**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                                                                                                                                                                                                                                                                             |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                   |   |                                                                                           |
| **For the quarterly period ended  March 31, 2003**                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                   |
| **or,**                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                   |
| **o**                                                                                                                                                                                                                                                                                                  |   | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                   |   |                                                                                           |
| **For the transition period from                         to                       ** |
|                                                                                                                                                                                                                                                                                                   |   |                                                                                           |
| **Commission file number 0-27012**                                                                                                                                                                                                                                                                     |

 

**InsigniaSolutions plc**

(Exact name of Registrant as specified in its charter)

 

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

 

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

 

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

 

As of May 5, 2003, therewere 20,088,709 ordinary shares of £0.20 each nominal value, outstanding.

 

 

----

 

**INSIGNIA SOLUTIONS PLC**

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

 

2

----

 

**PARTI****– FINANCIAL INFORMATION**

 

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

## **INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED****BALANCESHEETS**

**(amounts in thousands, unaudited)**

 
|                                                                            |   | **March 31,  2003** |   | **December  31,  2002** |   |
|---------------------------------------------------------------------------------|--------|---------------------|--------|-------------------------|--------|
| **ASSETS**                                                                      |   |                |   |                    |   |
| Current  assets:                                                                |   |                |   |                    |   |
| Cash  and cash equivalents                                                      |   | $                   | 124    |                    | $      | 726 |   |
| Restricted  cash                                                                |   | 90                  |   | 250                     |   |
| Accounts  receivable, net of allowances  of $28  and $50, respectively     |   | 397                 |   | 931                     |   |
| Tax  receivable                                                                 |   | 706                 |   | 702                     |   |
| Prepaid  royalties                                                              |   | 901                 |   | 1,000                   |   |
| Prepaid  expenses                                                               |   | 478                 |   | 695                     |   |
| Other  current assets                                                           |   | 441                 |   | 438                     |   |
| Total  current assets                                                           |   | 3,137               |   | 4,742                   |   |
|                                                                            |   |                |   |                    |   |
| Property  and equipment, net                                                    |   | 186                 |   | 230                     |   |
| Prepaid  royalties                                                              |   | 1,381               |   | 1,381                   |   |
| Other  non-current assets                                                       |   | —              |   | 100                     |   |
|                                                                            |   | $                   | 4,704  |                    | $      | 6,453 |   |
|                                                                            |   |                |   |                    |   |
| **LIABILITIES,  MANDATORILY REDEEMABLE WARRANTS AND SHAREHOLDERS’ EQUITY** |   |                |   |                    |   |
| Current  liabilities:                                                           |   |                |   |                    |   |
| Accounts  payable                                                               |   | $                   | 1,124  |                    | $      | 665 |   |
| Accrued  liabilities                                                            |   | 818                 |   | 950                     |   |
| Accrued  severance                                                              |   | 209                 |   | —                  |   |
| Note  payable                                                                   |   | 1,000               |   | —                  |   |
| Deferred  revenue                                                               |   | 451                 |   | 534                     |   |
| Income  taxes payable                                                           |   | 187                 |   | 191                     |   |
| Total  current liabilities                                                      |   | 3,789               |   | 2,340                   |   |
|                                                                            |   |                |   |                    |   |
| Commitments  and Contingencies (Note 6)                                         |   |                |   |                    |   |
|                                                                            |   |                |   |                    |   |
| Mandatorily  redeemable warrants                                                |   | 1,440               |   | 1,440                   |   |
|                                                                            |   |                |   |                    |   |
| Shareholders’  equity:                                                     |   |                |   |                    |   |
| Ordinary  shares                                                                |   | 6,445               |   | 6,444                   |   |
| Additional  paid-in capital                                                     |   | 59,901              |   | 59,901                  |   |
| Accumulated  deficit                                                            |   | (66,410             | )      | (63,211                 | )      |
| Other  accumulated comprehensive loss                                           |   | (461                | )      | (461                    | )      |
| Total  shareholders’ equity                                                |   | (525                | )      | 2,673                   |   |
|                                                                            |   |                |   |                    |   |
|                                                                            |   | $                   | 4,854  |                    | $      | 6,453 |   |

 

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

 

3

----

 

**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSO****LIDATED STATEMENTS OF OPERATIONS**

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

 
|                                            |   | **Three  months ended  March 31,** | ** ** |
|-------------------------------------------------|--------|------------------------------------|------------|
|                                            |   | **2003**                           |       | **2002** | ** ** |
|                                            |   |                               |       |   |   |
| Net  revenues:                                  |   |                               |       |   |   |
| License                                         |   | $                                  | 192        |   | $ | 2,988 |   |
| Service                                         |   | 187                                |       | 556 |   |
|                                            |   |                               |       |   |   |
| Total  net revenues                             |   | 379                                |       | 3,544 |   |
|                                            |   |                               |       |   |   |
| Cost  of net revenues:                          |   |                               |       |   |   |
| License                                         |   | 115                                |       | 1,014 |   |
| Service                                         |   | 52                                 |       | 197 |   |
|                                            |   |                               |       |   |   |
| Total  cost of net revenues                     |   | 167                                |       | 1,211 |   |
|                                            |   |                               |       |   |   |
| Gross  margin                                   |   | 212                                |       | 2,333 |   |
|                                            |   |                               |       |   |   |
| Operating  expenses:                            |   |                               |       |   |   |
| Sales  and marketing                            |   | 645                                |       | 1,721 |   |
| Research  and development                       |   | 1,306                              |       | 1,196 |   |
| General  and administrative                     |   | 1,144                              |       | 938 |   |
| Restructuring                                   |   | 326                                |       | — |   |
|                                            |   |                               |       |   |   |
| Total  operating expenses                       |   | 3,421                              |       | 3,855 |   |
|                                            |   |                               |       |   |   |
| Operating  loss                                 |   | (3,209                             | )          | (1,522 | ) |
|                                            |   |                               |       |   |   |
| Interest  income (expense), net                 |   | (1                                 | )          | 21 |   |
| Other  income (expense), net                    |   | 13                                 |       | (32 | ) |
|                                            |   |                               |       |   |   |
| Loss  before income taxes                       |   | (3,197                             | )          | (1,533 | ) |
|                                            |   |                               |       |   |   |
| Provision  (benefit) for income taxes           |   | 2                                  |       | (561 | ) |
|                                            |   |                               |       |   |   |
| Net  loss                                       |   | $                                  | (3,199     | ) | $ | (972 | ) |
|                                            |   |                               |       |   |   |
| Basic  and diluted net loss per share           |   | $                                  | (0.16      | ) | $ | (0.05 | ) |
|                                            |   |                               |       |   |   |
| Weighted  average shares and share equivalents: |   |                               |       |   |   |
| Basic  and diluted                              |   | 20,089                             |       | 19,574 |   |

 

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

 

4

----

 

**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDAT****EDSTATEMENTS OF CASH FLOWS**

**(amounts in thousands, unaudited)**

 
|                                                                                |   | **Three  months ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                |   | **2003**                           |       | **2002** | ** ** |
| Cash  flows from operating activities:                                              |   |                               |       |   |   |
| Net  loss                                                                           |   | $                                  | (3,199     | ) | $ | (972 | ) |
| Adjustments  to reconcile net loss to net cash used   in operating activities: |   |                               | ** ** |   | ** ** |
| Depreciation                                                                        |   | 45                                 |       | 67 |   |
| Allowance  for doubtful accounts                                                    |   | (22                                | )          | (15 | ) |
| Net  changes in assets and liabilities:                                             |   |                               |       |   |   |
| Accounts  receivable                                                                |   | 556                                |       | 1,446 |   |
| Tax  receivable                                                                     |   | (4                                 | )          | — |   |
| Prepaid  royalties                                                                  |   | 99                                 |       | (741 | ) |
| Prepaid  expenses                                                                   |   | 217                                |       | 4 |   |
| Other  current assets                                                               |   | (3                                 | )          | — |   |
| Other  noncurrent assets                                                            |   | 100                                |       | — |   |
| Accounts  payable                                                                   |   | 459                                |       | 7 |   |
| Accrued  liabilities                                                                |   | (132                               | )          | (15 | ) |
| Accrued  severance                                                                  |   | 209                                |       | — |   |
| Deferred  revenue                                                                   |   | (83                                | )          | (2,360 | ) |
| Income  taxes payable                                                               |   | (4                                 | )          | (2 | ) |
| Net  cash used in operating activities                                              |   | (1,762                             | )          | (2,581 | ) |
| Cash  flows from investing activities:                                              |   |                               |       |   |   |
| Purchases  of property and equipment                                                |   | (1                                 | )          | — |   |
| Proceeds  from sale of property and equipment                                       |   | —                             |       | (21 | ) |
| Proceeds  from release of restricted cash                                           |   | 160                                |       | — |   |
| Proceeds  from note payable                                                         |   | 1,000                              |       | — |   |
| Net  cash provided by  (used in) investing  activities                         |   | 1,159                              |       | (21 | ) |
| Cash  flows from financing activities:                                              |   |                               |       |   |   |
| Proceeds  from issuance of shares, net                                              |   | —                             |       | (1 | ) |
| Proceeds  from exercise of warrants                                                 |   | —                             |       | 481 |   |
| Proceeds  from exercise of stock options                                            |   | 1                                  |       | 61 |   |
| Net  cash provided by financing activities                                          |   | 1                                  |       | 541 |   |
| Net  decrease in cash and cash equivalents                                          |   | (602                               | )          | (2,061 | ) |
| Cash  and cash equivalents at beginning of the period                               |   | 726                                |       | 8,643 |   |
| Cash  and cash equivalents at end of the period                                     |   | $                                  | 124        |   | $ | 6,582 |   |

 

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

 

5

----

 

**INSIGNIA SOLUTIONS PLC**

 

**NOTES TO UNAUDIT****ED CONDENSED CONSOLIDATED**

**FINANCIAL STATEMENTS**

**(unaudited)**

 

**Note 1.  Basis ofpresentation**

 

The accompanyingcondensed consolidated financial statements and related notes include theaccounts of Insignia Solutions plc (“Insignia”, “us” or “we”) and its whollyowned subsidiaries and are unaudited. However, in the opinion of management, all adjustments (consisting onlyof normal recurring adjustments) which are necessary for a fair presentation ofthe financial position and results for the interim period have beenincluded.  Interim results are notnecessarily indicative of results for a full year.

 

During the past 24months, we have incurred an aggregate loss from operations and negativeoperating cash flows of $21,230,000 and $19,156,000, respectively.  We have undertaken measures to reduceoperating expenses and redesign our commercial efforts to adapt to newdevelopments.  As part of these newdevelopments, our current plans may require obtaining additional financingwithin the next 12 months.  If such financingis not obtained, or if we experience a significant shortfall in expectedrevenue, we will need to further reduce the level of expenses in order to meetour working capital  requirements duringthe next 12 months.

 

Assuming the receipt ofthe $6.9 million due from esmertec A.G. (“esmertec”) under the Asset PurchaseAgreement and the Master Distribution and License Agreement, each dated March4, 2003, and the definitive agreements signed on April 23, 2003 (see Note 5),and assuming that management achieves its plans to generate SSP revenue in thesecond half of the year while controlling operating costs, we believe thatInsignia will have sufficient funds to meet its operating and capitalrequirements through the end of fiscal year 2003.  However, there can be no assurance that we will not requireadditional funding or that we will be able to obtain additional funding ifneeded, on acceptable terms or at all. The failure to raise additional funds, if needed, on a timely basis andon sufficient favorable terms could have a material adverse effect on ourbusiness, operating results and financial condition.  Insignia’s liquidity may also be adversely affected in the futureby factors such as continued higher interest rates, inability to borrow withoutcollerateral, availability of capital financing and continued operatinglosses.  In addition, as of March 31,2003, we were not in compliance with the minimum stock price and totalshareholders’ equity requirements to maintain the listing of our ADSs on theNasdaq SmallCap Market.  These circumstancesraise substantial doubt about Insignia’s ability to continue as a goingconcern.  The accompanying financialstatements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

We follow accountingpolicies that are in accordance with principles generally accepted in theUnited States of America.  We conductmost of our business in U.S. dollars. All amounts included in the financial statements and in the notes hereinare in U.S. dollars unless designated ‘‘£’’, in which case they are in Britishpound sterling.  The exchange rates usedbetween the U.S. dollar and the British pound sterling were $1.58 and $1.43(expressed in U.S. dollars per British pound sterling) at March 31, 2003 and2002, respectively.

 

The results of operationsfor the three months ended March 31, 2003 are not necessarily indicative of theresults to be expected for the entire fiscal year, which ends on December 31,2003.

 

6

----

 

These unaudited condensedconsolidated financial statements should be read in conjunction with thefinancial statements and notes thereto for the year ended December 31, 2002,included in Insignia’s 2002 Annual Report and Form 10-K.

 

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

 

Net income (loss) pershare is presented on a basic and diluted basis, and is computed using theweighted average number of ordinary shares and ordinary equivalent sharesoutstanding during the period.  Ordinaryequivalent shares consist of warrants and stock options (using the treasurystock method).  Under the basic methodof calculating net income (loss) per share, ordinary equivalent shares areexcluded from the computation.  Underthe diluted method of calculating net income (loss) per share, ordinaryequivalent shares are excluded from the computation if their effect isantidilutive.

 

Statement regardingcomputation of loss per share  (inthousands except per share data):

 
|                                                                        |   | **Three  months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                        |   | **2003**                           |       | **2002** | ** ** |
|                                                                        |   |                               |       |   |   |
| Net  loss                                                                   |   | $                                  | (3,199     | ) | $ | (972 | ) |
|                                                                        |   |                               |       |   |   |
| Calculation  of basic and diluted loss per share:                           |   |                               |       |   |   |
| Weighted  average number of ordinary shares outstanding used in computation |   | 20,089                             |       | 19,574 |   |
|                                                                        |   |                               |       |   |   |
| Basic  and diluted loss per share                                           |   | $                                  | (0.16      | ) | $ | (0.05 | ) |

 

If Insignia had reportednet income, the following weighted average number of options and warrants wouldnot be included in the calculation of diluted EPS because their inclusion wouldhave been anti-dilutive:

 
|     |   | **Three  months ended  March 31,** | ** ** |
|----------|--------|------------------------------------|------------|
|     |   | **2003**                           |       | **2002** | ** ** |
|     |   |                               |       |   |   |
| Options  |   | 3,308,179                          |       | 69,739 |   |
| Warrants |   | 4,191,334                          |       | 189,653 |   |

 

**Note 3.  Comprehensiveincome (loss)**

 

Statement of FinancialAccounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”),requires that all items recognized under accounting standards as components ofcomprehensive earnings be reported in an annual statement that is displayedwith the same prominence as other annual financial statements.  SFAS 130 also requires that an entityclassify items of other comprehensive earnings by their nature in an annualfinancial statement.  Comprehensiveincome, as defined, includes all changes in equity during a period fromnon-owner sources.

 

**Note4.  Stock based compensation**

 

On December 31, 2002, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 148 (“SFAS No. 148”), “Accounting for Stock BasedCompensation-Transition and Disclosure”, which amends SFAS No. 123.  SFAS No. 148 requires more prominent andfrequent disclosures about the effects of stock-based compensation, which wehave adopted for the year ended December 31, 2002.  We account for our employee stock option plans and employee stockpurchase plan in accordance with provisions of the Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and FASBInterpretation No. 44 (“FIN 44”), “Accounting for Certain TransactionsInvolving Stock Compensation – an Interpretation of APB No. 25,” and complieswith the disclosure provision of Statement of Financial Accounting StandardsNo. 123, “Accounting for Stock-Based Compensation” (“FAS 123”) in these notesto consolidated financial statements. Under APB No. 25, compensation costs is determined based on thedifference, if any, on the grant date between the fair value of our stock andthe amount an employee must pay to acquire the stock.

 

Stocks, stock options,and warrants for stock issued to non-employees have been accounted for inaccordance with the provisions of SFAS 123 and Emerging Issue Task Force IssueNo. 96-18, (“EITF 96-18”) “Accounting for Equity Instruments That are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods andServices”.

 

###### **Fair value disclosures**

 

Had the compensation costfor our stock option plans and the Purchase Plan been determined based on thefair value at the grant dates, as prescribed in FAS 123, the net income (loss)and net income (loss) per share would have been adjusted to the pro-formaamounts indicated below (in thousands, except per share data):

 
|                                                                            |   | **Three  months ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                            |   | **2003**                          |       | **2002** | ** ** |
|                                                                            |   |                              |       |   |   |
| Net  loss-as reported                                                           |   | $                                 | (3,199     | ) | $ | (972 | ) |
| Less  stock based compensation expense determined under fair value based method |   | (1,926                            | )          | (2,417 | ) |
| Pro  forma Net loss-pro forma                                                   |   | (5,125                            | )          | (3,389 | ) |
| Net  loss per share-basic as reported                                           |   | (0.15                             | )          | (0.05 | ) |
| Net  loss per share-basic Pro forma                                             |   | (0.25                             | )          | (0.17 | ) |
| Net  loss per share-diluted as reported                                         |   | (0.15                             | )          | (0.05 | ) |
| Net  loss per share-diluted pro forma                                           |   | $                                 | (0.25      | ) | $ | (0.17 | ) |

 

 

7

----

 

In accordance with thedisclosure provisions of FAS 123, the fair value of employee stock optionsgranted the three months ended March 31, 2003 and 2002 was estimated at thedate of grant using the Black-Scholes model and the following weighted averageassumptions:

 
|                               |   | **Three  months ended March 31,** | ** ** |
|------------------------------------|--------|-----------------------------------|------------|
|                               |   | **2003**                          |       | **2002** | ** ** |
| **Stock  Options:**                |   |                              |       |   |   |
| Volatility  range                  |   | 59                                | %          | 71 | % |
| Risk-free  interest rate range     |   | 1.0 - 3.1                         | %          | 1.8 - 4.2 | % |
| Dividend  yield                    |   | 0                                 | %          | 0 | % |
| Expected  life (years)             |   | 4                                 |       | 4 |   |
|                               |   |                              |       |   |   |
| **Employee  Stock Purchase Plan:** |   |                              |       |   |   |
| Volatility  range                  |   | 59                                | %          | 71 | % |
| Risk-free  interest rate range     |   | 1.2                               | %          | 1.7 | % |
| Dividend  yield                    |   | 0                                 | %          | 0 | % |
| Expected  life (years)             |   | .5                                |       | .5 |   |

 

Total comprehensive losswas not different from the net loss reported for the three months ended March31, 2003.

 

**Note 5.  Newaccounting pronouncements**

 

In June 2002, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No., “Accounting for Exit or Disposal Activities” (“SFAS146”).  SFAS 146 addresses significantissues regarding the recognition, measurement, and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under the Emerging Issues TaskForce (“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 is effective for exit or disposal activities that are initiated afterDecember 31, 2002.  The provisions ofEITF No. 94-3 shall continue to apply for an exit activity initiated under anexit plan that meets the criteria of EITF No. 94-3 prior to the adoption of  SFAS 146. The effect on adoption of SFAS 146 will change on a prospective basisthe timing of when restructuring charged are recorded from a commitment dateapproach to when the liability is incurred. SFAS 146 was adopted in the first quarter of 2003.  The adoption of SFAS 146 did not have amaterial effect on our financial position, results of operations, or cashflows.

 

In January 2003, the FASBissued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable InterestEntities, an Interpretation of ARB No. 51”. FIN 46 requires certain variable interest entities to be consolidated bythe primary beneficiary of the entity if the equity investors in the entity donot have the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entiity to finance its activities withoutadditional subordinated financial support from other parties.  FIN 46 is effective immediately for all newvariable interest entities created or acquired after January 31, 2003.  For variable interest entities created oracquired prior to February 1, 2003, the provisions of FIN 46 must be appliedfor the first interim or annual period beginning after June 15, 2003.  We adopted FIN 46 effective February 1,2003.  The adoption of FIN 46 did nothave a material impact on our financial position, results of operation or cashflows.

 

**Note 6.  EsmertecAgreements**

 

On February 7, 2003, weentered into a loan agreement with esmertec whereby esmertec loaned Insignia $1million. The loan was made in two installments of $500,000 each on February 13,2003 and February 26, 2003.  The rate ofinterest on each loan is at prime plus two percent.  Accrued interest is due on the last day of each month.  The accrued interest as of March 31, 2003was $6,730. The principal and any outstanding accrued interest is due on orbefore February 3, 2004.

 

On March 4, 2003, weentered into several other agreements (the “Agreements”) with esmertecincluding a definitive agreement to sell certain assets relating to our JavaVirtual Machine (“JVM”) line of business in exchange for $3.5 million payablein installments.  Payments under theagreement would be $800,000 on April 18, 2003, $800,000 on July 23, 2003,$800,000 on October 15, 2003, $800,000 on January 15, 2004 and $300,000 on April15, 2004.  The assets primarily includedthe fixed assets, customer agreements and employees related to the JVM line

 

8

----

 

of business.  The transaction closed on April 23,2003.  Under the terms of theAgreements, esmertec became the exclusive master distributor of the JVMtechnology in exchange for $3.4 million in minimum guaranteed royalties throughJune 30, 2004 at which time, the JVM technology rights will transfer toesmertec.  Minimum payments under thelicense are as follows:

 

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

 

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

 

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

 

The Jeode platform hadbeen our principal product line since the third quarter of 1999.  With the completion of the sale of our JVMbusiness to esmertec in April 2003, Insignia’s sole product line will consistof its SSP products for the mobile handset and wireless carrier industry.  The SSP product became available for lab andmarket trials in early 2003 and is expected to be available for shipment tocustomers in the second half of 2003.

 

On February 11, 2003, weannounced a restructuring of the organization to focus on the SSPtechnology.  As part of therestructuring, Richard Noling resigned as Chief Executive Officer and ActingChief Financial Officer.  Mark McMillan,President and Chief Operating Officer, was promoted to Chief Executive Officerand Linda Potts, Controller, was promoted to Chief  Financial Officer.

 

9

----

 

In September 2001,Insignia and Sun Microsystems, Inc. (“Sun”) entered into Amendment No. 3 (the“Amendment”) to the Technology License and Distribution Agreement (the“Distribution Agreement”) between the two companies.  In addition, in June 2001, the two companies entered into anaddendum (the “Addendum”) to the Distribution Agreement relating todistribution of products to an Insignia customer.  The Amendment and the Addendum each require Insignia to make non-refundableroyalty prepayments to Sun.  A total of$7.0 million of prepaid royalties were paid to Sun under these agreementsthrough the third quarter of 2002. There are no  additional royaltyprepayments due to Sun under this agreement. The amended Distribution Agreement expires June 30, 2004.  Any unused royalty prepayments outstandingon June 30, 2004 are forfeited.  Theprepaid royalty balance as of March 31, 2003 was $2.3 million.

 

During 1998, Insigniasublet until March 2002 facilities it previously occupied in the UnitedKingdom, on substantially the same terms as those applicable to Insignia.  In January 2002, Insignia entered into anagreement with the landlord to terminate the lease on April 3, 2002 and paid asurrender payment of approximately $470,000.

 

**Note 7. Commitments and Contingencies**

 

**Guarantee Agreements**

 

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

 

Insignia, as permittedunder Delaware law and in accordance with our Bylaws, indemnifies our officersand directors for certain events or occurrences, subject to certain limits,while the officer is or was serving at our request in such capacity.  The term of the indemnification period isfor the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited;however we do have a Director and Officer Insurance Policy that limits ourexposure and enables us to recover a portion of any future amounts paid.  As a result of the insurance policy coveragewe believe the fair value of these indemnification agreements is minimal.

 

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

 

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

 

Insignia warrants thebinary version of its software products against defects in material andworkmanship under normal use and service for a period of ninety days.  All warranties are

 

10

----

 

disclaimed for sourcecode licenses.  There is no warrantyaccrual recorded because potential future payments either are not probable orwe have yet to incur the expense.

 

**Note 8.  Segmentreporting**

 

Statement of FinancialAccounting Standards 131, “Disclosures about Segments of an Enterprise andRelated Information” (“SFAS 131”), provides for segment reporting based uponthe “management” approach.  Themanagement approach designates the internal organization that is used bymanagement for making operating decisions and assessing performance as thesource of Insignia’s reportable segments. SFAS 131 also requires disclosures about products and services,geographic areas, and major customers.

 

We operate in a singleindustry segment providing virtual machine technology which enables softwareapplications and operating systems to be run on various computerplatforms.  In the first quarter of2003, Hewlett-Packard Company accounted for 34% of total revenues.  In the first quarter of 2002, PhoenixTechnologies, Ltd.  (“Phoenix”),accounted for 78% of total revenues.  No other customer accounted for 10% or more of Insignia’s total revenuesduring the first quarter of 2003 and 2002.

 

11

----

 

###### **Geographicinformation**

 

Financial information bygeographical region is summarized below (in thousands):

 
|                                   |   | **Three  months ended  March 31,** | ** ** |
|----------------------------------------|--------|------------------------------------|------------|
|                                   |   | **2003**                           |       | **2002** | ** ** |
| Revenues  from unaffiliated customers: |   |                               |       |   |   |
| United  States                         |   | $                                  | 332        |   | $ | 3,512 |   |
| International                          |   | 47                                 |       | 32 |   |
| Consolidated                           |   | $                                  | 379        |   | $ | 3,544 |   |
| Intercompany  revenues:                |   |                               |       |   |   |
| United  States                         |   | $                                  | 38         |   | $ | 25 |   |
| International                          |   | 148                                |       | 1,468 |   |
| Intercompany  items and eliminations   |   | (186                               | )          | (1,493 | ) |
| Consolidated                           |   | $                                  | —     |   | $ | — |   |
| Operating  loss:                       |   |                               |       |   |   |
| United  States                         |   | $                                  | (1,526     | ) | $ | (891 | ) |
| International                          |   | (1,683                             | )          | (631 | ) |
| Consolidated                           |   | $                                  | (3,209     | ) | $ | (1,522 | ) |
| Identifiable  assets:                  |   |                               |       |   |   |
| United  States                         |   | $                                  | 2,963      |   | $ | 11,029 |   |
| International                          |   | 34,754                             |       | 39,238 |   |
| Intercompany  items and eliminations   |   | (33,013                            | )          | (35,300 | ) |
| Consolidated                           |   | $                                  | 4,704      |   | $ | 14,967 |   |
| Long-lived  assets:                    |   |                               |       |   |   |
| United  States                         |   | $                                  | 1,454      |   | $ | 166 |   |
| International                          |   | 33,126                             |       | 35,540 |   |
| Intercompany  items and eliminations   |   | (33,013                            | )          | (35,300 | ) |
| Consolidated                           |   | $                                  | 1,567      |   | $ | 406 |   |

 

All of the internationalrevenues and substantially all of the international identifiable assets relateto Insignia’s operations in the United Kingdom.  Intercompany sales are accounted for at prices intended toapproximate those that would be charged to unaffiliated customers.

 

12

----

 

Revenue by geographicarea for the quarter ended March 31, 2003 was as follows (in thousands):

 
|                         |   | **U.S.** |   | **U.S.  Exports** | ** ** | **Europe** | ** ** | **Total** | ** ** |
|------------------------------|--------|----------|--------|-------------------|------------|------------|------------|-----------|------------|
|                         |   |     |   |              |       |       |       |      |       |
| Distributor                  |   | $        | 69     |              | $          | 22         |       | $         | 40         |   | $ | 131 |   |
| OEM                          |   | 221      |   | 7                 |       | 3          |       | 231       |       |
| End  User                    |   | 4        |   | 9                 |       | 4          |       | 17        |       |
|                         |   |     |   |              |       |       |       |      |       |
| Total                        |   | $        | 294    |              | $          | 38         |       | $         | 47         |   | $ | 379 |   |
|                         |   |     |   |              |       |       |       |      |       |
| Percentage  of total revenue |   | 78       | %      | 10                | %          | 12         | %          | 100       | %          |

 

Revenue by geographicarea for the quarter ended March 31, 2002 was as follows (in thousands):

 
|                         |   | **U.S.** |   | **U.S.  Exports** | ** ** | **Europe** | ** ** | **Total** | ** ** |
|------------------------------|--------|----------|--------|-------------------|------------|------------|------------|-----------|------------|
|                         |   |     |   |              |       |       |       |      |       |
| Distributor                  |   | $        | 2,858  |              | $          | 60         |       | $         | —     |   | $ | 2,918 |   |
| OEM                          |   | 518      |   | 71                |       | 9          |       | 598       |       |
| End  User                    |   | 6        |   | —            |       | 22         |       | 28        |       |
|                         |   |     |   |              |       |       |       |      |       |
| Total                        |   | $        | 3,382  |              | $          | 131        |       | $         | 31         |   | $ | 3,544 |   |
|                         |   |     |   |              |       |       |       |      |       |
| Percentage  of total revenue |   | 95       | %      | 4                 | %          | 1          | %          | 100       | %          |

 

There were no foreigncountries that accounted for more than 10% of total revenue.

 

**Note 9.  Equitytransactions and warrants**

 

On December 9, 1999, weentered into agreements whereby we issued 1,063,515 ordinary shares in AmericanDepository Shares (“ADS”) form at a price of $4.23 per share to Castle CreekTechnology Partners LLC and four other investors of whom one is a member of ourboard of directors.  We also issuedwarrants to the purchasers to purchase a total of 319,054 ADSs at the price of$5.29 per share.   The warrants expireon December 9, 2004.  We received $4.5million less offering expenses totaling $0.4 million.  The securities were issued in reliance upon the exemption fromregistration provided under Regulation D promulgated under the SecuritiesAct.  An issuance of shares and warrantson November 24, 2000 has had a dilutive effect on the warrants issued in theDecember 9, 1999 placement, resulting in an increase in the number of ADSsissuable to 353,834, and a decrease of the exercise price to $4.77.  An issuance of shares and warrants onFebruary 12, 2001 also triggered the anti-dilution provisions of the placementof December 9, 1999.  However, theeffect of such dilution was less than 1% of the exercise price, and consequentlysuch adjustment is deferred until such time as the accumulation of thisadjustment and future adjustments exceed at least 1% of the exercise price.

 

During 2000, we issued atotal of 19,994 ordinary shares in ADS form at various prices, ranging from$6.281 to $16.50 to a director of Insignia, as payment for draw down fees undera Line of

 

13

----

 

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 weentered into agreements whereby we issued 3,600,000 ordinary shares in ADS format a price of $5.00 to a total of 23 investors, including Sun Microsystems,BSquare, and a member of our board of directors.  We also issued warrants to purchase 1,800,000 ADSs to theinvestors at an exercise price of the lower of the average quoted closing saleprice of our ADSs for the ten trading days ending on the day preceding the dateof the warrant holder’s intent to exercise less a 10% discount, and $6.00.  The warrants expire on November 24, 2003,however, subject to certain conditions, if the quoted sale price of the ADSsexceed $9.00 per share for any thirty consecutive trading days, we may cancelthe warrants upon sixty days prior written notice.  We received $18.0 million less offering expenses totaling $2.0million.  We also issued warrants topurchase 225,000 ADSs to the placement agent exercisable at a price of$5.00.  These warrants expire onNovember 24, 2005.  The securities wereissued in reliance upon the exemption from registration provided underRegulation D promulgated under the Securities Act.

 

On December 31, 2000 weissued a total of 251,333 ordinary shares in ADS form to Quantum Peripherals(Europe) SA, at a per share price of $4.23 per share under the terms of aconvertible promissory note entered into on October 20, 1999.  The securities were issued in reliance uponthe exemption from registration provided under Section 4 (2) of the SecuritiesAct based on the fact that the shares were sold by the issuer in a sale notinvolving a public offering.

 

On February 12, 2001 weentered into agreements whereby we issued 940,000 ordinary shares in ADS format a price of $5.00 to a total of 4 investors, including Wind River Systems,Inc.,  and  a member of our board of directors.  We also issued warrants to purchase 470,000 ADSs to theinvestors, at an exercise price of the lower of the average quoted closing saleprice of our ADSs for the ten trading days ending on the day preceding the dateof the warrant holder’s intent to exercise less a  10%  discount, and $6.00.  The warrants expire on February 12, 2004,however, subject to certain conditions, if the quoted sale price of the ADSsexceed $9.00 per share for any thirty consecutive trading days, we may cancelthe warrants upon sixty days prior written notice.  We received $4.7 million less offering expenses totaling $0.5million.  We also issued warrants topurchase 25,000 ADSs to the placement agent exercisable at a price of$5.00.  These warrants expire onFebruary 12, 2006.  The securities wereissued in reliance upon the exemption from registration provided underRegulation D promulgated under the Securities Act.

 

In April 2001, threeinvestors exercised their warrants for 282,500 ADSs.  We received $682,283, net of $19,117 for legal fees for thewarrant exercises.  In March 2002, threeinvestors exercised their warrants for 400,000 ADSs.  We received $480,400, net of $15,400 for legal fees for thewarrant exercises.

 

**Subscription Agreement**

 

On October 17, 2002, weentered into a securities subscription agreement (“Agreement”) with FusionCapital Fund II, LLC (“Fusion Capital”), pursuant to which Fusion Capital hasagreed to purchase, on each trading day following the effectiveness of aregistration statement covering the American Depository Shares to be purchasedby Fusion Capital, $10,000 of our American Depository Shares up to an aggregateof $6.0 million over a period of 30 months. The purchase price of the American Depository Shares will be equal to aprice based upon the future market price of the shares without any fixeddiscount to the market price.  In orderto be in compliance

 

14

----

 

with Nasdaq rules, wecould not sell our ordinary shares to Fusion Capital at a price below $0.38,which represents the greater of the book value per share of our ordinary sharesas of September 30, 2002, or the closing sale price per share of our ADSs onOctober 16, 2002 which was $0.38.  If weelect to sell our shares to Fusion Capital at a price per share below $0.38, wefirst would be required to obtain shareholder approval in order to be in compliancewith applicable Nasdaq rules.  Under thelaws of England and Wales, we are not permitted to sell our ADSs at a purchaseprice that is less than the nominal value of our ordinary shares.  Currently, the nominal value per ordinaryshare is the U.S. dollar equivalent of 20.5 pence.  As of March 31, 2003, we had not sold any shares under thisAgreement.  We have incurredapproximately $350,000 in expenses which were in December 2002.  As of March 31, 2003, the closing marketprice of our shares was $0.22 per share. As a result, we do not anticipateselling any shares under our agreement with Fusion Capital unless and until themarket price of our shares increases from current levels. In addition, the saleof our shares to Fusion Capital under the Agreement is subject to otherconditions which have not been met.

 

Under the terms of theAgreement, we issued to Fusion Capital one redeemable warrant for AmericanDepository Shares representing 1,000,000 ordinary shares, and onenon-redeemable warrant for American Depository Shares representing 1,000,000ordinary shares.  The redeemable warrantmay be redeemed by Insignia at any time on or before June 30, 2003 for anaggregate redemption price of $200,000. The exercise price per share of each warrant is the U.S. dollarequivalent of 20.5 pence.  Each warrantexpires on September 30, 2007.  The fairvalue of the warrants was estimated at $544,000 on the date of grant using theBlack-Scholes pricing model with the following assumptions: no dividend yield;risk-free rate of 2.5%; volatility of 101%; and an expected life of fiveyears.  The fair value of the warrantshave been expensed in other expense entirely for the year ended December 31,2002.  Unless an event of default occursunder the Agreement, the shares issuable upon exercise of these warrants mustbe held by Fusion Capital until 30 months from the date of the Agreement or thedate the Agreement is terminated.   Thewarrants are immediately exercisable; however, Fusion Capital may not exercisethe warrants if Fusion Capital, together with its affiliates, wouldbeneficially own more than 9.9% of our shares outstanding at the time of theexercise by Fusion Capital.  TheAgreement and the forms of the Registration Rights Agreement, the RedeemableWarrant and the Non-Redeemable Warrant between Insignia and Fusion Capital arefiled as Exhibits to the 8-K dated October 22, 2002.

 

###### **Dilution Adjustments**

 

In December 1999, weissued 1,063,515 ordinary shares in ADS form at a price of $4.23 per sharethrough a private placement.  Along withADSs, we also issued to the investors warrants that entitle them to purchase atotal of 319,054 ADSs at an exercise price of $5.29 per ADS.  As described below, the exercise price andthe number of ADSs issuable under the warrants are subject to variousadjustments.  In addition, we may issueadditional warrants that entitle the investors to purchase ADSs at the nominalvalue on designated adjustment dates in the future.

 

Under the December 1999private placement, the investors received warrants to purchase three ADSs forevery 10 ADSs they purchased.  Theexercise price of the warrants was set at 125% of the original per ADS purchaseprice, or $5.29.  However, the warrantscontain anti-dilution provisions which decrease this exercise price andincrease the number of ADSs purchasable if we sell or are deemed to sell anyshares at below market price during the term of the warrants, which ends onDecember 9, 2004.  The private placementthat closed on November 24, 2000 was a sale which triggered the anti-dilutionprovisions in the warrants, and, as a consequence, the exercise

 

15

----

 

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 issuance of 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 warrantagreements, the investors may be entitled to cash payments upon the occurrenceof certain Major Transactions, as defined in the warrant agreements, includingchange of control provisions.  Cashpayments are determined in a methodology described in the agreement.  Such methodology is impacted by marketprice.  A major transaction is definedas a merger, reorganization, or sale of all or substantially all of the assetsof Insignia in which the stockholders of Insignia immediately prior to thetransaction possess less than 50% of the voting power of the surviving entity(or its parent) immediately after the transaction.

 

Under the December 1999private placement, the investors were entitled to additional warrants topurchase ADSs at £0.20 nominal value per share if the average of the closingbid price of the ADSs over the ten days before an adjustment date was less than$4.23.  The adjustment dates commencedon March 10, 2000 and occurred on the 10th of each month throughMarch 10, 2001, inclusive.  The rightsfor an adjustment date to occur would terminate upon release of at least $4.75million of the funds held in escrow by Citrix on December 9, 1999.  However, not enough of the funds held werereleased to trigger this termination. As calculated the average bid price of our ADSs on all the adjustmentdates exceeded $4.23 per share and consequently no adjustment occurred.  The adjustment rights have now expired.

 

We obtained a third-partyvaluation to allocate fair value to amounts received from the private placementbetween the ADSs and the warrants.  In1999 the amount allocated to mandatorily redeemable warrants totaled $1.440million, of which $0.590 million was allocated to the warrant, and $0.850million was allocated to the additional warrant.  Of the remaining net proceeds received, $2.619 million wasallocated to mandatorily redeemable capital. The $2.619 million of mandatorily redeemable capital was reclassed, whenthe registration statement for the ADSs and the ADSs underlying the warrantsissued in the December 1999 private placement became effective on March 28,2000, of which $0.340 million was classified as ordinary shares and $2.279 millionwas classified as additional paid-in capital.

 

Amounts classified aswarrants will remain outside of shareholders’ equity for the life of thewarrant or until they are exercised, whichever  occurs  first. This  classification  reflects certain potential cash payments that may occur, should we complete amajor transaction, such as a takeover, during the life of  the warrants.  If a major transaction had occurred as of March 31, 2003, themaximum cash payout would have been approximately $12,030 based on theestimated Black-Scholes value of the warrant.

 

Limitations in thetransaction agreements preclude these investors in question from achievingcertain levels of beneficial ownership. The securities purchase agreement, the warrants and the additional warrantscontain the restriction that we may not issue and a selling investor may notpurchase, and the warrants and additional warrants may not be exercised for anyADSs if doing so would cause such investor to beneficially own more than 9.9%of the total ordinary shares in issue as determined in accordance with Section13(d) of the Securities Exchange Act of 1934. Under the additional warrants, if such investors are prohibited fromexercising the additional warrant as a result of the 9.9% restriciton, theselling investor may, at its option and in addition

 

16

----

 

to its other rights underthe securities purchase agreement and the warrant, retain the warrant or demandpayment, in cash, from us in an amount calculated by the Black-Scholes formulamultiplied by the number of ADSs  forwhich the additional warrant was exercisable, without regard to any limits onexercise.  The restrictions on thelevels of beneficial ownership in these documents do not, however, restrict those investors  from  exercising the  warrants or additionalwarrants up to those limitations, selling ADSs to decrease their level ofbeneficial ownership, and exercising the warrants to receive additionalADSs.  This could result in additionaldilution to the holders of our ADSs and a potential decrease in the price ofthe ADSs.

 

The following tablesummarizes activity on warrants:

 
|                        |   | **Warrants  outstanding and  exercisable** |   | **Warrants  outstanding  exercise price** | ** ** |
|-----------------------------|--------|--------------------------------------------|--------|-------------------------------------------|------------|
| Balance,  December 31, 2001 |   | 2,591,334                                  |   | $4.77- $6.00 (1)                          |       |
| Granted                     |   | 2,000,000                                  |   | Par value                                 |       |
| Exercised                   |   | (400,000                                   | )      | $1.24 (1)                                 |       |
| Balance,  December 31, 2002 |   | 4,191,334                                  |   | Par value - 6.00 (1)                      |       |
| Granted                     |   | —                                     |   | —                                    |       |
| Exercised                   |   | —                                     |   | —                                    |       |
| Balance,  March 31, 2003    |   | 4,191,334                                  |   | Par value - 6.00 (1)                      |       |

 

The $6.00 warrants arethe lesser of $6.00 or 90% of 10-day average market value

 

### **Note 10.  Lineof credit**

 

On March 28, 2002,Insignia’s U.S. subsidiary, Insignia Solutions, Inc. (“Insignia U.S.”) enteredinto an accounts receivable financing agreement with Silicon Valley Bank.  The financing agreement allowed InsigniaU.S. to borrow an amount up to 80% of eligible receivables not to exceed$1,200,000, with interest at the bank’s prime rate plus two percentage points.  The agreement was cancelled on February 12,2003, and the UCC filing liens on the assets of Insignia U.S. wereterminated.  No funds were ever borrowedunder this credit facility.

 

**Note 11.  Relatedparty transaction**

 

During the three monthsended March 31, 2003 and the twelve months ended December 31, 2002, Insigniarecognized revenue of $22,000 and $4,200,000, respectively, from Phoenix.  The CEO of Phoenix was a director onInsignia’s board of directors from March 1997 until March 2001.

 

During the three monthsended March 31, 2003 and the twelve months ended December 31, 2002, Insigniarecognized revenue of $0 and $300,000, respectively, from Wind River Systems,Inc. (“Wind River”).  Wind Riverparticipated in a private placement of equity in Insignia in February 2001 onthe same 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 additional 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 January2001.

 

17

----

 

On February 13,2001, we entered into a promissory note with Richard M. Noling, President andChief Executive Officer of Insignia whereby Mr. Noling borrowed $150,000 fromthe U.S.-based subsidiary of Insignia. The promissory note was due in three equal installments, on each annualanniversary from the date of the note. The note was amended on January 24, 2002 to extend the first andsubsequent installments one year.  Thefirst installment became due on February 13, 2003.  Mr. Noling’s employment was terminated with Insignia effectiveFebruary 14, 2003.  We forgave,effective March 6, 2003, the balance of the loan, $128,154, in lieu of anybonus compensation.  Interest accrued onthe unpaid principal balance at a rate per annum equal to the prime lendingrate of interest as listed in the Wall Street Journal plus 1%.  Accrued interest was 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.

 

**Note 12.Restructuring**

 

SFAS 146 (See Note 5)requires restructing changes to be recorded at the commitment date.  For the quarter ended March 31, 2003, werestructured the organizaion resulting in actual payments of $117,000 and anaccrual of future payments totaling $209,000. The future payments consist of $161,000 and $48,000 in the second andthird quarters of 2003, respectively.

 

 

18

----

 

 

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

 

The following discussionand analysis should be read in conjunction with the unaudited condensedconsolidated financial statements and notes thereto included in Part I - Item 1of this Form 10-Q and the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” set forth in Insignia’s Form 10-K for theyear ended December 31, 2002 (the “Form 10-K”).

 

**Future operating results**

 

This Form 10-Q containsforward-looking statements.  Theseforward-looking statements concern matters which include, but are not limitedto, the revenue model and market for the Secure System Provisioning (“SSP”)product line, the features, benefits and advantages of the SSP platforms,international operations and sales, gross margins, spending levels, theavailability of licenses to third-party proprietary rights, business and salesstrategies, matters relating to proprietary rights, competition, exchange ratefluctuations 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 SSP platform;the performance and functionality of SSP technology; Insignia’s ability todeliver products on time, and market acceptance of new products or upgrades ofexisting products; the timing of, or delay in, large customer orders; continuedavailability of technology and intellectual property license rights; productlife cycles; quality control of products sold; competitive conditions in theindustry; economic conditions generally or in various geographic areas; and therisks listed from time to time in the reports that Insignia files with the U.S.Securities and Exchange Commission. Factors that could cause or contribute to such differences in resultsand outcomes include without limitation those discussed below as well as thosediscussed elsewhere in this Report. Readers are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate hereof.  Insignia assumes noobligation to update these forward-looking statements to reflect actual resultsor changes in factors or assumptions affecting such forward-looking statements.

 

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

 

In addition, Insigniaalso faces significant risks associated with the development and futuredeployment of its SSP products and the successful execution of the relatedbusiness strategy. During 2001, Insignia began development of a range of SSPproducts for the mobile handset and wireless carrier industry.  These SSP products build on Insignia’sposition as a Virtual Machine (“VM”) supplier for manufacturers of mobiledevices and are designed to allow wireless carriers to execute over the airrepair services and build valuable incremental services.  With the sale of the Jeode business toesmertec, Insignia’s sole product line consists of the SSP products. The SSPproduct is currently in lab and market trials and is expected to be availablefor shipment to customers in the second half of 2003.  Insignia has limited history with sales initiatives for new

 

19

----

 

products. Additionally,the sales cycle for the SSP products is expected to take longer than the six tonine months sales cycle typically experienced with the Jeode product.

 

Insignia has experiencedoperating losses in each quarter since the second quarter of 1996.  To achieve profitability, Insignia will haveto increase its revenue.  With the saleof the Jeode business, Insignia’s ability to increase revenues depends upon thesuccess of its SSP product line.  SSP isnot expected to be available until the second half of 2003, and it may notachieve widespread market acceptance. If Insignia is unable to generate revenues from SSP in the form ofdevelopment license fees, maintenance and support fees, commercial useroyalties and nonrecurring engineering activities, Insignia’s current revenuelevels will be insufficient to sustain its business.

 

Insignia has undertakenmeasures to reduce operating expenses and redesign its commercial efforts toadapt to new developments. Based upon Insignia’s current forecasts andestimates, Insignia’s current cash, cash equivalents and short-terminvestments, together with cash generated from on-going operations and otherliquid sources of cash (including the cash from the sale of the Java VirtualMachine (“JVM”) assets) available to Insignia, may not be sufficient to meetits anticipated cash needs for working capital and capital expenditures throughcalendar 2003.  In particular, Insigniawill need to further reduce the level of operating expenses in the event thatrevenue is lower than expected.  Inaddition, if Insignia is unable to maintain the reduction of operating expensesor increase revenue, if unplanned cash payments or expenses arise, or ifInsignia is unable to obtain access to additional capital, it may not havesufficient resources to fund continuing operations through calendar year2003.  In addition, based on its currentforecasts and estimates, Insignia anticipates that, in any event, it willrequire additional financing in calendar year 2004.

 

To the extent thatInsignia requires additional financing, there can be no assurances thatInsignia will be able to obtain such funding when it is needed on acceptableterms, or at all.  The failure to raisesuch additional funds on a timely basis and on sufficiently favorable termswould have a material adverse effect on Insignia’s business, operating resultsand financial condition. Insignia’s liquidity also may be adversely affected inthe future by factors such as higher interest rates, inability to borrowwithout collateral, limited availability of capital financing and continuedoperating losses.

 

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

 

Except as otherwisenoted, this Form 10-Q does not reflect the anticipated sale of our JVM businessto esmertec.

 

20

----

 

The following table setsforth the unaudited condensed consolidated results of operations as a percentageof total revenues for the three month periods ended March 31, 2003 and 2002.

 
|                                  |   | **Three  months ended  March 31,** | ** ** |
|---------------------------------------|--------|------------------------------------|------------|
|                                  |   | **2003**                           |       | **2002** | ** ** |
| Net  revenues:                        |   |                               |       |   |   |
| License                               |   | 50.7                               | %          | 84.3 | % |
| Service                               |   | 49.3                               | %          | 15.7 | % |
|                                  |   |                               |       |   |   |
| Total  net revenues                   |   | 100.0                              | %          | 100.0 | % |
|                                  |   |                               |       |   |   |
| Cost  of net revenues:                |   |                               |       |   |   |
| License                               |   | 30.4                               | %          | 28.6 | % |
| Service                               |   | 13.7                               | %          | 5.6 | % |
|                                  |   |                               |       |   |   |
| Total  cost of net revenues           |   | 44.1                               | %          | 34.2 | % |
|                                  |   |                               |       |   |   |
| Gross  margin                         |   | 55.9                               | %          | 65.8 | % |
|                                  |   |                               |       |   |   |
| Operating  expenses:                  |   |                               |       |   |   |
| Sales  and marketing                  |   | 170.2                              | %          | 48.6 | % |
| Research  and development             |   | 344.6                              | %          | 33.7 | % |
| General  and administrative           |   | 301.9                              | %          | 26.5 | % |
| Restructuring                         |   | 86.0                               | %          | 0.0 | % |
|                                  |   |                               |       |   |   |
| Total  operating expenses             |   | 902.7                              | %          | 108.8 | % |
|                                  |   |                               |       |   |   |
| Operating  loss                       |   | (846.8                             | )%         | (43.0 | )% |
|                                  |   |                               |       |   |   |
| Interest  income (expense), net       |   | (0.2                               | )%         | 0.6 | % |
| Other  income (expense), net          |   | 3.4                                | %          | (0.9 | )% |
|                                  |   |                               |       |   |   |
| Loss  before income taxes             |   | (843.6                             | )%         | (43.3 | )% |
|                                  |   |                               |       |   |   |
| Provision  (benefit) for income taxes |   | 0.5                                | %          | (15.8 | )% |
|                                  |   |                               |       |   |   |
| Net  loss                             |   | (844.1                             | )%         | (27.5 | )% |

 

21

----

 

**Overview**

 

We commenced operationsin 1986, and currently develop, market and support software technologies thatimplement accelerated virtual machine technology for memory-constrained smartdevices.  In January 1998, we announcedour intention to launch a new product line called the JeodeÔplatform, based on our Embedded Virtual Machine (“EVM”TM) technology.  We also explored new markets that wouldleverage our 17 years of emulation software development experience.  The Jeode platform is our implementation ofSun Microsystems, Inc.’s (“Sun”) Java® technology tailored for smartdevices.  It leverages patent-pendingintellectual property to provide these resource-constrained devices with highperformance, fully-compatible Java applet and application support.  The product became available for sale inMarch 1999.  The Jeode platform has beenour principal product line since the third quarter of 1999.  The Jeode product line was sold in April2003.

 

During 2001, we begandevelopment of a range of products (“Secure System Provisioning” or “SSP”products) for the mobile handset and wireless carrier industry.  These SSP products build on our position asa Virtual Machine (“VM”) supplier for manufacturers of mobile devices and allowwireless carriers to execute over the air repair and build valuable incrementalservices.  With the sale of our JVMbusiness in April 2003, our sole product line will consist of our SSPproduct.  The SSP product becameavailable for lab and market trials in early 2003 and will be available forshipment to customers in the second half of 2003. We have limited history withsales initiatives for new products. Additionally, the sales cycle for the SSP products is expected to takelonger than the typical six to nine months to complete as seen with the Jeodeproduct.

 

Our operations outside ofthe United States are primarily in the United Kingdom, where the majority ofour research and development operations and our European sales activities arelocated.  We distribute our Jeode platformthrough OEM’s.  Our revenues fromcustomers outside the United States are derived primarily from Europe and Asiaand are generally affected by the same factors as our revenues from customersin the United States.  The operatingexpenses of our operations outside the United States are mostly incurred inEurope and relate to our research and development and European salesactivities.  Such expenses consistprimarily of ongoing fixed costs and consequently do not fluctuate in directproportion to revenues.  Our revenues andexpenses outside the United States can fluctuate from period to period based onmovements in currency exchange rates. Historically, movements in currency exchange rates have not had amaterial effect on our revenues.

 

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

 

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

 

On February 7, 2003, weentered into a $1 million loan agreement with esmertec AG (“esmertec”).  The loan was made in two installments of$500,000 each on February 13, 2003 and February 26, 2003.  The rate of interest on each loan is atprime plus two percent.  Accruedinterest is due on the last day of each month. The accrued interest as of March 31, 2003, was $6730.  The principal and any outstanding accruedinterest is due on or before February 3, 2004.

 

22

----

 

On March 5, 2003, weentered into several other agreements (the “Agreements”) with esmertecincluding a definitive agreement to sell certain assets relating to our JavaVirtual Machine (“JVM”) line of business in exchange for $3.5 million payablein installments.  Payments under theagreement would be $800,000 on April 18, 2003, $800,000 on July 23, 2003,$800,000 on October 15, 2003, $800,000 on January 15, 2004 and $300,000 onApril 15, 2004.  The assets primarilyincluded the fixed assets, customer agreements and employees related to the JVMline of business. The transaction closed on April 23, 2003.  Under the terms of the Agreements, esmertecbecame the exclusive master distributor of the JVM technology in exchange for$3.4 million in minimum guaranteed royalties through June 30, 2004 at whichtime, the JVM technology rights will transfer to esmertec.  Minimum payments under the license are asfollows:

 

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

 

In addition, we can earnup to an additional $4.0 million over the next three years based on apercentage of esmertec’s future sales of the JVM product.  Additionally, the parties have entered intoa cooperative agreement to promote Insignia’s SSP software product toesmertec’s mobile platform customers. The Agreements provide for esmertec to manage the existing Insignia JVMcustomer relationships and license the Insignia and esmertec technologies tosell to the then combined customer base and business partners.  Under the Agreements, esmertec will assumethe entire JVM business through a final asset purchase in June 2004.

 

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

 

The Jeode platform hasbeen our principal product line since the third quarter of 1999.  With the sale of our JVM business toesmertec, Insignia’s sole product line consists of its SSP products for themobile handset and wireless carrier industry. The SSP product became available for lab and market trials in early 2003and is expected to be available for shipment to customers in the second half of2003.  We have limited history withsales initiatives for new products.

 

23

----

 

Additionally, the salescycle for the SSP products is expected to take longer than the typical six tonine months experienced to complete as seen with the Jeode product.

 

Except as otherwisenoted, this Form 10-Q does not reflect the anticipated sale of our JVM businessto esmertec.

 

**Critical accounting policies and estimates**

 

The consolidatedfinancial statements are prepared in accordance with generally acceptedaccounting principles.  Certain of ouraccounting policies require the application of significant judgment bymanagement in selecting the appropriate assumptions for calculating financialestimates.  These estimates affect thereported amounts of assets and liabilities at the dates of the financialstatements and the reported amounts of revenues and expenses during thereporting periods.  By their nature,these judgments are subject to an inherent degree of uncertainty.  The most significant estimates andassumptions relate to revenue recognition, the recoverability of prepaidroyalties, and the adequacy of allowances for doubtful accounts. Actual amountscould differ from these estimates.

 

*Revenue recognition*

 

We recognize revenue inaccordance with Statement of Position 97-2 (“SOP 97-2”), “Software RevenueRecognition”, as amended.  SOP 97-2requires that four basic criteria must be met before revenue can be recognized:(1) persuasive evidence of an arrangement exists; (2) delivery has occurred orservices rendered; (3) the fee is fixed or determinable; and (4) collectibilityis probable. Determination of criteria (3) and (4) are based on management’sjudgments regarding the fixed nature of the fee charged for services renderedand products delivered and the collectibility of those fees. Should changes inconditions cause management to determine these criteria are not met for certainfuture transactions, revenue recognized for any reporting period could beadversely affected.

 

At the time of thetransaction, we assess whether the fee associated with our revenue transactionis fixed or determinable and whether or not collection is reasonablyassured.  We assess whether the fee isfixed or determinable based on the payment terms associated with thetransaction. If a significant portion of a fee is due after the normal paymentterms, which are 30 to 90 days from invoice date, we account for the fee as notbeing fixed or determinable. In these cases, we recognize revenue on theearlier of due date or cash collected.

 

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

 

For all sales, we use eithera signed license agreement or a binding purchase order (primarily formaintenance renewals) as evidence of an arrangement.

 

For arrangements withmultiple obligations (for example, undelivered maintenance and support), wewill allocate revenue to each component of the arrangement using the residualvalue method based on the fair value of the undelivered elements, which isspecific to us.  This means that we willdefer 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

 

24

----

 

sales of renewals toother customers or upon renewal rates quoted in the contracts.  Fair value of services, such as training orconsulting, is based upon separate sales by us of these services to othercustomers.

 

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

 

We recognize revenue formaintenance services ratably over the contract term.  Our training and consulting services are billed based on hourlyrates, and we will generally recognize revenue as these services areperformed.  However, at the time ofentering into a transaction, we will assess whether or not any servicesincluded within the arrangement require us to perform significant work eitherto alter the underlying software or to build additional complex interfaces sothat the software performs as the customer requests.  If these services are included as part of an arrangement, werecognize the entire fee using the percentage of completion method.  We estimate the percentage of completionbased on our estimate of the total costs estimated to complete the project as apercentage of the costs incurred to date and the estimated costs to complete.

 

*Accounts receivable and allowance for doubtful accounts*

 

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

 

The preparation offinancial statements requires us to make estimates of the uncollectability ofour accounts receivables.  Wespecifically analyze accounts receivable and analyze historical bad debts,customer concentrations, customer credit-worthiness, current economic trendsand changes in its customer payment terms when evaluating the adequacy of theallowance for doubtful accounts.

 

*Prepaid royalties*

 

Our agreements withlicensors sometimes require us to make advance royalty payments and payroyalties based on product sales. Prepaid royalties are capitalized andamortized as cost of sales based on the contractual royalty rate based onactual net product sales.  Wecontinually evaluate recoverability of prepaid royalties and, if necessary,will charge to cost of sales any amount that we deem unlikely to be recoverablein the future.  The prepaid royaltiescarried on the balance sheet, under the terms of the Distribution Agreementbetween Sun and Insignia, require us to use these prepaid licenses before June30, 2004.  We have performed anassessment of whether there was an indication that prepaid royalties of $2.28million are impaired as of March 31, 2003. Our estimation of utilization, basedon past revenue history and future revenue estimates using current average perunit selling price ranges, indicates that there could be unused prepaid

 

25

----

 

royalties at theexpiration of the Distribution Agreement. As part of the sale of the JVM business to esmertec, esmertec hasentered into a master distribution license agreement with Insignia, wherebyesmertec will license product from Insignia which will consume all the prepaidspaid to Sun.  However, if esmertecshould breach the agreement, we believe that should unused prepaid royaltiesbecome predictable in the future, we could reduce the selling price in order toutilize the remaining prepaid balance. This price reduction would result in lower gross margins.  We will continue to assess this potentialimpairment on a quarterly basis.  Thedeterioration of the business climate and lower than expected product salescould potentially impact this assessment and require an impairment charge in afuture quarter.  Prepaid royalties areclassified as both current and non-current assets based on estimated netproduct sales within the next year.

 

**Revenues**

 
|               |   | **Three  months ended  March 31,** | ** ** |
|--------------------|--------|------------------------------------|------------|
|               |   | **2003**                           |       | **2002** | ** ** |
|               |   | **(in  thousands)**                | ** ** |
|               |   |                               |       |   |   |
| License  revenue   |   | $                                  | 192        |   | $ | 2,988 |   |
| Service  revenue   |   | 187                                |       | 556 |   |
| Total  net revenue |   | $                                  | 379        |   | $ | 3,544 |   |

 

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

 

In the first quarter of2003, total revenues decreased by 89% compared to total revenues for the firstquarter of 2002.  The decrease wasprimarily due to decreased license revenues relating to the Jeode platformproduct line and the March 2003 revenue transferred as part of the JVM sale toesmertec.  The Jeode platform accountedfor 95% and 100% of total revenue for the three months ended March 31, 2003 and2002, respectively.  Future revenue fromJeode will be earned as a percentage of the revenue share program from the saleof the JVM business.  Jeode revenue willdecrease from prior quarters.  We expectto generate revenue from the SSP product in the second half of 2003.

 

License revenue andservice revenue accounted for 51% and 49%, respectively, of total revenues inthe first quarter of 2003.  In the firstquarter of 2002, license revenue and service revenue accounted for 84% and 16%,respectively.

 

License revenue decreased93% in the first quarter of 2003 compared to license revenues in the firstquarter of 2002.  The decrease wasprimarily due to the decline in the Internet Appliance market and the generalweakening of the economy.  Jeode licenserevenues for the three months ended March 31, 2003 and the three months endedMarch 31, 2002 accounted for 90% and 100% of total license revenues,respectively.  A one-time Softwindowstransaction accounted for 10% of the license revenue for the three months endedMarch 31, 2003.

 

Service revenue in thefirst quarter of 2003 was 66% lower than service revenue in the first quarterof 2002.  The decrease was primarily dueto decreased Jeode engineering and Jeode

 

26

----

 

support contracts.  Jeode service revenues for the three monthsended March 31, 2003 and the three months ended March 31, 2002 accounted for100% of total service revenues.

 

Sales to distributors andOEM’s representing more than 10% of total revenue in each period accounted forthe following percentages of total revenues.

 
|               |   | **Three  months ended  March 31,** | ** ** |
|--------------------|--------|------------------------------------|------------|
|               |   | **2003**                           |       | **2002** | ** ** |
| Distributors:      |   |                               |       |   |   |
| Hewlett  Packard   |   | 34                                 | %          |   | * |
| Phoenix            |   |                               | *          | 78 | % |
| All  Distributors: |   | 35                                 | %          | 82 | % |
|               |   |                               |       |   |   |
| OEM’s:        |   |                               |       |   |   |
| All  OEM’s    |   | 61                                 | %          | 17 | % |
| Less  than 10%     |   |                               |       |   |   |

 

Sales to customersoutside the United States, derived mainly from customers in Europe and Asia,represented approximately 10% of total revenues in the three months ended March31, 2003 and 5% of total revenues in the three months ended March 31, 2002.  We marketed Jeode to customers in the UnitedStates, Europe and Japan.

 

**Cost of revenues and gross margin**

 
|                           |   | **Three  months ended  March 31,**      | ** ** |
|--------------------------------|--------|-----------------------------------------|------------|
|                           |   | **2003**                                |       | **2002** | ** ** |
|                           |   | **(in  thousands, except percentages)** | ** ** |
|                           |   |                                    |       |   |   |
| Cost  of license revenue       |   | $                                       | 115        |   | $ | 1,014 |   |
| Gross  margin: license revenue |   | 40                                      | %          | 66 | % |
|                           |   |                                    |       |   |   |
| Cost  of service revenue       |   | $                                       | 52         |   | $ | 197 |   |
| Gross  margin: service revenue |   | 72                                      | %          | 65 | % |
|                           |   |                                    |       |   |   |
| Total  cost of revenues        |   | $                                       | 167        |   | $ | 1,211 |   |
| Gross  margins: total revenues |   | 56                                      | %          | 66 | % |

 

Cost of license revenueis mainly comprised of royalties to third parties. Cost of service revenueincludes costs associated with nonrecurring engineering activities and end-usersupport under maintenance contracts.

 

We believe that thesignificant factors affecting the Jeode platform gross margin include pricingof the development license, pricing of the unit usage and royalties to thirdparties such as Sun Microsystems, Inc. (“Sun”).  In early 1999, we signed a five-year agreement with Sun underwhich Sun established us as an authorized Virtual Machine provider.  Under this agreement, we are required to paySun a per unit royalty on each Jeode platform-enabled smart device shipped byour customers, plus a royalty on all development licenses put in place betweenour customers and us. In the third quarter of 2001, we amended our licenseagreement with Sun.  The

 

27

----

 

amendment expanded thescope of the licensed technology, changed the royalty rate, limited the royaltyobligations to only per units licensed, established required prepaid royaltiesand extended the expiration date of the contract from March 2004 to June2004.  License revenue gross margins inthe quarter ended March 31, 2003 were 40%, compared to 66% for the same periodin 2002.  The decrease in licenserevenue gross margins reflected the impact of sharing the March 2003 JVMrevenue while the cost per unit did not change and resulted in lower grossmargins.

 

Gross margin for servicerevenue is impacted by the level of and pricing terms of nonrecurringengineering activities, which can vary from customer to customer, from contractto contract and based on the level of maintenance contracts sold.  Gross margin for service revenue increasedin the first quarter of 2003 to 72% from 65% in the same period of 2002 due tomore favorable labor costs on fixed price engineering consulting contracts.

#### ** **

#### **Operatingexpenses**

 
|                          |   | **Three  months ended  March 31,**      | ** ** |
|-------------------------------|--------|-----------------------------------------|------------|
|                          |   | **2003**                                |       | **2002** | ** ** |
|                          |   | **(in  thousands, except percentages)** | ** ** |
|                          |   |                                    |       |   |   |
| Sales  and marketing          |   | $                                       | 645        |   | $ | 1,721 |   |
| Percentage  of total revenues |   | 170                                     | %          | 49 | % |
|                          |   |                                    |       |   |   |
| Research  and development     |   | $                                       | 1,306      |   | $ | 1,196 |   |
| Percentage  of total revenues |   | 345                                     | %          | 34 | % |
|                          |   |                                    |       |   |   |
| General  and administrative   |   | $                                       | 1,144      |   | $ | 938 |   |
| Percentage  of total revenues |   | 302                                     | %          | 26 | % |

 

Sales and marketingexpenses consist primarily of personnel and related overhead costs, salespersoncommissions, advertising and promotional expenses and trade shows.  Sales and marketing expenses decreased by62% in the quarter ended March 31, 2003 from the quarter ended March 31, 2002.The primary reason for the significant decrease was attributed to the transferof the March 2003 JVM business expenses to esmertec. The decrease primarilyreflected a $625,000 reduction in personnel costs. In addition, travel related costsdecreased $125,000 and discretionary marketing decreased $192,000.  Overhead costs allocated using headcountalso decreased by $75,000.  Weanticipate a moderate decrease in sales and marketing expenses in the near termas we continue to control expenses in our sales and marketing organizations.

 

Research and developmentexpenses consist primarily of personnel costs, overhead costs relating tooccupancy and equipment depreciation. Research and development expenses increased by 9% in the three months endedMarch 31, 2003 compared to the same period in 2002.  The primary reason for the increase was due to the quarter endedMarch 31, 2003 incurring an increased overhead cost allocation using headcountof $31,000 and the prior year quarter allocating an additional $145,000 ofresearch and development expenses to cost of sales for Jeode support andmaintenance and Jeode nonrecurring engineering activities.  The quarter ended March 31, 2002reported greater Jeode revenue and therefore greater Jeode cost of sales thanthe quarter ended March 31, 2003. Additional increases in expenditures of $38,000 in the quarter endedMarch 31, 2003 were a result of independent contractor costs.  The increases were offset by salary andsalary related cost decreases of $97,000 primarily due to the transferring ofJVM business expenses effective March 1, 2003. Research and development expenses are expected to decrease moderately inthe near term.

 

General andadministrative expenses consist primarily of personnel and related overheadcosts for finance, information systems, human resources and generalmanagement.  General and administrativeexpenses increased by 7% in the three months ended March 31, 2003 compared tothe same period of 2002.  The increasewas primarily due to an increase in professional service

 

28

----

 

expenditures of $226,000related to the sale of the JVM business to esmertec.  The increase was also due to the loan forgiveness to the ChiefExecutive Officer of $128,000.  Theincrease was offset in part to a $136,000 decrease in salaries and a $19,000decrease in personnel related costs which consist primarily of  benefits and payroll tax expenses.  Salaries and personnel costs decreased dueto a reduction in force in the quarter ended March 31, 2003 and thetransfer of the JVM business expenses effective March 1, 2003.  Expenses are expected to decrease moderatelyin the near term.

 

###### **Restructuring**

 
|                          |   | **Three  months ended  March 31,**      | ** ** |
|-------------------------------|--------|-----------------------------------------|------------|
|                          |   | **2003**                                |       | **2002** | ** ** |
|                          |   | **(in  thousands, except percentages)** | ** ** |
|                          |   |                                    |       |   |   |
| Restructuring                 |   | $                                       | 326        |   | $ | — |   |
| Percentage  of total revenues |   | 86                                      | %          | — |   |
|                               |        |                                         |            |  |  |  |  |

 

On February 11, 2003, weannounced a restructuring of the organization to focus on the SSPtechnology.  As part of therestructuring, Richard Noling, resigned as Chief Executive Officer and ActingChief  Financial Officer.  Mark McMillan, President and Chief OperatingOfficer, was promoted to Chief Executive Officer and Linda Potts, Controller,was promoted to Chief  FinancialOfficer.  Restructuring expenses consistof severance payments paid in the quarter ended March 31, 2003 of $117,000 andcontinuing severance payments of $209,000 in the quarters ended June 30, 2003and September 30, 2003.  Restructuringexpenses represented 86% of total revenues for the quarter ended March 31,2003.  The restructuring in both thequarter ended March 31, 2003 and the the prior quarter, in addition to thetransfer of employees from the sale of the JVM business, resulted in aworldwide reduction of headcount of approximately 70% of our staff (62 people).

 

**Interest income (expense), net**

 
|                            |   | **Three  months ended  March 31,**      | ** ** |
|---------------------------------|--------|-----------------------------------------|------------|
|                            |   | **2003**                                |       | **2002** | ** ** |
|                            |   | **(in  thousands, except percentages)** | ** ** |
|                            |   |                                    |       |   |   |
| Interest  income (expense), net |   | $                                       | (1         | ) | $ | 21 |   |
| Percentage  of total revenues   |   | —                                  |       | 1 | % |
|                                 |        |                                         |            |  |  |  |  |

 

Net interest incomedecreased from income of $21,000 in the three months ended March 31, 2002 toexpense of $1,000 in the three months ended March 31, 2003.  The change from interest income to interestexpense in the first quarter of 2003 was primarily due to a combination oflower interest rates on lower cash and cash equivalent balances and interestexpense on a loan received in February, 2003. Interest expense is expected to increase in 2003 and offset interestincome.

 

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

 
|                          |   | **Three  months ended  March 31,**      | ** ** |
|-------------------------------|--------|-----------------------------------------|------------|
|                          |   | **2003**                                |       | **2002** | ** ** |
|                          |   | **(in  thousands, except percentages)** | ** ** |
|                          |   |                                    |       |   |   |
| Other  income, net            |   | $                                       | 13         |   | $ | (32 | ) |
| Percentage  of total revenues |   | 3                                       | %          | (1 | )% |
|                               |        |                                         |            |  |  |  |  |

 

29

----

 

Net other incomeincreased from expense of $32,000 in the three months ended March 31, 2002 toincome of $13,000 in the three months ended March 31, 2003, primarilyreflecting foreign exchange gains or losses in the respective periods.

 

For the three monthsended March 31, 2003 approximately 88% of our total revenues and over 43% ofour operating expenses are denominated in U.S. dollars.  Most of our remaining revenues and expensesare British pound sterling denominated and consequently we are exposed to fluctuationsin British pound sterling exchange rates. There can be no assurance that such fluctuations will not have amaterial effect on our results of operations in the future.  We did not enter with any currency optionhedge contracts in 2002 or the first quarter of 2003.

 

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

 

**Provision (benefit) for income taxes**

 
|                                  |   | **Three  months ended  March 31,** | ** ** |
|---------------------------------------|--------|------------------------------------|------------|
|                                  |   | **2003**                           |       | **2002** | ** ** |
|                                  |   | **(in  thousands)**                | ** ** |
|                                  |   |                               |       |   |   |
| Provision  (benefit) for income taxes |   | $                                  | 2          |   | $ | (561 | ) |
| Effective  income tax rate            |   | —                             |       | — |   |
|                                       |        |                                    |            |  |  |  |  |

 

Our provision for incometaxes for the three months ended March 31, 2003 primarily represented paymentsto U.S. tax authorities for annual filing fees.  Our benefit for income taxes for the three months ended March 31,2002 primarily represented a refund received from the United Kingdom forresearch and development claims.  Wehave recorded a full valuation allowance against all deferred tax assets,primarily comprised of net operating losses, on the basis that significant uncertaintyexists with respect to their realization.

 

Effective 2002 andretroactive to 2000, research and development expenditures incurred in theUnited Kingdom qualified for a tax credit. The tax credit does not offset tax liability but rather is a refund.  The estimated refund for 2002 is $702,000and is recorded as a receivable on the balance sheet.

 

**Liquidity and capital resources**

 
|                                                              |   | **March 31,**       | ** ** |
|-------------------------------------------------------------------|--------|---------------------|------------|
|                                                              |   | **2003**            |       | **2002** | ** ** |
|                                                              |   | **(in  thousands)** | ** ** |
|                                                              |   |                |       |   |   |
| Cash,  cash equivalents and restricted cash                       |   | $                   | 214        |   | $ | 6,832 |   |
| Working  capital (deficit)                                        |   | $                   | (652       | ) | $ | 10,498 |   |
| Net  cash used in operating activities for the three month period |   | $                   | (1,762     | ) | $ | (2,581 | ) |

 

30

----

 

We have transitioned ourproduct focus from the Jeode product to our SSP product line.  This change in product focus has resulted ina redirection of available resources from Insignia’s historical revenue basetowards the development and marketing efforts associated with the SSP product.Cash used in operating activities in the first quarter of 2003 totaled $1.8million compared to $2.6 million for the same period in 2002.  For the three months ended March 31, 2003,cash used in operating activities resulted primarily from a net loss of $3.2million and a decrease of accrued liabilities of $132,000.  Offsetting these were a decrease of accountsreceivable of $556,000, an increase of accounts payable of $459,000, and anincrease of accrued severance of $209,000.

 

Cash provided byinvesting activities for the three months ended March 31, 2003 was $1,159,000,which consisted primarily of proceeds from the loan of $1,000,000 and proceedsfrom the release of restricted cash of $160,000.

 

Cash provided byfinancing activities for the three months ended March 31, 2003 was $1,000 andwas proceeds from the employee stock purchase plan.

 

Our cash, cashequivalents and restricted cash were $214,000 at March 31, 2003, a decrease of$6.6 million from $6.8 million at March 31, 2002.  At March 31, 2003, we had a working capital deficit of$652,000.  At March 31, 2002, we hadworking capital of $10.5 million.  Theprincipal source of working capital came from receivable collections and a notepayable.  Capital additions totaled$1,000 and $21,000 for the three months ending March 31, 2003 and March 31,2002, respectively.  We have no materialcommitments for capital expenditures or strategic investments.  Our commitments for expenditures consist ofbuilding leases in the U.K. and U.S. and a debt payment due in February2004.  We expect that the decrease inaccounts receivables, decreased revenues for the three months ended March 31,2003 and other factors will substantially decrease our future cash flows forthe next several quarters.

 

As of March 31, 2003,five customers accounted for 79% of the gross receivable.

 

In September 2001,Insignia and Sun Microsystems, Inc. (“Sun”) entered into Amendment No. 3 (the“Amendment”) to the Technology License and Distribution Agreement (the“Distribution Agreement”) between the two companies.  In addition, in June 2001, the two companies entered into anaddendum (the “Addendum”) to the Distribution Agreement relating todistribution of products to an Insignia customer.  The Amendment and the Addendum each required us to makenon-refundable royalty prepayments to Sun. A total of $7.0 million prepaid royalties were paid to Sun under theDistribution Agreement through the second quarter of 2002.  There are no additional required royaltyprepayments due to Sun under this agreement. The prepaid royalties carried on the balance sheet, under the terms ofthe agreement between Sun and Insignia, require us to use these prepaidlicenses before June 30, 2004.  Wecontinually evaluate recoverability of these prepaid royalties and, ifnecessary, will charge to cost of sales any amount that we deem unlikely to berecoverable in the future.  We haveperformed an assessment of whether there was an indication that the prepaidroyalties of $2.28 million are impaired as of March 31, 2003.   Our estimation of utilization, based onpast revenue history and future revenue estimates using current average perunit selling price ranges, indicates that there could be unused prepaidroyalties at the expiration of the license and distribution agreement.  However, we believe that should unusedprepaid royalties become predictable in the future, we could reduce the sellingprice in order to utilize the remaining prepaid balance. This price reductionwould result in lower gross margins.  Wewill continue to assess this potential impairment on a quarterly basis.  The deterioration of the business climateand lower than expected product sales could potentially impact this assessmentand require an impairment charge in a future quarter.

 

32

----

 

During 1998, we subletuntil March 2002 facilities we previously occupied in the United Kingdom, onsubstantially the same terms as those applicable to us.  In January 2002, we entered into anagreement with the landlord to terminate the lease on April 13, 2002.

 

On March 28, 2002, ourU.S. subsidiary, Insignia Solutions, Inc. (“Insignia U.S.”) entered into anaccounts receivable financing agreement with Silicon Valley Bank.  The financing agreement allowed InsigniaU.S. to borrow an amount up to 80% of eligible receivables not to exceed$1,200,000, with interest at the bank’s prime rate plus two percentagepoints.  The agreement was canceled onFebruary 12, 2003, and the UCC filing liens on the assets of Insignia U.S. wereterminated.  No funds were ever borrowedunder this credit facility.

 

We have granted extendedpayment terms from time to time and, depending on various factors, includingthe length of the extended payment period and the creditworthiness of thecustomer.  We report these future paymentsas accounts receivable and either recognized revenue or deferred revenue.  Deferred revenue decreased $83,000 for thethree months ended March 31, 2003 and primarily reflects fewer support andmaintenance contracts.

 

Insignia, as permittedunder Delaware law and in accordance with our Bylaws, indemnifies our officersand directors for certain events or occurrences, subject to certain limits,while the officer is or was serving at our request in such capacity.  The term of the indemnification period is forthe officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited;however we do have a Director and Officer Insurance Policy that limits ourexposure and enables us to recover a portion of any future amounts paid.  As a result of the insurance policy coveragewe believe the fair value of these indemnification agreements is minimal.

 

In our sales agreements,we typically agree to indemnify our customers for any expenses or liabilityresulting from claimed infringements of patents, trademarks or copyrights ofthird parties.  The terms of theseindemnification agreements are generally perpetual any time after execution ofthe agreement.  The maximum amount ofpotential future indemnification is unlimited. We have not paid any amounts to settle claims or defend lawsuits.

 

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

 

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

 

On October 17, 2002, weentered into a securities subscription agreement (“Agreement”) with FusionCapital Fund II, LLC (“Fusion Capital”), pursuant to which Fusion Capitalagreed to purchase, on each trading day following the effectiveness of aregistration statement covering the ADSs, to be purchased by Fusion Capital,$10,000 of our ADSs up to an aggregate of $6.0 million over a period of 30months.  The purchase price of the ADSswill be equal to a price based upon the future market price of the shareswithout any fixed discount to the market price.  In order to be in compliance with Nasdaq rules, we could not sellour ordinary shares to Fusion Capital at a price below $0.38, which representsthe greater of the book value per share of our ordinary shares as of  September 30, 2002 or the closing sale priceper share of our ADSs on October 16, 2002. If we elect to sell our shares to Fusion Capital at a price per sharebelow $0.38, we first would be required to obtain shareholder approval in orderto be in compliance with applicable Nasdaq rules.  Under the laws of England and Wales, we are not permitted to sell

 

33

----

 

our ADSs at a purchaseprice that is less than the nominal value of our ordinary shares.  Currently, the nominal value per ordinaryshare is £0.20. As of May 8, 2003, the closing market price of our shares was$0.22 per share. As a result, we do not anticipate selling any shares under ouragreement with Fusion Capital until the market price of our shares increasesfrom current levels. In addition, the sale of our shares to Fusion Capitalunder the Agreement is subject to other conditions which have not been met.

 

Under the terms of theAgreement, we issued to Fusion Capital one redeemable warrant for ADSsrepresenting 1,000,000 ordinary shares, and one non-redeemable warrant for ADSsrepresenting 1,000,000 ordinary shares. The redeemable warrant may be redeemed by Insignia at any time on orbefore June 30, 2003 for an aggregate redemption price of $200,000.  The exercise price per ordinary share ofeach warrant is the U.S. dollar equivalent of 20.5 pence.  Each warrant expires on September 30, 2007and are partially exercisable.  As ofDecember 31, 2002, the estimated value of the warrants, using the Black-Scholesmodel, was $544,000.  Unless an event ofdefault occurs under the Agreement, the shares issuable upon exercise of thesewarrants must be held by Fusion Capital until 30 months from the date of theAgreement or the date the Agreement is terminated.  The warrrants are immediately exercisable; however, FusionCapital may not exercise the warrants if Fusion Capital, together with itsaffiliates, would beneficially own more than 9.9% of our shares outstanding atthe time of the exercise by Fusion Capital. The Agreement and the forms of the Registration Rights Agreement, theRedeemable Warrant and the Non-Redeemable Warrant between Insignia and FusionCapital are filed as Exhibits to the 8-K dated October 22, 2002.

 

Based upon our currentforecasts and estimates, our current cash and cash equivalents, together withcash generated from on-going operations and other liquid sources of cash(including the securities subscription and cash generated from the sale of theJVM business to esmertec) may not be sufficient to meet our anticipated cashneeds for working capital and capital expenditures.  If cash currently available from all sources is insufficient tosatisfy our liquidity requirements, we may seek additional sources of financingincluding selling additional equity or obtaining convertible debtsecurities.  If additional funds areraised through the issuance of equity or debt securities, these securities couldhave rights, preferences and privileges senior to holders of our shares, andthe terms of such securities could impose restrictions on our operations.  The sale of additional equity or convertibledebt securities could result in additional dilution to our shareholders.  We may not be able to obtain additionalfinancing on acceptable terms, if at all. If we are unable to obtain additional financing as and when needed andon acceptable terms, we may be required to reduce the scope of our plannedsales, marketing and product development efforts, which could jeopardize ourbusiness.  The size of our accumulateddeficit, our losses and our ongoing need for capital in order to continue ouroperations raises substantial doubt as to our ability to continue operations.  Failure to reduce expenses and/or obtainadditional financing will result in a material adverse effect on our ability tomeet our business objectives and continue as a going concern.  The report of our independent accountants onour financial statements included in our annual report on Form 10-K includes anexplanatory paragraph as to the uncertainty that we will continue as a goingconcern.

 

**RiskFactors**

 

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

 

34

----

 

**We needadditional financing to sustain our operations.**

 

We had a working capitaldeficit of $652,000 at March 31, 2003, and our cash, cash equivalents, andrestricted cash totaled $214,000 at March 31, 2003.  We had an operating cash flow deficit of $1.8 million for thethree months ended March 31, 2003 and an operating cash flow deficit of $2.6million for the three months ended March 31, 2002.  The sale of our JVM business to esmertec is expected to providecash of $4,150,000 in 2003.  Because ourcurrent financial resources are not expected to be sufficient to fund ouroperations or those of our subsidiaries, we need additional funds to continuethese operations.  There is no assurancethat additional financing will be available to us on terms that are acceptable,or at all.  These circumstances raisesubstantial doubt about our ability to continue as a going concern.  The report of our independent accountantsincluded on our consolidated financial statements on Form 10-K filed on April15, 2003 includes an explanation paragraph as to the uncertainty that we willcontinue as a going concern.

 

We only have the right toreceive $10,000 per trading day, up to an aggregate of $6 million over a periodof 30 months under the agreement with Fusion Capital unless our stock priceequals or exceeds $1.00, in which case the daily amount may be increased, atthe option of Insignia, as the price of our shares increases.  Fusion Capital will not have the right norbe obligated to purchase any of our shares on any trading days that the marketprice of our shares is less than $0.15 per share.  Since we intend to initially register 10,000,000 shares for saleby Fusion Capital (in addition to 2,000,000 shares exercisable pursuant towarrants held by Insignia), the selling price of our shares to Fusion Capitalwill have to average at least $0.60 per share for us to receive the maximumproceeds of $6 million without registering additional shares.  Assuming a purchase price of $0.39 per share(the closing sale price per share of our ADSs on October 30, 2002) and thepurchase by Fusion Capital of the full 10,000,000 shares under the securitiessubscription agreement with Insignia, proceeds to us would be $3.9 millionunless we choose to register more than 10,000,000 shares, which we have theright, but not the obligation, to do.

 

In order to be incompliance with Nasdaq rules, we could not sell our ordinary shares to FusionCapital at a price below $0.38, which represents the greater of the book valueper share of our ordinary shares as of September 30, 2002 or the closing saleprice per share of our ADSs on October 16, 2002. As of March 31, 2003, theclosing market price of our shares was $0.22 per share. If we elect to sell ourshares to Fusion Capital at a price per share below $0.38, we first would berequired to obtain shareholder approval in order to be in compliance with theNasdaq rules.  Under the laws of Englandand Wales, we are not permitted to sell our ADSs at a purchase price that isless than the nominal value of our ordinary shares.  Currently, the nominal value per ordinary share is £0.20. As aresult, we do not anticipate selling any shares under our agreement with FusionCapital until the market price of our shares increases from currentlevels.  In addition, the sale of ourshares to Fusion Capital under the Agreement is subject to other conditionswhich have not been met.

 

The extent we rely onFusion Capital as a source of funding will depend on a number of factorsincluding our financial performance and ability to generate revenues, theprevailing market price of our shares and the extent to which we are able tosecure working capital from other sources. If obtaining sufficient financing from Fusion Capital were to proveprohibitively expensive, we may need to secure another source of funding inorder to satisfy our working capital needs. Even if we are able to access the full $6.0 million under the securitiessubscription agreement with Fusion Capital, we may still need additionalcapital to implement our business, operating and development plans.

 

35

----

 

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

 

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

 

During the twelve monthsended May 5, 2003, the closing price of our shares ranged from a high of $1.58to a low of $0.20.  Under the rules ofthe Nasdaq Stock Market, our stock price must remain above $1.00 per share forcontinued quotation of our shares on the Nasdaq National Market or the NasdaqSmallCap Market.  We received a letterfrom Nasdaq notifying us that we were not in compliance with this requirementand that we would be provided 90 calendar days, or until December 11, 2002, toregain compliance.  In connection withthis notification, we transferred the listing of our shares from the NasdaqNational Market to the Nasdaq SmallCap Market on January 9, 2003 to obtainadditional time and flexibility to meet this requirement.  In addition, as of March 31, 2003, we had anegative total shareholders’ equity of $525,000.  In order to maintain our listing on the Nasdaq SmallCap Market,we are required to have total shareholders’ equity of at least $2.5million.  As a result, our shares couldbe delisted from the Nasdaq SmallCap Market, which could adversely affect ourability to raise additional funds.

 

**The saleof our shares to Fusion Capital may cause dilution, and the sale of the sharesby Fusion Capital could cause the price of our shares to decline.**

 

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

 

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

 

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

 

Our future performancedepends upon sales of products within our SSP product line.  Revenues related to the Jeode product line,which was sold to esmertec in April 2003, accounted for 100% of our totalrevenue of $379,000 for the three months ended March 31, 2003.  As a result, the SSP product line is ouronly product line and we expect to rely upon sales of the SSP product for ourrevenue in the future. The SSP product became available for lab and markettrials in early 2003 and is expected to be available for shipment to customersin the second half of 2003.  We havereduced our current expense levels, which will require total revenues of morethan $1.5 million per quarter to achieve an operating profit.  SSP may not achieve or sustain marketacceptance or provide the desired revenue levels.

 

36

----

 

**The longand complex process of licensing our SSP product may make our revenueunpredictable.**

 

Our revenue is dependentupon our ability to license SSP product to third parties. Licensing our SSPproduct is expected to be a long and complex process, which could take longerthan the typical six to nine months. Before committing to license our products,potential customers must generally consider a wide range of issues includingproduct benefits, infrastructure requirements, ability to work with existingsystems, functionality and reliability. The process of entering into adevelopment license with a company typically involves lengthynegotiations.  Because of the salescycle, it is difficult for us to predict when, or if, a particular prospect mightsign a license agreement.  Developmentlicense fees may be delayed or reduced because of this process.  The SSP product became available for lab andmarket trials in early 2003 and will be available for shipment to customers inthe second half of 2003.  We havelimited history with sales initiatives for new products.

 

**Ifproducts that integrate our SSP technology do not sell well, we will notreceive royalty payments on our licenses.**

 

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

 

**If ourlicense agreement with Sun Microsystems, Inc. is terminated or expires withoutrenewal, we would not be able to market our Jeode product line through theMaster Distribution License Agreement with esmertec.**

 

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

 

We also license softwaredevelopment tool products from other companies to distribute with some of ourproducts.  These third parties may notbe able to provide competitive products with adequate features and high qualityon a timely basis or to provide sales and marketing cooperation.  Further, our products compete with productsproduced by some of our licensors.

 

37

----

 

When these licensesterminate or expire, continued license rights might not be available to us onreasonable terms.  We might not be ableto obtain similar products to substitute into our tool suites.  Through the date of this report, we have notexperienced any major problems with our third-party licenses.

 

**We havea history of losses and we must generate significantly greater revenue if weare to achieve profitability.**

 

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

 

For the three monthsended March 31, 2002 and 2003 we spent 49% and 170%, respectively, of our totalrevenues on sales and marketing.  Weexpect to continue to incur disproportionately high sales and marketing expensesin the future.  To market SSPeffectively, we must develop client and server channel markets.  We will continue to incur the expenses for asales and marketing infrastructure before we recognize significant revenue fromsales of the product.  Because customersin the smart device market tend to remain with the same vendor over time, webelieve that we must devote significant resources to each potential sale.  If potential customers do not design ourproducts into their systems, the resources we have devoted to the sales prospectwould be lost.  If we fail to achieveand sustain significant increases in our quarterly sales, we may not be able tocontinue to increase our investment in these areas.  With increased expenses, we must significantly increase ourrevenues if we are to become profitable.

 

**If ournew products or product enhancements fail to achieve customer acceptance, or ifwe fail to manage product transitions, our business reputation will likelysuffer and revenues may decline.**

 

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

 

•                  accurately anticipate industry trendsand changes in technology standards;

 

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

 

•                  continue to enhance our existingproduct lines;

 

•                  respond promptly to customers’requirements and preferences.

 

The introduction of newor enhanced products also requires that we manage the transition from olderproducts to minimize disruption in customer ordering patterns.  We have had difficulty managing thetransition from older products in the past. For example, between 1995 and 1999, we transitioned from our SoftWindowsproduct line to our NTRIGUE product line and began

 

38

----

 

preparations for ourJeode product line.  During this sameperiod our 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 because we didnot timely introduce new products which could compensate for the decreasingdemand for our SoftWindows product line. Development delays are commonplace inthe software industry.  We haveexperienced delays in the development of new products and the enhancement ofexisting products in the past and are likely to experience delays in thefuture.  We may not be successful indeveloping 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.

 

In addition, we also facesignificant risks associated with the development and future deployment of ourSSP products and the successful execution of the related business strategy.With the sale of the JVM business to esmertec, the SSP product is our soleproduct line.  During 2001, we begandevelopment of a range of SSP products for the mobile handset and wirelesscarrier industry.  These SSP productsbuild on our position as a VM supplier for manufacturers of mobile devices andallow wireless carriers to build valuable Over-The-Air Repair and dynamiccapability services.  The SSP productbecame available for lab and market trials in early calendar 2003 and isexpected to be available for shipment to customers in the second half of 2003.We have limited history with sales initiatives for new products. Additionally,the sales cycle for the SSP products is expected to take longer than thetypical six to nine month cycle of the Jeode product.

 

**Ourtargeted market is highly competitive.**

 

Our SSP product line istargeted for the mobile operator and mobile device market.  The market for these products is fragmentedand highly competitive.  This market isalso rapidly changing and there are many companies creating products thatcompete or will compete with ours. As the industry develops, we expectcompetition to increase in the future. This competition may come from existingcompetitors or other companies that we do not yet know about.  Our main competitors include Bitfone andDoOnGo. The Jeode product line is targeted at the emerging Java-based smartdevice marketplaces, which are rapidly changing and are characterized by anincreasing number of new entrants whose products compete with the Jeodeplatform.

 

If these competitorsdevelop products that are cheaper or provide better capabilities orfunctionality than our SSP product line, our market share will drop. Many ofour current competitors and potential competitors have greater resources thanwe do, and we might not be able to compete successfully against thesecompanies.  Competition could force usto reduce the prices of our products, which would result in reduced profitmargins and could harm our ability to provide adequate service to ourcustomers. Our pricing model for our software products is based on a derivativeusage model with integration and support and maintenance fees, and may besubject to significant pricing pressures, including buy-out arrangements.  Also, the market may demand alternativepricing models in the future.  A varietyof other potential actions by our competitors, including increased promotionand accelerated introduction of new or enhanced products, could also harm ourcompetitive position.

 

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

 

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

 

39

----

 

•                  the volume and timing of ordersreceived during the quarter;

 

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

 

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

 

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

 

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

 

•                  changes in product pricing;

 

•                  buyouts of commercial use licenses;

 

•                  product life cycles;

 

•                  the level of our sales of third-partyproducts;

 

•                  variances in costs in fixed pricecontracts;

 

•                  purchasing patterns of customers;

 

•                  competitive conditions in theindustry;

 

•                  foreign currency exchange ratefluctuations;

 

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

 

•                   extraordinary events, such aslitigation, and related charges.

 

All of these factors aredifficult to forecast. Our future operating results may fluctuate due to theseand other factors, including our ability to continue to develop innovative andcompetitive products. An increasing amount of our sales orders involve productsand services that yield revenue over multiple quarters or upon completion ofperformance. If license agreements entered into during a quarter do not meetour revenue recognition criteria, even if we meet or exceed our forecast ofaggregate licensing and other contracting activity, it is possible that ourrevenues would not meet expectations. Due to all of these factors, we believethat period-to-period comparisons of our results of operations are notnecessarily meaningful and should not be viewed as an indication of our futureperformance. In the past, we have experienced actual performance that did notmeet financial market expectations. It is likely that, in some future quarters,our operating results will again be below the expectations of stock marketanalysts and investors.

 

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

 

Sales from outside of theUnited States accounted for approximately 22% and 5% of our total revenue forthe three months ended March 31, 2003 and 2002, respectively, and are expectedto increase with the SSP product.  Weexpect to market SSP to mobile operators and terminal manufacturers inEurope.  Economic conditions in Europegenerally and fluctuations

 

40

----

 

in the value of the euroagainst the U.S. dollar and British pound sterling could impair our revenuesand results of operations. International operations are subject to a number ofother risks. These risks include:

 

•                  foreign government regulation;

 

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

 

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

 

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

 

•                  potentially adverse tax consequences;

 

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

 

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

 

•                  possible recessionary environments ineconomies outside the United States.

 

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

 

Our software products,like all software products, may have undetected errors or compatibilityproblems.  This is particularly truewhen a product is first introduced or a new version is released.  Despite thorough testing, our products mightbe shipped with errors. If this were to happen, our products could be rejectedby customers, or there might be costly delays in correcting the problems.  Our products are increasingly used insystems that interact directly with the general public, such as in transportationand medical systems.  In systems such asthese, the failure of our product could cause substantial property damage orpersonal injury, which would expose us to product liability claims.  Our products are used for applications inbusiness systems where the failure of our product could be linked tosubstantial economic loss.  Ouragreements with our customers typically contain provisions designed to limitour exposure to potential product liability and other claims.  It is likely, however, that these provisionsare not effective in all circumstances and in all jurisdictions.  We may not have adequate insurance againstproduct liability risks and renewal of our insurance may not be available to uson commercially reasonable terms. Further, our errors and omissions insurance may not be adequate to coverclaims.

 

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

 

41

----

 

have taken prudentmeasures to reduce the risk of interruption in our operations.  However, these measures might not besufficient.  As of the date of thisreport, we have not experienced any major interruptions in our operationsbecause of a catastrophic event.

 

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

 

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

 

**If wefail to protect our intellectual property rights, competitors could introducesimilar or superior products, and we could lose market share.**

 

We depend on ourproprietary technology. Despite our efforts to protect our proprietary rights,it may be possible for unauthorized third parties to copy our products or toreverse engineer or obtain and use information that we consider proprietary.  Our competitors could independently developtechnologies that are substantially equivalent or superior to ourtechnologies.  Policing unauthorized useof our products is difficult, and while we are unable to determine the extentto which software piracy of our products exists, software piracy can beexpected to be a persistent problem. Effective protection of intellectual property rights may be unavailableor limited in foreign countries.  Thestatus of U.S. patent protection in the software industry is not well definedand will evolve as the United States Patent and Trademark Office grantsadditional patents.  Patents have beengranted on fundamental technologies in software, and patents may issue that relateto fundamental technologies incorporated into our products.

 

**Ourproducts may infringe the intellectual property rights of third parties, whichmay result in lawsuits and prevent us from selling our products.**

 

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

 

42

----

 

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

 

Some security holdershave rights to be issued additional ADSs by Insignia if the registrationstatements covering their shares and the shares underlying their warrants aresuspended for more than 60 days in any 12 month period.  We must issue a total of 252,000 ADSs if wesuspend registration statement number 333-51234 for more than the 60 days inany 12 month period, and a total of 65,800 ADSs if we suspend registrationstatement number 333-57528 for more than the 60 days in any 12 monthperiod.  We have not suspendedregistration statements for more than 60 days in any 12 month period in thepast.  However, because registration statementnumber 333-57528 was not declared effective by the Securities and ExchangeCommission by May 14, 2001, we made available to certain investors anadditional total of 65,800 ADSs.  Threeof four investors have purchased their ADSs and one investor has yet topurchase the shares available to it. The purchase price shareholders have paid or will pay per additional ADSis the nominal value, or £0.20 per ADS, which is the lowest amount these sharescan be purchased under English law. If we issue additional ADSs under theseobligations, the ownership interest of existing shareholders will be diluted.

 

**Somesecurity holders have anti-dilution rights, which, if triggered, would dilutethe ownership interests of existing security holders.**

 

Certain investors whoparticipated in our four private placements received warrants which have anti-dilutionprotections.  This means that they areentitled to purchase an additional amount of ordinary shares, in the form ofADSs, if we issue ordinary shares at a price below market price. Theanti-dilution protections, if triggered, increase the number of shares whichthe investors may purchase with their warrants.  The exact amount of the increase is not known until theanti-dilution protections are actually triggered.  There are two ways the anti-dilution protections can betriggered: (1) if we sell our securities in a transaction, such as a privateplacement financing, for a price that is lower than the ten day average priceof our ADSs before the transaction, or (2) if the warrants issued in thoserelevant private placements are exercised at a price less than the ten dayaverage price of our ADSs at the time of exercise.  The issuance of the warrants to Fusion under the securitiessubscription agreement triggered these anti-dilution protections.  Further, when some of the warrants we issuedin the private placements are exercised, anti-dilution protections will likelybe triggered.  The amount of theanti-dilution adjustment is based on a formula where the lower the price of theour ADSs as quoted on the Nasdaq Stock Market, the greater the potential increasein the number of shares issuable to the warrants due to the anti-dilutionprotections.  Assuming that the warrantsare exercised at the lowest exercise price possible under applicable law andpursuant to the terms of their respective agreements, the maximum amount ofadditional shares issuable to these investors would be approximately185,000.  These anti-dilutionadjustments could accelerate and increase the magnitude of a decline in thequoted share price of our ADSs.  Warrantholders have the right to purchase an increasing amount of shares during adecline in the price of our ADSs. If the warrant holders exercise theirwarrants and sell their shares in the open market during this time, downwardpressure is added to the price.  Thiscan further increase the anti-dilution adjustments for the remaining warrantholders. Short sales of our shares may further the downward pressure on theprice of our ADSs. Anti-dilution adjustments and short sales may accelerate andcompound a decline in the price of our ADSs. Shareholders will also be diluted as warrant holders gain the right topurchase an increasingly large number of shares due to their anti-dilutionprotections.

 

43

----

 

 

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

 

The prices for our ADSshave fluctuated widely in the past. During the 12 months ended March 5, 2003,the closing price per share of Insignia ranged from a high of $1.58 to a recentlow of $0.20.  Under the rules of TheNasdaq Stock Market, our stock price must remain above $1.00 per share forcontinued quotation of our shares on the Nasdaq SmallCap Market. Stock pricevolatility has had a substantial effect on the market prices of securitiesissued by us and other high technology companies, often for reasons unrelatedto the operating performance of the specific companies. In the past, followingperiods of volatility in the market price of a company’s securities, securitiesclass action litigation has often been instituted against high technologycompanies.  We may in the future be thetarget of similar litigation. Regardless of the outcome, securities litigation may result insubstantial costs and divert management attention and resources.

 

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

 

Insignia is incorporatedunder the laws of England and Wales. One of our executive officers and two of our directors reside inEngland. All or a substantial portion of the assets of these persons, and asignificant portion of our assets, are located outside of the United States. Itmay not be possible for investors to serve a complaint within the United Statesupon these persons or to enforce against them or against us, in U.S. courts,judgments obtained in U.S. courts based upon the civil liability provisions ofU.S. securities laws.  There is doubtabout the enforceability outside of the United States, in original actions orin actions for enforcement of judgments of U.S. courts, of civil liabilitiesbased solely upon U.S. securities laws. The rights of holders of our shares are governed by English law,including the Companies Act 1985, and by our memorandum and articles ofassociation.  The rights of holders ofour ADSs are also affected by English law. These rights differ from the rightsof security holders in typical U.S. corporations.

 

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

 

On April 3, 1996, aclass-action lawsuit was filed against us alleging that we misrepresented ourbusiness, the strength of our sales force and our financial health.  The suit stemmed from our failure to achievethe consensus earnings estimates of research analysts in the first quarterfollowing our initial public offering in November 1995.  In August 1997, we reached a memorandum ofunderstanding to settle the suits. Although we never agreed with the allegations, we paid $8.0 million tothe plaintiffs, of which our insurance company paid $7.5 million.  In February 1997, we restated our financialresults for the quarters ended March 31 and June 30, 1996.  We revised our revenue and net incomenumbers downward for these two quarters due to inflated revenues resulting frommisstatement of inventory levels of one of our resellers by two of our salesand marketing personnel.  We agreed withthe SEC to cease and desist from engaging in similar accounting practices.  The two Insignia sales and marketing peopleinvolved in the revenue misstatement are no longer with Insignia and wereforced to pay significant fines.  We didnot have to pay any fines.

 

44

----

 

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

 

From time to time, weenter into derivative financial instruments such as currency option contractsto hedge certain anticipated, but not yet committed, transactions expected tobe denominated in foreign currencies. We do not use derivative financial instruments for trading orspeculative purposes.  Our downside riskwith respect to currency option contracts (British pound sterling) is limitedto the premium paid for the right to exercise the option.  We did not enter into any currency optionhedge contracts in the first quarter of 2003 or the first quarter of 2002 andhad no option hedge contracts outstanding as of March 31, 2003 or March 31,2002.

 

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

 

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

 

45

----

 

**PARTII****- OTHER INFORMATION**

 

 

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

### ** **

None

 

### **Item 2**. Changes in Securities and Use of Proceeds

### ** **

None

 

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

### ** **

None

 

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

### ** **

None

 

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

### ** **

None

 

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

 

(a) Exhibits

 

The following exhibitsare filed as part of this Report:

 
| **Exhibit  Number** |   | **Exhibit Title**                                                                                                                                                                                       |
|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |   |                                                                                                                                                                                                    |
| 10.78               |   | Asset Purchase  Agreement between between Insignia Solutions plc (and subsidiaries) and  esmertec A.G. dated March 4, 2003  (incorporated by reference to Exhibit 2.1 on Form 8-K filed on May 8, 2003) |
|                |   |                                                                                                                                                                                                    |
| 10.79               |   | Debenture Agreement  between Insignia Solutions plc (and subsidiaries) and esmertec A.G. dated  February 7, 2003 (incorporated by  reference to Exhibit 2.2 on Form 8-K filed on May 8, 2003)           |
|                |   |                                                                                                                                                                                                    |
| 10.80               |   | Loan Agreement between  Insignia Solutions plc (and subsidiaries) and esmertec A.G. dated February 7,  2003 (incorporated by reference to  Exhibit 2.3 on Form 8-K filed on May 8, 2003)                |
|                |   |                                                                                                                                                                                                    |
| 10.81               |   | Guaranty Supplement  Agreement between Insignia Solutions Inc. and esmertec A.G. dated February 7,  2003 (incorporated by reference to  Exhibit 2.4 on Form 8-K filed on May 8, 2003)                   |
|                |   |                                                                                                                                                                                                    |
| 10.82               |   | Security Agreement  between Insignia Solutions Inc. and esmertec A.G. dated February 7, 2003 (incorporated by reference to Exhibit 2.5  on Form 8-K filed on May 8, 2003)                               |

 

46

----

 
|                    |   |                                                                                                                                                                                        |
|-------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.83                   |   | Intellectual Property  Agreement between Insignia Solutions plc and esmertec A.G. dated March 4,  2003 (incorporated by reference to  Exhibit 2.6 on Form 8-K filed on May 8, 2003)         |
|                    |   |                                                                                                                                                                                        |
| 10.84                   |   | Master Distribution and License Agreement between Insignia  Solutions plc and smertec A.G. dated March 4, 2003 (incorporated by reference to Exhibit 2.7 on Form 8-K filed on May 8,  2003) |
|                    |   |                                                                                                                                                                                        |
| 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                    |   |                                                                                                                                                                                        |

 

47

----

 

**SIG****NATURES**

 

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

 
| INSIGNIA  SOLUTIONS PLC |
|-------------------------|
| (Registrant)            |
|                    |   |
| Date: May 15, 2003      |
|                    |
|                    | s/ LINDA C.  POTTS |   |
|                    | LINDA C. POTTS |   |
|                    | Chief Financial  Officer |   |
|                         |  |  |  |

 
| **Signature**              |   | **Capacity**              |   | **Date**     |   |
|----------------------------|--------|---------------------------|--------|--------------|--------|
|                       |   |                      |   |         |   |
|  /s/ Mark E. McMillan |   | Chief Executive  Officer  |   | May 15, 2003 |   |
|  Mark E. McMillan     |   |                      |   |         |   |
|                       |   |                      |   |         |   |
|  /s/ Linda C. Potts   |   | Chief Financial  Officer, |   | May 15, 2003 |   |
|  Linda C. Potts       |   |                      |   |         |   |

 

48

----

 

**CERTIFICATIONS UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF2002**

 

I,Mark E. McMillan, certify that:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of Insignia Solutions plc;

 

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s Board of Directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Dated: May 15, 2003 |                    |
|---------------------|-------------------------|
|                |                    |
|                |                    |
|                | /s/ Mark E. McMillan    |   |
|                | Mark E. McMillan        |
|                | Chief Executive Officer |

 

49

----

 

**CERTIFICATIONS UNDER SECTION 302 OF THE SARBANES-OXLEY ACT OF2002**

 

I, Linda C. Potts,certify that:

 

1.               Ihave reviewed this quarterly report on Form 10-Q of Insignia Solutions plc;

 

2.               Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.               Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.               Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)             evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c)              presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.               Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s Board of Directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave significant role in the registrant’s internal controls; and

 

6.               Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Dated: May 15, 2003 |                    |
|---------------------|-------------------------|
|                |                    |
|                |                    |
|                | /s/ Linda C. Potts      |   |
|                | Linda C. Potts          |
|                | Chief Financial Officer |

 

50

----