**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  June 30, 2004** |
| ** **                                             |
| **or,**                                                |
|                                                   | ** **                                                                                         |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from              to              **

 

**Commissionfile****number 0-27012**

 

**Insignia Solutions plc**

(Exact name of Registrant asspecified 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 mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  ý   No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act):  Yes  o   No ý

 

Asof August 9, 2004, there were 28,575,189 Ordinary shares of £0.20 eachnominal value, outstanding.

 

 

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**INSIGNIA SOLUTIONS PLC**

 
| **PART 1 - FINANCIAL INFORMATION** | ** **                                                                                                                          |
|------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                                |   |
| **Item 1.**                        | **Financial Statements:**                                                                                                           |   |
|                               |                                                                                                                                |   |
|                               | Condensed  Consolidated Balance Sheets at June 30, 2004 and December 31, 2003  (unaudited)                                |   |
|                               |                                                                                                                                |   |
|                               | Condensed Consolidated Statements of  Operations for the three months and six months ended June 30, 2004 and  2003 (unaudited) |   |
|                               |                                                                                                                                |   |
|                               | Condensed Consolidated Statements of Cash  Flows for the six months ended June 30, 2004 and 2003 (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**

 

**Item 1.****  Financial Statements**

 

**INSIGNIASOLUTIONS PLCCONDENSED CONSOLIDATED BALANCE SHEETS(amounts in thousands, unaudited)**

 
| ** **                                                          | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                          |       |                    |       |                        |       |
|                                                                |       |                    |       |                        |       |
| Current assets:                                                     |       |                    |       |                        |       |
| Cash and cash equivalents                                           |       | $                       | 1,950      |                        | $          | 2,212 |   |
| Restricted cash                                                     |       | 50                      |       | 20                          |       |
| Accounts receivable, net                                            |       | 245                     |       | 50                          |       |
| Other receivables                                                   |       | 235                     |       | 1,153                       |       |
| Tax receivable                                                      |       | 436                     |       | 391                         |       |
| Prepaid royalties                                                   |       | —                  |       | 2,185                       |       |
| Prepaid expenses                                                    |       | 349                     |       | 410                         |       |
| Total current assets                                                |       | 3,265                   |       | 6,421                       |       |
| Property and equipment, net                                         |       | 159                     |       | 154                         |       |
| Investment in affiliate                                             |       | 35                      |       | —                      |       |
| Other assets                                                        |       | 226                     |       | 219                         |       |
|                                                                |       | $                       | 3,685      |                        | $          | 6,794 |   |
|                                                                |       |                    |       |                        |       |
| **LIABILITIES, REDEEMABLE WARRANTS AND  SHAREHOLDERS’ EQUITY** |       |                    |       |                        |       |
| Current liabilities:                                                |       |                    |       |                        |       |
| Accounts payable                                                    |       | $                       | 180        |                        | $          | 468 |   |
| Accrued liabilities                                                 |       | 1,120                   |       | 1,239                       |       |
| Note payable                                                        |       | —                  |       | 1,000                       |       |
| Deferred revenue                                                    |       | 45                      |       | 1,460                       |       |
| Total current liabilities                                           |       | 1,345                   |       | 4,167                       |       |
|                                                                |       |                    |       |                        |       |
| Commitments and contingencies (Note 6)                              |       |                    |       |                        |       |
|                                                                |       |                    |       |                        |       |
| Redeemable warrants                                                 |       | 38                      |       | 38                          |       |
|                                                                |       |                    |       |                        |       |
| Shareholders’ equity:                                          |       |                    |       |                        |       |
| Ordinary shares                                                     |       | 9,639                   |       | 8,111                       |       |
| Additional paid-in capital                                          |       | 63,872                  |       | 61,898                      |       |
| Common stock subscription                                           |       | —                  |       | 575                         |       |
| Accumulated deficit                                                 |       | (70,748                 | )          | (67,534                     | )          |
| Other accumulated comprehensive loss                                |       | (461                    | )          | (461                        | )          |
| Total shareholders’ equity                                     |       | 2,302                   |       | 2,589                       |       |
|                                                                |       | $                       | 3,685      |                        | $          | 6,794 |   |

 

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

 

3

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**INSIGNIA SOLUTIONS PLC****CONDENSED CONSOLIDATED STATEMENTS OF****OPE****RATIONS****(amounts in thousands, except per share amounts, unaudited)**

 
| ** **                                      | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Net revenues:                                   |       |                                  |       |                                |       |   |   |   |   |
| License                                         |       | $                                     | 105        |                                | $          | — |   | $ | 421 |   | $ | 192 |   |
| Service                                         |       | 2                                     |       | —                              |       | 5 |   | 187 |   |
| Total net revenues                              |       | 107                                   |       | —                              |       | 426 |   | 379 |   |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Cost of net revenues:                           |       |                                  |       |                                |       |   |   |   |   |
| License                                         |       | 5                                     |       | 36                                  |       | 28 |   | 151 |   |
| Service                                         |       | —                                |       | —                              |       | — |   | 52 |   |
| Total cost of net revenues                      |       | 5                                     |       | 36                                  |       | 28 |   | 203 |   |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Gross profit                                    |       | 102                                   |       | (36                                 | )     | 398 |   | 176 |   |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Operating expenses:                             |       |                                  |       |                                |       |   |   |   |   |
| Sales and marketing                             |       | 529                                   |       | 261                                 |       | 1,345 |   | 906 |   |
| Research and development                        |       | 661                                   |       | 719                                 |       | 1,472 |   | 2,025 |   |
| General and administrative                      |       | 670                                   |       | 386                                 |       | 1,261 |   | 1,530 |   |
| Restructuring                                   |       | —                                |       | 173                                 |       | — |   | 499 |   |
| Total operating expenses                        |       | 1,860                                 |       | 1,539                               |       | 4,078 |   | 4,960 |   |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Operating loss                                  |       | (1,758                                | )          | (1,575                              | )          | (3,680 | ) | (4,784 | ) |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Interest income (expense), net                  |       | 3                                     |       | (12                                 | )          | 2 |   | (13 | ) |
| Other income, net                               |       | 264                                   |       | 3,529                               |       | 251 |   | 3,542 |   |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Income (loss) before income taxes               |       | (1,491                                | )          | 1,942                               |       | (3,427 | ) | (1,255 | ) |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Benefit from income taxes                       |       | (187                                  | )          | (331                                | )          | (213 | ) | (329 | ) |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss)                               |       | $                                     | (1,304     | )                                   | $          | 2,273 |   | $ | (3,214 | ) | $ | (926 | ) |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss) per share:                    |       |                                  |       |                                |       |   |   |   |   |
| Basic                                           |       | $                                     | (0.04      | )                                   | $          | 0.11 |   | $ | (0.11 | ) | $ | (0.05 | ) |
| Diluted                                         |       | $                                     | (0.04      | )                                   | $          | 0.11 |   | $ | (0.11 | ) | $ | (0.05 | ) |
|                                            |       |                                  |       |                                |       |   |   |   |   |
| Weighted average shares and share  equivalents: |       |                                  |       |                                |       |   |   |   |   |
| Basic                                           |       | 29,240                                |       | 20,089                              |       | 28,928 |   | 20,089 |   |
| Diluted                                         |       | 29,240                                |       | 20,347                              |       | 28,928 |   | 20,089 |   |

 

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

 

4

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**INSIGNIA SOLUTIONS PLCCONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(amounts in thousands, unaudited)**

 
| ** **                                                                   | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                   | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                        |       |                                |       |   |   |
| Net loss                                                                     |       | $                                   | (3,214     | ) | $ | (926 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Depreciation                                                                 |       | 53                                  |       | 81 |   |
| Allowance for doubtful accounts                                              |       | —                              |       | (38 | ) |
| Non-cash charge for warrant issuance                                         |       | 353                                 |       | — |   |
| Equity in net loss of affiliate                                              |       | 40                                  |       | — |   |
| Gain on sale of product line                                                 |       | (298                                | )          | (3,500 | ) |
| Net changes in assets and liabilities:                                       |       |                                |       |   |   |
| Accounts receivable                                                          |       | (195                                | )          | 835 |   |
| Other receivables                                                            |       | (428                                | )          | — |   |
| Tax receivable                                                               |       | (45                                 | )          | 522 |   |
| Prepaid royalties                                                            |       | 2,185                               |       | 99 |   |
| Prepaid expenses                                                             |       | 61                                  |       | 86 |   |
| Other assets                                                                 |       | (7                                  | )          | 311 |   |
| Accounts payable                                                             |       | (251                                | )          | 134 |   |
| Accrued liabilities                                                          |       | (106                                | )          | (158 | ) |
| Accrued severance                                                            |       | —                              |       | 215 |   |
| Deferred revenue                                                             |       | (821                                | )          | 112 |   |
| Income tax payable                                                           |       | —                              |       | (4 | ) |
| Net cash used in operating activities                                        |       | (2,673                              | )          | (2,231 | ) |
| Cash flows from investing activities:                                        |       |                                |       |   |   |
| Purchases of property and equipment                                          |       | (58                                 | )          | (15 | ) |
| Investment in affiliate                                                      |       | (75                                 | )          | — |   |
| Proceeds from sale of product line, net                                      |       | —                              |       | 713 |   |
| Decrease (increase) in restricted cash                                       |       | (30                                 | )          | 230 |   |
| Net cash provided by (used in) investing  activities                         |       | (163                                | )          | 928 |   |
| Cash flows from financing activities:                                        |       |                                |       |   |   |
| Proceeds from issuance of shares, net                                        |       | 1,604                               |       | — |   |
| Proceeds from exercise of warrants                                           |       | 389                                 |       | — |   |
| Proceeds from note payable                                                   |       | —                              |       | 1,000 |   |
| Proceeds from exercise of stock options and  employee stock purchase plan    |       | 581                                 |       | 1 |   |
| Net cash provided by financing activities                                    |       | 2,574                               |       | 1,001 |   |
| Net decrease in cash and cash equivalents                                    |       | (262                                | )          | (302 | ) |
| Cash and cash equivalents at beginning of  the period                        |       | 2,212                               |       | 726 |   |
| Cash and cash equivalents at end of the  period                              |       | $                                   | 1,950      |   | $ | 424 |   |

 

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

 

5

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**INSIGNIA SOLUTIONS PLC**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATE****DFINANCIAL STATEMENTS(unaudited)**

 

**Note 1.****  Basis of presentation**

 

The accompanying unaudited condensed consolidated financial statementsof Insignia Solutions plc (“Insignia”, “us” or “we”) have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and pursuant to the instructionsto Form 10-Q and Article 10 of Regulation S-X.  The unaudited interim financial statementshave been prepared on the same basis as the annual financial statements and, inthe opinion of management, reflect all adjustments, consisting of normalrecurring adjustments, considered necessary for a fair presentation.  Interim results are not necessarilyindicative of results for a full year. These condensed consolidated financial statements and notes hereinshould be read in conjunction with Insignia’s audited consolidated financialstatements for the year ended December 31, 2003, and notes thereto,included in Insignia’s Annual Report on Form 10-K.

 

During the past 24months, we have incurred an aggregate loss from operations and negativeoperating cash flows of $17,352,000 and $13,123,000, respectively.  In 2003 we undertook measures to reduceoperating expenses and redesign our commercial efforts to adapt to newdevelopments in the market place. Assuming we achieve our revenue targets for the SSP product and controloperating costs, we believe that we will have sufficient funds to meet ouroperating and capital requirements through the end of fiscal year 2004.  We are currently in the process of exploringfinancing alternatives including selling additional equity or debtsecurities.  If additional funds areraised through the issuance of equity or debt securities, these securitiescould have rights, preferences and privileges senior to holders of our shares,and the terms of such securities could impose restrictions on our operations.The sale of additional equity or debt securities could result in additionaldilution to our shareholders. We may not be able to obtain additional financingon acceptable terms, or at all. If we are unable to obtain additional financingas and when needed, and on acceptable terms, we may be required to reduce thescope of our planned sales, marketing and product development efforts, whichcould jeopardize our business.  OnAugust 4, 2004 we received a letter from Nasdaqstating that we were not in compliance with the Nasdaq rule that requires us tohave, among other possibilities, a minimum of $2.5 million in shareholders’equity.  We are in the process ofdeveloping a plan to achieve and sustain compliance with all the NasdaqSmallCap listing requirement, including the time frame for completion of theplan.

 

We followaccounting principles generally accepted in the United States of America.  We conduct most of our business in U.S.dollars.  All amounts included in thecondensed consolidated financial statements and notes herein are denominated in  U.S. dollarsunless designated ‘‘£’’, in which case they are in British pound sterling.  The exchange rates used between the U.S.dollar and the British pound sterling were $1.83 and $1.64 (expressed in U.S.dollars per British pound sterling) at June 30, 2004 and 2003,respectively.

 

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 dividingnet income (loss) by the weighted average number of ordinary shares andordinary equivalent shares outstanding during the period.  Ordinary equivalent shares consist ofwarrants and stock options (using the treasury stock method).  Under the basic method of calculating netincome (loss) per share, ordinary equivalent shares are excluded from thecomputation.  Under the diluted method ofcalculating net income (loss) per share, ordinary equivalent shares areexcluded from the computation only if their effect is anti-dilutive.

 

Calculation of basic and diluted net income (loss) per share (inthousands, except per share data):

 
| ** **                                                         | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator – basic and diluted income (loss)  per share:       |       |                                  |       |                                |       |   |   |   |   |
| Net income (loss)                                                  |       | $                                     | (1,304     | )                                   | $          | 2,273 |   | $ | (3,214 | ) | $ | (926 | ) |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Denominator –  basic income (loss) per share:            |       |                                  |       |                                |       |   |   |   |   |
| Weighted average number of ordinary shares  outstanding            |       | 29,240                                |       | 20,089                              |       | 28,928 |   | 20,089 |   |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Basic net income (loss) per share                                  |       | $                                     | (0.04      | )                                   | $          | 0.11 |   | $ | (0.11 | ) | $ | (0.05 | ) |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Denominator – diluted income (loss) per  share:               |       |                                  |       |                                |       |   |   |   |   |
| Weighted average number of ordinary shares  outstanding            |       | 29,240                                |       | 20,089                              |       | 28,928 |   | 20,089 |   |
| Dilutive ordinary equivalent shares                                |       | —                                |       | 258                                 |       | — |   | — |   |
| Weighted average number of ordinary  equivalent shares outstanding |       | 29,240                                |       | 20,347                              |       | 28,928 |   | 20,089 |   |
|                                                               |       |                                  |       |                                |       |   |   |   |   |
| Diluted net income (loss) per share                                |       | $                                     | (0.04      | )                                   | $          | 0.11 |   | $ | (0.11 | ) | $ | (0.05 | ) |

 

The following number of options and warrants have not been included in thecalculation of diluted net income (loss) per share because their inclusionwould have been anti-dilutive:

 
| ** ** | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|       |       |                                  |       |                                |       |   |   |   |   |
| Options    |       | 1,422,881                             |       | 2,938,032                           |       | 1,664,314 |   | 4,570,532 |   |
| Warrants   |       | 144,742                               |       | 603,834                             |       | 325,185 |   | 4,191,334 |   |

 

7

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**Note 3.**** Stock based compensation**

 

Insignia accountsfor stock based employee compensation using the intrinsic value method underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” and related interpretations, and complies with the disclosureprovisions of Statement of Financial Accounting Standards No. 148, “Accountingfor Stock Based Compensation, Transition and Disclosure – an Amendment of FASBStatement No. 123”.  The following tableillustrates the effect on net income (loss) and net income (loss) per share ifwe had applied the fair value recognition provisions of Statement of FinancialAccounting Standards No. 123, “Accounting for Stock Based Compensation” (“SFAS123”), to stock based compensation:

 
| ** **                                                                    | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                          |       |                                 |       |                               |       |   |   |   |   |
| Net income (loss)-as reported                                                 |       | $                                    | (1,304     | )                                  | $          | 2,273 |   | $ | (3,214 | ) | $ | (926 | ) |
| Less stock based compensation expense  determined under the fair value method |       | (204                                 | )          | (261                               | )          | (390 | ) | (525 | ) |
| Net income (loss)-pro forma                                                   |       | $                                    | (1,508     | )                                  | $          | 2,012 |   | $ | (3,604 | ) | $ | (1,451 | ) |
| Basic and diluted net income (loss) per  share-as reported                    |       | $                                    | (0.04      | )                                  | $          | 0.11 |   | $ | (0.11 | ) | $ | (0.05 | ) |
| Basic and diluted net income (loss) per  share-proforma                       |       | $                                    | (0.05      | )                                  | $          | 0.10 |   | $ | (0.13 | ) | $ | (0.07 | ) |

 

In accordance withthe disclosure provisions of SFAS 123, the fair value of employee stock optionsgranted during the three and six months ended June 30, 2004 and 2003 wasestimated at the date of grant using the Black-Scholes model and the followingweighted average assumptions:

 
| ** **                         | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **2004**                             | ** ** | **2003**                           | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Stock Options:**                 |       |                                 |       |                               |       |   |   |   |   |
| Volatility range                   |       | 139% - 140                           | %          | 142% - 244                         | %          | 139% - 198 | % | 142% - 244 | % |
| Risk-free interest rate range      |       | 3.75% - 4.07                         | %          | 1.25% - 2.79                       | %          | 1.11% - 4.07 | % | 1.00% - 3.06 | % |
| Dividend yield                     |       | 0                                    | %          | 0                                  | %          | 0 | % | 0 | % |
| Expected life (years)              |       | 4                                    |       | 4                                  |       | 4 |   | 4 |   |
|                               |       |                                 |       |                               |       |   |   |   |   |
| **Employee  Stock Purchase Plan:** |       |                                 |       |                               |       |   |   |   |   |
| Volatility range                   |       | N/A                                  |       | N/A                                |       | 198 | % | 59 | % |
| Risk-free interest rate range      |       | N/A                                  |       | N/A                                |       | 1.13 | % | 1.17 | % |
| Dividend yield                     |       | 0                                    | %          | 0                                  | %          | 0 | % | 0 | % |
| Expected life (years)              |       | .5                                   |       | .5                                 |       | .5 |   | .5 |   |

 

**Note 4.****  New accounting pronouncements**

 

In January 2003, the Financial Accounting Standards Board(“FASB”) issued Interpretation No. 46,“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”(“FIN 46”), which requires certain variable interest entities to beconsolidated by the primary beneficiary of the entity if the equity investorsin the entity do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  FIN 46 is effective immediatelyfor all new variable interest entities created or acquired afterJanuary 31, 2003.  For variableinterest entities created or acquired prior to February 1, 2003, theprovisions of FIN 46 have been delayed and currently apply to the first fiscal yearor interim period beginning after December 15, 2003. We do not have anyvarible interest entities as of June 30, 2004 that require disclosure ornew consolidation as a result of adopting the provisions of FIN 46.

 

In April 2004, the Emerging Issues Task Force issued Statement No.03-06, “Participating Securities and the Two-Class Method Under FASB StatementNo. 128, Earnings Per Share” (“EITF 03-06”), which addresses a number ofquestions regarding the computation of earnings per share by companies thathave issued securities other than common stock that contractually entitle theholder to participate in dividends and earnings of the company when, and if, itdeclares dividends on its common stock. EITF 03-06 also provides furtherguidance in applying the two-class method of calculating earnings per share,clarifying what constitutes a participating security and how to apply thetwo-class method of computing earnings per

 

8

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share once it is determined that a securityis participating, including how to allocate undistributed earnings to such asecurity. EITF 03-06 is effective for fiscal periods beginning afterMarch 31, 2004. The adoption of EITF 03-06 is not expected to have amaterial effect on Insignia’s results of operations or financial position.

 

**Note 5.****  Esmertec agreements**

 

On February 7, 2003, we entered into a loan agreement withesmertec AG (“esmertec”) whereby esmertec loaned Insignia $1.0 million at aninterest rate of prime plus two percent. The principal amount of $1.0 million was repaid on January 15, 2004and all remaining accrued interest of $55,161 was repaid on March 15,2004. Accordingly, there are no outstanding balances or future amounts due toesmertec under the loan agreement as of June 30, 2004.

 

On March 4, 2003, we entered into several other agreements (the“Agreements”) with esmertec including a definitive agreement to sell certainassets relating to our Java Virtual Machine (“JVM”) product line in exchangefor $3.5 million, due in installments through April 2004.  The transaction closed on April 23, 2003and was amended on June 30, 2004. The assets sold primarily included the fixed assets, customer agreementsand employees related to the JVM product line. Under the terms of the Agreements,esmertec also became the exclusive master distributor of the JVM technology inexchange for $3.4 million in minimum guaranteed royaltiespayable through October 2004.

 

Under the original agreements, Insignia could have earned up to anadditional $4.0 million over the subsequent three year period from theeffective date of the Agreements based on a percentage of esmertec’s sales ofthe JVM product during the period. Additionally, the parties entered into a cooperative agreement whereasesmertec would promote Insignia’s Secure System Provisioning (“SSP”) softwareproduct to esmertec’s mobile platform customers.

 

As part of the sale of our JVM product line, we transferred 42employees to esmertec, of which 31 were development engineers.  In addition, as part of the sale, esmertecentered into an agreement with our U.K. building landlord in order to assumethe lease on one of the two buildings leased by Insignia.

 

On February 13, 2004, Insignia and esmertec executed the finalpurchase agreement upon signing the Limited Assignment of Rights of TechnologyLicense and Distribution Agreement.  Thefinal purchase agreement transferred the intellectual property of Jeode and thetitle for Insignia’s remaining prepaid royalties to esmertec.

 

On June 30, 2004, Insignia and esmertec executed a Termination andWaiver Agreement. This Agreement offset esmertec related liabilities anddeferred revenue totaling $853,000 against $600,000 of remaining guaranteedroyalty payments due from esmertec in exchange for a final cash payment toInsignia of $185,000.  The resulting netgain of $298,000 was recorded as other income in the second quarter of 2004 andis net of expenses.  The final paymentwas received from esmertec on July 8, 2004.

 

The Jeode platform had been our principal product line since the thirdquarter of 1999.  With the completion ofthe sale of our JVM product line to esmertec in February 2004, Insignia’ssole product line currently consists of its SSP products for the mobile handsetand wireless carrier industry.  We beganshipment of our SSP product to customers in the fourth quarter of 2003.

 

**Note 6.****  Commitments and contingencies**

 

In June 2001, Insignia and Sun Microsystems, Inc. (“Sun”) enteredinto an addendum (the “Addendum”) to the Distribution Agreement (the“Distribution Agreement”) relating to distribution of products to an Insigniacustomer.  In September 2001,Insignia and Sun entered into Amendment No. 3 (the “Amendment”) to theTechnology License and Distribution Agreement between the two companies.  The Addendum and the Amendment each requiredInsignia to make non-refundable royalty prepayments to Sun which would beforfeited if the prepaid royalties had not been used by the date theDistribution Agreement expired, June 30, 2004.  The title to the prepaid royalties wastransferred to esmertec under the final asset purchase agreement onFebruary 13, 2004. Sun agreed to the transfer to esmertec effective as ofJune 14, 2003.

 

*Guarantee Agreements*

 

Insignia, Inc., a Delaware subsidiary of Insignia, as permitted underDelaware law and in accordance with our Bylaws, indemnifies our officers anddirectors for certain events or occurrences, subject to certain limitations,while the officer is or was serving at our request in such capacity.  The term of the indemnification period is forthe officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited;however we do have a Director and Officer Insurance Policy that limits ourexposure and enables us to recover a portion of any future amounts paid under

 

9

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certain circumstances.  As a result of the insurance policy coverage,we believe the fair value of 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 for the products, as delivered by Insignia.  The terms of these indemnification agreementsare generally perpetual any time after execution of the agreement.  The maximum amount of potential futureindemnification is unlimited, however, we normallyretain the right to limit the remedies the customer may receive.  We have not paid any amounts to settle claimsor 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 haveyet to incur any expense related to price protection.

 

Insignia typicallywarrants the binary version and the source code license of its softwareproducts against defects in material and workmanship under normal use andservice for a period of ninety days.  There is no warranty accrual because potential future payments eitherare not probable or we have yet to incur any warrant expense.

 

**Note 7.****  Segment information**

 

Insignia operatesin a single industry segment providing software technologies that enable mobileoperators and phone manufacturers to update the firmware of mobile devicesusing standard over-the-air data networks.

 

Sales to customersoutside the United States, derived mainly from customers in Europe and Asia,represented approximately 100% and 65% of total revenues in the three and sixmonths ended June 30, 2004 and 0% and 10% of total revenues in the threeand six months ended June 30, 2003, respectively.

 

One customeraccounted for 98% and 25% of our total revenues for the three and six monthsended June 30, 2004. For the six months ended June 30, 2003, onecustomer accounted for 35% of total revenue. There were no revenues in thesecond quarter of 2003.

 

#### **Note 8.** Equity transactions and warrants

####  

On January 5,2004, we issued 2,262,500 ordinary shares in ADS form at a price of $0.80 to atotal of 10 investors. We also issued warrants to purchase 565,625 ADSs to theinvestors at an exercise price of $1.04. The warrants were exercisableimmediately and expire January 5, 2009. We received $1.8 million lessoffering expenses totaling approximately $0.2 million in this transaction. Wealso issued warrants to purchase 108,562 ADSs to the two principals of theplacement agent, which are exercisable at a price of $1.09 per share. Thesewarrants were exercisable immediately and expire January 5, 2009.

 

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

 

10

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The following table summarizes the warrant activity during the sixmonths ended June 30, 2004:

 
| ** **                      | ** ** | **Warrants  outstanding  and  exercisable** | ** ** | **Warrants outstanding  exercise price** | ** ** |
|---------------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|
| Balance, December 31, 2003 |       | 739,657                                     |       | $4.77 - $6.00                            | (1)        |
| Granted                         |       | 881,187                                     |       | $1.03 - $2.68                            |       |
| Exercised                       |       | (470,000                                    | )          | $0.85                                    |       |
| Balance, June 30, 2004     |       | 1,148,844                                   |       | $1.04-$6.00                              | (1)        |

 

----

(1) The $6.00 warrants are the lesser of $6.00 or 90% of 10-day averagemarket value

 

**Note 9.****  Related party transaction**

 

OnFebruary 13, 2001, we entered into a promissory note with Richard M.Noling, then President and Chief Executive Officer of Insignia whereby Mr.Noling borrowed $150,000 from Insignia. The promissory note was due in three equal installments, on each annualanniversary from the date of the note. Interest accrued on the unpaid principal balance at a rate per annumequal to the prime lending rate of interest as listed in the Wall StreetJournal plus 1%.  Accrued interest wasdue and payable monthly in arrears on the last calendar day of each month, beginningMarch 31, 2001.  The note wasamended on January 24, 2002 to extend the first and subsequentinstallments by one year.  The firstinstallment became due on February 13, 2003.  Mr. Noling’s employment was terminated withInsignia effective February 14, 2003. We forgave, effective March 6, 2003, thebalance of the loan, $128,154, in lieu of any bonus compensation.

 

On December 31, 2003, Insignia entered into a joint ventureagreement with J Tek Corporation to form Insignia Asia Chusik Hoesa (“InsigniaAsia”).  During the six months endedJune 30, 2004, Insignia recognized license revenue of $75,000 fromInsignia Asia.

 

**Note 10.****  Restructuring**

 

Statement ofFinancial Accounting Standards No. 146, “Accounting for Exit or DisposalActivities” requires restructuring charges to be recorded at the commitmentdate.  On February 11, 2003, weannounced a restructuring of the organization to focus on the SSP technology.The restructuring charges for the quarters ended March 31, June 30,September 30 and December 31, 2003 were $326,000, $173,000, ($19,000)and $18,000, respectively, for employee termination benefits. Restructuringcharges paid in the four quarters of 2003 were $117,000, $167,000, $109,000 and$115,000, respectively.  There were noaccrued restructuring charges remaining as of December 31, 2003 orJune 30, 2004.

 

11

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**Item 2.****  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

The following discussion and analysis should be read in conjunctionwith the unaudited condensed consolidated financial statements and notesthereto included in Part I - Item 1 of this Form 10-Q and the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” set forthin Insignia’s Form 10-K for the year ended December 31, 2003 (the “Form10-K”).

 

**Future operating results**

 

*This Form 10-Q contains forward-looking statements. Words such as “anticipates,” “believes,”“expects,” “future,” and “intends,” and similar expressions are used toidentify forward-looking statements. These forward-looking statements involverisks and uncertainties that could cause actual results to differ materiallyfrom those in the forward-looking statements. Factors that could cause or contributeto such differences in results and outcomes include without limitation thosediscussed in the section titles “Risk Factors”. Readers are cautioned notto place undue reliance on these forward-looking statements, which reflectmanagement’s analysis only as of the date hereof. We assume no obligation toupdate these forward-looking statements to reflect actual results or changes infactors or assumptions affecting such forward-looking statements.*

 

12

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The following table sets forth the unaudited condensed consolidatedresults of operations as a percentage of total revenues for the three andsix-month periods ended June 30, 2004 and 2003:

 
| ** **                        | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Net revenues:                     |       |                                  |       |                                |       |   |   |   |   |   |
| License                           |       | 98.1                                  | %          |                                | —     | %* | 98.8 | % | 50.7 | % |
| Service                           |       | 1.9                                   | %          |                                | —     | %* | 1.2 | % | 49.3 | % |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Total net revenues                |       | 100.0                                 | %          |                                | —     | %* | 100.0 | % | 100.0 | % |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Cost of net revenues:             |       |                                  |       |                                |       |   |   |   |   |   |
| License                           |       | 4.7                                   | %          |                                | —     | %* | 6.6 | % | 39.9 | % |
| Service                           |       | 0.0                                   | %          |                                | —     | %* | 0.0 | % | 13.7 | % |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Total cost of net revenues        |       | 4.7                                   | %          |                                | —     | %* | 6.6 | % | 53.6 | % |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Gross margin                      |       | 95.3                                  | %          |                                | —     | %* | 93.4 | % | 46.4 | % |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Operating expenses:               |       |                                  |       |                                |       |   |   |   |   |   |
| Sales and marketing               |       | 494.4                                 | %          |                                | —     | %* | 315.7 | % | 239.0 | % |
| Research and development          |       | 617.8                                 | %          |                                | —     | %* | 345.5 | % | 534.3 | % |
| General and administrative        |       | 626.2                                 | %          |                                | —     | %* | 296.0 | % | 403.7 | % |
| Restructuring                     |       | —                                |       |                                | —     | %* | — | % | 131.7 | % |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Total operating expenses          |       | 1,738.3                               | %          |                                | —     | %* | 957.3 | % | 1,308.7 | % |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Operating loss                    |       | (1,643.0                              | )%         |                                | —     | %* | (863.8 | )% | (1,262.3 | )% |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Interest income (expense), net    |       | 2.8                                   | %          |                                | —     | %* | 0.5 | % | (3.4 | )% |
| Other income, net                 |       | 246.7                                 | %          |                                | —     | %* | 58.9 | % | 934.6 | % |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Income (Loss) before income taxes |       | (1,393.5                              | )%         |                                | —     | %* | (804.5 | )% | (331.1 | )% |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Benefit from income taxes         |       | (174.8                                | )%         |                                | —     | %* | (50.0 | )% | (86.8 | )% |
|                              |       |                                  |       |                                |       |   |   |   |   |   |
| Net income (loss)                 |       | (1,218.7                              | )%         |                                | —     | %* | (754.5 | )% | (244.3 | )% |

 

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* There were no revenues in the second quarter of 2003 due to the saleof the JVM product line to esmertec.

 

**Overview**

 

We commenced operations in 1986 and currently develop,market and support software technologies that enable mobile operators and phonemanufacturers to update the firmware of mobile devices using standardover-the-air data networks. Before 2003, our principal product line was theJeodeTM platform based on our Embedded Virtual Machine (“EVM”TM) technology.

 

During 2001, we began development of a range of products (“SecureSystem Provisioning” or “SSP” products) for the mobile phone and wirelessoperator industry. These SSP products are based on our position as a VirtualMachine (“VM”) supplier for manufacturers of mobile devices and allow wirelessoperators and phone manufacturers to reduce customer care and software recallcosts as well as increase subscriber revenue by deploying new mobile servicesbased on provisional capabilities. With the sale of our JVM product line inApril 2003, our sole product line consists of our SSP product. We shippedour first SSP product in December 2003.

 

Our operations outside of the United States are primarily in the UnitedKingdom, where part of our research and development operations and our Europeansales activities are located. We sell our SSP platform directly to customers orthrough our hosted partners such as Metrowerks and Accord Customer CareSolutions. Our revenues from customers outside the United

 

13

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States are derived primarily from Europe and Asia. The operatingexpenses of our operations outside the United States are mostly incurred inEurope and relate to our research and development department in the UnitedKingdom and our European sales activities. Such expenses consist primarily ofongoing fixed costs and consequently do not fluctuate in direct proportion torevenues. Our revenues and expenses outside the United States can fluctuatefrom period to period based on movements in currency exchange rates.Historically, movements in currency exchange rates have not had a materialeffect on our revenues.

 

We operate with the U.S. dollar as our functional currency, with amajority of our revenues and operating expenses denominated in U.S. dollars.Pound sterling exchange rate fluctuations against the dollar can cause U.K.expenses, which are translated into dollars for financial statement reportingpurposes, to vary from period-to-period.

 

**The current economic environment**

 

The economic climate in which we operate has been difficult over thelast three years, and information technology (“IT”) spending has decreaseddramatically. This has had an effect on our ability to generate new licensefees, as IT budgets have been reduced or frozen and expenditures like thoserequired to purchase some of our products have been limited. We cannot provideany assurance that the pressures on IT spending will ease. Continuedcompetitive pressure could have a continuing pronounced effect on our operatingresults. In 2003, we undertook a variety of cost reduction measures designed tobring our operating expenses in line with our perceptions of the businessclimate, including workforce reductions.

 

###### **Saleof Java Virtual Machine assets**

###### ** **

On February 7, 2003, we entered into a loan agreement withesmertec AG (“esmertec”) whereby esmertec loaned Insignia $1.0 million at aninterest rate of prime plus two percent. The principal amount of $1.0 million was repaid on January 15, 2004and all remaining accrued interest of $55,161 was repaid on March 15,2004. Accordingly, there are no outstanding balances or future amounts due toesmertec under the agreement as of June 30, 2004.

 

On March 4, 2003, we entered into several other agreements (the“Agreements”) with esmertec including a definitive agreement to sell certainassets relating to our Java Virtual Machine (“JVM”) product line in exchangefor $3.5 million due in installments through April 2004.  The transaction closed on April 23, 2003and was amended on June 30, 2004.  The assets sold primarily included the fixed assets, customer agreementsand employees related to the JVM product line. Under the terms of theAgreements, esmertec also became the exclusive master distributor of the JVMtechnology in exchange for $3.4 million in minimum guaranteed royalties throughOctober 2004.

 

Under the original agreements, Insignia could have earned up to anadditional $4.0 million over the subsequent three year period from theeffective date of the agreement based on a percentage of esmertec’s sales ofthe JVM product during the period. Additionally, the parties entered into a cooperative agreement whereasesmertec would promote Insignia’s Secure System Provisioning (“SSP”) softwareproduct to esmertec’s mobile platform customers.

 

As part of the sale of our JVM product line, we transferred 42 employeesto esmertec, of which 31 were development engineers.  In addition, as part of the sale, esmertecentered into an agreement with our U.K. building landlord in order to assumethe lease on one of the two buildings leased by Insignia.

 

On February 13, 2004, Insignia and esmertec executed the finalpurchase agreement upon signing the Limited Assignment of Rights of TechnologyLicense and Distribution Agreement.  Thefinal purchase agreement transferred the intellectual property of Jeode and thetitle for Insignia’s remaining prepaid royalties to esmertec.

 

On June 30, 2004, Insignia and esmertec executed a Termination andWaiver Agreement. The Agreement offset esmertec related liabilities anddeferred revenue totaling $853,000 against $600,000 of remaining guaranteedroyalty payments due from esmertec of $600,000 in exchange for a final cashpayment of $185,000.  The resulting netgain of $298,000 was recorded as other income in the second quarter of 2004 andis net of expenses.  The final paymentwas received from esmertec on July 8, 2004.

 

The Jeode platform had been our principal product line since the thirdquarter of 1999.  With the completion ofthe sale of our JVM product line to esmertec in February 2004, Insignia’ssole product line currently consists of its SSP products for the mobile handsetand wireless carrier industry.  We beganshipment of our SSP product to customers in the fourth quarter of 2003.

 

14

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**Revenues**

 
| ** **        | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **        | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **        | ** ** | **(in thousands)**                    | ** ** |
| License revenue   |       | $                                     | 105        |                                | $          | — |   | $ | 421 |   | $ | 192 |   |
| Service revenue   |       | 2                                     |       | —                              |       | 5 |   | 187 |   |
| Total net revenue |       | $                                     | 107        |                                | $          | — |   | $ | 426 |   | $ | 379 |   |

 

The SSP productline was our primary business for the first half of 2004 and the Jeode productline was our sole business for the first half of 2003.  Revenue from the SSP product line is derivedfrom a combination of sources including (1) initial licensing fees, (2) activatedsubscriber fees, (3) support and maintenance fees, and (4) engineering servicefees. Revenue from the Jeode product line was derived from four main sources:(1) the sale of a development license, (2) the sale of annual maintenance andsupport contracts/services, (3) prepaid royalties and transactional occurrencefees based on shipments of products that include Jeode technology, and (4)nonrecurring engineering activities.

 

Esmertec completedits purchase of the JVM product line and all revenue sharing has ended inaccordance with the Termination and Waiver Agreement signed on June 30,2004.  Accordingly on February 13,2004, we do not expect future revenues to be generated from the JVM productline.

 

*TotalRevenues*

 

Total revenue inthe second quarter of 2004 was $107,000, compared to no revenues beingrecognized in the second quarter of 2003. The increase in total revenues period over period is primarily due to norevenues being recorded in the second quarter of 2003, as the Company completedthe sale of the JVM product line and began transitioning its product offeringsto the SSP product line. License revenue and service revenue accounted for 99%and 1%, respectively, of total revenues in the second quarter of 2004, comparedto no revenue being recorded in the second quarter of 2003.

 

For the six months ended June 30, 2004, total revenues increasedby 12%, to $426,000 from $379,000 for the first six months of 2003.  The increase is due to new contracts for theSSP product line. License revenue and service revenue accounted for 99% and 1%,respectively, of total revenue for the first half of 2004 compared to 51% and49%, respectively, for the first half of 2003.

 

##### *License Revenue*

#####  

The $105,000 increase in license revenues from the second quarter of2003 to the second quarter of 2004, as well as the $229,000, or 119%, increasein license revenues in the first half of 2004 over the first half of 2003, isprimarily due to revenues being generated from new licenses of our SSP productsas compared to no revenues being generated in the second quarter of 2003.

 

*Service Revenue*

 

The increase in service revenues from the second quarter of 2003 to thesecond quarter of 2004 was a result of transitioning from the JVM to the SSPproduct lines.

 

Service revenues decreased 97% in the six months ended June 30,2004 when compared to the six months ended June 30, 2003 due primarily to decreased Jeode engineering and Jeode support contractsafter the sale of the JVM product line.

 

15

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Sales to customers outside the United States, derived mainly fromcustomers in Europe and Asia, represented approximately 100% and 65% of totalrevenues in the three and six months ended June 30, 2004, respectively, and 0%and 10% of total revenues in the three and six months ended June 30, 2003,respectively. One customer accounted for 98% and 25% of our total revenues forthe three and six months ended June 30, 2004. For the six months ended June 30,2003, one customer accounted for 35% of total revenue. There were no revenuesin the second quarter of 2003.  We arecurrently targeting that revenues from sales of our SSP products outside theUnited States will continue to contribute a substantial percentage of our totalrevenues.

 

**Cost of revenues and gross margin**

 
| ** **                    | ** ** | **Three months ended  June 30,**  | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                    | ** ** | **2004**                               | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                    | ** ** | **(in thousands, except percentages)** | ** ** |
| Cost of license revenue       |       | $                                      | 5          |                                | $          | 36 |   | $ | 28 |   | $ | 151 |   |
| Gross margin: license revenue |       | 95                                     | %          |                                | *          | 93 | % | 21 | % |
|                          |       |                                   |       |                                |       |   |   |   |   |
| Cost of service revenue       |       | $                                      | 0          |                                | $          | — |   | $ | — |   | $ | 52 |   |
| Gross margin: service revenue |       | 100                                    | %          |                                | *          | 100 | % | 72 | % |
|                          |       |                                   |       |                                |       |   |   |   |   |
| Total cost of revenue         |       | $                                      | 5          |                                | $          | 36 |   | $ | 28 |   | $ | 203 |   |
| Gross margin: total revenue   |       | 95                                     | %          |                                | *          | 93 | % | 46 | % |

 

----

* There were no revenues recorded in the second quarter of 2003 due tothe sale of the JVM product line to esmertec.

 

Cost of license revenue is mainly comprised of royalties andcommissions to third parties as well as commissions earned by our internalsales force.  Cost of service revenueincludes costs associated with nonrecurring engineering activities and end-usersupport under maintenance contracts.

 

The increase in license revenue gross margins in the second quarter andfirst six months of 2004 is due to the higher margins on our recently launchedSSP product line when compared to the lower margins on our older product line,Jeode, which was sold in the second quarter of 2003.

 

Gross margin for service revenue is impacted by the level and pricingterms of nonrecurring engineering activities. These factors can vary fromcustomer to customer, and from contract to contract, based on the level ofmaintenance contracts sold.  Gross marginfor service revenue increased in the second quarter and the first half of 2004to 100% from 0% in the second quarter of 2003, and from 72% in the first halfof 2003. The increase in gross margins in the second quarter and six months of2004 was primarily due to requiring a lower level of costs to support a highervolume of maintenance contracts. There were no servicerevenues recognized in the second quarter of 2003.

 

**Operating expenses**

 
| ** **                   | ** ** | **Three months ended  June 30,**  | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **2004**                               | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                   | ** ** | **(in thousands, except percentages)** | ** ** |
| Sales and marketing          |       | $                                      | 529        |                                | $          | 261 |   | $ | 1,345 |   | $ | 906 |   |
| Percentage of total revenues |       | 494                                    | %          |                                | %*         | 316 | % | 239 | % |
|                         |       |                                   |       |                                |       |   |   |   |   |
| Research and development     |       | $                                      | 661        |                                | $          | 719 |   | $ | 1,472 |   | $ | 2,025 |   |
| Percentage of total revenues |       | 618                                    | %          |                                | %*         | 346 | % | 534 | % |
|                         |       |                                   |       |                                |       |   |   |   |   |
| General and administrative   |       | $                                      | 670        |                                | $          | 386 |   | $ | 1,261 |   | $ | 1,530 |   |
| Percentage of total revenues |       | 626                                    | %          |                                | %*         | 296 | % | 404 | % |

 

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* There were no revenues recorded in the second quarter of 2003 due tothe sale of the JVM product line to esmertec.

 

**Sales and marketing expenses**consist primarily of personnel and related employee costs, salespersoncommissions, advertising costs, promotional expenses and travel expenses.  Sales and marketing expenses increased by103% to $529,000 in the second quarter ended June 30, 2004 from $261,000in the second quarter ended June 30, 2003. The increase was primarily due to $103,000 of expenses related to astrategic sales partner promoting our product line in the Asian markets,$61,000 in increased salaries and related employee expenses for additionalheadcount, $41,000 in additional marketing programs and $51,000 in additionaltravel expenses.

 

16

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Sales and marketing expenses increased by 48% to $1,345,000 from$906,000 for the six months ended June 30, 2004 compared to the sameperiod of 2003.  The primary reason forthe increase was a result of a $353,000 one-time charge from options earned byour strategic sales partner and a $162,000 payment for the engagement of astrategic partner for the Asian markets. These increases were offset in part bydecreases in salaries and employee related expense of $107,000 due to reducedsales and marketing head count.  Weanticipate a modest increase in sales and marketing expense in the next fewquarters as we continue to expand our sales team for the SSP product line.  Insignia has established a direct sales forcein the United States and Europe, a strategic partner to promote sales into theAsian market, and a joint venture in Korea.

 

**Research and development expenses**consist primarily of personnel costs and outside contract engineeringservices.  Research and developmentexpenses in the second quarter of 2004 decreased 8% to $661,000 from $719,000in the same period in 2003.  The decreasewas primarily a result of lower support and maintenance expense no longerrequired to support the Jeode product line.

 

For the six months ended June 30, 2004, research and developmentexpenditures decreased 27% to $1,472,000 from $2,025,000 for the same period in2003.  The decrease primarily consistedof a $316,000 reduction in salaries and employee related expenses due to areduction in headcount in 2003 and a $197,000 decrease in software support andmaintenance expenditures no longer required to support the Jeode productline.  Research and development expensesare expected to increase moderately in the near term as Insignia furtherenhances its Secure System Provisioning technology, and as we provide supportand maintenance for future licensing agreements.

 

In accordance with Statement of Financial Accounting Standards No. 86,software development costs are expensed as incurred until technologicalfeasibility is established, after which any additional costs are capitalized.In 2004 and 2003, no development expenditures were capitalized, as there wereno amounts that qualified for capitalization.

 

**General and administrative expenses**consist primarily of personnel and outside services costs for accounting, legaland printing fees.  General andadministrative expenses increased in the second quarter of 2004 by 74% to$670,000 from $386,000 in the second quarter of 2003.  The primary reasons for the increase were anincrease in outside accounting, legal and printing fees amounting toapproximately $104,000 and an increase of $117,000 in salary and employeerelated expenses due to increased headcount in 2004 and a resumption of paymentof fees to our outside directors.

 

General and administrative expenses in the first half of 2004 decreased18% to $1,261,000 from $1,530,000 in the first half of 2003.  A decrease in professional services amountingto approximately $206,000 was the primary reason for the decline in expenses.

 

General and administrative expenses are expected to increase slightlyfor the remainder of 2004 due to the additional costs of being compliant withthe Sarbanes Oxley Act of 2002.

 

###### **Restructuring**

 
| ** **                   | ** ** | **Three months ended  June 30,**  | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **2004**                               | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                   | ** ** | **(in thousands, except percentages)** | ** ** | ** **                          | ** ** | ** ** | ** ** |
|                         |       |                                   |       |                                |       |   |   |   |   |
| Restructuring                |       | $                                      | —     |                                | $          | 173 |   | $ | — |   | $ | 499 |   |
| Percentage of total revenues |       | —                                 | %          | —                              | %*         | — | % | 132 | % |
|                              |            |                                        |            |                                     |            |  |  |  |  |  |  |  |  |

 

----

* There were no revenues recorded in the second quarter of 2003 due tothe sale of the JVM product line to esmertec.

 

On February 11, 2003, we announced a restructuring of theorganization to focus on the SSP technology. Restructuring expenses consisted of charges for termination benefits inthe quarter ended June 30, 2003 of $173,000 and $499,000 for the first sixmonths of 2003.  Restructuring expensesrepresented 132% of total revenues for the six months ended June 30, 2003,and 0% of total revenue for the three and six months ended June 30, 2004.

 

17

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**Interest income (expense), net**

 
| ** **                     | ** ** | **Three months ended  June 30,**  | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                     | ** ** | **2004**                               | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **(in thousands, except percentages)** | ** ** |
| Interest income (expense), net |       | $                                      | 3          |                                | $          | (12 | ) | $ | 2 |   | $ | (13 | ) |
| Percentage of total revenues   |       | 3                                      | %          | —                              | %*         | 0 | % | 3 | % |
|                                |            |                                        |            |                                     |            |  |  |  |  |  |  |  |  |

 

----

* There were no revenues recorded in the second quarter of 2003 due tothe sale of the JVM product line to esmertec.

 

Interest income (expense), net increased from an expense of $12,000 inthe three months ended June 30, 2003 to income of $3,000 in the threemonths ended June 30, 2004. Interest income (expense), net increased from an expense of $13,000 inthe six months ended June 30, 2003 to income of  $2,000 in the six months endedJune 30, 2004.  The change frominterest expense in the three months and six months ended June 30, 2003 tointerest income in the three months and six months ended June 30, 2004 wasprimarily due to the absence of any interest expense in 2004 attributable tothe $1.0 million esmertec note payable entered into on February 7,2003.  The loan was repaid onJanuary 15, 2004.  Interest income(expense), net is expected to remain flat in 2004.

 

### **Otherincome, net**

 
| ** **                   | ** ** | **Three months ended  June 30,**  | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------|------------|----------------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **2004**                               | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                   | ** ** | **(in thousands, except percentages)** | ** ** |
| Other income, net            |       | $                                      | 264        |                                | $          | 3,529 |   | $ | 251 |   | $ | 3,542 |   |
| Percentage of total revenues |       | 247                                    | %          | —                              | %*         | 59 | % | 935 | % |
|                              |            |                                        |            |                                     |            |  |  |  |  |  |  |  |  |

 

----

* There were no revenues recorded in the second quarter of 2003 due tothe sale of the JVM product line to esmertec.

 

The primary components of other income, net for the periods presentedare foreign exchange gain/loss, joint venture losses, and gain on sale of theJeode product line.  In the secondquarter of 2004, we recorded a net gain on the sale of our Jeode product lineof $298,000 resulting from the Termination and Waiver Agreement signed byInsignia and esmertec on June 30, 2004. The agreement offset esmertec related liabilities and deferred revenuetotaling $853,000 against $600,000 of remaining guaranteed royalty payments duefrom esmertec of $600,000 in exchange for a final cash payment to Insignia of$185,000.  The final payment was receivedfrom esmertec on July 8, 2004.  Thisgain was further offset by our share of the year to date loss on our jointventure investment, Insignia Asia, of $40,000. In the quarter ended June 30, 2003, we recognized an initial gainof $3,500,000 relating to the sale of the Jeode product line.  Other income, net recognized in the sixmonths ended June 30, 2004 was also primarily the result of the $298,000gain on the sale of the Jeode line of business and joint venture losses whilethe other income, net recognized in the six months ended June 30, 2003 wassubstantially comprised of the $3,500,000 relating to the gain on the sale ofthe Jeode product line.

 

For the six months ended June 30, 2004, 100% of our revenue andapproximately 61% of our operating expenses were denominated in U. S. dollars.  Most of our remaining revenues and expensesare British pound sterling denominated and, consequently, we are exposed tofluctuations in British pound sterling exchange rates.  There can be no assurance that suchfluctuations will not have a material effect on our results of operations inthe future.  We did not enter into anycurrency option hedge contracts in 2003 or the six months ended June 30,2004.

 

We have, at times, an investment portfolio of fixed income securitiesthat are classified as “available for sale securities.”  These securities, like all fixed incomeinstruments, are subject to interest rate risk and will fall in value if marketinterest rates increase.  We attempt tolimit this exposure by investing primarily in short-term securities.

 

**Benefit from income taxes**

 
| ** **                | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|---------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(in thousands)**                    | ** ** |
| Benefit from income taxes |       | $                                     | 187        |                                | $          | 331 |   | $ | 213 |   | $ | 329 |   |
| Effective income tax rate |       | —                                |       | —                              |       | — |   | — |   |
|                           |            |                                       |            |                                     |            |  |  |  |  |  |  |  |  |

 

18

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The benefit from income taxes for the three and six months endedJune 30, 2004 is the result of reducing a payable of $187,000 forpotential tax liabilities, which is no longer necessary due to our accumulatedoperating loss carry forwards, tax receivables, and the lack of tax assessmentsor expenses.

 

The benefit from income taxes for the three and six months endedJune 30, 2003 primarily represented a tax credit received from the UnitedKingdom for research and development investments. 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.

 

We have recorded a full valuation allowance against all deferred taxassets, primarily comprised of net operating losses, on the basis thatsignificant uncertainty exists with respect to their realization.

 

**Liquidity and capital resources**

 

We have transitioned our product focus from the Jeode product line toour new SSP product line.  This change inproduct focus has resulted in a redirection of our working capital andpersonnel from our former Jeode product line towards the development andmarketing efforts associated with our newer SSP product. Cash used in operatingactivities in the first half of  2004 totaled $2,673,000 compared to$2,231,000 for the same period in 2003. For the six months ended June 30, 2004, cash used in operatingactivities resulted primarily from a net loss of $3,214,000, a decrease indeferred revenue of $821,000, and a decrease in accounts payable and accruedliabilities of $357,000.  These werepartially offset by a decrease in prepaid royalties of $2,185,000, a netdecrease in accounts receivable and other receivables of 623,000, and anon-cash charge for warrants in the amount of $353,000.

 

Cash used in investing activities for the six months endedJune 30, 2004 was $163,000, which consisted primarily of an investment inan affiliate and purchases of property and equipment.

 

Cash provided byfinancing activities for the six months ended June 30, 2004 was$2,574,000, resulting from proceeds from share issuance in the amount of$1,604,000, and proceeds from the exercise of stock options and warrantsamounting to $970,000.

 

Our cash, cashequivalents and restricted cash were $2,000,000 at June 30, 2004, adecrease of $262,000 from $2,262,000 at December 31, 2003.  At June 30, 2004, we had a workingcapital surplus of $1,920,000.  Theprincipal source of working capital came as a result of the proceeds from ourJanuary 2004 financing and exercise of options and warrants.  At June 30, 2003, we had a workingcapital surplus of  $1,666,000.  Capital additions totaled $58,000 and $15,000for the six months ending June 30, 2004 and 2003, respectively. We have nomaterial commitments for capital expenditures or strategic investments. Ourcommitments for expenditures consist of building leases in the U.K. and U.S.

 

As ofJune 30, 2004, we had the following contractual cash obligations(including operating lease obligations that were restructured pursuant to thesale of the JVM product line) (in thousands):

 

| ** **                                               | ** ** | **Operating  leases** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|
| Year ending December 31,                            |       |                  |       |
| 2004 (July 1, 2004 through  December 31, 2004) |       | $                     | 149        |   |
| 2005                                                     |       | 282                   |       |
| 2006                                                     |       | 193                   |       |
| 2007                                                     |       | 165                   |       |
| 2008                                                     |       | 165                   |       |
| Thereafter                                               |       | 762                   |       |
|                                                     |       | $                     | 1,716      |   |

 

In September 2001, Insignia and Sun Microsystems, Inc. (“Sun”)entered into Amendment No. 3 (the “Amendment”) to the Technology License andDistribution Agreement (the “Distribution Agreement”) between the twocompanies.  The Amendment requiredInsignia to make non-refundable royalty prepayments to Sun which would beforfeited if the prepaid royalties had not been used by the date theDistribution Agreement and Amendments expired, June 30, 2004.  The title to the prepaid royalties wastransferred to esmertec on February 13, 2004 under the final assetpurchase agreement.

 

On October 17, 2002, we entered into a securities subscriptionagreement (“Agreement”) with Fusion Capital Fund II, LLC (“Fusion Capital”),pursuant to which Fusion Capital agreed to purchase, on each trading dayfollowing the effectiveness of a

 

19

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registration statement covering the American Depository Shares (“ADSs”)to be purchased by Fusion Capital, $10,000 of our ADSs up to an aggregate of$6.0 million over a period of 30 months. The purchase price of theADSs will be equal to a price based upon the future market price of the shares.In order to be in compliance with Nasdaq rules, wecannot sell our ordinary shares to Fusion Capital at a price below $0.38, whichrepresented the greater of the book value per share of our ordinary shares asof September 30, 2002 and the closing sale price per share of our ADSs onOctober 16, 2002.

 

In November 2003, Fusion made a binding election to purchase anaggregate of 1,766,667 ADSs for an aggregate purchase price of $1,325,000.  In November 2003, we issued 1,000,000ADSs to Fusion for an aggregate purchase price of $750,000.  Fusion’s delivery of the additional amount of$575,000 in November 2003 constituted a binding commitment to purchase theremaining 766,667 shares at such time as Fusion’s beneficial ownership ofInsignia became less than 9.9%, and the balance ofthese 766,667 shares were issued to Fusion in January 2004.

 

Fusion also purchased an aggregate of 2,000,000 ADSs on exercise ofwarrants.  Unless an event of defaultoccurs under the Agreement, these shares must be held by Fusion Capital untilthe earlier of 30 months from the date of the Agreement or the date theAgreement is terminated.

 

Assuming weachieve our revenue targets for the SSP product and control operating costs, webelieve that we will have sufficient funds to meet our operating and capitalrequirements through the end of fiscal year 2004.  We are currently in the process of exploringfinancing alternatives including selling additional equity or debtsecurities.  If additional funds areraised through the issuance of equity or debt securities, these securities couldhave rights, preferences and privileges senior to holders of our shares, andthe terms of such securities could impose restrictions on our operations. Thesale of additional equity or debt securities could result in additionaldilution to our shareholders. We may not be able to obtain additional financingon acceptable terms, or at all. If we are unable to obtain additional financingas and when needed, and on acceptable terms, we may be required to reduce thescope of our planned sales, marketing and product development efforts, whichcould jeopardize our business.  OnAugust 4, 2004 we received a letter from Nasdaqstating that we were not in compliance with the Nasdaq rule that requires us tohave, among other possibilities, a minimum of $2.5 million in shareholders’equity.  We are in the process ofdeveloping a plan to achieve and sustain compliance with all the NasdaqSmallCap listing requirements, including the time frame for completion of theplan.

 

**Newaccounting pronouncements**

 

InJanuary 2003, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 46, “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51” (“FIN 46”). 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 theentity to finance its activities without additional subordinated financialsupport from other parties. FIN 46 is effective immediately for all newvariable interest entities created or acquired after January 31, 2003. Forvariable interest entities created or acquired prior to February 1, 2003,the provisions of FIN 46 have been delayed and currently apply to the firstfiscal year or interim period beginning after December 15, 2003. We do nothave any entities as of March 31, 2004 that will require disclosure or newconsolidation as a result of adopting the provisions of FIN 46.

 

InApril 2004, the Emerging Issues Task Force issued Statement No. 03-06,“Participating Securities and the Two-Class Method Under FASB Statement No.128, Earnings Per Share” (“FITF 03-06”). EITF 03-06 addresses a number ofquestions regarding the computation of earnings per share by companies thathave issued securities other than common stock that contractually entitle theholder to participate in dividends and earnings of the company when, and if, itdeclares dividends on its common stock. The issue also provides furtherguidance in applying the two-class method of calculating earnings per share,clarifying what constitutes a participating security and how to apply thetwo-class method of computing earnings per share once it is determined that asecurity is participating, including how to allocate undistributed earnings tosuch a security. EITF 03-06 is effective for fiscal periods beginning afterMarch 31, 2004. The adoption of EITF 03-06 is not expected to have amaterial effect on Insignia’s results of operations or financial position.

 

#### **Risk Factors**

####  

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

 

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**We need additional financing to sustain ouroperations**.

 

We had workingcapital of $1.9 million at June 30, 2004, and our cash, cash equivalents,and restricted cash totaled $2.0 million at June 30, 2004.  We had an operating cash flow deficit of $1.7million and $2.2 million for the six months ended June 30, 2004 and 2003,respectively.

 

Assuming weachieve our revenue targets for the SSP product and control operating costs, webelieve that we will have sufficient funds to meet our operating and capitalrequirements through the end of fiscal year 2004.  We are currently in the process of exploringfinancing alternatives including selling additional equity or debtsecurities.  If additional funds areraised through the issuance of equity or debt securities, these securitiescould have rights, preferences and privileges senior to holders of our shares,and the terms of such securities could impose restrictions on our operations.The sale of additional equity or debt securities could result in additionaldilution to our shareholders. We may not be able to obtain additional financingon acceptable terms, or at all. If we are unable to obtain additional financingas and when needed and on acceptable terms, we may be required to reduce thescope of our planned sales, marketing and product development efforts, whichcould jeopardize our business.  OnAugust 4, 2004 we received a letter from Nasdaqstating that we were not in compliance with the Nasdaq rule that requires us tohave, among other possibilities, a minimum of $2.5 million in shareholders’equity.  We are in the process ofdeveloping a plan to achieve and sustain compliance with all the NasdaqSmallCap listing requirement, including the time frame for completion of theplan.

 

We are able to receive only $10,000 per trading day under our equityline of credit with Fusion Capital, and thus this equity line of credit is alimited source of liquidity for us.

 

**Wehave received a letter from Nasdaq stating that we arenot in compliance with certain Nasdaq SmallCap listing requirements, and ourstock could be delisted from Nasdaq.**

 

On August 4,2004 we received a letter from Nasdaq stating that wewere not in compliance with the Nasdaq rule that requires us to have, amongother possibilities, a minimum of $2.5 million in shareholders’ equity.  We have submitted to Nasdaqa plan to achieve and sustain compliance with all the Nasdaq SmallCap listingrequirement, including the time frame for completion of the plan.  However, Nasdaq mayconclude that our plan does not adequately address our shareholders’ equitydeficiency and may determine to delist our shares.  If we receive such a notice, we currentlyintend to appeal that decision.

 

In addition, underthe Nasdaq listing rules, the closing bid price of ourstock must remain above $1.00 per share; however, as of June 30, 2004, theclosing bid price of our stock was $0.88 per share.

 

We are currentlyin the process of exploring financing alternatives.  If we are unable to close a financing orotherwise increase our shareholders’ equity to $2.5 million or if the closingbid price of our stock remains below $1.00 for the requisite period, our sharescould be delisted from the Nasdaq SmallCap Market, which could adversely affectthe liquidity of the market for our shares and our ability to raise additionalfunds.

 

**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 subscription price for the shares to be issued to Fusion Capitalpursuant to the securities subscription agreement with Fusion Capital willfluctuate based on the price of our shares. All shares sold to Fusion Capital under the securities subscriptionagreement will be freely tradable. Fusion Capital may sell none, some or all of the shares purchased fromus at any time.  We expect that theshares to be sold to Fusion Capital will be sold over a period of up to 30months from the effective date of the registration statement filed inconnection with the transaction.

 

Depending upon market liquidity at the time, a sale of such shares atany given time could cause the trading price of our shares to decline.  The sale of a substantial number of shares,or anticipation of such sales, could make it more difficult for us to sellequity or equity-related securities in the future at a time and at a price thatwe might otherwise wish to effect sales.

 

**We have achieved minimal sales of our SSP product line to date.**

 

Our future performance depends upon sales of products within our SSPproduct line, which is our sole product line. We only began shipping the SSPproduct in December 2003 and have achieved only minimal sales todate.  We only began shipping SSPproducts in December 2003 and have achieved only minimal sales todate.  The SSP line may not achieve orsustain

 

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market acceptance or provide the desiredrevenue levels.

 

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

** **

Our revenue is dependent upon our ability to license SSP product tothird parties. Licensing our SSP product is expected to be a long and complexprocess, which could take longer than the typical six to nine months. Beforecommitting to license our products, potential customers must generally considera wide range of issues including product benefits, infrastructure requirements,our ability to work with existing systems,functionality and reliability. The process of entering into a developmentlicense with a company typically involves lengthy negotiations.  Because of the sales cycle, it is difficultfor us to predict when, or if, a particular prospect might sign a licenseagreement.  Development license fees maybe delayed or reduced because of this process. We only began shipping the SSP product in December 2003 and haveachieved only minimal sales to date.  Wehave limited history with sales initiatives for new products.

 

**We rely on third parties for software development tools,which we distribute with some of our products.**

** **

We license software development tool products from other companies todistribute with some of our products. These third parties may not be able toprovide competitive products with adequate features and high quality on atimely basis or to provide sales and marketing cooperation. Further, ourproducts compete with products produced by some of our licensors. When theselicenses terminate or expire, continued license rights might not be availableto us on reasonable terms. We might not be able to obtain similar products tosubstitute into our tool suites.

 

**If handset manufacturers (and otherthird parties) do not achieve substantial sales of their products thatincorporate our SSP technology, we will not receive royalty payments on ourlicenses.**

** **

Our success depends upon the use of our technology by our licensees intheir smart devices.  Our licenseesundertake a lengthy process of developing systems that use our technology.  Until a licensee has sales of its systemsincorporating our technology, they will not create commercial use royalties tous.  We expect that the period of timebetween entering into a development license and actually recognizing commercialuse royalties will be lengthy and difficult to predict.

 

**We have a history of losses and wemust generate significantly greater revenue if we are to achieve profitability.**

** **

We have experienced operating losses in each quarter since the secondquarter of 1996. To achieve profitability, we will have to increase our revenuesignificantly.  Our ability to increaserevenues depends upon the success of our SSP product line, and to date we havereceived only minimal revenues from sales of this product.  If we are unable to create revenues from SSPin the form of development license fees, maintenance and support fees,commercial use royalties and nonrecurring engineering services, our currentrevenues will be insufficient to sustain our business.

 

**We need to increase our sales and marketingexpenditures in order to achieve sales of our SSP product; however, thisincrease in expenses is expected to decrease our cash position.**

** **

For the six months ended June 30, 2004 and 2003, we spent 316% and239%, respectively, of our total revenues on sales and marketing.  We expect to continue to incurdisproportionately high sales and marketing expenses in the future.  To market SSP effectively, we must developclient and server channel markets.  Wewill continue to incur the expenses for a sales and marketing infrastructurebefore we recognize significant revenue from sales of the product.  Because customers in the smart device markettend to remain with the same vendor over time, we believe that we must devotesignificant resources to each potential sale. If potential customers do not design our products into their systems,the resources we have devoted to the sales prospect would be lost.  If we fail to achieve and sustain significantincreases in our quarterly sales, we may not be able to continue to increaseour investment in these areas.  Withincreased expenses, we must significantly increase our revenues if we are tobecome profitable.

 

**Our business strategy is focused on our sole product line, the SSPproduct line.**

 

In addition, we also face significant risksassociated with the development and future deployment of our SSP products andthe successful execution of the related business strategy.  With the sale of the Jeode product line toesmertec, the SSP product is our sole product line.  We only began shipping the SSP product inDecember 2003 and have achieved only minimal sales to date.  We have limited history with salesinitiatives for new products. Additionally, the sales cycle for the SSP products is expected to takelonger than the typical six to nine months cycle of the Jeode product.

 

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**If we are unable to stay abreast oftechnological changes, evolving industry standards and rapidly changingcustomer requirements, our business reputation will likely suffer and revenuesmay decline.**

** **

The market for mobile devices is fragmented and characterized bytechnological change, evolving industry standards and rapid changes in customerrequirements.  Our existing products willbecome less competitive or obsolete if we fail to introduce new products orproduct enhancements that anticipate the features and functionality thatcustomers demand.  The success of our newproduct introductions will depend on our ability to:

 

•                  accurately anticipate industry trends and changes intechnology standards;

 

•                  complete andintroduce new product designs and features in a timely manner;

 

•                  continue toenhance our existing product lines;

 

•                  respond promptlyto customers’ requirements and preferences.

 

Development delays are commonplace in the software industry.  We have experienced delays in the developmentof new products and the enhancement of existing products in the past and arelikely to experience delays in the future. We may not be successful in developing and marketing, on a timely basis orat all, competitive products, product enhancements and new products thatrespond to technological change, changes in customer requirements and emergingindustry standards.

 

**Our targeted market is highlycompetitive.**

** **

Our SSP product line is targeted for the mobile operator and mobiledevice market.  The market for theseproducts is fragmented and highly competitive. This market is also rapidly changing and there are many companiescreating products that compete or will compete with ours. As the industrydevelops, we expect competition to increase in the future. This competition maycome from existing competitors or other companies that we do not yet knowabout.  Our main competitors includeBitfone, DoOnGo, FourthPass, OpenWave and RedBend.

 

If these competitors develop products that are less expensive orprovide better capabilities or functionality than our SSP product line, we willbe unable to gain market share. Many of our current competitors and potentialcompetitors have greater resources, including larger customer bases and greaterfinancial resources than we do, and we might not be able to competesuccessfully against these companies. Competition could force us to reduce, the prices of our products, whichwould result in reduced profit margins and could harm our ability to provideadequate service to our customers. Our pricing model for our software productsis a combination of (1) initial license fees, (2) activated subscriber fees,(3) support and maintenance fees, and (4) engineering service fees, any ofwhich may be subject to significant pricing pressures.  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.

 

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

** **

Our quarterly operating results can vary significantly depending on anumber of factors. These factors include:

 

•                  the volume and timing of orders received during the quarter;

 

•                  the mix of and changes in customers to whom our products aresold;

 

•                  the mix of product and service revenue received during thequarter;

 

•                  the mix of development license fees and commercial useroyalties received;

 

•                  the timing and acceptance of new products and productenhancements by us or by our competitors;

 

•                  changes in product pricing;

 

•                  buyouts of commercial use licenses;

 

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•                  product life cycles;

 

•                  the level of our sales of third-party products;

 

•                  variances in costs in fixed price contracts;

 

•                  purchasingpatterns of customers;

 

•                  competitive conditions in the industry;

 

•                  foreign currency exchange rate fluctuations;

 

•                  business cycles and economic conditions that affect themarkets for our products; and

 

•                  extraordinary events, such as litigation, and relatedcharges.

 

All of these factors are difficult to forecast. Our future operatingresults may fluctuate due to these and other factors, including our ability tocontinue to develop innovative and competitive products. An increasing amountof our sales orders involve products and services that yield revenue overmultiple quarters or upon completion of performance. If license agreementsentered into during a quarter do not meet our revenue recognition criteria,even if we meet or exceed our forecast of aggregate licensing and othercontracting activity, it is possible that our revenues would not meetexpectations. Due to all of these factors, we believe that period-to-periodcomparisons of our results of operations are not necessarily meaningful andshould not be viewed as an indication of our future performance. In the past,we have experienced actual performance that did not meet financial market expectations.It is likely that, in some future quarters, our operating results will again bebelow the expectations of stock market analysts and investors.

 

**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 the United States accounted for approximately 65%and 10% of our total revenue for the six months ended June 30, 2004 and2003, respectively, and are expected to increase with regard to sales of theSSP product.  We expect to market SSP tomobile operators and handset manufacturers in Europe.  Economic conditions in Europe generally andfluctuations in the value of the euro against the U.S. dollar and British poundsterling in particular could impair our revenues and results of operations.International operations are subject to a number of other risks. These risksinclude:

 

•                  foreign government regulation;

 

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

 

•                  longer receivable collection periods and greater difficultyin accounts receivable collection;

 

•                  unexpected changes in, or imposition of, regulatoryrequirements, tariffs, import and export restrictions  and other barriers and restrictions;

 

•                  potentially adverse tax consequences;

 

•                  the burdens of complying with a variety of foreign laws andstaffing and managing foreign operations;

 

•                  general geopolitical risks, such as political and economicinstability, terrorism, hostilities with neighboring countries and changes indiplomatic and trade relationships; and

 

•                  possible recessionary environments in economies outside theUnited States.

 

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

** **

Our software products, like all software products, may have undetectederrors or compatibility problems. Software errors are particularly common when a product is firstintroduced or a new version is released. Despite thorough testing, our products might be shipped with errors. Ifthis were to happen, customers could reject our products, or there might becostly delays in correcting the problems. Our products are increasingly used in systems that interact directlywith the general public, such as in transportation and medical systems.  In systems such as these, the failure of ourproduct could cause substantial property damage or personal injury, which wouldexpose us to product liability claims. Our products are used for applications in business systems where thefailure of our product could be linked to substantial economic loss.  Our agreements with our customers typicallycontain provisions designed to limit our exposure to potential product liabilityand other 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 insurancemay not be adequate to cover claims.  Ifwe ever had to recall our product due to errors or other problems, it wouldcost us a great deal of time, effort and expense.

 

Our operations depend on our ability to protect our computer equipmentand the information stored in our databases against damage by fire, naturaldisaster, power loss, telecommunications failure, unauthorized intrusion andother catastrophic events.  The measureswe have taken to reduce the risk of interruption in our operations may not besufficient.  However, these measuresmight not be sufficient.  As of the dateof this report, we have not experienced any major interruptions in ouroperations because 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 performance depends to a significant degree upon the continuedcontributions of our key management, product development, sales, marketing and operations personnel.  We do not have agreements with any of our keypersonnel that require them to work for us for a specific term, and we do notmaintain any key person life insurance policies.  We currently intend to hire additionalsalespeople and believe our future success will depend in large part upon ourability to attract and retain highly skilled managerial, engineering, sales,marketing and operations personnel, many of whom are in great demand.  Competition for qualified personnel can beintense in the San Francisco bay area, where our U.S. operations areheadquartered.

 

**If we fail to protect ourintellectual property rights, competitors could introduce similar or superiorproducts, and we could lose market share.**

** **

We depend on our proprietary technology. Despite our efforts to protectour proprietary rights, it may be possible for unauthorized third parties tocopy our products or to reverse engineer or otherwise obtain and useinformation that we consider proprietary. Our competitors could independently develop technologies that aresubstantially equivalent or superior to our technologies.  Policing unauthorized use of our products isdifficult, and while we are unable to determine the extent to which softwarepiracy of our products exists, software piracy can be expected to be apersistent problem.  Effective protectionof intellectual property rights may be unavailable or limited in foreigncountries.  The status of U.S. patentprotection in the software industry is not well defined and will evolve as theUnited States Patent and Trademark Office grants additional patents.  Patents have been granted on fundamentaltechnologies in software, and patents may issue that relate to fundamentaltechnologies incorporated into our products.

 

**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 intellectualproperty rights in our industry increases, products based on our technology mayincreasingly become the subject of infringement claims.  Third parties could assert infringement claimsagainst us in the future. Infringement claims, with or without merit, could betime consuming, result in costly litigation, cause product shipment delays orrequire us to enter into royalty or licensing agreements. Royalty or licensingagreements, if required, might not be available on terms acceptable to us.  We may initiate claims or litigation againstthird parties for infringement of our proprietary rights or to establish thevalidity of our proprietary rights. Litigation to determine the validity of any claims, whether or not thelitigation is resolved in our favor, could result in significant expense to usand divert the efforts of our technical and management personnel fromproductive tasks. If there is an adverse ruling against us in any litigation,we may be required to pay substantial damages, discontinue the use and sale ofinfringing products, expend significant resources todevelop 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 to purchasesignificant numbers of American Depository Shares (“ADSs”) at nominal valueupon the occurrence of specified events which, if triggered, would dilute theownership interests of existing security holders.**

 

Some security holders have rights to be issued additional ADSs byInsignia if the registration statements covering their shares and the sharesunderlying their warrants are suspended for more than 60 days in any 12 monthperiod.  We must issue a total of 252,000ADSs if we suspend registration statement number 333-51234 for more than 60days in any 12 month period, and a total of 65,800 ADSs if we suspend registrationstatement number 333-57528 for more than the 60 days in any 12 monthperiod.  We have not suspended either ofthese registration statements for more than 60 days in any 12 month period inthe past.

 

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

 

Stock market volatility has had a substantial effect on the marketprices of securities issued by us and other high technology companies, oftenfor reasons unrelated to the operating performance of the specific companies.Following periods of volatility in the market price of a company’s securities,securities class action litigation has often been instituted against hightechnology companies.  We have in thepast been, and may in the future be, the target of similar litigation.  Regardless of the outcome, securitieslitigation may result in substantial costs and divert management attention andresources.

 

**Our investors may have difficulty enforcing judgments against us inU.S. courts because many of our assets and some of our management are locatedin England.**

 

Insignia is incorporated under the laws of England and Wales.  Two of our directors reside in England. Allor a substantial portion of the assets of these persons, and a significantportion of our assets, are located outside of the United States. It may not bepossible for investors to serve a complaint within the United States upon thesepersons or to enforce against them or against us, in U.S. courts, judgmentsobtained in U.S. courts based upon the civil liability provisions of U.S.securities laws.  There is doubt aboutthe enforceability outside of the United States, in original actions or inactions for enforcement of judgments of U.S. courts, of civil liabilities basedsolely upon U.S. securities laws.  Therights of holders of our shares are governed by English law, including theCompanies Act 1985, and by our memorandum and articles of association.  The rights of holders of our ADSs are also affectedby English law.  These rights differ fromthe rights of security holders in typical U.S. corporations.

 

**Insignia has undergone a class action lawsuit and an SEC investigationin the past eight years.**

 

On April 3, 1996, a class-action lawsuit was filed against usalleging that we misrepresented our business, the strength of our sales forceand our financial health.  The suitstemmed from our failure to achieve the consensus earnings estimates ofresearch analysts in the first quarter following our initial public offering inNovember 1995.  In August 1997,we reached a memorandum of understanding to settle the suits.  Although we never agreed with theallegations, we paid $8.0 million to the plaintiffs, of which our insurancecompany paid $7.5 million.  InFebruary 1997, we restated our financial results for the quarters endedMarch 31 and June 30, 1996.  Werevised our revenue and net income numbers downward for these two quarters dueto inflated revenues resulting from misstatement of inventory levels of one ofour resellers by two of our sales and marketing personnel.  We agreed with the SEC to cease and desistfrom engaging in similar accounting practices. The two Insignia sales and marketing people involved in the revenuemisstatement are no longer with Insignia and were forced to pay significantfines.  We did not have to pay any fines.

 

**Item 3.****  Quantitative and QualitativeDisclosures  About Market Risk**

 

For the six monthsended June 30, 2004, 100% of our revenue and 61% of our operating expenseswere denominated in U.S. dollars.  Mostof our remaining expenses are British pound sterling denominated, andconsequently we are exposed to fluctuations in British pound sterling exchangerates.  There can be no assurance thatsuch fluctuations will not have a material effect on our results of operationsin the future.  We did not enter into anycurrency option hedge contracts in 2003 or the first half of 2004.

 

We have, at times,an investment portfolio of fixed income securities that are classified as “available-for-sale-securities.”  These securities, like all fixed incomeinstruments, are subject to interest rate risk and will fall in value if marketinterest rates increase.  We attempt tolimit this exposure by investing primarily in short-term securities.

 

26

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

 

We have evaluated thedesign and operation of our disclosure controls and procedures to determinewhether they are effective in ensuring that the disclosure of requiredinformation is timely made in accordance with the Exchange Act and the rulesand regulations of the Securities and Exchange Commission.  This evaluation was made under thesupervision and with the participation of management, including our principal executiveofficer and principal financial officer within the 90-day period prior to thefiling of this Quarterly Report on Form 10-Q. The principal executive officerand principal financial officer have concluded, based on their review, that ourdisclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c)and 15d-14(c), are effective to ensure that information required to bedisclosed by us in reports that we file under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.  No significant changes were made to ourinternal controls or other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

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**PART II - OTHERINFORMATION**

 

### **Item 1.  Legal Proceedings**

### ** **

None

 

### **Item 2.  Changes in Securities and Use ofProceeds**

### ** **

None

 

### **Item 3.  Defaults Upon Senior Securities**

### ** **

None

 

### **Item 4.**  Submissionof Matters to a Vote of Security Holders

### ** **

(a)          Insignia held its Annual General Meeting onJune 30, 2004.  Proxies for the meeting were solicited pursuant toRegulation 14A.

 

(b)         At each Annual General Meeting, the third ofInsignia’s Board of Directors who have been in office longest since their lastelection, as well as any directors appointed by the Board during the precedingyear, are required to resign and are then considered for re-election, assumingthey wish to stand for re-election.  John C. Fogelin and Vincent S. Pinowere re-elected as Directors at the meeting.  The Directors whose term ofoffice continues after the meeting are Nicholas, Viscount Bearsted, Mark E.McMillan, David G. Frodsham and Richard M. Noling.

 

(c)          The matters described below were voted on at theAnnual General Meeting, and the number of votes cast withrespect to each matter and, with respect to the election of directors, for eachnominee, were as indicated:

 

**1.****             **Security holder vote not required.

 

**2.****             **To receive and approve the Directors remunerationreport.

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 6,812,119 |       | 770,934     |       | 104,696     |

 

**3.****             **To reappoint MacIntyre Hudson as the U.K. statutoryauditors and independent accountants of the Company to hold office until theconclusion of the Company’s next annual general meeting at which accounts arelaid before the Company, and to authorize the Board of Directors of the Companyto determine their remuneration.

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 7,594,298 |       | 47,545      |       | 45,906      |

 

**4.****             **To ratify the appointment of Burr, Pilger & MayerLLP as the Company’s United States independent auditors for the fiscal yearending December 31, 2004.

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 7,104,655 |       | 519,888     |       | 63,206      |

 

**5.****             **To re-elect as a Director John C. Fogelin.

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 7,040,157 |       | 571,304     |       | 76,288      |

 

28

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**6.****             **To re-elect as a Director Vincent S. Pino.

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 7,529,548 |       | 80,913      |       | 77,288      |

 

**7.****             **To amend and restate the Company’s 1995 Employee Share Purchase Plan toincrease the number of ordinary shares available for issuance under this planby an additional 300,000 to a total of 1,200,000 shares and extend theexpiration of this plan until February 9, 2015.

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 5,541,439 |       | 2,081,512   |       | 64,798      |

### ** **

**8.****             **To amend the Company’s U. K. Employee Share Option Scheme 1996 toincrease the number of ordinary shares available for issuance under this planby 1,000,000 to a total of 8,572,071 shares. This plan shares the same shares reserved for issuance in the stockoption pool as the Company’s 1995 Incentive Stock Option Plan for US Employees,which is the Company’s stock option plan for employees in the UnitedStates.  The two plans will need to beseparately amended to increase the combined option pool by a total of 1,000,000ordinary shares.

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 5,526,989 |       | 2,098,937   |       | 61,823      |

 

**9.****             **To amend and restate the Company’s 1995 Incentive Stock Option Plan forU.S. Employees to increase the number of ordinary shares available for issuanceunder this plan by 1,000,000 to a total of 8,572,071 shares and to extend theexpiration date of this plan until April 30, 2014.  This plan shares the same shares reserved forissuance in the stock option pool as the Company’s U.K. Employee Share OptionScheme 1996, which is the Company’s stock option plan for employees in theUntied Kingdom.  The two plans will needto be separately amended to increase the combined option pool by a total of1,000,000 ordinary shares.

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 5,545,243 |       | 2,089,903   |       | 52,603      |

 

**10.****      **To increase the Company’s authorizedshare capital by creating an additional 25,000,000 ordinary shares of 20pnominal value.

 

The following OrdinaryResolution was considered and passed at the meeting in relation to Proposal 10,which required an affirmative vote of a majority of the votes cast at themeeting to be passed:

 

“THAT theCompany’s authorized share capital be increased from £10,600,000 to £15,600,000by the creation of an additional 25,000,000 Ordinary Shares of 20p nominalvalue, each ranking pari passu in all respects with the existing OrdinaryShares in the capital of the Company”.

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 5,602,269 |       | 2,033,247   |       | 52,233      |

 

**11.****      **To authorize the Board ofDirectors of the Company to issue up to 45,858,647 ordinary shares and up to3,000,000 preferred shares (or other securities derived from such ordinaryshares and preferred shares, such as options or warrants) of the Companywithout first gaining shareholder approval, with such authority lasting aperiod of five years.

 

The followingOrdinary Resolution was considered and passed at the meeting in relation toProposal 11, which required a majority of the shareholder votes cast at themeeting to be passed:

 

“THAT,conditionally upon the passing of the Resolution numbered 10 above, inaccordance with Section 80 of the Companies Act 1985 (the “Act”), thedirectors be and are hereby generally and unconditionally authorized toexercise all the powers of the Company to allot relevant securities (as definedin Section 80 of the Act) up to an aggregate nominal amount of 9,771,729.40provided that this authority (unless previously revoked or renewed) shallexpire on June 22, 2009 and that the Company may before such expiry makean offer or agreement which would or might require relevant securities to beallotted after such expiry and the directors may allot relevant securities inpursuance of such an offer or agreement as if the authority conferred herebyhad not expired; and THAT the authority conferred on the directors by anordinary resolution passed on April 26, 2001 to allot shares up to anaggregate nominal amount of £5,244,849.80 (to expire on April 25, 2006)shall cease to have effect upon and with effect from the passing of thisresolution.”

 

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| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 5,648,304 |       | 1,992,775   |       | 46,670      |

 

**12.****      **In conjunction with theauthority proposed to be given in Proposal 11, to authorize the Board ofDirectors of the Company to issue up to 45,858,647 ordinary shares for cash (orother securities derived from such ordinary shares, such as options orwarrants) without giving shareholders the first opportunity to purchase suchshares or securities. This authority is to last a period of five years.

 

Thefollowing Special Resolution was considered and passed at the meeting inrelation to Proposal 12, which required at least 75% of the shareholder votescast at the meeting to be passed:

 

“THAT,conditionally upon the passing of the Resolutions numbered 10 and 11 above, inaccordance with Section 95(1) of the Act, the directors be and are herebygiven power, for the period commencing on and with effect from the date ofadoption of this Resolution and (unless previously revoked or renewed) expiringon June 22, 2009, to allot equity securities (as defined inSection 94(2) of the Act) pursuant to the authority conferred by theResolution numbered 11 above as if Section 89(1) of the Act did not applyto such allotment and provided that the Company may before the expiry onJune 22, 2009 of the authority conferred by this Resolution numbered 12make an offer or agreement which would or might require equity securities to beallotted after such expiry and the directors may allot equity securities inpursuance of such an offer or agreement as if the authority conferred herebyhad not expired; and THAT the power conferred on the directors by a specialresolution passed on April 26, 2001 to allot shares up to an aggregatenominal amount of £5,244,849.80 as if Section 89 of the Act did not applyto such allotment (to expire on April 25, 2006) shall cease to have effectupon and with effect from the passing of this resolution.”

 
| **FOR**   | ** ** | **AGAINST** | ** ** | **ABSTAIN** |
|-----------|------------|-------------|------------|-------------|
| 6,075,390 |       | 1,573,281   |       | 39,078      |

 

### **Item5.  Other Information**

 

None

 

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

 

(a) Exhibits

 

The followingexhibits are filed as part of this Report:

 
| **Exhibit  Number** | ** ** | **Exhibit Title**                                                                                   |
|---------------------|------------|-----------------------------------------------------------------------------------------------------|
|                |       |                                                                                                |
| 10.87               |       | Termination and Waiver Agreement dated June 30, 2004 between the  Registrant and esmertec A.G. |
|                |       |                                                                                                |
| 31.1                |       | Section 302 certification of Chief Executive Officer                                           |
|                |       |                                                                                                |
| 31.2                |       | Section 302 certification of Chief Financial Officer                                           |
|                |       |                                                                                                |
| 32.1                |       | Section 906 certification of Chief Executive Officer                                           |
|                |       |                                                                                                |
| 32.2                |       | Section 906 certification of Chief Financial Officer                                           |

 

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(b) Reports on Form 8-K

 

Form 8-K filed May 12, 2004 (under Items 12 and 7) for press releaseannouncing financial results for quarter ended March 31, 2004.

 

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**SIGNATURES**

 

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

 

 
|                       | INSIGNIA SOLUTIONS PLC                                 |   |
|----------------------------|--------------------------------------------------------|--------|
|                       | (Registrant)                                           |   |
|                       |                                                   |   |
| Date: August 13, 2004 |                                                   |   |
|                       |                                                   |   |
|                       | /s/ ROBERT E. COLLINS                                  |   |
|                       | ROBERT E. COLLINS                                      |   |
|                       | Chief Financial Officer  (Principal Financial Officer) |   |

 

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