** **

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                        | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                              |                                                                                          |
| **For the quarterly period ended June  30, 2003** |
|                                              |
| **or,**                                           |
|                                              |                                                                                          |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom                  to                  **

 

**Commission file number 0-27012**

 

**Insignia Solutions plc**

 (Exact name of Registrant as specified in itscharter)

** **

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

 

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

 

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

 

As of August 8, 2003,there were 20,088,709 Ordinary shares of £0.20 each nominal value, outstanding.

 

 

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**INSIGNIA SOLUTIONS PLC**

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

 

2

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**PARTI - FINANCIAL INFORMATION**

**Item1.  Financial Statements**

**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(amounts in thousands, unaudited)**

** **
|                                                                            |   | **June 30,  2003** |   | **December  31,  2002** |   |
|---------------------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|
| **ASSETS**                                                                      |   |               |   |                    |   |
| Current assets:                                                                 |   |               |   |                    |   |
| Cash and cash  equivalents                                                      |   | $                  | 424    |                    | $      | 726 |   |
| Restricted cash                                                                 |   | 20                 |   | 250                     |   |
| Accounts  receivable, net of allowances of $12 and $50, respectively            |   | 134                |   | 931                     |   |
| Other receivable                                                                |   | 2,700              |   | —                  |   |
| Tax receivable                                                                  |   | 180                |   | 702                     |   |
| Prepaid  royalties                                                              |   | 901                |   | 1,000                   |   |
| Prepaid expenses                                                                |   | 487                |   | 695                     |   |
| Other current  assets                                                           |   | 227                |   | 438                     |   |
| Total current  assets                                                           |   | 5,073              |   | 4,742                   |   |
| Property and  equipment, net                                                    |   | 141                |   | 230                     |   |
| Prepaid  royalties                                                              |   | 1,381              |   | 1,381                   |   |
| Other noncurrent  assets                                                        |   | —             |   | 100                     |   |
|                                                                            |   | $                  | 6,595  |                    | $      | 6,453 |   |
| **LIABILITIES,  MANDATORILY REDEEMABLE WARRANTS AND SHAREHOLDERS’ EQUITY** |   |               |   |                    |   |
| Current  liabilities:                                                           |   |               |   |                    |   |
| Accounts payable                                                                |   | $                  | 788    |                    | $      | 665 |   |
| Accrued  liabilities                                                            |   | 730                |   | 950                     |   |
| Accrued  severance                                                              |   | 215                |   | —                  |   |
| Note payable                                                                    |   | 1,000              |   | —                  |   |
| Deferred revenue                                                                |   | 487                |   | 534                     |   |
| Income taxes  payable                                                           |   | 187                |   | 191                     |   |
| Total current  liabilities                                                      |   | 3,407              |   | 2,340                   |   |
|                                                                            |   |               |   |                    |   |
| Commitments and  contingencies (Note 6)                                         |   |               |   |                    |   |
|                                                                            |   |               |   |                    |   |
| Mandatorily  redeemable warrants                                                |   | 590                |   | 1,440                   |   |
|                                                                            |   |               |   |                    |   |
| Shareholders’  equity:                                                     |   |               |   |                    |   |
| Ordinary shares                                                                 |   | 6,445              |   | 6,444                   |   |
| Additional  paid-in capital                                                     |   | 60,751             |   | 59,901                  |   |
| Accumulated  deficit                                                            |   | (64,137            | )      | (63,211                 | )      |
| Other  accumulated comprehensive loss                                           |   | (461               | )      | (461                    | )      |
| Total  shareholders’ equity                                                |   | 2,598              |   | 2,673                   |   |
|                                                                            |   | $                  | 6,595  |                    | $      | 6,453 |   |

 

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

 

3

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**INSIGNIASOLUTIONS PLC**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
|                                            |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                            |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Net revenues:                                   |   |                              |   |                            |   |   |   |   |   |
| License                                         |   | $                                 | — |                            | $      | 1,547 |   | $ | 192 |   | $ | 4,535 |   |
| Service                                         |   | —                            |   | 345                             |   | 187 |   | 901 |   |
| Total net  revenues                             |   | —                            |   | 1,892                           |   | 379 |   | 5,436 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Cost of net  revenues:                          |   |                              |   |                            |   |   |   |   |   |
| License                                         |   | 36                                |   | 714                             |   | 151 |   | 1,728 |   |
| Service                                         |   | —                            |   | 252                             |   | 52 |   | 449 |   |
| Total cost of  net revenues                     |   | 36                                |   | 966                             |   | 203 |   | 2,177 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Gross margin                                    |   | (36                               | )      | 926                             |   | 176 |   | 3,259 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Operating  expenses:                            |   |                              |   |                            |   |   |   |   |   |
| Sales and  marketing                            |   | 261                               |   | 1,492                           |   | 906 |   | 3,213 |   |
| Research and  development                       |   | 719                               |   | 1,385                           |   | 2,025 |   | 2,581 |   |
| General and  administrative                     |   | 386                               |   | 967                             |   | 1,530 |   | 1,905 |   |
| Restructuring                                   |   | 173                               |   | —                          |   | 499 |   | — |   |
| Total operating  expenses                       |   | 1,539                             |   | 3,844                           |   | 4,960 |   | 7,699 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Operating loss                                  |   | (1,575                            | )      | (2,918                          | )      | (4,784 | ) | (4,440 | ) |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Interest income  (expense), net                 |   | (12                               | )      | 27                              |   | (13 | ) | 48 |   |
| Other income,  net                              |   | 3,529                             |   | 133                             |   | 3,542 |   | 101 |   |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Income (loss)  before income taxes              |   | 1,942                             |   | (2,758                          | )      | (1,255 | ) | (4,291 | ) |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Benefit from  income taxes                      |   | (331                              | )      | (1,271                          | )      | (329 | ) | (1,832 | ) |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss)                              |   | $                                 | 2,273  |                            | $      | (1,487 | ) | $ | (926 | ) | $ | (2,459 | ) |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss) per share:                   |   |                              |   |                            |   |   |   |   |   |
| Basic                                           |   | $                                 | 0.11   |                            | $      | (0.07 | ) | $ | (0.05 | ) | $ | (0.12 | ) |
| Diluted                                         |   | $                                 | 0.11   |                            | $      | (0.07 | ) | $ | (0.05 | ) | $ | (0.12 | ) |
|                                            |   |                              |   |                            |   |   |   |   |   |
| Weighted average  shares and share equivalents: |   |                              |   |                            |   |   |   |   |   |
| Basic                                           |   | 20,089                            |   | 20,020                          |   | 20,089 |   | 19,798 |   |
| Diluted                                         |   | 20,347                            |   | 20,020                          |   | 20,089 |   | 19,798 |   |

 

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

 

4

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**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands, unaudited)**

 
|                                                                         |   | **Six months  ended  June 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                         |   | **2003**                        |       | **2002** |   |
| Cash flows from  operating activities:                                       |   |                            |       |   |   |
| Net loss                                                                     |   | $                               | (926       | ) | $ | (2,459 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                            | ** ** |   | ** ** |
| Depreciation                                                                 |   | 81                              |       | 131 |   |
| Allowance for  doubtful accounts                                             |   | (38                             | )          | (18 | ) |
| Gain on sale of  product line                                                |   | (3,500                          | )          | 5 |   |
| Net changes in  assets and liabilities:                                      |   |                            |       |   |   |
| Accounts  receivable                                                         |   | 835                             |       | 4,955 |   |
| Tax receivable                                                               |   | 522                             |       | (382 | ) |
| Prepaid  royalties                                                           |   | 99                              |       | (1,437 | ) |
| Prepaid expenses                                                             |   | 86                              |       | 99 |   |
| Other current  assets                                                        |   | 211                             |       | (14 | ) |
| Other noncurrent  assets                                                     |   | 100                             |       | — |   |
| Accounts payable                                                             |   | 134                             |       | (337 | ) |
| Accrued  liabilities                                                         |   | (158                            | )          | 75 |   |
| Accrued  royalties                                                           |   | —                          |       | 600 |   |
| Accrued  severance                                                           |   | 215                             |       | — |   |
| Deferred revenue                                                             |   | 112                             |       | (3,533 | ) |
| Income taxes  payable                                                        |   | (4                              | )          | (2 | ) |
| Net cash used in  operating activities                                       |   | (2,231                          | )          | (2,317 | ) |
| Cash flows from  investing activities:                                       |   |                            |       |   |   |
| Proceeds from  sale of property and equipment                                |   | —                          |       | (44 | ) |
| Purchases of  property and equipment                                         |   | (15                             | )          | — |   |
| Proceeds from  sale of product line, net                                     |   | 713                             |       | — |   |
| Proceeds from  release of restricted cash                                    |   | 230                             |       | — |   |
| Net cash  provided (used) in investing activities                            |   | 928                             |       | (44 | ) |
| Cash flows from  financing activities:                                       |   |                            |       |   |   |
| Proceeds from  issuance of shares, net                                       |   | —                          |       | (1 | ) |
| Proceeds from  exercise of warrants                                          |   | —                          |       | 481 |   |
| Proceeds from  note payable                                                  |   | 1,000                           |       | — |   |
| Proceeds from  exercise of stock options                                     |   | 1                               |       | 128 |   |
| Net cash  provided by financing activities                                   |   | 1,001                           |       | 608 |   |
| Net decrease in  cash and cash equivalents                                   |   | (302                            | )          | (1,753 | ) |
| Cash and cash  equivalents at beginning of the period                        |   | 726                             |       | 8,643 |   |
| Cash and cash  equivalents at end of the period                              |   | $                               | 424        |   | $ | 6,890 |   |

 

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

 

5

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**INSIGNIA SOLUTIONS PLC**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED**

**FINANCIAL STATEMENTS**

 

**Note1.  Basis of presentation**

 

The accompanying unaudited condensed consolidated financial statementsof Insignia Solutions plc (“Insignia”, “us” or “we”) have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and pursuant to the instructionsto Form 10-Q and Article 10 of Regulation S-X. The unaudited interim financial statements have been prepared on thesame basis as the annual financial statements and, in the opinion ofmanagement, reflect all adjustments, consisting of normal recurringadjustments, considered necessary for a fair presentation.  Interim results are not necessarily indicativeof results for a full year.  Thesefinancial statements and notes should be read in conjunction with Insignia’saudited financial statements for the year ended December 31, 2002 and footnotesthereto, included in the Insignia’s Annual Report on Form 10-K.

 

During the past 24months, we have incurred an aggregate loss from operations and negativeoperating cash flows of $20,292,000 and $14,135,000, respectively.  We have undertaken measures to reduceoperating expenses and redesign our commercial efforts to adapt to newdevelopments. As part of these new developments, our current plans may requireobtaining additional financing within the next 12 months.  If such financing is not obtained, or if weexperience a significant shortfall in expected revenue, we will need to furtherreduce the level of expenses in order to meet our working capital requirementsduring the next 12 months.

 

Assuming the receipt 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 higher interest rates, inability to borrow withoutcollateral, 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.  As of June 30,2003, we regained compliance with the minimum shareholders equity requirement,but remained out of compliance with the minimum stock price. Thesecircumstances raise substantial doubt about Insignia’s ability to continue as agoing concern.  The accompanyingfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

 

6

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

 

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

 

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

 
|                                                         |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|--------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                         |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
| Numerator –  basic and diluted:                         |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss)                                           |   | $                                 | 2,273  |                            | $      | (1,487 | ) | $ | (926 | ) | $ | (2,459 | ) |
|                                                         |   |                              |   |                            |   |   |   |   |   |
| Denominator  calculation of basic income (loss) per share:   |   |                              |   |                            |   |   |   |   |   |
| Weighted average  number of ordinary shares outstanding      |   | 20,089                            |   | 20,020                          |   | 20,089 |   | 19,798 |   |
|                                                         |   |                              |   |                            |   |   |   |   |   |
| Basic income  (loss) per share                               |   | $                                 | 0.11   |                            | $      | (0.07 | ) | $ | (0.05 | ) | $ | (0.12 | ) |
|                                                         |   |                              |   |                            |   |   |   |   |   |
| Denominator  calculation of diluted income (loss) per share: |   |                              |   |                            |   |   |   |   |   |
| Weighted average  number of ordinary shares outstanding      |   | 20,089                            |   | 20,020                          |   | 20,089 |   | 19,798 |   |
| Dilutive common  equivalent shares                           |   | 258                               |   | —                          |   | — |   | — |   |
| Weighted average  number of ordinary shares outstanding      |   | 20,347                            |   | 20,020                          |   | 20,089 |   | 19,798 |   |
|                                                         |   |                              |   |                            |   |   |   |   |   |
| Diluted income  (loss) per share                             |   | $                                 | 0.11   |                            | $      | (0.07 | ) | $ | (0.05 | ) | $ | (0.12 | ) |

 

The following number ofoptions and warrants have not been included in the calculation of diluted netincome (loss) per share because their inclusion would have been anti-dilutive:

 
|     |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|----------|--------|-----------------------------------|--------|---------------------------------|--------|
|     |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|     |   |                              |   |                            |   |   |   |   |   |
| Options  |   | 2,938,032                         |   | 3,856,935                       |   | 4,570,532 |   | 3,856,935 |   |
| Warrants |   | 603,834                           |   | 2,191,334                       |   | 4,191,334 |   | 2,191,334 |   |

 

7

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**Note 3.  Stock basedcompensation**

 

Insignia accounts forstock based employee compensation using the intrinsic value method underAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees” (“APB 25”), and related interpretations and complies with thedisclosure provisions of  Statement of FinancialAccounting Standards No. 148, “Accounting for Stock Based Compensation,Transition and Disclosure – an Amendment of FASB Statement No.123”.  The following table illustrates the effecton net income (loss) and net income (loss) per share if we had applied the fairvalue recognition provisions of Statement of Financial Accounting StandardsNo.123, “Accounting for Stock Based Compensation” to stock based compensation.

 
|                                                                            |   | **Three  months ended June 30,** |   | **Six months  ended June 30,** |   |
|---------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                            |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                                                            |   |                             |   |                           |   |   |   |   |   |
| Net income  (loss)-as  reported                                            |   | $                                | 2,273  |                           | (1,487 | ) | $ | (926 | ) | $ | (2,459 | ) |
| Less stock based  compensation expense determined under fair value based method |   | (261                             | )      | (617                           | )      | (525 | ) | (1,234 | ) |
| Net income  (loss)-pro forma                                                    |   | 2,012                            |   | (2,104                         | )      | (1,451 | ) | (3,693 | ) |
| Basic and  diluted net income (loss) per share-as reported                      |   | 0.11                             |   | (0.07                          | )      | (0.05 | ) | (0.12 | ) |
| Basic and  diluted net income (loss) per share-proforma                         |   | 0.10                             |   | (0.11                          | )      | (0.07 | ) | (0.19 | ) |
|                                                                                 |        |                                  |        |                                |        |  |  |  |  |  |  |  |

 

In accordance with thedisclosure provisions of SFAS 123, the fair value of employee stock optionsgranted the three and six months ended June 30, 2003 and 2002 was estimated atthe date of grant using the Black-Scholes model and the following weightedaverage assumptions:

 
|                              |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|-----------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                              |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| **Stock  Options:**               |   |                            |   |                          |   |   |   |   |   |
| Volatility range                  |   | 142% - 244                      | %      | 50% - 56                      | %      | 142% - 244 | % | 50% - 68 | % |
| Risk-free  interest rate range    |   | 1.25% - 2.79                    | %      | 2.35% - 4.40                  | %      | 1.00% - 3.06 | % | 1.81% - 4.4 | % |
| Dividend yield                    |   | 0                               | %      | 0                             | %      | 0 | % | 0 | % |
| Expected life  (years)            |   | 4                               |   | 4                             |   | 4 |   | 4 |   |
|                              |   |                            |   |                          |   |   |   |   |   |
| **Employee Stock Purchase Plan:** |   |                            |   |                          |   |   |   |   |   |
| Volatility range                  |   | N/A                             |   | 71                            | %      | 59 | % | 71 | % |
| Risk-free  interest rate range    |   | N/A                             |   | 1.71                          | %      | 1.17 | % | 1.71 | % |
| Dividend yield                    |   | 0                               | %      | 0                             | %      | 0 | % | 0 | % |
| Expected life  (years)            |   | .5                              |   | .5                            |   | .5 |   | .5 |   |

 

Total comprehensive losswas not different from the net loss reported for the three months and sixmonths ended June 30, 2003.

 

**Note4.  New accounting pronouncements**

 

In January 2003, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation ofVariable Interest Entities, an Interpretation of ARB No. 51”.  FIN 46 requires certain variable interestentities to be consolidated by the primary beneficiary of

 

8

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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.

 

**Note5.  Esmertec Agreements**

 

On February 7, 2003, we entered into a loan agreement with esmertecwhereby esmertec loaned Insignia $1 million. The loan was made in twoinstallments 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 June 30, 2003 was $14,066. The principal andany outstanding accrued interest is due on or before February 3, 2004.  At June 30, 2003, the principal amountoutstanding on this loan was $1 million.

 

On March 4, 2003, we entered into several other agreements (the“Agreements”) with esmertec including a definitive agreement to sell certainassets relating to our Java Virtual Machine (“JVM”) product line in exchangefor $3.5 million payable in installments. Payments under the agreement would be $800,000 on April 18, 2003,$800,000 on July 23, 2003, $800,000 on October 15, 2003, $800,000 on January15, 2004 and $300,000 on April 15, 2004. As of June 30, 2003, esmertec has paid $800,000 under thisagreement.  The assets primarilyincluded the fixed assets, customer agreements and employees related to the JVMproduct line. 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 |   |

 

9

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As of June 30, 2003, payments under this agreement have been paid in atimely manner.

 

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

 

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

 

The Jeode platform had been our principal product line since the thirdquarter of 1999.  With the completion ofthe sale of our JVM product line to esmertec in April 2003, Insignia’s soleproduct line will consist of its SSP products for the mobile phone and wirelessoperator industry.  The SSP product iscurrently in lab and market trials and is expected to be available for shipmentto customers in the second half of 2003.

 

**Note6.  Commitments and Contingencies**

 

In June 2001, Insignia and Sun Microsystems, Inc. (“Sun”) entered intoan addendum (the “Addendum”) to the Distribution Agreement relating todistribution of products to an Insignia customer.  In addition, in September 2001, the two companies entered intoAmendment No. 3 (the “Amendment”) to the Technology License and DistributionAgreement (the “Distribution Agreement”) between the two companies.  The Amendment and the Addendum each requireInsignia to make non-refundable royalty prepayments to Sun.  A total of $7.0 million of prepaid royaltieswere paid to Sun under these agreements through the third quarter of 2002.  There are no additional royalty prepaymentsdue to Sun under this agreement.  Theamended Distribution Agreement expires June 30, 2004.  Any unused royalty prepayments outstanding on June 30, 2004 areforfeited.  The prepaid royalty balanceas of June 30, 2003 was $2.3 million.

 

**Guarantee Agreements**

 

In November 2002, the FASB issued FASB InterpretationNo. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Guarantees of Indebtedness of Others.” FIN 45 requiresthat upon issuance of certain guarantees, a guarantor must recognize

 

10

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a liability for the fair value of an obligationassumed under the guarantee.  FIN 45also requires significant new disclosures, in both interim and annual financialstatements by a 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 the agreement.  The maximum amount of potential futureindemnification is unlimited, however, we normally retain the right to limitthe 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 disclaimed for sourcecode licenses.  There is no warrantyaccrual recorded because potential future payments either are not probable orwe have yet to incur the expense.

 

**Note7.  Segment information**

 

Insignia operates in asingle industry segment providing software technologies that enable mobileoperators and phone manufacturers to update the firmware of mobile devicesusing standard over-the-air data networks. There were no revenues in the secondquarter of 2003. In the second quarter of 2002, Phoenix Technologies, Ltd.(“Phoenix”) and Wind River Systems, Inc. accounted for 65% and 12% of totalrevenues, respectively. For the six months ended June 30, 2003, Hewlett-PackardCompany accounted for 35% of total revenues. For the six months ended June 30, 2002, Phoenix accounted for 74% oftotal revenues.  No other customeraccounted for 10% or more of Insignia’s total revenues during the secondquarter of 2003 and 2002. There were no foreign countries that accounted formore than 10% of total revenue.

 

11

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**Note8.  Equity transactions and warrants**

 

During the quarter ended June 30, 2003, $850,000, which represented therelative fair value of the warrants issuable in connection with our 1999private placement, was reclassified to additonal paid in capital.  The reclassification was a result of theexpiration of our obligation to issue these warrants.

 

**Note9.  Restructuring**

 

In the quarter ended March 31, 2003, werestructured the organization resulting in a restructuring charge of $326,000for employee termination benefits. Restructuring charges paid in the first quarter were $117,000 with theremaining amount to be paid in the second and third quarters of 2003.  In the quarter ended June 30, 2003, weincurred an additional restructuring charge of $173,000 for employeetermination benefits and paid a total of $167,000.  The remaining amount of the restructuring, $215,000, will be paidby the end of fiscal year 2003.

 

12

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

 

The following discussion and analysis should be read in conjunctionwith the unaudited condensed consolidated financial statements and notesthereto included in Part I - Item 1 of this Form 10-Q and the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” setforth in Insignia’s Form 10-K for the year ended December 31, 2002 (the “Form10-K”).

 

**Futureoperating results**

 

This Form 10-Q contains forward-looking statements.  These forward-looking statements concernmatters which include, but are not limited to, the revenue model and market forthe Secure System Provisioning (“SSP”) product line, the features, benefits andadvantages of the SSP platforms, international operations and sales, grossmargins, spending levels, the availability of licenses to third-partyproprietary rights, business and sales strategies, matters relating toproprietary rights, competition, exchange rate fluctuations and Insignia’sliquidity and capital needs.  These andother statements regarding matters that are not historical are forward-lookingstatements.  These matters involve risksand uncertainties that could cause actual results to differ materially fromthose in the forward-looking statements. In addition to the factors discussed above, among other factors thatcould cause actual results to differ materially are the following: the demandfor the SSP platform; the performance and functionality of SSP technology;Insignia’s ability to deliver products on time, and market acceptance of newproducts or upgrades of existing products; the timing of, or delay in, largecustomer orders; continued availability of technology and intellectual propertylicense rights; product life cycles; quality control of products sold;competitive conditions in the industry; economic conditions generally or invarious geographic areas; and the risks listed from time to time in the reportsthat Insignia files with the U.S. Securities and Exchange Commission.  Factors that could cause or contribute to suchdifferences in results and outcomes include without limitation those discussedbelow as well as those discussed elsewhere in this Report.  Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’s analysisonly as of the date hereof.  Insigniaassumes no obligation to update these forward-looking statements to reflectactual results or changes in factors or assumptions affecting suchforward-looking statements.

 

Insignia continues to face significant risks associated with thesuccessful execution of its business strategy. These significant risks include, but are not limited to continuedtechnology and product development, introduction and market acceptance of newproducts, changes in the marketplace, liquidity, competition from existing andnew competitors that may enter the marketplace, impairment of prepaid royaltiesand retention of key personnel.

 

In addition, Insignia also faces significant risks associated with thedevelopment and future deployment of its SSP products and the successfulexecution of the related business strategy. During 2001, Insignia begandevelopment of a range of SSP products for the mobile handset and wirelesscarrier industry.  These SSP productsbuild on Insignia’s position as a Virtual Machine (“VM”) supplier formanufacturers of mobile devices and are designed to allow wireless carriers

 

13

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to execute over the air repair services and build valuable incrementalservices.  With the sale of the Jeodeproduct line to esmertec, Insignia’s sole product line consists of the SSPproducts. The SSP product is currently in lab and market trials and is expectedto be available for shipment to customers in the second half of 2003.  Insignia has limited history with salesinitiatives for new products. Additionally, the sales cycle for the SSPproducts is expected to take longer than the six to nine months sales cycletypically experienced with the Jeode product.

 

Insignia has experienced operatinglosses in each quarter since the second quarter of 1996.  To achieve profitability, Insignia will haveto increase its revenue.  With the saleof the Jeode product line, Insignia’s ability to increase revenues depends uponthe success of its SSP product line. SSP is not expected to be available until the second half of 2003, andit may not achieve widespread market acceptance.  If Insignia is unable to generate revenues from SSP in the formof development 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’s accumulated deficit, its losses and its ongoingneed for capital in order to continue its operations raises substantial doubtas to Insignia’s ability to continue operations during 2003.  Failure to reduce expenses and/or obtainadditional financing will result in a material adverse effect on its ability tomeet its business objectives and continue as a going concern.  The report of the Company’s independentaccountants included in Insignia’s Annual Report on Form 10-K filed on April15, 2003 includes an explanatory paragraph as to the uncertainty that theCompany will continue as a going concern.

 

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The following table setsforth the unaudited condensed consolidated results of operations as apercentage of total revenues for the three and six month periods ended June 30,2003 and 2002.

 
|                            |   | **Three months  ended  June 30,** |   | **Six months  ended  June 30,** |   |
|---------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                            |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                            |   |                              |   |                            |   |   |   |   |   |
| Net revenues:                   |   |                              |   |                            |   |   |   |   |   |
| License                         |   | —                            |   | 81.8                            | %      | 50.7 | % | 83.4 | % |
| Service                         |   | —                            |   | 18.2                            | %      | 49.3 | % | 16.6 | % |
|                            |   |                              |   |                            |   |   |   |   |   |
| Total net  revenues             |   | —                            |   | 100.0                           | %      | 100.0 | % | 100.0 | % |
|                            |   |                              |   |                            |   |   |   |   |   |
| Cost of net  revenues:          |   |                              |   |                            |   |   |   |   |   |
| License                         |   | —                            |   | 37.8                            | %      | 39.9 | % | 31.8 | % |
| Service                         |   | —                            |   | 13.3                            | %      | 13.7 | % | 8.3 | % |
|                            |   |                              |   |                            |   |   |   |   |   |
| Total cost of  net revenues     |   | —                            |   | 51.1                            | %      | 53.6 | % | 40.1 | % |
|                            |   |                              |   |                            |   |   |   |   |   |
| Gross margin                    |   | —                            |   | 48.9                            | %      | 46.4 | % | 59.9 | % |
|                            |   |                              |   |                            |   |   |   |   |   |
| Operating  expenses:            |   |                              |   |                            |   |   |   |   |   |
| Sales and  marketing            |   | —                            |   | 78.8                            | %      | 239.0 | % | 59.1 | % |
| Research and  development       |   | —                            |   | 73.2                            | %      | 534.3 | % | 47.5 | % |
| General and  administrative     |   | —                            |   | 51.1                            | %      | 403.7 | % | 35.0 | % |
| Restructuring                   |   | —                            |   | —                          |   | 131.7 | % | — |   |
|                            |   |                              |   |                            |   |   |   |   |   |
| Total operating  expenses       |   | —                            |   | 203.1                           | %      | 1,308.7 | % | 141.6 | % |
|                            |   |                              |   |                            |   |   |   |   |   |
| Operating loss                  |   | —                            |   | (154.2                          | )%     | (1,262.3 | )% | (81.7 | )% |
|                            |   |                              |   |                            |   |   |   |   |   |
| Interest income  (expense), net |   | —                            |   | 1.4                             | %      | (3.4 | )% | 0.9 | % |
| Other income,  net              |   | —                            |   | 7.0                             | %      | 934.6 | % | 1.9 | % |
|                            |   |                              |   |                            |   |   |   |   |   |
| Loss before income  taxes       |   | —                            |   | (145.8                          | )%     | (331.1 | )% | (78.9 | )% |
|                            |   |                              |   |                            |   |   |   |   |   |
| Benefit from  income taxes      |   | —                            |   | (67.2                           | )%     | (86.8 | )% | (33.7 | )% |
|                            |   |                              |   |                            |   |   |   |   |   |
| Net loss                        |   | —                            |   | (78.6                           | )%     | (244.3 | )% | (45.2 | )% |

 

**Overview**

 

We commenced operations in 1986, and currently develop, market and supportsoftware technologies that enable mobile operators and phone manufacturers toupdate the firmware of mobile devices using standard over-the-air datanetworks.  Before 2003, our principalproduct line was the JeodeÔplatform, based on our Embedded Virtual Machine (“EVM”TM) technology.  The Jeode platform was our implementation ofSun Microsystems, Inc.’s (“Sun”) Java® technology tailored for smartdevices.  The product became availablefor sale in March 1999 and

 

15

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had been our principal product line since the third quarter of1999.  The Jeode product line was soldin April 2003.

 

During 2001, we began development of a range of products (“SecureSystem Provisioning” or “SSP” products) for the mobile phone and wirelessoperator industry.  These SSP productsbuild on our position as a Virtual Machine (“VM”) supplier for manufacturers ofmobile devices and allow wireless operators and phone manufacturers to reducecustomer care and software recall costs as well as increase subscriber revenueby deploying new mobile services based dynamically provisionalcapabilities.  With the sale of our JVMproduct line in April 2003, our sole product line consists of our SSP product.  The SSP product is currently in lab andmarket trials and is expected to be available for shipment to customers in thesecond half of 2003. We have limited history with sales initiatives for newproducts.  Additionally, the sales cyclefor the SSP products is expected to take longer than the typical six to ninemonths to complete as seen with previous Insignia products.

 

Our operations outside of the United States are primarily in the UnitedKingdom, where the majority of our research and development operations and ourEuropean sales activities are located. We distributed our Jeode platform through OEM’s.  Our revenues from customers outside theUnited States are derived primarily from Europe and Asia and are generallyaffected by the same factors as our revenues from customers in the UnitedStates.  The operating expenses of ouroperations outside the United States are mostly incurred in Europe and relateto our research and development and European sales activities.  Such expenses consist primarily of ongoingfixed costs and consequently do not fluctuate in direct proportion torevenues.  Our revenues and expensesoutside 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 amajority of revenues and operating expenses denominated in U.S. dollars.  Pound sterling exchange rate fluctuationsagainst the dollar can cause U.K. expenses, which are translated into dollarsfor financial statement reporting purposes, to vary from period-to-period.

 

###### **Sale of Java VirtualMachine assets**

 

On February 7, 2003, we entered into a $1 million loan agreement withesmertec AG (“esmertec”).  The loan wasmade in two installments of $500,000 each on February 13, 2003 and February 26,2003.  The rate of interest on each loanis at prime plus two percent.  Accruedinterest is due on the last day of each month. The accrued interest as of June 30, 2003, was $14,066.  The principal and any outstanding accruedinterest is due on or before February 3, 2004. At June 30, 2003, the principal amount outstanding on this loan was $1million.

 

On March 5, 2003, we entered into several other agreements (the“Agreements”) with esmertec including a definitive agreement to sell certainassets relating to our Java Virtual Machine (“JVM”) product line in exchangefor $3.5 million payable in installments. Payments under the agreement would be $800,000 on April 18, 2003,$800,000 on July 23, 2003, $800,000 on

 

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October 15, 2003, $800,000 on January 15, 2004 and $300,000 on April15, 2004.  As of June 30, 2003, esmertechas paid $800,000 under this agreement. The assets primarily included the fixedassets, customer agreements and employees related to the JVM product line. Thetransaction closed on April 23, 2003. Under the terms of the Agreements, esmertec became the exclusive masterdistributor of the JVM technology in exchange for $3.4 million in minimumguaranteed royalties through June 30, 2004 at which time, the JVM technologyrights will transfer to esmertec. Minimum payments under the license are as follows:

 

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

 

As of June 30, 2003, payments due under this agreement have been paidin a timely manner.

 

In addition, we can earn up to an additional $4.0 million over the nextthree years based on a percentage of esmertec’s future sales of the JVMproduct.  Additionally, the parties haveentered into a cooperative agreement to promote Insignia’s SSP software productto esmertec’s mobile platform customers. The Agreements provide for esmertec to manage the existing Insignia JVMcustomer relationships and license the Insignia and esmertec technologies tosell them to the then combined customer base and business partners.  Under the Agreements, esmertec will assumethe entire JVM product line through a final asset purchase in June 2004.

 

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

 

17

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**Revenues**

 
|               |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|--------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|               |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|               |   | **(in thousands)**                |   |
| License revenue    |   | $                                 | — |                            | $      | 1,547 |   | $ | 192 |   | $ | 4,535 |   |
| Service revenue    |   | —                            |   | 345                             |   | 187 |   | 901 |   |
| Total net  revenue |   | $                                 | — |                            | $      | 1,892 |   | $ | 379 |   | $ | 5,436 |   |

 

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

 

There was no revenue in the second quarter of 2003 due to the sale ofthe Jeode product line and the transition to the SSP product. In the six monthsended June 30, 2003, total revenues decreased by 93% compared to total revenuesfor the first six months of 2002. The decrease was primarily due to thedecreased license revenues and sale of the Jeode product line.  The Jeode platform accounted for 95% oftotal revenue for the six months ended June 30, 2003. The Jeode platformaccounted for 100% of the total revenue for the three and six months ended June30, 2002.  Future revenue from Jeodewill be earned as a percentage of the revenue share program from the sale ofthe JVM product line.  Jeode revenue hasdecreased from prior quarters.  Weexpect to generate revenue from the SSP product in the second half of 2003.

 

There was no license revenue or service revenue for the three monthsended June 30, 2003.  For the six monthsended June 30, 2003, license revenue and service revenue accounted for 51% and49%, respectively, of total revenues. License revenue and service revenue accounted for 82% and 18%, respectively,of total revenues for the three months ended June 30, 2002.  For the six months ended June 30, 2002,license revenue and service revenue accounted for 83% and 17%, respectively, oftotal revenues.

 

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

 
|                  |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|-----------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                  |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                  |   |                              |   |                            |   |   |   |   |   |
| Distributors:         |   |                              |   |                            |   |   |   |   |   |
| Hewlett-Packard       |   | —                            | %      |                            | *      | 34 | % |   | * |
| Phoenix  Technologies |   | —                            |   | 65                              | %      |   | * | 74 | % |
|                  |   |                              |   |                            |   |   |   |   |   |
| All  Distributors:    |   | —                            | %      | 79                              | %      | 35 | % | 81 | % |
|                  |   |                              |   |                            |   |   |   |   |   |
| OEM’s:           |   |                              |   |                            |   |   |   |   |   |
| All OEM’s:       |   | —                            | %      | 21                              | %      | 61 | % | 18 | % |

 

----

* Less than 10%

 

18

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Sales to customers outside the United States, derived mainly fromcustomers in Europe and Asia, represented approximately 0% and 10% of totalrevenues in the three and six months ended June 30, 2003, respectively, and 4%of total revenues in the three and six months ended June 30, 2002. We marketedJeode to customers in the United States, Europe and Japan.

 

**Cost ofrevenues and gross margin**

 
|                           |   | **Three  months ended  June 30,**      |       | **Six months  ended  June 30,** |   |
|--------------------------------|--------|----------------------------------------|------------|---------------------------------|--------|
|                           |   | **2003**                               |       | **2002**                        |   | **2003** |   | **2002** |   |
|                           |   | **(in thousands, except percentages)** | ** ** |
| Cost of license  revenue       |   | $                                      | 36         |                            | $      | 714 |   | $ | 151 |   | $ | 1,728 |   |
| Gross margin:  license revenue |   | —                                 |       | 54                              | %      | 21 | % | 62 | % |
|                           |   |                                   |       |                            |   |   |   |   |   |
| Cost of service  revenue       |   | —                                 |       | 252                             |   | 52 |   | 449 |   |
| Gross margin:  service revenue |   | —                                 |       | 27                              | %      | 72 | % | 50 | % |
|                           |   |                                   |       |                            |   |   |   |   |   |
| Total cost of  revenues        |   | $                                      | 36         |                            | $      | 966 |   | $ | 203 |   | $ | 2,177 |   |
| Gross margins:  total revenues |   | —                                 |       | 49                              | %      | 46 | % | 60 | % |

 

Cost of license revenue is mainly comprised of royalties to thirdparties.  Cost of service revenueincludes costs associated with nonrecurring engineering activities and end-usersupport under maintenance contracts.

 

We believe that the significant factors affecting the Jeode platformgross margin include pricing of the development license, pricing of the unitusage and royalties to third parties such as Sun Microsystems, Inc.(“Sun”).  In early 1999, we signed afive-year agreement with Sun under which Sun established us as an authorizedVirtual Machine provider.  Under thisagreement, we are required to pay Sun a per unit royalty on each Jeodeplatform-enabled smart device shipped by our customers, plus a royalty on alldevelopment licenses put in place between our customers and us.  In the third quarter of 2001, we amended ourlicense agreement with Sun.  Theamendment expanded the scope of the licensed technology, changed the royaltyrate, limited the royalty obligations to only per units licensed, establishedrequired prepaid royalties and extended the expiration date of the contractfrom March 2004 to June 2004.  Licenserevenue gross margins in the quarter ended June 30, 2003 were 0%, as there wasno revenue in the same quarter, compared to 54% for the same period in2002.  For the six months ended June 30,2003, license revenue gross margins were 22% compared to 62% for the sameperiod in 2002.  The cost of revenue recordedin the quarter ended June 30, 2003 was due to an unexpected write off of aroyalty due from Sun Microsystems.  Thedecrease in license revenue gross margins reflected the impact of transferringthe March through June 2003 JVM revenue while the cost per unit did not changeand resulted in lower gross margins.

 

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Gross margin for servicerevenue is impacted by the level of and pricing terms of customer fundedengineering 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 decreasedin the second quarter of 2003 to 0% from 27% in the same period of 2002.  The decrease is due to the transfer of thecontracts in the sale of the JVM product line. For the six months ended June 30, 2003, service revenue gross marginswere 72% compared to 50% for the same period in 2002.  The higher margin was due to more favorable labor costs on fixedprice engineering consulting contracts.

 

**Operating expenses**

 
|                          |   | **Three  months ended  June 30,**       |   | **Six months  ended  June 30,** |   |
|-------------------------------|--------|-----------------------------------------|--------|---------------------------------|--------|
|                          |   | **2003**                                |   | **2002**                        |   | **2003** |   | **2002** |   |
|                          |   | **(in  thousands, except percentages)** |   |
| Sales and  marketing          |   | $                                       | 261    |                            | $      | 1,492 |   | $ | 906 |   | $ | 3,213 |   |
| Percentage of  total revenues |   | —                                  |   | 79                              | %      | 239 | % | 59 | % |
|                          |   |                                    |   |                            |   |   |   |   |   |
| Research and  development     |   | $                                       | 719    |                            | $      | 1,385 |   | $ | 2,025 |   | $ | 2,581 |   |
| Percentage of  total revenues |   | —                                  |   | 73                              | %      | 534 | % | 47 | % |
|                          |   |                                    |   |                            |   |   |   |   |   |
| General and  administrative   |   | $                                       | 386    |                            | $      | 967 |   | $ | 1,530 |   | $ | 1,905 |   |
| Percentage of total  revenues |   | —                                  |   | 51                              | %      | 404 | % | 35 | % |

 

Sales and marketing expenses consist primarily of personnel and relatedoverhead costs, salesperson commissions, advertising and promotional expensesand trade shows.  Sales and marketingexpenses decreased by 83% in the quarter ended June 30, 2003 from the quarterended June 30, 2002. The decrease in expenditures was primarily due to a$760,000 decrease in personnel costs and an $85,000 decrease in travelcosts.  In addition, there was a$167,000 decrease in expenses relating to discretionary marketing and an$84,000 decrease in professional services, telephone and miscellaneous otherexpenses.  Related overhead costs alsodecreased $134,000.  Sales and marketingexpenses decreased by 72% for the six months ended June 30, 2003 from the sameperiod of 2002.  The decrease wasprimarily due to a $1.4 million reduction in personnel and personnel relatedcosts.  In addition, there was adecrease in travel expenditures of $210,000, a $359,000 decrease indiscretionary marketing and a $33,000 decrease in telecommunicationsexpenditures as well as a $16,000 decrease in expenditures for professionalservices.  Insignia anticipates amoderate increase in sales and marketing expenses in the next few quarters asInsignia continues to expand its marketing and sales efforts for its SSPproduct line. Insignia has established a direct sales force in the UnitedStates and Europe and we have also developed relationships with strategicpartners to sell into the Asian market.

 

Research and development expenses consist primarily of personnel costs,overhead costs relating to occupancy and equipment depreciation.  Research and development expenses decreasedby 48% in the three months ended June 30, 2003 compared to the same period in2002, of which substantially all of the decrease was due to reductions inpersonnel.  Research and development

 

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expenses decreased by 22% for the six months ended June 30, 2003compared to the same period in 2002.  Approximately $769,000 of the decrease was due to reductions inpersonnel related expenses.  There wereadditional reductions consisting of a $44,000 decrease in travel costs offsetby a $13,000 increase in professional service expenditures.  Related overhead costs increased by$274,000.  Research and developmentexpenses are expected to increase moderately in the near term as Insigniafurther enhances its Secure System Provisioning technology.  In accordance with Statement of FinancialAccounting Standards No. 86, software development costs are expensed asincurred until technological feasibility is established, after which anyadditional costs are capitalized. In 2003 and 2002, no development expenditureswere capitalized, as there were no amounts that qualified for capitalization.

 

General and administrative expenses consist primarily of personnel andrelated overhead costs for finance, legal, information systems, human resourcesand general management. General and administrative expenses decreased by 60% inthe three months ended June 30, 2003 over the same period of 2002.  The decrease was due primarily to a $308,000decrease in personnel related expenditures and a $110,000 decrease inprofessional services.  Othersignificant decreases in expenses were a $90,000 decrease in rent and relatedfacility expenditures due to renegotiated rent costs and the elimination ofunused office space as well as a $39,000 decrease in travel costs and an$18,000 decrease in telecommunications costs. General and administrative expenses decreased by 20% for the six monthsended June 30, 2003 over the same period of 2002.  The decrease primarily reflected a decrease of $386,000 in salarycosts and a $77,000 decrease in personnel related costs.  Facility related expenditures decreased by$87,000 and insurance expenditures decreased by $57,000.  Travel expenditures also decreased byapproximately $47,000.  These decreaseswere offset in part due to increased professional service expenditures ofapproximately $116,000.  General andadministrative expenses are expected to remain flat in the near term.

 

###### **Restructuring**

 
|                          |   | **Three  months ended**June 30,         |   | **Six months ended**June 30, |   |
|-------------------------------|--------|-----------------------------------------|--------|------------------------------|--------|
|                          |   | **2003**                                |   | **2002**                     |   | **2003** |   | **2002** |   |
|                          |   | **(in  thousands, except percentages)** |   |                         |   |   |   |
|                          |   |                                    |   |                         |   |   |   |   |   |
| Restructuring                 |   | $                                       | 173    |                         | $      | — |   | $ | 499 |   | $ | — |   |
| Percentage of  total revenues |   | —                                  |   | —                       |   | 132 | % | 0 | % |
|                               |        |                                         |        |                              |        |  |  |  |  |  |  |  |  |

 

On February 11, 2003, we announced a restructuring of the organizationto focus on the SSP technology.  As partof the restructuring, Richard Noling, resigned as Chief Executive Officer andActing Chief  Financial Officer.  Mark McMillan, President and Chief OperatingOfficer, was promoted to Chief Executive Officer and Linda Potts, Controller,was promoted to Chief  FinancialOfficer. In the quarter ended March 31,2003, we restructured the organization resulting in a restructuring charge of$326,000 for employee termination benefits. Restructuring charges paid in the first quarter were $117,000 with theremaining amount to be paid in the second and third quarters of 2003.  In the quarter ended June 30, 2003, weincurred an additional restructuring charge of $173,000 for employeetermination benefits and paid a total of $167,000.

 

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The remaining amount of the restructuring,$215,000, will be paid by the end of Insignia’s fiscal year 2003. Restructuringexpenses represented 132% of total revenues for the six months ended June 30,2003.  The restructuring in the pastthree quarters ended June 30, 2003, in addition to the transfer of employeesfrom the sale of the JVM product line, resulted in a worldwide reduction ofheadcount of approximately 70% of our staff (63 people).

 

**Interestincome (expense), net**

 
|                            |   | **Three  months ended  June 30,**       |   | **Six months  ended  June 30,** |   |
|---------------------------------|--------|-----------------------------------------|--------|---------------------------------|--------|
|                            |   | **2003**                                |   | **2002**                        |   | **2003** |   | **2002** |   |
|                            |   | **(in  thousands, except percentages)** |   |
| Interest income  (expense), net |   | $                                       | (12    | )                               | $      | 27 |   | $ | (13 | ) | $ | 48 |   |
| Percentage of  total revenues   |   | —                                  |   | 1                               | %      | (3 | )% | 1 | % |
|                                 |        |                                         |        |                                 |        |  |  |  |  |  |  |  |  |

 

Net interest income decreased from income of $27,000 in the threemonths ended June 30, 2002 to expense of $12,000 in the three months ended June30, 2003.  Net interest income decreasedfrom income of $48,000 in the six months ended June 30, 2002 to expense of  $13,000 in the six months ended June 30,2003.  The change from interest incometo interest expense in the three and six months ended June 30, 2003 wasprimarily due to a combination of lower interest rates on lower cash and cashequivalent balances and interest expense on a loan received in February, 2003.Interest expense is expected to continue to increase in 2003 and offsetinterest income.

 

### **Other income, net**

 
|                          |   | **Three  months ended  June 30,**       |   | **Six months  ended  June 30,** |   |
|-------------------------------|--------|-----------------------------------------|--------|---------------------------------|--------|
|                          |   | **2003**                                |   | **2002**                        |   | **2003** |   | **2002** |   |
|                          |   | **(in  thousands, except percentages)** |   |
| Other income,  net            |   | $                                       | 3,529  |                            | $      | 133 |   | $ | 3,542 |   | $ | 101 |   |
| Percentage of  total revenues |   | —                                  |   | 7                               | %      | 935 | % | 2 | % |
|                               |        |                                         |        |                                 |        |  |  |  |  |  |  |  |  |

 

In the three months ended June 30, 2003, Insignia realized a foreignexchange gain of $29,000 compared to a gain of $133,000 in the three monthsended June 30, 2002.  The balance ofother income, $3,500,000, is the gain recognized on the sale of the Jeodeproduct line.  In the six months endedJune 30, 2003, Insignia realized a foreign exchange gain of $43,000 compared toa gain of $101,000 in the six months ended June 30, 2002.

 

For the six months ended June 30, 2003 approximately 88% of our totalrevenues and over 43% of our operating expenses are denominated in U. S.dollars.  Most of our remaining revenuesand expenses are British pound sterling denominated and consequently we areexposed to fluctuations in British pound sterling exchange rates.  There can be no assurance that suchfluctuations will not have a material effect on our results of operations inthe future.  We did not enter into anycurrency option hedge contracts in 2002 or the six months ended June 30, 2003.

 

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

 

**Benefitfrom income taxes**

 
|                       |   | **Three  months ended  June 30,** |   | **Six months  ended  June 30,** |   |
|----------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                       |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                       |   | **(in  thousands)**               |   |
| Benefit from  income taxes |   | $                                 | (331   | )                               | $      | (1,271 | ) | $ | (329 | ) | $ | (1,832 | ) |
| Effective income  tax rate |   | —                            |   | —                          |   | — |   | — |   |
|                            |        |                                   |        |                                 |        |  |  |  |  |  |  |  |  |

 

Our benefit from income taxes for the three and six months ended June30, 2003 primarily represented a refund received from the United Kingdom forresearch and development claims and an accrual for the current year.  We have recorded a full valuation allowanceagainst all deferred tax assets, primarily comprised of net operating losses,on the basis that significant uncertainty exists with respect to theirrealization.

 

Effective 2002 and retroactive to 2000, research and developmentexpenditures incurred in the United Kingdom qualified for a tax credit.  The tax credit does not offset tax liabilitybut rather is a refund.  The estimatedrefund for 2002 recorded as a receivable on the December 31, 2002 balance sheetwas $702,000. The actual refund received in June 2003 was $873,000.

 

**Liquidityand capital resources**

** **
|                                                            |   | **June 30,  2003** |   | **June 30,  2002** |   |
|-----------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|
|                                                            |   | **(in thousands)** |   |
| Cash, cash  equivalents and restricted cash                     |   | $                  | 444    |               | $      | 7,140 |   |
| Working capital                                                 |   | 1,666              |   | 9,124              |   |
| Net cash used in  operating activities for the six months ended |   | (2,231             | )      | (2,317             | )      |
|                                                                 |        |                    |        |                    |        |  |  |

 

We have transitioned our product focus from the Jeode product line toour SSP product line.  This change inproduct focus has resulted in a redirection of available resources fromInsignia’s historical revenue base towards the development and marketingefforts associated with the SSP product. Cash used in operating activities inthe second quarter of 2003 totaled $469,000 compared to cash provided of$264,000 for the same period in 2002. For the six months ended June 30, 2003 and 2002, cash used in operatingactivities totaled $2.2 million and $2.3 million, respectively.  For the three months ended June 30, 2003,cash used in operating activities resulted primarily from a decrease ofaccounts payable of $325,000 and an increase of other receivable of $3.5million.  Offsetting these were netincome of  $2.273 million, a decrease ofaccounts receivable of $279,000, a decrease of tax receivable of $526,000, anda decrease of other current assets of $214,000.

 

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Cash provided by investing activities for the three months ended June30, 2003 was $857,000 which consisted primarily of net proceeds from the saleof the JVM product line of $713,000 and proceeds from the release of restrictedcash of $70,000.  Offsetting these werepurchases of property  and equipment for$13,000.

 

Cash provided by financing activities for the six months ended June 30,2003 consisted primarily of proceeds from the loan of $1,000,000 and $1,000from the employee stock purchase plan.

 

Our cash, cashequivalents and restricted cash were $444,000 at June 30, 2003, a decrease of$6.7 million from $7.1 million at June 30, 2002.  At June 30, we had working capital of $1.67 million. At June 30,2002, we had working capital of $9.1 million. The principal source of working capital came from the sale of the JVM productline and receivable collections. Capital additions totaled $13,000 and $23,000 for the three monthsending June 30, 2003 and 2002, respectively. We have no material commitmentsfor capital expenditures or strategic investments. Our commitments for expendituresconsist of building leases in the U.K. and U.S. and a debt payment due inFebruary 2004.  We expect that thedecrease in accounts receivables, decreased revenues for the three months endedJune 30, 2003 and other factors will substantially decrease our future cashflows for the next several quarters.

 

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

 

 
|                                           |   | **Operating** |   |         |   |      |   |
|------------------------------------------------|--------|---------------|--------|--------------|--------|-----------|--------|
|                                           |   | **Leases**    |   | **Debt (1)** |   | **Total** |   |
| Year ending  December 31,                      |   |          |   |         |   |      |   |
| 2003 (July 1,  2003 through December 31, 2003) |   | $             | 175    |         | $      | —    |   | $ | 175 |   |
| 2004                                           |   | 296           |   | 1,000        |   | 1,296     |   |
| 2005                                           |   | 282           |   | —       |   | 282       |   |
| 2006                                           |   | 193           |   | —       |   | 193       |   |
| 2007                                           |   | 165           |   | —       |   | 165       |   |
| Thereafter                                     |   | 927           |   | —       |   | 927       |   |
|                                           |   | $             | 2,038  |         | $      | 1,000     |   | $ | 3,038 |   |
|                                           |   |          |   |         |   |      |   |

----

(1) Excludes interest

 

As of June 30, 2003, fivecustomers accounted for 60% of the gross receivable.

 

In June 2001, Insigniaand Sun Microsystems, Inc. (“Sun”) entered into an addendum (the “Addendum”) tothe Distribution Agreement relating to distribution of products to an Insigniacustomer.  In September 2001, the twocompanies entered into Amendment No. 3 (the “Amendment”) to the Technology Licenseand Distribution Agreement (the "Distribution Agreement").  The Amendment and the Addendum each requiredus to make non-refundable royalty prepayments to Sun.  A total of $7.0 million prepaid royalties were paid to Sun underthe Distribution 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 June 30, 2003.  Our estimation of utilization, based on pastrevenue history and future revenue estimates using current average per unitselling price ranges, indicates that there could be unused prepaid royalties atthe 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 climate andlower than expected product sales could potentially impact this assessment andrequire an impairment charge in a future quarter.

 

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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 percentage points.  The agreement was canceled 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.

 

We have granted extended payment terms from time to time and, dependingon various factors, including the length of the extended payment period and thecreditworthiness of the customer.  Wereport these future payments as accounts receivable and either recognizedrevenue or deferred revenue.  Deferredrevenue increased $36,000 for the three months ended June 30, 2003 due to anadditional $200,000 from the master distributor agreement with esmertec offsetby fewer support and maintenance contracts which were transferred as part ofthe sale of the JVM product line.

 

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.  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 September30, 2002 or the closing sale price per share of our ADSs on

 

25

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October 16, 2002.  If we elect to sell our shares to Fusion Capitalat a price per share below $0.38, we first would be required to obtainshareholder approval in order to be in compliance with applicable Nasdaqrules.  Under the laws of England andWales, we are not permitted to sell our ADSs at a purchase price that is lessthan the nominal value of our ordinary shares. Currently, the nominal value per ordinary share is £0.20.

 

Under the terms of the Agreement, we issued to Fusion Capital oneredeemable warrant for ADSs representing 1,000,000 ordinary shares, and onenon-redeemable warrant for ADSs representing 1,000,000 ordinary shares.  The redeemable warrant may be redeemed byInsignia at any time on or before June 30, 2003 for an aggregate redemptionprice of $200,000.  Insignia did notredeem the warrant and the time has lapsed. The exercise price per ordinary share of each warrant is the U.S. dollarequivalent of 20.5 pence.  Each warrantexpires on September 30, 2007 and are partially exercisable.  As of December 31, 2002, the estimated valueof the warrants, using the Black-Scholes model, was $544,000.  Unless an event of default occurs under theAgreement, the shares issuable upon exercise of these warrants must be held byFusion Capital until 30 months from the date of the Agreement or the date theAgreement is terminated.  The warrrantsare immediately exercisable; however, Fusion Capital may not exercise thewarrants if Fusion Capital, together with its affiliates, would beneficiallyown more than 9.9% of our shares outstanding at the time of the exercise byFusion Capital.  The Agreement and theforms of the Registration Rights Agreement, the Redeemable Warrant and theNon-Redeemable Warrant between Insignia and Fusion Capital are filed asExhibits 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 product line to esmertec) may not be sufficient to meet our anticipatedcash needs for working capital and capital expenditures.  If cash currently available from all sourcesis insufficient to satisfy our liquidity requirements, we may seek additionalsources of financing including selling additional equity or obtainingconvertible debt securities.  Ifadditional funds are raised through the issuance of equity or debt securities,these securities could have rights, preferences and privileges senior toholders of our shares, and the terms of such securities could imposerestrictions on our operations.  Thesale of additional equity or convertible debt securities could result inadditional dilution to our shareholders. We may not be able to obtain additional financing on acceptable terms,if at all.  If we are unable to obtainadditional financing as and when needed and on acceptable terms, we may berequired to reduce the scope of our planned sales, marketing and productdevelopment efforts, which could jeopardize our business.  The size of our accumulated deficit, ourlosses and our ongoing need for capital in order to continue our operationsraises substantial doubt as to our ability to continue operations.  Failure to reduce expenses and/or obtainadditional financing will result in a material adverse effect on our ability tomeet our business objectives and continue as a going concern.  The report of our independent accountants onour financial statements included in our annual report on Form 10-K includes anexplanatory paragraph as to the uncertainty that we will continue as a goingconcern.

 

26

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Risk Factors

 

In addition to the other information in this report, the followingfactors should be considered carefully in evaluating our business andprospects:

 

We need additional financing to sustain our operations.

 

We had a working capital of $1,666,000 at June 30, 2003, and our cash,cash equivalents, and restricted cash totaled $444,000 at June 30, 2003.  We had an operating cash flow deficit of$2.2 million and $2.3 million for the six months ended June 30, 2003 and 2002,respectively.  The sale of our JVMproduct line to esmertec is expected to provide cash of $4,150,000 in 2003.  Because our current financial resources arenot expected to be sufficient to fund our operations or those of oursubsidiaries, we need additional funds to continue these operations.  There is no assurance that additionalfinancing will be available to us on terms that are acceptable, or at all.  These circumstances raise substantial doubtabout our ability to continue as a going concern.  The report of our independent accountants included on ourconsolidated financial statements on Form 10-K filed on April 15, 2003 includesan explanation paragraph as to the uncertainty that we will continue as a goingconcern.

 

We only have the right to receive $10,000 per trading day, up to anaggregate of $6 million over a period of 30 months under the agreement withFusion Capital unless our stock price equals or exceeds $1.00, in which casethe daily amount may be increased, at the option of Insignia, as the price ofour shares increases.  Fusion Capitalwill not have the right nor be obligated to purchase any of our shares on anytrading days that the market price of our shares is less than $0.15 pershare.  Since we intend to initiallyregister 10,000,000 shares for sale by Fusion Capital (in addition to 2,000,000shares exercisable pursuant to warrants held by Insignia), the selling price ofour shares to Fusion Capital will have to average at least $0.60 per share forus to receive the maximum proceeds of $6 million without registering additionalshares.  Assuming a purchase price of$0.39 per share (the closing sale price per share of our ADSs on October 30,2002) and the purchase by Fusion Capital of the full 10,000,000 shares underthe securities subscription agreement with Insignia, proceeds to us would be$3.9 million unless we choose to register more than 10,000,000 shares, which wehave the right, but not the obligation, to do.

 

In order to be in compliance with Nasdaq rules, we could not sell ourordinary shares to Fusion Capital at a price below $0.38, which represents thegreater of the book value per share of our ordinary shares as of September 30,2002 or the closing sale price per share of our ADSs on October 16, 2002. As ofJune 30, 2003, the closing market price of our shares was $0.56 per share. Ifwe elect to sell our shares to Fusion Capital at a price per share below $0.38,we first would be required to obtain shareholder approval in order to be incompliance with the Nasdaq rules.  Underthe laws of England and Wales, we are not permitted to sell our ADSs at apurchase price that is less than the nominal value of our ordinary shares.  Currently, the nominal value per ordinaryshare is £0.20.

 

The extent we rely on Fusion Capital as a source of funding will dependon a number of factors including our financial performance and ability togenerate revenues, the prevailing market price of our shares and the extent towhich we are able to secure working capital from other sources.  If obtaining sufficient financing fromFusion Capital were to prove prohibitively expensive, we

 

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may need to secure another source of funding in order to satisfy ourworking capital needs.  Even if we areable to access the full $6.0 million under the securities subscriptionagreement with Fusion Capital, we may still need additional capital toimplement our business, operating and development plans.

 

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

 

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

 

During the twelve monthsended August 8, 2003, the closing price of our shares ranged from a high of$0.74 to a low of $0.20.  Under therules of the Nasdaq Stock Market, our stock price must remain above $1.00 pershare for continued quotation of our shares on the Nasdaq National Market orthe Nasdaq SmallCap Market.  We receiveda letter from Nasdaq notifying us that we were not in compliance with thisrequirement and that we would be provided 90 calendar days, or until December11, 2002, to regain compliance.  Inconnection with this notification, we transferred the listing of our sharesfrom the Nasdaq National Market to the Nasdaq SmallCap Market on January 9,2003 to obtain additional time and flexibility to meet this requirement.  In addition, as of March 31, 2003, we had anegative total shareholders’ equity of $316,000.  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 of June 30, 2003, our shareholders’equity was $2.5 million.  To the extentour shareholders’ equity declines, our shares could be delisted from the NasdaqSmallCap Market, which could adversely affect our ability to raise additionalfunds.

 

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

 

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

 

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

 

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**We maynever achieve profitability if our SSP product line does not reach desiredsales goals.**

 

Our future performance depends upon sales of products within our SSPproduct line.  Revenues related to theJeode product line, which was sold to esmertec in April 2003, accounted for 95%of our total revenue for the six months ended June 30, 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 is currently in lab and market trialsand is expected to be available for shipment to customers in the second half of2003.  We have reduced our currentexpense levels, which will require total revenues of more than $1.5 million perquarter to achieve an operating profit. SSP may not achieve or sustain market acceptance or provide the desiredrevenue levels.

 

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

 

Our revenue is dependent upon our ability to license SSP product tothird parties. Licensing our SSP product is expected to be a long and complexprocess, which could take longer than the typical six to nine months. Beforecommitting to license our products, potential customers must generally considera wide range of issues including product benefits, infrastructure requirements,ability to work with existing systems, functionality and reliability. Theprocess of entering into a development license with a company typicallyinvolves lengthy negotiations.  Becauseof the sales cycle, it is difficult for us to predict when, or if, a particularprospect might sign a license agreement. Development license fees may be delayed or reduced because of thisprocess.  The SSP product is currentlyin lab and market trials and will be available for shipment to customers in thesecond half of 2003.  We have limitedhistory 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 upon the use of our technology by our licensees intheir smart devices.  Our licenseesundertake a lengthy process of developing systems that use our technology.  Until a licensee has sales of its systemsincorporating our technology, they will not create commercial use royalties tous.  We expect that the period of timebetween entering into a development license and actually recognizing commercialuse royalties to be lengthy and difficult to predict.

 

**Ifour license agreement with Sun Microsystems, Inc. is terminated or expireswithout renewal, we would not be able to market our Jeode product line throughthe Master Distribution License Agreement with esmertec.**

 

In the first quarter of 1999, we signed a five-year Technology Licenseand Distribution Agreement (“Distribution Agreement”) with Sun Microsystems,Inc. under which Sun established Insignia as a Sun authorized virtual machineprovider.  The Distribution Agreementalso grants us immediate access to the Java compatibility test suite and theJava technology source code.  TheDistribution Agreement includes technology sharing and compatibilityverification.  Under the Distribution Agreement,we are required to pay Sun a per unit royalty on each Jeode-enabled smartdevice shipped by our customers, plus a royalty on all development licensesbetween our customers and us.  In thethird quarter of 2001, we amended our

 

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Distribution Agreement with Sun. The Distribution Amendment expanded the scope of the licensedtechnology, changed the royalty rate, limited the royalty obligations to onlyper units licensed, established a prepaid royalty schedule and extended theexpiration date of the contract from March 2004 to June 2004.  If the Distribution Agreement with Sunterminates or expires without renewal, we would not be able to market our Jeodeproduct line through the Master Distribution License Agreement with esmertec.  Any disruption in our relationship with Sunwould likely impair our royalty sales of Jeode from esmertec.  In addition, any termination of theDistribution Agreement with Sun would likely adversely impact our ability toreceive amounts to be paid under our agreement with esmertec in connection withthe sale of the JVM product line.

 

We also license software development tool products from other companiesto distribute with some of our products. These third parties may not be able to provide competitive products withadequate features and high quality on a timely basis or to provide sales andmarketing cooperation.  Further, ourproducts compete with products produced by some of our licensors. When theselicenses terminate or expire, continued license rights might not be availableto us on reasonable terms.  We might notbe able to 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.

 

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

 

We have experienced operating losses in each quarter since the secondquarter of 1996. To achieve profitability, we will have to increase our revenuesignificantly.  Our ability to increaserevenues depends upon the success of our SSP product line.  SSP will be available for shipment tocustomers in the second half of 2003 and it may not achieve market acceptance.If we are unable to create revenues from SSP in the form of development licensefees, maintenance and support fees, commercial use royalties and nonrecurringengineering services, our current revenues will be insufficient to sustain ourbusiness.

 

For the six months ended June 30, 2002 and 2003 we spent 59% and 239%,respectively, of our total revenues on sales and marketing.  We expect to continue to incurdisproportionately high sales and marketing expenses in the future.  To market SSP effectively, we must developclient and server channel markets.  Wewill continue to incur the expenses for a sales and marketing infrastructurebefore we recognize significant revenue from sales of the product.  Because customers in the smart device markettend to remain with the same vendor over time, we believe that we must devotesignificant resources to each potential sale. If potential customers do not design our products into their systems,the resources we have devoted to the sales prospect would be lost.  If we fail to achieve and sustainsignificant increases in our quarterly sales, we may not be able to continue toincrease our investment in these areas. With increased expenses, we must significantly increase our revenues ifwe are to become profitable.

 

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

 

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

 

•                  accuratelyanticipate industry trends and changes in technology standards;

 

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

 

•                  continue toenhance our existing product lines;

 

•                  respond promptlyto 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 preparations for our Jeodeproduct line.  During this same periodour yearly revenues dropped from a high of $55.1 million in 1995 to a low of$6.8 million in 1999. The decrease in revenues was partly because we did nottimely introduce new products which could compensate for the decreasing demandfor our SoftWindows product line. Development delays are commonplace in thesoftware industry.  We have experienceddelays in the development of new products and the enhancement of existingproducts in the past and are likely to experience delays in the future.  We may not be successful in developing andmarketing, on a timely basis or at all, competitive products, productenhancements and new products that respond to technological change, changes incustomer requirements and emerging industry standards.

 

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

 

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**Ourtargeted market is highly competitive.**

 

Our SSP product line is targeted for the mobile operator and mobiledevice market.  The market for theseproducts is fragmented and highly competitive. This market is also rapidly changing and there are many companiescreating products that compete or will compete with ours. As the industrydevelops, we expect competition to increase in the future. This competition maycome from existing competitors or other companies that we do not yet knowabout.  Our main competitors includeBitfone and DoOnGo. The Jeode product line is targeted at the emergingJava-based smart device marketplaces, which are rapidly changing and arecharacterized by an increasing number of new entrants whose products competewith the Jeode platform.

 

If these competitors develop products that are cheaper or providebetter capabilities or functionality than our SSP product line, our marketshare will drop. Many of our current competitors and potential competitors havegreater resources than we do, and we might not be able to compete successfullyagainst these companies.  Competitioncould force us to reduce the prices of our products, which would result inreduced profit margins and could harm our ability to provide adequate serviceto our customers. Our pricing model for our software products is based on aderivative usage model with integration and support and maintenance fees, andmay be subject to significant pricing pressures, including buy-outarrangements.  Also, the market maydemand alternative pricing models in the future.  A variety of other potential actions by our competitors,including increased promotion and accelerated introduction of new or enhancedproducts, could also harm our competitive position.

 

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

 

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

 

•                  the volume andtiming of orders received during the quarter;

 

•                  the mix of andchanges in customers to whom our products are sold;

 

•                  the mix ofproduct and service revenue received during the quarter;

 

•                  the mix ofdevelopment license fees and commercial use royalties received;

 

•                  the timing andacceptance of new products and product enhancements by us or by ourcompetitors;

 

•                  changes inproduct pricing;

 

•                  buyouts ofcommercial use licenses;

 

•                  product lifecycles;

 

•                  the level of oursales of third-party products;

 

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•                  variances incosts in fixed price contracts;

 

•                  purchasing patternsof customers;

 

•                  competitiveconditions in the industry;

 

•                  foreign currencyexchange rate fluctuations;

 

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

 

•                  extraordinaryevents, such as litigation, and related charges.

 

All of these factors are difficult to forecast. Our future operatingresults may fluctuate due to these and other factors, including our ability tocontinue to develop innovative and competitive products. An increasing amountof our sales orders involve products and services that yield revenue overmultiple quarters or upon completion of performance. If license agreementsentered into during a quarter do not meet our revenue recognition criteria,even if we meet or exceed our forecast of aggregate licensing and othercontracting activity, it is possible that our revenues would not meetexpectations. Due to all of these factors, we believe that period-to-periodcomparisons of our results of operations are not necessarily meaningful andshould not be viewed as an indication of our future performance. In the past,we have experienced actual performance that did not meet financial marketexpectations. It is likely that, in some future quarters, our operating resultswill again be below the expectations of stock market analysts 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 the United States accounted for approximately 10%and 4% of our total revenue for the six months ended June 30, 2003 and 2002,respectively, and are expected to increase with the SSP product.  We expect to market SSP to mobile operatorsand terminal manufacturers in Europe. Economic conditions in Europe generally and fluctuations in the value ofthe euro against the U.S. dollar and British pound sterling could impair ourrevenues and results of operations. International operations are subject to anumber of other risks. These risks include:

 

•                  foreigngovernment regulation;

 

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

 

•                  longerreceivable collection periods and greater difficulty in accounts receivablecollection;

 

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

 

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•                  potentiallyadverse tax consequences;

 

•                  the burdens ofcomplying with a variety of foreign laws and staffing and managing foreignoperations;

 

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

 

•                  possiblerecessionary environments in economies outside the United States.

 

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

 

Our software products, like all software products, may have undetectederrors or compatibility problems.  Thisis particularly true when a product is first introduced or a new version isreleased.  Despite thorough testing, ourproducts might be shipped with errors. If this were to happen, our productscould be rejected by customers, or there might be costly delays in correctingthe problems.  Our products areincreasingly used in systems that interact directly with the general public,such as in transportation and medical systems. In systems such as these, the failure of our product could causesubstantial property damage or personal injury, which would expose us toproduct liability claims.  Our productsare used for applications in business systems where the failure of our productcould be linked to substantial economic loss. Our agreements with our customers typically contain provisions designedto limit our 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 this report, we have not had any product liabilityclaims or recalls against our Jeode line of products.  However, a product liability claim or claim for economic lossbrought against us in the future could lead to unexpected large expenses andlost sales.  Also, if we ever had to recallour product due to errors or other problems, it would cost us a great deal oftime, effort and expense.  Ouroperations depend on our ability to protect our computer equipment and theinformation stored in our databases against damage by fire, natural disaster,power loss, telecommunications failure, unauthorized intrusion and othercatastrophic events.  We believe we havetaken prudent measures to reduce the risk of interruption in our operations.  However, these measures might not besufficient.  As of the date of thisreport, we have not experienced any major interruptions in our operationsbecause of a catastrophic event.

 

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

 

Our future performance depends to a significant degree upon thecontinued contributions of our key management, product development, sales,marketing and operations personnel.  Wedo not have agreements with any of our key personnel that require them to workfor us for a specific term, and we do not maintain any key person lifeinsurance policies.  We believe ourfuture success will also depend in large part upon our ability to attract andretain highly skilled managerial, engineering, sales, marketing and operationspersonnel, many of whom are in great demand. Competition for qualified personnel can be intense in the San Franciscobay area, where our U.S. operations are headquartered.

 

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

 

We depend on our proprietary technology. Despite our efforts to protectour proprietary rights, it may be possible for unauthorized third parties tocopy our products or to reverse engineer or obtain and use information that weconsider proprietary.  Our competitorscould independently develop technologies that are substantially equivalent orsuperior to our technologies.  Policingunauthorized use of our products is difficult, and while we are unable todetermine the extent to which software piracy of our products exists, softwarepiracy can be expected to be a persistent problem.  Effective protection of intellectual property rights may beunavailable or limited in foreign countries. The status of U.S. patent protection in the software industry is notwell defined and will evolve as the United States Patent and Trademark Officegrants additional patents.  Patents havebeen granted on fundamental technologies in software, and patents may issuethat relate to 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 intellectualproperty rights in our industry increases, products based on our technology mayincreasingly become the subject of infringement claims.  Third parties could assert infringementclaims against us in the future. Infringement claims with or without meritcould be time consuming, result in costly litigation, cause product shipmentdelays or require us to enter into royalty or licensing agreements. Royalty orlicensing agreements, if required, might not be available on terms acceptableto us.  We may initiate claims orlitigation against third parties for infringement of our proprietary rights orto establish the validity of our proprietary rights.  Litigation to determine the validity of any claims, whether ornot the litigation is resolved in our favor, could result in significantexpense to us and divert the efforts of our technical and management personnelfrom productive tasks. If there is an adverse ruling against us in anylitigation, we may be required to pay substantial damages, discontinue the useand sale of infringing products, expend significant resources to developnon-infringing technology or obtain licenses to infringing technology.  Our failure to develop or license asubstitute technology could prevent us from selling our products.

 

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

 

Some security holders have rights to be issued additional ADSs byInsignia if the registration statements covering their shares and the sharesunderlying their warrants are suspended for more than 60 days in any 12 monthperiod.  We must issue a total of252,000 ADSs if we suspend registration statement number 333-51234 for morethan the 60 days in any 12 month period, and a total of 65,800 ADSs if wesuspend registration statement number 333-57528 for more than the 60 days inany 12 month period.  We have notsuspended registration statements for more than 60 days in any 12 month periodin the past.  However, becauseregistration statement number 333-57528 was not declared effective by theSecurities and Exchange Commission by May 14, 2001, we made available tocertain investors an additional total of 65,800 ADSs.  Three of four investors have purchased their ADSs and oneinvestor has yet to purchase the shares available to it.  The purchase price shareholders have paid orwill pay per additional ADS is the nominal value, or £0.20 per ADS, which isthe lowest amount these shares can be purchased under English law. If we issueadditional ADSs under these obligations, the ownership interest of existingshareholders will be diluted.

 

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

 

Certain investors who participated in our four private placementsreceived warrants which have anti-dilution protections.  This means that they are entitled topurchase an additional amount of ordinary shares, in the form of ADSs, if weissue ordinary shares at a price below market price. The anti-dilutionprotections, if triggered, increase the number of shares which the investorsmay purchase with their warrants.  Theexact amount of the increase is not known until the anti-dilution protectionsare actually triggered.  There are twoways the anti-dilution protections can be triggered: (1) if we sell oursecurities in a transaction, such as a private placement financing, for a pricethat is lower than the ten day average price of our ADSs before thetransaction, or (2) if the warrants issued in those relevant private placementsare exercised at a price less than the ten day average price of our ADSs at thetime of exercise.  The issuance of thewarrants to Fusion under the securities subscription agreement triggered theseanti-dilution protections.  Further,when some of the warrants we issued in the private placements are exercised,anti-dilution protections will likely be triggered.  The amount of the anti-dilution adjustment is based on a formulawhere the lower the price of the our ADSs as quoted on the Nasdaq Stock Market,the greater the potential increase in the number of shares issuable to thewarrants due to the anti-dilution protections. Assuming that the warrants are exercised at the lowest exercise pricepossible under applicable law and pursuant to the terms of their respectiveagreements, the maximum amount of additional shares issuable to these investorswould be approximately 185,000.  Theseanti-dilution adjustments could accelerate and increase the magnitude of adecline in the quoted share price of our ADSs. Warrant holders have the right to purchase an increasing amount ofshares during a decline in the price of our ADSs. If the warrant holdersexercise their warrants and sell their shares in the open market during thistime, downward pressure is added to the price. This can further increase the anti-dilution adjustments for the

 

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remaining warrant holders. Short sales of our shares may further thedownward pressure on the price of our ADSs. Anti-dilution adjustments and shortsales may accelerate and compound a decline in the price of our ADSs.  Shareholders will also be diluted as warrantholders gain the right to purchase an increasingly large number of shares dueto their anti-dilution protections.

 

**We areat risk of securities litigation which, regardless of the outcome, could resultin substantial costs and divert management attention and resources.**

 

The prices for our ADSs have fluctuated widely in the past. During the12 months ended August  8, 2003, theclosing price per share of Insignia ranged from a recent high of $0.74 to a lowof $0.20.  Under the rules of The NasdaqStock Market, our stock price must remain above $1.00 per share for continuedquotation of our shares on the Nasdaq SmallCap Market. Stock price volatilityhas had a substantial effect on the market prices of securities issued by usand other high technology companies, often for reasons unrelated to theoperating performance of the specific companies. In the past, following periodsof volatility in the market price of a company’s securities, securities classaction 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.

 

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

 

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

 

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

 

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

 

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June 30, 1996.  We revised ourrevenue and net income numbers downward for these two quarters due to inflatedrevenues resulting from misstatement of inventory levels of one of ourresellers by two of our sales and marketing personnel.  We agreed with the SEC to cease and desistfrom engaging in similar accounting practices. The two Insignia sales and marketing people involved in the revenuemisstatement are no longer with Insignia and were forced to pay significantfines.  We did not have to pay anyfines.

 

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

 

From time to time,Insignia enters into derivative financial instruments such as currency optioncontracts to hedge certain anticipated, but not yet committed, transactionsexpected to be denominated in foreign currencies.  Insignia does not use derivative financial instruments fortrading or speculative purposes. Insignia’s downside risk with respect to currency option contracts(British pound sterling) is limited to the premium paid for the right toexercise the option.  Insignia did notenter into any currency option hedge contracts in the second quarter of 2003 orthe second quarter of 2002 and had no option hedge contracts outstanding as ofJune 30, 2003 or June 30, 2002.

 

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

** **

**Item 4.  Controls and Procedures**

We have evaluated the design and operation of ourdisclosure controls and procedures to determine whether they are effective inensuring that the disclosure of required information is timely made inaccordance with the Exchange Act and the rules and regulations of theSecurities and Exchange Commission. This evaluation was made under the supervision and with theparticipation of management, including our principal executive officer andprincipal financial officer within the 90-day period prior to the filing ofthis Quarterly Report on Form 10-Q. The principal executive officer andprincipal financial officer have concluded, based on their review, that ourdisclosure controls and procedures, as defined at Exchange Act Rules 13a-14(c)and 15d-14(c), are effective to ensure that information required to bedisclosed by us in reports that we file under the Exchange Act is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.  No significant changes were made to our internal controls orother factors that could significantly affect these controls subsequent to thedate of their evaluation.

 

 

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**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 ofSecurity 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**                                    |
|---------------------|--------|------------------------------------------------------|
|                |   |                                                 |
| 31.1                |   | Section 302 certification of Chief Executive Officer |
|                |   |                                                 |
| 31.2                |   | Section 302 certification of Chief Financial Officer |
|                |   |                                                 |
| 32.1                |   | Section 906 certification of Chief Executive Officer |
|                |   |                                                 |
| 32.2                |   | Section 906 certification of Chief Financial Officer |

 

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(b) Reports on Form 8-K

 

Form 8-K filed May 8, 2003 in connection with the sale of Insignia’sJVM product line to esmertec AG.

 

Form 8-K filed May 15, 2003 for press release announcing financialresults for quarter ended March 31, 2003.

 

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**SIGNATURES**

 

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

 

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

 

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

 

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