**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-Q**

 

| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|----------------------------------------------------------------------------------------------|

 

**For the quarterlyperiod ended March 31, 2004**

 

**or,**

 

| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**For the transitionperiod from             to             **

 

**Commission filenumber 0-27012**

 

**Insignia Solutions plc**

(Exact name of Registrant as specified in itscharter)

 

| **England and Wales**                                                                           |   | **Not applicable**                                                                                            |
|-------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------|
| (State or other jurisdiction  of incorporation or  organization)                                |   | (I.R.S. employer  identification number)                                                                      |
|                                                                                            |   |                                                                                                          |
| **41300 Christy Street  Fremont  California 94538  United States of America  (510) 360-3700**   |   | **Mercury Park, Wycombe Lane  Wooburn Green  High Wycombe, Bucks HP10 0HH  United Kingdom  (44) 1628-539500** |
| (Address and telephone number  of principal executive offices and principal places of business) |

 

Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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  ý   No  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theAct):  Yes  o   No  ý

 

As of May 3, 2004, there were29,141,353 ordinary shares of £0.20 each nominal value, outstanding.

 

 

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**INSIGNIA SOLUTIONSPLC**

 
| **PART 1 – FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |   |
| **Item 1.**                             | **Financial Statements:** |   |
|                                    |   |   |
|                                    | Condensed Consolidated Balance Sheets at March  31, 2004  and December 31, 2003 (unaudited) | 3 |
|                                    |   |   |
|                                    | Condensed Consolidated Statements of  Operations for the three months  ended March 31, 2004 and 2003 (unaudited) | 4 |
|                                    |   |   |
|                                    | Condensed Consolidated Statements of Cash  Flows for the three months  ended March 31, 2004 and 2003 (unaudited) | 5 |
|                                    |   |   |
|                                    | Notes to Unaudited Condensed Consolidated  Financial Statements | 6 |
|                                    |   |   |
| **Item 2.**                             | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations** | 13 |
|                                    |   |   |
| **Item 3.**                             | **Quantitative and Qualitative Disclosures  About Market Risk** | 32 |
|                                    |   |   |
| **Item 4.**                             | **Controls and Procedures** | 33 |
|                                    |   |   |
| **PART II – OTHER INFORMATION**    |
|                                    |   |   |
| **Item 1.**                             | **Legal Proceedings** | 34 |
|                                    |   |   |
| **Item 2.**                             | **Changes in Securities and Use of Proceeds** | 34 |
|                                    |   |   |
| **Item 3.**                             | **Defaults Upon Senior Securities** | 34 |
|                                    |   |   |
| **Item 4.**                             | **Submission of Matters to a Vote of Security  Holders** | 34 |
|                                    |   |   |
| **Item 5.**                             | **Other Information** | 34 |
|                                    |   |   |
| **Item 6.**                             | **Exhibits and Reports on Form 8-K** | 34 |
|                                    |   |   |
| **Signatures**                          |   | 36 |

 

2

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**PART I – FINANCIAL INFORMATION**

**Item 1. Financial Statements**

 

**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED  BALANCE  SHEETS**

**(amounts in  thousands, unaudited)**

 
|                                                                                                                                                |   | **March 31,  2004** |   | **December  31,  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **A S S E T S**                                                                                                                                     |   |                |   |                    |   |
|                                                                                                                                                |   |                |   |                    |   |
| Current assets:                                                                                                                                     |   |                |   |                    |   |
| Cash and cash equivalents                                                                                                                           |   | $                   | 2,839  |                    | $      | 2,212 |   |
| Restricted cash                                                                                                                                     |   | 20                  |   | 20                      |   |
| Accounts receivable, net                                                                                                                            |   | 200                 |   | 50                      |   |
| Other receivable                                                                                                                                    |   | 1,363               |   | 1,153                   |   |
| Tax receivable                                                                                                                                      |   | 436                 |   | 391                     |   |
| Prepaid royalties                                                                                                                                   |   | —              |   | 2,185                   |   |
| Prepaid expenses                                                                                                                                    |   | 383                 |   | 410                     |   |
| Total current assets                                                                                                                                |   | 5,241               |   | 6,421                   |   |
|                                                                                                                                                |   |                |   |                    |   |
| Property and equipment, net                                                                                                                         |   | 149                 |   | 154                     |   |
| Investment in affiliate                                                                                                                             |   | 75                  |   | —                  |   |
| Other assets                                                                                                                                        |   | 226                 |   | 219                     |   |
|                                                                                                                                                |   | $                   | 5,691  |                    | $      | 6,794 |   |
|                                                                                                                                                |   |                |   |                    |   |
| **L I A B I L I T I E S,  R E D  E E M A B L E  W A R R A N T S **

**A N D  S H A R E H O L D E R  S’  E Q U I T Y** |   |                |   |                    |   |
|                                                                                                                                                |   |                |   |                    |   |
| Current liabilities:                                                                                                                                |   |                |   |                    |   |
| Accounts payable                                                                                                                                    |   | $                   | 320    |                    | $      | 468 |   |
| Accrued liabilities                                                                                                                                 |   | 995                 |   | 1,239                   |   |
| Note payable                                                                                                                                        |   | —              |   | 1,000                   |   |
| Deferred revenue                                                                                                                                    |   | 820                 |   | 1,460                   |   |
| Total current liabilities                                                                                                                           |   | 2,135               |   | 4,167                   |   |
|                                                                                                                                                |   |                |   |                    |   |
| Redeemable warrants                                                                                                                                 |   | 38                  |   | 38                      |   |
| Shareholders’ equity:                                                                                                                          |   |                |   |                    |   |
| Ordinary shares                                                                                                                                     |   | 9,561               |   | 8,111                   |   |
| Additional paid-in capital                                                                                                                          |   | 63,862              |   | 61,898                  |   |
| Common stock subscription                                                                                                                           |   | —              |   | 575                     |   |
| Accumulated deficit                                                                                                                                 |   | (69,444             | )      | (67,534                 | )      |
| Other accumulated comprehensive loss                                                                                                                |   | (461                | )      | (461                    | )      |
| Total shareholders’ equity                                                                                                                     |   | 3,518               |   | 2,589                   |   |
|                                                                                                                                                |   |                |   |                    |   |
|                                                                                                                                                |   | $                   | 5,691  |                    | $      | 6,794 |   |

 

### **The accompanying notes are an integral part of thesecondensed consolidated financial statements**

 

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**INSIGNIA SOLUTIONS  PLC**

**CONDENSED  CONSOLIDATED  STATEMENTS  OF OPERATIONS**

**(amounts in thousands,  except  per share  amounts, unaudited)**

 
|                                            |   | **Three  months ended  March  31,** |   |
|-------------------------------------------------|--------|------------------------------------------|--------|
|                                            |   | **2004**                                 |   | **2003** |   |
| Net revenues:                                   |   |                                     |   |   |   |
| License                                         |   | $                                        | 316    |   | $ | 192 |   |
| Service                                         |   | 3                                        |   | 187 |   |
|                                            |   |                                     |   |   |   |
| Total net revenues                              |   | 319                                      |   | 379 |   |
|                                            |   |                                     |   |   |   |
| Cost of net revenues:                           |   |                                     |   |   |   |
| License                                         |   | 23                                       |   | 115 |   |
| Service                                         |   | —                                   |   | 52 |   |
|                                            |   |                                     |   |   |   |
| Total cost of net revenues                      |   | 23                                       |   | 167 |   |
|                                            |   |                                     |   |   |   |
| Gross profit                                    |   | 296                                      |   | 212 |   |
|                                            |   |                                     |   |   |   |
| Operating expenses:                             |   |                                     |   |   |   |
| Sales and marketing                             |   | 816                                      |   | 645 |   |
| Research and development                        |   | 811                                      |   | 1,306 |   |
| General and administrative                      |   | 591                                      |   | 1,144 |   |
| Restructuring                                   |   | —                                   |   | 326 |   |
|                                            |   |                                     |   |   |   |
| Total operating expenses                        |   | 2,218                                    |   | 3,421 |   |
|                                            |   |                                     |   |   |   |
| Operating loss                                  |   | (1,922                                   | )      | (3,209 | ) |
|                                            |   |                                     |   |   |   |
| Interest income (expense), net                  |   | (1                                       | )      | (1 | ) |
| Other income (expense), net                     |   | (13                                      | )      | 13 |   |
|                                            |   |                                     |   |   |   |
| Loss before income taxes                        |   | (1,936                                   | )      | (3,197 | ) |
|                                            |   |                                     |   |   |   |
| Provision for (benefit from) income taxes       |   | (26                                      | )      | 2 |   |
|                                            |   |                                     |   |   |   |
| Net loss                                        |   | $                                        | (1,910 | ) | $ | (3,199 | ) |
|                                            |   |                                     |   |   |   |
| Basic and diluted net loss per share            |   | $                                        | (0.07  | ) | $ | (0.16 | ) |
|                                            |   |                                     |   |   |   |
| Weighted average shares and share  equivalents: |   |                                     |   |   |   |
| Basic and Diluted                               |   | 28,616                                   |   | 20,089 |   |

 

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

 

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**INSIGNIA SOLUTIONSPLC**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts inthousands, unaudited)**

 
|                                                                         |   | **Three  months ended  March 31,** |       |
|------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                         |   | **2004**                           |       | **2003** |   |
| Cash flows from operating activities:                                        |   |                               |       |   |   |
| Net loss                                                                     |   | $                                  | (1,910     | ) | $ | (3,199 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |   |                               | ** ** |   | ** ** |
| Depreciation                                                                 |   | 26                                 |       | 45 |   |
| Allowance for doubtful accounts                                              |   | —                             |       | (22 | ) |
| Non-cash charge for warrant issuance                                         |   | 349                                |       | — |   |
| Net changes in assets and liabilities:                                       |   |                               |       |   |   |
| Accounts receivable                                                          |   | (150                               | )          | 556 |   |
| Other receivables                                                            |   | (1,010                             | )          | (3 | ) |
| Tax receivable                                                               |   | (45                                | )          | (4 | ) |
| Prepaid royalties                                                            |   | 2,185                              |       | 99 |   |
| Prepaid expenses                                                             |   | 27                                 |       | 217 |   |
| Other assets                                                                 |   | (7                                 | )          | 100 |   |
| Accounts payable                                                             |   | (148                               | )          | 459 |   |
| Accrued liabilities                                                          |   | (244                               | )          | (132 | ) |
| Accrued severance                                                            |   | —                             |       | 209 |   |
| Deferred revenue                                                             |   | (840                               | )          | (83 | ) |
| Income tax payable                                                           |   | —                             |       | (4 | ) |
| Net cash used in operating activities                                        |   | (1,767                             | )          | (1,762 | ) |
| Cash flows from investing activities:                                        |   |                               |       |   |   |
| Investment in affiliate                                                      |   | (75                                | )          | — |   |
| Purchases of property and equipment                                          |   | (21                                | )          | (1 | ) |
| Proceeds from release of restricted cash                                     |   | —                             |       | 160 |   |
| Net cash provided by  (used in) investing activities                    |   | (96                                | )          | 159 |   |
| Cash flows from financing activities:                                        |   |                               |       |   |   |
| Proceeds from issuance of shares, net                                        |   | 1604                               |       | — |   |
| Proceeds from exercise of warrants                                           |   | 389                                |       | — |   |
| Proceeds from note payable                                                   |   | —                             |       | 1,000 |   |
| Proceeds from exercise of stock options and  employee stock purchase plan    |   | 497                                |       | 1 |   |
| Net cash provided by financing activities                                    |   | 2,490                              |       | 1,001 |   |
| Net increase (decrease) in cash and cash  equivalents                        |   | 627                                |       | (602 | ) |
| Cash and cash equivalents at beginning of  the period                        |   | 2,212                              |       | 726 |   |
| Cash and cash equivalents at end of the  period                              |   | $                                  | 2,839      |   | $ | 124 |   |

 

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

 

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**INSIGNIA SOLUTIONSPLC**

 

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED**

**FINANCIAL STATEMENTS**

**(unaudited)**

 

**Note 1. Basis of presentation**

 

The accompanying unauditedcondensed consolidated financial statements of Insignia Solutions plc(“Insignia”, “us” or “we”) have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and pursuant to the instructions to Form 10-Q and Article10 of Regulation S-X.  The unauditedinterim financial statements have been prepared on the same basis as the annualfinancial statements and, in the opinion of management, reflect alladjustments, consisting of normal recurring adjustments, considered necessaryfor a fair presentation.  Interimresults are not necessarily indicative of results for a full year.  These condensed consolidated financialstatements and notes should be read in conjunction with Insignia’s auditedconsolidated financial statements for the year ended December 31, 2003 andfootnotes thereto, included in Insignia’s Annual Report on Form 10-K.

 

Duringthe past 24 months, we have incurred an aggregate loss from operations andnegative operating cash flows of $18,512,000 and $11,867,000,respectively.  We have undertakenmeasures to reduce operating expenses and redesign our commercial efforts toadapt to new developments.  Assuming thereceipt of the remaining $1.3 million of the $6.9 million due from esmertecA.G. (“esmertec”) under the Asset Purchase Agreement and the MasterDistribution and License Agreement, each dated March 4, 2003, and thedefinitive agreements signed on April 23, 2003, (as well as the Charge OverIntellectual Property, Deed of Release, Assignment of Intellectual PropertyRights and Licenses (Deferred IP) all signed on February 13, 2004), we believethat Insignia will have sufficient funds to meet its operating and capitalrequirements through the end of fiscal year 2004.  However, there can be no assurance that we will not requireadditional funding or that we will be able to obtain additional funding ifneeded, on acceptable terms or at all. The failure to raise additional funds, if needed, on a timely basis andon sufficiently favorable terms could have a material adverse effect on ourbusiness, operating results and financial condition.  Insignia’s liquidity may also be adversely affected in the futureby factors such as an increase in interest rates, inability to borrow withoutcollerateral, availability of capital financing and continued operatinglosses.  The accompanying financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

Wefollow accounting principles generally accepted in the United States ofAmerica.  We conduct most of ourbusiness in U.S. dollars.  All amountsincluded in the financial statements and in the notes herein are in U.S.dollars unless designated ‘‘£’’, in which case they are in British poundsterling.  The exchange rates usedbetween the U.S. dollar and the British pound sterling were $1.83 and $1.58(expressed in U.S. dollars per British pound sterling) at March 31, 2004 and2003, respectively.

 

**Note 2. Net loss per share**

 

Netloss per share is presented on a basic and diluted basis, and is computed bydividing net loss by the weighted average number of ordinary shares andordinary equivalent shares outstanding during the period.  Ordinary equivalent shares consist ofwarrants and stock options (using the treasury stock method).  Under the basic method of calculating netloss per share, ordinary 

 

6

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equivalentshares are excluded from the computation. Under the diluted method of calculating net loss per share, ordinaryequivalent shares are excluded from the computation only if their effect isanti-dilutive.

 

Calculation of basic and dilutednet loss per share (in thousands, except per share data):

 
|                                                    |   | **Three  months ended  March 31,** |   |
|---------------------------------------------------------|--------|------------------------------------|--------|
|                                                    |   | **2004**                           |   | **2003** |   |
| Numerator – basic and diluted:                     |   |                               |   |   |   |
| Net loss                                                |   | $                                  | (1,910 | ) | $ | (3,199 | ) |
|                                                    |   |                               |   |   |   |
| Denominator calculation of basic loss per  share:       |   |                               |   |   |   |
| Weighted average number of ordinary shares  outstanding |   | 28,616                             |   | 20,089 |   |
|                                                    |   |                               |   |   |   |
| Basic net loss per share                                |   | $                                  | (0.07  | ) | $ | (0.16 | ) |
|                                                    |   |                               |   |   |   |
| Denominator calculation of diluted loss per  share:     |   |                               |   |   |   |
| Weighted average number of ordinary shares  outstanding |   | 28,616                             |   | 20,089 |   |
| Dilutive common equivalent shares                       |   | —                             |   | — |   |
| Weighted average number of ordinary shares  outstanding |   | 28,616                             |   | 20,089 |   |
|                                                    |   |                               |   |   |   |
| Diluted net loss per share                              |   | $                                  | (0.07  | ) | $ | (0.16 | ) |

 

Thefollowing number of options and warrants have not been included in thecalculation of diluted net loss per share because their inclusion would havebeen anti-dilutive:

 
|     |   | **Three  months ended  March 31,** |   |
|----------|--------|------------------------------------|--------|
|     |   | **2004**                           |   | **2003** |   |
|     |   |                               |   |   |   |
| Options  |   | 4,299,737                          |   | 3,308,179 |   |
| Warrants |   | 1,143,844                          |   | 4,191,334 |   |

 

**Note 3.  Stock based compensation**

 

Insigniaaccounts for stock based employee compensation using the intrinsic value methodunder Accounting Principles Board Opinion No. 25, “Accounting for Stock Issuedto Employees” (“APB 25”), and related interpretations and complies with thedisclosure provisions of  Statement ofFinancial Accounting Standards No. 148, “Accounting for Stock-BasedCompensation, Transition and Disclosure – an Amendment of FASB StatementNo.123”.  The following tableillustrates the effect on net loss and net loss per share if we had applied thefair value recognition provisions of Statement of Financial AccountingStandards No.123, “Accounting for Stock Based Compensation” to stock basedcompensation.

 

7

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|                                                                            |   | **Three  months ended  March 31,** |   |
|---------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                            |   | **2004**                           |   | **2003** |   |
|                                                                            |   |                               |   |   |   |
| Net loss-as reported                                                            |   | $                                  | (1,910 | ) | $ | (3,199 | ) |
| Less stock based compensation expense  determined under fair value based method |   | (174                               | )      | (264 | ) |
| Net loss-pro forma                                                              |   | $                                  | (2,084 | ) | $ | (3,463 | ) |
| Basic and diluted net loss per share - as  reported                             |   | $                                  | (0.07  | ) | $ | (0.16 | ) |
| Basic and diluted net loss per share - pro  forma                               |   | $                                  | (0.07  | ) | $ | (0.17 | ) |

 

Inaccordance with the disclosure provisions of SFAS 123, the fair value ofemployee stock options granted during the three months ended March 31, 2004 and2003 was estimated at the date of grant using the Black-Scholes model and thefollowing weighted average assumptions:

 
|                              |   | **Three  months ended March 31,** |   |
|-----------------------------------|--------|-----------------------------------|--------|
|                              |   | **2004**                          |   | **2003** |   |
| **Stock Options:**                |   |                              |   |   |   |
| Volatility range                  |   | 143-198                           | %      | 59 | % |
| Risk-free interest rate range     |   | 1.1-3.2                           | %      | 1.0-3.1 | % |
| Dividend yield                    |   | 0                                 | %      | 0 | % |
| Expected life (years)             |   | 4                                 |   | 4 |   |
|                              |   |                              |   |   |   |
| **Employee Stock Purchase Plan:** |   |                              |   |   |   |
| Volatility range                  |   | 198                               | %      | 59 | % |
| Risk-free interest rate range     |   | 1.1                               | %      | 1.2 | % |
| Dividend yield                    |   | 0                                 | %      | 0 | % |
| Expected life (years)             |   | 0.5                               |   | 0.5 |   |

 

**Note 4. New accounting pronouncements**

 

InJanuary 2003, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 46 (“FIN 46”), “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51”. FIN 46 requires certainvariable interest entities to be consolidated by the primary beneficiary of theentity if the equity investors in the entity do not have the characteristics ofa controlling financial interest or do not have sufficient equity at risk forthe entity to finance its activities without additional subordinated financialsupport from other parties. FIN 46 is effective immediately for all newvariable interest entities created or acquired after January 31, 2003. Forvariable interest entities created or acquired prior to February 1, 2003,the provisions of FIN 46 have been delayed and currently apply to the firstfiscal year or interim period beginning after December 15, 2003. We do nothave any entities as of March 31, 2004 that will require disclosure or newconsolidation as a result of adopting the provisions of FIN 46.

 

**Note 5. Esmertec Agreements**

 

On February 7, 2003, we enteredinto a loan agreement with esmertec whereby esmertec loaned Insignia $1million. The loan was made in two installments of $500,000 each on February 13,2003 and February 26, 2003.  The rate ofinterest on each loan was at prime plus two percent.  Accrued interest was due on the last day of each month.  The outstanding principal of $1.0 millionwas paid on January 15, 2004.  Theaccrued interest of $55,161 was paid March 15, 2004.  At March 31, 2004, there was no balance outstanding under thisagreement.

 

On March 4, 2003, we enteredinto several other agreements (the “Agreements”) with esmertec including adefinitive agreement to sell certain assets relating to our Java VirtualMachine 

 

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(“JVM”) line of business inexchange for $3.5 million payable in installments.  Payments under the agreement were $800,000 on April 18, 2003,$800,000 on July 23, 2003, $800,000 on October 15, 2003, $800,000 on January15, 2004 and $300,000 on April 15, 2004. The assets primarily included the fixed assets, customer agreements andemployees related to the JVM line of business. The transaction closed on April 23, 2003.  Under the terms of the Agreements, esmertec became the exclusivemaster distributor of the JVM technology in exchange for $3.4 million inminimum guaranteed royalties through June 30, 2004 at which time, the JVM technologyrights will transfer to esmertec. Minimum payments under the license are as follows:

 

| **DUE DATE**      |   | **PAYMENT** |      |
|-------------------|--------|-------------|-----------|
| April 30, 2003    |   | $           | 250,000   |   |
| May 15, 2003      |   | $           | 200,000   |   |
| July 15, 2003     |   | $           | 200,000   |   |
| July 31, 2003     |   | $           | 250,000   |   |
| August 15, 2003   |   | $           | 200,000   |   |
| October 15, 2003  |   | $           | 200,000   |   |
| October 31, 2003  |   | $           | 250,000   |   |
| November 15, 2003 |   | $           | 200,000   |   |
| January 15, 2004  |   | $           | 200,000   |   |
| January 31, 2004  |   | $           | 250,000   |   |
| February 15, 2004 |   | $           | 200,000   |   |
| April 15, 2004    |   | $           | 200,000   |   |
| May 15, 2004      |   | $           | 200,000   |   |
| July 15, 2004     |   | $           | 200,000   |   |
| August 15, 2004   |   | $           | 200,000   |   |
| October 15, 2004  |   | $           | 200,000   |   |
|              |   |        |      |
| Total             |   | $           | 3,400,000 |   |

 

As of March 31, 2004, theminimum payments under this agreement have been paid in a timely manner.

 

In addition, we can earn up toan additional $4.0 million over the next three years based on a percentage ofesmertec’s future sales of the JVM product. Additionally, the parties have entered into a cooperative agreement topromote Insignia’s Secure System Provisioning (“SSP”) software product toesmertec’s mobile platform customers. The Agreements provide for esmertec to manage the existing Insignia JVMcustomer relationships and license the Insignia and esmertec technologies tothe then combined customer base and business partners.

 

As part of the sale of our JVMproduct line, we transferred 42 employees to esmertec, of which 31 weredevelopment engineers.  In addition, aspart of the sale, esmertec entered into an agrement with our U.K. buildinglandlord to assume the lease on one of the two buildings leased by Insignia.

 

On February 13, 2004, Insigniaand esmertec executed the final purchase agreement upon signing the LimitedAssignment of Rights of Technology License and Distribution Agreement.  The final purchase agreement transferred theintellectual property of Jeode and the title for the prepaid royalities toesmertec.

 

9

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The Jeode platform had been ourprincipal product line since the third quarter of 1999.  With the completion of the sale of our JVMbusiness to esmertec in April 2003, Insignia’s sole product line consists ofits SSP products for the mobile handset and wireless carrier industry.  We began shipment of our SSP product tocustomers in the fourth quarter of 2003.

 

**Note 6. Commitments and Contingencies**

 

In June 2001, Insignia and SunMicrosystems, Inc. (“Sun”) entered into an addendum (the “Addendum”) to theDistribution Agreement relating to distribution of products to an Insigniacustomer.  In addition, in September2001, the two companies entered into Amendment No. 3 (the “Amendment”) to theTechnology License and Distribution Agreement (the “Distribution Agreement”)between the two companies.  TheAmendment and the Addendum each require Insignia to make non-refundable royaltyprepayments to Sun.  A total of $7.0million of prepaid royalties were paid to Sun under these agreements throughthe third quarter of 2002.  There are noadditional royalty prepayments due to Sun under this agreement.  The amended Distribution Agreement expiresJune 30, 2004.  Any unused royaltyprepayments outstanding on June 30, 2004 will be forfeited.  The prepaid royalty balance as of February13, 2004 was $2.2 million.  The entireprepaid royalty balance was transferred to esmertec under the final assetpurchase agreement.  Sun agreed to thetransfer to esmertec effective as of June 14, 2003.

 

**Guarantee Agreements**

 

Insignia,as permitted under Delaware law and in accordance with our Bylaws, indemnifiesour officers and directors for certain events or occurrences, subject tocertain limits, while the officer is or was serving at our request in suchcapacity.  The term of theindemnification period is for the officer’s or director’s lifetime.  The maximum amount of potential futureindemnification is unlimited; however we do have a Director and OfficerInsurance Policy that limits our exposure and enables us to recover a portionof any future amounts paid.  As a resultof the insurance policy coverage we believe the fair value of theseindemnification agreements is minimal.

 

Inour sales agreements, we typically agree to indemnify our customers for anyexpenses or liability resulting from claimed infringements of patents,trademarks or copyrights of third parties for the products, as delivered byInsignia.  The terms of theseindemnification provisions are generally perpetual.  The maximum amount of potential future indemnification isunlimited; however, we normally retain the right to limit the remedies thecustomer may receive.  We have not paidany amounts to settle claims or defend lawsuits.

 

Insignia,on a limited basis, has granted price protection.  The terms of these agreements are generally perpetual.  We have not recorded any liabilities forthese potential future payments either because they are not probable or we haveyet to incur the expense.

 

Insigniatypically warrants the binary version and the source code licenses of itssoftware product against defects in material and workmanship under normal useand service for a period of ninety days. There is no warranty accrual recorded because potential future paymentseither are not probable or we have yet to incur the expense.

 

**Note 7. Segment reporting**

 

Insigniaoperates in a single industry segment providing software technologies thatenable mobile operators and phone manufacturers to update the firmware ofmobile devices using standard 

 

10

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over-the-airdata networks. In the first quarter of 2004, revenues received from sales ofSSP products and from esmertec with regard to our percentage of the revenueshare program from sales of the Jeode product line accounted for 71% and 29% ofthe revenue, respectively. In the first quarter of 2004, one United Statescustomer, Insignia Asia and esmertec accounted for 47%, 24% and 22% of totalrevenues, respectively.  In the firstquarter of 2003, one customer accounted for 34% of total revenues. No othercustomer accounted for 10% or more of Insignia’s total revenues during the firstquarter of 2004 or 2003.  Sales to customersoutside the United States, derived mainly from customers in Europe and Asia,represented approximately 47% of total revenues in the three months ended March31, 2004, and 12% of total revenues in the three months ended March 31, 2003.

 

**Note 8. Equity transactions and warrants**

 

OnJanuary 5, 2004, we issued 2,262,500 ordinary shares in ADS form at aprice of $0.80 to a total of 10 investors. We also issued warrants to purchase565,625 ADSs to the investors at an exercise price of $1.04. The warrants areexercisable immediately and expire January 5, 2009. We received$1.81 million less offering expenses totaling approximately $0.2 millionin this transaction. We also issued warrants to purchase 108,562 ADSs to thetwo principals of the placement agent, which are exercisable at a price of$1.09 per share. These warrants are exercisable immediately and expireJanuary 5, 2009.

 

InJanuary 2004, new ordinary shares of 766,667 were issued to Fusion Capitalpursuant to a binding commitment to deliver such shares entered into inNovember 2003.

 

The following table summarizesthe warrant activity during the three months ended March 31, 2004.

 
|                       |   | **Warrants  outstanding  and  exercisable** |   | **Warrants  outstanding  exercise price** |   |
|----------------------------|--------|---------------------------------------------|--------|-------------------------------------------|--------|
| Balance, December 31, 2003 |   | 739,657                                     |   | $4.77 - $6.00                             | (1)    |
| Granted                    |   | 874,187                                     |   | $1.03 - $1.09                             |   |
| Exercised                  |   | (470,000                                    | )      | $0.85                                     |   |
| Balance, March 31, 2004    |   | 1,143,844                                   |   | $1.04-$6.00                               | (1)    |

 

----

(1) The $6.00 warrants are thelesser of $6.00 or 90% of 10-day average market value

 

**Note 9. Related party transaction**

 

Duringthe three months ended March 31, 2003, Insignia recognized license revenue of$22,000 from Phoenix Technologies.  TheCEO of Phoenix Technologies was a director on Insignia’s board of directorsfrom March 1997 until March 2001.

 

OnFebruary 13, 2001, we entered into a promissory note with Richard M. Noling,then President and Chief Executive Officer of Insignia whereby Mr. Nolingborrowed $150,000 from the U.S.-based subsidiary of Insignia.  The promissory note was due in three equalinstallments, on each annual anniversary from the date of the note.  Interest accrued on the unpaid principalbalance at a rate per annum equal to the prime lending rate of interest aslisted in the Wall Street Journal 

 

11

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plus1%.  Accrued interest was due andpayable monthly in arrears on the last calendar day of each month, beginningMarch 31, 2001.  The note was amended onJanuary 24, 2002 to extend the first and subsequent installments by oneyear.  The first installment became dueon February 13, 2003.  Mr. Noling’semployment was terminated with Insignia effective February 14, 2003.  We forgave, effective March 6, 2003, thebalance of the loan, $128,154, in lieu of any bonus compensation.

 

On December 31, 2003, Insigniaentered into a joint venture agreement with J Tek Corporation to form InsigniaAsia Chusik Hoesa (“Insignia Asia”). During the three months ended March 31, 2004, Insignia recognizedlicense revenue of $75,000 from Insignia Asia.

 

**Note 10. Restructuring**

 

Statementof Financial Accounting Standards No. 146, “Accounting for Exit or DisposalActivities” requires restructuring charges to be recorded at the commitmentdate.  On February 11, 2003, weannounced 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. Restructuringcharges paid in the first through fourth quarters of 2003 were $117,000,$167,000, $109,000 and $115,000, respectively. There were no accrued restructuring charges as of December 31, 2003 andMarch 31, 2004.

 

12

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

The following discussion andanalysis should be read in conjunction with the unaudited condensedconsolidated financial statements and notes thereto included in Part I - Item 1of this Form 10-Q and the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” set forth in Insignia’s Form 10-K for theyear ended December 31, 2003 (the “Form 10-K”).

 

*This Form 10-Q contains forward-lookingstatements. Words such as“anticipates,” “believes,” “expects,” “future,” and “intends,” and similarexpressions are used to identify forward-looking statements. Theseforward-looking statements concern matters which include, but are not limitedto, the revenue model and market for the SSP product line, the features,benefits and advantages of the SSP platform, international operations andsales, gross margins, spending levels, the availability of licenses tothird-party proprietary rights, business and sales strategies, matters relatingto proprietary rights, competition, exchange rate fluctuations and ourliquidity and capital needs. These and other statements regarding matters thatare not historical are forward-looking statements. These matters involve risksand uncertainties that could cause actual results to differ materially fromthose in the forward-looking statements. In addition to the factors discussedabove, among other factors that could cause actual results to differ materiallyare the following: the demand for the SSP platform; the performance andfunctionality of SSP technology; our ability to deliver products on time, andmarket acceptance of new products or upgrades of existing products; the timingof, or delay in, large customer orders; continued availability of technologyand intellectual property license rights; product life cycles; quality controlof products sold; competitive conditions in the industry; economic conditionsgenerally or in various geographic areas; and the other risks listed from timeto time in the reports that we file with the U.S. Securities and ExchangeCommission. Factors that could cause or contribute to such differences inresults and outcomes include without limitation those discussed below as wellas those discussed elsewhere in this Report. Readers are cautioned not to placeundue reliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. We assume no obligation to update theseforward-looking statements to reflect actual results or changes in factors orassumptions affecting such forward-looking statements.*

 

13

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The following table sets forththe unaudited condensed consolidated results of operations as a percentage oftotal revenues for the three month periods ended March 31, 2004 and 2003.

 
|                                      |   | **Three  months ended  March 31,** |   |
|-------------------------------------------|--------|------------------------------------|--------|
|                                      |   | **2004**                           |   | **2003** |   |
| Net revenues:                             |   |                               |   |   |   |
| License                                   |   | 99.1                               | %      | 50.7 | % |
| Service                                   |   | 0.9                                | %      | 49.3 | % |
|                                      |   |                               |   |   |   |
| Total net revenues                        |   | 100                                | %      | 100.0 | % |
|                                      |   |                               |   |   |   |
| Cost of net revenues:                     |   |                               |   |   |   |
| License                                   |   | 7.2                                | %      | 30.4 | % |
| Service                                   |   | 0                                  | %      | 13.7 | % |
|                                      |   |                               |   |   |   |
| Total cost of net revenues                |   | 7.2                                | %      | 44.1 | % |
|                                      |   |                               |   |   |   |
| Gross profit                              |   | 92.8                               | %      | 55.9 | % |
|                                      |   |                               |   |   |   |
| Operating expenses:                       |   |                               |   |   |   |
| Sales and marketing                       |   | 255.8                              | %      | 170.2 | % |
| Research and development                  |   | 254.2                              | %      | 344.6 | % |
| General and administrative                |   | 185.3                              | %      | 301.9 | % |
| Restructuring                             |   | 0.0                                | %      | 86.0 | % |
|                                      |   |                               |   |   |   |
| Total operating expenses                  |   | 695.3                              | %      | 902.7 | % |
|                                      |   |                               |   |   |   |
| Operating loss                            |   | (602.5                             | )%     | (846.8 | )% |
|                                      |   |                               |   |   |   |
| Interest income (expense), net            |   | (0.3                               | )%     | (0.2 | )% |
| Other income (expense), net               |   | (4.1                               | )%     | 3.4 | % |
|                                      |   |                               |   |   |   |
| Loss before income taxes                  |   | (606.9                             | )%     | (843.6 | )% |
|                                      |   |                               |   |   |   |
| Provision for (benefit from) income taxes |   | (8.2                               | )%     | 0.5 | % |
|                                      |   |                               |   |   |   |
| Net loss                                  |   | (598.7                             | )%     | (844.1 | )% |

 

14

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**Overview**

 

We commencedoperations in 1986, and currently develop, market and support softwaretechnologies that enable mobile operators and phone manufacturers to update thefirmware of mobile devices using standard over-the-air data networks. Before2003, our principal product line was the JeodeTM platform, based on our EmbeddedVirtual Machine (“EVM”TM) 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 SSPproducts build on our position as a Virtual Machine (“VM”) supplier formanufacturers of mobile devices and allow wireless operators and phonemanufacturers to reduce customer care and software recall costs as well asincrease subscriber revenue by deploying new mobile services based ondynamically provisional capabilities. With the sale of our JVM product line inApril 2003, our sole product line consists of our SSP product. We shippedour first SSP product in December 2003.

 

Our operationsoutside of the United States are primarily in the United Kingdom, where part ofour research and development operations and our European sales activities arelocated. We sell our SSP platform directly to customers or through our hostedpartners such as Metrowerks and Accord Customer Care Solutions. Our revenuesfrom customers outside the United States are derived primarily from Europe andAsia and are generally affected by the same factors as our revenues fromcustomers in the United States. The operating expenses of our operationsoutside the United States are mostly incurred in Europe and relate to ourresearch and development and European sales activities. Such expenses consistprimarily of ongoing fixed costs and consequently do not fluctuate in direct proportionto revenues. Our revenues and expenses outside the United States can fluctuatefrom period to period based on movements in currency exchange rates.Historically, movements in currency exchange rates have not had a materialeffect on our revenues.

 

We operatewith the U.S. dollar as our functional currency, with a majority of revenuesand operating expenses denominated in U.S. dollars. Pound sterling exchangerate fluctuations against the dollar can cause U.K. expenses, which aretranslated into dollars for financial statement reporting purposes, to varyfrom period-to-period.

 

*The Current Economic Environment*

 

The economicclimate in which we operate has been difficult over the last three years, andinformation technology (“IT”) spending has decreased dramatically. This has hadan effect on our ability to generate new license fees, as IT budgets have beenreduced or frozen and expenditures like those required to purchase some of ourproducts have been quite limited. We cannot provide any assurance that thesepressures on IT spending will ease, or that the general economic climate willimprove. Continued competitive pressure and a weak economy could have acontinuing pronounced effect on our operating results. We have undertaken avariety of cost reduction measures designed to bring our operating expenses inline with our perceptions of the business climate, including workforcereductions.

 

**Critical accounting policies and estimates**

 

The condensed consolidatedfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America.  Certain of our accounting policies require the application ofsignificant judgment by management in selecting the appropriate assumptions forcalculating financial estimates.  Theseestimates affect the reported amounts of assets and liabilities at the dates ofthe financial statements and the reported amounts of revenues 

 

15

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and expenses during thereporting periods.  By their nature,these judgments are subject to an inherent degree of uncertainty.  The most significant estimates andassumptions relate to revenue recognition, the recoverability of prepaidroyalties, and the adequacy of allowances for doubtful accounts. Actual amountscould differ from these estimates.

 

*Revenue recognition*

 

We recognize revenue inaccordance with Statement of Position 97-2 (“SOP 97-2”), “Software RevenueRecognition”, as amended.  SOP 97-2requires that four basic criteria must be met before revenue can be recognized:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred orservices rendered; (3) the fee is fixed or determinable; and (4) collectibilityis reasonably assured. Determination of criteria (3) and (4) are based onmanagement’s judgments regarding the fixed nature of the fee charged forservices rendered and products delivered and the collectibility of those fees.Should changes in conditions cause management to determine these criteria arenot met for certain future transactions, revenue recognized for any reportingperiod could be adversely affected.

 

At the time of the transaction,we assess whether the fee associated with our revenue transaction is fixed ordeterminable and whether or not collection is reasonably assured.  We assess whether the fee is fixed ordeterminable based on the payment terms associated with the transaction. If asignificant portion of a fee is due after the normal payment terms, which are30 to 90 days from invoice date, we account for the fee as not being fixed ordeterminable. In these cases, we recognize revenue on the earlier of due dateor cash collected.

 

We assess collectibility basedon a number of factors, including past transaction history with the customerand the credit-worthiness of the customer. We do not request collateral from our customers.  If we determine that collection of a fee isnot reasonably assured, we will defer the fee and recognize revenue at the timecollection becomes reasonably assured, which is generally upon receipt of cash.

 

For all sales, we use either asigned license agreement or a binding purchase order (primarily for maintenancerenewals) as evidence of an arrangement.

 

For arrangements with multipleobligations (for example, undelivered maintenance and support), we willallocate revenue to each component of the arrangement using the residual valuemethod based on the fair value of the undelivered elements, which is specificto us.  This means that we will deferrevenue equivalent to the fair value of the undelivered elements.  Fair value for the ongoing maintenance andsupport obligation is based upon separate sales of renewals to other customersor upon renewal rates quoted in the contracts. Fair value of services, such as training or consulting, is based uponseparate sales by us of these services to other customers.

 

Our arrangements do notgenerally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptanceoccurs upon the earlier of receipt of written customer acceptance or expirationof the acceptance period.

 

We recognize revenue formaintenance services ratably over the contract term.  Our training and consulting services are billed based on hourlyrates, and we will generally recognize revenue as these services areperformed.  However, at the time ofentering into a transaction, we will assess whether or not any servicesincluded within the arrangement require us to perform significant work eitherto alter the underlying software or to build additional complex interfaces sothat the 

 

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software performs as thecustomer requests.  If these servicesare included as part of an arrangement, we recognize the entire fee using thepercentage of completion method.  Weestimate the percentage of completion based on our estimate of the total costsestimated to complete the project as a percentage of the costs incurred to dateand the estimated costs to complete.

 

*Accounts receivable and allowance fordoubtful accounts*

 

We perform ongoing creditevaluations of our customers and will adjust credit limits based upon paymenthistory and the customer’s current credit worthiness, as determined by ourreview of their current credit information. We continuously monitor collections and payments from our customers andmaintain an allowance for estimated credit losses based upon historicalexperience and any specific customer collection issues that we haveidentified.  While such credit losseshave historically been within expectations and the allowance established, wecannot guarantee that we will continue to experience the same credit loss ratesas in the past.  Since our accountsreceivable are concentrated in a relatively few number of customers, asignificant change in the liquidity or financial position of any one of thesecustomers could have a material adverse impact on the collectability ofaccounts receivables and future operating results.

 

The preparation of financialstatements requires us to make estimates of the uncollectability of ouraccounts receivables.  We specificallyanalyze accounts receivable and analyze historical bad debts, customerconcentrations, customer credit-worthiness, current economic trends and changesin its customer payment terms when evaluating the adequacy of the allowance fordoubtful accounts.

 

*Prepaid royalties*

 

Our agreements with licensorssometimes require us to make advance royalty payments or pay royalties based onproduct sales.  Prepaid royalties arecapitalized and amortized as cost of sales based on the contractual royaltyrate based on actual net product sales. We continually evaluate recoverability of prepaid royalties and, ifnecessary, will charge to cost of sales any amount that we deem unlikely to berecoverable in the future.  The prepaidroyalties carried on the balance sheet for the quarter ended March 31, 2003were subject to the terms of the Distribution Agreement between Sun andInsignia, which required us to use these prepaid licenses before June 30,2004.  The title to these prepaidroyalties was transferred to esmertec upon executing the Limited Assignment ofRights of Technology License and Distribution Agreement, on February 13, 2004.

 

**Revenues**

 
|              |   | **Three  months ended  March 31,** |   |
|-------------------|--------|------------------------------------|--------|
|              |   | **2004**                           |   | **2003** |   |
|              |   | **(in  thousands)**                |   |
|              |   |                               |   |   |   |
| License revenue   |   | $                                  | 316    |   | $ | 192 |   |
| Service revenue   |   | 3                                  |   | 187 |   |
| Total net revenue |   | $                                  | 319    |   | $ | 379 |   |

 

17

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TheSSP product line was our sole business for the first quarter of 2004 and theJeode product line was our primary business for the first quarter of 2003.  Revenue from the Jeode product line wasderived from four main sources: (1) the sale of a development license, (2) thesale of annual maintenance and support contracts/services, (3) prepaid royaltiesand transactional occurrence fees based on shipments of products that includeJeode technology, and (4) nonrecurring engineering activities.  Revenue from the SSP product line is derivedfrom a combination of sources including (1) initial licensing fees, (2)transactional occurrence fees, (3) support and maintenance fees, and (4)engineering service fees.

 

The 16% decrease in totalrevenues from the first quarter of 2003 to the first quarter of 2004 wasprimarily due to decreased service revenues relating to the Jeode platformproduct line as a result of the sale of the JVM product line.  The Jeode platform accounted for 29% and 95%of total revenue for the three months ended March 31, 2004 and 2003,respectively.  Future revenue from Jeodewill be recognized as a percentage of the revenue share program with esmertecfrom the sale of the JVM product line. Jeode revenue is expected to continue to decrease from prior quarters.

 

Licenserevenue and service revenue accounted for 99% and 1%, respectively, of totalrevenues in the first quarter of 2004. In the first quarter of 2003, license revenue and service revenueaccounted for 51% and 49%, respectively.

 

The increase in licenserevenues from the first quarter of 2003 to the first quarter of 2004 was primarilydue to revenues generated from our new SSP product initially shipped inDecember 2003.  Jeode license revenuesfor the three months ended March 31, 2004 (from our revenue share program withesmertec) and the three months ended March 31, 2003 accounted for 29% and 90%of total license revenues, respectively.

 

The 98% decrease in servicerevenues from the first quarter of 2003 to the first quarter of 2004 wasprimarily due to decreased Jeode engineering and Jeode support contracts.  Jeode service revenues for the three monthsended March 31, 2004 and the three months ended March 31, 2003 was 0% and 100%of total service revenues, respectively.

 

Sales to distributors and OEM’srepresenting more than 10% of total revenue in each period accounted for the followingpercentages of total revenues.

 
|              |   | **Three  months ended  March 31,** |   |
|-------------------|--------|------------------------------------|--------|
|              |   | **2004**                           |   | **2003** |   |
| Distributors:     |   |                               |   |   |   |
| Hewlett Packard   |   | —                             |   | 34 | % |
| All Distributors: |   | 93                                 | %      | 35 | % |
| OEM’s:       |   |                               |   |   |   |
| All OEM’s    |   | 7                                  | %      | 61 | % |

 

Sales to customers outside theUnited States, derived mainly from customers in Europe and Asia, representedapproximately 53% of total revenues in the three months ended March 31, 2004and 10% of total revenues in the three months ended March 31, 2003.

 

18

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**Cost of revenues and gross margin**

 
|                          |   | **Three  months ended  March 31,**      |   |
|-------------------------------|--------|-----------------------------------------|--------|
|                          |   | **2004**                                |   | **2003** |   |
|                          |   | **(in  thousands, except percentages)** |   |
|                          |   |                                    |   |   |   |
| Cost of license revenue       |   | $                                       | 23     |   | $ | 115 |   |
| Gross margin: license revenue |   | 93                                      | %      | 40 | % |
|                          |   |                                    |   |   |   |
| Cost of service revenue       |   | $                                       | 0      |   | $ | 52 |   |
| Gross margin: service revenue |   | 100                                     | %      | 72 | % |
|                          |   |                                    |   |   |   |
| Total cost of revenues        |   | $                                       | 23     |   | $ | 167 |   |
| Gross margins: total revenues |   | 93                                      | %      | 56 | % |

 

Costof license revenue is mainly comprised of royalties to third parties. Cost ofservice revenue includes costs associated with nonrecurring engineeringactivities and end-user support under maintenance contracts.

 

We believe that the significantfactors affecting the Jeode platform gross margin include pricing of thedevelopment license, pricing of the unit usage and royalties paid to thirdparties such as Sun Microsystems, Inc. (“Sun”).  In early 1999, we signed a five-year agreement with Sun underwhich Sun established us as an authorized virtual machine provider.  Under this agreement, we are required to paySun a per unit royalty on each Jeode platform-enabled smart device shipped byour customers, plus a royalty on all development licenses put in place betweenour customers and us. In the third quarter of 2001, we amended our licenseagreement with Sun.  The amendmentexpanded the scope of the licensed technology, changed the royalty rate,limited the royalty obligations solely to units licensed, established requiredprepaid royalties and extended the expiration date of the contract from March2004 to June 2004.  The title to theseprepaid royalties was transferred to esmertec in February 2004.  The increase in license revenue grossmargins in the first quarter of 2004 was due to higher gross margins on ourrecently launched SSP product line compared to the lower product gross marginsin the first quarter of 2003 as a result of sharing the March 2003 JVM revenuewith esmertec.

 

Gross margin for servicerevenue is impacted by the level and pricing terms of nonrecurring engineeringactivities, which can vary from customer to customer, from contract to contractand based on the level of maintenance contracts sold.  Gross margin for service revenue increased in the first quarterof 2004 to 100% from 72% in the same period of 2003 due to revenue receivedfrom a service and maintenance contract in the first quarter of 2004.

 

#### **Operating expenses**

 
|                         |   | **Three  months ended  March 31,**      |   |
|------------------------------|--------|-----------------------------------------|--------|
|                         |   | **2004**                                |   | **2003** |   |
|                         |   | **(in  thousands, except percentages)** |   |
|                         |   |                                    |   |   |   |
| Sales and marketing          |   | $                                       | 816    |   | $ | 645 |   |
| Percentage of total revenues |   | 256                                     | %      | 170 | % |
|                         |   |                                    |   |   |   |
| Research and development     |   | $                                       | 811    |   | $ | 1,306 |   |
| Percentage of total revenues |   | 254                                     | %      | 345 | % |
|                         |   |                                    |   |   |   |
| General and administrative   |   | $                                       | 591    |   | $ | 1,144 |   |
| Percentage of total revenues |   | 185                                     | %      | 302 | % |

 

19

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Sales and marketing expensesconsist primarily of personnel and related overhead costs, salespersoncommissions, advertising and promotional expenses and trade shows.  Sales and marketing expenses increased by27% in the quarter ended March 31, 2004 from the quarter ended March 31, 2003.The primary reason for the increase was a non-cash charge of $349,000 forwarrants that were issued to outside partners supporting the Company’s SSPproduct launch. Without the $349,000 charge in the first quarter of 2004, salesand marketing expenses would have been $467,000, which was a decrease of 28%from the first quarter of 2003, primarily as a result of reducing salaryrelated costs in sales and marketing as a result of transferring the JVMproduct line expenses to esmertec in March 2003. Excluding the warrant chargeof $349,000 in the first quarter of 2004, we anticipate a moderate increase insales and marketing expense in the near term as we continue to launch our newSSP product line.

 

Research and developmentexpenses consist primarily of personnel costs, overhead costs relating tooccupancy and equipment depreciation. Research and development expenses decreased by 38% in the three monthsended March 31, 2004 compared to the same period in 2003.  The primary reason for the decrease was areduction in salaries and personnel related costs in the first quarter of 2004as a result of transferring the JVM product line expenses and related headcountto esmertec in March 2003.  Research anddevelopment expenses are expected to remain approximately the same in the nearterm.

 

General and administrativeexpenses consist primarily of personnel and related overhead costs for finance,information systems, human resources and general management.  General and administrative expenses decreasedby 48% in the three months ended March 31, 2004 compared to the same period of2003.  The decrease was primarily due toa reduction in salaries, personnel related costs and facility costs.  Salaries and personnel costs decreased dueto a reduction in force in the quarter ended March 31, 2003 and the transfer ofthe JVM product line expenses effective March 4, 2003.  General and administrative expenses areexpected to remain approximately the same in the near term.

 

###### **Restructuring**

 
|                         |   | **Three  months ended  March 31,**      |   |
|------------------------------|--------|-----------------------------------------|--------|
|                         |   | **2004**                                |   | **2003** |   |
|                         |   | **(in  thousands, except percentages)** |   |
|                         |   |                                    |   |   |   |
| Restructuring                |   | $                                       | 0      |   | $ | 326 |   |
| Percentage of total revenues |   | 0                                       | %      | 86 | % |
|                              |        |                                         |        |  |  |  |  |

 

On February 11, 2003, weannounced a restructuring of the organization to focus on the SSPtechnology.  Restructuring expensesconsisted of severance payments paid in the quarter ended March 31, 2003 of$117,000 and continuing severance payments of $209,000 in the quarters endedJune 30, 2003 and September 30, 2003. Restructuring expenses represented 86% of total revenues for the quarterended March 31, 2003.

 

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**Interest income (expense), net**

 
|                           |   | **Three  months ended  March 31,**      |   |
|--------------------------------|--------|-----------------------------------------|--------|
|                           |   | **2004**                                |   | **2003** |   |
|                           |   | **(in  thousands, except percentages)** |   |
|                           |   |                                    |   |   |   |
| Interest income (expense), net |   | $                                       | (1     | ) | $ | (1 | ) |
| Percentage of total revenues   |   | —                                  |   | — |   |
|                                |        |                                         |        |  |  |  |  |

 

Net interest expense was $1,000for the first quarter of 2004 and remained the same as it was in the threemonths ended March 31, 2003.  Weanticipate interest income (expense), net to increase in the near term, as aresult of paying the note payable due to esmertec in the first quarter of 2004and increased cash balances.

 

### **Other income (expense),net**

 
|                         |   | **Three  months ended  March 31,**      |   |
|------------------------------|--------|-----------------------------------------|--------|
|                         |   | **2004**                                |   | **2003** |   |
|                         |   | **(in  thousands, except percentages)** |   |
|                         |   |                                    |   |   |   |
| Other income (expense), net  |   | $                                       | (13    | ) | $ | 13 |   |
| Percentage of total revenues |   | (4                                      | )%     | 3 | % |
|                              |        |                                         |        |  |  |  |  |

 

Netother income (expense) decreased from income of $13,000 in the three monthsended March 31, 2003 to an expense of $13,000 in the three months ended March31, 2004, primarily reflecting foreign exchange gains or losses in therespective periods.

 

Forthe three months ended March 31, 2004 approximately 100% of our total revenuesand 66% of our operating expenses were denominated in U.S. dollars.  Most of our remaining expenses are Britishpound sterling denominated and consequently we are exposed to fluctuations inBritish pound sterling exchange rates. There can be no assurance that such fluctuations will not have amaterial effect on our results of operations in the future.  We did not enter with any currency optionhedge contracts in 2003 or the first quarter of 2004.

 

We have, at times, aninvestment portfolio of fixed income securities that are classified as“available-for-sale-securities.”  Thesesecurities, like all fixed income instruments, are subject to interest raterisk and will decrease in value if market interest rates increase.  We attempt to limit this exposure byinvesting primarily in short-term securities.

 

**Provision for (benefit from) for income taxes**

 
|                                           |   | **Three  months ended  March 31,** |   |
|------------------------------------------------|--------|------------------------------------|--------|
|                                           |   | **2004**                           |   | **2003** |   |
|                                           |   | **(in  thousands)**                |   |
|                                           |   |                               |   |   |   |
| Provision for (benefit from) for income  taxes |   | $                                  | (26    | ) | $ | 2 |   |
| Effective income tax rate                      |   | (1                                 | )%     | — |   |
|                                                |        |                                    |        |  |  |  |  |

 

Our benefit from income taxesof $26,000 for the three months ended March 31, 2004 primarily represented arefund received from the United Kingdom for research and developmentclaims.  

 

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The provision for income taxesfor the three months ended March 31, 2003 primarily represented payments toU.S. tax authorities for annual filing fees. We have recorded a full valuation allowance against all deferred taxassets, primarily comprised of net operating losses, on the basis thatsignificant uncertainty exists with respect to their realization.

 

Effective 2002 and retroactiveto 2000, research and development expenditures incurred in the United Kingdomqualified for a tax credit.  The taxcredit does not offset tax liability but rather is a refund.  The estimated refund for 2003 was $436,000and was recorded as a tax receivable on the balance sheet.

 

### **Liquidity and capitalresources**

 
|                                                              |   | **March 31,**       |   |
|-------------------------------------------------------------------|--------|---------------------|--------|
|                                                              |   | **2004**            |   | **2003** |   |
|                                                              |   | **(in  thousands)** |   |
|                                                              |   |                |   |   |   |
| Cash, cash equivalents and restricted cash                        |   | $                   | 2,859  |   | $ | 214 |   |
| Working capital (deficit)                                         |   | $                   | 3,106  |   | $ | (652 | ) |
| Net cash used in operating activities for  the three month period |   | $                   | (1,767 | ) | $ | (1,762 | ) |

 

We have transitioned ourproduct focus from the Jeode product to our SSP product line.  This change in product focus has resulted ina redirection of available resources from Insignia’s historical revenue basetowards the development and marketing efforts associated with the SSP product.Cash used in operating activities in the first quarter of 2004 totaled$1,767,000 compared to $1,762,000 for the same period in 2003.  For the three months ended March 31, 2004,cash used in operating activities resulted primarily from a net loss of$1,910,000, a decrease in deferred revenue of $840,000, a decrease in accountspayable and accrued liabilities of $392,000, and an increase in accountsreceivable and other receivable of $1,160,000. These were partially offset by a decrease in prepaid royalities of$2,185,000 and a non-cash charge for warrants in the amount of $349,000.

 

Cash used in investingactivities for the three months ended March 31, 2004 was $96,000, whichconsisted of an investment in an affiliate and purchases of property andequipment.

 

Cashprovided by financing activities for the three months ended March 31, 2004 was$2,490,000, resulting from share issuance in the amount of $1,604,000, andproceeds from the exercise of stock options and warrants amounting to $886,000.

 

Ourcash, cash equivalents and restricted cash were $2,859,000 at March 31, 2004,an increase of $627,000 from $2,232,000 at December 31, 2003.  At March 31, 2004, we had a working capitalsurplus of $3,106,000. The principal source of working capital came as a resultof the issuance of shares. At March 31, 2003, we had a working capital deficitof $652,000.  Capital additions totaled$21,000 and $1,000 for the three months ending March 31, 2004 and 2003,respectively. We have no material commitments for capital expenditures orstrategic investments. Our commitments for expenditures consist of buildingleases in the U.K. and U.S.

 

Asof March 31, 2004, we had the following contractual cash obligations (includingoperating lease obligations that were restructured pursuant to the sale of theJVM product line) (in thousands):

 

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|                                            |   | **Operating  leases** |   |
|-------------------------------------------------|--------|-----------------------|--------|
| Year ending December 31,                        |   |                  |   |
| 2004 (April 1, 2004 through December 31,  2004) |   | $                     | 222    |   |
| 2005                                            |   | 282                   |   |
| 2006                                            |   | 193                   |   |
| 2007                                            |   | 165                   |   |
| 2008                                            |   | 165                   |   |
| Thereafter                                      |   | 762                   |   |
|                                            |   | $                     | 1,789  |   |

 

Asof March 31, 2004, two customers accounted for 100% of our total accountsreceivable.

 

InJune 2001, Insignia and Sun Microsystems, Inc. (“Sun”) entered into an addendum(the “Addendum”) to the Distribution Agreement relating to distribution ofproducts to an Insignia customer. In September 2001, the two companies enteredinto Amendment No. 3 (the “Amendment”) to the Technology License andDistribution Agreement (the “Distribution Agreement”).  TheAmendment and the Addendum each required us to make non-refundable royaltyprepayments to Sun.  A total of $7.0million prepaid royalties were paid to Sun under the Distribution Agreementthrough the second quarter of 2002.  Thereare no additional required royalty prepayments due to Sun under this agreement.The title to these prepaid royalties was transferred to esmertec upon executingthe Limited Assignment of Rights of Technology License and DistributionAgreement which occurred on February 13, 2004.

 

On October 17, 2002, weentered into a securities subscription agreement (“Agreement”) with FusionCapital Fund II, LLC (“Fusion Capital”), pursuant to which Fusion Capitalagreed to purchase, on each trading day following the effectiveness of aregistration statement covering the American Depository Shares (“ADSs”) to bepurchased by Fusion Capital, $10,000 of our ADSs up to an aggregate of $6.0 millionover a period of 30 months. The purchase price of the ADSs will be equalto a price based upon the future market price of the shares without any fixeddiscount to the market price. 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 ordinaryshares as of September 30, 2002 or the closing sale price per share of ourADSs on October 16, 2002.

 

In November 2003, Fusion made abinding election to purchase an aggregate of 1,766,667 ADSs for an aggregatepurchase price of $1,325,000.  InNovember 2003, we issued 1,000,000 ADSs to Fusion for an aggregate purchaseprice of $750,000.  Fusion’s delivery ofthe additional amount of $575,000 in November 2003 constituted a bindingcommitment to purchase the remaining 766,667 shares at such time as Fusion’sbeneficial ownership of Insignia became less than 9.9%, and the balance ofthese 766,667 shares were issued to Fusion in January 2004.

 

Fusion also purchased anaggregate of 2,000,000 ADSs on exercise of warrants.  Unless an event of default occurs under the Agreement, theseshares must be held by Fusion Capital until the earlier of 30 months from thedate of the Agreement or the date the Agreement is terminated.

 

Basedupon our current forecasts and estimates of targets for revenues and accountsreceivable collections, our current cash and cash equivalents together withcash generated from on-going operations and other liquid sources of cash(including cash generated from the sale of the Jeode product line to esmertec),we believe that Insignia will have sufficient funds to meet its operating 

 

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andcapital requirements through the end of 2004. If cash currently available fromall sources is insufficient to satisfy our liquidity requirements, we may seekadditional sources of financing, including selling additional equity or debtsecurities. If additional funds are raised through the issuance of equity ordebt securities, these securities could have rights, preferences and privilegessenior to holders of our shares, and the terms of such securities could imposerestrictions on our operations. The sale of additional equity or debtsecurities could result in additional dilution to our shareholders. We may notbe able to obtain additional financing on acceptable terms, if at all. If weare unable to obtain additional financing as and when needed and on acceptableterms, we may be required to reduce the scope of our planned sales, marketingand product development efforts, which could jeopardize our business.

 

**New Accounting Pronouncements**

 

InJanuary 2003, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 46 (“FIN 46”), “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51”. FIN 46 requires certainvariable interest entities to be consolidated by the primary beneficiary of theentity if the equity investors in the entity do not have the characteristics ofa controlling financial interest or do not have sufficient equity at risk forthe entity to finance its activities without additional subordinated financialsupport from other parties. FIN 46 is effective immediately for all new variableinterest entities created or acquired after January 31, 2003. For variableinterest entities created or acquired prior to February 1, 2003, theprovisions of FIN 46 have been delayed and currently apply to the first fiscalyear or interim period beginning after December 15, 2003. We do not haveany entities as of March 31, 2004 that will require disclosure or newconsolidation as a result of adopting the provisions of FIN 46.

 

**Risk Factors**

 

Inaddition to the other information in this report, the following factors shouldbe considered carefully in evaluating our business and prospects:

 

**Wemay need additional financing to sustain our operations.**

 

We had workingcapital of $3.1 million at March 31, 2004, and our cash, cashequivalents, and restricted cash totaled $2.9 million at March 31,2004. We had an operating cash flow deficit of $1.8 million for the threemonths ended March 31, 2004 and an operating cash flow deficit of$1.8 million for the three months ended March 31, 2003. The sale of ourJVM product line to esmertec is currently expected to provide cash of$1.3 million during the last three quarters of 2004. Based upon ourcurrent forecasts and estimates, our current cash and cash equivalents togetherwith cash generated from on-going operations and other liquid sources of cash(including the cash generated from the sale of the Jeode product line toesmertec), we believe that Insignia will have sufficient funds to meet itsoperating and capital requirements through the end of 2004. If cash currentlyavailable from all sources is insufficient to satisfy our liquidityrequirements, we may seek additional sources of financing including sellingadditional equity or debt securities. If additional funds are raised throughthe issuance of equity or debt securities, these securities could have rights,preferences and privileges senior to holders of our shares, and the terms ofsuch securities could impose restrictions on our operations. The sale ofadditional equity or debt securities could result in additional dilution to ourshareholders. The failure to raise additional funds on a timely basis and onacceptable terms, if at all, would have a material adverse effect on ourbusiness, operating results and financial condition.

 

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We only havethe right to receive $10,000 per trading day, up to an aggregate of$6.0 million over a period of 30 months under the agreement withFusion Capital unless our stock price equals or exceeds $1.00, in which casethe daily amount may be increased, at the option of Insignia, as the price ofour shares increases.  Since weinitially registered 10,000,000 shares for sale by Fusion Capital (in additionto 2,000,000 shares issued on exercise of warrants held by Insignia), the sellingprice of our shares to Fusion Capital will have to average at least $0.60 pershare for us to receive the maximum proceeds of $6.0 million withoutregistering additional shares.

 

In addition,in connection with our private placement of ADSs in January 2004, we agreed notto draw down on our Fusion equity line until July 5, 2004 and also agreed notto sell shares to other third parties below a certain price until that date.

 

The extent towhich we rely on Fusion Capital as a source of funding will depend on a numberof factors including our financial performance and ability to generaterevenues, the prevailing market price of our shares and the extent to which weare able to secure working capital from other sources. If obtaining sufficientfinancing from Fusion Capital were to prove prohibitively expensive, we mayneed to secure another source of funding in order to satisfy our workingcapital needs. Even if we are able to access the full $6.0 million underthe securities subscription agreement with Fusion Capital, we may still needadditional capital to implement our business, operating and development plans.

 

**Ifour stock price does not exceed $1.00 per share or we fail to meet otherlisting requirements, we could be delisted from Nasdaq.**

 

Duringthe three months ended March 31, 2004, the closing price of our sharesranged from a high of $3.34 to a low of $0.91. In 2003, we transferred thelisting of our shares from the Nasdaq National Market to the Nasdaq SmallCapMarket. Under the rules of the Nasdaq Stock Market, our closing bid price mustremain above $1.00 per share for continued quotation of our shares on theNasdaq SmallCap Market. In order to maintain our listing on the Nasdaq SmallCapMarket, we are also required to have total shareholders’ equity of at least$2.5 million. As of March 31, 2004, our shareholders’ equity was$3.5 million. To the extent our shareholders’ equity declines, or theclosing bid price of our shares falls below $1.00 for the requisite period, ourshares could be delisted from the Nasdaq SmallCap Market, which could adverselyaffect the liquidity of the market for our shares and our ability to raiseadditional funds.

 

**Thesale of our shares to Fusion Capital may cause dilution, and the sale of theshares by Fusion Capital could cause the price of our shares to decline.**

 

Thesubscription price for the shares to be issued to Fusion Capital pursuant tothe securities subscription agreement with Fusion Capital will fluctuate basedon the price of our shares. All shares sold to Fusion Capital under thesecurities subscription agreement will be freely tradable. Fusion Capital maysell none, some or all of the shares purchased from us at any time. We expectthat the shares to be sold to Fusion Capital will be sold over a period of up to30 months from the effective date of the registration statement filed inconnection with the transaction.

 

Depending uponmarket liquidity at the time, a sale of such shares at any given time couldcause the trading price of our shares to decline. The sale of a substantialnumber of shares, or anticipation of such sales, could make it more difficultfor us to sell equity or equity-related securities in the future at a time andat a price that we might otherwise wish to effect sales.

 

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**We may never achieve profitability if our SSPproduct line does not reach desired sales goals.**

 

Our futureperformance depends upon sales of products within our SSP product line.Revenues from our revenue sharing program with esmertec related to the Jeodeproduct line accounted for 29% of our total revenue for the three months endedMarch 31, 2004, and we expect revenues from this revenue sharing programto decrease in the future. As a result, the SSP product line is our onlyproduct line and we expect to rely upon sales of the SSP product for ourrevenue in the future. We only began shipping the SSP product inDecember 2003 and have achieved only minimal sales to date. SSP may notachieve or sustain market acceptance or provide the desired revenue levels.

 

**Thelong and complex process of licensing our SSP product makes our revenueunpredictable.**

 

Our revenue isdependent upon our ability to license the SSP product to third parties.Licensing our SSP product is expected to be a long and complex process, whichcould take longer than the typical six to nine months for our Jeode product.Before committing to license our products, potential customers must generallyconsider a wide range of issues, including product benefits, infrastructurerequirements, ability to work with existing systems, functionality andreliability. The process of entering into a development license with a companytypically involves lengthy negotiations. Because of the sales cycle, it isdifficult for us to predict when, or if, a particular prospect might sign alicense agreement. Development license fees may be delayed or reduced becauseof this process. We only began shipping the SSP product in December 2003and have achieved only minimal sales to date. We have limited history withsales initiatives for new products.

 

**Werely on third parties for software development tools, which we distribute withsome of our products**

 

We licensesoftware development tool products from other companies to distribute with someof our products. These third parties may not be able to provide competitiveproducts with adequate features and high quality on a timely basis or toprovide sales and marketing cooperation. Further, our products compete withproducts produced by some of our licensors. When these licenses terminate orexpire, continued license rights might not be available to us on reasonableterms. We might not be able to obtain similar products to substitute into ourtool suites.

 

**Wehave a history of losses and we must generate significantly greater revenue ifwe are to achieve profitability.**

 

Wehave experienced operating losses in each quarter since the second quarter of1996. To achieve profitability, we will have to increase our revenuesignificantly. Our ability to increase revenues depends upon the success of ourSSP product line. We only began shipping the SSP product in December 2003and have achieved only minimal sales to date.

 

**We must continue to invest in our sales and marketinginfrastructure, even though our revenues from sales of our SSP product have notbegun to scale.**

 

For the threemonths ended March 31, 2004 and 2003 we spent 256% and 170%, respectively, ofour total revenues on sales and marketing. We expect to continue to incur 

 

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disproportionately high salesand marketing expenses in the future. To market SSP effectively, we mustdevelop client and server channel markets. We will continue to incur theexpenses for a sales and marketing infrastructure before we recognizesignificant revenue from sales of the product. Because customers in the mobiledevice market tend to remain with the same vendor over time, we believe that wemust devote significant resources to each potential sale. If potential customersdo not design our products into their systems, the resources we have devoted tothe sales prospect would be lost. If we fail to achieve and sustain significantincreases in our quarterly sales, we may not be able to continue to increaseour investment in these areas. With increased expenses, we must significantlyincrease our revenues if we are to become profitable.

 

**Ifour new products or product enhancements fail to achieve customer acceptance,or if we fail to manage product transitions, our business reputation willlikely suffer and revenues may decline.**

 

The market formobile devices is fragmented and characterized by technological change,evolving industry standards and rapid changes in customer requirements. Ourexisting products will become less competitive or obsolete if we fail tointroduce new products or product enhancements that anticipate the features andfunctionality that customers demand. The success of our new productintroductions will depend on our ability to:

 

•                                          accuratelyanticipate industry trends and changes in technology standards;

 

•                                          completeand introduce new product designs and features in a timely manner;

 

•                                          continueto enhance our existing product lines;

 

•                                          respondpromptly to customers’ requirements and preferences.

 

The introductionof new or enhanced products also requires that we manage the transition fromolder products to minimize disruption in customer ordering patterns. We havehad difficulty managing the transition from older products in the past. Forexample, between 1995 and 1999, we transitioned from our SoftWindows productline to our NTRIGUE product line and began preparations for our Jeode productline. During this same period our yearly revenues dropped from a high of$55.1 million in 1995 to a low of $6.8 million in 1999. The decreasein revenues was partly because we did not timely introduce new products whichcould compensate for the decreasing demand for our SoftWindows product line.Development delays are commonplace in the software industry. We have experienceddelays in the development of new products and the enhancement of existingproducts in the past and are likely to experience delays in the future. We maynot be successful in developing and marketing, on a timely basis or at all,competitive products, product enhancements and new products that respond totechnological change, changes in customer requirements and emerging industrystandards.

 

**Ourbusiness strategy is focused on our sole product line, the SSP product line.**

 

In addition,we also face significant risks associated with the development and futuredeployment of our SSP products and the successful execution of the relatedbusiness strategy. With the sale of the Jeode product line to esmertec, the SSPproduct is our sole product line.  Weonly began shipping the SSP product in December 2003 and have achievedonly minimal sales to date. We have limited history with sales initiatives fornew products. Additionally, the sales cycle for the 

 

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SSP products is expected totake longer than the typical six to nine months cycle of the Jeode product.

 

**Ourtargeted market is highly competitive.**

 

OurSSP product line is targeted for the mobile operator and mobile device market.The market for these products is fragmented and highly competitive. This marketis also rapidly changing and there are many companies creating products thatcompete or will compete with ours. As the industry develops, we expectcompetition to increase in the future. This competition may come from existingcompetitors or other companies that we do not yet know about. Our maincompetitors include Bitfone, DoOnGo, Openwave and Red Bend.

 

If thesecompetitors develop products that are cheaper or provide better performance orfunctionality than our SSP product line, our market share will drop. Many ofour current competitors and potential competitors have greater resources thanwe do, and we might not be able to compete successfully against thesecompanies. Competition could force us to reduce the prices of our products,which would result in reduced profit margins and could harm our ability toprovide adequate service to our customers. Our pricing model for our softwareproducts is a combination of (1) initial licensing fees, (2) transactional occurrencefees, (3) support and maintenance fees, and (4) engineering service fees. Also,the market may demand alternative pricing models in the future. A variety ofother potential actions by our competitors, including increased promotion andaccelerated introduction of new or enhanced products, could also harm ourcompetitive position.

 

**Fluctuationsin our quarterly results could cause the market price of our shares to decline.**

 

Our quarterlyoperating results can vary significantly depending on a number of factors.These factors include:

 

•                                          ourability to close licenses of our SSP products to third parties on a timelybasis;

 

•                                          thevolume and timing of orders received during the quarter;

 

•                                          themix of and changes in customers to whom our products are sold;

 

•                                          themix of product and service revenue received during the quarter;

 

•                                          themix of development license fees and commercial use royalties received;

 

•                                          thetiming and acceptance of new products and product enhancements by us or by ourcompetitors;

 

•                                          changesin product pricing;

 

•                                          buyoutsof commercial use licenses;

 

•                                          productlife cycles;

 

•                                          thelevel of our sales of third-party products;

 

•                                          variancesin costs in fixed price contracts;

 

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•                                          purchasingpatterns of customers;

 

•                                          competitiveconditions in the industry;

 

•                                          foreigncurrency exchange rate fluctuations;

 

•                                          businesscycles and economic conditions that affect the markets for our products; and

 

•                                          extraordinaryevents, such as litigation, and related charges.

 

All of thesefactors are difficult to forecast. Our future operating results may fluctuatedue to these and other factors, including our ability to continue to developinnovative and competitive products. An increasing amount of our sales ordersinvolve products and services that yield revenue over multiple quarters or uponcompletion of performance. If license agreements entered into during a quarterdo not meet our revenue recognition criteria, even if we meet or exceed ourforecast of aggregate licensing and other contracting activity, it is possiblethat our revenues would not meet expectations. Due to all of these factors, webelieve that period-to-period comparisons of our results of operations are notnecessarily meaningful and should not be viewed as an indication of our futureperformance. In the past, we have experienced actual performance that did notmeet financial market expectations. It is likely that, in some future quarters,our operating results will again be below the expectations of stock marketanalysts and investors.

 

**Internationalsales of our products, which we expect to comprise a significant portion oftotal revenues, expose us to the business and economic risks of internationaloperations.**

 

Sales fromoutside of the United States accounted for approximately 53% and 10% of ourtotal revenue in the three months ending March 31, 2004 and 2003, respectively,and are expected to increase over time. We expect to market SSP in Europe.Economic conditions in Europe generally and fluctuations in the value of theeuro against the U.S. dollar and British pound sterling could impair ourrevenues and results of operations. International operations are subject to anumber of other risks. These risks include:

 

•                                          foreigngovernment regulation;

 

•                                          reducedprotection of intellectual property rights in some countries where we dobusiness;

 

•                                          longerreceivable collection periods and greater difficulty in accounts receivablecollection;

 

•                                          unexpectedchanges in, or imposition of, regulatory requirements, tariffs, import andexport restrictions and other barriers and restrictions;

 

•                                          potentiallyadverse tax consequences;

 

•                                          theburdens of complying with a variety of foreign laws and staffing and managingforeign operations;

 

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•                                          generalgeopolitical risks, such as political and economic instability, hostilitieswith neighboring countries and changes in diplomatic and trade relationships;and

 

•                                          possiblerecessionary environments in economies outside the United States.

 

**Productdefects can be expensive to fix and may cause us to lose customers.**

 

Our softwareproducts, like all software products, may have undetected errors orcompatibility problems. This is particularly true when a product is first introducedor a new version is released. Despite our testing, our products might beshipped with errors. If this were to happen, our products could be rejected bycustomers, or there might be costly delays in correcting the problems. Ourproducts are increasingly used in systems that interact directly with thegeneral public, such as in transportation and medical systems. In systems suchas these, the failure of our product could cause substantial property damage orpersonal injury, which would expose us to product liability claims. Ourproducts are used for applications in business systems where the failure of ourproduct could be linked to substantial economic loss. Our agreements with ourcustomers typically contain provisions designed to limit our exposure topotential product liability and other claims. It is likely, however, that theseprovisions are not effective in all circumstances and in all jurisdictions. Wemay not have adequate insurance against product liability risks and renewal ofour insurance may not be available to us on commercially reasonable terms.Further, our errors and omissions insurance may not be adequate to coverclaims.

 

A productliability claim or claim for economic loss brought against us could lead tounexpected large expenses and lost sales. Also, if we ever had to recall ourproduct 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 ourcomputer equipment and the information stored in our databases against damageby fire, natural disaster, power loss, telecommunications failure, unauthorizedintrusion and other catastrophic events. The measures we have taken to reducethe risk of interruption in our operations might not be sufficient. As of thedate of this report, we have not experienced any major interruptions in ouroperations because of a catastrophic event.

 

**Ifwe lose key personnel or are unable to hire additional qualified personnel asnecessary, we may not be able to successfully manage our business or sell ourproducts.**

 

Our futureperformance depends to a significant degree upon the continued contributions ofour key management, product development, sales, marketing and operationspersonnel. We do not have agreements with any of our key personnel that requirethem to work for us for a specific term, and we do not maintain any key personlife insurance policies. We believe our future success will also depend inlarge part upon our ability to attract and retain highly skilled managerial,engineering, sales, marketing and operations personnel, many of whom are ingreat demand. Competition for qualified personnel can be intense in the SanFrancisco bay area, where our U.S. operations are headquartered.

 

**Ifwe fail to protect our intellectual property rights, competitors couldintroduce similar or superior products, and we could lose market share.**

 

We depend onour proprietary technology. Despite our efforts to protect our proprietaryrights, it may be possible for unauthorized third parties to copy our productsor to reverse engineer or obtain and use information that we considerproprietary. Our competitors could independently develop technologies that aresubstantially equivalent or superior to our technologies. Policing 

 

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unauthorized use of ourproducts is difficult, and while we are unable to determine the extent to whichsoftware piracy of our products exists, software piracy can be expected to be apersistent problem. Effective protection of intellectual property rights may beunavailable or limited in foreign countries. The status of U.S. patentprotection in the software industry is not well defined and will evolve as theUnited States Patent and Trademark Office grants additional patents. Patentshave been granted on fundamental technologies in software, and patents mayissue that relate to fundamental technologies incorporated into our products.

 

**Ourproducts may infringe the intellectual property rights of third parties, andthird parties may infringe our proprietary rights, either of which may resultin lawsuits, distraction of management and the impairment of our business.**

 

As the numberof patents, copyrights, trademarks and other intellectual property rights inour industry increases, products based on our technology may increasinglybecome the subject of infringement claims. Third parties could assertinfringement claims against us in the future. Infringement claims with orwithout merit could be time consuming, result in costly litigation, causeproduct shipment delays or require us to enter into royalty or licensingagreements. Royalty or licensing agreements, if required, might not beavailable on terms acceptable to us. We may initiate claims or litigationagainst third parties for infringement of our proprietary rights or toestablish the validity of our proprietary rights. Litigation to determine thevalidity 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 ourtechnical and management personnel from productive tasks. If there is anadverse ruling against us in any litigation, we may be required to paysubstantial damages, discontinue the use and sale of infringing products,expend significant resources to develop non-infringing technology or obtainlicenses to infringing technology. Our failure to develop or license asubstitute technology could prevent us from selling our products.

 

**Somesecurity holders have rights under their warrants to purchase significantnumbers of American Depository Shares (“ADSs”) at nominal value upon theoccurrence of specified events which, if triggered, would dilute the ownershipinterests of existing security holders.**

 

Some securityholders have rights to be issued additional ADSs by Insignia if theregistration statements covering their shares and the shares underlying theirwarrants 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 statementnumber 333-51234 for more than the 60 days in any 12 month period,and a total of 65,800 ADSs if we suspend registration statement number333-57528 for more than the 60 days in any 12 month period. We havenot suspended registration statements for more than 60 days in any12 month period in the past. However, because registration statementnumber 333-57528 was not declared effective by the Securities and ExchangeCommission by May 14, 2001, we made available to certain investors anadditional total of 65,800 ADSs. Three of four investors have purchased theirADSs and one investor has yet to purchase the shares available to it. Thepurchase price shareholders have paid or will pay per additional ADS is thenominal value, or £0.20 per ADS, which is the lowest amount these shares can bepurchased under English law. If we issue additional ADSs under theseobligations, the ownership interest of existing shareholders will be diluted.

 

**Weare at risk of securities litigation which, regardless of the outcome, couldresult in substantial costs and divert management attention and resources.**

 

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The prices forour ADSs have fluctuated widely in the past. During the three months endedMarch 31, 2004, the closing price per share of Insignia ranged from a high of$3.34 to a low of $0.91. Under the rules of The Nasdaq Stock Market, our stockprice must remain above $1.00 per share for continued quotation of our shareson the Nasdaq SmallCap Market. Stock price volatility has had a substantialeffect on the market prices of securities issued by us and other hightechnology companies, often for reasons unrelated to the operating performanceof the specific companies. In the past, following periods of volatility in the marketprice of a company’s securities, securities class action litigation has oftenbeen instituted against high technology companies. We may in the future be thetarget of similar litigation. Regardless of the outcome, securities litigationmay result in substantial costs and divert management attention and resources.

 

**Ourinvestors may have difficulty enforcing judgments against us in U.S. courtsbecause many of our assets and some of our management are located in England.**

 

Insignia isincorporated under the laws of England and Wales. Two of our directors residein England. All or a substantial portion of the assets of these persons, and asignificant portion of our assets, are located outside of the United States. Itmay not be possible for investors to serve a complaint within the United Statesupon 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 ofU.S. securities laws. There is doubt about the enforceability outside of theUnited States, in original actions or in actions for enforcement of judgmentsof 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 CompaniesAct 1985, and by our memorandum and articles of association. The rights ofholders of our ADSs are also affected by English law. These rights differ fromthe rights of security holders in typical U.S. corporations.

 

**Insigniahas undergone a class action lawsuit and an SEC investigation in the past eightyears.**

 

OnApril 3, 1996, a class-action lawsuit was filed against us alleging thatwe misrepresented our business, the strength of our sales force and ourfinancial health. The suit stemmed from our failure to achieve the consensusearnings estimates of research analysts in the first quarter following ourinitial public offering in November 1995. In August 1997, we reacheda memorandum of understanding to settle the suits. Although we never agreed withthe allegations, we paid $8.0 million to the plaintiffs, of which ourinsurance company paid $7.5 million. In February 1997, we restatedour financial results for the quarters ended March 31 and June 30,1996. We revised our revenue and net income numbers downward for these twoquarters due to inflated revenues resulting from misstatement of inventorylevels of one of our resellers by two of our sales and marketing personnel. Weagreed with the SEC to cease and desist from engaging in similar accounting practices.The two Insignia sales and marketing people involved in the revenuemisstatement are no longer with Insignia and were forced to pay significantfines. The Company did not have to pay any fines.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

Forthe three months ended March 31, 2004 approximately 100% of our total revenuesand 66% of our operating expenses were denominated in U.S. dollars.  Most of our remaining expenses are Britishpound sterling denominated and consequently we are exposed to fluctuations inBritish pound sterling exchange rates. There can be no assurance that such fluctuations will not have amaterial effect on our results of operations in the future.  We did not enter into any currency optionhedge contracts in 2003 or the first quarter of 2004.

 

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Wehave, at times, an investment portfolio of fixed income securities that areclassified as “available-for-sale-securities.” These securities, like all fixed income instruments, are subject tointerest rate risk and will fall in value if market interest ratesincrease.  We attempt to limit thisexposure by investing primarily in short-term securities.

 

**Item 4.**           Controls and Procedures

 

We have evaluated thedesign and operation of our disclosure controls and procedures to determinewhether they are effective in ensuring that the disclosure of requiredinformation is timely made in accordance with the Exchange Act and the rulesand regulations of the Securities and Exchange Commission.  This evaluation was made under thesupervision and with the participation of management, including our principalexecutive officer and principal financial officer within the 90-day period priorto the filing of this Quarterly Report on Form 10-Q. The principal executiveofficer and principal financial officer have concluded, based on their review,that our disclosure controls and procedures, as defined at Exchange Act Rules13a-14(c) and 15d-14(c), are effective to ensure that information required tobe disclosed by us in reports that we file under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.  No significant changes were made to our internal controls orother factors that could significantly affect these controls subsequent to thedate of their evaluation.

 

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**PART II - OTHER INFORMATION**

 

### **Item1.  Legal Proceedings**

 

None

 

### **Item 2. Changes in 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

 

### **Item5.  Other Information**

 

None

 

**Item 6. Exhibits and Reports on Form 8-K**

 

(a) Exhibits

 

Thefollowing exhibits are filed as part of this Report:

 
| **Exhibit  Number** |   | **Exhibit  Title**                                                                                                                                |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                              |
| 10.03(1)            |   | Amended and Restated 1995 Incentive Stock Option Plan for U.S.  Employees                                                                         |
|                |   |                                                                                                                                              |
| 10.42(1)            |   | Amended and Restated 1995 Employee Share  Purchase Plan                                                                                           |
|                |   |                                                                                                                                              |
| 10.86               |   | Assignment of Intellectual Property  Agreement between Insignia Solutions plc, Insignia Solutions Inc. and  esmertec A.G. dated February 13, 2004 |
|                |   |                                                                                                                                              |
| 31.1                |   | Section 302  certification of Chief Executive Officer                                                                                             |
|                |   |                                                                                                                                              |
| 31.2                |   | Section 302  certification of Chief Financial Officer                                                                                             |
|                |   |                                                                                                                                              |
| 32.1                |   | Section 906  certification of Chief Executive Officer                                                                                             |
|                |   |                                                                                                                                              |
| 32.2                |   | Section 906  certification of Chief Financial Officer                                                                                             |

 

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(1)          Supercedespreviously filed exhibits.

 

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(b) Reports on Form 8-K

 

We filed two Current Reports onForm 8-K during the first quarter of 2004: one Form 8-K was filed on January 9,2004, which reported matters under Items 7 (Financial Statements, Pro FormaFinancial Statements and Exhibits) and 12 (Results of Operations and FinancialCondition), and one Form 8-K was filed on February 5, 2004, which also reportedmatters under Items 7 and 12.

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                | INSIGNIA  SOLUTIONS PLC |   |
|---------------------|-------------------------|--------|
|                | (Registrant)            |   |
|                |                    |
| Date: May  17, 2004 |                    |
|                |                    |
|                |                    |
|                | /s/ ROBERT E. COLLINS   |   |
|                | ROBERT E. COLLINS       |   |
|                | Chief Financial Officer |
|                     |                         |        |  |  |

 

 
| **Signature**         |   | **Capacity**             |   | **Date**     |
|-----------------------|--------|--------------------------|--------|--------------|
|                  |   |                     |   |         |
| /s/ Mark E. McMillan  |   | Chief  Executive Officer |   | May 17, 2004 |
| Mark E. McMillan      |   |                     |   |         |
|                  |   |                     |   |         |
| /s/ Robert E. Collins |   | Chief  Financial Officer |   | May 17, 2004 |
| Robert E. Collins     |   |                     |   |         |

 

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