##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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 0-27012 Insignia Solutions plc (Exact name of Registrant as specified in its charter)
 England and Wales
    
    Not applicable(State or other jurisdiction of
    
    (I.R.S. employer identificationincorporation or organization)
    
    number)
    41300 Christy Street
Fremont
California 94538
United States of America
(510) 360-3700
    
    Mercury Park, Wycombe Lane
Wooburn Green
High Wycombe, Bucks HP10 0HH
United Kingdom
(44) 1628-539500
 (Address and telephone number of principal executive offices and principal places of business) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act):
Yes o No þ As of April 22, 2005, there were 42,372,199 ordinary shares of £0.20 each nominal value,
outstanding.




---



##### Table of Contents



EXPLANATORY NOTE We are filing this Quarterly Report for the three months ended March 31, 2005 on Form 10-Q,
solely to correct our prior filing of this report on Form 10-QSB on May 16, 2005.   This Form
10-Q does not reflect events occurring after the filing of the original Quarterly Report.




---



##### Table of Contents



INSIGNIA SOLUTIONS PLC  
 PART 1  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:
    
    
    3Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004 (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the three months
ended March 31, 2005 and 2004 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3.
    
    Quantitative and
Qualitative Disclosures About Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3.
    
    Defaults Upon Senior Securities
    
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    30Item 5.
    
    Other Information
    
    
    30Item 6.
    
    Exhibits
    
    
    30Signature
    
    
    
    
    31EXHIBIT 31.1EXHIBIT 32.1
 - 2 -




---



##### Table of Contents



PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements INSIGNIA SOLUTIONS PLC 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited, amounts in thousands, except share amounts)
 March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    882
    
    
    $
    902Restricted cash
    
    
    50
    
    
    
    50Accounts receivable, net of allowances of $175 and $0, respectively
    
    
    669
    
    
    
    175Other receivables
    
    
    103
    
    
    
    241Tax receivable
    
    
    133
    
    
    
    322Prepaid expenses
    
    
    330
    
    
    
    456Total current assets
    
    
    2,167
    
    
    
    2,146Property and equipment, net
    
    
    150
    
    
    
    140Intangible assets, net
    
    
    2,387
    
    
    
    Goodwill
    
    
    509
    
    
    
    Investment in affiliate
    
    
    50
    
    
    
    68Other noncurrent assets
    
    
    232
    
    
    
    233$
    5,495
    
    
    $
    2,587LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accrued payable
    
    $
    470
    
    
    $
    241Accrued
liabilities
    
    
    1,070
    
    
    
    995Income tax payable
    
    
    63
    
    
    
    Notes
payable
    
    
    104
    
    
    
    Deferred revenue
    
    
    148
    
    
    
    10Total current liabilities
    
    
    1,855
    
    
    
    1,246Commitments and contingencies (Note 6)Shareholders equity:Preferred shares, £0.20 par value: 3,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Ordinary shares, £0.20 par value: 75,000,000 shares authorized;
42,372,199 shares and 35,722,205 shares issued and outstanding
in 2005 and 2004, respectively
    
    
    14,451
    
    
    
    11,939Additional paid-in capital
    
    
    65,448
    
    
    
    64,459Ordinary
share subscription
    
    
    687
    
    
    
    Accumulated deficit
    
    
    (76,485
    )
    
    
    (74,596
    )Other accumulated comprehensive loss
    
    
    (461
    )
    
    
    (461
    )Total shareholders equity
    
    
    3,640
    
    
    
    1,341$
    5,495
    
    
    $
    2,587
 The accompanying notes are an integral part of these condensed consolidated financial statements - 3 -




---



##### Table of Contents



INSIGNIA SOLUTIONS PLC 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited, amounts in thousands, except per share amounts)
 Three months endedMarch 31,2005
    
    
    2004Net revenues:License
    
    $
    417
    
    
    $
    316Service
    
    
    45
    
    
    
    3Total net revenues
    
    
    462
    
    
    
    319Expenses:Cost of net revenues
    
    
    5
    
    
    
    23Sales and marketing
    
    
    662
    
    
    
    816Research and development
    
    
    824
    
    
    
    811General and administrative
    
    
    794
    
    
    
    591Total operating expenses
    
    
    2,285
    
    
    
    2,241Operating loss
    
    
    (1,823
    )
    
    
    (1,922
    )Interest income (expense), net
    
    
    1
    
    
    
    (1
    )Other income (expense), net
    
    
    (31
    )
    
    
    (13
    )Loss before income taxes
    
    
    (1,853
    )
    
    
    (1,936
    )Provision for (benefit from) income taxes
    
    
    36
    
    
    
    (26
    )Net loss
    
    $
    (1,889
    )
    
    $
    (1,910
    )Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.07
    )Weighted average shares and share equivalents:Basic and diluted
    
    
    39,490
    
    
    
    28,616
 The accompanying notes are an integral part of these condensed consolidated financial statements. - 4 -




---



##### Table of Contents



INSIGNIA SOLUTIONS PLC 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited, amounts in thousands)
 Three months endedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net loss
    
    $
    (1,889
    )
    
    $
    (1,910
    )Adjustments to reconcile net loss to net cash used
in operating activities:Depreciation
    
    
    25
    
    
    
    26Amortization of intangible assets
    
    
    13
    
    
    
    Allowance for doubtful accounts
    
    
    175
    
    
    
    Non-cash
charge for warrant issuance
    
    
    
    
    
    
    349Equity in net loss of affiliate
    
    
    18
    
    
    
    Net changes in assets and liabilities:Accounts receivable
    
    
    (499
    )
    
    
    (150
    )Other receivables
    
    
    146
    
    
    
    (1,010
    )Tax receivable
    
    
    189
    
    
    
    (45
    )Prepaid royalties
    
    
    
    
    
    
    2,185Prepaid expenses
    
    
    140
    
    
    
    27Other noncurrent assets
    
    
    1
    
    
    
    (7
    )Accounts payable
    
    
    148
    
    
    
    (148
    )Accrued liabilities
    
    
    (264
    )
    
    
    (244
    )Deferred revenue
    
    
    24
    
    
    
    (840
    )Income taxes
    
    
    34
    
    
    
    Net cash used in operating activities
    
    
    (1,739
    )
    
    
    (1,767
    )Cash flows from investing activities:Investment in affiliate
    
    
    
    
    
    
    (75
    )Acquisition
of Mi4e, net of cash acquired
    
    
    301
    
    
    
    Purchases of property and equipment
    
    
    (10
    )
    
    
    (21
    )Net cash
provided
(used) by investing activities
    
    
    291
    
    
    
    (96
    )Cash flows from financing activities:Proceeds from issuance of shares, net
    
    
    1,361
    
    
    
    1,604Proceeds from exercise of warrants
    
    
    
    
    
    
    389Proceeds from exercise of stock options and
employee stock purchases
    
    
    67
    
    
    
    497Net cash provided by financing activities
    
    
    1,428
    
    
    
    2,490Net increase (decrease) in cash and cash equivalents
    
    
    (20
    )
    
    
    627Cash and cash equivalents at beginning of the period
    
    
    902
    
    
    
    2,212Cash and cash equivalents at end of the period
    
    $
    882
    
    
    $
    2,839Non-cash issuance of shares for acquired business
    
    $
    2,760
    
    
    $
    
 The accompanying notes are an integral part of these condensed consolidated financial statements. - 5 -




---



##### Table of Contents



INSIGNIA SOLUTIONS PLC 
 NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) Note 1. Basis of presentation The accompanying unaudited condensed consolidated financial statements of Insignia Solutions plc
(Insignia, us, our, we or the Company) have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim financial information and
pursuant to the instructions to Form 10-Q. The unaudited interim
financial statements have been prepared on the same basis as the annual financial statements and,
in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation. Interim results are not necessarily indicative of
results for a full year. These unaudited condensed consolidated financial statements and notes
should be read in conjunction with Insignias audited consolidated financial statements for the
year ended December 31, 2004 and footnotes thereto, included in Insignias Annual Report on Form
10-K. During the past 24 months, we have incurred an aggregate loss from operations and negative
operating cash flows of $13,946,000 and $11,795,000, respectively. On April 19, 2005, we received
a Nasdaq Staff Determination indicating that the Company was not, at December 31, 2004, in
compliance with the Nasdaq rule that requires us to have a minimum of $2.5 million in shareholders
equity. We are, therefore, subject to delisting from the Nasdaq SmallCap Market. We have requested
and have been granted a hearing on May 19, 2005 before a Nasdaq Listing Qualifications Panel to
appeal the Staff Determination. The delisting has been stayed pending the Panels decision. At
December 31, 2004, our shareholders equity was $1,341,000. Although as of March 31, 2005, our
shareholders equity was $3,640,000, there is no assurance the Panel will grant the Companys
appeal for continued listing. As part of our strategy for ongoing funding and compliance with Nasdaq listing requirements, we
have entered into a securities subscription agreement with Fusion Capital Fund II, LLC (Fusion).
Under this securities subscription agreement, Fusion has agreed to purchase on each trading day
after the commencement of funding, $20,000 of our American Depository Shares (ADSs), for an
aggregate of up to $12 million over a 30-month period, subject to earlier termination at our
discretion. The commencement of funding under the securities subscription agreement is subject to
certain conditions, including the declaration of effectiveness by the Securities and Exchange
Commission of a registration statement covering the sale of the ADSs issued to Fusion under the
securities subscription agreement. There can be no assurance as to whether, or when, these
conditions will be satisfied. Any delay in the commencement of funding under the 2005 Fusion
Capital securities subscription agreement could jeopardize Insignias business. By instituting cost cutting measures, increasing revenue streams, collecting current outstanding
receivables and accessing the subscription agreement, we believe we will be able to meet our
operating and capital requirements through the end of 2005. Under the rules and regulations of the Nasdaq SmallCap Market, the Company would be required to
obtain shareholder approval to sell more than 19.99% of the issued and outstanding shares as of
February 9, 2005 under this agreement. We have called a shareholders meeting on May 24, 2005 in
order to seek such approval, pursuant to a definitive proxy statement that we filed on May 3, 2005.
However, there can be no assurance that our shareholders will approve the subscription agreement. The failure to raise additional funds, if needed, on a timely basis and on sufficiently favorable
terms could have a material adverse effect on our business, operating results and financial
condition. Insignias liquidity may also be adversely affected in the future by factors such as an
increase in interest rates, inability to borrow without collateral, availability of capital
financing and continued operating losses. The accompanying unaudited
condensed consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty. - 6 -




---



##### Table of Contents



We follow accounting principles generally accepted in the United States of America. We conduct our
business in U.S. dollars, Euros and British pounds, and since March 16, 2005, also in Swedish
Krona. All amounts included in the financial statements and in the notes herein are in U.S.
dollars unless designated £, in which case they are in British pounds. Note 2. Net loss per share Net loss per share is presented on a basic and diluted basis, and is computed by dividing our net
loss by the weighted average number of ordinary shares and ordinary equivalent shares outstanding
during the period. Ordinary equivalent shares consist of warrants and stock options that have a
dilutive effect (using the treasury stock method). Under the basic method of calculating net loss
per share, ordinary equivalent shares are excluded from the computation. Under the diluted method
of calculating net loss per share, ordinary equivalent shares are excluded from the computation
only if their effect is anti-dilutive, due to our net loss. Calculation of basic and diluted net loss per share (in thousands, except per share data): Three months endedMarch 31,2005
    
    
    2004Numerator  basic and diluted:Net loss
    
    $
    (1,889
    )
    
    $
    (1,910
    )Denominator calculation of basic net loss per share:Weighted average number of ordinary shares outstanding
    
    
    39,490
    
    
    
    28,616Basic net loss per share
    
    $
    (0.05
    )
    
    $
    (0.07
    )Denominator calculation of diluted net loss per share:Weighted average number of ordinary shares outstanding
    
    
    39,490
    
    
    
    28,616Dilutive ordinary equivalent shares
    
    
    
    
    
    
    Weighted average number of ordinary shares outstanding
    
    
    39,490
    
    
    
    28,616Diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.07
    )
 The following number of options and warrants have not been included in the calculation of diluted
net loss per share because their inclusion would have been anti-dilutive: Three months endedMarch 31,2005
    
    
    2004Options
    
    
    4,319,724
    
    
    
    4,299,737Warrants
    
    
    6,130,911
    
    
    
    1,143,844
 Note 3. Stock based compensation Insignia accounts for stock based employee compensation using the intrinsic value method under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations and complies with the disclosure provisions of Statement of Financial Accounting
Standards No. 148, Accounting for - 7 -




---



##### Table of Contents



Stock-Based Compensation, Transition and Disclosure  an
Amendment of FASB Statement No.123. The following table illustrates the effect on our net loss
and net loss per share if we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No.123 (SFAS 123), Accounting for Stock Based Compensation to
stock based compensation. Three months endedMarch 31,2005
    
    
    2004Net loss-as reported
    
    $
    (1,889
    )
    
    $
    (1,910
    )Less stock based compensation expense determined under fair
value based method
    
    
    (83
    )
    
    
    (174
    )Net loss  pro forma
    
    $
    (1,972
    )
    
    $
    (2,084
    )Basic and diluted net loss per share  as reported
    
    $
    (0.05
    )
    
    $
    (0.07
    )Basic and diluted net loss per share  pro forma
    
    $
    (0.05
    )
    
    $
    (0.07
    )
 In accordance with the disclosure provisions of SFAS No. 123, the fair value of employee stock
options granted during the three months ended March 31, 2005 and 2004 was estimated at the date of
grant using the Black-Scholes model and the following weighted average assumptions: Three months ended March 31,2005
    
    
    2004Stock Options:Volatility range
    
    
    104-276
    %
    
    
    143-198
    %Risk-free interest rate range
    
    
    3.9
    %
    
    
    1.1-3.0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Expected life (years)
    
    
    4
    
    
    
    4Employee Stock Purchase Plan:Volatility range
    
    
    84
    %
    
    
    198
    %Risk-free interest rate range
    
    
    2.9
    %
    
    
    1.1
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Expected life (years)
    
    
    0.5
    
    
    
    0.5
 Note 4. New accounting pronouncement In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004) Share-Based Payment (SFAS 123R), a
revision to SFAS 123. SFAS 123R addresses all forms of share-based payment (SBP) awards,
including shares issued under our 1995 Incentive Stock Option Plan (Purchase Plan), stock
options, restricted stock, restricted stock units and stock appreciation rights. SFAS 123R will
require Insignia to record compensation expense for SBP awards based on the fair value of the
SBP awards. Under SFAS 123R, restricted stock and restricted stock units will generally be valued
by reference to the market value of freely tradable shares of the
Companys ordinary shares. Stock
options, stock appreciation rights and shares issued under the Purchase Plan will generally be
valued at fair value determined through an option valuation model, such as a lattice model or the
Black-Scholes model (the model that Insignia currently uses for its footnote disclosure). SFAS
123R is effective for annual periods beginning after June 15, 2005 and, accordingly, Insignia must
adopt the new accounting provisions effective January 1, 2006. The Company will adopt the
provisions of SFAS 123R using a modified prospective application. Under a modified prospective
application, SFAS 123R will apply to new awards and to awards that are outstanding on the
effective
date and are subsequently modified or cancelled. Compensation expense for outstanding awards for
which the requisite service had not been rendered as of the effective date will be recognized over
the remaining service period using the compensation cost calculated for pro forma disclosure
purposes under SFAS 123. Insignia is in the process of determining how the new method of
valuing stock-based compensation as prescribed in SFAS 123R will be applied to valuing
share-based awards granted after the effective date and the impact the recognition of compensation
expense related to such awards will have on its consolidated financial statements. - 8 -




---



##### Table of Contents



Note 5. Mi4e Acquisition On March 16, 2005, we acquired 100% of Mi4e Device Management AB (Mi4e), a private company
headquartered in Stockholm, Sweden. The consideration paid in the transaction was 2,969,692
American depositary shares (ADSs) representing ordinary shares, and another 989,896 ADSs issuable on March 31, 2006, subject to potential offset for breach of representations, warranties
and covenants. In addition, up to a maximum of 700,000 Euros is payable in a potential earn-out
based on a percentage of future revenue collected from sales of existing Mi4e products. Mi4e
develops, markets and supports software technologies that enable mobile operators and phone
manufacturers to update firmware of mobile devices using standards over-the-air data networks. Its
main product is a Device Management Server (DMS) and is a mobile device management infrastructure
solution for mobile operators that support the Open Mobile Alliance OMA Client Provisioning
Specification. The initial purchase price of approximately $3.0 million consisted of 3,959,588 ordinary shares
with a value of approximately $2,760,000 and acquisition costs of approximately $247,000. The fair
value of Insignias ordinary shares was determined using an average value of $0.6943 per share,
which was the average closing price of Insignias ordinary shares three days before and after the
measurement date of February 10, 2005. The shares issuable in
March 2006 have been recorded as an ordinary share subscription on the condensed consolidated balance sheet. In addition, up to a maximum of 700,000 Euros is payable in
a potential earn-out based on a percentage of future revenue collected from sales of existing Mi4e
products. Any earn-out amounts paid by Insignia to Mi4es shareholders will be recorded as additional purchase price and an
increase to goodwill. Insignia allocated the initial purchase price
to the tangible net assets and intangible assets acquired and liabilities assumed, based on their estimated fair values. Under the
purchase method of accounting, the initial purchase price does not include the contingent earn-out
amount described above. By integrating the Mi4e capabilities with existing Insignia applications,
the Company will be able to deliver comprehensive solutions across multiple generations of
technology and therefore resolve firmware update and compatibility issues for current and future
users who require over-the-air repair. The preliminary estimated initial purchase price is allocated as follows (in thousands): Allocation of Purchase Price:Tangible assets acquired
    
    $
    518Liabilities assumed
    
    
    (420
    )Goodwill(a)
    
    
    509Customer relationships(b)
    
    
    900Technology (c)
    
    
    1,500Total purchase price
    
    $
    3,007
   (a)
    
    Goodwill represents the excess
of the purchase price over the
fair value of the net assets
acquired and liabilities
assumed.(b)
    
    Customer relationships will be
amortized over 10 years, the
period of time Insignia
estimates it will benefit from
the acquired customer
relationships.(c)
    
    Technology will be amortized
over 5 years, the period of
time Insignia estimates it will
benefit from the technology
acquired. In performing the purchase price allocation of acquired intangible assets, Insignia considered its
intention for future use of the assets, analysis of historical financial performance and estimates
of future performance of Mi4es
products, among other factors. Insignia determined the fair values of the above intangible
technology assets using the residual income method, and for the customer relationships the
income approach method was used. The excess of the purchase price over the fair value of the identifiable tangible and intangible
net assets acquired and liabilities assumed of $509,000 was assigned to goodwill. In accordance with SFAS No. 142
Goodwill and Other Intangible Assets
 (SFAS 142), goodwill will not be amortized but will be
tested for impairment at least annually. This amount is not deductible for tax purposes. - 9 -




---



##### Table of Contents



The following table presents unaudited summarized combined results of operations of Insignia and
Mi4e, on a pro forma basis, as though the companies had been combined as of the beginning of each
period presented after giving effect to certain purchase accounting adjustments. The operating results of Mi4e have been included in Insignias condensed
consolidated financial statements from March 16, 2005, the date of acquisition. The following
unaudited pro forma amounts are in thousands, except the per share amounts: Three months endedMarch 31, 20052005
    
    
    2004Net revenues
    
    $
    675
    
    
    $
    448Net loss
    
    $
    (2,050
    )
    
    $
    (2,077
    )Net loss per share  Basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.07
    )
 The above unaudited pro forma summarized results of operations are intended for informational
purposes only and, in the opinion of management, are neither indicative of the results of
operations of Insignia had the acquisition actually taken place as of
the beginning of the periods presented, nor
indicative of Insignias future results of operations. In addition, the above unaudited pro forma
summarized results of operations do not include potential cost savings from operating efficiencies
or synergies that may result from Insignias acquisition of Mi4e. Note 6. Commitments and Contingencies Guarantee Agreements Insignia indemnifies its officers and directors for certain events or occurrences, subject to
certain limits, while the officer is or was serving at our request in such capacity. The term of
the indemnification period is for the officers or directors lifetime. The maximum amount of
potential future indemnification is unlimited; however we do have a Director and Officer Insurance
Policy that limits our exposure and enables us to recover a portion of any future amounts paid. As
a result of the insurance policy coverage, we believe the fair value of these indemnification
agreements is minimal. In our sales agreements, we typically agree to indemnify our customers for any expenses or
liability resulting from claimed infringements of patents, trademarks or copyrights of third
parties. The terms of these indemnification provisions are generally perpetual any time after the
execution of the agreement. The maximum amount of potential future indemnification is unlimited.
To date we have not paid any amounts to settle claims or defend lawsuits. Insignia, on a limited basis, has granted price protection. The terms of these agreements are
generally perpetual. We have not recorded any liabilities for these potential future payments
either because they are not probable or we have yet to incur the expense. Insignia warrants its software products against defects in material and workmanship under normal
use and service for a period of ninety days. There is no warranty accrual recorded because
potential future payments either are not probable or we have yet to incur the expense. Note 7. Segment reporting
and long-lived assets Insignia operates in a single industry segment, providing software technologies that enable mobile
operators and phone manufacturers to update the firmware of mobile devices using standard
over-the-air data networks. In the first quarter of 2004, revenues received from sales of SSP
products and from esmertec (with regard to our percentage of the revenue share program from sales
of the Jeode product line) accounted for 71% and 29% of revenues, respectively. In the first
quarter of 2004, one United States customer, Insignia Asia and esmertec accounted for 47%, 24% and
22% of total revenues, respectively. In the first quarter of 2005, one French company accounted
for 48% of total revenues, one Israeli company accounted for 28% of total revenues and one Spanish
company accounted for 22% of total revenues. No other customers accounted for 10% or more of
Insignias total revenues during the first quarter of 2005 or 2004. Sales to customers outside the
United States, derived mainly from customers in Europe, the - 10 -




---



##### Table of Contents



Middle East and Asia, represented
approximately 100% of total revenues in the three months ended March 31, 2005, and 47% of total
revenues in the three months ended March 31, 2004. Revenue is attributed to countries based on
customer location. The majority of our
long-lived assets are located outside the United States, principally
in Sweden. All
of our net intangible assets ($2,387,000), goodwill ($509,000), investment in
affiliate ($50,000) and other non-current assets ($232,000) are located outside
the United States. $55,000 of our net fixed assets ($150,000) are located
outside the United States. At December 31, 2004, substantially
all of our long-lived assets were located in the United States. Note 8. Equity transactions and warrants On October 17, 2002, we entered into a securities subscription agreement with Fusion Capital
Fund II, LLC (Fusion Capital), pursuant to which Fusion Capital agreed to purchase, on each
trading day following the effectiveness of a registration statement covering the American
Depository Shares (ADSs) to be purchased by Fusion Capital, $10,000 of our ADSs up to an
aggregate of $6 million over a period of 30 months. The purchase price of the ADSs was based on a
formula based on the market price at the time of each purchase. During January 2005, we sold
299,007 shares under the 2002 Fusion Capital agreement, for aggregate proceeds of $200,000, net of
transaction costs. In 2004, we sold 3,100,060 shares to Fusion Capital for aggregate proceeds of
$1.5 million, net of transaction costs, under the 2002 Fusion Capital securities subscription
agreement. During 2003, we issued and sold to Fusion Capital 3,380,132 shares resulting in proceeds
of $1.9 million, net of transaction costs, under the 2002 Fusion Capital securities subscription
agreement. On February 9, 2005, Insignia and Fusion Capital entered into a mutual termination
agreement pursuant to which their 2002 Fusion Capital securities subscription agreement was
terminated. On February 9, 2005, we sold to Fusion Capital 3,220,801 ADSs at a purchase price of $0.40 per
share, resulting in proceeds of approximately $1.3 million. These shares were issued to Fusion
Capital in a private placement. Insignia intends to file as soon as practicable a registration
statement on Form S-3 in order to register the resale of these shares. In addition to the shares purchased by Fusion Capital under the 2002 Fusion Capital securities
subscription agreement, we also issued warrants to purchase an aggregate of 2,000,000 shares to
Fusion Capital, with a per share exercise price of the United States dollar equivalent of 20.5
pence. As of December 31, 2002, the estimated value of the warrants, using the Black-Scholes model
was $544,000. Upon Fusions exercise of the warrants in 2003, we issued Fusion Capital 2,000,000
ADSs for a total of $668,000, net of issuance costs. On February 10, 2005, Insignia entered into a new securities subscription agreement with
Fusion Capital to sell up to $12 million in ADSs, representing ordinary shares, to Fusion Capital
over a period of 30 months (subject to a daily maximum purchase amounts) (the 2005 Fusion Capital
securities subscription agreement). The shares will be priced based on a market-based formula at
the time of purchase. Under this securities subscription agreement we
issued warrants to purchase 4,000,000 ADSs as a commitment fee to Fusion Capital. This agreement with
Fusion Capital does not constitute an offer to sell securities. The commencement of funding under
the 2005 Fusion Capital securities subscription agreement is subject to certain conditions,
including the declaration of effectiveness by the Securities and Exchange Commission of the
registration statement covering the ADSs to be purchased by Fusion Capital under the 2005 Fusion
Capital securities subscription agreement. Under the rules and regulations of the Nasdaq SmallCap
Market, the Company is required to obtain shareholder approval to sell more than 19.99% of
the issued and outstanding shares as of February 9, 2005 under this agreement. Insignia currently
expects that commencement of funding under the 2005 Fusion Capital securities subscription
agreement will begin during the second quarter of 2005, however the timing and certainty of the
commencement of funding under the 2005 Fusion Capital securities subscription agreement are not
within Insignias control. Any delay in the
commencement of funding under the 2005 Fusion Capital securities subscription agreement could
jeopardize Insignias business. On March 16, 2005, we acquired Mi4e. The consideration paid in the transaction was 2,969,692 ADSs representing
ordinary shares and another 989,896 ADSs issuable on March 31, 2006, subject to potential
offset for breach of representations, warranties and covenants. The
shares issuable in March 2006 have been recorded as an ordinary share
subscription on the condensed consolidated balance sheet. - 11 -




---



##### Table of Contents



The following table summarizes the warrant activity during the three months ended March 31, 2005. Warrants outstanding and
    
    
    Warrants outstandingexercisable
    
    
    exercise priceBalance, December 31, 2004
    
    
    2,130,911
    
    
    $
    1.03 - $5.00Granted
    
    
    4,000,000
    
    
    
    0.40 - $0.60
    (1)Exercised
    
    
    
    
    
    
    Balance, March 31, 2005
    
    
    6,130,911
    
    
    $
    0.40 - $5.00
    (1)
   (1)
    
    2,000,000 of the warrants are exercisable at
£0.205 ($0.40) and 2,000,000 of the warrants are exercisable at
the greater of £0.205 or $0.60. Note 9. Related party transactions On March 16, 2005, we closed our acquisition of Mi4e. The consideration paid in the
transaction was 2,969,692 ADSs representing ordinary shares and another 989,896 ADSs issuable on March 31, 2006, subject to potential offset for breach of representations, warranties
and covenants. In addition up to a maximum of 700,000 Euros is payable in a potential earn-out
based on a percentage of future revenue collected from sales of existing Mi4e products. Anders
Furehed, our senior vice president of European operations, was an indirect 50% shareholder of Mi4e
and thus received 1,484,846 ADSs on the closing of the acquisition. Note 10. Notes payable With
the March 16, 2005 acquisition of Mi4e, Insignia assumed two
notes payable. The largest note is from ALMI Foretagspartner
(ALMI) and is referred to as a regional development
loan. The total loan amount is SEK 700,000 or
approximately $100,000. This note is to be repaid within
42 months. The interest rate on this note is 9.5% per annum. As
of March 31, 2005, the outstanding balance of the ALMI note was
approximately SEK 530,000 or $77,000. In
addition to the ALMI note payable, there is a note payable from
Smandinaviska Enskilda Banken (SEB). The total note
amount is SEK 400,000 or approximately $57,000. The interest rate on the SEB
note is approximately 8% per annum. As of March 31, 2005, the
outstanding balance was SEK 192,000 or approximately $27,000. - 12 -




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in Part
I  Item 1 of this Form 10-Q
and the Managements Discussion and Analysis of Financial Condition and Results of Operations set
forth in Insignias Form 10-K for the year ended December 31, 2004 (the Form 10-K) filed with the
Securities and Exchange Commission. This Form 10-Q contains forward-looking statements. Words such as anticipates, believes,
expects, future, and intends, and similar expressions are used to identify forward-looking
statements. These forward-looking statements concern matters which include, but are not limited to,
the revenue model and market for our products, its features, benefits and advantages of our
international operations and sales, gross margins, spending levels, the availability of licenses to
third-party proprietary rights, business and sales strategies, matters relating to proprietary
rights, competition, exchange rate fluctuations and our liquidity and capital needs. These and
other statements regarding matters that are not historical are forward-looking statements. These
matters involve risks and uncertainties that could cause actual results to differ materially from
those in the forward-looking statements. In addition to the factors discussed above, among other
factors that could cause actual results to differ materially are the following: the demand for our
products; their performance and functionality; our ability to deliver products on time, and market
acceptance of new products or upgrades of existing products; the timing of, or delay in, large
customer orders; continued availability of technology and intellectual property license rights;
product life cycles; quality control of products sold; competitive conditions in the industry;
economic conditions generally or in various geographic areas; and the other risks listed from time
to time in the reports that we file with the U.S. Securities and Exchange Commission. Factors that
could cause or contribute to such differences in results and outcomes include without limitation
those discussed below as well as those discussed elsewhere in this Report. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect managements
analysis only as of the date hereof. We assume no obligation to update these forward-looking
statements to reflect actual results or changes in factors or assumptions affecting such
forward-looking statements. - 13 -




---



##### Table of Contents



The following table sets forth the unaudited condensed consolidated results of operations as a
percentage of total revenues for the three-month periods ended March 31, 2005 and 2004. Three months endedMarch 31,2005
    
    
    2004Net revenues:License
    
    
    90.3
    %
    
    
    99.1
    %Service
    
    
    9.7
    %
    
    
    0.9
    %Total net revenues
    
    
    100.0
    %
    
    
    100
    %Expenses:Cost of revenues
    
    
    1.1
    %
    
    
    7.2
    %Sales and marketing
    
    
    143.3
    %
    
    
    255.8
    %Research and development
    
    
    178.3
    %
    
    
    254.2
    %General and administrative
    
    
    171.9
    %
    
    
    185.3
    %Total operating expenses
    
    
    494.6
    %
    
    
    702.5
    %Operating loss
    
    
    (394.6
    )%
    
    
    (602.5
    )%Interest income (expense), net
    
    
    0.2
    %
    
    
    (0.3
    )%Other income (expense), net
    
    
    (6.7
    )%
    
    
    (4.1
    )%Loss before income taxes
    
    
    (401.1
    )%
    
    
    (606.9
    )%Provision for (benefit from) income taxes
    
    
    7.8
    %
    
    
    (8.2
    )%Net loss
    
    
    (408.9
    )%
    
    
    (598.7
    )%
 - 14 -




---



##### Table of Contents



Overview We commenced operations in 1986, and currently develop, market and support software
technologies that enable mobile operators and phone manufacturers to update the firmware of mobile
devices using standard over-the-air data networks. Before 2003, our principal product line was the
Jeode platform, based on our Embedded Virtual Machine (EVM) technology. During 2001, we began development of a range of products (Secure System Provisioning or
SSP products) for the mobile phone and wireless operator industry. These SSP products build on
our position as a Virtual Machine (VM) supplier for manufacturers of mobile devices and allow
wireless operators and phone manufacturers to reduce customer care and software recall costs as
well as increase subscriber revenue by deploying new mobile services based on dynamically
provisional capabilities. With the sale of our JVM product line in April 2003, our sole product
line until March 2005 consisted of our SSP product. We shipped our first SSP product in December
2003. On March 16, 2005, we closed our acquisition of Mi4e Device Management AB (Mi4e), a private
company headquartered in Stockholm, Sweden. The consideration paid in the transaction was
2,969,692 American depositary shares (ADSs) representing ordinary shares, and another 989,896 ADSs
issuable on March 31, 2006, subject to potential offset for breach of representations,
warranties and covenants. In addition, up to a maximum of 700,000 Euros is payable in a potential
earn-out based on a percentage of future revenue collected from sales of existing Mi4e products.
Mi4e develops, markets and supports software technologies that enable mobile operators and phone
manufacturers to update firmware of mobile devices using standards over-the-air data networks. Its
main product is a Device Management Server (DMS) and is a mobile device management infrastructure
solution for mobile operators that support the Open Mobile Alliance OMA Client Provisioning
Specification. DMS was first deployed at Telstra in Australia in 2000 and has since been deployed
at more than ten carriers around the world. Our operations outside of the United States are primarily in the United Kingdom (U.K.) and
Sweden, where part of our research and development operations and our European sales activities are
located. We sell our products directly to operators, to distributors and OEMs. Our revenues from
customers outside the United States are derived primarily from Europe and Asia and are generally
affected by the same factors as our revenues from customers in the United States. The operating
expenses of our operations outside the United States are mostly incurred in Europe and relate to
our research and development and European sales activities. Such expenses consist primarily of
ongoing fixed costs and consequently do not fluctuate in direct proportion to revenues. Our
revenues and expenses outside the United States can fluctuate from period to period based on
movements in currency exchange rates. Historically, movements in currency exchange rates have not
had a material effect on our revenues and expenses. We operate with the U.S. dollar as our functional currency, with a majority of revenues and
operating expenses denominated in Euros, U.S. dollars, British pounds sterling and Swedish Krona.
Exchange rate fluctuations against the dollar can cause U.K. and Swedish expenses, which are
translated into dollars for financial statement reporting purposes, to vary from period-to-period. The Current Economic Environment The economic climate in which we operate has been difficult over recent years, and information
technology (IT) spending has decreased dramatically. This has had an effect on our ability to
generate new license fees, as expenditures like those required to purchase some of our products
have been quite limited. We cannot provide any assurance that these pressures on IT spending will
ease, or that the general economic climate will improve. Continued competitive pressure and a weak
economy could have a continuing pronounced effect on our operating results. We have undertaken a
variety of cost reduction measures designed to bring our operating expenses in line with our
perceptions of the business climate, including workforce reductions. - 15 -




---



##### Table of Contents



Critical accounting policies and estimates The condensed consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. Certain of our accounting policies
require the application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. These estimates affect the reported amounts of
assets and liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. By their nature, these judgments are subject
to an inherent degree of uncertainty. The most significant estimates and assumptions relate to
revenue recognition, and the adequacy of allowances for doubtful accounts. Actual amounts could
differ from these estimates. Revenue recognition We recognize revenue in accordance with Statement of Position 97-2 (SOP 97-2), Software Revenue
Recognition, as amended. SOP 97-2 requires that four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or
services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably
assured. Determination of criteria (3) and (4) are based on managements judgments regarding the
fixed nature of the fee charged for services rendered and products delivered and the collectibility
of those fees. Should changes in conditions cause management to determine these criteria are not
met for certain future transactions, revenue recognized for any reporting period could be adversely
affected. At the time of the transaction, we assess whether the fee associated with our revenue transaction
is fixed or determinable and whether or not collection is reasonably assured. We assess whether
the fee is fixed or determinable based on the payment terms associated with the transaction. If a
significant portion of a fee is due after the normal payment terms, which are 30 to 90 days from
invoice date, we account for the fee as not being fixed or determinable. In these cases, we
recognize revenue on the earlier of due date or cash collected. We assess collectibility based on a number of factors, including past transaction history with the
customer and the credit-worthiness of the customer. We do not request collateral from our
customers. If we determine that collection of a fee is not reasonably assured, we will defer the
fee and recognize revenue at the time collection becomes reasonably assured, which is generally
upon receipt of cash. For all sales, we use either a signed license agreement or a binding purchase order (primarily for
maintenance renewals) as evidence of an arrangement. For arrangements with multiple obligations (for example, undelivered maintenance and support), we
will allocate revenue to each component of the arrangement using the residual value method based on
the fair value of the undelivered elements, which is specific to us. This means that we will defer
revenue equivalent to the fair value of the undelivered elements. Fair value for the ongoing
maintenance and support obligation is based upon separate sales of renewals to other customers or
upon renewal rates quoted in the contracts. Fair value of services, such as training or
consulting, is based upon separate sales by us of these services to other customers. Our arrangements do not generally include acceptance clauses. However, if an arrangement includes
an acceptance provision, recognition occurs upon the earlier of receipt of written customer
acceptance or expiration of the acceptance period. We recognize revenue for maintenance and hosting services ratably over the contract term. Our
training and consulting services are billed based on hourly rates, and we will generally recognize
revenue as these services are performed. However, at the time of entering into a transaction, we
will assess whether or not any services included within the arrangement require us to perform
significant work either to alter the underlying software or to build additional complex interfaces
so that the software performs as the customer requests. If these services are included as part of
an arrangement, we recognize the entire fee using the percentage of completion method. We estimate
the percentage of completion based on our estimate of the total costs estimated to complete the
project as a percentage of the costs incurred to date and the estimated costs to complete. - 16 -




---



##### Table of Contents



Accounts receivable and allowance for doubtful accounts We perform ongoing credit evaluations of our customers and will adjust credit limits based upon
payment history and the customers current credit worthiness, as determined by our review of their
current credit information. We continuously monitor collections and payments from our customers
and maintain an allowance for estimated credit losses based upon historical experience and any
specific customer collection issues that we have identified. While such credit losses have
historically been within expectations and the allowance established, we cannot guarantee that we
will continue to experience the same credit loss rates as in the past. Since our accounts
receivable are concentrated in a relatively few number of customers, a significant change in the
liquidity or financial position of any one of these customers could have a material adverse impact
on the collectibility of accounts receivables and future operating results. The preparation of financial statements requires us to make estimates of the uncollectibility of
our accounts receivables. We specifically analyze accounts receivable and analyze historical bad
debts, customer concentrations, customer credit-worthiness, current economic trends and changes in
customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Results of Operations Revenues Three months endedMarch 31,2005
    
    
    2004(in thousands)License revenue
    
    $
    417
    
    
    $
    316Service revenue
    
    
    45
    
    
    
    3Total net revenue
    
    $
    462
    
    
    $
    319
 The SSP product line, which we launched in 2003, was expanded by our introduction of additional
products in March 2005. These products include Device Management Server (DMS) and Open Management
Client (OMC). The DMS product was developed by Insignia and the OMC was acquired through the
acquisition of Mi4E in March 2005. In the first quarter of 2004, revenue from the SSP product line
was derived from a combination of sources including (1) initial licensing fees, (2) transactional
occurrence fees, (3) support and maintenance fees and (4) engineering service fees. In the first
quarter of 2005 the revenue from SSP, DMS and OMC included (1) initial licensing fees, (2)
transactional occurrence fees, (3) support and maintenance fees, (4) trials and installations, (5)
hosting services and (6) engineering service and set up fees. The 45% increase in total revenues from the first quarter of 2004 to the first quarter of 2005 was
primarily due to increased license revenues. License revenue and service revenue accounted for 90%
and 10%, respectively, of total revenues in the first quarter of 2005. In the first quarter of
2004, license revenue and service revenue accounted for 99% and 1% respectively. The increase in license revenues from the first quarter of 2004 to the first quarter of 2005 was
primarily due to increased revenues from our SSP, DMS and OMC products. The SSP, DMS and OMC
products made up 43%, 29% and 28%, respectively, of license revenues in the first quarter of 2005.
In the first quarter of 2004, the SSP and Jeode product lines made up 71% and 29% of total license
revenues respectively. The increase in service revenue from the first quarter of 2004 to the first quarter of 2005 was
primarily due to the increase in agreements for set up, hosting, and support and maintenance
services for the DMS and SSP products. Sales to distributors represented approximately 100% of total revenues in the three months ended
March 31, 2005 and 93% of total revenues in the three months ended March 31, 2004. 7% of total
revenues in the three months ended March 31, 2004 were to OEMs. - 17 -




---



##### Table of Contents



Sales to customers outside the United States, derived mainly from customers in Europe, the Middle
East and Asia, represented approximately 100% of total revenues in the three months ended March 31,
2005 and 47% of total revenues in the three months ended March 31, 2004. Expenses Three months endedMarch 31,2005
    
    
    2004(in thousands, except percentages)Sales and marketing
    
    $
    662
    
    
    $
    816Percentage of total revenues
    
    
    143
    %
    
    
    256
    %Research and development
    
    $
    824
    
    
    $
    811Percentage of total revenues
    
    
    178
    %
    
    
    254
    %General and administrative
    
    $
    794
    
    
    $
    591Percentage of total revenues
    
    
    172
    %
    
    
    185
    %
 Sales and marketing expenses consist primarily of personnel and related overhead costs,
salespersons commissions, advertising and promotional expenses and expenses relating to trade
shows. Sales and marketing expenses decreased by 19% in the quarter ended March 31, 2005 from the
quarter ended March 31, 2004. The decrease was primarily due to a non-cash charge of $349,000 in
the first quarter of 2004, for warrants issued to outside partners supporting the Companys SSP
product launch. This decrease was offset in part by a $110,000 increase in expenses related to
fees for outside sales consultants as well as a $32,000 increase in discretionary marketing. There
was an increase of $30,000 relating to sales and marketing salaries and related employee expenses.
In addition, there was a $24,000 increase in sales and marketing travel. In the future we
anticipate a moderate increase in sales and marketing expenses as we attempt to increase our
revenues. Research and development costs consist primarily of personnel costs, professional consulting and
travel expenses. Research and development expenses increased by 2% in the three months ended March
31, 2005 compared to the same period of 2004. In the three months ended March 31, 2005 compared to
the same period in 2004, engineering salaries and related personnel expenses increased by $45,000.
This increase was offset in part by decreases in personnel recruiting fees of $22,000 and a
decrease in engineering consulting costs of $7,000. General and administrative expenses consist primarily of personnel and related overhead costs for
finance, information systems, human resources and general management. General and administrative
expenses increased by 34% in the three months ended March 31, 2005 compared to the same period of
2004. The increase was due primarily to an increase of $175,000 in the reserve for doubtful
accounts for two customers in Asia. There was also a $60,000 increase in professional and
consulting services for the period ended March 31, 2005 over the same period of 2004 and an
increase in general and administrative salaries and related expenses of $25,000. These increases
were offset in part by a $44,000 decrease in recruiting costs as well as a $7,000 decrease in
insurance and a $6,000 decrease in general and administrative travel for the period ended March 31,
2005 over the period ended March 31, 2004. - 18 -




---



##### Table of Contents



Provision for (benefit
from) income taxes
    
    Three months endedMarch 31,2005
    
    
    2004(in thousands, except percentages)Provision for (benefit from) income taxes
    
    $
    36
    
    
    $
    (26
    )Effective income tax rate
    
    
    2
    %
    
    
    (1
    )%
 The provision for income taxes for the three months ended March 31, 2005 primarily represents taxes
on our earnings in Sweden. Our benefit from income taxes of $26,000 for the three months ended
March 31, 2004 primarily represented a refund received from the United Kingdom for research and
development claims. We have recorded a full valuation allowance against all deferred tax assets,
primarily comprised of net operating losses, on the basis that significant uncertainty exists with
respect to their realization. Liquidity and capital resources March 31,2005
    
    
    2004(in thousands)Cash, cash equivalents and restricted cash
    
    $
    932
    
    
    $
    2,859Working capital
    
    $
    312
    
    
    $
    3,106Net cash used in operating activities for the
three month period
    
    $
    (1,739
    )
    
    $
    (1,767
    )
 Cash has been used for the development and marketing efforts associated with our products. Cash
used in operating activities in the first quarter of 2005 totaled
$1,739,000 compared to $1,767,000
for the same period in 2004. For the three months ended March 31, 2005, cash used in operating
activities resulted primarily from a net loss of $1,889,000, and an increase in accounts receivable
of $499,000, partially offset by a decrease in other receivables and
prepaid expenses of $475,000 and an
increase of accounts payable of $148,000 and deferred revenue of
$24,000. In addition accrued liabilities decreased by $264,000. Cash provided by investing
activities for the three months ended March 31, 2005 was $291,000, which
consisted of cash received from the purchase of Mi4e of $301,000 less
$10,000 for the purchase of
fixed assets. Cash provided by financing activities for the three months ended March 31, 2005 was $1,428,000,
resulting from share issuances to Fusion Capital with aggregate proceeds of $1,361,000 and proceeds
from exercise of stock options and employee stock purchase plan of $67,000. Our cash, cash equivalents and restricted cash were $932,000 at March 31, 2005, a decrease of
$20,000 from $952,000 at December 31, 2004. At March 31, 2005 and 2004, we had a working capital
surplus of $312,000 and $3,106,000, respectively. The principal source of working capital came as a
result of the issuance of shares. We have no material commitments for capital expenditures. Our
commitments for expenditures consist of building leases in the U.K. and U.S. - 19 -




---



##### Table of Contents



As of March 31, 2005, we had the following contractual cash obligations (including operating lease
obligations that were restructured pursuant to the sale of the JVM product line) (in thousands): OperatingLeasesYear ending December 31,
2005 (April 1, 2005 through December 31, 2005)
    
    $
    1602006
    
    
    1222007
    
    
    952008
    
    
    952009
    
    
    95Thereafter
    
    
    918$
    1,485
 As of March 31, 2005, four customers accounted for 85% of our total accounts receivable. On October 17, 2002, we entered into a securities subscription agreement (Agreement) with Fusion
Capital Fund II, LLC (Fusion Capital), pursuant to which Fusion Capital agreed to purchase, on
each trading day following the effectiveness of a registration statement covering the American
Depository Shares (ADSs) to be purchased by Fusion Capital, $10,000 of our ADSs up to an
aggregate of $6.0 million over a period of 30 months. The purchase price of the ADSs will be equal
to a price based upon the future market price of the shares. In order to be in compliance with
Nasdaq rules, we cannot sell our ordinary shares to Fusion Capital at a price below $0.38, which
represented the greater of the book value per share of our ordinary shares as of September 30, 2002
and the closing sale price per share of our ADSs on October 16, 2002. In November 2003, Fusion made a binding election to purchase an aggregate of 1,766,667 ADSs for an
aggregate purchase price of $1,325,000. In November 2003, we issued 1,000,000 ADSs to Fusion for an
aggregate purchase price of $750,000. Fusions delivery of the additional amount of $575,000 in
November 2003 constituted a binding commitment to purchase the remaining 766,667 shares at such
time as Fusions beneficial ownership of Insignia became less than 9.9%, and the balance of these
766,667 shares were issued to Fusion in January 2004. During the third quarter of 2003, Fusion also purchased an aggregate of 2,000,000 ADSs on exercise
of warrants. On October 18, 2004, we closed two equity financing transactions in which we raised over $2.3
million, net of transaction costs. We closed a private placement financing with certain
institutional and other accredited investors pursuant to which we issued and sold 3,208,499 newly
issued ADSs and warrants to purchase 802,127 ADSs, for a total purchase price of approximately
$1.540 million, or $1.366 million net of transaction costs. The shares were priced at $0.48 per
share, and the warrants had an exercise price of $1.06 per share. The warrants may be exercised any
time after the date that is six months after the closing of the private placement until the earlier
of April 18, 2010 or a change of control of Insignia. We issued warrants to purchase an aggregate
of 204,597 ADSs to the two principals of Nash Fitzwilliams Ltd., who served as the private
placement agent in the private placement. The warrants issued to Nash Fitzwilliams Ltd.s
principals have the same exercise price and terms as
the warrants issued to the investors in the private placement. As part of the transaction, we had
agreed to file a resale registration statement on Form S-3 with the Securities and Exchange
Commission within 30 days after closing for the purpose of registering the resale of the shares,
and the shares underlying the warrants, issued in the private placement. Two investors in the October 18, 2004 private placement were related parties of Insignia. Mark
McMillan, our Chief Executive Officer, invested $25,000 to purchase 52,083 ADSs and warrants to
purchase 13,021 additional ADSs. In addition, Vincent Pino, one of our directors, and his immediate
family invested $200,000 to purchase 416,667 ADSs and warrants to purchase 104,167 additional ADSs. - 20 -




---



##### Table of Contents



Additionally, under a the previously executed securities subscription agreement, we sold to Fusion
Capital 2,500,000 shares of newly issued ADSs at a purchase price of $0.40 per share (which
quantity and price the parties agreed to under a modification of the agreement), resulting in
proceeds of approximately $1.0 million, net of transaction costs. As of October 18, 2004, we had
sold $3.152 million of our ADSs (out of a total potential issuance of $6 million under the
securities subscription agreement) to Fusion Capital. On February 9, 2005, Insignia entered into a new securities subscription agreement with Fusion
Capital to sell up to $12 million in ADSs, representing ordinary shares, to Fusion Capital over a
period of 30 months (subject to daily maximum purchase amounts). The shares will be priced based on
a market-based formula at the time of purchase. The closing of the 2005 Fusion Capital securities
subscription agreement is subject to certain closing conditions, including the declaration of
effectiveness by the Securities and Exchange Commission of a registration statement covering the
ADSs to be purchased by Fusion Capital under the 2005 Fusion Capital securities subscription
agreement. Insignia currently expects that the 2005 Fusion Capital securities subscription
agreement will be closed by the second quarter of 2005, however the timing and certainty of the
closing of the 2005 Fusion Capital securities subscription agreement are not within Insignias
control. Any delay in the closing of the 2005 Fusion Capital securities subscription agreement
could jeopardize our business. Based upon our current forecasts and estimates of targets for revenues and accounts receivable
collections and funding from Fusion Capital, our current cash and cash equivalents together with
cash generated from on-going operations, we believe that we will have sufficient funds to meet our
operating and capital requirements through the end of 2005. If cash currently available from all
sources is insufficient to satisfy our liquidity requirements, we may seek additional sources of
financing, including selling additional equity or debt securities. If additional funds are raised
through the issuance of equity or debt securities, these securities could have rights, preferences
and privileges senior to holders of our shares, and the terms of such securities could impose
restrictions on our operations. The sale of additional equity or debt securities could result in
additional dilution to our shareholders. We may not be able to obtain additional financing on
acceptable terms, if at all. If we are unable to obtain additional financing as and when needed and
on acceptable terms, we may be required to reduce the scope of our planned sales, marketing and
product development efforts, which could jeopardize our business. New Accounting Pronouncement In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004) Share-Based Payment (SFAS 123R), a
revision to SFAS 123. SFAS 123R addresses all forms of share-based payment (SBP) awards,
including shares issued under the 1995 Incentive Stock Option Plan (Purchase Plan), stock
options, restricted stock, restricted stock units and stock appreciation rights. SFAS 123R will
require the Company to record compensation expense for SBP awards based on the fair value of the
SBP awards. Under SFAS 123R, restricted stock and restricted stock units will generally be valued
by reference to the market value of freely tradable shares of the
Companys ordinary shares. Stock
options, stock appreciation rights and shares issued under the Purchase Plan will generally be
valued at fair value determined through an option valuation model, such as a lattice model or the
Black-Scholes model (the model that Insignia currently uses for its footnote disclosure). SFAS
123R is effective for annual periods beginning after June 15, 2005 and, accordingly, Insignia must
adopt the new accounting provisions effective January 1, 2006. The Company will adopt the
provisions of SFAS 123R using a modified prospective application. Under a modified prospective
application, SFAS 123R will apply to new awards and to awards that are outstanding on the
effective date and are subsequently modified or cancelled. Compensation expense for outstanding awards for
which the requisite service had not been rendered as of the effective date will be recognized over
the remaining service period using the compensation cost calculated for pro forma disclosure
purposes under SFAS 123. The Company is in the process of determining how the new method of
valuing stock-based compensation as prescribed in SFAS 123R will be applied to valuing
stock-based awards granted after the effective date and the impact the recognition of compensation
expense related to such awards will have on its financial statements. Risk Factors In addition to the other information in this report, the following factors should be considered
carefully in evaluating our business and prospects: - 21 -




---



##### Table of Contents



We may need additional financing to sustain our operations, and we may not be able to continue to
operate as a going concern. We had cash, cash equivalents, and restricted cash of $0.9 million at March 31, 2005. We had
recurring net losses of $7.1 million, $4.3 million, and $8.4 million for the years ended December
31, 2004, 2003, and 2002, respectively, and we also had net cash used in operations of $7.6
million, $4.2 million, and $8.4 million for the years ended December 31, 2004, 2003, and 2002,
respectively. In the quarter ended March 31, 2005 we had a net loss of $1.9 million and had net
cash used in operations of $1.7 million. These conditions raise substantial doubt about our
ability to continue as a going concern. Based upon our current forecasts and estimates, including the timely closing of the 2005
Fusion Capital securities subscription agreement and the achievement of our target revenues,
cost-cutting and accounts receivable collection goals, our current forecasted cash and cash
equivalents will be sufficient to meet our operating and capital requirements through December 31,
2005. If cash currently available from all sources is insufficient to satisfy our liquidity
requirements, we may seek additional sources of financing including selling additional equity or
debt securities. If additional funds are raised through the issuance of equity or debt securities,
these securities could have rights, preferences and privileges senior to holders of our shares, and
the terms of such securities could impose restrictions on our operations. The sale of additional
equity or debt securities could result in additional dilution to our shareholders. We may not be
able to obtain additional financing on acceptable terms, if at all. If we are unable to obtain
additional financing as and when needed and on acceptable terms our business may be jeopardized. On February 9, 2005, Insignia entered into a new securities subscription agreement with Fusion
Capital to sell ADSs, representing ordinary shares having an aggregate purchase price of up to
$12.0 million, to Fusion Capital Fund II, LLC over a period of 30 months . The shares will be
priced based on a market-based formula at the time of purchase. The commencement of funding under
the 2005 Fusion Capital securities subscription agreement is subject to the declaration of
effectiveness by the Securities and Exchange Commission of a registration statement covering the
ADSs to be purchased by Fusion Capital under the 2005 Fusion Capital securities subscription
agreement. Under the rules and regulations of the Nasdaq SmallCap Market, the Company is seeking
shareholder approval to sell more than 19.99% of the 39,249,013 issued and outstanding shares as of
February 10, 2005 If we do not obtain such shareholder approval, we may only sell 7,845,878
shares (including 4,000,000 shares issuable on exercise of warrants held by Fusion Capital) to
Fusion Capital under the 2005 securities subscription agreement. The timing and certainty of such
shareholder approval and the effectiveness of this registration statement are not within Insignias
control. Any delay in the commencement of funding under the 2005 Fusion Capital securities
subscription agreement could jeopardize Insignias business. We only have the right to receive $20,000 per trading day under the agreement with Fusion
Capital unless our stock price equals or exceeds $1.00, in which case the daily amount may be
increased under certain conditions as the price of our common stock increases. Fusion Capital shall
not have the right nor be obligated to purchase any shares of our common stock on any trading days
that the market price of our common stock is less than $0.40. Under the laws of England and Wales,
we are not permitted to sell our ADSs at a purchase price that is less than the nominal value of
our ordinary shares. Currently, the nominal value per ordinary share is £0.20. In addition,
Insignia will not effect any issuance of ordinary shares (or have its transfer agent or
depository issue any ADSs) on any trading day where the purchase price for any subscriptions would
be less than the U.S. dollar equivalent of 102.5% of the then nominal value of the ordinary shares. We have a total of 75,000,000 shares authorized for issuance, of which 42,372,199 shares were
outstanding as of April 22, 2005, 7,021,007 shares were reserved for issuance upon the exercise of
outstanding warrants and options and 989,896 shares were reserved in connection with the Mi4e
acquisition. Accordingly, we have a total of 24,616,898 shares available and authorized for
issuance in connection with future financing and strategic transactions. Because we are registering 20,000,000 shares for sale by Fusion Capital (of which 4,000,000
shares are purchasable on exercise of warrants issued to Fusion Capital), the selling price of our
common stock to Fusion Capital will have to average at least $0.75 per share for us to receive the
maximum proceeds of $12,000,000. - 22 -




---



##### Table of Contents



Assuming an average purchase price of $0.70 per share (the closing
sale price of the common stock on May 4, 2005) and the purchase by Fusion Capital of 16,000,000
shares under the 2005 securities subscription agreement, proceeds to us would be $11,200,000, plus
approximately $2,000,000 from exercise of warrants. In addition, even if we are able to access the
full $12,000,000 under the 2005 securities subscription agreement with Fusion Capital, we may still
need additional capital to implement our business, operating and development plans. Should the
financing we require to sustain our working capital needs be unavailable or prohibitively expensive
when we require it, our business could be jeopardized. Our stock could be delisted from Nasdaq. The Company received on April 19, 2005 a Nasdaq Staff Determination indicating that the
Company was not, at December 31, 2004, in compliance with the stockholders equity requirement for
continued listing set forth in MarketPlace Rule 4310(c)(2)(B) and that its securities are,
therefore, subject to delisting from the Nasdaq SmallCap Market at the opening of business on April
28, 2005. The Company has a hearing before a Nasdaq Listing Qualifications Panel to review the
Staff Determination on May 19, 2005. The delisting is stayed pending the Panels decision.
MarketPlace Rule 4310(c)(2)(B) requires that the Company have a minimum stockholders equity of
$2,500,000 for continued listing on the Nasdaq SmallCap Market. At December 31, 2004 the Companys
shareholders equity was $1,341,000. Although as of March 31, 2005 the companys shareholders
equity exceeded $2,500,000, there is no assurance the Panel will grant the Companys request for
continued listing. The sale of our shares to Fusion Capital may cause dilution, and the sale of the shares by Fusion
Capital could cause the price of our shares to decline. The number of shares to be issued to Fusion Capital
pursuant to the 2005 securities subscription agreement with Fusion Capital will fluctuate based on
the price of our shares. Shares sold to Fusion Capital under the 2005 securities subscription
agreement will be freely tradable. Fusion Capital may sell none, some or all of the shares
purchased from us at any time. We expect that the shares to be sold to Fusion Capital will be sold
over a period of up to 30 months from the effective date of the registration statement filed in
connection with the transaction. In addition, we are registering for resale an aggregate of 10,534,064 shares sold to other
parties in connection with either private placement transactions or acquisitions. Depending upon
market liquidity at the time, a sale of such shares at any given time could cause the trading price
of our shares to decline. The sale of a substantial number of shares, or anticipation of such
sales, could make it more difficult for us to sell equity or equity-related securities in the
future at a time and at a price that we might otherwise wish to effect sales. We have achieved minimal
sales of our products to date. Our future performance depends upon sales of our SSP, DMS and OMC product lines.
We began shipping the SSP product in December 2003 and the OMC product line in October 2004. We
have achieved only minimal sales to date, including revenues of only $450,000 relating to sales of
the SSP product in 2004. The DMS
product line was acquired as part of Mi4e in March 2005 and we thus have limited experience in
selling this product. If we are unable to gain the necessary customer traction for our products, our business may be jeopardized. Our SSP and OMS products represents the next-generation products that enable carriers to
repair and update mobile phones over-the-air without having their customers send back their
handsets to the carrier for repair or update. To the extent that carriers continue to use the
current generation of over-the-air products, such as those offered by Bitfone, Innopath, Openwave and mFormation, to make repairs and updates and do not believe that the next generation
products, such as our SSP product, offer a sufficiently important improvement at a reasonable cost,
then we may not achieve our targeted sales and our business could fail. Conversely our newly
acquired DMS product represents the current generation of technology. In addition, some prospective customers have been reticent to buy our products because of our current financial position. To the extent that prospective customers
believe that we are under-capitalized, they may be hesitant to buy our products. - 23 -




---



##### Table of Contents



The long and complex process of licensing our products makes our revenue unpredictable. Our revenue is dependent upon our ability to license our products to third parties. Licensing
our products has to date been a long and complex process, typically being a six to nine months
sales cycle. Before committing to license our products, potential customers must generally
consider a wide range of issues including product benefits, infrastructure requirements,
functionality, reliability and our ability to work with existing systems. The process of entering
into a development license with a company typically involves lengthy negotiations. Because of the
sales cycle, it is difficult for us to predict when, or if, a particular prospect might sign a
license agreement. Development license fees may be delayed or reduced because of this process. We
only began shipping the SSP product in December 2003 and have achieved only minimal sales to date. We rely on third parties for software development tools, which we distribute with some of our
products. We license software development tool products from other companies to distribute with some of
our products. These third parties may not be able to provide competitive products with adequate
features and high quality on a timely basis or to provide sales and marketing cooperation.
Furthermore, our products compete with products produced by some of our licensors. When these
licenses terminate or expire, continued license rights might not be available to us on reasonable
terms, or at all. We might not be able to obtain similar products to substitute into our tool
suites. If handset manufacturers (and other third parties) do not achieve substantial sales of their
products that incorporate our technology, we will not receive royalty payments on our licenses. Our success depends upon the use of our technology by our licensees in their smart devices.
Our licensees undertake a lengthy process of developing systems that use our technology. Until a
licensee has sales of its systems incorporating our technology, they will not pay commercial use
royalties to us. We expect that the period of time between entering into a development license and
actually recognizing commercial use royalties will be lengthy and difficult to predict. We have a history of losses and we must generate significantly greater revenue if we are to achieve
profitability. We have experienced operating losses in each quarter since the second quarter of 1996. To
achieve profitability, we will have to increase our revenue significantly. Our ability to increase
revenue depends upon the success of our products, and to date we have received only minimal
revenue. If we are unable to create revenue in the form of development license fees, maintenance
and support fees, commercial use royalties and nonrecurring engineering services, our current
revenue will be insufficient to sustain our business. We need to increase our sales and marketing expenditures in order to achieve sales of our products;
however, this increase in expenses is expected to decrease our cash position. In the quarters ended March 31, 2005 and March 31, 2004, we spent 143% and 256%, respectively,
of our total revenue on sales and marketing. We expect to continue to incur disproportionately high
sales and marketing expenses in the future. To market our products effectively, we must develop
client and server channel markets. We will continue to incur the expenses for a sales and marketing
infrastructure before we recognize significant revenue from sales of the product. Because customers
in the smart device market tend to remain with the same vendor over time, we believe that we must
devote significant resources to each potential sale. If potential customers do not design our
products into their systems, the resources we have devoted to the sales prospect would be lost. If
we fail to achieve and sustain significant increases in our quarterly sales, we may not be able to
continue to increase our investment in these areas. With increased expenses, we must significantly
increase our revenue if we are to become profitable. - 24 -




---



##### Table of Contents



If we are unable to stay abreast of technological changes, evolving industry standards and rapidly
changing customer requirements, our business reputation will likely suffer and revenue may decline. The market for mobile devices is fragmented and characterized by technological change,
evolving industry standards and rapid changes in customer requirements. Our products will need to
be continually improved to meet emerging market conditions, such as new interoperability standards,
new methods of wireless notifications, new flash silicon technologies and new telecom
infrastructure elements. Our existing products will become less competitive or obsolete if we fail
to introduce new products or product enhancements that anticipate the features and functionality
that customers demand. The success of our new product introductions will depend on our ability to:  
    accurately anticipate industry trends and changes in technology standards;
    complete and introduce new product designs and features in a timely manner;
    continue to enhance our existing product lines; and
    respond promptly to customers requirements and preferences. Development delays are commonplace in the software industry. We have experienced delays in the
development of new products and the enhancement of existing products in the past and are likely to
experience delays in the future. We may not be successful in developing and marketing, on a timely
basis or at all, competitive products, product enhancements and new products that respond to
technological change, changes in customer requirements and emerging industry standards. Our targeted market is highly competitive. Our products are targeted for the mobile operator and mobile device market. The market for
these products is fragmented and highly competitive. This market is also rapidly changing, and
there are many companies creating products that compete or will compete with ours. As the industry
develops, we expect competition to increase in the future. This competition may come from existing
competitors or other companies that we do not yet know about. Our main competitors include Bitfone,
IBM, InnoPath, 4thPass, mFormation, Openwave and Red Bend. If these competitors develop products that are less expensive or provide better capabilities
or functionality than do our products, we will be unable to gain market share. Many of our current
competitors and potential competitors have greater resources, including larger customer bases and
greater financial resources than we do, and we might not be able to compete successfully against
these companies. A variety of other potential actions by our competitors, including increased promotion and accelerated introduction of new or enhanced
products, could also harm our competitive position. Our revenue model may not succeed. Competition could force us to reduce the prices of our products, which would result in reduced
gross margins and could harm our ability to provide adequate service to our customers and our
business. Our pricing model for our software products is a combination of (1) initial license fees,
(2) activated subscriber fees, (3) support and maintenance fees, (4) hosting services and (5)
engineering service fees, any of which may be subject to significant pricing pressures. Also, the
market may demand alternative pricing models in the future, which could decrease our revenues and
gross margins. Fluctuations in our quarterly results could cause the market price of our shares to decline. Our quarterly operating results can vary significantly depending on a number of factors. These
factors include:  
    the volume and timing of orders received during the quarter;
    the mix of and changes in customers to whom our products are sold; - 25 -




---



##### Table of Contents




    the mix of product and service revenue received during the quarter;
    the mix of development license fees and commercial use royalties received;
    the timing and acceptance of new products and product enhancements by us or by our competitors;
    changes in product pricing;
    foreign currency exchange rate fluctuations; and
    ability to recognize revenue on orders received. All of these factors are difficult to forecast. Our future operating results may fluctuate due
to these and other factors, including our ability to continue to develop innovative and competitive
products. Due to all of these factors, we believe that period-to-period comparisons of our results
of operations are not necessarily meaningful and should not be viewed as an indication of our
future performance. We have engineering and other operations both in the United States and foreign countries, which is
expensive and can create logistical challenges. We currently have 17 employees in the United States, 10 employees in the United Kingdom and 7
employees in Sweden. In the past, the geographic distance between our engineering personnel in the
United Kingdom and our principal offices in California and primary markets in Asia, Europe and the
United States has led to logistical and communication difficulties. In the future, we may
experience similar difficulties, which may have an adverse impact on our business. Further, because
a substantial portion of our research and development operations is located in the United Kingdom
and Sweden, our operations and expenses are directly affected by economic and political conditions
in the United Kingdom and Sweden. Economic conditions in Europe and fluctuations in the value of the U.S. dollar against the
Euro, Swedish Krona and British pound sterling could impair our revenue and results of operations.
International operations are subject to a number of other special risks. These risks include
foreign government regulation, reduced protection of intellectual property rights in some countries
where we do business, longer receivable collection periods and greater difficulty in accounts
receivable collection, unexpected changes in, or imposition of, regulatory requirements, tariffs,
import and export restrictions and other barriers and restrictions, potentially adverse tax
consequences, the burdens of complying with a variety of foreign laws and staffing and
managing foreign operations, general geopolitical risks, such as political and economic
instability, hostilities with neighboring countries and changes in diplomatic and trade
relationships, and possible recessionary environments in economies outside the United States. In March 2005, we acquired Mi4e Device Management, AB, a company headquartered in Sweden. We
now have 7 employees and an office in Sweden. It takes substantial management time and financial
resources to integrate operations in connection with an acquisition, and the potential logistical,
personnel and customer challenges are exacerbated when, as in this case, the acquirer and target
company are separated by great geographic distance. International sales of our products, which we expect to comprise a significant portion of total
revenue, expose us to the business and economic risks of international operations. Sales
from outside of the United States accounted for approximately 100%
and 47% of our total
revenue for the quarters ended March 31, 2005 and March 31, 2004, respectively. We expect to
market SSP, DMS and OMC to mobile operators and handset manufacturers in Europe. Economic
conditions in Europe and fluctuations in the value of the Euro, British pounds sterling and Swedish
Krona against the U.S. dollar could impair our revenue and results of operations. International
operations are subject to a number of other risks. These risks include:  
    longer receivable collection periods and greater difficulty in accounts receivable collection; - 26 -




---



##### Table of Contents




    foreign government regulation;
    reduced protection of intellectual property rights in some countries where we do business;
    unexpected changes in, or imposition of, regulatory requirements, tariffs, import and
export restrictions and other barriers and restrictions;
    potentially adverse tax consequences;
    the burdens of complying with a variety of foreign laws and staffing and managing foreign operations;
    general geopolitical risks, such as political and economic instability, terrorism,
hostilities with neighboring countries and changes in diplomatic and trade relationships;
and
    possible recessionary environments in economies outside the United States. Product defects can be expensive to fix and may cause us to lose customers. Our software products, like all software products, may have undetected errors or compatibility
problems. Software errors are particularly common when a product is first introduced or a new
version is released. Despite thorough testing, our products might be shipped with errors. If this
were to happen, customers could reject our products, or there might be costly delays in correcting
the problems. Our products are increasingly used in systems that interact directly with the general
public, such as in transportation and medical systems. In these public-facing systems, the failure
of our product could cause substantial property damage or personal injury, which could expose us to
product liability claims. Our products are used for applications in business systems where the
failure of our product could be linked to substantial economic loss. Our agreements with our
customers typically contain provisions designed to limit our exposure to potential product
liability and other claims. It is likely, however, that these provisions are not effective in all
circumstances and in all jurisdictions. We may not have adequate insurance against product
liability risks, and renewal of our insurance may not be available to us on commercially reasonable
terms. Further, our errors and omissions insurance may not be adequate to cover claims. If we ever
had to recall our product due to errors or other problems, it would cost us a great deal of time,
effort and expense. Our operations depend on our ability to protect our computer equipment and the information
stored in our databases against damage by fire, natural disaster, power loss, telecommunications
failure, unauthorized intrusion and other catastrophic events. The measures we have taken to reduce
the risk of interruption in our operations may not be sufficient. As of the date of this report, we
have not experienced any major interruptions in our operations because of a catastrophic event. If we lose key personnel or are unable to hire additional qualified personnel as necessary, we may
not be able to successfully manage our business or sell our products. Our future performance depends to a significant degree upon the continued contributions of our
key management, product development, sales, marketing and operations personnel. We do not have
agreements with any of our key personnel that obligates them to work for us for a specific term,
and we do not maintain any key person life insurance policies. We currently intend to hire
additional salespeople and believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering, sales, marketing and operations
personnel, many of whom are in great demand. Competition for qualified personnel can be intense in
the San Francisco Bay Area, where our U.S. operations are headquartered. If we fail to protect our intellectual property rights, competitors could introduce similar or
superior products, and we could lose market share. We depend on our proprietary technology. Despite our efforts to protect our proprietary
rights, it may be possible for unauthorized third parties to copy our products or to reverse
engineer or otherwise obtain and use information that we consider proprietary. Our competitors
could independently develop technologies that are substantially - 27 -




---



##### Table of Contents



equivalent or superior to our
technologies. Policing unauthorized use of our products is difficult, and while we are unable to
determine the extent to which software piracy of our products exists, software piracy can be
expected to be a persistent problem. Effective protection of intellectual property rights may be
unavailable or limited in foreign countries. The status of U.S. patent protection in the software
industry is not well defined and will evolve as the United States Patent and Trademark Office
grants additional patents. Patents have been granted on fundamental technologies in software, and
patents may be issued that relate to fundamental technologies incorporated into our products. Our products may infringe the intellectual property rights of third parties, which may result in
lawsuits and prevent us from selling our products. As the number of patents, copyrights, trademarks and other intellectual property rights in our
industry increases, products based on our technology may increasingly become the subject of
infringement claims. Third parties could assert infringement claims against us in the future.
Infringement claims, with or without merit, could be time consuming, result in costly litigation,
cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty
or licensing agreements, if required, might not be available on terms acceptable to us. We may
initiate claims or litigation against third parties for infringement of our proprietary rights or
to establish the validity of our proprietary rights. Litigation to determine the validity of any
claims, whether or not the litigation is resolved in our favor, could result in significant expense
to us and divert the efforts of our technical and management personnel from productive tasks. If
there is an adverse ruling against us in any litigation, we may be required to pay substantial
damages, discontinue the use and sale of infringing products, expend significant resources to
develop non-infringing technology or obtain licenses to infringing technology. Our failure to
develop or license a substitute technology could prevent us from selling our products. We are at risk of securities litigation which, regardless of the outcome, could result in
substantial costs and divert management attention and resources. Stock market volatility has had a substantial effect on the market prices of securities issued
by us and other high technology companies, often for reasons unrelated to the operating performance
of the specific companies. Following periods of volatility in the market price of a companys
securities, securities class action litigation has often been instituted against high technology
companies. We have in the past been, and may in the future be, the target of similar litigation. Regardless of the outcome, securities litigation may result in
substantial costs and divert management attention and resources. Our investors may have difficulty enforcing judgments against us in U.S. courts because many of our
assets and some of our directors and management are located in England and Sweden. Insignia is incorporated under the laws of England and Wales. Two of our directors reside in
England. All or a substantial portion of the assets of these persons, and a portion of our assets,
are located outside of the United States. It may not be possible for investors to serve a complaint
within the United States upon these persons or to enforce against them or against us, in U.S.
courts, judgments obtained in U.S. courts based upon the civil liability provisions of U.S.
securities laws. There is doubt about the enforceability outside of the United States, in original
actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities based
solely upon U.S. securities laws. The rights of holders of our shares are governed by English law,
including the Companies Act 1985, and by our memorandum and articles of association. The rights of
holders of our ADSs are also affected by English law. These rights differ from the rights of
security holders in typical U.S. corporations. 
 - 28 -




---



##### Table of Contents



Item 3. Quantitative
and Qualitative Disclosures About Market Risk For the three months ended March 31, 2005 approximately 29% of our total revenues and 48% of our
operating expenses were denominated in U.S. dollars. 71% of our revenues were in Euros. 50% of
our expenses were in British pound sterling and 2% of our expenses in Swedish Krona. Consequently
we are exposed to fluctuations in Euro, British pound sterling and Swedish Krona exchange rates.
There can be no assurance that such fluctuations will not have a material effect on our results of
operations in the future. We did not enter into any currency option hedge contracts in 2004 or the
first quarter of 2005. Item 4. Controls and Procedures We have evaluated the design and operation of our disclosure controls and procedures to determine
whether they are effective. This evaluation was made under the supervision and with the
participation of management, including our principal executive
officer, principal accounting officer and principal financial
officer within the 90-day period prior to the filing of this
Quarterly Report on Form 10-Q. The
principal executive officer, principal accounting officer and principal financial officer has
concluded, based on his review,
that our disclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c) and
15d-14(c), are effective to ensure that information required to be disclosed by us in reports that
we file under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. No significant changes
were made to our internal controls during our first quarter of 2005 that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting. - 29 -




---



##### Table of Contents



PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings None 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits The following exhibits are filed as part of this Report: ExhibitNumber
    
    Exhibit Title31.1
    
    Certificate of Chief Executive Officer, Principal Accounting Officer and Principal Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of Chief Executive Officer, Principal Accounting Officer and Principal Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 - 30 -




---



##### Table of Contents



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INSIGNIA SOLUTIONS PLC
(Registrant)Date: June 6, 2005
    /s/ Mark E  McMillanMARK E. MCMILLANChief Executive Officer
Principal Accounting and
Principal Financial Officer -31-




---



##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Exhibit Title31.1
    
    Certificate of Chief Executive Officer, Principal Accounting Officer and Principal Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of Chief Executive Officer, Principal Accounting Officer and Principal Financial
Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.