##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 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  England and Wales
    
    Not applicable(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. employer identification number)41300 Christy Street
    
    The Mercury Centre, Wycombe LaneFremont
    
    Wooburn GreenCalifornia 94538
    
    High Wycombe, Bucks HP10 0HHUnited States of America
    
    United Kingdom(510) 360-3700
    
    (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 x 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 x As of November 5, 2004, there were 35,239,173 Ordinary shares of £0.20 each
nominal value, outstanding.




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INSIGNIA SOLUTIONS PLC Table of Contents PART 1 - FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:
    
    PageCondensed Consolidated Balance Sheets at September 30, 2004 and December 31, 2003 (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended
September 30, 2004 and 2003 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004
and 2003 (unaudited)
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    26Item 2.
    

Unregistered
Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3.
    
    Defaults Upon Senior Securities
    
    
    26Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    26Item 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    26Signatures
    
    
    
    
    27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 CONDENSED CONSOLIDATED BALANCE SHEETS INSIGNIA SOLUTIONS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, unaudited) September 30,
    
    
    December 31,2004
    
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    477
    
    
    $
    2,212Restricted cash
    
    
    50
    
    
    
    20Accounts receivable, net
    
    
    489
    
    
    
    50Other receivables
    
    
    33
    
    
    
    1,153Tax receivable
    
    
    429
    
    
    
    391Prepaid royalties
    
    
    
    
    
    
    2,185Prepaid expenses
    
    
    258
    
    
    
    410Total current assets
    
    
    1,736
    
    
    
    6,421Property and equipment, net
    
    
    144
    
    
    
    154Investment in affiliate
    
    
    35
    
    
    
    Other assets
    
    
    222
    
    
    
    219$
    2,137
    
    
    $
    6,794LIABILITIES, REDEEMABLE WARRANTS AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    357
    
    
    $
    468Accrued liabilities
    
    
    784
    
    
    
    1,239Note payable
    
    
    
    
    
    
    1,000Deferred revenue
    
    
    238
    
    
    
    1,460Total current liabilities
    
    
    1,379
    
    
    
    4,167Commitments and contingencies (Note 6)Redeemable warrants
    
    
    38
    
    
    
    38Shareholders equity:Ordinary shares
    
    
    9,656
    
    
    
    8,111Additional paid-in capital
    
    
    64,002
    
    
    
    61,898Common stock subscription
    
    
    
    
    
    
    575Accumulated deficit
    
    
    (72,477
    )
    
    
    (67,534
    )Other accumulated comprehensive loss
    
    
    (461
    )
    
    
    (461
    )Total shareholders equity
    
    
    720
    
    
    
    2,589$
    2,137
    
    
    $
    6,794
 The accompanying notes are an integral part of these condensed consolidated
financial statements. 3




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS INSIGNIA SOLUTIONS PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts, unaudited) Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Net revenueLicense
    
    $
    100
    
    
    $
    201
    
    
    $
    521
    
    
    $
    393Service
    
    
    7
    
    
    
    
    
    
    
    12
    
    
    
    187Total net revenue
    
    
    107
    
    
    
    201
    
    
    
    533
    
    
    
    580Cost of net revenue:License
    
    
    
    
    
    
    70
    
    
    
    28
    
    
    
    221Service
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52Total cost of net revenue
    
    
    
    
    
    
    70
    
    
    
    28
    
    
    
    273Gross profit
    
    
    107
    
    
    
    131
    
    
    
    505
    
    
    
    307Operating expenses:Sales and marketing
    
    
    578
    
    
    
    423
    
    
    
    1,923
    
    
    
    1,329Research and development
    
    
    654
    
    
    
    670
    
    
    
    2,126
    
    
    
    2,695General and administrative
    
    
    603
    
    
    
    665
    
    
    
    1,864
    
    
    
    2,195Restructuring
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    480Total operating expenses
    
    
    1,835
    
    
    
    1,739
    
    
    
    5,913
    
    
    
    6,699Operating loss
    
    
    (1,728
    )
    
    
    (1,608
    )
    
    
    (5,408
    )
    
    
    (6,392
    )Interest income (expense), net
    
    
    4
    
    
    
    (14
    )
    
    
    6
    
    
    
    (27
    )Other income (expense), net
    
    
    (3
    )
    
    
    (124
    )
    
    
    248
    
    
    
    3,418Loss before income taxes
    
    
    (1,727
    )
    
    
    (1,746
    )
    
    
    (5,154
    )
    
    
    (3,001
    )Provision for (benefit from) income taxes
    
    
    2
    
    
    
    (90
    )
    
    
    (211
    )
    
    
    (419
    )Net loss
    
    $
    (1,729
    )
    
    $
    (1,656
    )
    
    $
    (4,943
    )
    
    $
    (2,582
    )Loss per share:Basic and diluted
    
    $
    (0.06
    )
    
    $
    (0.08
    )
    
    $
    (0.17
    )
    
    $
    (0.13
    )Weighted average shares and share equivalents:Basic and diluted
    
    
    29,384
    
    
    
    20,634
    
    
    
    29,081
    
    
    
    20,272
 The accompanying notes are an integral part of these condensed consolidated
financial statements. 4




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##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS INSIGNIA SOLUTIONS PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands, unaudited) Nine months endedSeptember 30,2004
    
    
    2003Cash flows from operating activities:Net loss
    
    $
    (4,943
    )
    
    $
    (2,582
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    77
    
    
    
    113Allowance for doubtful accounts
    
    
    
    
    
    
    (26
    )Non-cash charge relating to warrants
    
    
    353
    
    
    
    88Equity in net loss of affiliate
    
    
    40
    
    
    
    Gain on sale of product line
    
    
    (302
    )
    
    
    (3,500
    )Net changes in assets and liabilities:Accounts receivable
    
    
    (439
    )
    
    
    922Other receivables
    
    
    (225
    )
    
    
    Tax receivable
    
    
    (38
    )
    
    
    428Prepaid royalties
    
    
    2,185
    
    
    
    170Prepaid expenses
    
    
    152
    
    
    
    254Other current assets
    
    
    
    
    
    
    45Other noncurrent assets
    
    
    (3
    )
    
    
    100Accounts payable
    
    
    (74
    )
    
    
    (13
    )Accrued liabilities
    
    
    (318
    )
    
    
    (162
    )Accrued severance
    
    
    
    
    
    
    97Deferred revenue
    
    
    (627
    )
    
    
    537Income tax payable
    
    
    
    
    
    
    (4
    )Net cash used in operating activities
    
    
    (4,162
    )
    
    
    (3,533
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (67
    )
    
    
    (62
    )Investment in affiliate
    
    
    (75
    )
    
    
    Proceeds from sale of product line, net
    
    
    
    
    
    
    1,513Decrease (increase) in restricted cash
    
    
    (30
    )
    
    
    230Net cash provided by (used in) investing activities
    
    
    (172
    )
    
    
    1,681Cash flows from financing activities:Proceeds from issuance of shares, net
    
    
    1,604
    
    
    
    800Proceeds from exercise of warrants
    
    
    389
    
    
    
    796Proceeds from note payable
    
    
    
    
    
    
    1,000Proceeds from exercise of stock options and employee stock purchase plan
    
    
    606
    
    
    
    1Net cash provided by financing activities
    
    
    2,599
    
    
    
    2,597Net increase (decrease) in cash and cash equivalents
    
    
    (1,735
    )
    
    
    745Cash and cash equivalents at beginning of the period
    
    
    2,212
    
    
    
    726Cash and cash equivalents at end of the period
    
    $
    477
    
    
    $
    1,471
 The accompanying notes are an integral part of these condensed consolidated
financial statements. 5




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##### Table of Contents



INSIGNIA SOLUTIONS PLC 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited) Note 1. Basis of presentation The accompanying unaudited condensed consolidated financial statements of
Insignia Solutions plc (Insignia, us or we) 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 and Article 10 of Regulation S-X. 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 condensed consolidated financial statements and notes herein
should be read in conjunction with Insignias audited consolidated financial
statements for the year ended December 31, 2003, and notes 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 $17,128,000 and $11,016,000, respectively.
Additionally, on August 4, 2004, we received a letter from Nasdaq stating that
we were not in compliance with the Nasdaq rule that requires us to have, among
other possibilities, a minimum of $2.5 million in shareholders equity. On
October 18, 2004, we announced that we had closed two equity related financing
transactions in which we raised over $2.3 million, net of transaction costs.
The funds received from these two financings will be used for working capital
to help us promote our Secure Systems Provisioning v2 (SSP v2) product in the
mobile operator community. We believe that as a result of the two financings
announced on October 18, 2004, our shareholders equity has been increased
above the $2.5 million minimum required by Nasdaq. We currently believe that we will have sufficient funds to meet our operating
and capital requirements for the next twelve months based on the funds raised
from the October 2004 financings, potential funds available under our
securities subscription agreement with Fusion Capital, our targeted revenue
from our SSP product line, and our continued control of operating costs.
However, the SSP product line was only introduced in December 2003, and we have
achieved minimal sales of these products to date. Thus the achievement of our
SSP revenue targets is risky. If we dont achieve our revenue targets, we will
need to raise additional funding and we may not be able to do so on acceptable
terms or at all. The failure to raise additional funds, if needed, on a timely
basis and on sufficiently favorable terms could harm our business. We follow accounting principles generally accepted in the United States of
America. We conduct most of our business in U.S. dollars. All amounts
included in the unaudited condensed consolidated financial statements and notes
herein are denominated in U.S. dollars unless designated
£, in which case
they are in British pound sterling. The exchange rates used between the U.S.
dollar and the British pound sterling were $1.80 and $1.66 (expressed in U.S.
dollars per British pound sterling) at September 30, 2004 and 2003,
respectively. Note 2. Net income (loss) per share Net income (loss) per share is presented on a basic and diluted basis and is
computed by dividing net income (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 (using the
treasury stock method). Under the basic method of calculating net income
(loss) per share, ordinary equivalent shares are excluded from the computation.
Under the diluted method of calculating net income (loss) per share, ordinary
equivalent shares are excluded from the computation only if their effect is
anti-dilutive. 6




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##### Table of Contents



Calculation of basic and diluted net loss per share (in thousands, except per
share data): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Numerator  basic and diluted
loss per share:Net loss
    
    $
    (1,729
    )
    
    $
    (1,656
    )
    
    $
    (4,943
    )
    
    $
    (2,582
    )Denominator  basic and diluted
loss per share:Weighted average number of ordinary shares
outstanding
    
    
    29,384
    
    
    
    20,634
    
    
    
    29,081
    
    
    
    20,272Basic and diluted net loss per share
    
    $
    (0.06
    )
    
    $
    (0.08
    )
    
    $
    (0.17
    )
    
    $
    (0.13
    )
 Options to purchase 4,440,113 and 4,417,937 American Depository Shares (ADSs)
and warrants to purchase 1,143,844 and 2,182,157 ADSs were outstanding at
September 30, 2004 and 2003, respectively, but were not included in the
computation of diluted net loss per share as the effect would have been
anti-dilutive. 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 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,
Accounting for Stock Based Compensation (SFAS 123), to stock based
compensation: Three months ended September 30,
    
    Nine months ended September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Net loss-as reported
    
    $
    (1,729
    )
    
    $
    (1,656
    )
    
    $
    (4,943
    )
    
    $
    (2,582
    )Less stock based compensation expense
determined under the fair value method
    
    
    (144
    )
    
    
    (346
    )
    
    
    (534
    )
    
    
    (871
    )Net loss-pro forma
    
    $
    (1,873
    )
    
    $
    (2,002
    )
    
    $
    (5,477
    )
    
    $
    (3,453
    )Basic and diluted net loss per share-as reported
    
    $
    (0.06
    )
    
    $
    (0.08
    )
    
    $
    (0.17
    )
    
    $
    (0.13
    )Basic and diluted net loss per share-pro forma
    
    $
    (0.06
    )
    
    $
    (0.10
    )
    
    $
    (0.19
    )
    
    $
    (0.17
    )
 In accordance with the disclosure provisions of SFAS 123, the fair value of
employee stock options granted during the three and nine months ended September
30, 2004 and 2003 was estimated at the date of grant using the Black-Scholes
model and the following weighted average assumptions: Three months ended September 30,
    
    Nine months ended September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Stock Options:Volatility range
    
    
    155% - 274
    %
    
    
    252
    %
    
    
    139%-274
    %
    
    
    59%-252
    %Risk-free interest rate range
    
    
    2.39% - 3.77
    %
    
    
    2.53
    %
    
    
    1.11% - 4.07
    %
    
    
    1.00% - 3.06
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life (years)
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Employee Stock Purchase Plan:Volatility range
    
    
    66
    %
    
    
    N/A
    
    
    
    66% - 198
    %
    
    
    59
    %Risk-free interest rate range
    
    
    1.25
    %
    
    
    N/A
    
    
    
    1.13% - 1.25
    %
    
    
    1.17
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected life (years)
    
    
    .5
    
    
    
    .5
    
    
    
    .5
    
    
    
    .5
 Note 4. New accounting pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (FIN 46), which requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 have been delayed and currently
apply to the first fiscal year or interim period beginning after December 15,
2003. We do not have any varible interest entities as of September 30, 2004
that require disclosure or new consolidation as a result of adopting the
provisions of FIN 46. 7




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In April 2004, the Emerging Issues Task Force issued Statement No. 03-06,
Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share (EITF 03-06), which addresses a number of questions
regarding the computation of earnings per share by companies that have issued
securities other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and if, it declares
dividends on its common stock. EITF 03-06 also provides further guidance in
applying the two-class method of calculating earnings per share, clarifying
what constitutes a participating security and how to apply the two-class method
of computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The adoption of EITF 03-06 did not have a material effect on Insignias
results of operations or financial position. Note 5. Esmertec agreements On February 7, 2003, we entered into a loan agreement with esmertec AG
(esmertec) whereby esmertec loaned Insignia $1.0 million at an interest rate
of prime plus two percent. The principal amount of $1.0 million was repaid on
January 15, 2004 and all remaining accrued interest of $55,161 was repaid on
March 15, 2004. Accordingly, there are no outstanding balances or future
amounts due to esmertec under the loan agreement as of September 30, 2004. On March 4, 2003, we entered into several other agreements (the Agreements)
with esmertec, including a definitive agreement to sell certain assets relating
to our Java Virtual Machine (JVM) product line in exchange for $3.5 million,
due in installments through April 2004. The transaction closed on April 23,
2003 and was amended on June 30, 2004. The assets sold primarily included the
fixed assets, customer agreements and employees related to the JVM product
line. Under the terms of the Agreements, esmertec also became the exclusive
master distributor of the JVM technology in exchange for $3.4 million in
minimum guaranteed royalties payable through October 2004. Under the original agreements, Insignia could have earned up to an additional
$4.0 million over the subsequent three year period from the effective date of
the Agreements based on a percentage of esmertecs sales of the JVM product
during the period. Additionally, the parties entered into a cooperative
agreement whereby esmertec would promote Insignias Secure System Provisioning
(SSP) software product to esmertecs mobile platform customers. As part of the sale of our JVM product line, we transferred 42 employees to
esmertec, of which 31 were development engineers. In addition, as part of the
sale, esmertec entered into an agreement with our U.K. building landlord in
order to assume the lease on one of the two buildings leased by Insignia. On February 13, 2004, Insignia and esmertec executed the final purchase
agreement upon signing the Limited Assignment of Rights of Technology License
and Distribution Agreement. The final purchase agreement transferred the
intellectual property of Jeode and the title for Insignias remaining prepaid
royalties to esmertec. On June 30, 2004, Insignia and esmertec executed a Termination and Waiver
Agreement. This Agreement offset esmertec-related liabilities and deferred
revenue totaling $853,000 against $600,000 of remaining guaranteed royalty
payments due from esmertec in exchange for a final cash payment to Insignia of
$185,000. The resulting net gain of $302,000 was recorded as other income in
the second quarter of 2004 and is net of expenses. The final payment was
received from esmertec on July 8, 2004. The Jeode platform had been our principal product line since the third quarter
of 1999. With the completion of the sale of our JVM product line to esmertec
in February 2004, Insignias sole product line currently consists of its SSP
products for the mobile handset and wireless carrier industry. We began
shipment of our SSP product to customers in the fourth quarter of 2003. Note 6. Commitments and contingencies In June 2001, Insignia and Sun Microsystems, Inc. (Sun) entered into an
addendum (the Addendum) to the Distribution Agreement (the Distribution
Agreement) relating to distribution of products to an Insignia customer. In
September 2001, Insignia and Sun entered into Amendment No. 3 (the Amendment)
to the Technology License and Distribution Agreement between the two companies.
The Addendum and the Amendment each required Insignia to make non-refundable
royalty prepayments to Sun, which would be forfeited if the prepaid royalties
had not been used by the date the Distribution Agreement expired, June 30,
2004. The title to the prepaid royalties was transferred to esmertec under the
final asset purchase agreement on February 13, 2004. Sun agreed to the transfer
to esmertec effective as of June 14, 2003. 8




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Guarantee Agreements Insignia, Inc., a Delaware subsidiary of Insignia, as permitted under Delaware
law and in accordance with our Bylaws, indemnifies our officers and directors
for certain events or occurrences, subject to certain limitations, 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 under certain
circumstances. 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 for the products, as delivered by
Insignia. The terms of these indemnification agreements are generally
perpetual any time after execution of the agreement. The maximum amount of
potential future indemnification is unlimited, however, we normally retain the
right to limit the remedies the customer may receive. We have not paid any
amounts to settle claims or defend lawsuits under these indemnifications. 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 any expense related to price protection. Insignia typically warrants the binary version and the source code license of
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
because potential future payments either are not probable or we have yet to
incur any warrant expense. Note 7. Segment information 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. Sales to customers outside the United States, derived mainly from customers in
Europe and Asia, represented 100% and 72% of total revenue in the three and
nine months ended September 30, 2004 and 100% and 42% of total revenue in the
three and nine months ended September 30, 2003, respectively. One customer accounted for 93% of our total revenue for the three months ended
September 30, 2004. For the nine months ended September 30, 2004 five
customers accounted for 28%, 21% , 19%, 14%, and 13% of our total revenue,
respectively. For the nine months ended September 30, 2003 one customer
accounted for 10% of total revenue. Note 8. Equity transactions and warrants On January 5, 2004, we issued 2,262,500 ordinary shares in ADSs form at a price
of $0.80 to a total of 10 investors. We also issued warrants to purchase
565,625 ADSs to the investors at an exercise price of $1.04. The warrants were
exercisable immediately and expire January 5, 2009. We received $1.8 million
less offering expenses totaling approximately $0.2 million in this transaction.
We also issued warrants to purchase 108,562 ADSs to the two principals of the
placement agent, which are exercisable at a price of $1.09 per share. These
warrants were exercisable immediately and expire January 5, 2009. In January 2004, new ordinary shares of 766,667 were issued to Fusion Capital
Fund II, LLC, a Chicago-based institution investor, (Fusion Capital),
pursuant to a binding commitment to deliver such shares entered into in
November 2003. The following table summarizes the warrant activity during the nine months
ended September 30, 2004: Warrantsoutstandingand
    
    
    Warrants outstandingexercisable
    
    
    exercise priceBalance, December 31, 2003
    
    
    739,657
    
    
    
    $4.77 - $6.00
    (1)Granted
    
    
    874,187
    
    
    
    $1.03 - $2.68Exercised
    
    
    (470,000
    )
    
    
    $0.85
    (1)Balance, September 30, 2004
    
    
    1,143,844
    
    
    
    $1.04 - $6.00
    (1)
   (1)
    
    The exercise price of the $6.00 warrants are the lesser of $6.00 or 90% of
10-day average market value. 9




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##### Table of Contents



Note 9. Related party
transactions On February 13, 2001, we entered into a promissory note with Richard M. Noling,
then President and Chief Executive Officer of Insignia, whereby Mr. Noling
borrowed $150,000 from Insignia. The promissory note was due in three equal
installments, on each annual anniversary from the date of the note. Interest
accrued on the unpaid principal balance at a rate per annum equal to the prime
lending rate of interest as listed in the Wall Street Journal plus 1%. Accrued
interest was due and payable monthly in arrears on the last calendar day of
each month, beginning March 31, 2001. The note was amended on January 24, 2002
to extend the first and subsequent installments by one year. The first
installment became due on February 13, 2003. Mr. Nolings employment was
terminated with Insignia effective February 14, 2003. We forgave, effective
March 6, 2003, the balance of the loan, $128,154, in lieu of any bonus
compensation. On December 31, 2003, Insignia entered into a joint venture agreement with J
Tek Corporation to form Insignia Asia Chusik Hoesa (Insignia Asia). During
the nine months ended September 30, 2004, Insignia recognized license revenue
of $75,000 from Insignia Asia. Note 10. Restructuring Statement of Financial Accounting Standards No. 146, Accounting for Exit or
Disposal Activities requires restructuring charges to be recorded at the
commitment date. On February 11, 2003, we announced a restructuring of the
organization to focus on the SSP technology. The restructuring charges for
the quarters ended March 31, June 30, September 30 and December 31, 2003 were
$326,000, $173,000, ($19,000) and $18,000, respectively, for employee
termination benefits. Restructuring charges paid in the four quarters of 2003
were $117,000, $167,000, $102,000 and $112,000, respectively. There were no
accrued restructuring charges remaining as of December 31, 2003 or for the nine
months ended September 30, 2004. Note 11. Subsequent event 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. Nash Fitzwilliams Ltd. served as the private
placement agent in the private placement. We issued warrants to purchase an
aggregate of 204,597 ADSs to the two principals of Nash Fitzwilliams Ltd. as
placement agent. The warrants issued to the 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 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. Additionally, under a 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. Fusion Capital
will be able to resell the shares it purchased under Insignias currently
effective S-1 registration statement. 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. 10




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##### 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, 2003 (the Form 10-K). Future operating results ThisForm 10-Qcontains forward-looking statements. Words such as
anticipates, believes, expects, future, intends, and similar
expressions, are used to identify forward-looking statements. These
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. Factors that could cause or contribute to such differences in
results and outcomes include without limitation those discussed in the section
titled Risk Factors. 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. 11




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##### Table of Contents



The following table sets forth the unaudited condensed consolidated results of
operations as a percentage of total revenue for the three and nine month
periods ended September 30, 2004 and 2003: Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003Net revenue:License
    
    
    93.5
    %
    
    
    100
    %
    
    
    97.7
    %
    
    
    67.8
    %Service
    
    
    6.5
    %
    
    
    
    %
    
    
    2.3
    %
    
    
    32.2
    %Total net revenue
    
    
    100.0
    %
    
    
    100
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of net revenue:License
    
    
    
    %
    
    
    34.8
    %
    
    
    5.3
    %
    
    
    38.1
    %Service
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    9.0
    %Total cost of net revenue
    
    
    
    %
    
    
    34.8
    %
    
    
    5.3
    %
    
    
    47.1
    %Gross margin
    
    
    100.0
    %
    
    
    65.2
    %
    
    
    94.7
    %
    
    
    52.9
    %Operating expenses:Sales and marketing
    
    
    540.2
    %
    
    
    210.4
    %
    
    
    360.6
    %
    
    
    229.1
    %Research and development
    
    
    611.2
    %
    
    
    333.3
    %
    
    
    399.1
    %
    
    
    464.7
    %General and administrative
    
    
    563.6
    %
    
    
    330.8
    %
    
    
    349.7
    %
    
    
    378.4
    %Restructuring
    
    
    
    
    
    
    (9.5
    )%
    
    
    
    %
    
    
    82.8
    %Total operating expenses
    
    
    1,715.0
    %
    
    
    865.2
    %
    
    
    1,109.4
    %
    
    
    1,155.0
    %Operating loss
    
    
    (1,615.0
    )%
    
    
    (800.0
    )%
    
    
    (1,014.6
    )%
    
    
    (1,102.1
    )%Interest income (expense), net
    
    
    3.7
    %
    
    
    (7.0
    )%
    
    
    1.1
    %
    
    
    (4.7
    )%Other income (expense), net
    
    
    (2.8
    )%
    
    
    (61.7
    )%
    
    
    46.5
    %
    
    
    589.3
    %Loss before income taxes
    
    
    (1,614.0
    )%
    
    
    (868.7
    )%
    
    
    (967.0
    )%
    
    
    (517.4
    )%Provision for (benefit from) income taxes
    
    
    1.9
    %
    
    
    (44.8
    )%
    
    
    (39.6
    )%
    
    
    (72.2
    )%Net loss
    
    
    (1,615.9
    )%
    
    
    823.9
    %
    
    
    (927.4
    )%
    
    
    (445.2
    )%
 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 are based 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 provisional capabilities. With the sale of our JVM product line in
April 2003, our sole product line consists of our SSP product line. We shipped
our first SSP product in December 2003. On September 16, 2004, we announced the deployment of Secure System
Provisioning v2 (SSP v2), a new standards based infrastructure software
product for mobile operators. The SSP v2 product is an interoperable device
management software platform that provides a complete set of device management
features. This allows operators and manufacturers to remotely configure mobile
data services as well as send firmware updates over-the-air based on a variety
of mobile management services, all using a single open standards system that
works with any OMA DM compatible phone. 12




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##### Table of Contents



Our operations outside of the United States are primarily in the United
Kingdom, where part of our research and development operations and our European
sales activities are located. We sell our SSP platform directly to customers
or through our hosted partners such as Metrowerks and Accord Customer Care
Solutions. Our revenue from customers outside the United States is derived
primarily from Europe and Asia. The operating expenses of our operations
outside the United States are mostly incurred in Europe and relate to our
research and development department in the United Kingdom and our European
sales activities. Such expenses consist primarily of ongoing fixed costs and
consequently do not fluctuate in direct proportion to revenue. Our revenue 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 revenue. We operate with the U.S. dollar as our functional currency, with a majority of
our revenue and operating expenses denominated in U.S. dollars. Pound sterling
exchange rate fluctuations against the dollar can cause U.K. 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 the last three
years, and information technology (IT) spending has decreased dramatically.
This has had an effect on our ability to generate new license fees, as IT
budgets have been reduced or frozen and expenditures like those required to
purchase some of our products have been limited. We cannot provide any
assurance that the pressures on IT spending will ease. Continued competitive
pressure could have a continuing pronounced effect on our operating results.
In 2003, we undertook a variety of cost reduction measures designed to bring
our operating expenses in line with our perceptions of the business climate,
including workforce reductions. In 2004, we have continued to control
expenditures. Sale of Java Virtual Machine assets On February 7, 2003, we entered into a loan agreement with esmertec AG
(esmertec) whereby esmertec loaned Insignia $1.0 million at an interest rate
of prime plus two percent. The principal amount of $1.0 million was repaid on
January 15, 2004 and all remaining accrued interest of $55,161 was repaid on
March 15, 2004. Accordingly, there are no outstanding balances or future
amounts due to esmertec under the loan agreement as of September 30, 2004. On March 4, 2003, we entered into several other agreements (the Agreements)
with esmertec including a definitive agreement to sell certain assets relating
to our Java Virtual Machine (JVM) product line in exchange for $3.5 million
due in installments through April 2004. The transaction closed on April 23,
2003 and was amended on June 30, 2004. The assets sold primarily included the
fixed assets, customer agreements and employees related to the JVM product
line. Under the terms of the Agreements, esmertec also became the exclusive
master distributor of the JVM technology in exchange for $3.4 million in
minimum guaranteed royalties through October 2004. Under the original agreements, Insignia could have earned up to an additional
$4.0 million over the subsequent three year period from the effective date of
the agreement based on a percentage of esmertecs sales of the JVM product
during the period. Additionally, the parties entered into a cooperative
agreement whereas esmertec would promote Insignias Secure System Provisioning
(SSP) software product to esmertecs mobile platform customers. As part of the sale of our JVM product line, we transferred 42 employees to
esmertec, of which 31 were development engineers. In addition, as part of the
sale, esmertec entered into an agreement with our U.K. building landlord in
order to assume the lease on one of the two buildings leased by Insignia. On February 13, 2004, Insignia and esmertec executed the final purchase
agreement upon signing the Limited Assignment of Rights of Technology License
and Distribution Agreement. The final purchase agreement transferred the
intellectual property of Jeode and the title for Insignias remaining prepaid
royalties to esmertec. On June 30, 2004, Insignia and esmertec executed a Termination and Waiver
Agreement. The Agreement offset esmertec related liabilities and deferred
revenue totaling $853,000 against $600,000 of remaining guaranteed royalty
payments due from esmertec in exchange for a final cash payment of $185,000.
The resulting net gain of $302,000 was recorded as other income in the second
quarter of 2004 and is net of expenses. The final payment was received from
esmertec on July 8, 2004. The Jeode platform had been our principal product line since the third quarter
of 1999. With the completion of the sale of our JVM product line to esmertec
in February 2004, Insignias sole product line currently consists of its SSP
products for the mobile handset and wireless carrier industry. We began
shipment of our SSP product to customers in the fourth quarter of 2003. 13




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##### Table of Contents



Revenue Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands)License revenue
    
    $
    100
    
    
    $
    201
    
    
    $
    521
    
    
    $
    393Service revenue
    
    
    7
    
    
    
    
    
    
    
    12
    
    
    
    187Total net revenue
    
    $
    107
    
    
    $
    201
    
    
    $
    533
    
    
    $
    580
 The SSP product line was our primary business for the first nine months of 2004
and the Jeode product line was our sole business for the first nine months of
2003. Revenue from the SSP product line is derived from a combination of
sources including (1) initial licensing fees, (2) activated subscriber fees,
(3) support and maintenance fees, and (4) engineering service fees. Revenue
from the Jeode product line was derived from four main sources: (1) the sale of
development licenses, (2) the sale of annual maintenance and support
contracts/services, (3) prepaid royalties and transactional occurrence fees
based on shipments of products that include Jeode technology, and (4)
nonrecurring engineering activities. Total revenue in the third quarter of 2004 was $107,000, compared to $201,000
of revenue being recognized in the third quarter of 2003. For the nine months
ended September 30, 2004, total revenue decreased to $533,000 from $580,000 for
the first nine months of 2003. License revenue and service revenue accounted
for 93% and 7%, respectively, of total revenue in the third quarter of 2004,
compared to license revenue and service revenue of 100% and 0.0% respectively
being recorded in the third quarter of 2003. License revenue and service
revenue accounted for 98% and 2% respectively of the total revenue for the
first nine months of the year of 2004 compared to 68% and 32%, respectively,
for the first nine months of 2003. Esmertec completed its purchase of the JVM product line and all revenue sharing
has ended in accordance with the Termination and Waiver Agreement signed on
June 30, 2004. Accordingly, we do not expect any future revenue to be
generated from the JVM product line. License Revenue License revenue decreased $101,000, or 50%, from the third quarter of 2003 to
the third quarter of 2004. The decrease in license revenue period over period
is primarily due to a shift in our sales efforts from the matured JVM product
line in 2003 to our newer SSP product line in 2004. The SSP product line was
first available in December 2003 and is relatively new to the marketplace. License revenue increased $128,000, or 33%, from the first nine months of 2003
to the first nine months of 2004. This is primarily due to the change in our
product offerings to the SSP product line from the JVM product line, which was
sold to esmertec in the second quarter of 2003. After the sale of the JVM
product line, all Jeode related revenue recognized was under a revenue share
agreement with esmertec. As anticipated, our revenue under the revenue share
agreement from sales of the JVM product line tapered off while we changed our
focus to the new SSP product line. Service Revenue Service revenue is comprised of revenue recognized from support and maintenance
contracts as well as non-recurring engineering agreements. The decrease in service revenue from the third quarter of 2003 to the third
quarter of 2004 is a result of transitioning from the JVM to the SSP product
lines. No service revenue was recorded in the third quarter of 2003 due to the
sale of the JVM product line in the second quarter of 2003 and the relatively
low level of sales of our SSP products in the third quarter of 2004. Service revenue decreased 94% in the nine months ended September 30, 2004 when
compared to the nine months ended September 30, 2003 due primarily to decreased
JVM engineering and JVM support contracts after the sale of the JVM product
line to esmertec. 14




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##### Table of Contents



Sales to customers outside the United States, derived mainly from customers in
Europe and Asia, represented approximately 100% and 72% of total revenue in the
three and nine months ended September 30, 2004, respectively, and 100% and 42%
of total revenue in the three and nine months ended September 30, 2003,
respectively. One customer accounted for 93% and 19% of our total revenue for
the three and nine months ended September 30, 2004. For the nine months ended
September 30, 2003, one customer accounted for 10% of total revenue. We are
currently expecting that revenue from sales of our SSP products outside the
United States will continue to contribute a substantial percentage of our total
revenue. Cost of revenue and gross margin Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands, except percentages)Cost of license revenue
    
    $
    
    
    
    $
    70
    
    
    $
    28
    
    
    $
    221Gross margin: license revenue
    
    
    100
    %
    
    
    65
    %
    
    
    5
    %
    
    
    44
    %Cost of service revenue
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    52Gross margin: service revenue
    
    
    100
    %
    
    
    
    %
    
    
    
    %
    
    
    72
    %Total cost of revenue
    
    $
    
    
    
    $
    70
    
    
    $
    28
    
    
    $
    273Gross margin: total revenue
    
    
    100
    %
    
    
    65
    %
    
    
    95
    %
    
    
    53
    %
 Cost of license revenue is mainly comprised of royalties. Cost of service
revenue includes costs associated with nonrecurring engineering activities and
end-user support under maintenance contracts. The increase in gross margins on our license revenue in the third quarter and
first nine months of 2004 is due to the higher margins on our SSP product line
when compared to the lower margins on our former JVM product line. Gross margin for service revenue is impacted by the level and pricing terms of
nonrecurring engineering activities. These factors can vary from customer to
customer, and from contract to contract, based on the level of maintenance
contracts sold. There were no service revenue or cost of service revenue in
the third quarter of 2003 due to the transitioning of product lines. Gross margin for total revenue increased in the third quarter of 2004 to 100%
from 65% in the third quarter of 2003 due to the higher margins of the SSP
product line. Operating expenses Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands, except percentages)Sales and marketing
    
    $
    578
    
    
    $
    423
    
    
    $
    1,923
    
    
    $
    1,329Percentage of total revenue
    
    
    540
    %
    
    
    210
    %
    
    
    361
    %
    
    
    229
    %Research and development
    
    $
    654
    
    
    $
    670
    
    
    $
    2,126
    
    
    $
    2,695Percentage of total revenue
    
    
    611
    %
    
    
    333
    %
    
    
    399
    %
    
    
    465
    %General and administrative
    
    $
    603
    
    
    $
    665
    
    
    $
    1,864
    
    
    $
    2,195Percentage of total revenue
    
    
    564
    %
    
    
    331
    %
    
    
    350
    %
    
    
    378
    %
 Sales and marketing expensesconsist primarily of personnel and related
employee costs, salesperson commissions, advertising costs, promotional
expenses and travel expenses. Sales and marketing expenses increased by 37% to
$578,000 in the third quarter ended September 30, 2004 from $423,000 in the
third quarter ended September 30, 2003. The increase of $155,000 was primarily
due to $88,000 of expenses related to a strategic sales partner promoting our
product line in the Asian markets, $41,000 of additional sales and marketing
salaries, and $27,000 in travel expenses. 15




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##### Table of Contents



Sales and marketing expenses increased by 45% to $1,923,000 from $1,329,000 for
the nine months ended September 30, 2004 compared to the same period of 2003.
The primary reason for the increase of $594,000 was a $348,000 one-time
non-cash charge resulting from the fair value of warrants issued and $176,000
for the engagement of our strategic partner in Asia. We anticipate a modest
increase in sales and marketing expense in the next few quarters as we continue
to expand our sales team to promote the SSP product line. Insignia has
established a direct sales force in the United States and Europe, a strategic
partner to promote sales in Asia, and a joint venture in Korea. Research and development expensesconsist primarily of personnel costs and
outside contract engineering services. Research and development expenses in
the third quarter of 2004 decreased 2% to $654,000 from $670,000 in the same
quarter of 2003. The decrease was primarily due to a $7,000 decrease in
engineering consulting expenditures. For the nine months ended September 30, 2004, research and development
expenditures decreased 21% to $2,126,000 from $2,695,000 for the same period in
2003. The decrease was primarily due to a $298,000 decrease in engineering
salaries and related benefits due to reduced headcount. In addition there was
a $198,000 decrease in support and maintenance relating strictly to the Jeode
product line as well as a $40,000 decrease in engineering consulting services.
Research and development expenses are expected to increase moderately in the
near term as Insignia further enhances its Secure System Provisioning
technology, and as we provide support and maintenance for future licensing
agreements. In accordance with Statement of Financial Accounting Standards No. 86, software
development costs are expensed as incurred until technological feasibility is
established, after which any additional costs are capitalized. In 2004 and
2003, no development expenditures were capitalized, as there were no amounts
that qualified for capitalization. General and administrative expensesconsist primarily of personnel and outside
services costs for accounting, legal and printing fees. General and
administrative expenses decreased in the third quarter of 2004 by 9% to
$603,000 from $665,000 in the third quarter of 2003. The primary reason for
the $62,000 decrease was a $90,000 decrease in employee related expenses, which
was partially offset by $36,000 due to reinstating fees to our board of
directors. General and administrative expenses in the first nine months of 2004 decreased
15% to $1,864,000 from $2,195,000 in the same period of 2003. The primary
reason for the decrease of $331,000 was due to the JVM sale to esmertec
resulting in a $200,000 decrease in general and administrative salaries and
related employee expenditures as a direct result of reduced headcount and a
$122,000 decrease in facility and related costs. General and administrative expenses are expected to increase slightly for the
remainder of 2004 due to the additional costs related to compliance with the
Sarbanes Oxley Act of 2002. Restructuring Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands, except percentages)Restructuring
    
    $
    
    
    
    $
    (19
    )
    
    $
    
    
    
    $
    480Percentage of total revenue
    
    
    
    %
    
    
    (10
    )%
    
    
    
    %
    
    
    83
    %
 On February 11, 2003, we announced a restructuring of the organization to focus
on the SSP technology. In the third quarter of 2003, we reversed $19,000 of
over accrued restructuring costs. For the nine months ended September 30,
2003, restructuring expenses consisted of charges for termination benefits of
$480,000. Restructuring expenses represented 83% of total revenue for the nine
months ended September 30, 2003. 16




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Interest income (expense), net Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands, except percentages)Interest income (expense), net
    
    $
    4
    
    
    $
    (14
    )
    
    $
    6
    
    
    $
    (27
    )Percentage of total revenue
    
    
    4
    %
    
    
    (7
    )%
    
    
    1
    %
    
    
    (5
    )%
 Interest income (expense), net increased from an expense of $14,000 in the
three months ended September 30, 2003 to income of $4,000 in the three months
ended September 30, 2004. Interest income (expense), net increased from an
expense of $27,000 in the nine months ended September 30, 2003 to income of
$6,000 in the nine months ended September 30, 2004. The change from interest
expense in the three months and nine months ended September 30, 2003 to
interest income in the three months and nine months ended September 30, 2004
was primarily due to the absence of any interest expense in 2004 attributable
to the $1.0 million esmertec note payable entered into on February 7, 2003.
The loan was repaid on January 15, 2004. Interest income (expense), net is
expected to remain flat for the remainder of 2004. Other income (expense), net Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands, except percentages)Other income (expense), net
    
    $
    (3
    )
    
    $
    (124
    )
    
    $
    248
    
    
    $
    3,418Percentage of total revenue
    
    
    (3
    )%
    
    
    (62
    )%
    
    
    47
    %
    
    
    589
    %
 The primary components of other income, net for the periods presented are
foreign exchange gain/loss, joint venture losses, and gain on sale of the Jeode
product line. In the first nine months of 2004, we recorded a gain on the sale
of our Jeode product line of $302,000. Of this amount, $298,000 was recorded
in the second quarter of 2004 and $4,000 was recognized in the third quarter
of 2004. The agreement offset esmertec related liabilities and deferred
revenue totaling $853,000 against $600,000 of remaining guaranteed royalty
payments due from esmertec in exchange for a final cash payment to Insignia of
$185,000. The final payment was received from esmertec on July 8, 2004. This
gain was further offset by our share of the year to date loss on our joint
venture investment, Insignia Asia, of $40,000. In the nine months ended
September 30, 2003, we recognized an initial gain of $3,400,000 relating to the
sale of the Jeode product line. For the nine months ended September 30, 2004, 100% of our revenue and
approximately 62% of our operating expenses were denominated in U. S. dollars.
Most of our remaining revenue and expenses are British pound sterling
denominated and, consequently, we are exposed to fluctuations in British pound
sterling 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 2003 or the nine months
ended September 30, 2004. We have, at times, an investment portfolio of fixed income securities that are
classified as available for sale securities. These securities, like all
fixed income instruments, are subject to interest rate risk and will fall in
value if market interest rates increase. We attempt to limit this exposure by
investing primarily in short-term securities. Provision for (benefit from) income taxes Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    
    2003
    
    
    2004
    
    
    2003(in thousands)Provision for (benefit from) income tax
    
    $
    2
    
    
    $
    (90
    )
    
    $
    (211
    )
    
    $
    (419
    )Effective income tax rate
    
    
    2
    %
    
    
    (45
    )%
    
    
    (40
    )%
    
    
    (72
    )%
 17




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The benefit from income taxes for the nine months ended September 30, 2004 is
the result of reducing a payable of $187,000 for potential tax liabilities,
which is no longer necessary due to our accumulated operating loss carry
forwards, tax receivables, and the lack of tax assessments or expenses, in
addition to a $24,000 United Kingdom research and development tax refund. The benefit from income taxes for the three and nine months ended September 30,
2003 primarily represented a tax credit received from the United Kingdom for
research and development investments. Effective 2002 and retroactive to 2000,
research and development expenditures incurred in the United Kingdom qualified
for a tax credit. The tax credit does not offset tax liability but rather is a
refund. 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 We have transitioned our product focus from the Jeode product line to our new
SSP product line. This change in product focus has resulted in a redirection
of our working capital and personnel from our former Jeode product line towards
the development and marketing efforts associated with our newer SSP product.
Cash used in operating activities in the first nine months of 2004 totaled
$4,162,000 compared to $3,533,000 for the same period in 2003. For the nine
months ended September 30, 2004, cash used in operating activities resulted
primarily from a net loss of $4,943,000, a gain on the sale of the Jeode
product line of $302,000, a decrease in deferred revenue of $627,000, a
decrease in accounts payable and accrued liabilities of $392,000, and an
increase in receivables of $664,000. These uses were partially offset by a
decrease in prepaid royalties of $2,185,000, a decrease in prepaid expenses of
$152,000, and a non-cash charge for warrants in the amount of $353,000. Cash used in investing activities for the nine months ended September 30, 2004
was $172,000, which consisted primarily of an investment in an affiliate and
purchases of property and equipment. Cash provided by financing activities for the nine months ended September 30,
2004 was $2,599,000 resulting from proceeds from share issuance in the amount
of $1,604,000, and proceeds from the exercise of stock options and warrants
amounting to $995,000. Our cash, cash equivalents and restricted cash were $527,000 at September 30,
2004, a decrease of $1,705,000 from $2,232,000 at December 31, 2003. At
September 30, 2004, we had working capital of $357,000. The principal source
of working capital came as a result of the proceeds from our January 2004
financing and exercise of options and warrants. At September 30, 2003, we had
a working capital surplus of $2,953,000. Capital additions totaled $67,000 and
$62,000 for the nine months ending September 30, 2004 and 2003, respectively.
We have no material commitments for capital expenditures or strategic
investments. Our commitments for expenditures consist of building leases in the
U.K. and U.S. As of September 30, 2004, we had the following contractual obligations
(including operating lease obligations that were restructured pursuant to the
sale of the JVM product line) (in thousands): Maturity
    
    OperatingleasesLess than 1 year
    
    $
    741-3 years
    
    
    6404-5 years
    
    
    927Thereafter
    
    
    $
    1,641
 In September 2001, Insignia and Sun Microsystems, Inc. (Sun) entered into
Amendment No. 3 (the Amendment) to the Technology License and Distribution
Agreement (the Distribution Agreement) between the two companies. The
Amendment required Insignia to make non-refundable royalty prepayments to Sun
which would be forfeited if the prepaid royalties had not been used by the date
the Distribution Agreement and Amendments expired, June 30, 2004. The title to
the prepaid royalties was transferred to esmertec on February 13, 2004 under
the final asset purchase agreement. 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. 18




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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. Unless an event of default occurs
under the Agreement, these shares must be held by Fusion Capital until the
earlier of 30 months from the date of the Agreement or the date the Agreement
is terminated. 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. Nash Fitzwilliams Ltd. served as the private
placement agent in the private placement. We issued warrants to purchase an
aggregate of 204,597 ADSs to the two principals of Nash Fitzwilliams Ltd. as
placement agent. The warrants issued to the 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. Additionally, under a 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. Fusion Capital will be
able to resell the shares it purchased under Insignias currently effective S-1
registration statement. During the past 24 months we have incurred an aggregate loss from operations
and negative operating cash flows of $16,151,000 and $10,137,000, respectively.
Additionally, on August 4, 2004, we received a letter from Nasdaq stating that
we were not in compliance with the Nasdaq rule that requires us to have, among
other possibilities, a minimum of $2.5 million in shareholders equity. We
believe that as a result of the two financings announced on October 18, 2004,
our shareholders equity has been increased above the $2.5 million minimum
required by Nasdaq. We currently believe that we will have sufficient funds to meet our operating
and capital requirements for the next twelve months based on the funds raised
from the October 2004 financings, potential funds available under our
securities subscription agreement with Fusion Capital, our targeted revenue
from our SSP product line, and our continued control of operating costs.
However, the SSP product line was only introduced in December 2003, and we have
achieved minimal sales of these products to date. Thus the achievement of our
SSP revenue targets is risky. If we dont achieve our revenue targets, we will
need to raise additional funding and we may not be able to do so on acceptable
terms or at all. The failure to raise additional funds, if needed, on a timely
basis and on sufficiently favorable terms could harm our business. New accounting pronouncements In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 (FIN 46). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new
variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 have been delayed and currently apply to the first fiscal
year or interim period beginning after December 15, 2003. We do not have any
entities as of March 31, 2004 that will require disclosure or new consolidation
as a result of adopting the provisions of FIN 46. 19




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In April 2004, the Emerging Issues Task Force issued Statement No. 03-06,
Participating Securities and the Two-Class Method Under FASB Statement No.
128, Earnings Per Share (EITF 03-06). EITF 03-06 addresses a number of
questions regarding the computation of earnings per share by companies that
have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the company when, and if, it
declares dividends on its common stock. The issue also provides further
guidance in applying the two-class method of calculating earnings per share,
clarifying what constitutes a participating security and how to apply the
two-class method of computing earnings per share once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-06 is effective for fiscal periods beginning after
March 31, 2004. The adoption of EITF 03-06 did not have a material effect on
Insignias results of operations or financial position. Risk Factors In addition to the other information in this report, the following factors
should be considered carefully in evaluating our business and prospects: We may need additional financing to sustain our operations. We had working capital of $357,000 at September 30, 2004, and our cash, cash
equivalents, and restricted cash totaled $527,000 at September 30, 2004. We
had an operating cash flow deficit of $4.2 million and $3.5 million for the
nine months ended September 30, 2004 and 2003, respectively. 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. Nash Fitzwilliams Ltd. served as the private
placement agent in the private placement. We issued warrants to purchase an
aggregate of 204,597 ADSs to the two principals of Nash Fitzwilliams Ltd. as
placement agent. The warrants issued to the 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 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. Additionally, under a 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. Fusion Capital
will be able to resell the shares it purchased under Insignias currently
effective S-1 registration statement. We currently believe that we will have sufficient funds to meet our operating
and capital requirements for the next twelve months based on the funds raised
from the October 2004 financings, potential funds available under our
securities subscription agreement with Fusion Capital, our targeted revenue
from our SSP product line, and our continued control of operating costs.
However, the SSP product line was only introduced in December 2003, and we have
achieved minimal sales of these products to date. Thus the achievement of our
SSP revenue targets is risky. If we dont achieve our revenue targets, we will
need to raise additional funding and we may not be able to do so on acceptable
terms or at all. The failure to raise additional funds, if needed, on a timely
basis and on sufficiently favorable terms could harm our business. We received a letter from Nasdaq stating that we were not in compliance with certain Nasdaq SmallCap listing requirements, and our stock could be delisted from Nasdaq. On August 4, 2004, Insignia Solutions, plc. received a letter from the Nasdaq
Stock Market (Nasdaq) notifying Insignia that it was not in compliance with
Marketplace Rule 4310(c)(2)(B) (the Rule), which requires that Insignia have
at least (i) $2,500,000 in stockholders equity, (ii) $35,000,000 in market
value of listed securities or (iii) $500,000 in net income from continuing
operations for the most recently completed fiscal year or two of the three most
recently completed fiscal years. We believe that, as of the date of this report, and as a result of the two
financings which closed on October 18, 2004, stockholders equity has been
increased above the $2,500,000 minimum requirement. Accordingly, Insignia has
regained compliance with this Nasdaq requirement. Insignia has been further
informed by a letter dated September 30, 2004, that Nasdaq will continue to
monitor Insignias ongoing compliance with the stockholders equity
requirement. If at the time of Insignias next periodic report Insignia does
not comply, Insignia may be subject to delisting. 20




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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 subscription price for the shares to be issued to Fusion Capital pursuant
to the securities subscription agreement with Fusion Capital will fluctuate
based on the price of our shares. All shares sold to Fusion Capital under the
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. 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 SSP product line to date. Our future performance depends upon sales of products within our SSP product
line, which is our sole product line. We only began shipping the SSP product
in December 2003 and have achieved only minimal sales to date. The SSP line
may not achieve or sustain market acceptance or provide the desired revenue
levels. The long and complex process of licensing our SSP product makes our revenue unpredictable. Our revenue is dependent upon our ability to license our SSP product to third
parties. Licensing our SSP product is expected to be a long and complex
process, which could take longer than the typical six to nine months sales
cycle for our former product. 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
have limited history with sales initiatives for new products. 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 SSP 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
SSP product line, and to date we have received only minimal revenue from sales
of this product. If we are unable to create revenue from SSP 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 SSP product; however, this increase in expenses is expected to decrease our cash position. For the nine months ended September 30, 2004 and 2003, we spent 361% and 229%,
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 SSP 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. 21




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##### Table of Contents



Our business strategy is focused on our sole product line, the SSP product line. We face significant risks associated with the development and future deployment
of our SSP products and the successful execution of the related business
strategy. With the sale of the Jeode product line to esmertec, the SSP product
is our sole product line. We only began shipping the SSP product in December
2003 and have achieved only minimal sales to date. We have limited history
with sales initiatives for new products. Additionally, the sales cycle for the
SSP products is expected to take longer than the typical six to nine months
cycle of the Jeode product. 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 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;
    
    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 SSP product line is 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, DoOnGo, 4thPass, OpenWave and RedBend. If these competitors develop products that are less expensive or provide better
capabilities or functionality than our SSP product line, 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. Competition could force us to reduce, the prices of our
products, which would result in reduced profit margins and could harm our
ability to provide adequate service to our customers. Our pricing model for our
software products is a combination of (1) initial license fees, (2) activated
subscriber fees, (3) support and maintenance fees, and (4) engineering service
fees, any of which may be subject to significant pricing pressures. Also, the
market may demand alternative pricing models in the future. 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. 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; 22




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
    
    the mix of and changes in customers to whom our products are sold;
    
    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;
    
    buyouts of commercial use licenses;
    
    product life cycles;
    
    the level of our sales of third-party products;
    
    variances in costs in fixed price contracts;
    
    purchasing patterns of customers;
    
    competitive conditions in the industry;
    
    foreign currency exchange rate fluctuations;
    
    business cycles and economic conditions that affect the markets for our products; and
    
    extraordinary events, such as litigation, and related charges. 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. An increasing amount of our
sales orders involve products and services that yield revenue over multiple
quarters or upon completion of performance. If license agreements entered into
during a quarter do not meet our revenue recognition criteria, even if we meet
or exceed our forecast of aggregate licensing and other contracting activity,
it is possible that our revenue would not meet expectations. 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. In the past, we have experienced actual
performance that did not meet financial market expectations. It is likely
that, in some future quarters, our operating results will again be below the
expectations of stock market analysts and investors. 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 72% and 42%
of our total revenue for the nine months ended September 30, 2004 and 2003,
respectively, and are expected to increase with regard to sales of the SSP
product. We expect to market SSP to mobile operators and handset manufacturers
in Europe. Economic conditions in Europe generally and fluctuations in the
value of the euro against the U.S. dollar and British pound sterling in
particular could impair our revenue and results of operations. International
operations are subject to a number of other 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; 23




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
    
    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 systems such as these, the failure of our product could
cause substantial property damage or personal injury, which would 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. However, these measures
might 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 require 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 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 issue 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. 24




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Some security holders have rights under their warrants to purchase significant numbers of American Depository Shares (ADSs) at nominal value upon the occurrence of specified events which, if triggered, would dilute the ownership interests of existing security holders. Some security holders have rights to be issued additional ADSs by Insignia if
the registration statements covering their shares and the shares underlying
their warrants are suspended for more than 60 days in any 12 month period. We
must issue a total of 252,000 ADSs if we suspend registration statement number
333-51234 for more than 60 days in any 12 month period, and a total of 65,800
ADSs if we suspend registration statement number 333-57528 for more than the 60
days in any 12 month period. We have not suspended either of these
registration statements for more than 60 days in any 12 month period in the
past. 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 management are located in England. 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 significant 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. Insignia has undergone a class action lawsuit and an SEC investigation in the past eight years. On April 3, 1996, a class-action lawsuit was filed against us alleging that we
misrepresented our business, the strength of our sales force and our financial
health. The suit stemmed from our failure to achieve the consensus earnings
estimates of research analysts in the first quarter following our initial
public offering in November 1995. In August 1997, we reached a memorandum of
understanding to settle the suits. Although we never agreed with the
allegations, we paid $8.0 million to the plaintiffs, of which our insurance
company paid $7.5 million. In February 1997, we restated our financial results
for the quarters ended March 31 and June 30, 1996. We revised our revenue and
net income numbers downward for these two quarters due to inflated revenue
resulting from misstatement of inventory levels of one of our resellers by two
of our sales and marketing personnel. We agreed with the SEC to cease and
desist from engaging in similar accounting practices. The two Insignia sales
and marketing people involved in the revenue misstatement are no longer with
Insignia and were forced to pay significant fines. We did not have to pay any
fines. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk For the nine months ended September 30, 2004, 100% of our revenue and 62% of
our operating expenses were denominated in U.S. dollars. Most of our remaining
expenses are British pound sterling denominated, and consequently we are
exposed to fluctuations in British pound sterling 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 2003 or the first half of 2004. We have, at times, an investment portfolio of fixed income securities that are
classified as available-for-sale-securities. These securities, like all
fixed income instruments, are subject to interest rate risk and will fall in
value if market interest rates increase. We attempt to limit this exposure by
investing primarily in short-term securities. 
 Item 4. Controls and Procedures We have evaluated the design and operation of our disclosure controls and
procedures to determine whether they are effective in ensuring that the
disclosure of required information is timely and made in accordance with the
Exchange Act and the rules and regulations of the Securities and Exchange
Commission. This evaluation was made under the supervision and with the
participation of
management, including our principal executive 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 and principal financial officer
have concluded, based on their 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 or other factors that could significantly affect these controls
subsequent to the date of their evaluation. 25




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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 Exhibits The following exhibits are filed as part of this Report: ExhibitNumber
    
    Exhibit Title31.1
    
    Section 302 certification of Chief Executive Officer31.2
    
    Section 302 certification of Chief Financial Officer32.1
    
    Section 906 certification of Chief Executive Officer32.2
    
    Section 906 certification of Chief Financial Officer
 26




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SIGNATURES 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: November 12, 2004
    /s/ ROBERT E. COLLINSROBERT E. COLLINSChief Financial Officer
(Principal Financial Officer) 27




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Exhibit Index ExhibitNumber
    
    Exhibit Title31.1
    
    Section 302 certification of Chief Executive Officer31.2
    
    Section 302 certification of Chief Financial Officer32.1
    
    Section 906 certification of Chief Executive Officer32.2
    
    Section 906 certification of Chief Financial Officer