** **

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                                                                                                                                                                                                | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                      |                                                                                          |
| **For the quarterly period ended  September 30, 2002**                                                                                                                                                                    |
|                                                                                                                                                                                                                      |
| **or,**                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                      |
| **o**                                                                                                                                                                                                                     | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                      |                                                                                          |
| **For the transition period  from               to               ** |
|                                                                                                                                                                                                                      |
| **Commission file number 0-27012**                                                                                                                                                                                        |

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

 

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

 

As of November 8,2002, there were 20,083,539 Ordinary shares of £0.20 each nominal value,outstanding.

 

 

----

 

**INSIGNIA SOLUTIONS PLC**

**TABLE OF CONTENTS**

 
| **PART 1 - FINANCIAL  INFORMATION** |
|-------------------------------------|
|                                |   |
| **Item 1.**                         | **Financial Statements:** |
|                                |   |
|                                | Condensed  Consolidated Balance Sheet at September 30, 2002 and December 31, 2001  (Unaudited) |
|                                |   |
|                                | Condensed  Consolidated Statement of Operations for the three months and nine months  ended September 30, 2002 and 2001 (Unaudited) |
|                                |   |
|                                | Condensed  Consolidated Statement of Cash Flows for the nine months ended September 30,  2002 and 2001 (Unaudited) |
|                                |   |
|                                | Notes to  Unaudited Condensed Consolidated Financial Statements |
|                                |   |
| **Item 2.**                         | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |
|                                |   |
| **Item 3.**                         | **Quantitative  and Qualitative Disclosures About Market Risk** |
|                                |   |
| **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**                      |
|                                |   |
| **Section 302  Certificates**       |

 

2

----

 

**PART I - FINANCIALINFORMATION**

 

**Item1.  Financial Statements**

**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED BALANCE SHEET**

**(amounts in thousands, unaudited)**

** **
|                                                                                  |   | **September  30,  2002** |   | **December  31,  2001** |   |
|---------------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
| **ASSETS**                                                                            |   |                     |   |                    |   |
| Current  assets:                                                                      |   |                     |   |                    |   |
| Cash  and cash equivalents                                                            |   | $                        | 3,362  |                    | $      | 8,643 |   |
| Restricted  cash                                                                      |   | 250                      |   | —                  |   |
| Accounts  receivable, net of allowances of $350 and $488, respectively                |   | 981                      |   | 6,015                   |   |
| Tax  receivable                                                                       |   | 546                      |   | —                  |   |
| Prepaid  royalties                                                                    |   | 2,454                    |   | 1,139                   |   |
| Prepaid  and other current assets                                                     |   | 1,006                    |   | 1,269                   |   |
| Total  current assets                                                                 |   | 8,599                    |   | 17,066                  |   |
|                                                                                  |   |                     |   |                    |   |
| Property  and equipment, net                                                          |   | 259                      |   | 352                     |   |
| Restricted  cash                                                                      |   | —                   |   | 250                     |   |
| Other  non-current assets                                                             |   | 100                      |   | 100                     |   |
|                                                                                  |   | $                        | 8,958  |                    | $      | 17,768 |   |
| **LIABILITIES,****MANDATORILY REDEEMABLE WARRANTS  AND SHAREHOLDERS’****EQUITY** |   |                     |   |                    |   |
| Current  liabilities:                                                                 |   |                     |   |                    |   |
| Accounts  payable                                                                     |   | $                        | 528    |                    | $      | 1,011 |   |
| Accrued  liabilities                                                                  |   | 1,038                    |   | 1,179                   |   |
| Deferred  revenue                                                                     |   | 553                      |   | 4,054                   |   |
| Accrued  royalties                                                                    |   | —                   |   | —                  |   |
| Income  taxes payable                                                                 |   | 187                      |   | 189                     |   |
| Total  current liabilities                                                            |   | 2,306                    |   | 6,433                   |   |
|                                                                                  |   |                     |   |                    |   |
| Commitments  and Contingencies (Note 5)                                               |   |                     |   |                    |   |
|                                                                                  |   |                     |   |                    |   |
| Mandatorily  redeemable warrants                                                      |   | 1,440                    |   | 1,440                   |   |
|                                                                                  |   |                     |   |                    |   |
| Shareholders’  equity:                                                           |   |                     |   |                    |   |
| Ordinary  shares                                                                      |   | 6,444                    |   | 6,278                   |   |
| Additional  paid-in capital                                                           |   | 59,357                   |   | 58,869                  |   |
| Accumulated  deficit                                                                  |   | (60,128                  | )      | (54,791                 | )      |
| Other  accumulated comprehensive loss                                                 |   | (461                     | )      | (461                    | )      |
| Total  shareholders’ equity                                                      |   | 5,212                    |   | 9,895                   |   |
|                                                                                  |   |                     |   |                    |   |
|                                                                                  |   | $                        | 8,958  |                    | $      | 17,768 |   |

 

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

 

3

----

 

# **INSIGNIA SOLUTIONS PLCCONDENSED CONSOLIDATED STATEMENT OF OPERATIONS**(amounts in thousands, except per shareamounts, unaudited)

 
|                                            |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|-------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                            |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Net  revenues:                                  |   |                                   |   |                                  |   |   |   |   |   |
| License                                         |   | $                                      | 736    |                                  | $      | 1,883 |   | $ | 5,271 |   | $ | 5,648 |   |
| Service                                         |   | 277                                    |   | 485                                   |   | 1,178 |   | 1,494 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Total  net revenues                             |   | 1,013                                  |   | 2,368                                 |   | 6,449 |   | 7,142 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Cost  of net revenues:                          |   |                                   |   |                                  |   |   |   |   |   |
| License                                         |   | 124                                    |   | 818                                   |   | 1,852 |   | 2,792 |   |
| Service                                         |   | 100                                    |   | 80                                    |   | 549 |   | 349 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Total  cost of net revenues                     |   | 224                                    |   | 898                                   |   | 2,401 |   | 3,141 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Gross  margin                                   |   | 789                                    |   | 1,470                                 |   | 4,048 |   | 4,001 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Operating  expenses:                            |   |                                   |   |                                  |   |   |   |   |   |
| Sales  and marketing                            |   | 1,262                                  |   | 1,791                                 |   | 4,475 |   | 5,337 |   |
| Research  and development                       |   | 1,677                                  |   | 1,568                                 |   | 4,258 |   | 4,751 |   |
| General  and administrative                     |   | 666                                    |   | 1,009                                 |   | 2,571 |   | 3,208 |   |
| Restructuring                                   |   | 213                                    |   | —                                |   | 213 |   | — |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Total  operating expenses                       |   | 3,818                                  |   | 4,368                                 |   | 11,517 |   | 13,296 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Operating  loss                                 |   | (3,029                                 | )      | (2,898                                | )      | (7,469 | ) | (9,295 | ) |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Interest  income, net                           |   | 17                                     |   | 80                                    |   | 65 |   | 419 |   |
| Other  income, net                              |   | 2                                      |   | 23                                    |   | 103 |   | 49 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Loss  before income taxes                       |   | (3,010                                 | )      | (2,795                                | )      | (7,301 | ) | (8,827 | ) |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Provision  (benefit) for income taxes           |   | (132                                   | )      | 3                                     |   | (1,964 | ) | 63 |   |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Net  loss                                       |   | $                                      | (2,878 | )                                     | $      | (2,798 | ) | $ | (5,337 | ) | $ | (8,890 | ) |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Basic  and diluted net loss per share:          |   | $                                      | (0.14  | )                                     | $      | (0.14 | ) | $ | (0.27 | ) | $ | (0.46 | ) |
|                                            |   |                                   |   |                                  |   |   |   |   |   |
| Weighted  average shares and share equivalents: |   |                                   |   |                                  |   |   |   |   |   |
| Basic  and diluted                              |   | 20,062                                 |   | 19,476                                |   | 19,887 |   | 19,163 |   |

 

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

 

4

----

 

**INSIGNIA SOLUTIONS PLC**

**CONDENSED CONSOLIDATED STATEMENT OFCASH FLOWS**

**(amounts in thousands, unaudited)**

** **
|                                                                         |   | **Nine  months ended  September 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                         |   | **2002**                              |       | **2001** |   |
| Cash  flows from operating activities:                                       |   |                                  |       |   |   |
| Net  loss                                                                    |   | $                                     | (5,337     | ) | $ | (8,890 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                  | ** ** |   | ** ** |
| Depreciation                                                                 |   | 194                                   |       | 253 |   |
| Allowance  for doubtful accounts                                             |   | (138                                  | )          | (173 | ) |
| Gain  on sale of fixed assets                                                |   | 7                                     |       | — |   |
| Net  changes in assets and liabilities:                                      |   |                                  |       |   |   |
| Accounts  receivable                                                         |   | 5,172                                 |       | (4,332 | ) |
| Tax  receivable                                                              |   | (546                                  | )          | — |   |
| Prepaid  royalties                                                           |   | (1,315                                | )          | — |   |
| Prepaid  and other current assets                                            |   | 263                                   |       | (856 | ) |
| Other  non-current assets                                                    |   | —                                |       | (100 | ) |
| Accounts  payable                                                            |   | (483                                  | )          | (670 | ) |
| Accrued  liabilities                                                         |   | (141                                  | )          | (678 | ) |
| Accrued  royalties                                                           |   | —                                |       | (770 | ) |
| Deferred  revenue                                                            |   | (3,501                                | )          | 4,715 |   |
| Income  taxes payable                                                        |   | (2                                    | )          | (146 | ) |
| Net  cash used in operating activities                                       |   | (5,827                                | )          | (11,647 | ) |
| Cash  flows from investing activities:                                       |   |                                  |       |   |   |
| Purchases  of property and equipment                                         |   | (108                                  | )          | (142 | ) |
| Product  line sale proceeds released from escrow                             |   | —                                |       | 5,050 |   |
| Net  cash provided by (used in) investing activities                         |   | (108                                  | )          | 4,908 |   |
| Cash  flows from financing activities:                                       |   |                                  |       |   |   |
| Proceeds  from issuance of shares, net                                       |   | (1                                    | )          | 4,969 |   |
| Proceeds  from exercise of warrants                                          |   | 481                                   |       | — |   |
| Proceeds  from exercise of stock options                                     |   | 174                                   |       | 245 |   |
| Net  cash provided by financing activities                                   |   | 654                                   |       | 5,214 |   |
| Net  decrease in cash and cash equivalents                                   |   | (5,281                                | )          | (1,525 | ) |
| Cash  and cash equivalents at beginning of the period                        |   | 8,643                                 |       | 12,051 |   |
| Cash  and cash equivalents at end of the period                              |   | $                                     | 3,362      |   | $ | 10,526 |   |

 

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

 

5

----

 

**INSIGNIA SOLUTIONS PLC**

 

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED**

**FINANCIAL STATEMENTS**

 

**Note 1.  Basis ofpresentation**

 

The accompanyingcondensed consolidated financial statements and related notes of InsigniaSolutions plc (“Insignia”) are unaudited. However, in the opinion of management, all adjustments (consisting onlyof normal recurring adjustments) which are necessary for a fair presentation ofthe financial position and results for the interim period have been included.

 

Insignia’scondensed consolidated financial statements have been presented on a goingconcern basis which contemplates the realization of assets and the satisfactionof liabilities in the normal course of operations. During the past 24 months,Insignia has incurred an aggregate loss from operations and negative operatingcash flows of $20,318,000 and $18,964,000, respectively. As of September 30,2002, Insignia has an accumulated deficit of $60,128,000 and has workingcapital of $6,293,000. The ability of Insignia to realize its assets andsatisfy its liabilities in the normal course of business is ultimatelycontingent upon Insignia generating revenue sufficient to exceed continuingcosts and eventually to generate net earnings.

 

Insignia hasundertaken measures to reduce operating expenses and redesign its commercialefforts to adapt to new developments. Based upon Insignia’s current forecastsand estimates, Insignia’s current cash, cash equivalents and short-terminvestments, together with cash generated from on-going operations and otherliquid sources of cash (including the existing credit line) available toInsignia, may not be sufficient to meet its anticipated cash needs for workingcapital and capital expenditures.  Inparticular, Insignia will need to further reduce the level of operatingexpenses in the event that revenue is lower than expected.  In addition, if Insignia is unable tomaintain the reduction of operating expenses or increase revenues, if unplannedcash payments or expenses arise, or if Insignia is unable to obtain access toadditional capital, it may not have sufficient resources to fund continuingoperations.  Based on its current forecastsand estimates, Insignia anticipates that, in any event, it will requireadditional financing in calendar year 2003.

 

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 raise such additional funds on a timely basisand on sufficiently favorable terms would have a material adverse effect onInsignia’s business, operating results and financial condition. Insignia’sliquidity also may be adversely affected in the future by factors such ashigher interest rates, inability to borrow without collateral, limitedavailability of capital financing and continued operating losses.  These circumstances raise substantial doubtabout Insignia’s ability to continue as a going concern.  The accompanying financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 

The size ofInsignia’s accumulated deficit, its losses and its ongoing need for capital inorder to continue its operations raises substantial doubt as to Insignia’sability to continue operations during 2002. Failure to reduce expenses and/or obtain additional financing will resultin a material adverse effect on its ability to meet its business objectives andcontinue as a going concern.  The reportof the Company’s independent accountants included on Insignia’s financial

 

6

----

 

statementsincluded in the registration statement on Form S-1 filed on October 31, 2002includes an explanatory paragraph as to the uncertainty that Insignia willcontinue as a going concern.

 

Insignia is a SunMicrosystems, Inc. (“Sun”) Authorized Virtual Machine provider.  If the agreement with Sun terminates orexpires without renewal, Insignia will not be able to market its Jeode productline.  Any disruption in Insignia’srelationship with Sun would likely impair its sales of Jeode products.  In addition, Insignia at times licensessoftware development tool products from other companies to distribute with someof its products.  Insignia may not beable to obtain similar products to substitute into its tool suites.

 

Insignia followsaccounting policies that are in accordance with principles generally acceptedin the United States of America. Insignia conducts most of its business in U.S. dollars.  All amounts included in the financialstatements and in the notes herein are in U.S. dollars unless designated ‘‘£’’,in which case they are in British pound sterling. The exchange rates betweenthe U.S. dollar and the British pound sterling were $1.56 and $1.47 (expressedin U.S. dollars per British pound sterling) at September 30, 2002 and 2001,respectively.

 

The results of operationsfor the three months and nine months ended September 30, 2002 are notnecessarily indicative of the results to be expected for the entire fiscalyear, which ends on December 31, 2002.

 

These unaudited condensedconsolidated financial statements should be read in conjunction with thefinancial statements and notes thereto for the year ended December 31, 2001included in  Insignia’s 2001 AnnualReport and Form 10-K.

 

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

 

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

 

7

----

 

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

 
|                                                                        |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                                        |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|                                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Net  loss                                                                   |   | $                                      | (2,878 | )                                     | $      | (2,798 | ) | $ | (5,337 | ) | $ | (8,890 | ) |
|                                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Calculation  of basic and diluted loss per share:                           |   |                                   |   |                                  |   |   |   |   |   |
| Weighted  average number of ordinary shares outstanding used in computation |   | 20,062                                 |   | 19,476                                |   | 19,887 |   | 19,163 |   |
|                                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Basic  and diluted loss per share                                           |   | $                                      | (0.14  | )                                     | $      | (0.14 | ) | $ | (0.27 | ) | $ | (0.46 | ) |

 

The followingweighted average number of options and warrants were not included in the  calculation of diluted EPS because theirinclusion would have been anti-dilutive (unaudited):

 
|     |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|----------|--------|----------------------------------------|--------|---------------------------------------|--------|
|     |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|     |   |                                   |   |                                  |   |   |   |   |   |
| Options  |   | 2,840                                  |   | 545,754                               |   | 80,533 |   | 839,574 |   |
| Warrants |   | 54,733                                 |   | 106,233                               |   | 158,750 |   | 198,874 |   |

 

**Note 3.  Comprehensiveincome (loss)**

 

Statement ofFinancial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS130”), requires that all items recognized under accounting standards ascomponents of comprehensive earnings be reported in an annual statement that isdisplayed with the same prominence as other annual financial statements.  SFAS 130 also requires that an entityclassify items of other comprehensive earnings by their nature in an annualfinancial statement.  Comprehensiveincome, as defined, includes all changes in equity during a period fromnon-owner sources.

 

Totalcomprehensive loss was not different from the net loss reported for the threeand nine months ended September 30, 2002 and September 30, 2001.

 

**Note 4.  Newaccounting pronouncements**

 

In July 2001, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standards, “SFAS”, No. 141,“Business Combinations’’ and SFAS 142, “Goodwill and Other Intangible Assets’’.Under SFAS 141, all business combinations initiated after June 30, 2001 must beaccounted for using the purchase method. SFAS 142 requires, among other things,the discontinuance of goodwill amortization. In addition, the standard includes provisions upon adoption for thereclassification of certain existing recognized intangibles as goodwill,reassessment of the useful lives of existing recognized intangibles and thetesting for impairment of existing goodwill and other intangibles. Insigniaadopted SFAS 142 effective January 1, 2002.

 

8

----

 

The adoption of these statements, SFAS 141 and 142,did not have a material impact on Insignia’s financial position and results ofoperations.

 

In July 2001, theFASBs Emerging Issues Task Force (EITF) reached final consensus on EITF  00-25, Vendor Income StatementCharacterization of Consideration Paid to a Reseller of the Vendor’s Products(“EITF 00-25”).  EITF 00-25 generally requiresthat consideration, including equity instruments, given to a customer beclasified in a vendor’s financial statements not as an expense, but as anoffset to revenue up to the amount of cumulative revenue recognized or to berecognized.  In November 2001, the EITFreached consensus on EITF 01-09, Accounting for Consideration Given by a Vendorto a Customer or Reseller of the Vendor’s Products (EITF 01-09).  EITF 01-09 clarifies and modifies certainitems discussed in EITF 00-25.  Insignia  adopted these new standards in the quarterended March 31, 2002.  Theimplementation of EITF 00-25, EITF 01-09, and the accompanying interpretiveguidance did not have a material impact on Insignia’s financial position,results of operations, or cash flows.

 

In October 2001,the FASB issued Statement of Financial Accounting Standard No. 144 (“SFAS 144”)“Accounting for the Impairment or Disposal of Long-Lived Assets”, which waseffective January 1, 2002.  SFAS 144supersedes FASB Statement 121, “Accounting for the Impairment or Disposal ofLong-Lived Assets and for Long-Lived Assets to be Disposed of, and theaccounting and reporting provisions relating to the disposal of a segment of abusiness set forth in Accounting Principles Board Opinion No. 30”.  This Statement retains many of thefundamental provisions of SFAS 121 and expands the scope of discontinuedoperations to include more disposal transactions.  Insignia adopted SFAS 144 effective January 1, 2002.  The implementation of SFAS 144 did not havea material effect on Insignia’s financial statements.

 

In August 2001,the FASB issued Statement of Financial Accounting Standard No. 143 (“SFAS 143”)“Accounting for the Asset Retirement Obligations”, which is effective forfiscal years beginning after June 15, 2002. Earlier adoption is encouraged. SFAS 143 addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  Insignia doesnot believe the adoption of SFAS 143 will have a material effect on itsfinancial statements.

 

In June 2002, theFASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS146”).  SFAS 146 addresses significantissues regarding the recognition, measurement, and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).”  The scope of SFAS 146 also includes costsrelated to terminating a contract that is not a capital lease and terminationbenefits that employees who are involuntarily terminated receive under theterms of a one-time benefit arrangement that is not an ongoing benefitarrangement or an individual deferred-compensation contract.  SFAS 146 will be effective for exit ordisposal activities that are initiated after December 31, 2002 and earlyapplication is encouraged.  Insigniawill adopt SFAS 146 during the first quarter ending March 31, 2003.  The provisions of EITF 94-3 shall continueto apply for an exit activity initiated under an exit plan that met thecriteria of EITF 94-3 prior to the adoption of SFAS 146.  The effect on adoption of SFAS 146 willchange on a prospective basis the timing of when restructuring charges arerecorded from a commitment date approach to when the liability isincurred.  Insignia does not believe theadoption of SFAS 146 will have a material effect on its financial statements.

 

9

----

 

In February 2002,the EITF issued Topic Number D-103, “Income Statement Characterization ofReimbursements Received for Out-of-Pocket Expenses Incurred”, which waseffective for financial statements beginning after December 31, 2001.  Topic Number D-103 requires thatreimbursements received for out-of-pocket expenses incurred, generally, becharacterized as revenue in the statement of operations.  Insignia has adopted Topic Number D-103effective January 1, 2002.  Insignia hashistorically recorded reimbursements of out-of-pocket expenses as net amountsin cost of services revenue in the statement of operations.  In accordance with the transition guidanceincluded in Topic Number D-103, adoption required the reclassification offinancial statements for prior periods presented for comparative purposes.  The adoption of Topic Number D-103 did notaffect Insignia’s net loss, financial position or cash flows.  The reclassification did affect thepresentation of certain revenue and cost of revenue items contained withinInsignia’s financial statements.

 

**Note 5.  Commitmentsand Contingencies**

 

In September 2001,Insignia and Sun entered into Amendment No. 3 (the “Amendment”) to theTechnology License and Distribution Agreement (the “Distribution Agreement”)between the two companies.  In addition,in June 2001, the two companies entered into an addendum (the “Addendum”) tothe Distribution Agreement relating to distribution of products to an Insigniacustomer.  The Amendment and theAddendum each require Insignia to make non-refundable royalty prepayments toSun.  A total of $7,000,000 of prepaidroyalties were paid to Sun under these agreements through the third quarter of2002.  There are no additional requiredroyalty prepayments due to Sun under this agreement.  The amended Distribution Agreement expires June 30, 2004.  Any unused royalty prepayments outstandingon June 30, 2004 are forfeited.  Theprepaid royalty balance as of September 30, 2002 was $2.45 million (see Note10).

 

During 1998, Insigniasublet until March 2002 facilities it previously occupied in the UnitedKingdom, on substantially the same terms as those applicable to Insignia. InJanuary 2002, Insignia entered into an agreement with the landlord to terminatethe lease on April 3, 2002.  On April 3,2002 Insignia paid a surrender payment of $470,000.  Insignia’s balance sheet, as of September 30, 2002, included areceivable of $70,200 from the sub-tenant pertaining to the recovery ofdilapidation costs per the facility lease. This receivable was subsequently received in October 2002.

 

**Note6.  Segment information**

 

###### **Statementof Financial Accounting Standards No. 131, “Disclosures about Segments of anEnterprise and Related Information” (“SFAS 131”), provides for segmentreporting based upon the “management” approach.  The management approach designates the internal organization thatis used by management for making operating decisions and assessing performanceas the source of Insignia’s reportable segments.  Insignia operates in a single industry segment providing virtualmachine technology which enables software applications and operating systems tobe run on various computer platforms. SFAS 131 also requires disclosures about products and**

###### **services,geographic areas, and major customers.**

 

10

----

 

###### **Geographic information**

 

Financialinformation by geographical region is summarized below (in thousands,unaudited):

 
|                                   |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|----------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                   |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Revenues  from unaffiliated customers: |   |                                   |   |                                  |   |   |   |   |   |
| United  States                         |   | $                                      | 943    |                                  | $      | 2,304 |   | $ | 6,325 |   | $ | 6,787 |   |
| International                          |   | 70                                     |   | 64                                    |   | 124 |   | 355 |   |
| Consolidated                           |   | $                                      | 1,013  |                                  | $      | 2,368 |   | $ | 6,449 |   | $ | 7,142 |   |
| Intercompany  revenues:                |   |                                   |   |                                  |   |   |   |   |   |
| United  States                         |   | $                                      | 56     |                                  | $      | 51 |   | $ | 100 |   | $ | 284 |   |
| International                          |   | 418                                    |   | 1,215                                 |   | 2,669 |   | 3,143 |   |
| Consolidated                           |   | $                                      | 474    |                                  | $      | 1,266 |   | $ | 2,769 |   | $ | 3,427 |   |
| Operating  loss:                       |   |                                   |   |                                  |   |   |   |   |   |
| United  States                         |   | $                                      | (1,175 | )                                     | $      | (1,704 | ) | $ | (3,576 | ) | $ | (5,160 | ) |
| International                          |   | (1,854                                 | )      | (1,194                                | )      | (3,893 | ) | (4,135 | ) |
| Consolidated                           |   | $                                      | (3,029 | )                                     | $      | (2,898 | ) | $ | (7,469 | ) | $ | (9,295 | ) |
|                                   |   |                                   |   |                                  |   |   |   |   |   |
|                                   |   |                                   |   |                                  |   | **Sept. 30,  2002** |   | **Dec. 31,  2001** |   |
| Identifiable  assets:                  |   |                                   |   |                                  |   |   |   |   |   |
| United  States                         |   |                                   |   |                                  |   | $ | 6,407 |   | $ | 14,091 |   |
| International                          |   |                                   |   |                                  |   | 37,270 |   | 38,637 |   |
| Intercompany  items and eliminations   |   |                                   |   |                                  |   | (34,719 | ) | (34,960 | ) |
| Consolidated                           |   |                                   |   |                                  |   | $ | 8,958 |   | $ | 17,768 |   |
| Long-lived  assets:                    |   |                                   |   |                                  |   |   |   |   |   |
| United  States                         |   |                                   |   |                                  |   | $ | 190 |   | $ | 425 |   |
| International                          |   |                                   |   |                                  |   | 34,888 |   | 35,237 |   |
| Intercompany  items and eliminations   |   |                                   |   |                                  |   | (34,719 | ) | (34,960 | ) |
| Consolidated                           |   |                                   |   |                                  |   | $ | 359 |   | $ | 702 |   |

 

All of theinternational revenues and substantially all of the international identifiableassets relate to Insignia’s operations in the United Kingdom.  Intercompany sales are accounted for atprices intended to approximate those that would be charged to unaffiliatedcustomers.

 

Revenues fromUnited States operations included export sales of $62,000 and $99,500 for thethree months ended September 30, 2002 and 2001, respectively, and $243,000 and$882,000 for the nine months ended September 30, 2002 and 2001, respectively.

 

11

----

 

Revenue by customerclassification and geographic area for the quarter ended September 30, 2002 isas follows (in thousands, unaudited):

 
|                        |   | **U.S.** |   | **U.S.  Exports** |   | **Europe** |   | **Total** |   |
|-----------------------------|--------|----------|--------|-------------------|--------|------------|--------|-----------|--------|
|                        |   |     |   |              |   |       |   |      |   |
| Distributor                 |   | $        | 239    |              | $      | 39         |   | $         | 50     |   | $ | 328 |   |
| OEM                         |   | 637      |   | 23                |   | 15         |   | 675       |   |
| End user                    |   | 5        |   | —            |   | 5          |   | 10        |   |
|                        |   |     |   |              |   |       |   |      |   |
| Total                       |   | $        | 881    |              | $      | 62         |   | $         | 70     |   | $ | 1,013 |   |
|                        |   |     |   |              |   |       |   |      |   |
| Percentage of total revenue |   | 87       | %      | 6                 | %      | 7          | %      | 100       | %      |

 

Revenue bycustomer classification and geographic area for the quarter ended September 30,2001 is as follows (in thousands, unaudited):

 
|                        |   | **U.S.** |   | **U.S.  Exports** |   | **Europe** |   | **Total** |   |
|-----------------------------|--------|----------|--------|-------------------|--------|------------|--------|-----------|--------|
|                        |   |     |   |              |   |       |   |      |   |
| Distributor                 |   | $        | 2,009  |              | $      | 78         |   | $         | 12     |   | $ | 2,099 |   |
| OEM                         |   | 194      |   | 21                |   | 47         |   | 262       |   |
| End user                    |   | 2        |   | —            |   | 5          |   | 7         |   |
|                        |   |     |   |              |   |       |   |      |   |
| Total                       |   | $        | 2,205  |              | $      | 99         |   | $         | 64     |   | $ | 2,368 |   |
|                        |   |     |   |              |   |       |   |      |   |
| Percentage of total revenue |   | 93       | %      | 4                 | %      | 3          | %      | 100       | %      |

 

There were noEuropean countries that accounted for more than 10% of total revenue.

 

In the thirdquarter of 2002, Hewlett Packard (“HP”), Phoenix Technologies, Ltd. (“Phoenix”)and Hughes Network Systems (“Hughes”), accounted for 32%, 17% and 15% of totalrevenues, respectively.  In the thirdquarter of 2001, Phoenix and Lineo, Inc. accounted for 53% and 26% of totalrevenues, respectively.   In the ninemonths ended September 30, 2002 and September 30, 2001 Phoenix accounted for65% and 46% of total revenues, respectively. No other customer accounted for 10% or more of Insignia’s total revenuesduring the third quarter of 2002 and 2001. As of September 30, 2002 and December 31, 2002, Phoenix accounted for13% and 74% of total accounts receivable, respectively.  As of September 30, 2002, four customers,including Phoenix, accounted for 60% of the gross accounts receivable balance.

 

**Note 7.  Privateplacement and warrants**

 

In December 1999, Insignia entered into agreements whereby Insigniaissued 1,063,515 ordinary shares in ADS form, bundled with warrants, at a priceof $4.23 per share to Castle Creek Technology Partners LLC and four otherinvestors of whom one is a member of Insignia’s Board of Directors. Insigniareceived $4.5 million less offering expenses totaling $0.4 million. The bundledwarrants gave the investors the right to purchase a total of 319,054 ADSs at anexercise

 

12

----

 

price of $5.29 per ADS.  Thewarrants expire on December 9, 2004. The securities were issued by Insignia in reliance upon the exemptionfrom registration provided under Rule 506 of Regulation D promulgated under theSecurities Act of 1933 (the “Securities Act”).

 

During 2000, Insignia issued a total of 19,994 ordinary shares in ADSform at various prices, ranging from $6.281 to $16.50 to a director of Insignia,as payment for drawdown fees under a line of credit arrangement entered into inMarch 2000.  The securities were issuedin reliance upon the exemption from registration provided under Section 4(2) ofthe Securities Act.

 

On November 24, 2000,Insignia entered into agreements whereby Insignia issued 3,600,000 ordinaryshares in ADS form, bundled with warrants, at a price of $5.00 per share to atotal of 23 investors, including Sun Microsystems, Bsquare, and a member ofInsignia’s Board of Directors.  Insigniareceived $18.0 million less offering expenses totaling $2.0 million. Thebundled warrants give the investors the right to purchase 1,800,000 ADSs at anexercise price of the lower of the average quoted closing sale price ofInsignia’s ADSs for the ten trading days ending on the day preceding the dateof the warrant holder’s intent to exercise less a 10% discount, and $6.00.  In the second quarter of 2001, threeinvestors exercised their warrants for 282,500 ADSs. In the first quarter of2002, three investors exercised their warrant rights for 400,000 ADSs.  The warrants expire on November 24, 2003,however, subject to certain conditions, if the quoted sale price of the ADSsexceed $9.00 per share for any thirty consecutive trading days, Insignia may cancelthe warrants upon sixty days prior written notice. Insignia also issued awarrant to purchase 225,000 ADSs to the placement agent exercisable at a priceof $5.00 per ADS.  This warrant expireson November 24, 2005.  The securitieswere issued by Insignia in reliance upon the exemption from registrationprovided under Rule 506 of Regulation D promulgated under the Securities Act.

 

On December 31, 2000,Insignia issued a total of 251,333 ordinary shares in ADS form to QuantumPeripherals (Europe) SA, at a per share price of $4.23 per share under theterms of a convertible promissory note entered into on October 20, 1999.  The securities were issued in reliance uponthe exemption from registration provided under Section 4 (2) of the SecuritiesAct.

 

On February 12,2001, Insignia entered into agreements whereby Insignia issued 940,000 ordinaryshares in ADS form, bundled with warrants, at a price of $5.00 per share to atotal of 4 investors, including Wind River Systems, Inc. and a member ofInsignia’s Board of Directors.  Thebundled warrants gave the investors the right to purchase 470,000 ADSs, at anexercise price of the lower of the average quoted closing sale price ofInsignia’s ADSs for the ten trading days ending on the day preceding the dateof the warrant holder’s intent to exercise less a 10% discount, and $6.00.  The warrants expire on February 12, 2004,however, subject to certain conditions, if the quoted sale price of the ADSsexceed $9.00 per share for any thirty consecutive trading days, Insignia maycancel the warrants upon sixty days prior written notice.  Insignia received $4.7 million less offeringexpenses totaling $0.5 million. Insignia also issued a warrant to purchase 25,000 ADSs to the placementagent exercisable at a price of $5.00 per ADS. This warrant expires on February 12, 2006.  The securities were issued by Insignia in reliance upon theexemption from registration provided under Rule 506 of Regulation D promulgatedunder the Securities Act.

 

**Dilutionadjustments**

 

As noted above, inDecember 1999, Insignia issued 1,063,515 ordinary shares in ADS form at a priceof $4.23 per share through a private placement.  Along with ADSs, Insignia also issued to

 

13

----

 

the investors warrants thatentitle them to purchase a total of 319,054 ADSs at an exercise price of $5.29per ADS.  As described below, theexercise price and the number of ADSs issuable under the warrants are subjectto various adjustments.

 

Under the December 1999private placement, the investors received warrants to purchase three ADSs forevery 10 ADSs they purchased.  Theexercise price of the warrants was set at 125% of the original per ADS purchaseprice, or $5.29.  However, the warrantscontain anti-dilution provisions which decrease this exercise price andincrease the number of ADSs purchasable if Insignia sells or is deemed to sellany shares at below market price during the term of the warrants, which ends onDecember 9, 2004.  The private placementthat closed on November 24, 2000 was a sale which triggered the anti-dilutionprovisions in the warrants, and, as a consequence, the exercise price of thewarrants has been decreased from $5.29 to $4.77 per ADS, and the number of ADSspurchasable has increased to 353,834.  Theprivate placement on February 12, 2001 also triggered the anti-dilutionprovisions of the warrants issued on December 9, 1999.  However, the effect of such dilution wasless than 1% of the exercise price, and, consequently, such adjustment isdeferred until such time as the accumulation of this adjustment and futureadjustments exceed at least 1% of the exercise price.

 

As part of their warrantagreements, the investors may be entitled to cash payments upon the occurrenceof certain Major Transactions, as defined in the warrant agreements, includingchange of control provisions. Cash payments are determined in a methodologydescribed in the agreement.  Suchmethodology is impacted by market price. A major transaction is defined as a merger, reorganization, or sale ofall or substantially all of the assets of Insignia in which the stockholders ofInsignia immediately prior to the transaction possess less than 50% of thevoting power of the surviving entity (or its parent) immediately after thetransaction.

 

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

 

Insignia obtained athird-party valuation to allocate fair value to amounts received from theprivate placement between the ADSs and the warrants.  In 1999 the amount allocated to mandatorily redeemable warrantstotaled $1.440 million, of which $0.590 million was allocated to the warrant,and $0.850 million was allocated to the additional warrant.  Of the remaining net proceeds received,$2.619 million was allocated to mandatorily redeemable capital.  The $2.619 million of mandatorily redeemablecapital was reclassed, when the registration statement for the ADSs and theADSs underlying the warrants issued in the December 1999 private placementbecame  effective on March 28, 2000, ofwhich $0.340 million was classified as ordinary shares and $2.279 million wasclassified as additional paid-in capital.

 

Amounts classified as warrants will remain outside  of shareholders’ equity for the life of the warrant or until they areexercised, whichever occurs first.  Thisclassification reflects certain potential cash payments that may occur,should  Insignia complete a majortransaction, such as a takeover, during the life of the warrants.  If a major transaction had occurred as of

 

14

----

 

September 30, 2002, the maximum cash payout would have been $70,767based on the estimated Black-Scholes value of the warrant.

 

Limitations in thetransaction agreements preclude these investors in question from achievingcertain levels of beneficial ownership. The securities purchase agreement, the warrants and the additionalwarrants contain the restriction that Insignia may not issue, and a sellinginvestor may not purchase, and the warrants and additional warrants may not beexercised for any ADSs, if doing so would cause such investor to beneficiallyown more than 9.9% of the total ordinary shares in issue as determined inaccordance with Section 13(d) of the Securities Exchange Act of 1934.  Under the additional warrants, if such investorsare prohibited from exercising the additional warrant as a result of the 9.9%restriction, the selling investor may, at its option and in addition to itsother rights under the securities purchase agreement and the warrant, retainthe warrant or demand payment, in cash, from Insignia in an amount  calculated by  the  Black-Scholes  formulamultiplied  by the number of ADSs  for which  the additional warrant wasexercisable, without regard to any limits on exercise.  The restrictions on the levels of beneficialownership in these  documents do not,however, restrict  those investors  from exercising  the  warrants or additional warrants up to thoselimitations, selling ADSs to decrease their level of beneficial ownership, andexercising the warrants to receive additional ADSs.  This could result in additional dilution to the holders ofInsignia’s ADSs and a potential decrease in the price of the ADSs.

 

**Note 8.  Line ofcredit**

 

On March 20, 2000, Insignia entered into an agreement with a directorand members of his family whereby they would provide Insignia a $5.0 millionline of credit with a commitment fee of four points based upon the total amountof the line and a draw down/termination fee of two points for drawdown ortermination.  The interest rate onamounts drawn down was at prime plus 2% until June 30, 2000 and thereafter atprime plus 4% per annum simple interest, payable in cash at the repaymentdate.  Insignia drew down a total of$3.0 million of the line of credit during 2000.  A total of 19,994 Ordinary Shares in ADS form were issued aspayment for draw down fees under the line of credit arrangement.  On November 27, 2000, Insignia repaid thissum, along with all accrued interest and the termination fee due.  The agreement expired on March 20, 2001.

 

On March 28, 2002, Insignia’s U.S. subsidiary, Insignia Solutions, Inc.(“Insignia U.S.”) entered into an accounts receivable financing agreement withSilicon Valley Bank.  The financingagreement allows Insignia U.S. to borrow an amount up to 80% of eligiblereceivables not to exceed $1,200,000, with interest at the bank’s prime rateplus two percentage points.  Theagreement expires on March 27, 2003. Borrowing is subject to compliance with certain covenants, including arequirement to maintain specific financial ratios.  Borrowings are secured by substantially all of the assets ofInsignia U.S.  Insignia U.S. was incompliance with these covenants at September 30, 2002, and at that time therewere no outstanding borrowings under this credit facility.

 

**Note9.  Related party transactions**

 

During the three monthsand nine months ended September 30, 2002, Insignia recognized revenue of$175,000 and $4,175,000, respectively, from Phoenix Technologies, Ltd.(“Phoenix”).  During the three monthsand nine months ended September 30, 2001, Insignia

 

15

----

 

recognized revenue of$1,250,000 and $3,300,000, respectively, from Phoenix.  The CEO of Phoenix was also a director onInsignia’s Board of Directors from March 1997 until March 2001.

 

During the three monthsand nine months ended September 30, 2002, Insignia recognized revenue of$25,000 and $275,000, respectively, from Wind River Systems, Inc. (“WindRiver”).  During the three months andnine months ended September 30, 2001, Insignia recognized revenue of $90,000and $304,000, respectively, from Wind River. Wind River participated in a private placement of equity in Insignia in February 2001 on the sameterms as the other three investors in the private placement.  Wind River paid the aggregate purchase priceof $2,000,000 for 400,000 ordinary shares represented by ADRs and warrants topurchase 200,000 ordinary shares represented by ADRs.   In addition, John C. Fogelin of Wind River was appointed toInsignia’s Board of Directors in January 2001. Mr. Fogelin continues to serve on Insignia’s Board of Directors.

 

On February 13, 2001, Insignia entered into a promissory note withRichard M. Noling, President and Chief Executive Officer of Insignia, wherebyMr. Noling borrowed $150,000 from Insignia U.S.  The promissory note is duein three equal installments, on each annual anniversary from the date of thenote.  The note was amended on January24, 2002 to extend the first and subsequent installments one year.  The first installment is now due on February13, 2003.  Interest accrues on theunpaid principal balance at a rate per annum equal to the prime lending rate ofinterest as listed in the Wall Street Journal plus 1%.  Accrued interest is due and payable monthlyin arrears on the last calendar day of each month, beginning March 31,2001.  Interest has been paid timely andis current.  In addition, on July 17,2001, Mr. Noling received an interest free loan of $50,000.  The $50,000 loan was repaid in full on September30, 2001.

 

**Note 10.  Prepaidroyalties**

 

Our agreements withlicensors sometimes require us to make advance royalty payments and payroyalties based on product sales. Prepaid royalties are capitalized andamortized as cost of sales based on the contractual royalty rate based onactual net product sales. We continually evaluate recoverability of prepaidroyalties and, if necessary, will charge to cost of sales any amount that wedeem unlikely to be recoverable in the future. We have performed an assessment of whether there was an indication thatprepaid royalties of $2.45 million are impaired as of September 30, 2002.  The prepaid royalties carried on the balancesheet, under the terms of the agreement between Sun and Insignia, require us touse these prepaid licenses before June 30, 2004.  Our estimation of utilization, based on past revenue history andfuture revenue estimates using current average per unit selling price ranges,indicates that there could be unused prepaid royalties at the expiration of thelicense and distribution agreement. However, we believe that should unused prepaid royalties becomepredictable in the future, we could reduce the selling price in order toutilize the remaining prepaid balance. This price reduction would result in lower gross margins.  We will continue to assess this potentialimpairment on a quarterly basis.  Thedeterioration of the business climate and lower than expected product salescould potentially impact this assessment and require an impairment charge in afuture quarter.  Prepaid royalties areclassified as current assets based on estimated net product sales within thenext year.

 

**Note 11. Restructuring**

 

In the third quarter of2002, we completed a worldwide reduction of headcount of approximately 11%.  Restructuring expenses consist principallyof severance payments paid during the quarter.

 

16

----

 

**Note 12.  Recentdevelopments**

 

On October 17,2002, we entered into a securities subscription agreement (“Agreement”) withFusion Capital Fund II, LLC (“Fusion Capital”), pursuant to which FusionCapital has agreed to purchase, on each trading day following the effectivenessof a registration statement covering the American Depository Shares to bepurchased by Fusion Capital, $10,000 of our American Depository Shares up to anaggregate of $6.0 million over a period of 30 months. The purchase price of theAmerican Depository Shares will be equal to a price based upon the futuremarket price of the shares without any fixed discount to the market price.

 

Under the terms of theAgreement, we issued to Fusion Capital one redeemable warrant for AmericanDepository Shares representing 1,000,000 ordinary shares, and onenon-redeemable warrant for American Depository Shares representing 1,000,000ordinary shares.  The redeemable warrantmay be redeemed by Insignia at any time on or before June 30, 2003 for anaggregate redemption price of $200,000. The exercise price per share of each warrant is the U.S. dollarequivalent of 20.5 pence.  Each warrantexpires on September 30, 2007.  Unlessan event of default occurs under the Agreement, the shares issuable uponexercise of these warrants must be held by Fusion Capital until 30 months fromthe date of the Agreement or the date the Agreement is terminated. Thewarrrants are immediately exercisable; however, Fusion Capital may not exercisethe warrants if Fusion Capital, together with its affiliates, wouldbeneficially own more than 9.9% of our shares outstanding at the time of theexercise by Fusion Capital.  The  Agreement and the forms of the RegistrationRights Agreement, the Redeemable Warrant and the Non-Redeemable Warrant betweenInsignia and Fusion Capital are filed as Exhibits to the 8-K dated October 22,2002.

 

On October 22, 2002, weannounced the departure of our Chief Financial Officer ("CFO"),Albert J. Wood.  In the interim, the CFOresponsibilities will be assumed by the current Chief Executive Officer,Richard M. Noling.

 

17

----

 

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

 

The following discussionand analysis should be read in conjunction with the unaudited condensedconsolidated financial statements and notes thereto included in Part I - Item 1of this Form 10-Q and the “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” set forth in Insignia’s Form 10-K/A forthe year ended December 31, 2001 (the “Form 10-K/A”).

 

**Future operating results**

 

This Form 10-Q containsforward-looking statements.  Theseforward-looking statements concern matters which include, but are not limitedto, the revenue model and market for the Jeode product line, the features, benefitsand advantages of the Jeode platform, 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 Jeode platform; the performance and functionality of Jeode 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 tosuch differences in results and outcomes include without limitation thosediscussed below as well as those discussed elsewhere in this Report.  Readers are cautioned not to place unduereliance on these forward-looking statements, which reflect management’sanalysis only as of the date hereof. Insignia assumes no obligation to update these forward-lookingstatements to reflect actual results or changes in factors or assumptionsaffecting such forward-looking statements.

 

Insignia continues toface significant risks associated with the successful execution of its businessstrategy. The 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, Insigniaalso faces significant risks associated with the development and futuredeployment of its Secure System Provisioning (“SSP”) products and thesuccessful execution of the related business strategy. During 2001, Insigniabegan development of a range of SSP products for the mobile handset andwireless carrier industry.  These SSPproducts build on Insignia’s position as a Virtual Machine (“VM”) supplier formanufacturers of mobile devices and are designed to allow wireless carriers tobuild valuable incremental services.  Insigniais planning for these new SSP products to be available for market trials inearly calendar 2003 and available for shipment to customers in mid-calendar2003. Insignia has limited history with sales initiatives for new products.Additionally, the sales cycle for the SSP products is expected to take longerthan the six to nine months sales cycle typically experienced with the Jeodeproduct.

 

18

----

 

Insignia does notcurrently have accurate visibility of future order rates and demand for theproducts that are currently available for shipment to customers or for newproducts that Insignia is currently developing.  There can be no assurance that Insignia’s current or futureproducts will achieve market acceptance.

 

Insignia has experiencedoperating losses in each quarter since the second quarter of 1996.  To achieve profitability, Insignia will haveto increase its revenue.  Insignia’s abilityto increase revenues depends upon the success of its Jeode product line.  Jeode has been available since March 1999,and it may not achieve widespread market acceptance.  If Insignia is unable to generate higher revenues from Jeode inthe form of development license fees, maintenance and support fees, commercialuse royalties and customer-funded engineering services, Insignia’s currentrevenue levels will be insufficient to sustain its business.

 

Insignia hasundertaken measures to reduce operating expenses and redesign its commercialefforts to adapt to new developments. Based upon Insignia’s current forecastsand estimates, Insignia’s current cash, cash equivalents and short-terminvestments, together with cash generated from on-going operations and otherliquid sources of cash (including the existing credit line) available toInsignia, may not be sufficient to meet its anticipated cash needs for workingcapital and capital expenditures.  Inparticular, Insignia will need to further reduce the level of operatingexpenses in the event that revenue is lower than expected.  In addition, if Insignia is unable tomaintain the reduction of operating expenses or increase revenue, if unplannedcash payments or expenses arise, or if Insignia is unable to obtain access toadditional capital, it may not have sufficient resources to fund continuingoperations.  Based on its currentforecasts and estimates, Insignia anticipates that, in any event, it willrequire additional financing in calendar year 2003.

 

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 raise such additional funds on a timely basisand on sufficiently favorable terms would have a material adverse effect onInsignia’s business, operating results and financial condition. Insignia’sliquidity also may be adversely affected in the future by factors such ashigher interest rates, inability to borrow without collateral, limitedavailability of capital financing and continued operating losses.

 

The size of Insignia’saccumulated deficit, its losses and its ongoing need for capital in order tocontinue its operations raises substantial doubt as to Insignia’s ability tocontinue operations during 2003.  Failureto reduce expenses and/or obtain additional financing will result in a materialadverse effect on its ability to meet its business objectives and continue as agoing concern.  The report of theCompany’s independent accountants included on Insignia’s financial statementsincluded in the registration statement on Form S-1 filed on October 31, 2002includes an explanatory paragraph as to the uncertainty that the Company willcontinue as a going concern.

 

19

----

 

The following table setsforth the unaudited condensed consolidated results of operations as apercentage of total revenues for the three and nine month periods endedSeptember 30, 2002 and 2001:

 
|                                  |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|---------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                  |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Net  revenues:                        |   |                                   |   |                                  |   |   |   |   |   |
| License                               |   | 72.7                                   | %      | 80.0                                  | %      | 81.7 | % | 79.1 | % |
| Service                               |   | 27.3                                   | %      | 20.0                                  | %      | 18.3 | % | 20.9 | % |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Total  net revenues                   |   | 100.0                                  | %      | 100.0                                 | %      | 100.0 | % | 100.0 | % |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Cost  of net revenues:                |   |                                   |   |                                  |   |   |   |   |   |
| License                               |   | 12.2                                   | %      | 34.5                                  | %      | 28.7 | % | 39.1 | % |
| Service                               |   | 9.9                                    | %      | 3.4                                   | %      | 8.5 | % | 4.9 | % |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Total  cost of net revenues           |   | 22.1                                   | %      | 37.9                                  | %      | 37.2 | % | 44.0 | % |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Gross  margin                         |   | 77.9                                   | %      | 62.1                                  | %      | 62.8 | % | 56.0 | % |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Operating  expenses:                  |   |                                   |   |                                  |   |   |   |   |   |
| Sales  and marketing                  |   | 124.6                                  | %      | 75.6                                  | %      | 69.4 | % | 74.7 | % |
| Research  and development             |   | 165.6                                  | %      | 66.2                                  | %      | 66.0 | % | 66.5 | % |
| General  and administrative           |   | 65.7                                   | %      | 42.6                                  | %      | 39.9 | % | 44.9 | % |
| Restructuring                         |   | 21.0                                   | %      | —                                |   | 3.3 | % | — |   |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Total  operating expenses             |   | 376.9                                  | %      | 184.4                                 | %      | 178.6 | % | 186.1 | % |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Operating  loss                       |   | (299.0                                 | )%     | (122.3                                | )%     | (115.8 | )% | (130.1 | )% |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Interest  income, net                 |   | 1.7                                    | %      | 3.4                                   | %      | 1.0 | % | 5.8 | % |
| Other  income, net                    |   | 0.2                                    | %      | 0.9                                   | %      | 1.6 | % | 0.7 | % |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Loss  before income taxes             |   | (297.1                                 | )%     | (118.0                                | )%     | (113.2 | )% | (123.6 | )% |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Provision  (benefit) for income taxes |   | (13.0                                  | )%     | 0.1                                   | %      | (30.5 | )% | 0.9 | % |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Net  loss                             |   | (284.1                                 | )%     | (118.1                                | )%     | (82.7 | )% | (124.5 | )% |

 

**Overview**

 

We commenced operationsin 1986 and currently develop, market and support software technologies thatimplement accelerated virtual machine technology for memory-constrained smartdevices.

 

In January 1998, weannounced that we were developing the Jeode product for the emerging Java basedsmart device marketplace.  The Jeodeplatform is Insignia’s implementation of Sun Microsystems, Inc.’s (“Sun”) Java®technology tailored for smart devices. It leverages patent-pending

 

20

----

 

intellectual property toprovide these resource-constrained devices with high performance,fully-compatible Java applet and application support. We released the Jeodeplatform in March 1999.  The Jeodeplatform was the principal product line of Insignia in the third quarter of 2002.  We expect to continue to rely upon sales ofJeode products, plus new products that may be introduced, for our revenue inthe foreseeable future.  The Jeodeproduct line revenue model is based on original equipment manufacturers’(“OEMs”) and channel partners’ customer transactions.

 

During 2001, we begandevelopment of a range of products (“Secure System Provisioning” or “SSP”products) for the mobile handset and wireless carrier industry.  These SSP products build on our position asa Virtual Machine (“VM”) supplier for manufacturers of mobile devices and  allow wireless carriers to build valuableincremental services.  We are planningfor these new SSP products to be

available for markettrials in early calendar 2003 and available for shipment to customers inmid-calendar 2003. We have limited history with sales initiatives for newproducts. Additionally, the sales cycle for the SSP products is expected totake longer than the six to nine months sales cycle typically experienced withthe Jeode VM product.

 

Before 1998, ourprincipal product line in past years was SoftWindowsTM.  This product enabled Microsoft Windows(“Windows”®) applications to be run on most Apple Computer Inc. (“Apple”®)Macintosh computers and many UNIX workstations.  Revenues from this product line grew until 1995, but declinedsignificantly after that date, along with margins.  This was due to a declining demand for Apple Macintosh productsand increased competition.  We alsoshipped RealPC, a low cost software product that allowed consumers to playgames and other applications designed for Intel-based PCs on their PowerMacintosh computers.  In 1999 we tooksteps to discontinue these product lines, thus allowing us to focus exclusivelyon our Jeode platform business strategy.

 

**Critical accounting policies**

 

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

 

We recognize revenue inaccordance with Statement of Position 97-2, “Software Revenue Recognition,” asamended.  SOP 97-2 requires that fourbasic criteria must be met before revenue can be recognized: (1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or services havebeen rendered; (3) the fee is fixed and determinable; and (4) collectibility isprobable. Determination of criteria (3) and (4) are based on management’sjudgments regarding the fixed nature of the fee charged for services renderedand products delivered and the collectibility of those fees. Should changes inconditions cause management to determine these criteria are not met for certainfuture transactions, revenue recognized for any reporting period could be adverselyaffected.

 

21

----

 

At the time of thetransaction, we also assess whether the fee associated with the revenuetransaction is fixed and determinable and whether or not collection isreasonably assured. We assess whether the fee is fixed and determinable basedon the payment terms associated with the transaction. If a significant portionof a fee is due after the normal payment terms, which are 30 to 90 days frominvoice date, we account for the fee as not being fixed and determinable. Inthese cases, we recognize revenue on the earlier of due date or cash collected.

 

For arrangements withmultiple obligations (for example, undelivered maintenance and support), weallocate revenue to each component of the arrangement using the residual valuemethod based on the fair value of the undelivered elements, which is specificto Insignia. This means that we will defer revenue from the arrangement feeequivalent to the fair value of the undelivered elements.  Fair value for the ongoing maintenance andsupport obligation is based upon separate sales of renewals to other customersor upon renewal rates quoted in the contracts. Fair value of services, such astraining or consulting, is based upon separate sales by us of these services toother customers.

 

We recognize revenue formaintenance services ratably over the contract term. Our training andconsulting services are billed based on hourly rates, and we generallyrecognize revenue as these services are performed. However, at the time ofentering into a transaction, we assess whether or not any services includedwithin the arrangement require us to perform significant work either to alterthe underlying software or to build additional complex interfaces so that the softwareperforms as the customer requests. If these services are included as part of anarrangement, we recognize the entire fee using the percentage of completionmethod. We estimate the percentage of completion based on our estimate of thetotal costs estimated to complete the project as a percentage of the costsincurred to date and the estimated costs to complete.

 

Our agreements withlicensors sometimes require us to make advance royalty payments and payroyalties based on product sales. Prepaid royalties are capitalized andamortized as cost of sales based on the contractual royalty rate based onactual net product sales. We continually evaluate recoverability of prepaidroyalties and, if necessary, will charge to cost of sales any amount that wedeem unlikely to be recoverable in the future. We have performed an assessment of whether there was an indication thatprepaid royalties of $2.45 million are impaired as of September 30, 2002.  The prepaid royalties carried on the balancesheet, under the terms of the agreement between Sun and Insignia, require us touse these prepaid licenses before June 30, 2004.  Our estimation of utilization, based on past revenue history andfuture revenue estimates using current average per unit selling price ranges,indicates that there could be unused prepaid royalties at the expiration of thelicense and distribution agreement. However, we believe that should unused prepaid royalties becomepredictable in the future, we could reduce the selling price in order toutilize the remaining prepaid balance. This price reduction would result in lower gross margins.  We will continue to assess this potentialimpairment on a quarterly basis.  Thedeterioration of the business climate and lower than expected product salescould potentially impact this assessment and require an impairment charge in afuture quarter.  Prepaid royalties areclassified as current assets based on estimated net product sales within thenext year.

 

22

----

 

**Revenues**

 
|               |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|--------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|               |   | **(in  thousands)**                    |   |
|               |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|               |   |                                   |   |                                  |   |   |   |   |   |
| License  revenue   |   | $                                      | 736    |                                  | $      | 1,883 |   | $ | 5,271 |   | $ | 5,648 |   |
| Service  revenue   |   | 277                                    |   | 485                                   |   | 1,178 |   | 1,494 |   |
| Total  net revenue |   | $                                      | 1,013  |                                  | $      | 2,368 |   | $ | 6,449 |   | $ | 7,142 |   |

 

The Jeode productline was our primary business for the third quarter of 2002 and 2001.  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.

 

In the third quarter of2002, total revenues decreased by 57% compared to total revenues for the thirdquarter of 2001.  In the nine monthsended September 30, 2002, total revenues decreased by 10% compared to totalrevenues for the first nine months of 2001. The Jeode platform  accounted for100% of the total revenue for the three and nine months ended September 30,2002 and 2001.   We expect to seeacceleration in the adoption of the Jeode platform.  However, not all of this growth will necessarily translate intorevenue at the time of licensing.

 

License revenue andservice revenue accounted for 73% and 27%, respectively, of total revenues forthe three months ended September 30, 2002. For the nine months ended September 30, 2002, license revenue andservice revenue accounted for 82% and 18%, respectively.  License revenue and service revenueaccounted for 80% and 20%, respectively, of total revenues for the three monthsended September 30, 2001.  For the ninemonths ended September 30, 2001, license revenue and service revenue accountedfor 79% and 21%, respectively, of total revenues.

 

License revenue decreased61% in the third quarter of 2002 compared to license revenues in the thirdquarter of 2001.  For the nine monthsended September 30, 2002, license revenue decreased 7% compared to the same periodin 2001.  The third quarter of 2002continued to be impacted by delays in technology spending by our customers.

 

Service revenue in thethird quarter of 2002 was 43% lower than service revenue in the third quarterof 2001.  For the nine months endedSeptember 30, 2002 service revenue decreased 21% compared to the same period in2001.  The decrease was primarily due todecreased Jeode engineering and Jeode support contracts.

 

Deferred revenuedecreased by $3,501,000 for the nine months ended September 30, 2002.  The decrease primarily reflected the revenuerecognition of approximately $3,200,000 from a June 2001 agreement with PhoenixTechnologies, Ltd. (“Phoenix”).

 

23

----

 

Sales to Distributors andOEMs representing more than 10% of total revenue in each period accounted forthe following percentages of total revenue:

 
|                    |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|-------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                    |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Distributors:           |   |                                   |   |                                  |   |   |   |   |   |
| Phoenix  Technologies   |   | 17                                     | %      | 53                                    | %      | 65 | % | 46 | % |
| Lineo                   |   | —                                 |   | 26                                    | %      |   | *  |   | *  |
|                    |   |                                   |   |                                  |   |   |   |   |   |
| All  Distributors:      |   | 32                                     | %      | 89                                    | %      | 74 | % | 70 | % |
|                    |   |                                   |   |                                  |   |   |   |   |   |
| OEMs:                   |   |                                   |   |                                  |   |   |   |   |   |
| Hughes  Network Systems |   | 15                                     | %      | —                                |   | 2 | % | — |   |
| Hewlett  Packard/Compaq |   | 32                                     | %      | —                                |   | 7 | % |   | * |
|                    |   |                                   |   |                                  |   |   |   |   |   |
| All  OEMs:              |   | 67                                     | %      | 11                                    | %      | 26 | % | 30 | % |

 

----

* Less than 10%

 

Sales to customersoutside the United States, derived mainly from customers in Europe and Asia,represented approximately 13% of total revenues in the three months endedSeptember 30, 2002, 7% of total revenues in the three months ended September30, 2001, 6% of total  revenues in thenine months ended September 30, 2002 and 15% of total revenues in the ninemonths ended September 30, 2001.  Wecurrently market Jeode to customers in the United States, Europe and Asia.

 

**Cost of revenues and gross margin**

 
|                           |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|--------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                           |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|                           |   | **(in thousands, except percentages)** |   |
|                           |   |                                   |   |                                  |   |   |   |   |   |
| Cost  of license revenue       |   | $                                      | 124    |                                  | $      | 818 |   | $ | 1,852 |   | $ | 2,792 |   |
| Gross  margin: license revenue |   | 83                                     | %      | 57                                    | %      | 65 | % | 51 | % |
|                           |   |                                   |   |                                  |   |   |   |   |   |
| Cost  of service revenue       |   | $                                      | 100    |                                  | $      | 80 |   | $ | 549 |   | $ | 349 |   |
| Gross  margin: service revenue |   | 64                                     | %      | 84                                    | %      | 53 | % | 77 | % |
|                           |   |                                   |   |                                  |   |   |   |   |   |
| Total  cost of revenues        |   | $                                      | 224    |                                  | $      | 898 |   | $ | 2,401 |   | $ | 3,141 |   |
| Gross  margins: total revenues |   | 78                                     | %      | 62                                    | %      | 63 | % | 56 | % |

 

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

 

24

----

 

We believe that thesignificant factors affecting the Jeode platform gross margin include pricingof the development license, pricing of the unit usage and royalties to thirdparties such as Sun Microsystems, Inc. (“Sun”).  In early 1999, we signed a five-year agreement with Sun underwhich Sun established us as an authorized Virtual Machine provider.  Under this agreement, we will pay Sun a perunit royalty on each Jeode platform-enabled smart device shipped by ourcustomers, plus a royalty on all development licenses put in place between ourcustomers and us. In the third quarter of 2001, we amended our licenseagreement with Sun.  The amendmentexpanded the scope of the licensed technology, changed the royalty rate,limited the royalty obligations to only per units licensed, established aprepaid royalty schedule and extended the expiration date of the contract fromMarch 2004 to June 2004.  Licenserevenue gross margins in the quarter ended September 30, 2002 were 83%,compared to 57% for the same period in 2001. For the nine months ended September 30, 2002, license revenue grossmargins were 65% compared to 51% for the same period in 2001.  The increases were due to the prior yearrevenue including a large deal with lower gross margin and the current yearincluding greater license revenue with minimal cost of sales.

 

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 third quarter of 2002 to 64% from 84% in the same period of 2001.  For the nine months ended September 30,2002, service revenue gross margins were 53% compared to 77% for the sameperiod in 2001.  The decreases were dueto fewer maintenance contracts.

 

**Operating expenses**

 
|                          |   | **Three  months ended  September 30,**  |   | **Nine  months ended  September 30,** |   |
|-------------------------------|--------|-----------------------------------------|--------|---------------------------------------|--------|
|                          |   | **2002**                                |   | **2001**                              |   | **2002** |   | **2001** |   |
|                          |   | **(in  thousands, except percentages)** |   |
|                          |   |                                    |   |                                  |   |   |   |   |   |
| Sales  and marketing          |   | $                                       | 1,262  |                                  | $      | 1,791 |   | $ | 4,475 |   | $ | 5,337 |   |
| Percentage  of total revenues |   | 125                                     | %      | 76                                    | %      | 69 | % | 75 | % |
|                          |   |                                    |   |                                  |   |   |   |   |   |
| Research  and development     |   | $                                       | 1,677  |                                  | $      | 1,568 |   | $ | 4,258 |   | $ | 4,751 |   |
| Percentage  of total revenues |   | 166                                     | %      | 66                                    | %      | 66 | % | 67 | % |
|                          |   |                                    |   |                                  |   |   |   |   |   |
| General  and administrative   |   | $                                       | 666    |                                  | $      | 1,009 |   | $ | 2,571 |   | $ | 3,208 |   |
| Percentage  of total revenues |   | 66                                      | %      | 43                                    | %      | 40 | % | 45 | % |
|                          |   |                                    |   |                                  |   |   |   |   |   |
| Restructuring                 |   | $                                       | 213    |                                  | $      | — |   | $ | 213 |   | $ | — |   |
| Percentage  of total revenues |   | 21                                      | %      | —                                |   | 3 | % | — |   |

 

Sales and marketingexpenses consist primarily of personnel and related overhead costs, salespersoncommissions, advertising and promotional expenses and trade shows.  Sales and marketing expenses decreased by 30%in the quarter ended September 30, 2002 from the quarter ended September 30,2001.  The decrease in expenditures wasprimarily due to a $351,000 decrease in personnel and travel costs.  In addition, there was a $106,000 decreasein professional services as a result of moving the patent and trademark expenseto general and administrative expense, and a $45,000 decrease in expensesrelating to telephone and supplies, printing and shipping expenditures.  Sales and marketing expenses decreased by16% for the nine months

 

25

----

 

ended September 30, 2002from the same period of 2001.  Thedecrease was primarily due to a $622,000 reduction in personnel and travelcosts, a $243,000 reduction in professional services, and a $148,000 reductionin overhead costs, offset substantially by a $176,000 increase in marketingexpenditures for the new mobile and wireless product initiatives. We anticipatea moderate decrease in sales and marketing expenses in the next few quarters aswe continue to control expenses in our marketing and sales organization for ourJeode product line and other product lines. We have established a direct sales force in the United States, Europeand Japan. We have also developed relationships with strategic partners toleverage the Jeode technology.

 

Research and developmentexpenses consist primarily of personnel costs, overhead costs relating tooccupancy and equipment depreciation. Research and development expenses increased by 7% in the three monthsended September 30, 2002 compared to the same period in 2001.  The increase was primarily due to a $148,000increased allocation of MIS and facility costs stemming largely fromdilapidation costs associated with a subtenant.  In addition, support and maintenance expenditures relating to anoutside vendor increased by $65,000. These increases were in part offset by an $85,000 decrease in personnelrelated expenses and a $34,000 decrease in expenses related to outsideconsultants.  Research and developmentexpenses decreased by 10% in the nine months ended September 30, 2002 comparedto the same period in 2001. Approximately $627,000 of the decrease was due toreductions in personnel related expenses. There was an additional decrease of $50,000 relating to a decreasedreliance on outside consultants as well as other standard expenditures such assupplies and depreciation.  Thesedecreases were offset in part by an increase of $65,000 for support andmaintenance expenditures relating to a software vendor.  Research and development expenses areexpected to decrease moderately in the near term.  In accordance with Statement of Financial Accounting StandardsNo. 86, software development costs are expensed as incurred until technologicalfeasibility is established, after which any additional costs are capitalized.In 2002 and 2001, no development expenditures were capitalized, as there wereno amounts that qualified for capitalization.

 

General andadministrative expenses consist primarily of personnel and related overheadcosts for finance, legal, information systems, human resources and generalmanagement. General and administrative expenses decreased by 34% in the threemonths ended September 30, 2002 from the same period of 2001.  The decrease was due to a $150,000 reductionin professional services, a $156,000 decrease in bad debt expense and a $70,000decrease in personnel related expenditures. These decreases were offset in part by an increase of $46,000 fordirectors and officers insurance. General and administrative expenses decreased by 20% for the nine monthsended September 30, 2002 from the same period of 2001. The decrease wasprimarily due to $178,000 in salary costs and a $155,000 decrease in personnelrelated costs, which consist primarily of recruiting and payroll relatedexpenses.  Professional serviceexpenditures also decreased by $281,000 and bad debt expense decreased by$252,000.  The decreases were offset inpart due to increased insurance costs of $123,000 and increased rent costs of$56,000.  General and administrativeexpenses are expected to decrease moderately in the near term.

 

26

----

 

### **Restructuring**

 

In the third quarter of2002, we completed a worldwide reduction of headcount of approximately11%.  Restructuring expenses consistprincipally of severance payments paid during the quarter.

 

**Interest income (expense), net**

 
|                            |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|---------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                            |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|                            |   | **(in thousands, except percentages)** |   |
|                            |   |                                   |   |                                  |   |   |   |   |   |
| Interest  income (expense), net |   | $                                      | 17     |                                  | $      | 80 |   | $ | 65 |   | $ | 419 |   |
| Percentage  of total revenues   |   | 2                                      | %      | 3                                     | %      | 1 | % | 6 | % |
|                                 |        |                                        |        |                                       |        |  |  |  |  |  |  |  |  |

 

Interest income(expense), net decreased from income of $80,000 in the three months endedSeptember 30, 2001 to income of $17,000 in the three months ended September 30,2002. For the nine months ended September 30, 2001, interest income, netdecreased from income of $419,000 to income of $65,000.  The decrease was primarily due to acombination of lower interest rates and lower cash and cash equivalentbalances.

 

### **Other income, net**

 
|                          |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|-------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                          |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|                          |   | **(in thousands, except percentages)** |   |
|                          |   |                                   |   |                                  |   |   |   |   |   |
| Other  income, net            |   | $                                      | 2      |                                  | $      | 23 |   | $ | 103 |   | $ | 49 |   |
| Percentage  of total revenues |   | —                                 | %      | 1                                     | %      | 2 | % | 1 | % |
|                               |        |                                        |        |                                       |        |  |  |  |  |  |  |  |  |

 

In the threemonths ended September 30, 2002, we realized a foreign exchange gain of $2,000compared to a gain of $23,000 in the three months ended September 30, 2001. Inthe nine months ended September 30, 2002, we realized a foreign exchange gainof $103,000 compared to a gain of $49,000 in the nine months ended September30, 2001.

 

Approximately 99% of ourtotal revenues and over 48% 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 the third quarter of 2002 or the thirdquarter of 2001 and had no option hedge contracts outstanding as of September30, 2002 or September 30, 2001.

 

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

 

27

----

 

**Benefit for income taxes**

 
|                                  |   | **Three  months ended  September 30,** |   | **Nine  months ended  September 30,** |   |
|---------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                  |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
|                                  |   | **(in thousands)**                     |   |
| Provision  (benefit) for income taxes |   | $                                      | (132   | )                                     | $      | 3 |   | $ | (1,964 | ) | $ | 63 |   |
| Effective  income tax rate            |   | —                                 |   | —                                |   | — |   | — |   |
|                                       |        |                                        |        |                                       |        |  |  |  |  |  |  |  |  |

 

The benefit for incometaxes for the three and nine months ended September 30, 2002 primarilyrepresented refunds received from the United Kingdom for research anddevelopment claims.  The provision forincome taxes for the three months and nine months ended September 30, 2001  primarily represented Japanese sales taxwithholding.  We have recorded a full valuationallowance against all deferred tax assets, primarily comprised of net operatinglosses, on the basis that significant uncertainty exists with respect to theirrealization.

 

**Liquidity and capital resources**

** **
|                                                              |   | **September  30,  2002** |   | **September  30,  2001** |   |
|-------------------------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                                              |   | **(in  thousands)**      |   |
|                                                              |   |                     |   |                     |   |
| Cash,  cash equivalents and restricted cash                       |   | $                        | 3,612  |                     | $      | 10,776 |   |
| Working  capital                                                  |   | 6,293                    |   | 12,762                   |   |
| Net  cash used in operating activities, for the nine months ended |   | $                        | (5,829 | )                        | $      | (11,647 | ) |

 

We have transitioned ourproduct focus from compatibility products to our Jeode product line based onour virtual machine technology.  Thischange in product focus has resulted in a redirection of available resourcesfrom our historical revenue base towards the development and marketing effortsassociated with the Jeode platform, which was released for general availabilityin March 1999.  Cash used in operatingactivities in the third quarter of 2002 totaled $3.5 million compared to cashprovided by operations of $264,000 in the second quarter of 2002.  For the nine months ended September 30,2002, cash used in operating activities totaled $5.8 million compared to $11.6million for the same period in 2001.

 

Cash, cashequivalents, and restricted cash, were $3.6 million at September 30, 2002, adecrease of $7.2 million from $10.8 million at September 30, 2001.  Working capital decreased to $6.3 million atSeptember 30, 2002, from $12.8 million at September 30, 2001. The principalsource of working capital came from accounts receivable collections and warrantand option exercises. During the nine months ended September 30, 2002, netaccounts receivable decreased $5.0 million from $6.0 million at December 31,2001 to $1.0 million at September 30, 2002 due to firm collection efforts. Weexpect that the decrease in accounts receivable, decreased revenues in thequarter ended September 30, 2002, and other factors will substantially decreaseour future cash flows for at least the next quarter.

 

As of September30, 2002, four customers accounted for 60% of the gross accounts receivablebalance. A large portion of the accounts receivable balance at December 31,2001 related to one customer, Phoenix, and accounted for 74% of the outstandingbalance.

 

28

----

 

In September 2001,Insignia and Sun Microsystems, Inc. (“Sun”) entered into Amendment No. 3 (the“Amendment”) to the Technology License and Distribution Agreement (the“Distribution Agreement”) between the two companies.  In addition, in June 2001, the two companies entered into anaddendum (the “Addendum”) to the Distribution Agreement relating todistribution of products to an Insignia customer.  The Amendment and the Addendum each required us to makenon-refundable royalty prepayments to Sun. There are no additional required royalty prepayments due to Sun underthis agreement.  We continually evaluaterecoverability of these prepaid royalties and, if necessary, will charge tocost of sales any amount that we deem unlikely to be recoverable in thefuture.  We have performed an assessmentof whether there was an indication that the prepaid royalties of $2.45 millionare impaired as of September 30, 2002. 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.  Ourestimation of utilization, based on past revenue history and future revenueestimates using current average per unit selling price ranges, indicates thatthere could be unused prepaid royalties at the expiration of the license anddistribution agreement.  However, webelieve that should unused prepaid royalties become predictable in the future,we could reduce the selling price in order to utilize the remaining prepaidbalance.  This price reduction wouldresult in lower gross margins.  We willcontinue to assess this potential impairment on a quarterly basis.  The deterioration of the business climateand lower than expected product sales could potentially impact this assessmentand require an impairment charge in a future quarter.

 

During 1998, wesublet until March 2002 facilities we previously occupied in the UnitedKingdom, on substantially the same terms as those applicable to Insignia. InJanuary 2002, we entered into an agreement with the landlord to terminate thelease on April 13, 2002.  On April 3,2002, we paid a surrender payment of $470,000. Our balance sheet at September 30, 2002 includes a receivable of $70,200from the sub-tenant pertaining to the recovery of dilapidation costs per thefacility lease.  This receivable wassubsequently collected in October 2002.

 

On March 28, 2002,our U.S. subsidiary, Insignia Solutions, Inc. (“Insignia U.S.”) entered into anaccounts receivable financing agreement with Silicon Valley Bank.  The financing agreement allows Insignia U.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 expires on March 27,2003.  Borrowing is subject tocompliance with certain covenants, including a requirement to maintain specificfinancial ratios.  Borrowings aresecured by substantially all of the assets of Insignia U.S.  Insignia U.S. was in compliance with thesecovenants at September 30, 2002, and at that time there were no outstandingborrowings under this credit facility.

 

We have granted extendedpayment terms from time to time and, depending on various factors, includingthe length of the extended payment period and the creditworthiness of thecustomer.   We report these futurepayments as accounts receivable and either recognized revenue or deferredrevenue.  Deferred revenue increased$32,000 for the three months ended September 30, 2002 and decreased by$3,501,000 for the nine months ended September 30, 2002.  The decrease primarily reflected the revenuerecognition of $3,200,000 from the Phoenix Technologies agreement.

 

On October 17,2002, we entered into a securities subscription agreement (“Agreement”) withFusion Capital Fund II, LLC (“Fusion Capital”), pursuant to which FusionCapital has agreed to purchase, on each trading day following the effectivenessof a registration statement covering the American Depository Shares to bepurchased by Fusion Capital, $10,000 of our American Depository Shares up to anaggregate of $6.0 million over a period of 30 months. The purchase price of theAmerican Depository Shares will be equal to a price based upon the futuremarket price of the shares without any fixed discount to the market price.

 

Under the terms of theAgreement, we issued to Fusion Capital one redeemable warrant for AmericanDepository Shares representing 1,000,000 ordinary shares, and onenon-redeemable warrant for American Depository Shares representing 1,000,000ordinary shares.  The redeemable warrantmay be redeemed by Insignia at any time on or before June 30, 2003 for anaggregate redemption price of $200,000. The exercise price per share of each warrant is the U.S. dollarequivalent of 20.5 pence.  Each warrantexpires on September 30, 2007.  Unlessan event of default occurs under the Agreement, the shares issuable uponexercise of these warrants must be held by Fusion Capital until 30 months fromthe date of the Agreement or the date the Agreement is terminated. The warrrantsare immediately exercisable; however, Fusion Capital

 

29

----

 

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 the forms of the RegistrationRights Agreement, the Redeemable Warrant and the Non-Redeemable Warrant betweenInsignia and Fusion Capital are filed as Exhibits to the 8-K dated October 22,2002.

 

Based upon ourcurrent forecasts and estimates, our current cash, cash equivalents andshort-term investments, together with cash generated from on-going operationsand other liquid sources of cash (including the existing credit line) availableto us, may not be sufficient to meet our anticipated cash needs for workingcapital and capital expenditures.  Therecan be no assurance that we will not require additional financing to fundoperations in calendar 2003.  If cashcurrently available from all sources is insufficient to satisfy our liquidityrequirements, we may seek additional sources of financing including sellingadditional equity or obtaining convertible debt securities. If additional fundsare raised through the issuance of equity or debt securities, these securitiescould have rights, preferences and privileges senior to holders of our shares,and the terms of such securities could impose restrictions on ouroperations.  The sale of additionalequity or convertible debt securities could result in additional dilution toour stockholders.  We may not be able toobtain additional financing on acceptable terms, if at all.  If we are unable to obtain additionalfinancing as and when needed and on acceptable terms, we may be required toreduce the scope of our planned sales, marketing and product developmentefforts, which could jeopardize our business. The size of our accumulated deficit, our losses and our ongoing need forcapital in order to continue our operations raises substantial doubt as to ourability to continue operations.  Failureto reduce expenses and/or obtain additional financing will result in a materialadverse effect on our ability to meet our business objectives and continue as agoing concern.  The report of theCompany’s independent accountants included on our financial statements includedin the registration statement on Form S-1 filed on October 31, 2002 includes anexplanatory paragraph as to the uncertainty that the Company will continue as agoing concern.

 

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

 

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

 

We had working capital of$6.3 million at September 30, 2002, and our cash, cash equivalents, andrestricted cash totaled $3.6 million at September 30, 2002.  We had an operating cash flow deficit of$5.8 million for the nine months ended September 30, 2002 and an operating cashflow deficit of $13.4 million for the year ended December 31, 2001.  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 the Company’s ability to continue as a going concern.  The report of our independent accountantsincluded on our financial statements included in the registration statement onForm S-1 filed on October 31, 2002 includes an explanatory paragraph as to theuncertainty that we will continue as a going concern.

 

We only have the right toreceive $10,000 per trading day, up to an aggregate of $6 million over a periodof 30 months under the agreement with Fusion Capital unless our stock priceequals or exceeds $1.00, in which case the daily amount may be increased, atthe option of Insignia, as the price of our shares increases.  Fusion Capital will not have the right norbe obligated to purchase any of our shares on any trading days that the marketprice of our shares is less than $0.15 per

 

30

----

 

share.  Since we intend to initially register10,000,000 shares for sale by Fusion Capital (in addition to 2,000,000 sharesexercisable pursuant to warrants held by Insignia), the selling price of ourshares to Fusion Capital will have to average at least $0.60 per share for usto receive the maximum proceeds of $6 million without registering additionalshares. Assuming a purchase price of $0.39 per share (the closing sale priceper share of our ADSs on October 30, 2002) and the purchase by Fusion Capitalof the full 10,000,000 shares under the securities subscription agreement withInsignia, proceeds to us would be $3.9 million unless we choose to registermore than 10,000,000 shares, which we have the right, but not the obligation,to do.

 

In order to be incompliance with Nasdaq National Market rules, we could not sell our ordinaryshares to Fusion Capital at a price below $0.38, which represents the greaterof the book value per share of our ordinary shares as of September 30, 2002 orthe closing sale price per share of our ADSs on October 16, 2002.  If we elect to sell our shares to FusionCapital at a price per share below $0.38, we first would be required to obtainshareholder approval in order to be in compliance with the Nasdaq NationalMarket rules.  Under the laws of Englandand Wales, we are not permitted to sell our ADSs at a purchase price that isless than the nominal value of our ordinary shares.  Currently, the nominal value per ordinary share is £0.20.

 

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

 

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

 

Whether or not we are able to raise additional fundson acceptable terms, it is likely that we will not have sufficientshareholders’ equity to maintain the listing of our shares on the NasdaqNational Market, the rules of which require us to maintain total shareholders’equity of at least $10 million.  As ofSeptember 30, 2002, our total shareholders’ equity was $5.2 million. We havereceived a letter from Nasdaq informing us that it would provide us with formalwritten notice of our failure to comply with this requirement if our publicfilings due after November 1, 2002 disclose shareholders’ equity below $10million.

 

Further, we may not be able to develop new products orenhance our existing products, take advantage of future opportunities orrespond to competitive pressures or unanticipated requirements. Whether or notadditional funds are raised through the issuance of debt securities, sale ofadditional equity or by other means, Insignia’s stock price may not remain above$1.00. During the twelve months ended November 6, 2002, the closing price ofour shares ranged from a high of $2.55 to a low of $0.31. Under the rules ofthe Nasdaq Stock Market, our stock price must remain above $1.00 per share forcontinued quotation of our shares on the Nasdaq National Market. We recentlyreceived a letter from Nasdaq notifying us that we were not in compliance withthis requirement and that we would be provided 90 calendar days, or untilDecember 11, 2002, to regain compliance.

 

31

----

 

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

 

The purchase price for the shares to be issued to FusionCapital pursuant to the securities subscription agreement with Fusion Capitalwill fluctuate based on the price of our shares.  All shares sold to Fusion Capital under the securitiessubscription agreement will be freely tradable.  Fusion Capital may sell none, some or all of the shares purchasedfrom us at any time.  We expect that theshares to be sold to Fusion Capital will be sold over a period of up to 30months from the effective date of the registration statement filed inconnection with the transaction. Depending upon market liquidity at the time, a sale of such shares atany given time could cause the trading price of our shares to decline.  The sale of a substantial number of shares,or anticipation of such sales, could make it more difficult for us to sellequity or equity-related securities in the future at a time and at a price thatwe might otherwise wish to effect sales.

 

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

 

Our future performance depends upon sales of productswithin our Jeode product line.  Revenuesrelated to the Jeode product line accounted for 100% of our total revenue of$6.4 million for the nine months ended September 30, 2002.  We incurred an operating loss of $7.3 millionfor the nine months ended September 30, 2002. At current expense levels, we require total revenues of more than $5million per quarter to achieve an operating profit. Jeode may not achieve orsustain market acceptance or provide the desired revenue levels.  The Jeode product line is our sole productline, and we rely, and expect to continue to rely upon, sales of Jeode productsfor our revenue in the future.

 

**The long and complex process oflicensing our Jeode product makes our revenue unpredictable.**

 

Our revenue is dependent upon our ability to licensethe Jeode product to third parties. Licensing our Jeode product is a long andcomplex process, which usually takes from 6 or 9 months to complete. 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. Because of the sales cycle, it is difficult forus to predict when, or if, a particular prospect might sign a licenseagreement. Development license fees may be delayed or reduced because of thisprocess.

 

32

----

 

**If products that integrate our Jeode technology do not sellwell, we will not receive additional royalty payments on our licenses.**

 

Our success depends upon the use of our technology byour licensees in their smart devices. Our licensees undertake a lengthy processof developing systems that use our technology. When a licensee enters into adevelopment license with us, we normally require the licensee to prepay somefuture commercial use royalties, typically an amount projected to cover 3 to 6months of future usage. Until a licensee has sales of its systems incorporatingour technology which create sufficient commercial use royalties to surpass anyprepayment to us, we do not receive any further royalties from that licensee.We expect that the period of time between entering into a development licenseand actually recognizing commercial use royalties to be lengthy and difficultto predict.

 

**If our license agreement with Sun Microsystems, Inc. isterminated or expires without renewal, we would not be able to market our Jeodeproduct line.**

 

In the first quarter of 1999, we signed a five-year agreement with SunMicrosystems, Inc. under which Sun established Insignia as a Sun authorizedvirtual machine provider. The agreement also grants us immediate access to theJava compatibility test suite and the Java technology source code. Theagreement includes technology sharing and compatibility verification. Under theagreement, we will 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 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, established aprepaid royalty schedule and extended the expiration date of the contract fromMarch 2004 to June 2004. If the agreement with Sun terminates or expireswithout renewal, we would not be able to market our Jeode product line. Anydisruption in our relationship with Sun would likely impair our sales of Jeode.

 

We also license software development tool products from other companiesto distribute with some of our products. These third parties may not be able toprovide competitive products with adequate features and high quality on atimely basis or to provide sales and marketing cooperation. Further, ourproducts compete with products produced by some of our licensors. When theselicenses terminate or expire, continued license rights might not be availableto us on reasonable terms. We might not be able to obtain similar products tosubstitute into our tool suites. Through the date of this report, we have notexperienced any major problems with our third-party licenses.

 

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

 

We have experiencedoperating losses in each quarter since the second quarter of 1996. To achieveprofitability, we will have to increase our revenue significantly. Our abilityto increase revenues depends upon the success of our Jeode product line. Jeodehas only been available since March 1999 and it may not achieve marketacceptance. If we are unable to create revenues from Jeode in the form ofdevelopment license fees, maintenance and support fees, commercial useroyalties and customer-funded engineering services, our current revenues willbe insufficient to sustain our business.

 

33

----

 

For the fiscal year 2001 and the nine months ended September 30, 2002,we spent 69% for both periods of our total revenues on sales and marketing. Weexpect to continue to incur disproportionately high sales and marketingexpenses in the future. To market Jeode effectively, we must further developdirect sales channels in the smart device market. We will continue to incur theexpenses for a sales and marketing infrastructure before we recognizesignificant revenue from sales of the product. Because customers in the smartdevice market tend to remain with the same vendor over time, we believe that wemust devote significant resources to each potential sale. If potentialcustomers do not design our products into their systems, the resources we havedevoted 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 mustsignificantly increase our revenues if we are to become profitable.

** **

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

 

The market for smart devices such as (Personal Digital Assistants(PDAs) and mobile handsets) is fragmented and characterized by technologicalchange, evolving industry standards and rapid changes in customer requirements.Our existing products will become less competitive or obsolete if we fail tointroduce new products or product enhancements that anticipate the features andfunctionality that customers demand. The success of our new productintroductions will depend on our ability to:

 

• accurately anticipate industrytrends and changes in technology standards;

 

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

 

• continue to enhance our existingproduct lines;

 

• offer our products across aspectrum of microprocessor families used in the smart devices market; and

 

• respond promptly to customers’requirements and preferences.

 

The introduction of new or enhanced products also requires that wemanage the transition from older products to minimize disruption in customerordering patterns. We have had difficulty managing the transition from olderproducts in the past. For example, between 1995 and 1999, we transitioned fromour SoftWindows product line to our NTRIGUE product line and began preparationsfor our Jeode product line. During this same period our yearly revenues droppedfrom a high of $55.1 million in 1995 to a low of $6.8 million in 1999. Thedecrease in revenues was partly because we did not timely introduce newproducts which could compensate for the decreasing demand for our SoftWindowsproduct line. Development delays are commonplace in the software industry. Wehave experienced delays in the development of new products and the enhancementof existing products in the past and are likely to experience delays in thefuture. We may not be successful in developing and marketing, on a timely basisor at all, competitive products, product enhancements and new products thatrespond to technological change, changes in customer requirements and emergingindustry standards.

 

In addition, we also face significant risks associated with thedevelopment and future deployment of our Secure System Provisioning (“SSP”)products and the successful execution of the related

 

34

----

 

business strategy. During 2001, we began development of a range of SSPproducts for the mobile handset and wireless carrier industry.  These SSP products build on our position asa Virtual Machine (“VM”) supplier for manufacturers of mobile devices and allowwireless carriers to build valuable incremental services.  We are planning for these new SSP productsto be available for market trials in early calendar 2003 and available forshipment to customers in mid-calendar 2003. We have limited history with salesinitiatives for new products. Additionally, the sales cycle for the SSPproducts is expected to take longer than the typical six to nine months tocomplete, as seen with the Jeode product.

 

**Ourtargeted market is highly competitive.**

 

Our Jeode product line is targeted for the smart device market.  The market for these products is fragmentedand highly competitive. This market is also rapidly changing and there are manycompanies creating products that compete or will compete with ours. As theindustry develops, we expect competition to increase in the future. Thiscompetition may come from existing competitors or other companies that we donot yet know about. Our main competitors include Aplix Corporation,  International Business Machines, Kada Systems,Inc., and Tao Group. 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 performance or functionality than our Jeode 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. Competition could force us to reduce the prices of ourproducts, which would result in reduced profit margins and could harm ourability to provide adequate service to our customers. Our pricing model for oursoftware products is based on a range of mid-priced development licensepackages, combined with low-priced per-unit royalty payments for each smartdevice that incorporates our technology, and may be subject to significantpricing pressures, including buy-out arrangements. Also, the market may demandalternative pricing models in the future. A variety of other potential actionsby our competitors, including increased promotion and accelerated introductionof new or enhanced products, 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:

 

•    thevolume and timing of orders received during the quarter;

 

•    themix of and changes in customers to whom our products are sold;

 

•    themix of product and service revenue received during the quarter;

 

•    themix of development license fees and commercial use royalties received;

 

•    thetiming and acceptance of new products and product enhancements by us or by ourcompetitors;

 

•    changesin product pricing;

 

35

----

 

•    buyoutsof commercial use licenses;

 

•    productlife cycles;

 

•    thelevel of our sales of third-party products;

 

•    variancesin costs in fixed price contracts;

 

•    purchasingpatterns of customers;

 

•    competitiveconditions in the industry;

 

•    foreigncurrency exchange rate fluctuations;

 

•    businesscycles and 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 agreements enteredinto during a quarter do not meet our revenue recognition criteria, even if wemeet or exceed our forecast of aggregate licensing and other contractingactivity, it is possible that our revenues would not meet expectations. Due toall of these factors, we believe that period-to-period comparisons of ourresults of operations are not necessarily meaningful and should not be viewedas an indication of our future performance. In the past, we have experiencedactual performance that did not meet financial market expectations. It islikely that, in some future quarters, our operating results will again be belowthe expectations of stock market analysts and investors.

 

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

 

Sales from outside of the United States accounted for approximately 14%and 6% of our total revenue in fiscal year 2001 and the nine months endedSeptember 30, 2002, respectively, and are expected to increase over time. Wemarket Jeode to manufacturers of smart devices in Europe and Asia, particularlyin Japan. Economic conditions in Asia and Europe generally and fluctuations inthe value of the Japanese yen and the euro against the U.S. dollar and Britishpound sterling could impair our revenues and results of operations.International operations are subject to a number of other risks. These risksinclude:

 

• foreign government regulation;

 

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

 

• longer receivable collectionperiods and greater difficulty in accounts receivable collection;

 

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

 

36

----

 

• potentially adverse taxconsequences;

 

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

 

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

 

• possible recessionary environmentsin 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 undetected errors or compatibilityproblems. This is particularly true when a product is first introduced or a newversion is released. Despite thorough testing, our products might be shippedwith errors. If this were to happen, our products could be rejected bycustomers, or there might be costly delays in correcting the problems. Ourproducts are increasingly used in systems that interact directly with thegeneral public, such as in transportation and medical systems. In systems suchas these, the failure of our product could cause substantial property damage orpersonal injury, which would expose us to product 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 customerstypically contain provisions designed to limit our exposure to potentialproduct liability and other claims. It is likely, however, that theseprovisions are not effective in all circumstances and in all jurisdictions. Wemay not have adequate insurance against product liability risks and renewal ofour insurance may not be available to us on 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 liabilityclaim or claim for economic loss brought against us in the future could lead tounexpected large expenses and lost sales. Also, if we ever had to recall ourproduct due to errors or other problems, it would cost us a great deal of time,effort and expense. Our operations depend on our ability to protect ourcomputer equipment and the information stored in our databases against damageby fire, natural disaster, power loss, telecommunications failure, unauthorizedintrusion and other catastrophic events. We believe we have taken prudentmeasures to reduce the risk of interruption in our operations. However, thesemeasures might not be sufficient. As of the date of this report, we have notexperienced any major interruptions in our operations because of a catastrophicevent.

 

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

 

Our future performancedepends to a significant degree upon the continued contributions of our keymanagement, product development, sales, marketing and 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 our future success will also depend in largepart upon our ability to attract and retain highly skilled managerial,engineering, sales, marketing and operations personnel, many of whom are ingreat demand. Competition for qualified personnel can be intense in the SanFrancisco bay area, where our U.S. operations are headquartered.

 

37

----

 

**If wefail to protect our intellectual property rights, competitors could introducesimilar 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 competitors could independently develop technologiesthat are substantially equivalent or superior 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 ofintellectual property rights may be unavailable or limited in foreigncountries. 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 have been granted on fundamentaltechnologies in software, and patents may issue that relate to fundamentaltechnologies incorporated into our products.

 

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

 

As the number of patents,copyrights, trademarks and other intellectual property rights in our industryincreases, products based on our technology may increasingly become the subjectof infringement claims. Third parties could assert infringement claims againstus in the future. Infringement claims with or without merit could be timeconsuming, result in costly litigation, cause product shipment delays orrequire us to enter into royalty or licensing agreements. Royalty or licensingagreements, if required, might not be available on terms acceptable to us. Wemay initiate claims or litigation against third parties for infringement of ourproprietary rights or to establish the validity of our proprietary rights.Litigation to determine the validity of any claims, whether or not thelitigation is resolved in our favor, could result in significant expense to usand divert the efforts of our technical and management personnel fromproductive tasks. If there is an adverse ruling against us in any litigation,we may be required to pay substantial damages, discontinue the use and sale ofinfringing products, expend significant resources to develop non-infringingtechnology or obtain licenses to infringing technology. Our failure to developor license a substitute technology could prevent us from selling our products.

 

**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 not suspended registration statements for morethan 60 days in any 12 month period in the past. However, because registrationstatement number 333-57528 was not declared effective by the Securities andExchange Commission by May 14, 2001, we made available to certain investors anadditional total of 65,800 ADSs.  Threeof four investors have purchased their ADSs and one investor has yet topurchase the shares available to it. The purchase price shareholders have paid or will pay per additional ADSis the nominal value, or £0.20 per ADS, which is the lowest amount these sharescan be purchased under

 

38

----

 

English law. If we issue additional ADSs under these obligations, theownership interest of existing shareholders will be diluted.

 

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

 

Certain investors who participated in our four private placementsreceived warrants which have anti-dilution protections. This means that theyare entitled to purchase an additional amount of ordinary shares, in the formof ADSs, if we issue ordinary shares at a price below market price. Theanti-dilution protections, if triggered, increase the number of shares whichthe investors may purchase with their warrants. The exact amount of theincrease is not known until the anti-dilution protections are actuallytriggered. There are two ways the anti-dilution protections can be triggered:(1) if we sell our securities in a transaction, such as a private placementfinancing, for a price that is lower than the ten day average price of our ADSsbefore the transaction, or (2) if the warrants issued in those relevant privateplacements are exercised at a price less than the ten day average price of ourADSs at the time of exercise. The issuance of the warrants to Fusion under thesecurities subscription agreement triggered these anti-dilution protections.  Further, when some of the warrants we issuedin the private placements are exercised, anti-dilution protections will likelybe triggered. The amount of the anti-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 rightto purchase an increasing amount of shares during a decline in the price of ourADSs. If the warrant holders exercise their warrants and sell their shares inthe open market during this time, downward pressure is added to the price. Thiscan further increase the anti-dilution adjustments for the remaining warrantholders. Short sales of our shares may further the downward pressure on theprice of our ADSs. Anti-dilution adjustments and short sales may accelerate andcompound a decline in the price of our ADSs. Shareholders will also be dilutedas warrant holders gain the right to purchase an increasingly large number ofshares due to 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 November 6, 2002, the closing price per share of Insigniaranged from a high of $2.55 to a recent low of $0.31. Under the rules of TheNasdaq Stock Market, our stock price must remain above $1.00 per share forcontinued quotation of our shares on the Nasdaq National Market. Stock pricevolatility has had a substantial effect on the market prices of securitiesissued by us and other high technology companies, often for reasons unrelatedto the operating performance of the specific companies. In the past, followingperiods of volatility in the market price of a company’s securities, securitiesclass action litigation has often been instituted against high technologycompanies. We may in the future be the target of similar litigation. Regardlessof the outcome, securities litigation may result in substantial costs anddivert management attention and resources.

 

39

----

 

**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.  One of our executive officers and two of ourdirectors reside in England. All or a substantial portion of the assets ofthese persons, and a significant portion of our assets, are located outside ofthe United States. It may not be possible for investors to serve a complaintwithin the United States upon these persons or to enforce against them oragainst us, in U.S. courts, judgments obtained in U.S. courts based upon thecivil liability provisions of U.S. securities laws. There is doubt about theenforceability outside of the United States, in original actions or in actionsfor enforcement of judgments of U.S. courts, of civil liabilities based solelyupon U.S. securities laws. The rights of holders of our shares are governed byEnglish law, including the Companies Act 1985, and by our memorandum andarticles of association. The rights of holders of our ADSs are also affected byEnglish law. These rights differ from the rights of security holders in typicalU.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 from our failure to achieve the consensusearnings estimates of research analysts in the first quarter following ourinitial public offering in November 1995. In August 1997, we reached amemorandum of understanding to settle the suits. Although we never agreed withthe allegations, we paid $8.0 million to the plaintiffs, of which our insurancecompany paid $7.5 million.  In February1997, we restated our financial results for the quarters ended March 31 andJune 30, 1996. We revised our revenue and net income numbers downward for thesetwo quarters due to inflated revenues resulting from misstatement of inventorylevels of one of our resellers by two of our sales and marketing personnel. Weagreed with the SEC to cease and desist from engaging in similar accountingpractices. The two Insignia sales and marketing people involved in the revenuemisstatement are no longer with Insignia and were forced to pay significantfines. We did not have to pay any fines.

 

**Item 3****.  Quantitative andQualitative Disclosures About Market Risk**

 

From time to time,we enter into derivative financial instruments such as currency optioncontracts to hedge certain anticipated, but not yet committed, transactionsexpected to be denominated in foreign currencies.  We do not use derivative financial instruments for trading orspeculative purposes.  Our downside riskwith respect to currency option contracts (British pound sterling) is limitedto the premium paid for the right to exercise the option.  We did not enter into any currency optionhedge contracts in the third quarter of 2002 or the third quarter of 2001 andhad no option hedge contracts outstanding as of September 30, 2002 or September30, 2001.

** **

**Item 4.     Controls andProcedures**

 

We have evaluatedthe design and operation of our disclosure controls and procedures to determinewhether they are effective in ensuring that the disclosure of requiredinformation is timely made in accordance with the Exchange Act and the rulesand regulations of the Securities and Exchange Commission. This evaluation wasmade under the supervision and with the participation of management, includingour principal executive officer and principal financial officer within the90-day period prior to the filing of this Quarterly Report on Form 10-Q. The

 

40

----

 

 principal executive officer and principalfinancial officer have concluded, based on their review, that our disclosurecontrols and procedures, as defined at Exchange Act Rules 13a-14(c) and15d-14(c), are effective to ensure that information required to be disclosed byus in reports that we file under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. No significant changes were made to ourinternal controls or other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

41

----

 

**PART II - OTHER INFORMATION**

 

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

 

None

 

### **Item2.  Changes in Securities and Use ofProceeds**

 

None

 

### **Item3.  Defaults Upon Senior Securities**

 

None

 

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

 

None

 

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

 

None

 

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

 

(a) Exhibits

 

The following exhibitsare filed as part of this Report:

 

99.1                                                                           Certification pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002 – Chief Executive Officer

 

99.2                                                                           Certification pursuant to 18 U.S.C.Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002 – Chief Financial Officer

 

 

(b) Reports on Form 8-K

 

None

 

42

----

 

**SIGNATURES**

 

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

 

 
|                    | INSIGNIA  SOLUTIONS PLC        |
|-------------------------|--------------------------------|
|                    | (Registrant)                   |
|                    |                           |
| Date: November 14, 2002 |                           |
|                    |                           |
|                    |                           | /s/ RICHARD M. NOLING |   |
|                    | RICHARD M. NOLING              |
|                    | Acting Chief Financial Officer |

 
| **Signature**                |   | **Capacity**                                  |   | **Date**          |
|------------------------------|--------|-----------------------------------------------|--------|-------------------|
|                         |   |                                          |   |              |
|  /s/ Richard M.  Noling |   | Chief Executive  Officer,                     |   | November 14, 2002 |
|  Richard M. Noling      |   | Acting Chief Financial   Officer and Director |   |              |
|                         |   |                                          |   |              |
|  /s/ Mark E.  McMillan  |   | President                                     |   | November 14, 2002 |
|  Mark E. McMillan       |   |                                          |   |              |

 

43

----

 

**CERTIFICATIONS****UNDER SECTION 302 OF THESARBANES-OXLEY ACT OF 2002**

 

I,Richard M. Noling, certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q ofInsignia Solutions plc;

 

2.               Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.               The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s Board of Directors (or personsperforming the equivalent function):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)             any fraud, whether or not material, that involvesmanagement or other employees who have significant role in the registrant’sinternal controls; and

 

6.               The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Dated: November 14,  2002 |                                                         |
|---------------------------|--------------------------------------------------------------|
|                      |                                                         |
|                      |                                                         |
|                      | /s/ Richard M. Noling                                        |   |
|                      | Richard M. Noling                                            |
|                      | Chief Executive Officer  and  Acting Chief Financial Officer |

 

44

----

** **

I, Mark E. McMillan,certify that:

 

1.               I have reviewed this quarterly report on Form 10-Q ofInsignia Solutions plc;

 

2.               Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

3.               Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in this quarterlyreport;

 

4.               The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and wehave:

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officers and I havedisclosed, based on our most recent evaluation, to the registrant’s auditorsand the audit committee of registrant’s Board of Directors (or personsperforming the equivalent function):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)             any fraud, whether or not material, that involvesmanagement or other employees who have significant role in the registrant’sinternal controls; and

 

6.               The registrant’s other certifying officers and I haveindicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantly affectinternal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Dated:  November 14, 2002 |                 |
|--------------------------------|----------------------|
|                           |                 |
|                           |                 |
|                           | /s/ Mark E. McMillan |   |
|                           | Mark E. McMillan     |
|                           | President            |

 

 

45

----