** **

**SECURITIES AND EXCHANGECOMMISSION**

**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 quarterly period ended  September 30, 2003**                                                                                                              |
|                                                                                                                                                                |
| **or,**                                                                                                                                                             |
|                                                                                                                                                                |
| **o**                                                                                                                                                               |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                |
| **For the transition period  from           to          ** |
|                                                                                                                                                                |
| **Commission file number 0-27012**                                                                                                                                  |

 

**InsigniaSolutions plc**

(Exact name of Registrant as specified in its charter)

** **

| **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**   |   | **The Mercury Centre, 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 markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý   No  o

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act):  Yes  o  No  ý

 

As of November 3, 2003there were 24,092,601 Ordinary shares of £0.20 each nominal value, outstanding.

 

 

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**INSIGNIA SOLUTIONS PLC**

 
| **PART 1 - FINANCIAL  INFORMATION** |
|-------------------------------------|
|                                |
| **Item 1.**                         | **Financial  Statements:** |
|                                |   |
|                                | Condensed Consolidated Balance Sheets at  September 30, 2003 and December 31, 2002 (unaudited) |
|                                |   |
|                                | Condensed  Consolidated Statements of Operations for the three months and nine months  ended September 30, 2003 and 2002 (unaudited) |
|                                |   |
|                                | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2003 and 2002 (unaudited) |
|                                |   |
|                                | Notes to  Unaudited Condensed Consolidated Financial Statements |
|                                |   |
| **Item 2.**                         | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |
|                                |   |
| **Item 3.**                         | **Quantitative  and Qualitative Disclosures About Market Risk** |
|                                |   |
| **Item 4.**                         | **Controls and  Procedures** |
|                                |   |
| **PART II - OTHER INFORMATION**     |
|                                |   |
| **Item 1.**                         | **Legal Proceedings** |
|                                |   |
| **Item  2.**                        | **Changes  in Securities and Use of Proceeds** |
|                                |   |
| **Item 3.**                         | **Defaults Upon  Senior Securities** |
|                                |   |
| **Item  4.**                        | **Submission  of Matters to a Vote of Security Holders** |
|                                |   |
| **Item 5.**                         | **Other Information** |
|                                |   |
| **Item 6.**                         | **Exhibits and  Reports on Form 8-K** |
|                                |   |
| **Signatures**                      |   |

 

2

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**PART I - FINANCIAL INFORMATION**

**Item1****.  FinancialStatements**

**INSIGNIA SOLUTIONS PLC**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(amounts in thousands, unaudited)**

** **
|                                                                              |   | **September  30,  2003** |   | **December  31,  2002** |   |
|-----------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| **ASSETS**                                                                        |   |                     |   |                    |   |
| Current  assets:                                                                  |   |                     |   |                    |   |
| Cash  and cash equivalents                                                        |   | $                        | 1,471  |                    | $      | 726 |   |
| Restricted  cash                                                                  |   | 20                       |   | 250                     |   |
| Accounts  receivable, net of allowances of $24 and $50, respectively              |   | 35                       |   | 931                     |   |
| Other  receivable                                                                 |   | 1,900                    |   | —                  |   |
| Tax  receivable                                                                   |   | 274                      |   | 702                     |   |
| Prepaid  royalties                                                                |   | 2,211                    |   | 1,000                   |   |
| Prepaid  expenses                                                                 |   | 319                      |   | 695                     |   |
| Other  current assets                                                             |   | 393                      |   | 438                     |   |
| Total  current assets                                                             |   | 6,623                    |   | 4,742                   |   |
| Property  and equipment, net                                                      |   | 157                      |   | 230                     |   |
| Prepaid  royalties                                                                |   | —                   |   | 1,381                   |   |
| Other  noncurrent assets                                                          |   | —                   |   | 100                     |   |
|                                                                              |   | $                        | 6,780  |                    | $      | 6,453 |   |
| **LIABILITIES,  MANDATORILY REDEEMABLE  WARRANTS AND SHAREHOLDERS’  EQUITY** |   |                     |   |                    |   |
| Current  liabilities:                                                             |   |                     |   |                    |   |
| Accounts  payable                                                                 |   | $                        | 641    |                    | $      | 665 |   |
| Accrued  liabilities                                                              |   | 833                      |   | 950                     |   |
| Accrued  severance                                                                |   | 97                       |   | —                  |   |
| Note  payable                                                                     |   | 1,000                    |   | —                  |   |
| Deferred  revenue                                                                 |   | 912                      |   | 534                     |   |
| Income  taxes payable                                                             |   | 187                      |   | 191                     |   |
| Total  current liabilities                                                        |   | 3,670                    |   | 2,340                   |   |
|                                                                              |   |                     |   |                    |   |
| Commitments  and contingencies (Note 6)                                           |   |                     |   |                    |   |
|                                                                              |   |                     |   |                    |   |
| Mandatorily  redeemable warrants                                                  |   | 38                       |   | 1,440                   |   |
|                                                                              |   |                     |   |                    |   |
| Shareholders’  equity:                                                       |   |                     |   |                    |   |
| Ordinary  shares                                                                  |   | 7,726                    |   | 6,444                   |   |
| Additional  paid-in capital                                                       |   | 61,600                   |   | 59,901                  |   |
| Accumulated  deficit                                                              |   | (65,793                  | )      | (63,211                 | )      |
| Other  accumulated comprehensive loss                                             |   | (461                     | )      | (461                    | )      |
| Total  shareholders’ equity                                                  |   | 3,072                    |   | 2,673                   |   |
|                                                                              |   | $                        | 6,780  |                    | $      | 6,453 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

3

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# **INSIGNIA SOLUTIONS PLC**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands, except pershare amounts, unaudited)**

 
|                                            |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|-------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                            |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Net  revenues:                                  |   |                                   |   |                                  |   |   |   |   |   |
| License                                         |   | $                                      | 201    |                                  | $      | 736 |   | $ | 393 |   | $ | 5,271 |   |
| Service                                         |   | —                                 |   | 277                                   |   | 187 |   | 1,178 |   |
| Total  net revenues                             |   | 201                                    |   | 1,013                                 |   | 580 |   | 6,449 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Cost  of net revenues:                          |   |                                   |   |                                  |   |   |   |   |   |
| License                                         |   | 70                                     |   | 124                                   |   | 221 |   | 1,852 |   |
| Service                                         |   | —                                 |   | 100                                   |   | 52 |   | 549 |   |
| Total  cost of net revenues                     |   | 70                                     |   | 224                                   |   | 273 |   | 2,401 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Gross  profit                                   |   | 131                                    |   | 789                                   |   | 307 |   | 4,048 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Operating  expenses:                            |   |                                   |   |                                  |   |   |   |   |   |
| Sales  and marketing                            |   | 423                                    |   | 1,262                                 |   | 1,329 |   | 4,475 |   |
| Research  and development                       |   | 670                                    |   | 1,677                                 |   | 2,695 |   | 4,258 |   |
| General  and administrative                     |   | 665                                    |   | 666                                   |   | 2,195 |   | 2,571 |   |
| Restructuring                                   |   | (19                                    | )      | 213                                   |   | 480 |   | 213 |   |
| Total  operating expenses                       |   | 1,739                                  |   | 3,818                                 |   | 6,699 |   | 11,517 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Operating  loss                                 |   | (1,608                                 | )      | (3,029                                | )      | (6,392 | ) | (7,469 | ) |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Interest  income (expense), net                 |   | (14                                    | )      | 17                                    |   | (27 | ) | 65 |   |
| Other  income (expense), net                    |   | (124                                   | )      | 2                                     |   | 3,418 |   | 103 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Loss  before income taxes                       |   | (1,746                                 | )      | (3,010                                | )      | (3,001 | ) | (7,301 | ) |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Benefit  from income taxes                      |   | (90                                    | )      | (132                                  | )      | (419 | ) | (1,964 | ) |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Net  loss                                       |   | $                                      | (1,656 | )                                     | $      | (2,878 | ) | $ | (2,582 | ) | $ | (5,337 | ) |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Net  loss per share:                            |   |                                   |   |                                  |   |   |   |   |   |
| Basic                                           |   | $                                      | (0.08  | )                                     | $      | (0.14 | ) | $ | (0.13 | ) | $ | (0.27 | ) |
| Diluted                                         |   | $                                      | (0.08  | )                                     | $      | (0.14 | ) | $ | (0.13 | ) | $ | (0.27 | ) |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Weighted  average shares and share equivalents: |   |                                   |   |                                  |   |   |   |   |   |
| Basic                                           |   | 20,634                                 |   | 20,062                                |   | 20,272 |   | 19,887 |   |
| Diluted                                         |   | 20,634                                 |   | 20,062                                |   | 20,272 |   | 19,887 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

4

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**INSIGNIA SOLUTIONS PLC**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands, unaudited)**

** **
|                                                                         |   | **Nine  months ended  September 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                         |   | **2003**                              |       | **2002** |   |
| Cash  flows from operating activities:                                       |   |                                  |       |   |   |
| Net  loss                                                                    |   | $                                     | (2,582     | ) | $ | (5,337 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                  | ** ** |   | ** ** |
| Depreciation                                                                 |   | 113                                   |       | 194 |   |
| Allowance  for doubtful accounts                                             |   | (26                                   | )          | (138 | ) |
| Gain  on sale of product line                                                |   | (3,500                                | )          | — |   |
| Gain  on sale of fixed assets                                                |   | —                                |       | 7 |   |
| Non-cash  charge for warrant modification                                    |   | 88                                    |       |   |   |
| Net changes  in assets and liabilities:                                      |   |                                  |       |   |   |
| Accounts  receivable                                                         |   | 922                                   |       | 5,172 |   |
| Tax  receivable                                                              |   | 428                                   |       | (546 | ) |
| Prepaid  royalties                                                           |   | 170                                   |       | (1,315 | ) |
| Prepaid  expenses                                                            |   | 254                                   |       | 283 |   |
| Other  current assets                                                        |   | 45                                    |       | (20 | ) |
| Other  noncurrent assets                                                     |   | 100                                   |       | — |   |
| Accounts  payable                                                            |   | (13                                   | )          | (483 | ) |
| Accrued  liabilities                                                         |   | (162                                  | )          | (141 | ) |
| Accrued  severance                                                           |   | 97                                    |       | — |   |
| Deferred  revenue                                                            |   | 537                                   |       | (3,501 | ) |
| Income  taxes payable                                                        |   | (4                                    | )          | (2 | ) |
| Net  cash used in operating activities                                       |   | (3,533                                | )          | (5,827 | ) |
| Cash  flows from investing activities:                                       |   |                                  |       |   |   |
| Purchases  of property and equipment                                         |   | (62                                   | )          | (108 | ) |
| Proceeds  from sale of product line, net                                     |   | 1,513                                 |       | — |   |
| Proceeds  from release of restricted cash                                    |   | 230                                   |       | — |   |
| Net  cash provided (used) in investing activities                            |   | 1,681                                 |       | (108 | ) |
| Cash  flows from financing activities:                                       |   |                                  |       |   |   |
| Proceeds  from issuance of shares, net                                       |   | 800                                   |       | (1 | ) |
| Proceeds  from exercise of warrants                                          |   | 796                                   |       | 481 |   |
| Proceeds  from note payable                                                  |   | 1,000                                 |       | — |   |
| Proceeds  from exercise of stock options                                     |   | 1                                     |       | 174 |   |
| Net  cash provided by financing activities                                   |   | 2,597                                 |       | 654 |   |
| Net  increase (decrease) in cash and cash equivalents                        |   | 745                                   |       | (5,281 | ) |
| Cash  and cash equivalents at beginning of the period                        |   | 726                                   |       | 8,643 |   |
| Cash  and cash equivalents at end of the period                              |   | $                                     | 1,471      |   | $ | 3,362 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

5

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**INSIGNIA SOLUTIONS PLC**

 

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED**

**FINANCIAL STATEMENTS**

 

**Note 1.  Basis ofpresentation**

 

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 financial statements and notes shouldbe read in conjunction with Insignia’s audited financial statements for theyear ended December 31, 2002 and footnotes thereto, included in Insignia’sAnnual Report on Form 10-K.

 

During the past 24 months, we have incurred an aggregate loss fromoperations and negative operating cash flows of $19,002,000 and $13,655,000,respectively.  We have undertakenmeasures to reduce operating expenses and redesign our commercial efforts toadapt to new developments. As part of these new developments, our current plansmay require obtaining additional financing within the next 12 months.  If such financing is not obtained, or if weexperience a significant shortfall in expected revenue, we will need to furtherreduce the level of expenses in order to meet our working capital requirementsduring the next 12 months.

 

Assuming the receipt of the $6.9 million due from esmertec A.G.(“esmertec”) under the Asset Purchase Agreement and the Master Distribution andLicense Agreement, each dated March 4, 2003, and the definitive agreementssigned on April 23, 2003 (see Note 5), and assuming that management achievesits plans to generate SSP revenue in the last quarter of the year whilecontrolling operating costs, we believe that Insignia will have sufficientfunds to meet its operating and capital requirements through the end of fiscalyear 2003.  However, there can be noassurance that we will not require additional funding or that we will be ableto obtain additional funding if needed, on acceptable terms or at all.  The failure to raise additional funds, ifneeded, on a timely basis and on sufficient favorable terms could have amaterial adverse effect on our business, operating results and financialcondition.  Insignia’s liquidity mayalso be adversely affected in the future by factors such as higher interestrates, inability to borrow without collateral, availability of capitalfinancing and continued operating losses. In addition, as of March 31, 2003, we were not in compliance with theminimum stock price and total shareholders’ equity requirements to maintain thelisting of our ADSs on the Nasdaq SmallCap Market.  As of June 30, 2003, we regained compliance with the minimumshareholders’ equity requirement, but remained out of compliance with theminimum stock price. These circumstances raise substantial doubt aboutInsignia’s ability to continue as a going concern.  The accompanying financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

6

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**Note 2.  Net income(loss) per share**

 

Net income (loss) per share is presented on a basic and diluted basis,and is computed by dividing net income (loss) by the weighted average number ofordinary shares and ordinary 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 netincome (loss) per share, ordinary equivalent shares are excluded from thecomputation.  Under the diluted methodof calculating net income (loss) per share, ordinary equivalent shares areexcluded from the computation only if their effect is anti-dilutive.

 

Calculation of basic anddiluted net income (loss) per share (in thousands, except per share data):

 
|                                                    |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|---------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                    |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Numerator  – basic and diluted:                    |   |                                   |   |                                  |   |   |   |   |   |
| Net  loss                                               |   | $                                      | (1,656 | )                                     | $      | (2,878 | ) | $ | (2,582 | ) | $ | (5,337 | ) |
|                                                    |   |                                   |   |                                  |   |   |   |   |   |
| Denominator  calculation of basic loss per share:       |   |                                   |   |                                  |   |   |   |   |   |
| Weighted  average number of ordinary shares outstanding |   | 20,634                                 |   | 20,062                                |   | 20,272 |   | 19,887 |   |
|                                                    |   |                                   |   |                                  |   |   |   |   |   |
| Basic  loss per share                                   |   | $                                      | (0.08  | )                                     | $      | (0.14 | ) | $ | (0.13 | ) | $ | (0.27 | ) |
|                                                    |   |                                   |   |                                  |   |   |   |   |   |
| Denominator  calculation of diluted loss per share:     |   |                                   |   |                                  |   |   |   |   |   |
| Weighted  average number of ordinary shares outstanding |   | 20,634                                 |   | 20,062                                |   | 20,272 |   | 19,887 |   |
| Dilutive  common equivalent shares                      |   | —                                 |   | —                                |   | — |   | — |   |
| Weighted  average number of ordinary shares outstanding |   | 20,634                                 |   | 20,062                                |   | 20,272 |   | 19,887 |   |
|                                                    |   |                                   |   |                                  |   |   |   |   |   |
| Diluted  loss per share                                 |   | $                                      | (0.08  | )                                     | $      | (0.14 | ) | $ | (0.13 | ) | $ | (0.27 | ) |

 

The followingnumber of options and warrants have not been included in the calculation ofdiluted net income (loss) per share because their inclusion would have beenanti-dilutive:

 
|     |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|----------|--------|----------------------------------------|--------|---------------------------------------|--------|
|     |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|     |   |                                   |   |                                  |   |   |   |   |   |
| Options  |   | 4,417,937                              |   | 3,796,758                             |   | 4,417,937 |   | 3,796,758 |   |
| Warrants |   | 2,182,157                              |   | 2,191,334                             |   | 2,182,157 |   | 2,191,334 |   |

 

7

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**Note 3.  Stock based compensation**

 

Insignia accounts for stock based employee compensation using theintrinsic value method under Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”), and relatedinterpretations and complies with the disclosure provisions of  Statement of Financial Accounting StandardsNo. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure –an Amendment of FASB Statement No.123”. The following table illustrates the effect on net income (loss) and netincome (loss) per share if we had applied the fair value recognition provisionsof Statement of Financial Accounting Standards No.123, “Accounting for StockBased Compensation” to stock based compensation.

 
|                                                                            |   | **Three months ended  September 30,** |   | **Nine months ended  September 30,** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                            |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                                            |   |                                  |   |                                 |   |   |   |   |   |
| Net  loss-as reported                                                           |   | $                                     | (1,656 | )                                    | $      | (2,878 | ) | $ | (2,582 | ) | $ | (5,337 | ) |
| Less  stock based compensation expense determined under fair value based method |   |                                  | (346   | )                                    |   | (617 | ) |   | (871 | ) |   | (1,851 | ) |
| Net  loss-pro forma                                                             |   | $                                     | (2,002 | )                                    | $      | (3,495 | ) | $ | (3,453 | ) | $ | (7,188 | ) |
| Basic  and diluted net loss per share - as reported                             |   | $                                     | (0.08  | )                                    | $      | (0.14 | ) | $ | (0.13 | ) | $ | (0.27 | ) |
| Basic  and diluted net loss per share - pro forma                               |   | $                                     | (0.10  | )                                    | $      | (0.17 | ) | $ | (0.17 | ) | $ | (0.36 | ) |

 

In accordance withthe disclosure provisions of SFAS 123, the fair value of employee stock optionsgranted during the three and nine months ended September 30, 2003 and 2002 wasestimated at the date of grant using the Black-Scholes model and the followingweighted average assumptions:

 
|                               |   | **Three months ended  September 30,** |   | **Nine months ended  September 30,** |   |
|------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                               |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| **Stock Options:**                 |   |                                  |   |                                 |   |   |   |   |   |
| Volatility  range                  |   | 252                                   | %      | 239% - 243                           | %      | 59% - 252 | % | 55% - 243 | % |
| Risk-free  interest rate range     |   | 2.53                                  | %      | 2.67% - 3.28                         | %      | 1.00% - 3.06 | % | 1.81% - 4.4 | % |
| Dividend  yield                    |   | 0                                     | %      | 0                                    | %      | 0 | % | 0 | % |
| Expected  life (years)             |   | 4                                     |   | 4                                    |   | 4 |   | 4 |   |
|                               |   |                                  |   |                                 |   |   |   |   |   |
| **Employee  Stock Purchase Plan:** |   |                                  |   |                                 |   |   |   |   |   |
| Volatility  range                  |   | N/A                                   |   | 71                                   | %      | 59 | % | 71 | % |
| Risk-free  interest rate range     |   | N/A                                   |   | 1.71                                 | %      | 1.17 | % | 1.71 | % |
| Dividend  yield                    |   | N/A                                   |   | 0                                    | %      | 0 | % | 0 | % |
| Expected  life (years)             |   | N/A                                   |   | .5                                   |   | .5 |   | .5 |   |

 

8

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**Note 4.  Newaccounting pronouncements**

 

In January 2003, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”),“Consolidation of Variable Interest Entities, an Interpretation of ARB No.51”.  FIN 46 requires certain variableinterest entities to be consolidated by the primary beneficiary of the entityif the equity investors in the entity do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentiity to finance its activities without additional subordinated financialsupport from other parties.  FIN 46 iseffective immediately for all new variable interest entities created oracquired after January 31, 2003.  Forvariable interest entities created or acquired prior to February 1, 2003, theprovisions of FIN 46 must be applied for the first interim or annual periodbeginning after June 15, 2003.  Weadopted FIN 46 effective February 1, 2003. The adoption of FIN 46 did not have a material impact on our financialposition, results of operation or cash flows.

 

In May 2003, the FASBissued Statement of Financial Accounting Standards No. 150 (“SFAS 150”),“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”.  SFAS 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Itrequires that an issuer classify a financial instrument that is within itsscope as a liability (or an asset in certain circumstances). Many of theseinstruments were previously classified as equity. Although some of theprovisions of this statement are consistent with the current definition ofliabilities in FASB Concepts Statement No. 6, “Elements of FinancialStatements”, the remainder are consistent with FASB’s intention to revise thatdefinition to encompass certain obligations that a reporting entity can or mustsettle by issuing its own shares. This statement is effective for financialinstruments entered into or modified after May 31, 2003 and otherwise iseffective at the beginning of the first interim period beginning after June 15,2003. There was no impact to the condensed consolidated financial statementsrelated to SFAS 150 for the nine months ended September 30, 2003.

 

**Note 5.  EsmertecAgreements**

 

On February 7, 2003, weentered into 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 is at prime plus two percent.  Accrued interest is due on the last day of each month.  The accrued interest as of September 30,2003 was $23,402. The principal and any outstanding accrued interest is due onor before February 3, 2004.  AtSeptember 30, 2003, the principal amount outstanding on this loan was $1million.

 

On March 4, 2003, weentered into several other agreements (the “Agreements”) with esmertecincluding a definitive agreement to sell certain assets relating to our JavaVirtual Machine (“JVM”) product line in exchange for $3.5 million payable ininstallments.  Payments under theagreement would be $800,000 on April 18, 2003, $800,000 on July 23, 2003,$800,000 on October 15, 2003, $800,000 on January 15, 2004 and $300,000 onApril 15, 2004.  As of

 

9

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September 30, 2003,esmertec has paid $1,600,000 under this agreement.  The assets primarily included the fixed assets, customeragreements and employees related to the JVM product line. The transactionclosed on April 23, 2003.  Under theterms of the Agreements, esmertec became the exclusive master distributor ofthe JVM technology in exchange for $3.4 million in minimum guaranteed royaltiesthrough June 30, 2004 at which time, the JVM technology rights will transfer toesmertec.  Minimum payments under thelicense 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 September 30, 2003,the minimum payments under this agreement have been paid in a timely manner.

 

In addition, we can earnup to an additional $4.0 million over the next three years based on apercentage of esmertec’s future sales of the JVM product.  Additionally, the parties have entered intoa cooperative agreement to promote Insignia’s Secure System Provisioning(“SSP”) software product to esmertec’s mobile platform customers.  The Agreements provide for esmertec tomanage the existing Insignia JVM customer relationships and license theInsignia and esmertec technologies to sell them to the then combined customerbase and business partners.  Under theAgreements, esmertec will assume the entire JVM product line through a finalasset purchase in June 2004.

 

As part of the sale ofour JVM product 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.

 

10

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The Jeode platform hadbeen our principal product line since the third quarter of 1999.  With the completion of the sale of our JVMproduct line to esmertec in April 2003, Insignia’s sole product line willconsist of its SSP products for the mobile phone and wireless operatorindustry.  The SSP product is currentlyin lab and market trials and is expected to be available for shipment tocustomers in the last quarter of 2003.

 

**Note 6.  Commitmentsand Contingencies**

 

In June 2001, Insigniaand Sun Microsystems, Inc. (“Sun”) entered into an addendum (the “Addendum”) tothe Distribution 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 are forfeited.  The prepaid royalty balance as of September30, 2003 was $2.2 million.

 

**Guarantee Agreements**

 

In November 2002, theFASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Guarantees of Indebtedness ofOthers.” FIN 45 requires that upon issuance of certain guarantees, a guarantormust recognize a liability for the fair value of an obligation assumed underthe guarantee.  FIN 45 also requiressignificant new disclosures, in both interim and annual financial statements bya guarantor about obligations associated with guarantees issued.

 

Insignia, aspermitted under Delaware law and in accordance with our Bylaws, indemnifies ourofficers and directors for certain events or occurrences, subject to certainlimits, 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.

 

In our salesagreements, we typically agree to indemnify our customers for any expenses orliability resulting from claimed infringements of patents, trademarks orcopyrights of third parties for the products, as delivered by Insignia.  The terms of these indemnificationagreements are generally perpetual any time after execution of theagreement.  The maximum amount ofpotential future indemnification is unlimited, however, we normally retain theright to limit the remedies the customer may receive.  We have not paid any amounts to settle claims or defend lawsuits.

 

11

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Insignia, on alimited 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.

 

Insignia warrantsthe binary version of its software products against defects in material andworkmanship under normal use and service for a period of ninety days.  All warranties are disclaimed for sourcecode licenses.  There is no warrantyaccrual recorded because potential future payments either are not probable orwe have yet to incur the expense.

 

**Note 7.  Segmentinformation**

 

Insignia operates in a single industry segment providing softwaretechnologies that enable mobile operators and phone manufacturers to update thefirmware of mobile devices using standard over-the-air data networks. In thethird quarter of 2003, the Jeode product line accounted for 100% of therevenue. In the third quarter of 2002, Hewlett Packard (‘HP”), PhoenixTechnologies, Ltd. (“Phoenix”) and Hughes Network Systems (“Hughes”) accountedfor 32%, 17% and 15% of total revenues, respectively. For the nine months endedSeptember 30, 2003, the Jeode product line accounted for 100% of totalrevenues.  For the nine months endedSeptember 30, 2002, Phoenix accounted for 65% of total revenues.  No other customer accounted for 10% or moreof Insignia’s total revenues during the third quarter of 2003 and 2002.  Sales to customers outside the UnitedStates, derived mainly from customers in Europe and Asia, representedapproximately 100% and 42% of total revenues in the three and nine months endedSeptember 30, 2003, respectively, and 13% and 6% of total revenues in the threeand nine months ended September 30, 2002, respectively.

 

**Note 8.  Equitytransactions and warrants**

 

During the quarter ended June 30, 2003, $850,000, which represented therelative fair value of the warrants issuable in connection with our 1999private placement, was reclassified from redeemable warrants to additionalpaid-in capital.  The reclassificationwas a result of the expiration of our obligation to issue these warrants.   In August 2003, the warrants were modifiedto reduce their exercise price to $0.40 per share.  The modification was accounted for in accordance with SFAS123 andresulted in a charge of approximately $88,000 to earnings and an increase inthe value of the redeemable warrants. In September 2003, warrants to purchase 334,177 ordinary shares were exercisedfor net proceeds of approximately $128,000. In connection with the exercise of the warrants, $640,000 wasreclassified from redeemable warrants to additional paid-in capital.  Additional warrants to purchase 2,000,000ordinary shares were exercised in September 2003 resulting in net proceeds ofapproximately $668,000. At September 30, 2003, warrants to purchase 19,657ordinary shares are outstanding and exercisable.

 

In September 2003, new ordinary shares of 1,613,465 were purchasedunder the Fusion Capital securities subscription agreement resulting in netproceeds of approximately $800,000.

 

**Note 9.  Restructuring**

 

Forthe quarters ended March 31, 2003 and June 30, 2003 we restructured theorganization resulting in restructuring charges of $326,000 and $173,000,respectively, for employee termination benefits.  Restructuring charges paid in the first and second quarter were$117,000

 

12

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and$167,000, respectively.  In the quarterended September 30, 2003, we paid a total of $99,000 and reversed $19,000.  The remaining amount of the restructuring,$97,000, will be paid by the end of fiscal year 2003.

 

**Note 10. Subsequent events**

 

On November 14, 2003, new ordinary shares of 1,766,667 were purchased underthe Fusion Capital securities subscription agreement at a purchase price of$0.75 (which quantity and price the parties agreed to under a modification ofthe Agreement) resulting in proceeds of approximately $1,200,000, net ofissuance costs.

 

 

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**Item 2****.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The following discussionand analysis 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, 2002 (the “Form 10-K”).

 

**Future operating results**

 

This Form 10-Q containsforward-looking statements.  Theseforward-looking statements concern matters which include, but are not limitedto, the revenue model and market for the Secure System Provisioning (“SSP”) productline, the features, benefits and advantages of the SSP platforms, internationaloperations and sales, gross margins, spending levels, the availability oflicenses to third-party proprietary rights, business and sales strategies,matters relating to proprietary rights, competition, exchange rate fluctuationsand Insignia’s liquidity and capital needs. These and other statements regarding matters that are not historical areforward-looking statements.  Thesematters involve risks and uncertainties that could cause actual results todiffer materially from those in the forward-looking statements.  In addition to the factors discussed above,among other factors that could cause actual results to differ materially are thefollowing: the demand for the SSP platform; the performance and functionalityof SSP technology; Insignia’s ability to deliver products on time, and marketacceptance of new products or upgrades of existing products; the timing of, ordelay in, large customer orders; continued availability of technology andintellectual property license rights; product life cycles; quality control ofproducts sold; competitive conditions in the industry; economic conditionsgenerally or in various geographic areas; and the risks listed from time totime in the reports that Insignia files with the U.S. Securities and ExchangeCommission.  Factors that could cause orcontribute to such differences in results and outcomes include withoutlimitation those discussed below as well as those discussed elsewhere in thisReport.  Readers are cautioned not toplace undue reliance on these forward-looking statements, which reflectmanagement’s analysis only as of the date hereof.  Insignia assumes no obligation to update these forward-lookingstatements to reflect actual results or changes in factors or assumptionsaffecting such forward-looking statements.

 

Insignia continues toface significant risks associated with the successful execution of its businessstrategy.  These significant risksinclude, but are not limited to continued technology and product development,introduction and market acceptance of new products, changes in the marketplace,liquidity, competition from existing and new competitors that may enter themarketplace, impairment of prepaid royalties and retention of key personnel.

 

In addition, Insigniaalso faces significant risks associated with the development and futuredeployment of its SSP products and the successful execution of the relatedbusiness strategy. During 2001, Insignia began development of a range of SSPproducts for the mobile handset and wireless carrier industry.  These SSP products build on Insignia’sposition as a Virtual Machine (“VM”) supplier for manufacturers of mobiledevices and are designed to allow wireless carriers

 

14

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to execute over the airrepair services and build valuable incremental services.  With the sale of the Jeode product line toesmertec, Insignia’s sole product line consists of the SSP products. The SSPproduct is currently in lab and market trials and is expected to be availablefor shipment to customers in the last quarter of 2003.  Insignia has limited history with salesinitiatives for new products. Additionally, the sales cycle for the SSPproducts is expected to take longer than the six to nine months sales cycletypically experienced with the Jeode product.

 

Insignia hasexperienced operating losses in each quarter since the second quarter of1996.  To achieve profitability,Insignia will have to increase its revenue. With the sale of the Jeode product line, Insignia’s ability to increaserevenues depends upon the success of its SSP product line.  SSP is not expected to be available untilthe last quarter of 2003, and it may not achieve widespread market acceptance.  If Insignia is unable to generate revenuesfrom SSP in the form of development license fees, maintenance and support fees,commercial use royalties and nonrecurring engineering activities, Insignia’scurrent revenue levels will be insufficient to sustain its business.

 

Insignia has undertaken measures to reduce operating expenses andredesign its commercial efforts to adapt to new developments. Based uponInsignia’s current forecasts and estimates, Insignia’s current cash and cashequivalents, together with cash generated from on-going operations and otherliquid sources of cash (including the cash from the sale of the Java VirtualMachine (“JVM”) assets) available to Insignia, may not be sufficient to meetits anticipated cash needs for working capital and capital expenditures throughcalendar 2004.  In particular, Insigniawill need to further reduce the level of operating expenses in the event thatrevenue is lower than expected.  Inaddition, if Insignia is unable to maintain the reduction of operating expensesor increase revenue, if unplanned cash payments or expenses arise, or ifInsignia is unable to obtain access to additional capital, it may not havesufficient resources to fund continuing operations through calendar year 2004.  In addition, based on its current forecastsand estimates, Insignia anticipates that, in any event, it will requireadditional financing in calendar year 2004.

 

To the extent that Insignia requires additional financing, there can beno assurances that Insignia will be able to obtain such funding when it isneeded on acceptable terms, or at all. The failure to raise such additional funds on a timely basis and onsufficiently favorable terms would have a material adverse effect on Insignia’sbusiness, operating results and financial condition. Insignia’s liquidity alsomay be adversely affected in the future by factors such as higher interestrates, inability to borrow without collateral, limited availability of capitalfinancing and continued operating losses.

 

The size of Insignia’saccumulated deficit, its losses and its ongoing need for capital in order tocontinue its operations raises substantial doubt as to Insignia’s ability tocontinue operations during 2004. Failure to reduce expenses and/or obtain additional financing willresult in a material adverse effect on its ability to meet its businessobjectives and continue as a going concern. The report of the Company’s independent accountants included inInsignia’s Annual Report on Form 10-K filed on April 15, 2003 includes anexplanatory paragraph as to the uncertainty that the Company will continue as agoing concern.

 

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The following table sets forth the unaudited condensed consolidatedresults of operations as a percentage of total revenues for the three and ninemonth periods ended September 30, 2003 and 2002.

 
|                            |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|---------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                            |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Net  revenues:                  |   |                                   |   |                                  |   |   |   |   |   |
| License                         |   | 100.0                                  | %      | 72.7                                  | %      | 67.8 | % | 81.7 | % |
| Service                         |   | 0.0                                    | %      | 27.3                                  | %      | 32.2 | % | 18.3 | % |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Total  net revenues             |   | 100.0                                  | %      | 100.0                                 | %      | 100.0 | % | 100.0 | % |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Cost  of net revenues:          |   |                                   |   |                                  |   |   |   |   |   |
| License                         |   | 34.8                                   | %      | 12.2                                  | %      | 38.1 | % | 28.7 | % |
| Service                         |   | —                                 |   | 9.9                                   | %      | 9.0 | % | 8.5 | % |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Total  cost of net revenues     |   | 34.8                                   | %      | 22.1                                  | %      | 47.1 | % | 37.2 | % |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Gross  profit                   |   | 65.2                                   | %      | 77.9                                  | %      | 52.9 | % | 62.8 | % |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Operating  expenses:            |   |                                   |   |                                  |   |   |   |   |   |
| Sales  and marketing            |   | 210.5                                  | %      | 124.6                                 | %      | 229.1 | % | 69.4 | % |
| Research  and development       |   | 333.3                                  | %      | 165.6                                 | %      | 464.7 | % | 66.0 | % |
| General  and administrative     |   | 330.9                                  | %      | 65.7                                  | %      | 378.4 | % | 39.9 | % |
| Restructuring                   |   | (9.5                                   | )%     | 21.0                                  | %      | 82.8 | % | 3.3 | % |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Total  operating expenses       |   | 865.2                                  | %      | 376.9                                 | %      | 1155.0 | % | 178.6 | % |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Operating  loss                 |   | (800.0                                 | )%     | (299.0                                | )%     | (1102.1 | )% | (115.8 | )% |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Interest  income (expense), net |   | (7.0                                   | )%     | 1.7                                   | %      | (4.6 | )% | 1.0 | % |
| Other  income (expense), net    |   | (61.7                                  | )%     | 0.2                                   | %      | 589.3 | % | 1.6 | % |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Loss  before income taxes       |   | (868.7                                 | )%     | (297.1                                | )%     | (517.4 | )% | (113.2 | )% |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Benefit  from income taxes      |   | (44.8                                  | )%     | (13.0                                 | )%     | (72.2 | )% | (30.5 | )% |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Net  loss                       |   | (823.9                                 | )%     | (284.1                                | )%     | (445.2 | )% | (82.7 | )% |

 

**Overview**

 

We commenced operationsin 1986, and currently develop, market and support software technologies thatenable mobile operators and phone manufacturers to update the firmware ofmobile devices using standard over-the-air data networks.  Before 2003, our principal product line wasthe JeodeÔ platform, based onour Embedded Virtual Machine (“EVM”TM) technology.  The Jeode platform was our implementation of Sun Microsystems,Inc.’s (“Sun”) Java®

 

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technology tailored forsmart devices.  The product becameavailable for sale in March 1999 and had been our principal product line sincethe third quarter of 1999.  The Jeodeproduct line was sold in April 2003.

 

During 2001, we begandevelopment of a range of products (“Secure System Provisioning” or “SSP”products) for the mobile phone and wireless operator industry.  These SSP products build on our position asa Virtual Machine (“VM”) supplier for manufacturers of mobile devices and allowwireless operators and phone manufacturers to reduce customer care and softwarerecall costs as well as increase subscriber revenue by deploying new mobileservices based dynamically provisional capabilities.  With the sale of our JVM product line in April 2003, our soleproduct line consists of our SSP product. The SSP product is currently in lab and market trials and is expected tobe available for shipment to customers in the last quarter of 2003. We havelimited history with sales initiatives for new products.  Additionally, the sales cycle for the SSPproducts is expected to take longer than the typical six to nine months tocomplete as seen with previous Insignia products.

 

Our operations outside ofthe United States are primarily in the United Kingdom, where the majority ofour research and development operations and our European sales activities arelocated.  We distributed our Jeodeplatform through OEM’s.  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.  Theoperating expenses of our operations outside the United States are mostlyincurred in Europe and relate to our research and development and Europeansales activities.  Such expenses consistprimarily of ongoing fixed costs and consequently do not fluctuate in directproportion to revenues.  Our revenuesand expenses outside the United States can fluctuate from period to periodbased on movements in currency exchange rates. Historically, movements in currency exchange rates have not had amaterial effect on our revenues.

 

We operate with the U.S.dollar as our functional currency, with a majority of revenues and operatingexpenses denominated in U.S. dollars. Pound sterling exchange rate fluctuations against the dollar can causeU.K. expenses, which are translated into dollars for financial statementreporting purposes, to vary from period-to-period.

 

###### **Sale of Java Virtual Machine assets**

 

On February 7, 2003, weentered into a $1 million loan agreement with esmertec AG (“esmertec”).  The loan was made in two installments of$500,000 each on February 13, 2003 and February 26, 2003.  The rate of interest on each loan is atprime plus two percent.  Accruedinterest is due on the last day of each month. The accrued interest as of September 30, 2003, was $23,402.  The principal and any outstanding accruedinterest is due on or before February 3, 2004. At September 30, 2003, the principal amount outstanding on this loan was$1 million.

 

On March 5, 2003, weentered into several other agreements (the “Agreements”) with esmertecincluding a definitive agreement to sell certain assets relating to our JavaVirtual Machine (“JVM”) product line in exchange for $3.5 million payable ininstallments.  Payments under the

 

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agreement would be$800,000 on April 18, 2003, $800,000 on July 23, 2003, $800,000 on October 15,2003, $800,000 on January 15, 2004 and $300,000 on April 15, 2004.  As of September 30, 2003, esmertec has paid$1,600,000 under this agreement. The assets primarily included the fixedassets, customer agreements and employees related to the JVM product line. Thetransaction closed on April 23, 2003. Under the terms of the Agreements, esmertec became the exclusive masterdistributor of the JVM technology in exchange for $3.4 million in minimum guaranteedroyalties through June 30, 2004 at which time, the JVM technology rights willtransfer to esmertec.  Minimum paymentsunder 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 September 30, 2003,the minimum payments due under this agreement have been paid in a timelymanner.

 

In addition, we can earnup to an additional $4.0 million over the next three years based on apercentage of esmertec’s future sales of the JVM product.  Additionally, the parties have entered intoa cooperative agreement to promote Insignia’s 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 tosell them to the then combined customer base and business partners.  Under the Agreements, esmertec will assumethe entire JVM product line through a final asset purchase in June 2004.

 

As part of thesale of our JVM product line, we transferred 42 employees to esmertec, of which31 were development engineers.  Inaddition, as part of the sale, esmertec entered into an agreement with our U.K.building landlord to assume the lease on one of the two buildings leased byInsignia.

 

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**Revenues**

 
|               |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|--------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|               |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|               |   | **(in thousands)**                     |   |
| License  revenue   |   | $                                      | 201    |                                  | $      | 736 |   | $ | 393 |   | $ | 5,271 |   |
| Service  revenue   |   | —                                 |   | 277                                   |   | 187 |   | 1,178 |   |
| Total  net revenue |   | $                                      | 201    |                                  | $      | 1,013 |   | $ | 580 |   | $ | 6,449 |   |

 

The Jeode productline was our primary business for the third quarter of 2003 and 2002.  Revenue from the Jeode product line isderived from four main sources: the sale of a development license, the sale ofannual maintenance and support contracts/services, prepaid royalties andcommercial use royalties based on shipments of products that include Jeodetechnology, and customer-funded engineering activities.

 

Revenue in the thirdquarter of 2003 was earned from the revenue share program from the sale of theJVM product line. In the nine months ended September 30, 2003, total revenuesdecreased by 91% compared to total revenues for the first nine months of 2002.The decrease was primarily due to the decreased license revenues and sale ofthe Jeode product line.  The Jeodeplatform accounted for 96% of total revenue for the nine months ended September30, 2003. The Jeode platform accounted for 100% of the total revenue for thethree and nine months ended September 30, 2002.   Future revenue from Jeode will be earned as a percentage of therevenue share program from the sale of the JVM product line.  We expect to generate revenue from the SSPproduct in the last quarter of 2003.

 

License revenue accountedfor 100% of total revenues for the three months ended September 30, 2003.  License revenue and service revenueaccounted for 73% and 27%, respectively, of total revenues for the three monthsended September 30, 2002. For the nine months ended September 30, 2003, licenserevenue and service revenue accounted for 68% and 32%, respectively, of totalrevenues.    For the nine months endedSeptember 30, 2002, license revenue and service revenue accounted for 82% and18%, respectively, of total revenues.

 

Sales todistributors and OEM’s representing more than 10% of total revenue in eachperiod accounted for the following percentages of total revenue.

 
|                    |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|-------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                    |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
| Distributors:           |   |                                   |   |                                  |   |   |   |   |   |
| Phoenix  Technologies   |   | —                                 | %      | 17                                    | %      |   | * | 65 | % |
|                    |   |                                   |   |                                  |   |   |   |   |   |
| All  Distributors:      |   | —                                 | %      | 32                                    | %      | — | % | 74 | % |
|                    |   |                                   |   |                                  |   |   |   |   |   |
| OEM’s:             |   |                                   |   |                                  |   |   |   |   |   |
| Hewlett-Packard/Compaq  |   | —                                 | %      | 32                                    | %      | — | % | 7 | % |
| Hughes  Network Systems |   | —                                 | %      | 15                                    | %      | — | % | 2 | % |
|                    |   |                                   |   |                                  |   |   |   |   |   |
| All  OEM’s:        |   | —                                 | %      | 67                                    | %      | — | % | 26 | % |

 

----

* Less than 10%

 

19

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Sales to customersoutside the United States, derived mainly from customers in Europe and Asia,represented approximately 100% and 42% of total revenues in the three and ninemonths ended September 30, 2003, respectively, and 13% and 6% of total revenuesin the three and nine months ended September 30, 2002, respectively. Wemarketed Jeode to customers in the United States, Europe and Japan.

 

**Cost of revenues and gross margin**

 
|                           |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|--------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                           |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                           |   | **(in thousands, except percentages)** |   |
| Cost  of license revenue       |   | $                                      | 70     |                                  | $      | 124 |   | $ | 221 |   | $ | 1,852 |   |
| Gross  margin: license revenue |   | 65                                     | %      | 83                                    | %      | 44 | % | 65 | % |
|                           |   |                                   |   |                                  |   |   |   |   |   |
| Cost  of service revenue       |   | —                                 |   | 100                                   |   | 52 |   | 549 |   |
| Gross  margin: service revenue |   | —                                 |   | 64                                    | %      | 72 | % | 53 | % |
|                           |   |                                   |   |                                  |   |   |   |   |   |
| Total  cost of revenues        |   | $                                      | 70     |                                  | $      | 224 |   | $ | 273 |   | $ | 2,401 |   |
| Gross  margins: total revenues |   | 65                                     | %      | 78                                    | %      | 53 | % | 63 | % |

 

Cost of license revenueis mainly comprised of royalties to third parties.  Cost of service revenue includes costs associated withnonrecurring engineering activities and end-user support under maintenancecontracts.

 

We believe that thesignificant factors affecting the Jeode platform gross margin include pricingof the development license, pricing of the unit usage and royalties 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 thirdquarter of 2001, we amended our license agreement with Sun.  The amendment expanded the scope of thelicensed technology, changed the royalty rate, limited the royalty obligationsto only per units licensed, established required prepaid royalties and extendedthe expiration date of the contract from March 2004 to June 2004.  License revenue gross margins in the quarterended September 30, 2003 were 65%, compared to 83% for the same period in2002.  For the nine months endedSeptember 30, 2003, license revenue gross margins were 44% compared to 65% forthe same period in 2002.    The decreasein license revenue gross margins reflected the impact of transferring the Marchthrough June 2003 JVM revenue while the cost per unit did not change andresulted in lower gross margins.

 

Gross margin forservice revenue is impacted by the level of and pricing terms of customerfunded engineering activities, which can vary from customer to customer, fromcontract to

 

20

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contract and basedon the level of maintenance contracts sold. Gross margin for service revenue decreased in the third quarter of 2003to 0% from 64% in the same period of 2002. The decrease is due to the transfer of the contracts in the sale of theJVM product line.  For the nine monthsended September 30, 2003, service revenue gross margins were 72% compared to53% for the same period in 2002.  Thehigher margin was due to more favorable labor costs on fixed price engineeringconsulting contracts.

 

### **Operating expenses**

 
|                          |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|-------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                          |   | **2003**                               |   | **2002**                              |   | **2003** |   | **2002** |   |
|                          |   | **(in thousands, except percentages)** |   |
| Sales  and marketing          |   | $                                      | 423    |                                  | $      | 1,262 |   | $ | 1,329 |   | $ | 4,475 |   |
| Percentage  of total revenues |   | 210                                    | %      | 125                                   | %      | 229 | % | 69 | % |
|                          |   |                                   |   |                                  |   |   |   |   |   |
| Research  and development     |   | $                                      | 670    |                                  | $      | 1,677 |   | $ | 2,695 |   | $ | 4,258 |   |
| Percentage  of total revenues |   | 333                                    | %      | 166                                   | %      | 465 | % | 66 | % |
|                          |   |                                   |   |                                  |   |   |   |   |   |
| General  and administrative   |   | $                                      | 665    |                                  | $      | 666 |   | $ | 2,195 |   | $ | 2,571 |   |
| Percentage  of total revenues |   | 331                                    | %      | 66                                    | %      | 378 | % | 40 | % |

 

Sales and marketingexpenses consist primarily of personnel and related overhead costs, salespersoncommissions, advertising and promotional expenses and trade shows.  Sales and marketing expenses decreased by66% in the quarter ended September 30, 2003 from the quarter ended September30, 2002. The decrease in expenditures was primarily due to a $637,000 decreasein personnel costs, a $58,000 decrease in travel costs and a $121,000 decreasein allocated overhead costs relating to facilities and management informationsystems expenses.  In addition, therewas also a  $58,000 decrease in expensesrelating to discretionary marketing and a $63,000 decrease in telephone andmiscellaneous other expenses.  Thesedecreases were offset, in part, from an increase of $70,000 of expenses in theFrench sales office and a $28,000 increase in professional services expenses.Sales and marketing expenses decreased by 70% for the nine months endedSeptember 30, 2003 from the same period of 2002.  The decrease was primarily due to a $2.02 million reduction inpersonnel and personnel related costs. In addition, there was a decrease in travel expenditures of $269,000, a$417,000 decrease in discretionary marketing, a $130,000 decrease in otherexpenses, a $59,000 decrease in telecommunications expenditures and relatedoverhead costs also decreased by $331,000. Insignia anticipates a moderate increase in sales and marketing expensesin the next few quarters as Insignia continues to expand its marketing andsales efforts for its SSP product line. Insignia has established a direct salesforce in the United States and Europe and we have also developed relationshipswith strategic partners to sell into the Asian market.

 

Research and developmentexpenses consist primarily of personnel costs, overhead costs relating tooccupancy and equipment depreciation. Research and development expenses decreased by 60% in the three monthsended September 30, 2003 compared to the same period in 2002. The decrease wasprimarily due to a decrease in personnel costs of $708,000 resulting fromreduced

 

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head count.  There was also $112,000 decrease in basesoftware expenditures and overhead allocated expenses decreased by$148,000.  In addition, engineeringconsulting fees decreased by $40,000 in the quarter ended September 30, 2003over the same quarterly period of 2002. Research and development expensesdecreased by 37% for the nine months ended September 30, 2003 compared to thesame period in 2002.  Approximately $1.5million of the decrease was due to reductions in personnel relatedexpenses.  There were additionalreductions consisting of a $64,000 decrease in travel costs. In addition,software support and maintenance costs decreased by $124,000 and otherexpenditures, which consist largely of engineering consulting fees, decreasedby $56,000. Related overhead costs increased by $138,000. Research anddevelopment expenses are expected to increase moderately in the near term asInsignia further enhances its Secure System Provisioning technology.  In accordance with Statement of FinancialAccounting Standards No. 86, software development costs are expensed asincurred until technological feasibility is established, after which anyadditional costs are capitalized. In 2003 and 2002, no development expenditureswere capitalized, as there were no amounts that qualified for capitalization.

 

General andadministrative expenses consist primarily of personnel and related overheadcosts for finance, legal, information systems, human resources and generalmanagement. General and administrative expenses did not decrease significantly,in total, in the three months ended September 30, 2003 over the same period of2002.  Personnel related expensesdecreased by $188,000 due to reduced head count.  Other expenses which largely include adjustments to bad debtexpense decreased by $144,000.  Othersignificant decreases in expenditures for the quarter ended September 30, 2003included reduced facilities costs of $80,000 as well as reduced insuranceexpenditures of $40,000. Telephone and travel expenditures decreased by $30,000in total.  These expenditures wereoffset by increases in professional fees of $125,000 and a $357,000 change inallocated overhead amounts relating to facilities costs and expenses associatedwith management information systems. General and administrative expenses decreased by 15% for the nine monthsended September 30, 2003 over the same period of 2002.  The decrease primarily reflected a decreaseof $667,000 in salary and personnel related costs.  Other general and administrative expenses decreased$347,000.  Facilities relatedexpenditures decreased by $168,000, and insurance expenditures decreased by$97,000.  Travel expenditures alsodecreased by approximately $67,000. These decreases were in a large part offsetby a $762,000 change in allocated costs for facilities and managementinformation system expenses.  Generaland administrative expenses are expected to remain flat in the near term.

 

###### **Restructuring**

|                          |   | **Three months ended****September  30,** |   | **Nine months ended****September  30,** |   |
|-------------------------------|--------|------------------------------------------|--------|-----------------------------------------|--------|
|                          |   | **2003**                                 |   | **2002**                                |   | **2003** |   | **2002** |   |
|                          |   | **(in  thousands, except  percentages)** |   |                                    |   |   |   |
|                          |   |                                     |   |                                    |   |   |   |   |   |
| Restructuring                 |   | $                                        | (19    | )                                       | $      | 213 |   | $ | 480 |   | $ | 213 |   |
| Percentage  of total revenues |   | (9                                       | )%     | 21                                      | %      | 83 | % | 3 | % |
|                               |        |                                          |        |                                         |        |  |  |  |  |  |  |  |  |

 

22

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On February 11, 2003, weannounced a restructuring of the organization to focus on the SSPtechnology.  For the quarter ended March 31, 2003 and June 30, 2003, we restructured theorganization resulting in restructuring charges of $326,000 and $173,0000respectively for employee termination benefits.  Restructuring charges paid in the first and second quarters were$117,000 and $167,000 respectively.  Inthe quarter ended September 30, 2003, we paid a total of $99,000 and reversed$19,000.  The remaining amount of therestructuring, $97,000, will be paid by the end of Insignia’s fiscal year 2003.Restructuring expenses represented 83% of total revenues for the ninemonths ended September 30, 2003.  Therestructuring in the past three quarters ended June 30, 2003, in addition tothe transfer of employees from the sale of the JVM product line, resulted in aworldwide reduction of headcount of approximately 70% of our staff (63 people).

 

**Interest income (expense), net**

 
|                            |   | **Three  months ended  September 30,**  |   | **Nine  months ended  September 30,** |   |
|---------------------------------|--------|-----------------------------------------|--------|---------------------------------------|--------|
|                            |   | **2003**                                |   | **2002**                              |   | **2003** |   | **2002** |   |
|                            |   | **(in  thousands, except percentages)** |   |
| Interest  income (expense), net |   | $                                       | (14    | )                                     | $      | 17 |   | $ | (27 | ) | $ | 65 |   |
| Percentage  of total revenues   |   | (7                                      | )%     | 2                                     | %      | (5 | )% | 1 | % |
|                                 |        |                                         |        |                                       |        |  |  |  |  |  |  |  |  |

 

Net interest incomedecreased from income of $17,000 in the three months ended September 30, 2002to expense of $14,000 in the three months ended September 30, 2003.  Net interest income decreased from income of$65,000 in the nine months ended September 30, 2002 to expense of  $27,000 in the nine months ended September30, 2003.  The change from interestincome to interest expense in the three and nine months ended September 30,2003 was primarily due to a combination of lower interest rates on lower cashand cash equivalent balances and interest expense on a loan received inFebruary 2003. Interest expense is expected to continue to increase in 2003 andoffset interest income.

 

### **Other income, net**

 
|                          |   | **Three  months ended  September 30,**  |   | **Nine months  ended  September 30,** |   |
|-------------------------------|--------|-----------------------------------------|--------|---------------------------------------|--------|
|                          |   | **2003**                                |   | **2002**                              |   | **2003** |   | **2002** |   |
|                          |   | **(in  thousands, except percentages)** |   |
| Other  income, net            |   | $                                       | (124   | )                                     | $      | 2 |   | $ | 3,418 |   | $ | 103 |   |
| Percentage  of total revenues |   | (62                                     | )%     | —                                |   | 589 | % | 2 | % |
|                               |        |                                         |        |                                       |        |  |  |  |  |  |  |  |  |

 

In the three months endedSeptember 30, 2003, Insignia realized a foreign exchange loss of $12,000compared to a gain of $2,000 in the three months ended September 30, 2002.  The balance of other income, $112,000 iscomprised of broker fee expense totaling $82,000 pertaining to the paymentsreceived on the sale of the JVM product line, $35,000 for the transfer of JVMpaid customer accounts and $5,000 miscellaneous other income recognized on thesale of the Jeode product line.  In thenine months ended September 30, 2003, Insignia realized a foreign exchange gainof $28,000 compared to a gain of $103,000 in the nine months ended

 

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September 30, 2002.  The balance of other income is the gainrecognized on the sale of the Jeode product line.

 

For the nine months endedSeptember 30, 2003 approximately 93% of our total revenues and over 46% of ouroperating expenses are denominated in U. S. dollars.  Most of our remaining revenues and expenses are British poundsterling denominated and consequently we are exposed to fluctuations in Britishpound sterling exchange rates.  Therecan be no assurance that such fluctuations will not have a material effect onour results of operations in the future. We did not enter into any currency option hedge contracts in 2002 or thenine months ended September 30, 2003.

 

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 fall in value if market interest rates increase.  We attempt to limit this exposure byinvesting primarily in short-term securities.

 

**Benefitfrom income taxes**

 
|                       |   | **Three  months ended  September 30,** |       | **Nine  months ended  September 30,** |       |
|----------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|
|                       |   | **2003**                               |       | **2002**                              | ** ** | **2003** | ** ** | **2002** | ** ** |
|                       |   | **(in  thousands)**                    | ** ** |
| Benefit  from income taxes |   | $                                      | (90        | )                                     | $          | (132 | ) | $ | (419 | ) | $ | (1,964 | ) |
| Effective  income tax rate |   | —                                 |       | —                                |       | — |   | — |   |
|                            |        |                                        |            |                                       |            |  |  |  |  |  |  |  |  |

 

Our benefit from incometaxes for the three and nine months ended September 30, 2003 primarilyrepresented a refund received from the United Kingdom for research anddevelopment claims and an accrual for the current year.  We have recorded a full valuation allowanceagainst all deferred tax assets, primarily comprised of net operating losses,on the basis that significant uncertainty exists with respect to theirrealization.

 

Effective 2002 andretroactive to 2000, research and development expenditures incurred in theUnited Kingdom qualified for a tax credit. The tax credit does not offset tax liability but rather is a refund.  The estimated refund for 2002 recorded as areceivable on the December 31, 2002 balance sheet was $702,000. The actualrefund received in June 2003 was $873,000.

 

**Liquidity and capital resources**

** **
|                                                             |   | **September  30,  2003** |   | **September  30,  2002** |   |
|------------------------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                                             |   | **(in thousands)**       |   |
| Cash,  cash equivalents and restricted cash                      |   | $                        | 1,491  |                     | $      | 3,612 |   |
| Working  capital                                                 |   | 2,953                    |   | 6,293                    |   |
| Net  cash used in operating activities for the nine months ended |   | (3,533                   | )      | (5,827                   | )      |
|                                                                  |        |                          |        |                          |        |  |  |

 

24

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We have transitioned ourproduct focus from the Jeode product line 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 third quarter of 2003 totaled $1.3million compared to $3.5 million for the same period in 2002.  For the nine months ended September 30, 2003and 2002, cash used in operating activities totaled $3.5 million and $5.8million, respectively.  For the threemonths ended September 30, 2003, cash used in operating activities resultedprimarily from a net loss of $1.7 million, a decrease of accounts payable of$147,000, a decrease of accrued severance of $118,000, an increase of othercurrent assets of $166,000 and an increase of tax receivable of $94,000.  Offsetting these were a decrease of accountsreceivable of $87,000, a decrease of prepaid royalties of $71,000, a decreaseof prepaid expenses of $168,000, an increase of accrued liabilities of $103,000and an increase of deferred revenue of $425,000.

 

Cash provided byinvesting activities for the three months ended September 30, 2003 was $753,000which consisted primarily of net proceeds from the sale of the JVM product lineof $800,000.  Offsetting these werepurchases of property  and equipment for$47,000.

 

Cash provided byfinancing activities for the three months ended September 30, 2003 consistedprimarily of net proceeds from the issuance of shares of $800,000 and netproceeds from the exercise of warrants of $796,000.

 

Our cash, cash equivalents and restricted cash were $1.5 million atSeptember 30, 2003, a decrease of $2.1 million from $3.6 million at September30, 2002.  At September 30, we hadworking capital of $2.95 million. At September 30, 2002, we had working capitalof $6.3 million.  The principal sourceof working capital came from the sale of the JVM product line, issuance ofshares and exercise of warrants. Capital additions totaled $47,000 and $64,000 for the three monthsending September 30, 2003 and 2002, respectively. We have no materialcommitments for capital expenditures or strategic investments. Our commitmentsfor expenditures consist of building leases in the U.K. and U.S. and a debtpayment due in February 2004.  We expectthat the decrease in accounts receivables, decreased revenues for the threemonths ended September 30, 2003 and other factors will substantially decreaseour future cash flows for the next several quarters.

 

As of September 30, 2003, we had the following contractual cashobligations (including operating lease obligations that were restructuredpursuant to the sale of the JVM product line) (in thousands):

 
|                                              |   | **Operating  leases** |   | **Debt (1)** |   | **Total** |   |
|---------------------------------------------------|--------|-----------------------|--------|--------------|--------|-----------|--------|
| Year  ending December 31,                         |   |                  |   |         |   |      |   |
| 2003  (October 1, 2003 through December 31, 2003) |   | $                     | 88     |         | $      | —    |   | $ | 88 |   |
| 2004                                              |   | 296                   |   | 1,000        |   | 1,296     |   |
| 2005                                              |   | 282                   |   | —       |   | 282       |   |
| 2006                                              |   | 193                   |   | —       |   | 193       |   |
| 2007                                              |   | 165                   |   | —       |   | 165       |   |
| Thereafter                                        |   | 927                   |   | —       |   | 927       |   |
|                                              |   | $                     | 1,951  |         | $      | 1,000     |   | $ | 2,951 |   |

 

25

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----

(1) Excludes interest

 

As of September30, 2003, three customers accounted for 90% of the gross receivable.

 

In June 2001,Insignia and Sun Microsystems, Inc. (“Sun”) entered into an addendum (the “Addendum”)to the Distribution Agreement relating to distribution of products to anInsignia customer. In September 2001, the two companies entered into AmendmentNo. 3 (the “Amendment”) to the Technology License and Distribution 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. There are no additional required royalty prepayments due to Sun underthis agreement.  The prepaid royaltiescarried on the balance sheet, under the terms of the agreement between Sun andInsignia, require us to use these prepaid licenses before June 30, 2004.  We continually evaluate recoverability ofthese prepaid royalties and, if necessary, will charge to cost of sales anyamount that we deem unlikely to be recoverable in the future.  We have performed an assessment of whetherthere was an indication that the prepaid royalties of $2.2 million are impairedas of September 30, 2003.   Ourestimation of utilization, based on past revenue history and future revenueestimates using current average per unit selling price ranges, indicates thatthere could be unused prepaid royalties at the expiration of the license anddistribution agreement.  However, webelieve that should unused prepaid royalties become predictable in the future,we could reduce the selling price in order to utilize the remaining prepaidbalance. This price reduction would result in lower gross margins.  We will continue to assess this potentialimpairment on a quarterly basis.  Thedeterioration of the business climate and lower than expected product salescould potentially impact this assessment and require an impairment charge in afuture quarter.

 

On March 28, 2002, our U.S. subsidiary, Insignia Solutions, Inc.(“Insignia U.S.”) entered into an accounts receivable financing agreement withSilicon Valley Bank.  The financingagreement allowed Insignia U.S. to borrow an amount up to 80% of eligiblereceivables not to exceed $1,200,000, with interest at the bank’s prime rateplus two percentage points.  Theagreement was canceled on February 12, 2003, and the UCC filing liens on theassets of Insignia U.S. were terminated. No funds were ever borrowed under this credit facility.

 

We have granted extendedpayment terms from time to time and, depending on various factors, includingthe length of the extended payment period and the creditworthiness of the customer.  We report these future payments as accountsreceivable and either recognized revenue or deferred revenue.  Deferred revenue increased $425,000 for thethree months ended September 30, 2003 due to an additional $400,000 from themaster distributor agreement and $250,000 from the guaranteed revenue share.Offsetting these increases, were deductions for reported usage.

 

Insignia, aspermitted under Delaware law and in accordance with our Bylaws, indemnifies ourofficers and directors for certain events or occurrences, subject to certainlimits, 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

 

26

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and enables us torecover a portion of any future amounts paid. As a result of the insurance policy coverage we believe the fair valueof these indemnification agreements is minimal.

 

In our salesagreements, we typically agree to indemnify our customers for any expenses orliability resulting from claimed infringements of patents, trademarks orcopyrights of third parties.  The termsof these indemnification agreements are generally perpetual any time afterexecution of the agreement.  The maximumamount of potential future indemnification is unlimited.  We have not paid any amounts to settleclaims or defend lawsuits.

 

Insignia, on alimited 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 havehas yet to incur the expense.

 

Insignia warrantsits software products against defects in material and workmanship under normaluse and service for a period of ninety days. There is no warranty accrual recorded because potential future payments eitherare not probable or we have yet to incur the expense.

 

On October 17,2002, we entered into a securities subscription agreement (“Agreement”) withFusion Capital Fund II, LLC (“Fusion Capital”), pursuant to which FusionCapital agreed to purchase, on each trading day following the effectiveness ofa registration statement covering the ADSs, to be purchased by Fusion Capital,$10,000 of our ADSs up to an aggregate of $6.0 million over a period of 30months.  The purchase price of the ADSswill be equal to a price based upon the future market price of the shareswithout any fixed discount to the market price.  In order to be in compliance with Nasdaq rules, we could not sellour ordinary shares to Fusion Capital at a price below $0.38, which representsthe greater of the book value per share of our ordinary shares as of September30, 2002 or the closing sale price per share of our ADSs on October 16,2002.  If we elect to sell our shares toFusion Capital at a price per share below $0.38, we first would be required toobtain shareholder approval in order to be in compliance with applicable Nasdaqrules.  Under the laws of England andWales, we are not permitted to sell our ADSs at a purchase price that is lessthan the nominal value of our ordinary shares. Currently, the nominal value per ordinary share is £0.20.  For the quarter ended September 30, 2003, weelected to sell Fusion 1,613,465 ADSs resulting in net proceeds of $800,000.

 

Under the terms of theAgreement, we issued to Fusion Capital one redeemable warrant for ADSsrepresenting 1,000,000 ordinary shares, and one non-redeemable warrant for ADSsrepresenting 1,000,000 ordinary shares. The redeemable warrant may be redeemed by Insignia at any time on orbefore June 30, 2003 for an aggregate redemption price of $200,000.  Insignia did not redeem the warrant and thetime has lapsed.  The exercise price perordinary share of each warrant is the U.S. dollar equivalent of 20.5 pence.  Each warrant expires on September 30, 2007and are partially exercisable.  As of December31, 2002, the estimated value of the warrants, using the Black-Scholes model,was $544,000.  Unless an event ofdefault occurs under the Agreement, the shares issuable upon exercise of thesewarrants must be held by Fusion Capital until 30 months from the date of theAgreement or the date the Agreement is terminated.  For the quarter ended September 30, 2003, Fusion exercised boththe redeemable and non-redeemable warrants. We issued 2,000,000 ADSs for a total of $668,000, net of issuancecosts.  The Agreement and the forms ofthe Registration Rights Agreement, the Redeemable Warrant

 

27

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and the Non-RedeemableWarrant between Insignia and Fusion Capital are filed as Exhibits to the 8-Kdated October 22, 2002.

 

Based upon ourcurrent forecasts and estimates, our current cash and cash equivalents,together with cash generated from on-going operations and other liquid sourcesof cash (including the securities subscription and cash generated from the saleof the JVM product line to esmertec) may not be sufficient to meet ouranticipated cash needs for working capital and capital expenditures.  If cash currently available from all sourcesis insufficient to satisfy our liquidity requirements, we may seek additionalsources of financing including selling additional equity or obtainingconvertible debt securities.  Ifadditional funds are raised through the issuance of equity or debt securities,these securities could have rights, preferences and privileges senior toholders of our shares, and the terms of such securities could imposerestrictions on our operations.  Thesale of additional equity or convertible debt securities could result inadditional dilution to our shareholders. We may not be able to obtain additional financing on acceptable terms,if at all.  If we are unable to obtainadditional financing as and when needed and on acceptable terms, we may berequired to reduce the scope of our planned sales, marketing and productdevelopment efforts, which could jeopardize our business.  The size of our accumulated deficit, ourlosses and our ongoing need for capital in order to continue our operationsraises substantial doubt as to our ability to continue operations.  Failure to reduce expenses and/or obtainadditional financing will result in a material adverse effect on our ability tomeet our business objectives and continue as a going concern.  The report of our independent accountants onour financial statements included in our annual report on Form 10-K includes anexplanatory paragraph as to the uncertainty that we will continue as a goingconcern.

 

**RiskFactors**

 

In addition to theother information in this report, the following factors should be consideredcarefully in evaluating our business and prospects:

 

**We need additional financing tosustain our operations.**

 

We had a working capitalof $3.0 million at September 30, 2003, and our cash, cash equivalents, andrestricted cash totaled $1.49 million at September 30, 2003.  We had an operating cash flow deficit of$3.5 million and $5.8 million for the nine months ended September 30, 2003 and2002, respectively.  The sale of our JVMproduct line to esmertec is expected to provide cash of $4,150,000 in 2003.  Because our current financial resources are notexpected to be sufficient to fund our operations or those of our subsidiaries,we need additional funds to continue these operations.  There is no assurance that additionalfinancing will be available to us on terms that are acceptable, or at all.  These circumstances raise substantial doubtabout our ability to continue as a going concern.  The report of our independent accountants included on ourconsolidated financial statements on Form 10-K filed on April 15, 2003 includesan explanation paragraph as to the uncertainty that we will continue as a goingconcern.

 

We only have the right toreceive $10,000 per trading day, up to an aggregate of $6 million over a periodof 30 months under the agreement with Fusion Capital unless our stock priceequals or

 

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exceeds $1.00, in whichcase the daily amount may be increased, at the option of Insignia, as the priceof our shares increases.  Fusion Capitalwill not have the right nor be obligated to purchase any of our shares on anytrading days that the market price of our shares is less than $0.15 pershare.  Since we intend to initiallyregister 10,000,000 shares for sale by Fusion Capital (in addition to 2,000,000shares exercisable pursuant to warrants held by Insignia), the selling price ofour shares to Fusion Capital will have to average at least $0.60 per share forus to receive the maximum proceeds of $6 million without registering additionalshares.    As of September 30, 2003, newordinary shares of 1,613,465 were purchased under the Fusion Capital securitiessubscription agreement for a total of $800,000, net of issuance costs.  In addition, Fusion Capital has exercisedtheir 2,000,000 warrants for $668,000, net of issuance costs.

 

In order to be in compliancewith Nasdaq rules, we could not sell our ordinary shares to Fusion Capital at aprice below $0.38, which represents the greater of the book value per share ofour ordinary shares as of September 30, 2002 or the closing sale price pershare of our ADSs on October 16, 2002. As of September 30, 2003, the closingmarket price of our shares was $1.18 per share. If we elect to sell our sharesto Fusion Capital at a price per share below $0.38, we first would be requiredto obtain shareholder approval in order to be in compliance with the Nasdaqrules.  Under the laws of England andWales, we are not permitted to sell our ADSs at a purchase price that is lessthan the nominal value of our ordinary shares. Currently, the nominal value per ordinary share is £0.20.

 

The extent we rely onFusion Capital as a source of funding will depend on a number of factorsincluding our financial performance and ability to generate revenues, theprevailing market price of our shares and the extent to which we are able to secureworking capital from other sources.  Ifobtaining sufficient financing from Fusion Capital were to prove prohibitivelyexpensive, we may need to secure another source of funding in order to satisfyour working capital needs.  Even if weare able to access the full $6.0 million under the securities subscriptionagreement with Fusion Capital, we may still need additional capital toimplement our business, operating and development plans.

 

Such additional financing may not be available on favorable terms, if at all.  Further, if we issue additional equity securities, security holders may experience dilution, and the new equity securities may have rights, preferences or privileges senior to those of our ordinary shares.

 

**If our stock price does not exceed $1.00 per share or if ourshareholders’ equity does not increase, we could be delisted from Nasdaq.**

 

During the twelvemonths ended November 3, 2003, the closing price of our shares ranged from ahigh of $1.30 to a low of $0.20.  Underthe rules of the Nasdaq Stock Market, our stock price must remain above $1.00per share for continued quotation of our shares on the Nasdaq National Marketor the Nasdaq SmallCap Market.  Wereceived a letter from Nasdaq notifying us that we were not in compliance withthis requirement and that we would be provided 90 calendar days, or untilDecember 11, 2002, to regain compliance. In connection with this notification, we transferred the listing of ourshares from the Nasdaq National Market to the Nasdaq SmallCap Market on January9, 2003 to obtain additional time and flexibility to meet thisrequirement.  In

 

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addition, as ofMarch 31, 2003, we had a negative total shareholders’ equity of $525,000.  In order to maintain our listing on theNasdaq SmallCap Market, we are required to have total shareholders’ equity ofat least $2.5 million.  As of September30, 2003, our shareholders’ equity was $3.1 million.  To the extent our shareholders’ equity declines, our shares couldbe delisted from the Nasdaq SmallCap Market, which could adversely affect ourability to raise additional funds.

 

**The sale of our shares to FusionCapital may cause dilution, and the sale of the shares by Fusion Capital couldcause the price of our shares to decline.**

 

The purchase price forthe shares to be issued to Fusion Capital pursuant to the securitiessubscription agreement with Fusion Capital will fluctuate based on the price ofour shares.  All shares sold to FusionCapital under the securities subscription agreement will be freelytradable.  Fusion Capital may sell none,some or all of the shares purchased from us at any time.  We expect that the shares to be sold toFusion Capital will be sold over a period of up to 30 months from the effectivedate of the registration statement filed in connection with the transaction.

 

Depending upon marketliquidity at the time, a sale of such shares at any given time could cause thetrading price of our shares to decline. The sale of a substantial number of shares, or anticipation of suchsales, could make it more difficult for us to sell equity or equity-relatedsecurities in the future at a time and at a price that we might otherwise wishto effect sales.

 

**We may never achieve profitability if our SSP product linedoes not reach desired sales goals.**

 

Our future performancedepends upon sales of products within our SSP product line.  Revenues related to the Jeode product line,which was sold to esmertec in April 2003, accounted for 96% of our totalrevenue for the nine months ended September 30, 2003.  As a result, the SSP product line is our only product line and weexpect to rely upon sales of the SSP product for our revenue in the future. TheSSP product is currently in lab and market trials and is expected to beavailable for shipment to customers in the last quarter of 2003.  We have reduced our current expense levels,which will require total revenues of more than $1.5 million per quarter toachieve an operating profit.  SSP maynot achieve or sustain market acceptance or provide the desired revenue levels.

 

**The long and complex process oflicensing our SSP product may make our revenue unpredictable.**

 

Our revenue is dependentupon our ability to license SSP product to third parties. Licensing our SSPproduct is expected to be a long and complex process, which could take longerthan the typical six to nine months. Before committing to license our products,potential customers must generally consider a wide range of issues includingproduct benefits, infrastructure requirements, ability to work with existingsystems, functionality and reliability. The process of entering into adevelopment license with a company typically involves lengthynegotiations.  Because of the sales cycle,it is difficult for us to predict when, or if, a particular prospect might signa license

 

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agreement.  Development license fees may be delayed orreduced because of this process.  TheSSP product is currently in lab and market trials and will be available forshipment to customers in the last quarter of 2003.  We have limited history with sales initiatives for new products.

 

**If products that integrate our SSPtechnology do not sell well, we will not receive royalty payments on ourlicenses.**

 

Our success depends uponthe use of our technology by our licensees in their smart devices.  Our licensees undertake a lengthy process ofdeveloping systems that use our technology. Until a licensee has sales of its systems incorporating our technology,they will not create commercial use royalties to us.  We expect that the period of time between entering into adevelopment license and actually recognizing commercial use royalties to belengthy and difficult to predict.

 

**If our license agreement with SunMicrosystems, Inc. is terminated or expires without renewal, we would not beable to market our Jeode product line through the Master Distribution LicenseAgreement with esmertec.**

 

In the first quarter of1999, we signed a five-year Technology License and Distribution Agreement(“Distribution Agreement”) with Sun Microsystems, Inc. under which Sunestablished Insignia as a Sun authorized virtual machine provider.  The Distribution Agreement also grants usimmediate access to the Java compatibility test suite and the Java technologysource code.  The Distribution Agreementincludes technology sharing and compatibility verification.  Under the Distribution Agreement, we are requiredto pay Sun a per unit royalty on each Jeode-enabled smart device shipped by ourcustomers, plus a royalty on all development licenses between our customers andus.  In the third quarter of 2001, weamended our Distribution Agreement with Sun. The Distribution Amendment expanded the scope of the licensedtechnology, changed the royalty rate, limited the royalty obligations to onlyper units licensed, established a prepaid royalty schedule and extended theexpiration date of the contract from March 2004 to June 2004.  If the Distribution Agreement with Sunterminates or expires without renewal, we would not be able to market our Jeodeproduct line through the Master Distribution License Agreement withesmertec.  Any disruption in ourrelationship with Sun would likely impair our royalty sales of Jeode fromesmertec.  In addition, any terminationof the Distribution Agreement with Sun would likely adversely impact ourability to receive amounts to be paid under our agreement with esmertec inconnection with the sale of the JVM product line.

 

We also license softwaredevelopment tool products from other companies to distribute with some of ourproducts.  These third parties may notbe able to provide competitive products with adequate features and high qualityon a timely basis or to provide sales and marketing cooperation.  Further, our products compete with productsproduced by some of our licensors. When these licenses terminate or expire,continued license rights might not be available to us on reasonable terms.  We might not be able to obtain similarproducts to substitute into our tool suites. Through the date of this report, we have not experienced any majorproblems with our third-party licenses.

 

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**We have a history of losses and we must generatesignificantly greater revenue if we are to achieve profitability.**

 

We have experiencedoperating losses in each quarter since the second quarter of 1996. To achieveprofitability, we will have to increase our revenue significantly.  Our ability to increase revenues dependsupon the success of our SSP product line. SSP will be available for shipment to customers in the last quarter of2003 and it may not achieve market acceptance. If we are unable to createrevenues from SSP in the form of development license fees, maintenance andsupport fees, commercial use royalties and nonrecurring engineering services,our current revenues will be insufficient to sustain our business.

 

For the nine months endedSeptember 30, 2002 and 2003 we spent 69% and 229%, respectively, of our totalrevenues on sales and marketing.  Weexpect to continue to incur disproportionately high sales and marketingexpenses in the future.  To market SSPeffectively, we must develop client and server channel markets.  We will continue to incur the expenses for asales and marketing infrastructure before we recognize significant revenue fromsales of the product.  Because customersin the smart device market tend to remain with the same vendor over time, webelieve that we must devote significant resources to each potential sale.  If potential customers do not design ourproducts into their systems, the resources we have devoted to the salesprospect would be lost.  If we fail toachieve and sustain significant increases in our quarterly sales, we may not beable to continue to increase our investment in these areas.  With increased expenses, we mustsignificantly increase our revenues if we are to become profitable.

 

**If our new products or product enhancements fail toachieve customer acceptance, or if we fail to manage product transitions, ourbusiness reputation will likely suffer and revenues may decline.**

 

The market for mobiledevices is fragmented and characterized by technological change, evolvingindustry standards and rapid changes in customer requirements.  Our existing products will become lesscompetitive or obsolete if we fail to introduce new products or productenhancements that anticipate the features and functionality that customersdemand.  The success of our new productintroductions will depend on our ability to:

 

•                  accurately anticipate industry trendsand changes in technology standards;

 

•                  complete and introduce new productdesigns and features in a timely manner;

 

•                  continue to enhance our existingproduct lines;

 

•                  respond promptly to customers’requirements and preferences.

 

The introduction of new or enhanced products also requires that wemanage the transition from older products to minimize disruption in customerordering patterns.  We have haddifficulty managing the transition from older products in the past.  For example, between 1995 and 1999, wetransitioned from our SoftWindows product line to our NTRIGUE product line andbegan preparations for our Jeode product line. During this same period our yearly revenues dropped from a high of $55.1million in 1995 to a low of $6.8 million in 1999. The decrease in revenues

 

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was partly because we did not timely introduce new products which couldcompensate for the decreasing demand for our SoftWindows product line.Development delays are commonplace in the software industry.  We have experienced delays in thedevelopment of new products and the enhancement of existing products in thepast and are likely to experience delays in the future.  We may not be successful in developing andmarketing, on a timely basis or at all, competitive products, productenhancements and new products that respond to technological change, changes incustomer requirements and emerging industry standards.

 

In addition, we also face significant risks associated with thedevelopment and future deployment of our SSP products and the successfulexecution of the related business strategy. With the sale of the JVM productline to esmertec, the SSP product is our sole product line.  During 2001, we began development of a rangeof SSP products for the mobile handset and wireless carrier industry.  These SSP products build on our position asa VM supplier for manufacturers of mobile devices and allow wireless carriersto build valuable Over-The-Air Repair and dynamic capability services.  The SSP product is currently in lab andmarket trials and is expected to be available for shipment to customers in thelast quarter of 2003. We have limited history with sales initiatives for newproducts. Additionally, the sales cycle for the SSP products is expected totake longer than the typical six to nine month cycle of the Jeode product.

 

**Our targeted market is highlycompetitive.**

 

Our SSP product line istargeted for the mobile operator and mobile device market.  The market for these products is fragmentedand highly competitive.  This market isalso 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 main competitors include Bitfone andDoOnGo. The Jeode product line is targeted at the emerging Java-based smartdevice marketplaces, which are rapidly changing and are characterized by anincreasing number of new entrants whose products compete with the Jeodeplatform.

 

If these competitorsdevelop products that are cheaper or provide better capabilities 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 usto reduce the prices of our products, which would result in reduced profitmargins and could harm our ability to provide adequate service to ourcustomers. Our pricing model for our software products is based on a derivativeusage model with integration and support and maintenance fees, and may besubject to significant pricing pressures, including buy-out arrangements.  Also, the market may demand alternativepricing models in the future.  A varietyof other potential actions by our competitors, including increased promotionand accelerated introduction of new or enhanced products, could also harm ourcompetitive position.

 

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**Fluctuations in our quarterly resultscould cause the market price of our shares to decline.**

 

Our quarterly operatingresults can vary significantly depending on a number of factors. These factorsinclude:

 

**•**                  the volume andtiming of orders received during the quarter;

 

•                  the mix of and changes in customersto whom our products are sold;

 

•                  the mix of product and servicerevenue received during the quarter;

 

•                  the mix of development license feesand commercial use royalties received;

 

•                  the timing and acceptance of newproducts and product enhancements by us or by our competitors;

 

•                  changes in product pricing;

 

•                  buyouts of commercial use licenses;

 

•                  product life cycles;

 

•                  the level of our sales of third-partyproducts;

 

•                  variances in costs in fixed pricecontracts;

 

•                  purchasing patterns of customers;

 

•                  competitive conditions in theindustry;

 

•                  foreign currency exchange ratefluctuations;

 

•                  business cycles and economicconditions that affect the markets for our products; and

 

•                  extraordinary events, such as litigation,and related charges.

 

All of these factors aredifficult to forecast. Our future operating results may fluctuate due to theseand other factors, including our ability to continue to develop innovative andcompetitive products. An increasing amount of our sales orders involve productsand services that yield revenue over multiple quarters or upon completion ofperformance. If license agreements entered into during a quarter do not meetour revenue recognition criteria, even if we meet or exceed our forecast ofaggregate licensing and other contracting activity, it is possible that ourrevenues would not meet expectations. Due to all of these factors, we believethat 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.

 

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**International sales of our products,which we expect to comprise a significant portion of total revenues, expose usto the business and economic risks of international operations.**

 

Sales from outside of theUnited States accounted for approximately 42% and 6% of our total revenue forthe nine months ended September 30, 2003 and 2002, respectively, and areexpected to increase with the SSP product. We expect to market SSP to mobile operators and terminal manufacturersin Europe.  Economic conditions inEurope generally and fluctuations in the value of the euro against the U.S.dollar and British pound sterling could impair our revenues and results ofoperations. International operations are subject to a number of other risks. Theserisks include:

 

•                  foreign government regulation;

 

•                  reduced protection of intellectualproperty rights in some countries where we do business;

 

•                  longer receivable collection periodsand greater difficulty in accounts receivable collection;

 

•                  unexpected changes in, or impositionof, regulatory requirements, tariffs, import and export restrictions  and other barriers and restrictions;

 

•                  potentially adverse tax consequences;

 

•                  the burdens of complying with avariety of foreign laws and staffing and managing foreign operations;

 

•                  general geopolitical risks, such aspolitical and economic instability, hostilities with neighboring countries andchanges in diplomatic and trade relationships; and

 

•                  possible recessionary environments ineconomies outside the United States.

 

**Product defects can be expensive tofix and may cause us to lose customers.**

 

Our software products,like all software products, may have undetected errors or compatibilityproblems.  This is particularly truewhen a product is first introduced or a new version is released.  Despite thorough testing, our products mightbe shipped with errors. If this were to happen, our products could be rejectedby customers, or there might be costly delays in correcting the problems.  Our products are increasingly used insystems that interact directly with the general public, such as intransportation and medical systems.  Insystems such as these, the failure of our product could cause substantialproperty damage or personal injury, which would expose us to product liabilityclaims.  Our products are used forapplications in business systems where the failure of our product could belinked to substantial economic loss. Our agreements with our customers typically contain provisions designedto limit our exposure to potential

 

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product liability andother claims.  It is likely, however,that these provisions are not effective in all circumstances and in alljurisdictions.  We may not have adequateinsurance against product liability risks and renewal of our insurance may notbe available to us on commercially reasonable terms.  Further, our errors and omissions insurance may not be adequateto cover claims.

 

As of the date of thisreport, we have not had any product liability claims or recalls against ourJeode line of products.  However, aproduct liability claim or claim for economic loss brought against us in thefuture could lead to unexpected large expenses and lost sales.  Also, if we ever had to recall our productdue to errors or other problems, it would cost us a great deal of time, effortand expense.  Our operations depend onour ability to protect our computer equipment and the information stored in ourdatabases against damage by fire, natural disaster, power loss,telecommunications failure, unauthorized intrusion and other catastrophicevents.  We believe we have takenprudent measures to reduce the risk of interruption in our operations.  However, these measures might not besufficient.  As of the date of thisreport, we have not experienced any major interruptions in our operationsbecause of a catastrophic event.

 

**If we lose key personnel or areunable to hire additional qualified personnel as necessary, we may not be ableto successfully manage our business or sell our products.**

 

Our future performancedepends to a significant degree upon the continued contributions of our keymanagement, product development, sales, marketing and operationspersonnel.  We do not have agreementswith any of our key personnel that require them to work for us for a specificterm, and we do not maintain any key person life insurance policies.  We believe our future success will alsodepend in large part upon our ability to attract and retain highly skilledmanagerial, engineering, sales, marketing and operations personnel, many ofwhom are in great demand.  Competitionfor qualified personnel can be intense in the San Francisco bay area, where ourU.S. operations are headquartered.

 

**If we fail to protect our intellectualproperty rights, competitors could introduce similar or superior products, andwe could lose market share.**

 

We depend on ourproprietary technology. Despite our efforts to protect our proprietary rights,it may be possible for unauthorized third parties to copy our products or toreverse engineer or obtain and use information that we considerproprietary.  Our competitors couldindependently develop technologies that are substantially equivalent orsuperior to our technologies.  Policingunauthorized use of our products is difficult, and while we are unable todetermine the extent to which software piracy of our products exists, softwarepiracy can be expected to be a persistent problem.  Effective protection of intellectual property rights may be unavailableor limited in foreign countries.  Thestatus of U.S. patent protection in the software industry is not well definedand will evolve as the United States Patent and Trademark Office grantsadditional patents.  Patents have beengranted on fundamental technologies in software, and patents may issue thatrelate to fundamental technologies incorporated into our products.

 

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**Our products may infringe theintellectual property rights of third parties, which may result in lawsuits andprevent us from selling our products.**

 

As the number of patents,copyrights, trademarks and other intellectual property rights in our industryincreases, products based on our technology may increasingly become the subjectof infringement claims.  Third partiescould assert infringement claims against us in the future. Infringement claimswith or without merit could be time consuming, result in costly litigation,cause product 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.  Wemay initiate claims or litigation against third parties for infringement of ourproprietary rights or to establish the validity of our proprietary rights.  Litigation to determine the validity of anyclaims, whether or not the litigation is resolved in our favor, could result insignificant expense to us and divert the efforts of our technical andmanagement personnel from productive tasks. If there is an adverse rulingagainst us in any litigation, we may be required to pay substantial damages,discontinue the use and sale of infringing products, expend significantresources to develop non-infringing technology or obtain licenses to infringingtechnology.  Our failure to develop orlicense a substitute technology could prevent us from selling our products.

 

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**Some security holders have rights under their warrants topurchase significant numbers of American Depository Shares (“ADSs”) at nominalvalue upon the occurrence of specified events which, if triggered, would dilutethe ownership interests of existing security holders.**

 

Some security holdershave rights to be issued additional ADSs by Insignia if the registrationstatements covering their shares and the shares underlying their warrants aresuspended for more than 60 days in any 12 month period.  We must issue a total of 252,000 ADSs if we suspendregistration statement number 333-51234 for more than the 60 days in any 12month period, and a total of 65,800 ADSs if we suspend registration statementnumber 333-57528 for more than the 60 days in any 12 month period.  We have not suspended registrationstatements for more than 60 days in any 12 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.  Threeof four investors have purchased their ADSs and one investor has yet topurchase the shares available to it. The purchase price shareholders have paid or will pay per additional ADSis the nominal value, or £0.20 per ADS, which is the lowest amount these sharescan be purchased under English law. If we issue additional ADSs under theseobligations, the ownership interest of existing shareholders will be diluted.

 

**Some security holders haveanti-dilution rights, which, if triggered, would dilute the ownership interestsof existing security holders.**

 

Certain investors whoparticipated in our four private placements received warrants which haveanti-dilution protections.  This meansthat they are entitled to purchase an additional amount of ordinary shares, inthe form of ADSs, if we issue ordinary shares at a price below market price.The anti-dilution protections, if triggered, increase the number of shareswhich the investors may purchase with their warrants.  The exact amount of the increase is not known until theanti-dilution protections are actually triggered.  There are two ways the anti-dilution protections can betriggered: (1) if we sell our securities in a transaction, such as a privateplacement financing, for a price that is lower than the ten day average priceof our ADSs before the transaction, or (2) if the warrants issued in thoserelevant private placements are exercised at a price less than the ten dayaverage price of our ADSs at the time of exercise.  The issuance of the warrants to Fusion under the securitiessubscription agreement triggered these anti-dilution protections.  Further, when some of the warrants we issuedin the private placements are exercised, anti-dilution protections will likelybe triggered.  The amount of the anti-dilutionadjustment is based on a formula where the lower the price of the our ADSs asquoted on the Nasdaq Stock Market, the greater the potential increase in thenumber of shares issuable to the warrants due to the anti-dilution protections.  Assuming that the warrants are exercised atthe lowest exercise price possible under applicable law and pursuant to theterms of their respective agreements, the maximum amount of additional sharesissuable to these investors would be approximately 185,000.  These anti-dilution adjustments couldaccelerate and increase the magnitude of a decline in the quoted share price ofour ADSs.  Warrant holders have theright to purchase an increasing amount of shares during a decline in the priceof our ADSs. If the warrant holders exercise their warrants and sell theirshares in the open market during this time, downward pressure is added to theprice.  This can further increase theanti-dilution adjustments for the

 

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remaining warrantholders. Short sales of our shares may further the downward pressure on theprice of our ADSs. Anti-dilution adjustments and short sales may accelerate andcompound a decline in the price of our ADSs. Shareholders will also be diluted as warrant holders gain the right topurchase an increasingly large number of shares due to their anti-dilutionprotections.

 

**We are at risk of securities litigation which, regardless ofthe outcome, could result in substantial costs and divert management attention andresources.**

 

The prices for our ADSshave fluctuated widely in the past. During the 12 months ended November 3,2003, the closing price per share of Insignia ranged from a recent high of$1.30 to a low of $0.20.  Under therules of The Nasdaq Stock Market, our stock price must remain above $1.00 pershare for continued quotation of our shares on the Nasdaq SmallCap Market.Stock price volatility has had a substantial effect on the market prices ofsecurities issued by us and other high technology companies, often for reasonsunrelated to the operating performance of the specific companies. In the past,following periods of volatility in the market price of a company’s securities,securities class action litigation has often been instituted against high technologycompanies.  We may in the future be thetarget of similar litigation. Regardless of the outcome, securities litigation may result insubstantial costs and divert management attention and resources.

 

**Our investors may have difficulty enforcing judgments againstus in U.S. courts because many of our assets and some of our management arelocated in England.**

 

Insignia is incorporatedunder the laws of England and Wales. Two of our directors reside in England. All or a substantial portion ofthe assets of these persons, and a significant portion of our assets, arelocated outside of the United States. It may not be possible for investors toserve a complaint within the United States upon these persons or to enforceagainst them or against us, in U.S. courts, judgments obtained in U.S. courtsbased upon the civil liability provisions of U.S. securities laws.  There is doubt about the enforceabilityoutside of the United States, in original actions or in actions for enforcementof judgments of U.S. courts, of civil liabilities based solely upon U.S.securities laws.  The rights of holdersof our shares are governed by English law, including the Companies Act 1985,and by our memorandum and articles of association.  The rights of holders of our ADSs are also affected by Englishlaw. These rights differ from the rights of security holders in typical U.S.corporations.

 

**Insignia has undergone a class action lawsuit and an SECinvestigation in the past seven years.**

 

On April 3, 1996, aclass-action lawsuit was filed against us alleging that we misrepresented ourbusiness, the strength of our sales force and our financial health.  The suit stemmed from our failure to achievethe consensus earnings estimates of research analysts in the first quarterfollowing our initial public offering in November 1995.  In August 1997, we reached a memorandum ofunderstanding to settle the suits. Although we never agreed with the allegations, we paid $8.0 million tothe plaintiffs, of which our insurance company paid $7.5 million.  In February 1997, we restated our financialresults for the quarters ended March 31 and

 

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June 30, 1996.  We revised our revenue and net incomenumbers downward for these two quarters due to inflated revenues resulting frommisstatement of inventory levels of one of our resellers by two of our salesand marketing personnel.  We agreed withthe SEC to cease and desist from engaging in similar accounting practices.  The two Insignia sales and marketing peopleinvolved in the revenue misstatement are no longer with Insignia and wereforced to pay significant fines.  We didnot have to pay any fines.

 

**Item 3****.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

From time to time, Insignia enters into derivative financialinstruments such as currency option contracts to hedge certain anticipated, butnot yet committed, transactions expected to be denominated in foreigncurrencies.  Insignia does not usederivative financial instruments for trading or speculative purposes.  Insignia’s downside risk with respect tocurrency option contracts (British pound sterling) is limited to the premiumpaid for the right to exercise the option. Insignia did not enter into any currency option hedge contracts in the thirdquarter of 2003 or the third quarter of 2002 and had no option hedge contractsoutstanding as of September 30, 2003 or September 30, 2002.

 

Insignia’s interest expense and income is sensitive to changes in thegeneral level of U.S. interest rates.  However,due to the short-term nature of Insignia’s cash investments and low levels ofdebt, Insignia does not believe that Insignia has a material risk exposure.

 

**Item 4****.  Controls and Procedures**

 

We have evaluated the design and operation of our disclosure controlsand procedures to determine whether they are effective in ensuring that thedisclosure of required information is timely made in accordance with theExchange Act and the rules and regulations of the Securities and ExchangeCommission.  This evaluation was madeunder the supervision and with the participation of management, including ourprincipal executive officer and principal financial officer within the 90-dayperiod prior to the filing of this Quarterly Report on Form 10-Q. The principalexecutive officer and principal financial officer have concluded, based ontheir review, that our disclosure controls and procedures, as defined atExchange Act Rules 13a-14(c) and 15d-14(c), are effective to ensure thatinformation required to be disclosed by us in reports that we file under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules and forms.  No significant changes were made to ourinternal controls or other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

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**PART II - OTHER INFORMATION**

 

### **Item 1.  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 SecurityHolders**

 

(a)          Insignia held its AnnualGeneral Meeting on November 5, 2003. Proxies for the meeting were solicited pursuant to Regulation 14A.

 

(b)         At each Annual GeneralMeeting, the third of Insignia’s Board of Directors who have been in officelongest since their last election, as well as any directors appointed by theBoard during the preceding year, are required to resign and are then consideredfor re-election, assuming they wish to stand for re-election.  Richard M. Noling was re-elected as Directorat the meeting and Mark E. McMillan was elected as Director.  The Directors whose term of office continuesafter the meeting are Nicholas, Viscount Bearsted, Vincent S. Pino, David G.Frodsham and John C. Fogelin.

 

(c)          The matters describedbelow were voted on at the Annual General Meeting, and the number of votes castwith respect to each matter and, with respect to the election of directors, foreach nominee, were as indicated:

 

 

**1.****             **Toreceive and approve the Directors renumeration report.

 
| **FOR**   |   | **AGAINST** |
|-----------|--------|-------------|
| 5,287,083 |   | 133,121     |

 

**2.****             **Toelect as a Director Mark E. McMillan.

 
| **FOR**   |   | **AGAINST** |
|-----------|--------|-------------|
| 5,303,905 |   | 134,291     |

 

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**3.****             **Tore-elect as a Director Richard M. Noling

 
| **FOR**   |   | **AGAINST** |
|-----------|--------|-------------|
| 4,594,320 |   | 838,699     |

 

**4.****             **Toappoint MacIntyre Hudson, in the place of the retiring auditorsPricewaterhouseCoopers LLP, as the U.K. statutory auditors and independentaccountants of the Company, to hold office until the conclusion of theCompany’s next annual general meeting at which accounts are laid before theCompany, and to authorize the Board of Directors of the Company to determinetheir renumeration.

 
| **FOR**   |   | **AGAINST** |
|-----------|--------|-------------|
| 5,317,185 |   | 92,234      |

 

### **Item 5.  Other Information**

 

None

 

**Item 6.  Exhibits andReports on Form 8-K**

 

(a) Exhibits

 

The following exhibits are filed as part of this Report:

 
| **Exhibit  Number** |   | **Exhibit  Title**                                    |
|---------------------|--------|-------------------------------------------------------|
|                |   |                                                  |
| 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 |

 

(b) Reports on Form 8-K

 

Form 8-K filed July 9,2003 in connection with the change of Insignia’s Certifying Accountant.

 

Form 8-K/A filed July 10,2003 amending and restating Item 7 of Insignia’s Current Report on Form 8-K,filed May 8, 2003.

 

Form 8-K/A filed July 18,2003 amending Item 7 in connection with the change of Insignia’s CertifyingAccountant.

 

42

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Form 8-K filed August 14,2003 for press release announcing financial results for quarter ended June 30,2003.

 

43

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                    | INSIGNIA SOLUTIONS PLC         |
|-------------------------|--------------------------------|
|                    | (Registrant)                   |   |
|                    |                           |   |
|                    |                           |   |
| Date: November 14, 2003 |                           |   |
|                    |                           |   |
|                    |                           |
|                    |                           | /s/ LINDA C. POTTS |   |
|                    | LINDA C. POTTS                 |   |
|                    | Chief Financial  Officer       |   |
|                    | (Principal Financial  Officer) |
|                         |                                |  |  |  |

 

 
| **Signature**               |   | **Capacity**            |   | **Date**          |   |
|-----------------------------|--------|-------------------------|--------|-------------------|--------|
|                        |   |                    |   |              |   |
|  /s/ Mark E.  McMillan |   | Chief Executive Officer |   | November 14, 2003 |   |
| Mark E. McMillan            |   |                    |   |              |   |
|                        |   |                    |   |              |   |
|  /s/ Linda C.  Potts   |   | Chief Financial Officer |   | November 14, 2003 |   |
| Linda C. Potts              |   |                    |   |              |   |

 

 
| **Exhibit Number** |   | **Description  of Document**                           |
|--------------------|--------|--------------------------------------------------------|
|               |   |                                                   |
| 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. |

 

44

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