**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

** **

**For the quarterly period ended June 30, 2002**

 

**or**

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

 

**For the transition period from**             **to**             

 

**Commission file number 0-27012**

 

**Insignia Solutions plc**

(Exactname of Registrant as specified in its charter)

** **

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

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes  ý   No  o

 

As of August 6, 2002, there were 20,019,729 Ordinary shares of £0.20each nominal value, outstanding.

 

 

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**INSIGNIA SOLUTIONS PLC**

 
| **PART 1 - FINANCIAL INFORMATION** |
|------------------------------------|
|                               |   |
| **Item 1.**                        | **Financial Statements:** |
|                               |   |
|                               | Condensed  Consolidated Balance Sheet at June 30, 2002 and December 31, 2001 (Unaudited) |
|                               |   |
|                               | Condensed  Consolidated Statement of Operations for the three months and six months  ended June 30, 2002 and 2001 (Unaudited) |
|                               |   |
|                               | Condensed  Consolidated Statement of Cash Flows for the six months ended June 30, 2002  and 2001 (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** |
|                               |   |
| **PART II - OTHER INFORMATION**    |
|                               |   |
| **Item  4.**                       | **Submission  of Matters to a Vote of Security Holders** |
|                               |   |
| **Item 6.**                        | **Exhibits and  Reports on Form 8-K** |
|                               |   |
| **Signatures**                     |   |

 

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**PARTI - FINANCIAL INFORMATION**

 

**Item1.  Financial Statements**

**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(amounts in thousands, unaudited)**

** **
|                                                                                  |   | **June 30,  2002** |   | **December  31,  2001** |   |
|---------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|
| **ASSETS**                                                                            |   |               |   |                    |   |
| Current assets:                                                                       |   |               |   |                    |   |
| Cash and cash  equivalents                                                            |   | $                  | 6,890  |                    | $      | 8,643 |   |
| Restricted cash                                                                       |   | 250                |   | —                  |   |
| Accounts  receivable, net of allowances of $470 and $488, respectively                |   | 1,078              |   | 6,015                   |   |
| Tax receivable                                                                        |   | 382                |   | —                  |   |
| Prepaid  royalties                                                                    |   | 2,576              |   | 1,139                   |   |
| Prepaid and  other current assets                                                     |   | 1,184              |   | 1,269                   |   |
| Total current  assets                                                                 |   | 12,360             |   | 17,066                  |   |
|                                                                                  |   |               |   |                    |   |
| Property and  equipment, net                                                          |   | 260                |   | 352                     |   |
| Restricted cash                                                                       |   | —             |   | 250                     |   |
| Other  non-current assets                                                             |   | 100                |   | 100                     |   |
|                                                                                  |   | $                  | 12,720 |                    | $      | 17,768 |   |
|                                                                                  |   |               |   |                    |   |
| **LIABILITIES,****MANDATORILY  REDEEMABLE   WARRANTS AND SHARE HOLDERS’ EQUITY** |   |               |   |                    |   |
| Current  liabilities:                                                                 |   |               |   |                    |   |
| Accounts payable                                                                      |   | $                  | 674    |                    | $      | 1,011 |   |
| Accrued  liabilities                                                                  |   | 1,254              |   | 1,179                   |   |
| Deferred revenue                                                                      |   | 521                |   | 4,054                   |   |
| Accrued  royalties                                                                    |   | 600                |   | —                  |   |
| Income taxes  payable                                                                 |   | 187                |   | 189                     |   |
| Total current  liabilities                                                            |   | 3,236              |   | 6,433                   |   |
|                                                                                  |   |               |   |                    |   |
| Commitments and  Contingencies (Note 5)                                               |   |               |   |                    |   |
|                                                                                  |   |               |   |                    |   |
| Mandatorily  redeemable warrants                                                      |   | 1,440              |   | 1,440                   |   |
|                                                                                  |   |               |   |                    |   |
| Shareholders’  equity:                                                           |   |               |   |                    |   |
| Ordinary shares                                                                       |   | 6,425              |   | 6,278                   |   |
| Additional  paid-in capital                                                           |   | 59,330             |   | 58,869                  |   |
| Accumulated  deficit                                                                  |   | (57,250            | )      | (54,791                 | )      |
| Other  accumulated comprehensive loss                                                 |   | (461               | )      | (461                    | )      |
| Total  shareholders’ equity                                                      |   | 8,044              |   | 9,895                   |   |
|                                                                                  |   |               |   |                    |   |
|                                                                                  |   | $                  | 12,720 |                    | $      | 17,768 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

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# **INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

** **
|                                            |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                            |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Net revenues:                                   |   |                              |   |                            |   |   |   |   |   |
| License                                         |   | $                                 | 1,547  |                            | $      | 2,684 |   | $ | 4,535 |   | $ | 3,765 |   |
| Service                                         |   | 345                               |   | 394                             |   | 901 |   | 1,009 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Total net  revenues                             |   | 1,892                             |   | 3,078                           |   | 5,436 |   | 4,774 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Cost of net  revenues:                          |   |                              |   |                            |   |   |   |   |   |
| License                                         |   | 714                               |   | 1,363                           |   | 1,728 |   | 1,974 |   |
| Service                                         |   | 252                               |   | 85                              |   | 449 |   | 269 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Total cost of  net revenues                     |   | 966                               |   | 1,448                           |   | 2,177 |   | 2,243 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Gross margin                                    |   | 926                               |   | 1,630                           |   | 3,259 |   | 2,531 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Operating  expenses:                            |   |                              |   |                            |   |   |   |   |   |
| Sales and  marketing                            |   | 1,492                             |   | 1,815                           |   | 3,213 |   | 3,546 |   |
| Research and  development                       |   | 1,385                             |   | 1,589                           |   | 2,581 |   | 3,183 |   |
| General and  administrative                     |   | 967                               |   | 948                             |   | 1,905 |   | 2,199 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Total operating  expenses                       |   | 3,844                             |   | 4,352                           |   | 7,699 |   | 8,928 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Operating loss                                  |   | (2,918                            | )      | (2,722                          | )      | (4,440 | ) | (6,397 | ) |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Interest income,  net                           |   | 27                                |   | 115                             |   | 48 |   | 339 |   |
| Other income  (expense), net                    |   | 133                               |   | (5                              | )      | 101 |   | 26 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Loss before  income taxes                       |   | (2,758                            | )      | (2,612                          | )      | (4,291 | ) | (6,032 | ) |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Provision  (benefit) for income taxes           |   | (1,271                            | )      | 60                              |   | (1,832 | ) | 60 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Net loss                                        |   | $                                 | (1,487 | )                               | $      | (2,672 | ) | $ | (2,459 | ) | $ | (6,092 | ) |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Basic and  diluted net loss per share:          |   | $                                 | (0.07  | )                               | $      | (0.14 | ) | $ | (0.12 | ) | $ | (0.32 | ) |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Weighted average  shares and share equivalents: |   |                              |   |                            |   |   |   |   |   |
| Basic and  diluted                              |   | 20,020                            |   | 19,349                          |   | 19,798 |   | 19,004 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

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** **

**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands, unaudited)**

** **
|                                                                         |   | **Six months  ended  June 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                         |   | **2002**                        |       | **2001** |   |
| Cash flows from  operating activities:                                       |   |                            |       |   |   |
| Net loss                                                                     |   | $                               | (2,459     | ) | $ | (6,092 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                            | ** ** |   | ** ** |
| Depreciation                                                                 |   | 131                             |       | 173 |   |
| Allowance for  doubtful accounts                                             |   | (18                             | )          | (261 | ) |
| Gain on sale of  fixed assets                                                |   | 5                               |       | 4 |   |
| Net changes in  assets and liabilities:                                      |   |                            |       |   |   |
| Accounts  receivable                                                         |   | 4,955                           |       | (6,864 | ) |
| Tax receivable                                                               |   | (382                            | )          | — |   |
| Prepaid  royalties                                                           |   | (1,437                          | )          | — |   |
| Prepaid and  other current assets                                            |   | 85                              |       | (886 | ) |
| Other  non-current assets                                                    |   | —                          |       | (100 | ) |
| Accounts payable                                                             |   | (337                            | )          | (460 | ) |
| Accrued  liabilities                                                         |   | 75                              |       | (754 | ) |
| Accrued  royalties                                                           |   | 600                             |       | (564 | ) |
| Deferred revenue                                                             |   | (3,533                          | )          | 6,095 |   |
| Income taxes  payable                                                        |   | (2                              | )          | (156 | ) |
| Net cash used in  operating activities                                       |   | (2,317                          | )          | (9,865 | ) |
| Cash flows from  investing activities:                                       |   |                            |       |   |   |
| Purchases of  property and equipment                                         |   | (44                             | )          | (109 | ) |
| Product line  sale proceeds released from escrow                             |   | —                          |       | 5,050 |   |
| Net cash  provided (used) in investing activities                            |   | (44                             | )          | 4,941 |   |
| Cash flows from  financing activities:                                       |   |                            |       |   |   |
| Proceeds from  issuance of shares, net                                       |   | (1                              | )          | 4,967 |   |
| Proceeds from  exercise of warrants                                          |   | 481                             |       | — |   |
| Proceeds from  exercise of stock options                                     |   | 128                             |       | 126 |   |
| Net cash  provided by financing activities                                   |   | 608                             |       | 5,093 |   |
| Net increase  (decrease) in cash and cash equivalents                        |   | (1,753                          | )          | 169 |   |
| Cash and cash  equivalents at beginning of the period                        |   | 8,643                           |       | 12,051 |   |
| Cash and cash  equivalents at end of the period                              |   | $                               | 6,890      |   | $ | 12,220 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

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**INSIGNIA SOLUTIONS PLC**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED**

**FINANCIAL STATEMENTS**

 

 

**Note1.  Basis of presentation**

 

The condensed consolidated financial statements are unaudited.  However, in the opinion of management, alladjustments (consisting only of normal recurring adjustments) which arenecessary for a fair presentation of the financial position and results for theinterim period have been included.

 

Insignia Solutions plc’s (“Insignia”) condensed consolidated financialstatements have been presented on a going concern basis which contemplates therealization of assets and the satisfaction of liabilities in the normal courseof operations.  During the past 24months, Insignia has incurred an aggregate loss from operations and negativeoperating cash flows of $19,492,000 and $20,521,000, respectively. As of June30, 2002, Insignia has an accumulated deficit of $57,250,000 and has workingcapital of $9,124,000. The ability of Insignia to realize its assets andsatisfy its liabilities in the normal course of business is ultimatelycontingent upon Insignia generating revenue sufficient to exceed continuingcosts and eventually to generate net earnings.

 

Insignia has undertaken measures to reduce operating expenses andredesign its commercial efforts to adapt to new developments. Management ofInsignia has prepared forecasts of expected future revenues and expenses, aswell as balances of cash, cash equivalents and short-term investments and otherliquid sources of cash (including its existing line of credit) available toInsignia. While Insignia is targeting these resources to be sufficient to meetits anticipated cash needs for working capital and capital expenditures throughcalendar year 2002, there can be no assurance that Insignia will not requireadditional financing to fund operations in calendar year 2002. In particular,Insignia will need to further reduce the level of operating expenses in theevent that revenue is lower than expected.  In addition, if Insignia is unable to maintain the reduction ofoperating expenses or achieve new sales currently projected, if unplanned cashpayments or expenses arise, or if Insignia is unable to obtain access toadditional capital, it may not have sufficient resources to fund continuingoperations through calendar year 2002. In addition, based on its currentforecasts and estimates, Insignia anticipates that, in any event, it willrequire additional financing in calendar year 2003.

 

To the extent that Insignia requires additional financing, there can beno assurances that Insignia will be able to obtain such funding when it isneeded on acceptable terms, or at all. The failure to raise such additionalfunds on a timely basis and on sufficiently favorable terms would have amaterial adverse effect on Insignia’s business, operating results and financialcondition. Insignia’s liquidity also may be adversely affected in the future byfactors such as higher interest rates, inability to borrow without collateral,limited availability of capital financing and continued operating losses.

 

Insignia is a Sun Microsystems, Inc. (“Sun”) Authorized Virtual Machineprovider.  If the agreement with Sunterminates or expires without renewal, Insignia will not be able to market itsJeode product line.  Any disruption inInsignia’s relationship with Sun would likely impair its sales of Jeode.  In addition, Insignia at times licensessoftware development tool products from

 

6

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other companies to distribute with some of its products.  Insignia may not be able to obtain similarproducts to substitute into its tool suites.

 

Insignia follows accounting policies that are in accordance withprinciples generally accepted in the United States of America.  Insignia conducts most of its business inU.S. dollars.  All amounts included inthe financial statements and in the notes herein are in U.S. dollars unlessdesignated ‘‘£’’, in which case they are in British pound sterling. The exchangerates between the U.S. dollar and the British pound sterling were $1.53 and$1.40 (expressed in U.S. dollars per British pound sterling) at June 30, 2002and 2001, respectively.

 

The results of operations for the three months and six months endedJune 30, 2002 are not necessarily indicative of the results to be expected forthe entire fiscal year, which ends on December 31, 2002.

 

These unaudited condensed consolidated financial statements should beread in conjunction with the financial statements and notes thereto for theyear ended December 31, 2001 included in  Insignia’s 2001 Annual Report and Form 10-K.

 

**Note2.  Net income (loss) per share**

 

Net income (loss) per share is presented on a basic and diluted basis,and is computed using 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 methodof calculating net income (loss) per share, ordinary equivalent shares areexcluded from the computation, if their effect is anti-dilutive.

 

Statement regarding computation of loss per share  (in thousands except per share data,****unaudited):

 
|                                                                        |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-----------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                        |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                                                        |   |                              |   |                            |   |   |   |   |   |
| Net loss                                                                    |   | $                                 | (1,487 | )                               | $      | (2,672 | ) | $ | (2,459 | ) | $ | (6,092 | ) |
|                                                                        |   |                              |   |                            |   |   |   |   |   |
| Calculation of  basic and diluted loss per share:                           |   |                              |   |                            |   |   |   |   |   |
| Weighted average  number of ordinary shares outstanding used in computation |   | 20,020                            |   | 19,349                          |   | 19,798 |   | 19,004 |   |
|                                                                        |   |                              |   |                            |   |   |   |   |   |
| Basic and  diluted loss per share                                           |   | $                                 | (0.07  | )                               | $      | (0.14 | ) | $ | (0.12 | ) | $ | (0.32 | ) |

 

7

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The following weighted average number of options and warrants were notincluded in the calculation of diluted EPS because their inclusion would havebeen anti-dilutive.

 
|     |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|----------|--------|-----------------------------------|--------|---------------------------------|--------|
|     |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|     |   |                              |   |                            |   |   |   |   |   |
| Options  |   | 186,000                           |   | 734,000                         |   | 161,000 |   | 938,000 |   |
| Warrants |   | 97,000                            |   | 386,000                         |   | 159,000 |   | 195,000 |   |

 

**Note3.  Comprehensive income (loss)**

 

Statement of Financial Accounting Standards No. 130, “ReportingComprehensive Income” (“FAS 130”) requires that all items recognized underaccounting standards as components of comprehensive earnings be reported in anannual statement that is displayed with the same prominence as other annualfinancial statements.  FAS 130 alsorequires that an entity classify items of other comprehensive earnings by theirnature in an annual financial statement. Comprehensive  income, asdefined, includes all changes in equity during a period from non-owner sources.

 

Total comprehensive loss was not different from the net loss reportedfor the three and six months ended June 30, 2002 and June 30, 2001.

 

**Note4.  New accounting pronouncements**

 

In July 2001, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards, “SFAS”, No. 141, “BusinessCombinations’’ and SFAS No. 142, “Goodwill and Other Intangible Assets’’. UnderSFAS No. 141, all business combinations initiated after June 30, 2001 must beaccounted for using the purchase method. SFAS No. 142 requires, among otherthings, the discontinuance of goodwill amortization.  In addition, the standard includes provisions upon adoption forthe reclassification of certain existing recognized intangibles as goodwill,reassessment of the useful lives of existing recognized  intangibles and the testing for impairment of existing goodwill and otherintangibles. Insignia adopted SFAS No. 142 effective January 1, 2002.  The adoption of these statements, SFAS No.141 and 142, did not have a material impact on Insignia’s financial positionand results of operations.

 

In July 2001, the FASBs Emerging Issues Task Force (EITF) reached finalconsensus on EITF No. 00-25, Vendor Income Statement Characterization ofConsideration Paid to a Reseller of the Vendor’s Products (EITF 00-25).  EITF 00-25 generally requires thatconsideration, including equity instruments, given to a customer be clasifiedin a vendor’s financial statements not as an expense, but as an offset torevenue up to the amount of cumulative revenue recognized or to berecognized.  In November 2001, the EITFreached consensus on EITF No. 01-09, Accounting for Consideration Given by aVendor to a Customer or Reseller of the Vendor’s Products (EITF 01-09).  EITF 01-09 clarifies and modifies certainitems discussed in EITF 00-25. Insignia  adopted these newstandards in the quarter ended March 31, 2002. The implementation of EITF 00-25, EITF 01-09, and the accompanyinginterpretive guidance did not have a material impact on Insignia’s financialposition, results of operations, or cash flows.

 

8

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In October 2001, the FASB issued Statement of Financial AccountingStandard No. 144 (SFAS 144) Accounting for the Impairment or Disposal of Long-LivedAssets, which was effective January 1, 2002. SFAS 144 supersedes FASB Statement No. 121, Accounting for theImpairment or Disposal of Long-Lived Assets and for Long-Lived Assets to beDisposed of, and the accounting and reporting provisions relating to thedisposal of a segment of a business set forth in Accounting Principles BoardOpinion No. 30.  This Statement retainsmany of the fundamental provisions of SFAS 121 and expands the scope ofdiscontinued operations to include more disposal transactions.  Insignia adopted SFAS 144 effective January1, 2002.  The implementation of SFAS 144did not have a material effect on Insignia’s financial statements.

 

In August 2001, the FASB issued Statement of Financial AccountingStandard No. 143 (SFAS 143) Accounting for the Asset Retirement Obligations,which is effective for fiscal years beginning after June 15, 2002.  Earlier adoption is encouraged.  SFAS 143 addresses financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs.  Insignia does not believe the adoption of SFAS 143 will have amaterial effect on its financial statements.

 

In June 2002, the FASB issued SFAS No. 146, "Accounting for Exitor Disposal Activities" ("SFAS 146").  SFAS 146 addresses significant issues regarding the recognition,measurement, and reporting of costs that are associated with exit and disposalactivities, including restructuring activities that are currently accounted forunder EITF No. 94-3, "Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring)." The scope of SFAS 146 also includes costs related to terminating acontract that is not a capital lease and termination benefits that employeeswho are involuntarily terminated receive under the terms of a one-time benefitarrangement that is not an ongoing benefit arrangement or an individualdeferred-compensation contract.  SFAS146 will be effective for exit or disposal activities that are initiated afterDecember 31, 2002 and early application is encouraged.  Insignia will adopt SFAS 146 during thefirst quarter ending March 31, 2003. The provisions of EITF No. 94-3 shall continue to apply for an exitactivity initiated under an exit plan that met the criteria of EITF No. 94-3prior to the adoption of SFAS 146.  Theeffect on adoption of SFAS 146 will change on a prospective basis the timing ofwhen restructuring charges are recorded from a commitment date approach to whenthe liability is incurred.

 

In February 2002, the EITF issued Topic Number D-103 Income StatementCharacterization of Reimbursements Received for Out-of-Pocket ExpensesIncurred, which was effective for financial statements beginning after December31, 2001.  Topic Number D-103 requiresthat reimbursements received for out-of-pocket expenses incurred, generally, becharacterized as revenue in the statement of operations.  Insignia has adopted Topic Number D-103effective January 1, 2002.  Insignia hashistorically recorded reimbursements of out-of-pocket expenses as net amountsin cost of services revenue in the statement of operations.  In accordance with the transition guidanceincluded in Topic Number D-103, adoption required the reclassification offinancial statements for prior periods presented for comparative purposes.  The adoption of Topic Number D-103 did notaffect Insignia’s net loss, financial position or cash flows.  The reclassification did affect the presentationof certain revenue and cost of revenue items contained within Insignia’sfinancial statements.

 

**Note5.  Commitments and Contingencies**

 

In September 2001, Insignia and Sun entered into Amendment No. 3 (the“Amendment”) to the Technology License and Distribution Agreement (the“Distribution Agreement”) between the two companies.  In addition, in June 2001, the two companies entered into anaddendum (the “Addendum”) to the Distribution Agreement relating to distributionof products to an Insignia customer. The Amendment and the Addendum each require Insignia to makenon-refundable royalty prepayments to Sun. A total of $7,000,000 of prepaid royalties were paid to Sun under theseagreements through the second quarter of 2002. There are no additional required royalty prepayments due to Sun underthis agreement.  The amendedDistribution Agreement expires June 30, 2004. Any unused royalty prepayments outstanding on June 30, 2004 areforfeited.

 

During 1998, Insignia sublet until March 2002 facilities it formerlyoccupied in the United Kingdom, on substantially the same terms as thoseapplicable to Insignia. In January 2002, Insignia entered into an agreementwith the landlord to terminate the lease on April 3, 2002.  On April 3, 2002 Insignia paid a surrenderpayment of  $470,000. Insignia's balancesheet includes a large receivable from the subtenant pertaining to the recoveryof dilapidation costs per the facility lease.

 

9

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**Note6.  Segment information**

 

Statement of Financial Accounting Standards No. 131, “Disclosures aboutSegments of an Enterprise and Related Information” (“SFAS 131”), provides forsegment reporting based upon the “management” approach.  The management approach designates theinternal organization that is used by management for making operating decisionsand assessing performance as the source of Insignia’s reportable segments.  SFAS 131 also requires disclosures aboutproducts and services, geographic areas, and major customers.

 

Insignia operates in a single industry segment providing virtualmachine technology which enables software applications and operating systems tobe run on various computer platforms. In the second quarter of 2002, Phoenix Technologies, Ltd. (“Phoenix”)and Wind River Systems, Inc. accounted for 65% and 12% of total revenues,respectively.  In the second quarter of2001, Phoenix and Toshiba Information Systems Corporation (“Toshiba”) accountedfor 66% and 12% of total revenues, respectively.   No other customer accounted for 10% or more of Insignia’s totalrevenues during the second quarter of 2002 and 2001.

###### ** **

###### **Geographicinformation**

 

Financial information by geographical region is summarized below (inthousands):

 
|                                   |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|----------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                   |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
| Revenues from  unaffiliated customers: |   |                              |   |                            |   |   |   |   |   |
| United States                          |   | $                                 | 1,870  |                            | $      | 2,991 |   | $ | 5,382 |   | $ | 4,484 |   |
| International                          |   | 22                                |   | 87                              |   | 54 |   | 290 |   |
| Consolidated                           |   | $                                 | 1,892  |                            | $      | 3,078 |   | $ | 5,436 |   | $ | 4,774 |   |
| Intercompany  revenues:                |   |                              |   |                            |   |   |   |   |   |
| United States                          |   | $                                 | 18     |                            | $      | 70 |   | $ | 43 |   | $ | 233 |   |
| International                          |   | 783                               |   | 1,228                           |   | 2,251 |   | 1,928 |   |
| Consolidated                           |   | $                                 | 801    |                            | $      | 1,298 |   | $ | 2,294 |   | $ | 2,161 |   |
| Operating loss:                        |   |                              |   |                            |   |   |   |   |   |
| United States                          |   | $                                 | (1,511 | )                               | $      | (1,547 | ) | $ | (2,401 | ) | $ | (3,456 | ) |
| International                          |   | (1,407                            | )      | (1,175                          | )      | (2,039 | ) | (2,941 | ) |
| Consolidated                           |   | $                                 | (2,918 | )                               | $      | (2,722 | ) | $ | (4,440 | ) | $ | (6,397 | ) |
|                                   |   |                              |   |                            |   |   |   |   |   |
|                                   |   |                              |   |                            |   | **June 30,** |   | **December 31,** |   |
|                                   |   |                              |   |                            |   | **2002** |   | **2001** |   |
| Identifiable  assets:                  |   |                              |   |                            |   |   |   |   |   |
| United States                          |   |                              |   |                            |   | $ | 6,119 |   | $ | 14,091 |   |
| International                          |   |                              |   |                            |   | 41,663 |   | 38,637 |   |
| Intercompany  items and eliminations   |   |                              |   |                            |   | (35,062 | )  | (34,960 | ) |
| Consolidated                           |   |                              |   |                            |   | $ | 12,720 |   | $ | 17,768 |   |
| Long-lived  assets:                    |   |                              |   |                            |   |   |   |   |   |
| United States                          |   |                              |   |                            |   | $ | 170 |   | $ | 425 |   |
| International                          |   |                              |   |                            |   | 35,252 |   | 35,237 |   |
| Intercompany items  and eliminations   |   |                              |   |                            |   | (35,062 | )  | (34,960 | ) |
| Consolidated                           |   |                              |   |                            |   | $ | 360 |   | $ | 702 |   |

 

10

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All of the international revenues and substantially all of theinternational identifiable assets relate to Insignia’s operations in the UnitedKingdom.  Intercompany sales areaccounted for at prices intended to approximate those that would be charged tounaffiliated customers.

 

Revenues from United States operations included export sales of $50,000and $408,000 for the three months ended June 30, 2002 and 2001, respectively,and $181,000 and $638,000 for the six months ended June 30, 2002 and 2001,respectively.

 

Revenue by geographic area for the quarter ended June 30, 2002 is asfollows (in thousands):

 
|                         |   | **U.S.** |   | **U.S.  Exports** |   | **Europe** |   | **Total** |   |
|------------------------------|--------|----------|--------|-------------------|--------|------------|--------|-----------|--------|
|                         |   |     |   |              |   |       |   |      |   |
| Distributor                  |   | $        | 1,478  |              | $      | 18         |   | $         | — |   | $ | 1,496 |   |
| OEM                          |   | 341      |   | 32                |   | 19         |   | 392       |   |
| End User                     |   | 1        |   | —            |   | 3          |   | 4         |   |
|                         |   |     |   |              |   |       |   |      |   |
| Total                        |   | $        | 1,820  |              | $      | 50         |   | $         | 22     |   | $ | 1,892 |   |
|                         |   |     |   |              |   |       |   |      |   |
| Percentage of  total revenue |   | 96       | %      | 3                 | %      | 1          | %      | 100       | %      |

 

Revenue by geographic area for the quarter ended June 30, 2001 is asfollows (in thousands):

 
|                         |   | **U.S.** |   | **U.S.  Exports** |   | **Europe** |   | **Total** |   |
|------------------------------|--------|----------|--------|-------------------|--------|------------|--------|-----------|--------|
|                         |   |     |   |              |   |       |   |      |   |
| Distributor                  |   | $        | 2,034  |              | $      | 408        |   | $         | — |   | $ | 2,442 |   |
| OEM                          |   | 549      |   | —            |   | 87         |   | 636       |   |
| End User                     |   | —   |   | —            |   | —     |   | —    |   |
|                         |   |     |   |              |   |       |   |      |   |
| Total                        |   | $        | 2,583  |              | $      | 408        |   | $         | 87     |   | $ | 3,078 |   |
|                         |   |     |   |              |   |       |   |      |   |
| Percentage of  total revenue |   | 84       | %      | 13                | %      | 3          | %      | 100       | %      |

 

There were no European countries that accounted for more than 10% oftotal revenue.

 

**Note7.  Private placement and warrants**

 

In December 1999, Insignia entered into agreements whereby Insigniaissued 1,063,515 ordinary shares in ADS form, bundled with warrants, at a priceof $4.23 per share to Castle Creek Technology Partners LLC and four otherinvestors of whom one is a member of Insignia’s board of directors. Insigniareceived $4.5 million less offering expenses totaling $0.4 million. The bundledwarrants gave the investors the right to purchase a total of 319,054 ADSs at anexercise price of $5.29 per ADS.  Thewarrants expire on December 9, 2004.   The securities were issued by Insignia in reliance upon the exemptionfrom registration provided under Rule 506 of Regulation D promulgated under theSecurities Act of 1933 (the “Securities Act”).

 

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During 2000, Insignia issued a total of 19,994 ordinary shares in ADSform at various prices, ranging from $6.281 to $16.50 to a director ofInsignia, as payment for drawdown fees under a line of credit arrangemententered into in March 2000.  Thesecurities were issued in reliance upon the exemption from registrationprovided under Section 4(2) of the Securities Act.

 

On November 24, 2000 Insignia entered into agreements whereby Insigniaissued 3,600,000 ordinary shares in ADS form, bundled with warrants, at a priceof $5.00 per share to a total of 23 investors, including Sun Microsystems,Bsquare, and a member of Insignia’s board of directors.  Insignia received $18.0 million lessoffering expenses totaling $2.0 million. The bundled warrants give the investors the right to purchase 1,800,000ADSs at an exercise price of the lower of the average quoted closing sale priceof Insignia’s ADSs for the ten trading days ending on the day preceding thedate of the warrant holder’s intent to exercise less a 10% discount, and$6.00.  In the second quarter of 2001,three investors exercised their warrants for 282,500 ADSs. In the first quarterof 2002, three investors exercised their warrant rights for 400,000 ADSs.  The warrants expire on November 24, 2003, however,subject to certain conditions, if the quoted sale price of the ADSs exceed$9.00 per share for any thirty consecutive trading days, Insignia may cancelthe warrants upon sixty days prior written notice. Insignia also issued awarrant to purchase 225,000 ADSs to the placement agent exercisable at a priceof $5.00 per ADS.  This warrant expireson November 24, 2005.  The securitieswere issued by Insignia in reliance upon the exemption from registrationprovided under Rule 506 of Regulation D promulgated under the Securities Act.

 

On December 31, 2000 Insignia issued a total of 251,333 ordinary sharesin ADS form to Quantum Peripherals (Europe) SA, at a per share price of $4.23per share under the terms of a convertible promissory note entered into onOctober 20, 1999.  The securities wereissued in reliance upon the exemption from registration provided under Section4 (2) of the Securities Act.

 

On February 12, 2001 Insignia entered into agreements whereby Insigniaissued 940,000 ordinary shares in ADS form, bundled with warrants, at a priceof $5.00 per share to a total of 4 investors, including Wind River Systems,Inc. and a member of Insignia’s board of directors.  The bundled warrants gave the investors the right to purchase470,000 ADSs, at an exercise price of the lower of the average quoted closingsale price of Insignia’s ADSs for the ten trading days ending on the daypreceding the date of the warrant holder’s intent to exercise less a 10%discount, and $6.00.  The warrantsexpire on February 12, 2004, however, subject to certain conditions, if thequoted sale price of the ADSs exceed $9.00 per share for any thirty consecutivetrading days, Insignia may cancel the warrants upon sixty days prior writtennotice.  Insignia received $4.7 millionless offering expenses totaling $0.5 million. Insignia also issued a warrant to purchase 25,000 ADSs to the placementagent exercisable at a price of $5.00 per ADS. This warrant expires on February 12, 2006.  The securities were issued by Insignia in reliance upon theexemption from registration provided under Rule 506 of Regulation D promulgatedunder the Securities Act.

 

### **Dilution adjustments**

 

As noted above, in December 1999, Insignia issued 1,063,515 ordinaryshares in ADS form at a price of $4.23 per share through a privateplacement.  Along with ADSs, Insigniaalso issued to the investors warrants that entitle them to purchase a total of319,054 ADSs at an exercise price of $5.29 per ADS.  As described below, the exercise price and the number of ADSs issuableunder the warrants are subject to various adjustments.

 

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Under the December 1999 private placement, the investors receivedwarrants to purchase three ADSs for every 10 ADSs they purchased.  The exercise price of the warrants was setat 125% of the original per ADS purchase price, or $5.29.  However, the warrants contain anti-dilutionprovisions which decrease this exercise price and increase the number of ADSspurchasable if Insignia sells or is deemed to sell any shares at below marketprice during the term of the warrants, which ends on December 9, 2004.  The private placement that closed onNovember 24, 2000 was a sale which triggered the anti-dilution provisions inthe warrants, and, as a consequence, the exercise price of the warrants hasbeen decreased from $5.29 to $4.77 per ADS, and the number of ADSs purchasablehas increased to 353,834.  The privateplacement on February 12, 2001 also triggered the anti-dilution provisions ofthe warrants issued on December 9, 1999. However, the effect of such dilution was less than 1% of the exerciseprice, and, consequently, such adjustment is deferred until such time as theaccumulation of this adjustment and future adjustments exceed at least 1% ofthe exercise price.

 

As part of their warrant agreements, the investors may be entitled tocash payments upon the occurrence of certain Major Transactions, as defined inthe warrant agreements, including change of control provisions.  Cash payments are determined in amethodology described in the agreement. Such methodology is impacted by market price.  A major transaction is defined as a merger, reorganization, orsale of all or substantially all of the assets of Insignia in which thestockholders of Insignia immediately prior to the transaction possess less than50% of the voting power of the surviving entity (or its parent) immediatelyafter the transaction.

 

Under the December 1999 private placement, the investors were entitledto additional warrants to purchase ADSs at £0.20 nominal value per share if theaverage of the closing bid price of the ADSs over the ten days before anadjustment date was less than $4.23. The adjustment dates commenced on March 10, 2000 and occurred on the 10thof each month through March 10, 2001, inclusive.  The rights for an adjustment date to occur would terminate uponrelease of at least $4.75 million of the funds held in escrow by Citrix onDecember 9, 1999.  However, not enoughof the funds held were released to trigger this termination.  As calculated, the average bid price ofInsignia’s ADSs on all the adjustment dates exceeded $4.23 per share andconsequently no adjustment occurred. The adjustment rights have now expired.

 

Insignia obtained a third-party valuation to allocate fair value toamounts received from the private placement between the ADSs and thewarrants.  In 1999 the amount allocatedto mandatorily redeemable warrants totaled $1.440 million, of which $0.590million was allocated to the warrant, and $0.850 million was allocated to theadditional warrant.  Of the remainingnet proceeds received, $2.619 million was allocated to mandatorily redeemablecapital.  The $2.619 million of mandatorilyredeemable capital was reclassed, when the registration statement for the ADSsand the ADSs underlying the warrants issued in the December 1999 private placement became  effective on March 28, 2000, of which $0.340 million wasclassified as ordinary shares and $2.279 million was classified as additionalpaid-in capital.

 

Amounts classified as warrants will remain outside  of shareholders’ equity  for  the life of   the warrant or untilthey are exercised,  whichever  occurs first.  This  classification  reflects  certainpotential  cash payments  that may occur, should  Insignia  complete a  major  transaction,  such  as  a takeover, during  the  life of the  warrants.  If a major transaction had occurred asof  June 30, 2002, the maximum cashpayout would have been $205,578 based on the estimated  Black-Scholes value ofthe warrant.

 

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Limitations in the transaction agreements preclude these investors inquestion from achieving certain levels of beneficial ownership.  The securities purchase agreement, thewarrants and the additional warrants contain the restriction that Insignia maynot issue, and a selling investor may not purchase, and the warrants andadditional warrants may not be exercised for any ADSs, if doing so would causesuch investor to beneficially own more than 9.9% of the total ordinary sharesin issue as determined in accordance with Section 13(d) of the SecuritiesExchange Act of 1934.  Under theadditional warrants, if such investors are prohibited from exercising theadditional warrant as a result of the 9.9% restriction, the selling investormay, at its option and in addition to its other rights under the securitiespurchase agreement and the warrant, retain the warrant or demand payment, incash, from Insignia in an amount calculated  by  the Black-Scholes  formulamultiplied  by the number of ADSs  for which  the additional warrant wasexercisable, without regard to any limits on exercise.  The restrictions on the levels of beneficialownership in these  documents do not, however,restrict  those investors  from exercising  the  warrants or additional warrants up to thoselimitations, selling ADSs to decrease their level of beneficial ownership, andexercising the warrants to receive additional ADSs.  This could result in additional dilution to the holders ofInsignia’s ADSs and a potential decrease in the price of the ADSs.

 

**Note8.  Line of credit**

 

On March 20, 2000, Insignia entered into an agreement with a directorand members of his family whereby they would provide Insignia a $5.0 million lineof credit with a commitment fee of four points based upon the total amount ofthe line and drawdown/termination fee of two points for drawdown ortermination.  The interest rate onamounts drawn down was at prime plus 2% until June 30, 2000 and thereafter atprime plus 4% per annum simple interest, payable in cash at the repaymentdate.  Insignia drew down a total of$3.0 million of the line of credit during 2000.  A total of 19,994 Ordinary Shares in ADS form were issued aspayment for drawdown fees under the line of credit arrangement.  On November 27, 2000 Insignia repaid thissum, along with all accrued interest and the termination fee due.

 

On March 28, 2002, Insignia’s U.S. subsidiary, Insignia Solutions, Inc.(“Insignia U.S.”) entered into an accounts receivable financing agreement withSilicon Valley Bank.  The financingagreement allows Insignia U.S. to borrow an amount up to 80% of eligiblereceivables not to exceed $1,200,000, with interest at the bank’s prime rateplus two percentage points.  Theagreement expires on March 27, 2003. Borrowing is subject to compliance with certain covenants, including arequirement to maintain specific financial ratios.  Borrowings are secured by substantially all of the assets ofInsignia U.S.  Insignia U.S. was incompliance with these covenants at June 30, 2002, and at that time there wereno outstanding borrowings under this credit facility.

 

**Note9.  Related party transaction**

 

During the three months and six months ended June 30, 2002, Insigniarecognized revenue of $1,225,000 and $4,000,000, respectively, from PhoenixTechnologies Ltd.  The CEO of PhoenixTechnologies Ltd. was also a director on Insignia’s Board of Directors fromMarch 1997 until March 2001.

 

During the three months and six months ended June 30, 2002, Insigniarecognized revenue of $225,000 and $250,000, respectively, from Wind RiverSystems, Inc. (“Wind River”).  WindRiver participated in a  privateplacement of equity in Insignia in February 2001 on the same

 

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terms as the other three investors in the private placement.  Wind River paid the aggregate purchase priceof $2,000,000 for 400,000 ordinary shares represented by ADRs and warrants topurchase 200,000 ordinary shares represented by ADRs.   In addition, a Vice President of Wind River, John C. Fogelin,was appointed to Insignia’s Board of Directors in January 2001.

 

On February 13, 2001, Insignia entered into a promissory note withRichard M. Noling, President and Chief Executive Officer of Insignia, wherebyMr. Noling borrowed $150,000 from Insignia U.S.  The promissory note is duein three equal installments, on each annual anniversary from the date of thenote.  The note was amended on January24, 2002 to extend the first and subsequent installments one year.  The first installment is now due on February13, 2003.  Interest accrues on theunpaid principal balance at a rate per annum equal to the prime lending rate ofinterest as listed in the Wall Street Journal plus 1%.  Accrued interest is due and payable monthlyin arrears on the last calendar day of each month, beginning March 31,2001.  In addition, on July 17, 2001,Mr. Noling received an interest free loan of $50,000.  The $50,000 loan was repaid in full on September 30, 2001.

 

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**Item2.  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” setforth in Insignia’s Form 10-K for the year ended December 31, 2001 (the “Form10-K”).

 

**Futureoperating results**

 

This Form 10-Q contains forward-looking statements.  These forward-looking statements concernmatters which include, but are not limited to, the revenue model and market forthe Jeode product line, the features, benefits and advantages of the Jeodeplatform, international operations and sales, gross margins, spending levels,the availability of licenses to third-party proprietary rights, business andsales strategies, matters relating to proprietary rights, competition, exchangerate fluctuations and Insignia’s liquidity and capital needs.  These and other statements regarding mattersthat are not historical are forward-looking statements.  These matters involve risks anduncertainties that could cause actual results to differ materially from thosein the forward-looking statements.  Inaddition to the factors discussed above, among other factors that could causeactual results to differ materially are the following: the demand for the Jeodeplatform; the performance and functionality of Jeode technology; Insignia’sability to deliver products on time, and market acceptance of new products orupgrades of existing products; the timing of, or delay in, large customerorders; continued availability of technology and intellectual property licenserights; product life cycles; quality control of products sold; competitiveconditions in the industry; economic conditions generally or in variousgeographic areas; and the risks listed from time to time in the reports that Insigniafiles with the U.S. Securities and Exchange Commission.  Factors that could cause or contribute tosuch differences in results and outcomes include without limitation thosediscussed below as well as those discussed elsewhere in this Report.  Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. Insignia assumes no obligation to update these forward-looking statementsto reflect actual results or changes in factors or assumptions affecting suchforward-looking statements.

 

Insignia continues to face significant risks associated with thesuccessful execution of its business strategy. The significant risks include,but are not limited to, continued technology and product development,introduction and market acceptance of new products, changes in the marketplace,liquidity, competition from existing and new competitors that may enter themarketplace, and retention of key personnel.

 

In addition, Insignia also faces significant risks associated with thedevelopment and future deployment of its Secure System Provisioning (“SSP”)products and the successful execution of the related business strategy. During2001, Insignia began development of a range of SSP products for the mobilehandset and wireless carrier industry. These SSP products build on Insignia’s position as a Virtual Machine(“VM”) supplier for manufacturers of mobile devices and are designed to allowwireless carriers to build valuable incremental services.  Insignia is planning for these new SSPproducts to be available for market trials in calendar 2002 and available forshipment to customers in calendar 2003. Insignia has limited history with salesinitiatives for new products. Additionally, the sales cycle for the SSPproducts is expected to take longer than the six to nine months sales cycletypically experienced with the Jeode product.

 

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Insignia does not currently have accurate visibility of future orderrates and demand for the products that are currently available for shipment tocustomers or for new products that Insignia is currently developing.  There can be no assurance that Insignia'scurrent or future products will achieve market acceptance.

 

Insignia has experienced operating losses in each quarter since thesecond quarter of 1996.  To achieveprofitability, Insignia will have to increase its revenue.  Insignia’s ability to increase revenuesdepends upon the success of its Jeode product line.  Jeode has been available since March 1999, and it may not achievewidespread market acceptance.  IfInsignia is unable to generate higher revenues from Jeode in the form ofdevelopment license fees, maintenance and support fees, commercial use royaltiesand customer-funded engineering services, Insignia’s current revenue levelswill be insufficient to sustain its business.

 

Insignia has undertaken measures to reduce operating expenses andredesign its commercial efforts to adapt to new developments. Management ofInsignia has prepared forecasts of expected future revenues and expenses, aswell as balances of cash, cash equivalents and short-term investments and otherliquid sources of cash (including its existing line of credit) available toInsignia. While Insignia is targeting these resources to be sufficient to meetits anticipated cash needs for working capital and capital expenditures throughcalendar year 2002, there can be no assurance that Insignia will not requireadditional financing to fund operations in calendar year 2002. In particular,Insignia will need to further reduce the level of operating expenses in theevent that revenue is lower than expected. In addition, if Insignia is unable to maintain the reduction ofoperating expenses or achieve new sales currently projected, if unplanned cashpayments or expenses arise, or if Insignia is unable to obtain access toadditional capital, it may not have sufficient resources to fund continuingoperations through calendar year 2002. In addition, based on its currentforecasts and estimates, Insignia anticipates that, in any event, it willrequire additional financing in calendar year 2003.

 

To the extent that Insignia requires additional financing, there can beno assurances that Insignia will be able to obtain such funding when it isneeded on acceptable terms, or at all. The failure to raise such additionalfunds on a timely basis and on sufficiently favorable terms would have amaterial adverse effect on Insignia’s business, operating results and financialcondition. Insignia’s liquidity also may be adversely affected in the future byfactors such as higher interest rates, inability  to  borrow without   collateral,  limited availability of  capital financing  and  continued operating losses.

 

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The following table sets forth the unaudited condensed consolidatedresults of operations as a percentage of total revenues for the three and sixmonth periods ended June 30, 2002 and 2001.

 
|                         |   | **Three months  ended  June 30,** |   | **Six months  ended  June 30,** |   |
|------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                         |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                         |   |                              |   |                            |   |   |   |   |   |
| Net revenues:                |   |                              |   |                            |   |   |   |   |   |
| License                      |   | 81.8                              | %      | 87.2                            | %      | 83.4 | % | 78.9 | % |
| Service                      |   | 18.2                              | %      | 12.8                            | %      | 16.6 | % | 21.1 | % |
|                         |   |                              |   |                            |   |   |   |   |   |
| Total net  revenues          |   | 100.0                             | %      | 100.0                           | %      | 100.0 | % | 100.0 | % |
|                         |   |                              |   |                            |   |   |   |   |   |
| Cost of net  revenues:       |   |                              |   |                            |   |   |   |   |   |
| License                      |   | 37.8                              | %      | 44.3                            | %      | 31.8 | % | 41.4 | % |
| Service                      |   | 13.3                              | %      | 2.7                             | %      | 8.3 | % | 5.6 | % |
|                         |   |                              |   |                            |   |   |   |   |   |
| Total cost of  net revenues  |   | 51.1                              | %      | 47.0                            | %      | 40.1 | % | 47.0 | % |
|                         |   |                              |   |                            |   |   |   |   |   |
| Gross margin                 |   | 48.9                              | %      | 53.0                            | %      | 59.9 | % | 53.0 | % |
|                         |   |                              |   |                            |   |   |   |   |   |
| Operating  expenses:         |   |                              |   |                            |   |   |   |   |   |
| Sales and  marketing         |   | 78.8                              | %      | 59.0                            | %      | 59.1 | % | 74.3 | % |
| Research and  development    |   | 73.2                              | %      | 51.6                            | %      | 47.5 | % | 66.6 | % |
| General and  administrative  |   | 51.1                              | %      | 30.8                            | %      | 35.0 | % | 46.1 | % |
|                         |   |                              |   |                            |   |   |   |   |   |
| Total operating  expenses    |   | 203.1                             | %      | 141.4                           | %      | 141.6 | % | 187.0 | % |
|                         |   |                              |   |                            |   |   |   |   |   |
| Operating loss               |   | (154.2                            | )%     | (88.4                           | )%     | (81.7 | )% | (134.0 | )% |
|                         |   |                              |   |                            |   |   |   |   |   |
| Interest income,  net        |   | 1.4                               | %      | 3.7                             | %      | 0.9 | % | 7.1 | % |
| Other income  (expense), net |   | 7.0                               | %      | (0.2                            | )%     | 1.9 | % | 0.5 | % |
|                         |   |                              |   |                            |   |   |   |   |   |
| Loss before  income taxes    |   | (145.8                            | )%     | (84.9                           | )%     | (78.9 | )% | (126.4 | )% |
|                         |   |                              |   |                            |   |   |   |   |   |
| Benefit for  income taxes    |   | (67.2                             | )%     | 1.9                             | %      | (33.7 | )% | 1.2 | % |
|                         |   |                              |   |                            |   |   |   |   |   |
| Net loss                     |   | (78.6                             | )%     | (86.8                           | )%     | (45.2 | )% | (127.6 | )% |

 

**Overview**

 

Insignia, which commenced operations in 1986, develops, markets andsupports software technologies that implement accelerated virtual machinetechnology for memory-constrained smart devices.

 

In January 1998, Insignia announced its intention to launch a newproduct line called the JeodeÔplatform, based on Insignia’s Embedded Virtual Machine (“EVM”TM)technology.  Insignia also explored newmarkets that would leverage Insignia’s 16 years of emulation softwaredevelopment experience.  The Jeodeplatform is Insignia’s implementation of Sun Microsystems, Inc.’s (“Sun”) Java®technology tailored for smart devices. It leverages patent-pending intellectual property to provide theseresource-constrained devices with high performance, fully-

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compatible Java applet and application support.   The product became available for sale inMarch 1999.  The Jeode platform was theprincipal product line of Insignia in the second quarter of 2002.  Insignia expects that it will continue torely upon sales of Jeode products, plus new products that may be introduced,for Insignia’s revenue in the foreseeable future.  The Jeode product line revenue model is based on originalequipment manufacturers’ (“OEMs”) and channel partners’ customer transactions.

 

During 2001, Insignia began development of a range of products (“SecureSystem Provisioning” or “SSP” products) for the mobile handset and wirelesscarrier industry.  These SSP productsbuild on our position as a Virtual Machine (“VM”) supplier for manufacturers ofmobile devices and are designed to allow wireless carriers to build valuableincremental services.  Insignia isplanning for these new SSP products to be available for market trials incalendar 2002 and available for shipment to customers in calendar 2003.Insignia has limited history with sales initiatives for new products.Additionally, the sales cycle for the SSP products is expected to take longerthan the six to nine months sales cycle typically experienced with the Jeode VMproduct.

 

Insignia’s principal product line in past years was SoftWindowsTM.  This product enabled Microsoft Windows(“Windows”®) applications to be run on most Apple Computer Inc. (“Apple”®)Macintosh computers and many UNIX workstations.  Revenues from this product line grew until 1995, but declinedsignificantly after that date, along with margins.  This was due to a declining demand for Apple Macintosh productsand increased competition.  Insigniaalso shipped RealPC, a low cost software product that allowed consumers to playgames and other applications designed for Intel-based PCs on their PowerMacintosh computers.  In 1999 managementtook steps to discontinue these product lines, thus allowing Insignia to focusexclusively on its Jeode platform business strategy.

 

**Criticalaccounting policies**

 

The consolidated financial statements are prepared in accordance withgenerally accepted accounting principles. Certain of Insignia’s accounting policies require the application  of significant judgment by management inselecting the appropriate assumptions for calculating financial estimates.   These estimates affect the reported amountsof assets and liabilities at the dates of the financial statements and thereported amounts of revenues and expenses during the reporting periods.  By their nature, these judgments are subjectto an inherent degree of uncertainty. The most significant estimates and assumptions relate to revenuerecognition, accounts receivable, the recoverability of prepaid royalties, andthe adequacy of allowances for doubtful accounts. Actual amounts could differfrom these estimates.

 

Insignia recognizes revenue in accordance with Statement of Position97-2, “Software Revenue Recognition”, as amended.  SOP 97-2 requires that four basic criteria must be met beforerevenue can be recognized: (1) persuasive evidence of an arrangement exists;(2) delivery has occurred or services have been rendered; (3) the fee is fixedand determinable; and (4) collectibility is reasonably assured. Determinationof criteria (3) and (4) are based on management’s judgments regarding the fixednature of the fee charged for services rendered and products delivered and thecollectibility of those fees. Should changes in conditions cause management todetermine these criteria are not met for certain future transactions, revenue recognizedfor any reporting period could be adversely affected.

 

At the time of the transaction, Insignia assesses whether the feeassociated with its revenue transactions is fixed and determinable and whetheror not collection is reasonably assured.

 

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Insignia assesses whether the fee is fixed and determinable based onthe payment terms associated with the transaction. If a significant portion ofa fee is due after the normal payment terms, which are 30 to 90 days frominvoice date, Insignia accounts for the fee as not being fixed anddeterminable. In these cases, Insignia recognizes revenue as the fees becomedue.

 

For arrangements with multiple obligations (for example, undeliveredmaintenance and support), Insignia allocates revenue to each component of thearrangement using the residual value method based on the fair value of theundelivered elements, which is specific to Insignia. This means that Insigniawill defer revenue from the arrangement fee equivalent to the fair value of theundelivered elements.  Fair value forthe ongoing maintenance and support obligation is based upon separate sales ofrenewals to other customers or upon renewal rates quoted in the contracts. Fairvalue of services, such as training or consulting, is based upon separate salesby Insignia of these services to other customers.

 

Insignia recognizes revenue for maintenance services ratably over thecontract term. Insignia’s training and consulting services are billed based onhourly rates, and Insignia generally recognizes revenue as these services areperformed. However, at the time of entering into a transaction, Insigniaassesses whether or not any services included within the arrangement requireInsignia to perform significant work either to alter the underlying software orto build additional complex interfaces so that the software performs as thecustomer requests. If these services are included as part of an arrangement,Insignia recognizes the entire fee using the percentage of completion method.Insignia estimates the percentage of completion based on Insignia’s estimate ofthe total costs estimated to complete the project as a percentage of the costsincurred to date and the estimated costs to complete.

 

Insignia’s agreements with licensors sometimes require Insignia to makeadvance royalty payments and pay royalties based on product sales. Prepaidroyalties are capitalized and amortized as cost of sales based on thecontractual royalty rate based on actual net product sales. Insigniacontinually evaluates recoverability of prepaid royalties and, if necessary,will charge to cost of sales any amount that Insignia deems unlikely to berecoverable in the future.  Whilehistorically Insignia has not recorded any unrecoverable prepaid royalties,Insignia cannot guarantee that future experiences will be within itsexpectations.  Prepaid royalties areclassified as current assets based on estimated net product sales within thenext year.

 

**Revenues**

 
|               |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|--------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|               |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|               |   | **(in  thousands)**               |   |
| License revenue    |   | $                                 | 1,547  |                            | $      | 2,684 |   | $ | 4,535 |   | $ | 3,765 |   |
| Service revenue    |   | 345                               |   | 394                             |   | 901 |   | 1,009 |   |
| Total net  revenue |   | $                                 | 1,892  |                            | $      | 3,078 |   | $ | 5,436 |   | $ | 4,774 |   |

 

The Jeode product line was the primary business of Insignia for thesecond quarter of 2002 and 2001. Revenue from the Jeode product line is derived from four main sources:the sale of a development license, the sale of annual maintenance and supportcontracts/services, prepaid royalties and commercial use royalties based onshipments of products that include Jeode technology, and customer-fundedengineering activities.

 

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In the second quarter of 2002, total revenues decreased by 39% comparedto total revenues for the second quarter of 2001.  In the six months ended June 30, 2002, total revenues increasedby 14% compared to total revenues for the first six months of 2001.   The Jeode platform  accounted for 100% of the total revenue forthe three and six months ended June 30, 2002 and 2001.   Insignia expects to see acceleration in theadoption of the Jeode platform. However, not all of this growth will necessarily translate into revenueat the time of licensing.

 

License revenue and service revenue accounted for 82% and 18%,respectively, of total revenues for the three months ended  June 30, 2002.  For the six months ended June 30, 2002, license revenue andservice revenue accounted for 83% and 17%, respectively.  License revenue and service revenueaccounted for 87% and 13%, respectively, of total revenues for the three monthsended June 30, 2001.  For the six monthsended June 30, 2001, license revenue and service revenue accounted for 79% and21%, respectively, of total revenues.

 

License revenue decreased 42% in the second quarter of 2002 compared tolicense revenues in the second quarter of 2001.  For the six months ended June 30, 2002, license revenue increased20% compared to the same period in 2001.

 

Service revenue in the second quarter of 2002 was 12% lower thanservice revenue in the second quarter of 2001. For the six months ended June 30, 2002 service revenue decreased 11%compared to the same period in 2001. The decrease was primarily due to decreased Jeode engineering and Jeodesupport contracts.

 

Deferred revenue decreased by $1,170,000 and $3,530,000 for the threemonths and six months ended June 30, 2002, respectively.  The decrease primarily reflected the revenuerecognition of approximately $3,200,000 from a June 2001 agreement with PhoenixTechnologies, Ltd. (“Phoenix”).

 

Sales to distributors and OEM’s representing more than 10% of totalrevenue in each period accounted for the following percentages of totalrevenue.

 
|                  |   | **Three  months ended  June 30,** |    | **Six months  ended  June 30,** |    |
|-----------------------|--------|-----------------------------------|---------|---------------------------------|---------|
|                  |   | **2002**                          |    | **2001**                        |    | **2002** |   | **2001** |   |
| Distributors:         |   |                              |    |                            |    |   |   |   |   |
| Phoenix  Technologies |   | 65                                | %       | 66                              | %       | 74 | % | 43 | % |
| Wind River            |   | 12                                | %       |                            | *  |   | *  |   | * |
| Toshiba               |   |                              | *  | 12                              | %       |   | *  |   | * |
|                  |   |                              |    |                            |    |   |   |   |   |
| All  Distributors:    |   | 79                                | %       | 79                              | %       | 81 | % | 60 | % |
|                  |   |                              |    |                            |    |   |   |   |   |
| OEM’s:           |   |                              |    |                            |    |   |   |   |   |
| Motorola              |   |                              | *  | —                          |    |   | * | 11 | % |
|                  |   |                              |    |                            |    |   |   |   |   |
| All OEM’s:       |   | 21                                | %       | 21                              | %       | 18 | % | 39 | % |

 

----

* Less than 10%

 

Sales to customers outside the United States, derived mainly fromcustomers in Europe and Asia, represented approximately 4% of total revenues inthe three months ended June 30, 2002, 16% of

 

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total revenues in the three months ended June 30, 2001, 4% of totalrevenues in the six months ended June 30, 2002 and 19% of total revenues in thesix months ended June 30, 2001. Insignia markets Jeode to customers in theUnited States, Europe and Japan.

 

**Cost ofrevenues and gross margin**

 
|                           |   | **Three  months ended  June 30,**       |   | **Six months  ended  June 30,** |   |
|--------------------------------|--------|-----------------------------------------|--------|---------------------------------|--------|
|                           |   | **2002**                                |   | **2001**                        |   | **2002** |   | **2001** |   |
|                           |   | **(in  thousands, except percentages)** |   |
| Cost of license  revenue       |   | $                                       | 714    |                            | $      | 1,363 |   | $ | 1,728 |   | $ | 1,974 |   |
| Gross margin:  license revenue |   | 54                                      | %      | 49                              | %      | 62 | % | 48 | % |
|                           |   |                                    |   |                            |   |   |   |   |   |
| Cost of service  revenue       |   | 252                                     |   | 85                              |   | 449 |   | 269 |   |
| Gross margin:  service revenue |   | 27                                      | %      | 78                              | %      | 50 | % | 73 | % |
|                           |   |                                    |   |                            |   |   |   |   |   |
| Total cost of  revenues        |   | $                                       | 966    |                            | $      | 1,448 |   | $ | 2,177 |   | $ | 2,243 |   |
| Gross margins:  total revenues |   | 49                                      | %      | 53                              | %      | 60 | % | 53 | % |

 

Cost of license revenue is mainly comprised of royalties to thirdparties, along with the costs of documentation, duplication and packaging.  Cost of service revenue includes costsassociated with customer-funded engineering activities and end-user supportunder maintenance contracts.

 

Insignia believes that the significant factors affecting the Jeodeplatform gross margin include pricing of the development license, pricing ofthe unit usage and royalties to third parties such as Sun Microsystems, Inc.(“Sun”).  In early 1999, Insignia signeda five-year agreement with Sun under which Sun established Insignia as anauthorized Virtual Machine provider.  Underthis agreement, Insignia will pay Sun a per unit royalty on each Jeodeplatform-enabled smart device shipped by Insignia’s customers, plus a royaltyon all development licenses put in place between Insignia and its customers.  In the third quarter of 2001, Insigniaamended its license agreement with Sun. The amendment expanded the scope of the licensed technology, changed theroyalty rate, limited the royalty obligations to only per units licensed,established a prepaid royalty schedule and extended the expiration date of thecontract from March 2004 to June 2004.  License revenue gross margins in the quarter ended June 30, 2002 were54%, compared to 49% for the same period in 2001.  For the six months ended June 30, 2002, license revenue grossmargins were 62% compared to 48% for the same period in 2001.  The increases were due to the prior yearincluding a large deal with lower gross margin.

 

Gross margin for service revenue is impacted by the level of andpricing terms of customer funded engineering activities, which can vary fromcustomer to customer, from contract to contract and based on the level ofmaintenance contracts sold.  Grossmargin for service revenue decreased in the second quarter of 2002 to 27% from78% in the same period of 2001.  For thesix months ended June 30, 2002, service revenue gross margins were 50% comparedto 73% for the same period in 2001.  Thedecreases were due to a reduction in maintenance contracts in the more recentperiods.

 

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**Operatingexpenses**

 
|                          |   | **Three  months ended  June 30,**       |   | **Six months  ended  June 30,** |   |
|-------------------------------|--------|-----------------------------------------|--------|---------------------------------|--------|
|                          |   | **2002**                                |   | **2001**                        |   | **2002** |   | **2001** |   |
|                          |   | **(in  thousands, except percentages)** |   |
| Sales and  marketing          |   | $                                       | 1,492  |                            | $      | 1,815 |   | $ | 3,213 |   | $ | 3,546 |   |
| Percentage of  total revenues |   | 79                                      | %      | 59                              | %      | 59 | % | 74 | % |
|                          |   |                                    |   |                            |   |   |   |   |   |
| Research and  development     |   | $                                       | 1,385  |                            | $      | 1,589 |   | $ | 2,581 |   | $ | 3,183 |   |
| Percentage of  total revenues |   | 73                                      | %      | 52                              | %      | 47 | % | 67 | % |
|                          |   |                                    |   |                            |   |   |   |   |   |
| General and  administrative   |   | $                                       | 967    |                            | $      | 948 |   | $ | 1,905 |   | $ | 2,199 |   |
| Percentage of  total revenues |   | 51                                      | %      | 31                              | %      | 35 | % | 46 | % |

 

Sales and marketing expenses consist primarily of personnel and relatedoverhead costs, salesperson commissions, advertising and promotional expensesand trade shows.  Sales and marketingexpenses decreased by 18% in the quarter ended June 30, 2002 from the quarterended June 30, 2001. The decrease in expenditures was primarily due to a$164,000 decrease in personnel and travel costs.  In addition, there was an $81,000 decrease in expenses relating  to discretionary marketing and professionalservices.   Sales and marketing expensesdecreased by 9% for the six months ended June 30, 2002 from the same period of2001.  The decrease was primarily due toa $227,000 reduction in personnel and travel costs, a $137,000 reduction inprofessional services, and a $92,000 reduction in overhead costs, offsetsubstantially by a $154,000 increase in marketing expenditures for new productlaunch.  Insignia anticipates a moderateincrease in sales and marketing expenses in the next few quarters as Insigniacontinues to increase its marketing and sales organization for its Jeodeproduct line and expands into other product lines.  Insignia has established a direct sales force in the UnitedStates, Europe and Japan. Insignia has also developed relationships withstrategic partners to leverage the Jeode technology.

 

Research and development expenses consist primarily of personnel costs,overhead costs relating to occupancy and equipment depreciation.  Research and development expenses decreasedby 13% in the three months ended June 30, 2002 compared to the same period in2001, of which substantially all of the decrease was due to reductions inpersonnel.  Research and developmentexpenses decreased by 19% for the six months ended June 30, 2002 compared tothe same period in 2001.  Approximately$526,000 of the decrease was due to reductions in personnel relatedexpenses.  An additional reduction of$159,000 in overhead costs was offset by an increase in base software expensesof approximately $110,000.  Research anddevelopment expenses are expected to increase moderately in the near term asInsignia further enhances its Jeode and Secure System Provisioningtechnology.  In accordance withStatement of Financial Accounting Standards No. 86, software development costsare expensed as incurred until technological feasibility is established, afterwhich any additional costs are capitalized. In 2002 and 2001, no developmentexpenditures were capitalized, as there were no amounts that qualified forcapitalization.

 

General and administrative expenses consist primarily of personnel andrelated overhead costs for finance, legal, information systems, human resourcesand general management. General and administrative expenses increased by 2% inthe three months ended June 30, 2002 over the same

 

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period of 2001.  The increasewas due primarily to the prior year bad debt expense including a reduction of$100,000.  Other significant increasesin expenses were a $60,000 reserve for dilapidation expenses relating to the UKsubtenant, standard annual rent increase of $30,000 and a $29,000 increase indirectors and officer’s insurance expense. These increases were partially offset by a $95,000 decrease in personnelcosts, a $98,000 decrease in professional services and an $8,000 decrease intelecommunication costs.  General andadministrative expenses decreased by 13% for the six months ended June 30, 2002over the same period of 2001.  Thedecrease primarily reflected a decrease of $118,000 in salary costs and a$145,000 decrease in personnel related costs, which consist primarily ofrecruiting and payroll related expenses. Professional service expenditures also decreased by roughly $132,000.  These decreases were offset in part due toincreased insurance expenditures of approximately $71,000.  General and administrative expenses areexpected to decrease moderately in the near term.

 

**Interestincome (expense), net**

 
|                            |   | **Three  months ended  June 30,**       |   | **Six months  ended  June 30,** |   |
|---------------------------------|--------|-----------------------------------------|--------|---------------------------------|--------|
|                            |   | **2002**                                |   | **2001**                        |   | **2002** |   | **2001** |   |
|                            |   | **(in  thousands, except percentages)** |   |
| Interest income  (expense), net |   | $                                       | 27     |                            | $      | 115 |   | $ | 48 |   | $ | 339 |   |
| Percentage of  total revenues   |   | 1                                       | %      | 4                               | %      | 1 | % | 7 | % |
|                                 |        |                                         |        |                                 |        |  |  |  |  |  |  |  |  |

 

Net interest income (expense) decreased from income of $115,000 in thethree months ended June 30, 2001 to income of $27,000 in the three months endedJune 30, 2002.  Net interest incomedecreased from income of $339,000 in the six months ended June 30, 2001 toincome of $48,000 in the six months ended June 30, 2002.  The decrease was primarily due to acombination of lower interest rates and lower cash and cash equivalentbalances.

 

### **Other income, net**

 
|                          |   | **Three  months ended  June 30,**       |   | **Six months  ended  June 30,** |   |
|-------------------------------|--------|-----------------------------------------|--------|---------------------------------|--------|
|                          |   | **2002**                                |   | **2001**                        |   | **2002** |   | **2001** |   |
|                          |   | **(in  thousands, except percentages)** |   |
| Other income, net             |   | $                                       | 133    |                            | $      | (5 | ) | $ | 101 |   | $ | 26 |   |
| Percentage of  total revenues |   | 7                                       | %      | —                          |   | 2 | % | 1 | % |
|                               |        |                                         |        |                                 |        |  |  |  |  |  |  |  |  |

 

In the three months ended June 30, 2002, Insignia realized a foreignexchange gain of $133,000 compared to a loss of $5,000 in the three monthsended June 30, 2001.  In the six monthsended June 30, 2002, Insignia realized a foreign exchange gain of $101,000compared to a gain of $26,000 in the six months ended June 30, 2001.

 

Approximately 99% of Insignia’s total revenues and over 50% of itsoperating expenses are denominated in United States dollars.  Most of the remaining revenues and expensesof Insignia are British pound sterling denominated and consequently Insignia isexposed to fluctuations in British pound sterling exchange rates.  Insignia did not enter into any currencyoption hedge contracts in the second quarter of 2002 or the second quarter of2001 and had no option hedge contracts outstanding as of June 30, 2002 or June30, 2001.

 

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Insignia has, at times, an investment portfolio of fixed incomesecurities 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.  Insignia attemptsto limit this exposure by investing primarily in short-term securities.

 

**Benefitfor income taxes**

 
|                                  |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|---------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                  |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                  |   | **(in  thousands)**               |   |
| Provision  (benefit) for income taxes |   | $                                 | (1,271 | )                               | $      | 60 |   | $ | (1,832 | ) | $ | 60 |   |
| Effective income  tax rate            |   | —                            |   | —                          |   | — |   | — |   |
|                                       |        |                                   |        |                                 |        |  |  |  |  |  |  |  |  |

 

Insignia’s benefit for income taxes for  the three and  sixmonths  ended June 30, 2002  primarily represented refunds received fromthe United Kingdom  for  research and  development  claims. Insignia’s benefit for income taxesfor the three and six months ended June 30, 2001 primarily represented Japanesesales tax withholding.  Insignia hasrecorded a full valuation allowance against all deferred tax assets, primarilycomprising net operating losses, on the basis that significant uncertaintyexists with respect to their realization.

 

**Liquidityand capital resources**

** **
|                                                             |   | **June 30,  2002**  |   | **June 30,  2001** |   |
|------------------------------------------------------------------|--------|---------------------|--------|--------------------|--------|
|                                                             |   | **(in  thousands)** |   |
| Cash, cash  equivalents and restricted cash                      |   | $                   | 7,140  |               | $      | 12,470 |   |
| Working capital                                                  |   | 9,124               |   | 15,396             |   |
| Net cash used in  operating activities, for the six months ended |   | (2,317              | )      | (9,865             | )      |
|                                                                  |        |                     |        |                    |        |  |  |

 

Insignia has transitioned its product focus from compatibility productsto its Jeode product line based on Insignia’s virtual machine technology.  This change in product focus has resulted ina redirection of available resources from Insignia’s historical revenue basetowards the development and marketing efforts associated with the Jeode platform,which was released for general availability in March 1999.  Cash provided by operating activities in thesecond quarter of 2002 totaled $264,000 compared to cash used of $2.6 millionin the first quarter of 2002.  For thesix months ended June 30, 2002, cash used in operating activities totaled $2.3million compared to $9.9 million for the same period in 2001.

 

Insignia’s cash, cash equivalents, and restricted cash, were $7.1million at June 30, 2002, a decrease of $5.4 million from $12.5 million at June30, 2001.  Working capital decreased to$9.1 million at June 30, 2002, from $15.4 million at June 30, 2001. Theprincipal source of working capital came from accounts receivable collectionsand warrant and option exercises. During the six months ended June 30, 2002Insignia’s net accounts receivable decreased $4.9 million from $6.0 million atDecember 31, 2001 to $1.1 million at June 30, 2002 due to firm collectionefforts. The lowered accounts receivable, lowered revenues in the quarter endedJune 30, 2002, receipt of the final payment by Phoenix Technology with respectto a previous software licensing

 

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transaction, and other factors will substantially decrease Insignia’sfuture cash flows for at least the next quarter.

 

A large portion of the gross accounts receivable balance as of December31, 2001 was related to one customer and accounted for 74% of the outstandingbalance.  The same customer accountedfor 64% of the March 31, 2002 balance. As of June 30, 2002, three customers accounted for 64% of the grossaccounts receivable balance.

 

In September 2001, Insignia and Sun Microsystems, Inc. (“Sun”) enteredinto Amendment No. 3 (the “Amendment”) to the Technology License andDistribution Agreement (the “Distribution Agreement”) between the twocompanies.  In addition, in June 2001,the two companies entered into an addendum (the “Addendum”) to the DistributionAgreement relating to distribution of products to an Insignia customer.  The Amendment and the Addendum each requireInsignia to make non-refundable royalty prepayments to Sun.  A total of $7,000,000 of prepaid royaltieswere paid to Sun under these agreements through the second quarter of2002.  There are no additional requiredroyalty prepayments due to Sun under this agreement.

 

During 1998, Insignia sublet until March 2002 facilities it formerlyoccupied in the United Kingdom, on substantially the same terms as thoseapplicable to Insignia. In January 2002, Insignia entered into an agreementwith the landlord to terminate the lease on April 13, 2002.  On April 3, 2002, Insignia paid a surrenderpayment of  $470,000.  Insignia's balance sheet includes a largereceivable from the subtenant pertaining to the recovery of dilapidation costsper the facility lease.

 

On March 28, 2002, Insignia’s U.S. subsidiary, Insignia Solutions, Inc.(“Insignia U.S.”) entered into an accounts receivable financing agreement withSilicon Valley Bank.  The financingagreement allows Insignia U.S. to borrow an amount up to 80% of eligiblereceivables not to exceed $1,200,000, with interest at the bank’s prime rateplus two percentage points.  Theagreement expires on March 27, 2003. Borrowing is subject to compliance with certain covenants, including arequirement to maintain specific financial ratios.  Borrowings are secured by substantially all of the assets ofInsignia U.S.  Insignia U.S. was incompliance with these covenants at June 30, 2002, and at that time there wereno outstanding borrowings under this credit facility.

 

Insignia has granted extended payment terms from time to time andclassifies the rights to these future payments as accounts receivable anddeferred revenue.  Deferred revenuedecreased $1,170,000 and $3,530,000 for the three months and six months endedJune 30, 2002, respectively.  The decreaseprimarily reflected the revenue recognition of $3,200,000 from the June 2001agreement with Phoenix.

 

Based upon Insignia’s current forecasts and estimates, Insignia istargeting its current cash, cash equivalents and short-term investments, togetherwith cash generated from on-going operations and other liquid sources of cash(including the existing credit line) available to Insignia, to be sufficient tomeet Insignia’s anticipated cash needs for working capital and capitalexpenditures through calendar 2002. However, there can be no assurance thatInsignia will not require additional financing to fund operations in calendaryear 2002.  If cash currently availablefrom all sources is insufficient to satisfy Insignia’s liquidity requirements,Insignia may seek additional sources of financing including selling additionalequity or obtaining convertible debt securities.  If additional funds are raised through the issuance of equity ordebt securities, these securities could have rights, preferences and privilegessenior to holders of common stock, and the terms of such securities  could impose restrictions on Insignia’soperations.  The sale of additionalequity or convertible debt securities could result in additional dilution toInsignia’s stockholders.  Insignia maynot be able to obtain additional financing on acceptable terms, if at all.  If Insignia is unable to obtain additionalfinancing as and when needed and on acceptable terms, Insignia

 

26

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may be required to reduce the scope of its planned sales, marketing andproduct development efforts, which could jeopardize Insignia’s business.

 

### **Additional risk factors that may affect future resultsof operations**

 

There can be no assurance that Insignia will experience growth inrevenues and net income in any particular period when compared to prior periodsor that Insignia will achieve profitability. Any quarterly or annual shortfall in net revenues and/or net income fromthe levels expected by securities analysts and shareholders is likely to resultin a substantial decline in the trading price of Insignia’s shares.

 

Insignia’s future performance depends upon sales of products withinInsignia’s Jeode product line as well as the timely and successful developmentand deployment of the SSP product line. During the second quarter of 2002,revenues related to the services and sales of products in the Jeode productline were $1.9 million, which accounted for 100% of Insignia’s total revenue insuch quarter. Insignia incurred an operating loss of $2.9 million in the secondquarter of 2002.  At current overheadlevels, Insignia requires revenues of approximately $6.0 million per quarter toachieve an operating profit. Currently, the Jeode product line is Insignia’s soleproduct line. Insignia expects that it will continue to rely upon sales ofJeode products for the majority of Insignia’s revenues in calendar 2002 andcalendar 2003, and the SSP product line, once released, is expected toincreasingly contribute to revenues. Either, or both, the Jeode and SSP productlines may not achieve or sustain market acceptance or provide desired revenuelevels.

 

Insignia’s revenue is dependent upon its ability to license the Jeodeproduct and, when available, the SSP product to third parties. Licensing theJeode product is a long and complex process, which usually takes six to ninemonths to complete. Insignia expects that the licensing of the SSP product,when available, will involve an even longer and more complex process than thelicensing of the Jeode product. Before committing to license the Jeode or SSPproducts, potential customers must generally consider a wide range of issuesincluding product benefits, infrastructure requirements, ability to work withexisting systems, functionality and reliability. The process of entering into adevelopment license with a potential customer typically involves lengthynegotiations. Because of the sales cycle, it is difficult for Insignia topredict when, or if, a particular prospect might sign a license agreement.Development license fees may be delayed or reduced because of this process.

 

Insignia’s success depends upon the use of Insignia’s technology byInsignia’s licensees in their smart devices. Insignia’s licensees undertake alengthy process of developing systems that use Insignia’s technology. When alicensee enters into a development license with Insignia, Insignia oftenrequires the licensee to prepay some future commercial use royalties, typicallyan amount projected to cover three to six months of future usage. Until alicensee has sales of its systems incorporating Insignia’s technology, whichcreate sufficient commercial use royalties to surpass any prepayment toInsignia, Insignia does not receive any further royalties from that licensee.Insignia expects that the period of time between entering into a developmentlicense and actually recognizing commercial use royalties will be lengthy anddifficult to predict.

 

Over the previous twelve months, there has been an increasing trend ofresistance by customers to prepay some future commercial use royalties. Thishas resulted in decreasing license revenues and a commensurate decrease in cashcollected from prepaid royalties. While it is expected that Insignia willreceive commercial use royalties sooner from those customers who do not prepayfuture royalties, there can be no assurance that the sales by the customers ofits systems

 

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incorporating Insignia’s technology will gain market acceptance or beshipped in sufficient quantities to generate sufficient royalties to Insignia.

 

In the first quarter of 1999, Insignia signed a five year agreementwith Sun Microsystems, Inc. (“Sun”) under which Sun established Insignia as aSun Authorized Virtual Machine provider. The agreement also grants Insigniaimmediate access to the Java compatibility test suite and the Java technologysource code. The agreement includes technology sharing and compatibilityverification. In September 2001, Insignia and Sun entered into Amendment No. 3(the “Amendment”) to the Technology License and Distribution Agreement (“theDistribution Agreement”) between the two companies.  The Amendment requires Insignia to make non-refundable royaltyprepayments to Sun. Any unused royalty prepayments outstanding at theexpiration of the contract will be forfeited. Under the agreement, Insigniawill pay Sun a per unit royalty on each smart device shipped by Insignia’scustomers. The Amendment deletes the former expiration terms and expires onJune 30, 2004 with an optional 3 year term renewal on a portion of the Suntechnology (specifically personal and embedded Java). If the agreement with Sunterminates or expires without renewal, Insignia will not be able to market itsJeode product line. Any disruption in Insignia’s relationship with Sun wouldlikely impair its sales of Jeode.

 

Insignia at times licenses software development tool products fromother companies to distribute with some of its products. These third partiesmay not be able to provide competitive products with adequate features and highquality on a timely basis or to provide sales and marketing cooperation.Further, Insignia’s products compete with products produced by some of itslicensors, including products produced by Sun. When these licenses terminate orexpire, continued license rights might not be available to Insignia onreasonable terms. Insignia might not be able to obtain similar products tosubstitute into its tool suites.

 

Insignia has experienced operating losses in each quarter since thesecond quarter of 1996. To achieve profitability, Insignia will have toincrease its revenue significantly. Insignia’s ability to increase revenuesdepends upon the success of its Jeode product line and the successful developmentand deployment of the SSP product line. Either, or both, Jeode or SSP may notachieve market acceptance. If Insignia is unable to create revenues from itsproducts in the form

 

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of development license fees, maintenance and support fees, commercialuse royalties and customer-funded engineering services, Insignia’s currentrevenues will be insufficient to sustain its business.

 

For the fiscal year 2002, 2001 and 2000 Insignia spent 79%, 69% and 50%,respectively, of its total revenues on sales and marketing. Insignia expects tocontinue to incur disproportionately high sales and marketing expenses in thefuture. To market Jeode effectively, Insignia must further develop saleschannels in the smart device and wireless device market. Insignia must continueto incur the expenses for a sales and marketing infrastructure before itrecognizes significant revenue from sales of the product. Because customers inthe smart device and wireless device market tend to remain with the same vendorover time, Insignia believes that it must devote significant resources to eachpotential sale and to the process of having potential customers designInsignia’s products into their systems. If Insignia fails to achieve andsustain significant increases in its quarterly sales, Insignia may not be ableto continue to increase its investment in these areas. With increased expenses,Insignia must significantly increase its revenues if it is to becomeprofitable.

 

The market for smart devices and wireless devices is fragmented and ischaracterized by technological change, evolving industry standards and rapidchanges in customer requirements. Insignia’s existing products will become lesscompetitive or obsolete if Insignia fails to introduce new products or productenhancements that anticipate the features and functionality that customersdemand. The success of Insignia’s new product introductions will depend onInsignia’s ability to:

 

• accurately anticipate industry trends and changes intechnology standards;

 

• complete and introduce new product designs and featuresin a timely manner;

 

• continue to enhance its existing product lines;

 

• offer Insignia’s products across a spectrum ofmicroprocessor families used in the smart devices and wireless devices market;and

 

• respond promptly to customers’ requirements andpreferences.

 

The introduction of new or enhanced products also requires thatInsignia manage the transition from older products to minimize disruption incustomer ordering patterns. Insignia has had difficulty managing the transitionfrom older products in the past. For example, between 1995 and 1999, Insigniasupplemented the SoftWindows product line with the NTRIGUE product line andbegan preparations for its Jeode product line. During this same periodInsignia’s yearly revenues dropped from a high of $55.1 million in 1995 to alow of $6.8 million in 1999. The decrease in revenues was partly becauseInsignia did not timely introduce new products that could compensate for thedecreasing demand for Insignia’s SoftWindows product line and the sale of theNTRIGUE product line.

 

Development delays are commonplace in the software industry. Insigniahas experienced delays in the development of new products and the enhancementof existing products in the past and it is likely to experience delays in thefuture.  Insignia may not be successfulin developing and marketing, on a timely basis or at all, competitive products,product enhancements and new products that respond to technological change,changes in customer requirements and emerging industry standards.

 

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Insignia’s Jeode product line is targeted for the smart device market.Insignia’s SSP product line is targeted for the mobile handset and wirelesscarrier industry. The market for these products is fragmented and highlycompetitive. This market is also rapidly changing and there are many companiescreating products that compete or will compete with Insignia. As the industrydevelops, Insignia expects competition to increase in the future. Thiscompetition may come from existing competitors or other companies that are notyet identified. If these competitors develop products that are cheaper orprovide better performance or functionality than Insignia’s Jeode product lineor the SSP product line, Insignia’s market share will drop. Many of Insignia’scurrent competitors and potential competitors have greater resources thanInsignia, and Insignia might not be able to compete successfully against theseorganizations. Competition could force Insignia to reduce the prices of itsproducts, which would result in reduced profit margins and could harmInsignia’s ability to provide adequate service to its customers. Further, Insignia’scompetitors can increase their promotions or introduce new or enhanced productsthat hurt Insignia’s market share.

 

Insignia anticipates that it will require additional financing by early2003.  If additional funds are raisedthrough the issuance of debt securities, these securities could have rights,preferences and privileges senior to holders of common stock, and the terms ofthis debt could impose restrictions on Insignia’s operations.  The sale of additional equity or convertibledebt securities could result in additional dilution to Insignia’sstockholders.  Insignia may not be ableto obtain additional financing on acceptable terms, if at all.  If Insignia is unable to obtain additionalfinancing as and when needed and on acceptable terms, Insignia may be requiredto reduce the scope of its planned sales, marketing and product developmentefforts, which could jeopardize Insignia’s business.  If Insignia cannot raise funds on acceptable terms, Insignia maynot have sufficient net shareholders’ equity to maintain the listing of itsshares on the Nasdaq National Market, the rules of which require Insignia tomaintain total shareholders’ equity of at least $10 million. Further, Insigniamay not be able to develop new products or enhance its existing products, takeadvantage of future opportunities or respond to competitive pressures orunanticipated requirements.  Whether ornot additional funds are raised through the issuance of debt securities, saleof additional equity or by other means, Insignia’s stock price may not remainabove $1.00. During the 12 months ended August ­­6, 2002, the closing price ofa share of Insignia’s common stock ranged from a high of $2.96 to a low of$0.72. Under the rules of the Nasdaq Stock Market, Insignia’s stock price mustremain above $1.00 per share for continued quotation of its shares on theNasdaq National Market.

 

**Relianceon international sales**

 

Sales from outside of the United States accounted for approximately 1%,14% and 18% of Insignia’s total revenue in 2002, 2001 and 2000, respectively.Insignia markets Jeode to manufacturers of smart devices and wireless devicesin Europe and Asia, particularly in Japan. Economic conditions in Asia andEurope generally and fluctuations in the value of the Japanese yen and the euroagainst the U.S. dollar and British pound sterling could impair Insignia’srevenue and results of operations. International operations are subject to anumber of other special risks. These risks include:

 

• foreign government regulation;

 

• reduced protection of intellectual property rights insome countries where Insignia does business;

 

• longer receivable collection periods and greaterdifficulty in accounts receivable collection;

 

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

 

• potentially adverse tax consequences;

 

• the burdens of complying with a variety of foreign lawsand staffing and managing foreign operations;

 

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

 

• possible recessionary environments in economies outsidethe United States.

 

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**Risksassociated with potential product defects**

 

Insignia’s software products, like all software products, may haveundetected errors or compatibility problems. This is particularly true when aproduct is first introduced or a new version is released. Despite thoroughtesting, Insignia’s products might be shipped with errors. If this were tohappen, Insignia’s products could be rejected by customers, or there might becostly delays in correcting the problems.

 

Insignia’s products are increasingly used in systems that interactdirectly with the general public, such as in transportation and medicalsystems. In systems such as these, the failure of Insignia’s product couldcause substantial property damage or personal injury, which could expose Insigniato product liability claims. Insignia’s products are used for applications inbusiness systems where the failure of Insignia’s product could be linked tosubstantial economic loss.

 

Insignia’s agreements with its customers typically contain provisionsdesigned to limit its exposure to potential product liability and other claims.It is likely, however, that these provisions are not effective in allcircumstances and in all jurisdictions. Insignia may not have adequateinsurance against product liability risks, and renewal of Insignia’s insurancemay not be available to us on commercially reasonable terms. Further,Insignia’s errors and omissions insurance may not be adequate to cover claims.As of the date of this Form 10-Q, Insignia has not had any product liabilityclaims or recalls against its Jeode line of products. However, a productliability claim or claim for economic loss brought against Insignia in thefuture could lead to unexpected large expenses and lost sales. Also, ifInsignia ever had to recall its product due to errors or other problems, itwould cost Insignia a great deal of time, effort and expense.

 

Insignia’s operations depend on its ability to protect its computerequipment and the information stored in its databases against damage by fire,natural disaster, power loss, telecommunications failure, unauthorizedintrusion and other catastrophic events. Insignia believes it has taken prudentmeasures to reduce the risk of interruption in its operations. However, thesemeasures might not be sufficient. As of the date of this Form 10-Q, Insigniahas not experienced any major interruptions in its operations because of acatastrophic event.

 

**Relianceon key personnel**

 

Insignia’s future performance depends to a significant degree upon thecontinued contributions of its key management, product development, sales,marketing and operations personnel. Insignia does not have agreements with anyof its key personnel that require them to work for Insignia for a specificterm, and Insignia does not maintain any key person life insurance policies.Insignia believes its future success will also depend in large part upon itsability to attract and retain highly skilled managerial, engineering, sales,marketing and operations personnel, many of whom are in great demand.Competition for qualified personnel is intense in the San Francisco bay area,where Insignia’s United States operations are headquartered, and Insignia maynot be able to attract and retain personnel.

 

**Intellectualproperty rights**

 

Insignia depends on its proprietary technology. Despite Insignia’sefforts to protect its proprietary rights, it may be possible for unauthorizedthird parties to copy Insignia’s products or to reverse engineer or obtain anduse information that Insignia considers proprietary. Insignia’s competitorscould independently develop technologies that are substantially equivalent orsuperior to

 

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Insignia’s technologies. Policing unauthorized use of Insignia’sproducts is difficult, and while Insignia is unable to determine the extent towhich software piracy of its products exists, software piracy can be expectedto be a persistent problem. Effective protection of intellectual propertyrights may be unavailable or limited in foreign countries.  The status of United States patentprotection in the software industry is not well defined and will evolve as theUnited States Patent and Trademark Office grants additional patents. Patents havebeen granted on fundamental technologies in software, and patents may issuethat relate to fundamental technologies incorporated into Insignia’s products.

 

As the number of patents, copyrights, trademarks and other intellectualproperty rights in Insignia’s industry increases, products based on Insignia’stechnology may increasingly become the subject of infringement claims. Thirdparties could assert infringement claims against Insignia in the future.Infringement claims with or without merit could be time consuming, result incostly litigation, cause product shipment delays or require Insignia to enterinto royalty or licensing agreements. Royalty or licensing agreements, ifrequired, might not be available on terms acceptable to Insignia. Insignia mayinitiate claims or litigation against third parties for infringement ofInsignia’s proprietary rights or to establish the validity of its proprietaryrights. Litigation to determine the validity of any claims, whether or not thelitigation is resolved in Insignia’s favor, could result in significant expenseto Insignia and divert the efforts of its technical and management personnelfrom productive tasks. If there is an adverse ruling against Insignia in anylitigation, Insignia may be required to pay substantial damages, discontinuethe use and sale of infringing products, expend significant resources todevelop non-infringing technology or obtain licenses to infringing technology.Insignia’s failure to develop or license a substitute technology could preventInsignia from selling its products.

 

**Potentialdilution resulting from warrants**

 

Some Insignia security holders have rights to be issued additional ADSsby Insignia if the registration statements covering their shares and the sharesunderlying their warrants are suspended for more than 60 days in any 12 monthperiod by Insignia. Insignia must issue a total of up to 317,800 ADSs if itsuspends any of the registration statements covering the shares and the sharesunderlying the warrants for more than 60 days. Insignia has not suspendedregistration statements for more than the 60 days in any 12 month period in thepast.  The purchase price the securityholders will pay per additional ADS is the nominal value, or 0.20 perADS, which is the lowest amount for which these shares may be purchased underEnglish law. If Insignia issues additional ADSs under these obligations, theownership interest of existing security holders will be diluted.

 

**Potentialdilution from anti-dilution rights**

 

The investors who participated in Insignia’s four most recent privateplacements received warrants which have anti-dilution protections. This meansthat they are entitled to purchase an additional amount of ordinary shares, inthe form of ADSs, if Insignia issues ordinary shares at a price below marketprice. The anti-dilution protections, if triggered, increase the number ofshares which the investors may purchase with their warrants. The exact amountof the increase is not known until the anti-dilution protections are actuallytriggered. There are two ways the anti-dilution protections can be triggered:

 

• if Insignia sells its securities in a transaction, suchas a private placement  financing, for aprice  that  is lower than the ten day average price of its ADSs before thetransaction, or

 

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• if the warrants issued in the four private placementsare exercised at a price less than the ten day average price of Insignia’s ADSsat the time of exercise.

 

When some of the warrants Insignia issued in the private placements areexercised, anti-dilution protections will likely be triggered. The amount ofthe anti-dilution adjustment is based on a formula where the lower the price ofInsignia’s ADSs as quoted on the Nasdaq Stock Market, the greater the potentialincrease in the number of shares issuable to the warrant holders due to theanti-dilution protections.  For example,if the average ten day price of Insignia’s ADSs drops to $2.09, the totalnumber of ADSs the investors could purchase with their warrants would increase by28,476, assuming all warrants are exercised at the same time. If the averageten-day price of our ADSs drops to $0.70, this increase would be approximately50,211 additional ADSs.

 

Anti-dilution adjustments could accelerate and increase the magnitudeof a decline in the quoted share price of Insignia’s ADSs. Warrant holders havethe right to purchase an increasing amount of shares during a decline in theprice of our ADSs. If the warrant holders exercise their warrants and selltheir shares in the open market during this time, downward pressure is added tothe price. This can further increase the anti-dilution adjustments for theremaining warrant holders. Short sales of Insignia’s shares may further thedownward pressure on the price of Insignia’s ADSs. Anti-dilution adjustmentsand short sales may accelerate and compound a decline in the price ofInsignia’s ADSs. Shareholders will also be diluted as warrant holders gain theright to purchase an increasingly large number of shares due to their anti-dilutionprotections.

 

**Risk ofshareholder litigation**

 

The prices for Insignia’s ADSs have fluctuated widely in the past.During the 12 months ended August ­­6, 2002, the closing price of a share ofInsignia’s common stock ranged from a high of $2.96 to a low of $0.72. Stockprice volatility has had a substantial effect on the market prices ofsecurities issued by Insignia and other high technology companies, often forreasons unrelated to the operating performance of the specific companies. Inthe past, following periods of volatility in the market price of a company’ssecurities, securities class action litigation has often been institutedagainst high technology companies including Insignia. We may in the future bethe target of similar litigation. Regardless of the outcome, securitieslitigation may result in substantial costs and divert management attention andresources.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

From time to time, Insignia enters into derivative financial instrumentssuch as currency option contracts to hedge certain anticipated, but not yetcommitted, transactions expected to be denominated in foreign currencies.  Insignia does not use derivative financialinstruments for trading or speculative purposes.  Insignia’s downside risk with respect to currency optioncontracts (British pound sterling) is limited to the premium paid for the rightto exercise the option.  Insignia didnot enter into any currency option hedge contracts in the second quarter of2002 or the second quarter of 2001 and had no option hedge contractsoutstanding as of June 30, 2002 or June 30, 2001.

 

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

 

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**PARTII - OTHER INFORMATION**

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

(a)          Insignia held its AnnualGeneral Meeting on June 5, 2002. Proxies for the meeting were solicited pursuant to Regulation 14A.

 

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

 

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

 

1.  To re-appointPricewaterhouseCoopers as UK statutory auditors of Insignia until theconclusion of the next Annual General Meeting and to authorize the Directors tofix their remuneration.
| FOR       |   | AGAINST |
|-----------|--------|---------|
| 4,447,438 |   | 70,733  |

 

2.  To re-elect as a DirectorNicholas, Viscount Bearsted
| FOR       |   | AGAINST |
|-----------|--------|---------|
| 4,265,444 |   | 236,195 |

 

3.  To re-elect as a DirectorDavid G. Frodsham.
| FOR       |   | AGAINST |
|-----------|--------|---------|
| 4,359,678 |   | 141,518 |

 

4. To amend Insignia’s UK Employee Share Option Scheme 1996 to increasethe number of ordinary shares available for issuance under the plan by1,500,000 to a total of 7,572,071 shares.
| FOR       |   | AGAINST   |
|-----------|--------|-----------|
| 3,361,786 |   | 1,118,059 |

 

5. To amend Insignia’s 1995 Incentive Stock Option Plan for USEmployees to increase the number of ordinary shares available for issuanceunder the plan by 1,500,000 to a total of 7,572,071 shares.
| FOR       |   | AGAINST   |
|-----------|--------|-----------|
| 3,317,936 |   | 1,157,704 |

 

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**Item6.  Exhibits and Reports on Form 8-K**

 

(a) Exhibits

The following exhibits are filed as part of this Report:

 
| 99.1   |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief  Executive Officer |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                               |
| 99.2   |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Chief  Financial Officer |

 

(b) Reports on Form 8-K

 

None

 

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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 14, 2002 |   |                           |
|                  |   |                           |
|                  |   |                           | /s/ALBERT J. WOOD |   |
|                  |   | ALBERT J. WOOD                 |
|                  |   | Chief Financial Officer        |
|                  |   | (Principal Financial  Officer) |

 
| **Signature**                |   | **Capacity**                         |   | **Date**        |
|------------------------------|--------|--------------------------------------|--------|-----------------|
|                         |   |                                 |   |            |
|   /s/Richard  M. Noling |   | Chief Executive Officer and Director |   | August 14, 2002 |
|   Richard M.  Noling    |   | (Principal Executive Officer)        |   |            |
|                         |   |                                 |   |            |
|   /s/Mark E.  McMillan  |   | President                            |   | August 14, 2002 |
|   Mark E.  McMillan     |   |                                 |   |            |

 

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