, to
      professional services engagements.





The
      costs
      of professional services and other revenues, as a percentage of revenues,
      decreased in the three and six months ended June 30, 2005, as compared to the
      corresponding periods of 2004, due to higher utilization rates and billable
      productivity of our consulting professionals. Cost of professional services
      and
      other revenues as a percentage of revenues can fluctuate from quarter to quarter
      based primarily on the billing productivity of our consultants, since these
      costs are relatively fixed in the short-term.




12
 Table
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***Operating
      Expenses***





*Sales
      and Marketing*


**Three
                Months Ended June 30,**
            
            
            
            **Six
                Months Ended June 30,****2005**
            
            **2004**
            
            **Percent**
                  **Increase**
            
            **2005**
            
            **2004**
            
            **Percent**
                **Increase**Sales
                and marketing expenses (in thousands)
            
            $
            2,035
            
            $
            1,659
            
            
            23
            %
            $
            3,900
            
            $
            3,152
            
            
            24
            %Sales
                and marketing expenses (as percentage of total revenues)
            
            
            40
            %
            
            37
            %
            
            
            
            
            38
            %
            
            36
            %





Sales
      and
      marketing expenses consist primarily of salaries, travel, allocation of
      facilities costs, promotional activities, and costs of advertising and trade
      shows. The increase in sales and marketing expenses for the three and six months
      ended June 30, 2005, as compared to the corresponding periods of 2004, is due
      primarily to the hiring of additional salespeople in both the U.S. and Europe,
      the hiring of our Vice President of Marketing in the second quarter of 2005,
      and
      higher expenditures on certain marketing events and promotional activities.
      We
      expect sales and marketing expenses to increase in future periods as we recruit
      and hire additional personnel and expand our marketing programs.





*Research
      and Development, Net*




**Three
                Months Ended****June
                30,**
            
            **Percent**
            
            **Six
                Months Ended****June
                30,**
            
            **Percent****Increase**
            
            
            
            
            
            **Increase****2005**
            
            **2004**
            
            **(Decrease)**
            
            **2005**
            
            **2004**
            
            **Decrease****Research
                and development (in thousands):**Research
                and development
            
            $
            1,462
            
            $
            1,241
            
            
            18
            %
            $
            2,714
            
            $
            2,650
            
            
            2
            %Less
                - funded research
            
            
            (649
            )
            
            (777
            )
            
            (16
            )%
            
            (1,175
            )
            
            (1,789
            )
            
            (34
            )%Research
                and development, net
            
            $
            813
            
            $
            464
            
            
            75
            %
            $
            1,539
            
            $
            861
            
            
            79
            %**Research
                and development (as percentage of total revenues):**Research
                and development
            
            
            29
            %
            
            28
            %
            
            
            
            
            26
            %
            
            30
            %Less
                - funded research
            
            
            (13
            )%
            
            (17
            )%
            
            
            
            
            (11
            )%
            
            (20
            )%Research
                and development, net
            
            
            16
            %
            
            10
            %
            
            
            
            
            15
            %
            
            10
            %





Net
      research and development expenses consist primarily of salaries and related
      benefits, equipment for software developers, allocation of facilities costs,
      and
      payments to outside contractors, less funded research. The increase in absolute
      dollars in the net research and development costs for the three and six months
      ended June 30, 2005, as compared to the corresponding periods of 2004, primarily
      reflects the decline in reimbursements from government research grants resulting
      in part from the pursuit of fewer grants, as we continue to focus our research
      efforts towards further development of technology more closely aligned with
      our
      commercial product lines.





The
      increase in gross research and development expenses for the three and six months
      ended June 30, 2005, as compared to the corresponding periods for 2004, is
      due
      primarily to the hiring of additional development personnel in our data analysis
      and InFact groups and to increased costs for outside consultants and
      sub-contractors incurred in connection with the second quarter 2004 release
      of
      the S-PLUS 7.0 upgrade, offset in part by a reduction in research personnel
      that
      occurred in late 2004. We expect our research and development expenses to
      increase in future periods as we add to our development staffing and continue
      to
      narrow our funded research focus.





*General
      and Administrative*




**Three
                Months Ended**
              **June
                30,**
            
            
            
            **Six
                Months Ended**
              **June
                30,****2005**
            
            **2004**
            
            **Percent**
                **Decrease**
            
            **2005**
            
            **2004**
            
            **Percent**
                **Decrease**General
                and administrative (in thousands)
            
            $
            817
            
            $
            1,019
            
            
            (20
            )%
            $
            1,891
            
            $
            2,238
            
            
            (16
            )%General
                and administrative (as percentage of revenues)
            
            
            16
            %
            
            23
            %
            
            
            
            
            18
            %
            
            25
            %





General
      and administrative expenses consist primarily of salaries and related costs
      associated with finance, accounting, legal, corporate governance, investor
      relations and administration, as well as allocation of facilities costs. The
      decline in general and administrative expenses for the three and six months
      ended June 30, 2005, as compared to the corresponding periods of 2004, is
      primarily related to significant legal costs incurred in the first quarter
      of
      2004 associated with the acquisition of the copyrights
      to the “S”
      programming language from Lucent Technologies Inc. in January 2004 and unusual
      audit costs incurred in the second quarter of 2004. This was offset in part
      by
      higher personnel costs and consulting services in 2005 primarily related to
      compliance with the Sarbanes-Oxley Act of 2002.





In
      general, we expect to incur expenses in connection with our efforts to enhance
      our information technology resources and improve our financial and managerial
      systems in
      connection with the enhanced regulatory and corporate governance requirements
      of
      the Sarbanes-Oxley Act of 2002. Because
      some of these costs are allocated to the income statement expense line items
      based on headcount, all the expense line items in the statement of income will
      be impacted by some of these added costs.




13
 Table
            of Contents




***Other
      Income (Expense)***





Other
      income (expense) consists of the following:




**Three
                Months Ended****June
                30,**
            
            **Six
                Months Ended****June
                30,****2005**
            
            **2004**
            
            **2005**
            
            **2004**Interest
                income
            
            $
            66
            
            $
            19
            
            $
            107
            
            $
            34Interest
                expense
            
            
            (2
            )
            
            (8
            )
            
            (8
            )
            
            (16
            )Foreign
                exchange transaction losses
            
            
            (59
            )
            
            (9
            )
            
            (177
            )
            
            (54
            )Other
            
            
            -
            
            
            -
            
            
            9
            
            
            1$
            5
            
            $
            2
            
            $
            (69
            )
            $
            (35
            )





The
      increase in interest income for the three and six months ended June 30, 2005,
      as
      compared to the corresponding periods of 2004, is a result of both increased
      invested cash balances and the related rate of return on those investments
      in
      the corresponding periods.





The
      increase in foreign exchange transaction losses for the three and six months
      ended June 30, 2005, as compared to the corresponding periods of 2004, is due
      primarily to a
      strengthening of the US dollar rate on US denominated intercompany amounts,
      specifically, those intercompany amounts due from our international subsidiaries
      to the US parent company that are expected to be settled within the foreseeable
      future. The foreign currency gains or losses resulting from intercompany amounts
      due from our international subsidiaries to the US parent company that are not
      expected to be settled within the foreseeable future are included in Other
      Comprehensive Income (Loss) during the period in which the exchange rates
      fluctuate. We expect foreign currency gains and losses to continue in future
      quarters.





***Income
      Tax Expense***





Income
      tax expense for the three and six months ended June 30, 2005 was $6,000 and
      $25,000, respectively, compared to $17,000 and $28,000 for the corresponding
      periods of 2004. Utilization of net operating loss carryforwards minimized
      our
      income taxes in each of the respective periods reported. This is expected to
      continue for the remainder of 2005 and possibly into future periods. Changes
      in
      income tax expense from period to period are attributed primarily to relative
      changes in the mix of operating income generated in the various tax
      jurisdictions in which we operate.





**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents were $9.6 million at June 30, 2005 and $9.7 million at December
      31, 2004. Our working capital increased from $4.8 million at December 31, 2004
      to $5.9 million at June 30, 2005.





We
      generated $0.7 million in cash from operating activities for the six months
      ended June 30, 2005 compared to $0.8 million for the corresponding period of
      2004.





The
      difference between our net income and our operating cash inflow is attributable
      to non-cash expenses included in net income and changes in non-cash operating
      assets and liabilities, as presented below (in thousands):





**Six
                  Months Ended****June
                  30,****2005**
            
            **2004**Net
                income
            
            $
            668
            
            $
            525Add:
                non-cash expenses
            
            
            601
            
            
            575Deduct:
                changes in non-cash operating assets and liabilities
            
            
            (541
            )
            
            (265
            )Net
                cash provided by operating activities
            
            $
            728
            
            $
            835




Non-cash
      expenses are associated with the amortization of intangible assets, including
      purchased technology, and depreciation and amortization of property and
      equipment. Changes in non-cash operating assets and liabilities reflect changes
      in working capital components of the balance sheet apart from cash and cash
      equivalents.





Investing
      activities resulted in net cash outflows of $0.8 million for the six months
      ended June 30, 2005 compared to net cash outflows of $1.3 million for the
      corresponding period of 2004. The decrease in cash outflows from investing
      activities relates primarily to the purchase of the “S” programming language
      from Lucent Technologies in the first quarter of 2004, which required a cash
      payment of $1.5 million, $1.3 million of which was considered acquisition of
      technology with the remainder considered an operating cash outflow. The final
      payment to Lucent of $0.5 million was made in the first quarter of 2005.





Financing
      activities resulted in net cash inflows of $0.1 million for the six months
      ended
      June 30, 2005 compared to net cash inflows of $1.8 million for the six months
      ended June 30, 2004. The decrease in cash inflows from financing activities
      relates primarily to a decrease in the proceeds received from the exercise
      of
      employee stock options and contributions to our employee stock purchase
      plan.





In
      March
      2005, we renewed a working capital revolving line of credit and security
      agreement with Silicon Valley Bank. The terms provide for up to $3.0 million
      in
      borrowing availability through March 25, 2006. This facility is secured by
      our
      accounts receivable and allows us to borrow up to the lesser of 75% of our
      eligible accounts receivable or $3.0 million and bears interest at the prime
      rate, which was 6.25% as of June 30, 2005, plus 1%. At June 30, 2005, no amounts
      had been borrowed under the line of credit facility.





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 Table
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At
      June
      30, 2005, we also had an outstanding balance on the equipment loan with Silicon
      Valley Bank, secured by the underlying assets. We borrowed $450,000 under this
      facility in 2002 and the remaining outstanding balance was $96,000 at June
      30,
      2005. This loan bears interest at the prime rate plus 1% and is being repaid
      over a 42-month period, ending in March of 2006.





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, 2005.





At
      June
      30, 2005, our principal unused sources of liquidity consisted of cash and cash
      equivalents of $9.6 million and our bank line of credit. Our liquidity needs
      are
      principally for financing of accounts receivable, capital assets, strategic
      investments, product development, and flexibility in a dynamic and competitive
      operating environment.





**Commitments**





As
      of
      June 30, 2005, our contractual commitments associated with our operating leases,
      primarily for our office space in Seattle, Washington, as well as other domestic
      and international locations, and equipment financing are as follows (in
      thousands):





**Before**
              **December
                31,**
            
            **Year
                Ending December 31,****2005**
            
            **2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **Thereafter**
            
            **Total**Equipment
                term loan
            
            $
            64
            
            $
            32
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            96Operating
                lease obligations
            
            
            309
            
            
            625
            
            
            515
            
            
            43
            
            
            37
            
            
            28
            
            
            1,557Total
            
            $
            373
            
            $
            657
            
            $
            515
            
            $
            43
            
            $
            37
            
            $
            28
            
            $
            1,653





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. Financing we may obtain, if any, 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
      is
      actually realized, 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 our expectations and those
      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 our expectations
      or those 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:





•
            our
                primary reliance on one product
                family;





•
            our
                ability to compete in the highly competitive statistics, data mining
                and
                text analysis markets;





•
            market
                acceptance of open source alternativesto
                our products and services;





•
            our
                ability to penetrate new markets;





•
            market
                awareness and acceptance of our
                products;





•
            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;





•
            elongated
                sales cycles and potential sales
                delays;





•
            fluctuations
                in foreign currency exchange rates;





•
            losses
                associated with expected increases in our
                expenses;





•
            our
                ability to maintain effective internal financial and managerial systems,
                controls and procedures;





•
            costs
                associated with being a public company, such as the cost of complying
                with
                the provisions of The Sarbanes-Oxley Act of 2002, or
                SOX.





•
            our
                ability to attract and retain key employees or management team
                members;





•
            our
                ability to obtain funding that may be necessary to support the expansion
                of our business;





•
            our
                ability to successfully expand our international
                operations;





15
 Table
            of Contents




•
            general
                economic conditions, which may affect our customers’ purchasing decisions;





•
            integration
                of our new key employees, including our senior management team
                members;





•
            rapid
                changes in technology and our ability to develop, introduce and market
                new
                products on a timely basis;





•
            our
                ability to protect our intellectual property
                rights;





•
            our
                ability to maintain third-party licenses;
                and





•
            defects
                or errors in our software, which may result in losses of customers
                or
                revenues.




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 variable, typically ranging between one and eight
                months
                from our initial contact with a current or potential data analysis
                product
                customer, and much longer for current or potential text analysis
                customers;





•
            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 purchase the S-PLUS product family, or if current
      customers do not continue to renew maintenance or license subscriptions, our
      revenues and operating results will be adversely affected.***





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





On
      April
      11, 2005, we released a significant new update of S-PLUS. In addition to new
      software features, the product has licensing terms end enforcement mechanisms
      that differ from previous versions and about
      which we have
      received complaints from customers .
      If the
      update of S-PLUS does not
      meet the expectations of our customers **** or
      does
      not achieve market acceptance ,
      our
      reputation may suffer and our operating results will be harmed.





***If
      we are unable to compete successfully in the statistics, data mining and text
      analysis 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 from our potential customers’ information technology departments who
      may seek to develop their own solutions. 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., The 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 text analysis 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.





We
      also
      face competition from R, an open-source software package that performs
      operations similar to the S language that forms the core of our S-PLUS product.





***Market
      acceptance of open source alternatives to proprietary software poses a threat
      to
      our potential growth in revenue and market share.*** **





Our
      business model has been based upon customers agreeing to pay a fee to license
      software developed and distributed by us. In recent years, there has been a
      growing challenge to the commercial software model. Under the non-commercial
      software model, open source software produced by loosely associated groups
      of
      unpaid programmers and made available for license to end users without charge
      is
      distributed at nominal cost by firms that earn revenue on complementary services
      and products, without having to bear the full costs of research and development
      for the open source software. The most notable example of open source software
      is the Linux operating system, which has presented a competitive challenge
      to
      leading vendors of proprietary operating systems. In the markets we serve,
      we
      face similar challenges because of the availability of R, an open source
      implementation of the S language that forms the core of our S-PLUS product.
      While we believe our products provide customers with significant advantages,
      the
      popularization of the non-commercial software model continues to pose a
      significant challenge to our business model. To the extent open source software
      gains increasing market acceptance, sales of our products may decline, we may
      have to reduce the prices we charge for our products, and revenue and operating
      margins may consequently decline.





***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 life
      sciences. 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 services, 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 text analysis
      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 text analysis solutions
      utilizing relationship search capabilities, and our products may not achieve
      market acceptance.***




16
 Table
          of Contents




Our
      text
      analysis product, InFact, was released in 2002 and has not contributed
      substantial revenues to date. The market for relationship search solutions
      like
      InFact is still emerging, with many competitors coming to market with
      alternative solutions. Growth in demand for and acceptance of these solutions,
      if any, remains uncertain. Even if this market grows, businesses may purchase
      our competitors’ solutions or develop their own. If InFact does not achieve
      market acceptance, our business may not grow.





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 our markets. 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, greater market share, 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. During the fiscal years 2001 through
      2003, these contracts generated from $4.3 to $4.8 million annually in offsets
      to
      our research and development expenses. During 2004, we began realigning our
      research and development efforts to ensure that we only pursue projects that
      directly support our business strategy. As a result of this realignment, we
      have
      applied for and received fewer government research contracts, and for the year
      ended December 31, 2004, research contracts generated $2.9 million. Further
      reductions in these offsets to our research and development expenses are likely
      and will negatively affect our operating results. Further, 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 operating 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.





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





***Our
      sales cycle is variable, and our limited ability to predict revenues 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 text analysis
      software and services is discretionary, involves a significant commitment of
      its
      resources and is influenced by its budget cycles. Our sales cycles can be
      variable, typically ranging between one 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, making our revenues difficult to
      predict in the short term. Occasionally sales require substantially more time,
      and sales cycles have shown to be substantially longer for our higher-priced
      text analysis product, InFact. In addition, sales delays could cause our
      operating results for any given period to fall below the expectations of
      securities analysts or investors, which could result in a decrease in our stock
      price.





***Our
      services business can be dependent on few large customers, the unexpected loss
      of which would affect our operating results and could cause a decline in our
      stock price.***





We
      perform consulting projects primarily on a time-and-materials basis, under
      which
      a customer may order us to cease work at any time. When the magnitude of any
      such project requires us to allocate a significant portion of our consulting
      time to its performance during a reporting period, the unplanned or otherwise
      untimely cessation of the project would create a shortfall in revenue that
      would result
      in
      a negative impact on operating results for the services segment. We are currently engaged on one
      project that accounted for more than 10% of our total revenue for the quarter
      ended June 30, 2005, and we expect to receive a significant amount of revenue
      from this project in the quarter ending September 30, 2005. We have allocated
      resources to this project that have limited, and may continue to limit, our
      ability to pursue other opportunities. If we cease work on this project prior
      to
      its intended completion, we would suffer significant reductions in our expected
      level of revenue and would continue to bear the generally fixed costs associated
      with our professional services staff. This would have a negative impact on
      our
      operating results and could negatively affect our stock price.





***We
      have incurred losses in past periods, and may again incur losses in future
      periods, 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, 2005, we had an accumulated deficit
      of over $27 million. We expect our expenses to be higher in 2005 than in 2004,
      in part due to our efforts to enhance our information technology resources
      and
      improve our financial and managerial systems. 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. For example,
      because we self-insure a portion of our employee medical benefits, we may
      experience significant increases in these expenses if the number or amount
      of
      claims for which we are responsible increases substantially. As a result, we
      may
      experience losses and negative cash flows in the near term, even if sales of
      our
      products and services continue to grow.





While
      we
      have shown a trend of growth in revenue and profit in recent quarters, there
      is
      no guarantee that these trends will continue. 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.




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***We
      may have difficulty implementing in a timely manner the internal controls
      necessary to allow our management to report on the effectiveness of our internal
      controls, and these reports may not reveal all material weaknesses or
      significant deficiencies with our internal controls.***





We
      have
      implemented efforts to improve our internal controls, but they might not prove
      sufficient. 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 and potentially to hire additional administrative personnel 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.





Pursuant
      to Section 404 of the Sarbanes-Oxley Act of 2002, we will be required to furnish
      an internal controls report of management’s assessment of the design and
      effectiveness of our internal controls as part of our Annual Report beginning
      with the fiscal year ended December 31, 2006. Our auditors will then be required
      to attest to, and report on, management’s assessment. In order to issue our
      report, our management must document both the design of our internal controls
      and the testing processes that support management’s evaluation and conclusion.
      This process will likely require us to hire additional personnel and engage
      outside advisory services which will result in additional accounting and legal
      expenses. In addition, the evaluation and attestation processes required by
      Section 404 are new and neither companies nor auditing firms have significant
      experience in complying with these requirements. Accordingly, we may encounter
      problems or delays in completing the review and evaluation, the implementation
      of improvements and the receipt of an attestation by our independent auditors.





Additionally,
      during our assessment of internal controls, certain deficiencies may be
      discovered that will require remediation. This remediation may require
      implementing additional controls, the costs of which could have a material
      adverse effect on our results of operations. If we are unable to implement
      the
      requirements of Section 404 in a timely manner or with adequate compliance,
      in
      addition to receiving an adverse opinion from our auditors, we might be subject
      to sanctions or investigation by regulatory authorities. Any such action could
      adversely affect our business and financial results. Further, our testing may
      not reveal all material weaknesses or significant deficiencies in our internal
      controls. Material weaknesses or significant deficiencies in our internal
      controls could have a material adverse effect on our results of operations.





Our
      management has started the necessary processes and procedures for issuing its
      report on our internal controls. We expect to remain a non-accelerated filer
      in
      2005 because we are eligible to use Forms 10-QSB and 10-KSB for our 2005
      quarterly and annual reports. However, if a determination is made that we are
      an
      accelerated filer as of December 31, 2005, we will be required to furnish our
      internal controls report with our Annual Report for 2005 rather than for 2006.
      In either case, we may not be able to complete the work necessary for our
      management to issue its management report in a timely manner and our management
      may be unable to report that our internal controls are effective.





***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 result
      in
      changes in the way
      software is sold or delivered. In
      addition, we may 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 competitors, our
      major hardware, systems or software vendors or we 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.





***If
      we do not attract and retain 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, accounting 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. 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 have difficulty recruiting staff with appropriate
      skills, and we may be required to increase the level of compensation paid to
      existing and new employees, which could materially increase our operating
      expenses.





In
      addition, our ability to attract and retain employees may be adversely affected
      by the market price of our common stock, which has fluctuated widely in the
      past. 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.
      Because our key employees are not obligated to continue their employment with
      us, they could leave at any time.





***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:




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•
            costs
                of customizing products for foreign
                countries;





•
            export
                and import restrictions, tariffs and other trade
                barriers;





•
            the
                need to comply with multiple, conflicting and changing laws and
                regulations;





•
            separate
                management information systems and control
                procedures;





•
            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 2004. Currency fluctuations resulted in foreign currency
      transaction losses of $0.1 million in the three months ended March 31, 2005
      and
      gains of $0.4 million during the year and quarter ended December 31, 2004.
      Future currency exchange rate fluctuations may have an adverse effect on our
      results of operations in future periods. 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.





***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.





Our
      credit line and equipment term loan with Silicon Valley Bank contain covenants
      that require us to maintain a certain level of profitability. 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.





***General
      or specific economic conditions could adversely affect our revenue growth and
      ability to forecast revenue.***





We
      focus
      our statistics business primarily on the financial services and life sciences
      markets and are thus sensitive to changes in the specific economic conditions
      that affect them. A substantial change in the economic condition of either
      or
      both of these markets will affect our ability to sell our products and to
      forecast sales.




In
      addition, our revenue growth and potential for profitability depend on the
      overall demand for statistics and data analysis, data mining and text analysis
      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.





***Integration
      of our new key employees could disrupt our business and the execution of our
      strategy.***





Substantially
      all of our executive leadership team has been replaced in the last 18 months.
      Since January 2004, we hired a new Chief Executive Officer, Chief Financial
      Officer, Vice President of Research and Development, Vice President of North
      American Sales and Vice President of Worldwide Marketing. Additionally, we
      have
      appointed two new members to our board of directors and audit committee. In
      addition, we have experienced turnover of other key finance and administration
      personnel in recent months. 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.





***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
      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.





***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 patents on InFact technology and our rights in the software code
      underlying the “S” programming language that we purchased from Lucent
      Technologies Inc. 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 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.




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***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.





***The
      outcome of current litigation could disrupt our operations and damage our
      reputation.***





On
      December 13, 2002, Wajih Alaiyan, a former employee of ours, filed a complaint
      against us in the Superior Court for King County, Washington. Mr. Alaiyan was
      formerly employed by the Company and he alleged that his employment was
      wrongfully terminated. On December 5, 2003, court granted summary judgment
      in
      our favor, dismissing the complaint. On June 13, 2005, the Court of Appeals
      for
      the State of Washington issued an unpublished opinion upholding the lower
      court’s decision. On July 12, 2005, Mr. Alaiyan filed a petition with the
      Supreme Court of Washington seeking review of the Court of Appeals’ decision. If
      the petition is granted, we expect to incur considerable expense in defending this
      action. If the Court of Appeals' decision is modified or reversed, we will
      likely resume litigation in the lower court, where we expect to continue at
      our
      considerable expense to vigorously defend ourselves against the employee’s
      claim, which we deny. Discovery obligations imposed on us during the course
      of
      such litigation will be disruptive to our normal operations. We cannot predict
      the outcome of the litigation, but an unfavorable outcome may require us to
      pay
      the employee significant damages and would have a material effect on our
      operating position, results of operations, and cash flows. Regardless of the
      outcome of the Supreme Court review, the court may issue a written opinion
      that
      will address only those issues of law that arose from the lower court’s decision
      to grant summary judgment. The veracity of the facts alleged by the employee
      in
      such an analysis is not at issue, and for the purposes of review the court
      will
      deem the allegations to be true. Because the allegations of the employee
      included “deceptive accounting practices,” the published opinion in either case
      will make reference to improprieties that we will be deemed to have committed
      solely for the purposes of this legal analysis. Such references, when separated
      from the parties’ ability to support or refute the facts, may be damaging to our
      reputation and may adversely affect our stock price.





***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 damage to our reputation.***





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.





***Market
      risks may affect the value of our assets, cash flows and financial
      results.***





We
      sell
      products developed in the U.S. worldwide and operate in the United Kingdom,
      France and Switzerland where we incur expenses and generate billings denominated
      in those local currencies. As a result, the value of our assets, cash flows
      and
      financial results could be affected by factors such as changes in foreign
      currency exchange rates or weak economic conditions in foreign markets. For
      example, currency fluctuations resulted in foreign currency transaction losses
      of $0.1 million in the three months ended March 31, 2005 and gains of $0.4
      million during the year and quarter ended December 31, 2004. In addition,
      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 which may fluctuate in value over time.





***Our
      cash and cash equivalents are subject to market risk.***





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. A significant change in the markets in which we are invested could
      reduce our reported assets and affect our stock price.




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***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 life sciences 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.




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.





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





The
      price
      of our common stock has been volatile over the past 18 months. Our common stock
      reached a high of $5.20 per share on May 14, 2004 and traded as low as $1.13
      per
      share on September 1, 2004. 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





•
            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;





•
            deficiencies
                in our internal controls;





•
            proprietary
                rights litigation or other litigation;
                or





•
            changes
                in accounting standards that adversely affect our revenues and
                earnings.





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.****CONTROLS
      AND PROCEDURES**







**Evaluation
      of 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.




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**PART
                  II.**
              **OTHER
                  INFORMATION**


**ITEM1.**
            **Legal
                Proceedings**





On
      December 13, 2002, Wajih Alaiyan, a former employee, filed a complaint against
      the Company in the Superior Court for King County, Washington. Mr.
      Alaiyan alleged that his employment was wrongfully terminated. On December
      5, 2003, the court granted summary judgment in the Company’s favor, dismissing
      the complaint. On June 13, 2005, the Court of Appeals for the State of
      Washington issued an unpublished opinion upholding the lower court’s decision.
      On July 12, 2005, Mr. Alaiyan filed a petition with the Supreme Court of
      Washington seeking review of the Court of Appeals’ decision. If the petition is
      granted, the Company expects to incur considerable expense in defending this
      action. If the Court of Appeals' decision is modified or reversed, the
      Company will likely resume litigation in the lower court, where it expects
      to
      continue at our considerable expense to vigorously defend itself against the
      employee’s claim, which it denies. The Company is unable to evaluate the
      likelihood of an adverse outcome.




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





We
      held
      our 2005 annual meeting of stockholders on June 9, 2005 at the offices of
      Orrick, Herrington & Sutcliffe LLP in Seattle, Washington. A total of
      11,603,066 shares of common stock (representing 92.5% 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, Mark C. Ozur was elected to serve as Class III director, to
      hold
      office for a three-year term or until his successor is elected and qualified.
      The incumbent Class III director who stood for reelection was elected with
      the
      following voting results:





Nominee
            Votes
                For
            Votes
                WithheldMark
                C. Ozur
            11,269,056
            334,016





At
      the
      annual meeting, a proposal to amend our Certificate of Incorporation to increase
      our authorized shares of common stock from 20,000,000 to 30,000,000 shares
      was
      adopted with the following voting results:





For:
            11,101,801Against:
            460,993Abstain:
            40,272





Also
      at
      the annual meeting, a proposal to ratify the selection of Moss Adams LLP, as
      our
      independent public accountant and auditor for the fiscal year ending December
      31, 2005 was adopted with the following voting results:





For:
            11,561,249Against:
            34,520Abstain:
            7,297





**ITEM
                6.**
            **Exhibits**





(a)
            See
                Index to Exhibits.





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 Table
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**SIGNATURES**





In
      accordance with 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.





August
      11, 2005




INSIGHTFUL
              CORPORATIONBy:
            /s/
                Jeffrey E. CoombsJeffrey
                E. CoombsPresident
                and Chief Executive Officer(Principal
                Executive Officer)





August
      11, 2005


INSIGHTFUL
              CORPORATIONBy:
            /s/
                Richard P. BarberRichard
                P. BarberChief
                Financial Officer(Principal
                Financial and Accounting Officer)




23
 Table
            of Contents




**EXHIBIT
      INDEX**




**Exhibit****Number**
            
            **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 200231.2
            
            Certification
                of Chief Financial Officer of Insightful Corporation as Required
                by
                Section 302 of Sarbanes-Oxley Act of 200232.1
            
            Certification
                of Financial Statements by Chief Executive Officer Insightful Corporation
                as Required by Section 906 of Sarbanes-Oxley Act of 200232.2
            
            Certification
                of Financial Statements by Chief Financial Officer of Insightful
                Corporation as Required by Section 906 of Sarbanes-Oxley Act of
                2002





(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.




24