Overview

Insignia Systems, Inc. markets in-store advertising programs, services and products to retailers and consumer packaged goods manufacturers. The Company's services and products include the Insignia Point-of-Purchase Services (POPS) in-store advertising program, thermal sign card supplies for the Company's SIGNright and Impulse systems, Stylus software and laser printable cardstock and label supplies.

Results of Operations



The following table sets forth, for the periods indicated, certain items in the
Company's Statements of Operations as a percentage of total net sales.



                                          Three Months Ended        Nine Months Ended
                                             September 30             September 30
                                           2008         2007         2008        2007
Net sales                                    100.0 %     100.0 %       100.0 %    100.0 %
Cost of sales                                 47.7        44.2          45.8       42.9
Gross profit                                  52.3        55.8          54.2       57.1
Operating expenses:
Selling                                       29.8        21.7          25.9       22.0
Marketing                                      5.2         5.5           5.3        5.4
Warrant expense (selling & marketing)            -        23.5             -        7.8
General and administrative                    23.2        19.3          24.0       18.3
Total operating expenses                      58.2        70.0          55.2       53.5
Operating income (loss)                       (5.9 )     (14.2 )        (1.0 )      3.6
Other income (expense)                         0.5         0.8           0.6        0.5
Income (loss) before taxes                    (5.4 )     (13.4 )        (0.4 )      4.1
Income tax expense (benefit)                  (2.4 )       0.7           0.0        0.4
Net income (loss)                             (3.0 )%    (14.1 )%       (0.4 )%     3.7 %

Increased net sales in the first nine months of 2008 compared to the first nine months of 2007 resulted in increased gross profit in 2008. This increase in gross profit was more than offset by increased operating expense in 2008 resulting in a net loss in the first nine months of 2008 as compared to net income in the first nine months of 2007. The increased operating expense in the 2008 period was primarily legal fees and expenses related to the News America litigation and increased sales commissions related to increased sales and higher incentives.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 1 to the annual financial statements as of and for the year ended December 31, 2007, included in our Form 10-K filed with the Securities and Exchange Commission on March 31, 2008. We believe our most critical accounting policies and estimates include the following:
• revenue recognition;

• allowance for doubtful accounts;

• accounting for deferred income taxes; and

• stock-based compensation.

Three and Nine Months ended September 30, 2008 Compared to Three and Nine Months Ended September 30, 2007

Net Sales. Net sales for the three months ended September 30, 2008, increased 33.1% to $8,597,000 compared to $6,461,000 for the three months ended September 30, 2007. Net sales for the nine months ended September 30, 2008, increased 16.6% to $22,738,000 compared to $19,495,000 for the nine months ended September 30, 2007.

Service revenues from our POPSign programs for the three months ended September 30, 2008, increased 39.9% to $7,999,000 compared to $5,718,000 for the three months ended September 30, 2007. Service revenues from our POPSign programs for the nine months ended September 30, 2008, increased 20.5% to $20,830,000 compared to $17,281,000 for the nine months ended September 30, 2007. The increases were primarily due to an increase in the number of POPSign programs executed for customers (consumer packaged goods manufacturers) during the 2008 periods which more than offset reductions in the average sign price during the 2008 periods.

Product sales for the three months ended September 30, 2008, decreased 19.5% to $598,000 compared to $743,000 for the three months ended September 30, 2007. Product sales for the nine months ended September 30, 2008, decreased 13.8% to $1,908,000 compared to $2,214,000 for the nine months ended September 30, 2007. The decreases were primarily due to lower sales of thermal and laser sign card supplies based on decreased demand for those products from our customers.

Gross Profit. Gross profit for the three months ended September 30, 2008, increased 24.7% to $4,499,000 compared to $3,608,000 for the three months ended September 30, 2007. Gross profit for the nine months ended September 30, 2008, increased 10.8% to $12,327,000 compared to $11,126,000 for the nine months ended September 30, 2007. Gross profit as a percentage of total net sales decreased to 52.3% for the three months ended September 30, 2008, compared to 55.8% for the three months ended September 30, 2007. Gross profit as a percentage of total net sales decreased to 54.2% for the nine months ended September 30, 2008, compared to 57.1% for the nine months ended September 30, 2007.

Gross profit from our POPSign program revenues for the three months ended September 30, 2008, increased 28.5% to $4,300,000 compared to $3,346,000 for the three months ended September 30, 2007. Gross profit from our POPSign program revenues for the nine months ended September 30, 2008, increased 13.4% to $11,640,000 compared to $10,264,000 for the nine months ended September 30, 2007. The increases in gross profit in the 2008 periods were primarily due to increased sales partially offset by increased costs (primarily retailer expenses). Gross profit as a percentage of POPSign program revenues for the three months ended September 30, 2008, decreased to 53.8% compared to 58.5% for the three months ended September 30, 2007. Gross profit as a percentage of POPSign program revenues for the nine months ended September 30, 2008 decreased to 55.9%, compared to 59.4% for the nine months ended September 30, 2007. The decreases in gross profit as a percentage of POPSign program revenues in the 2008 periods were primarily due to lower average sign prices combined with higher average sign costs (primarily retailer expenses) in the 2008 periods.

Gross profit from our product sales for the three months ended September 30, 2008, decreased 24.0% to $199,000 compared to $262,000 for the three months ended September 30, 2007. Gross profit from our product sales for the nine months ended September 30, 2008, decreased 20.3% to $687,000 compared to $862,000 for the nine months ended September 30, 2007. The decreases in gross profit in the 2008 periods were primarily due to decreased sales combined with fixed costs. Gross profit as a percentage of product sales was 33.3% for the three months ended September 30, 2008, compared to 35.3% for the three months ended September 30, 2007. Gross profit as a percentage of product sales was 36.0% for the nine months ended September 30, 2008, compared to 38.9% for the nine months ended September 30, 2007. The decreases in gross profit as a percentage of products sales in the 2008 periods were primarily due to decreased sales and the effect of fixed costs.

Operating Expenses

Selling. Selling expenses (exclusive of selling related warrant expense) for the three months ended September 30, 2008, increased 82.9% to $2,561,000 compared to $1,400,000 for the three months ended September 30, 2007. Selling expenses (exclusive of selling related warrant expense) for the nine months ended September 30, 2008, increased 36.9% to $5,878,000 compared to $4,295,000 for the nine months ended September 30, 2007. Increases in the 2008 periods were primarily due to increased sales commissions, staffing levels and meals and entertainment. The increased sales commissions were due to increased POPSign program sales and the effect of increased incentives for our strategic partner (Valassis Sales & Marketing Services, Inc. ("Valassis")) and our employed sales force.

Selling expenses (exclusive of selling related warrant expense) as a percentage of total net sales increased to 29.8% for the three months ended September 30, 2008, compared to 21.7% for the three months ended September 30, 2007. Selling expenses (exclusive of selling related warrant expense) as a percentage of total net sales increased to 25.9% for the nine months ended September 30, 2008, compared to 22.0% for the nine months ended September 30, 2007. The increases in selling expenses as a percentage of total net sales in the 2008 periods was due to the factors described above, partially offset by the effect of increased sales in the 2008 periods.

Marketing. Marketing expenses (exclusive of marketing related warrant expense) for the three months ended September 30, 2008, increased 26.3% to $451,000 compared to $357,000 for the three months ended September 30, 2007, primarily due to increased staffing levels and increased data acquisition expense. Marketing expenses (exclusive of marketing related warrant expense) for the nine months ended September 30, 2008, increased 15.1% to $1,211,000 compared to $1,052,000 for the nine months ended September 30, 2007, primarily due to increased staffing levels partially offset by decreased data acquisition expense.

Marketing expenses (exclusive of marketing related warrant expense) as a percentage of total net sales decreased to 5.2% for the three months ended September 30, 2008, compared to 5.5% for the three months ended September 30, 2007. Marketing expenses (exclusive of marketing related warrant expense) as a percentage of total net sales decreased to 5.3% for the nine months ended September 30, 2008, compared to 5.4% for the nine months ended September 30, 2007. Decreases in the 2008 periods were primarily due to the increased expenses discussed above which were more than offset by the effect of higher net sales during the 2008 periods.

Warrant expense (selling and marketing). On July 2, 2007, the Company and Valassis, entered into Amendment No. 2 (the "Amendment") to the Exclusive Reseller Agreement between the parties. The Amendment extends the term of the strategic alliance between the parties to December 31, 2017. The Amendment also expands the strategic alliance to increase the role of Valassis in developing and expanding the Company's participating retailer network. Valassis received a five-year warrant to acquire 800,000 shares of the Company's common stock at a price of $4.04 and will be paid a cash commission by the Company on the revenue the Company realizes from POPS programs the consumer packaged goods manufacturers conduct in the new retail chains. The Company recorded $1,521,000 of expense for the quarter ended September 30, 2007, related to the fair value of the warrant.

General and administrative. General and administrative expenses for the three months ended September 30, 2008, increased 60% to $1,992,000 compared to $1,245,000 for the three months ended September 30, 2007. General and administrative expenses for the nine months ended September 30, 2008 increased 52.9% to $5,457,000 compared to $3,569,000 for the nine months ended September 30, 2007. The increases in the 2008 periods were primarily due to increased legal expense related to the News America litigation (see below) and increased staffing which were partially offset by receipt of a lease termination payment. The Company received a payment of $400,000 for early termination of its previous facility lease on July 31, 2008. The payment, net of $115,000 of moving expense, is recorded as part of general and administrative expenses.

General and administrative expenses as a percentage of total net sales increased to 23.2% for the three months ended September 30, 2008, compared to 19.3% for the three months ended September 30, 2007. General and administrative expenses as a percentage of total net sales increased to 24.0% for the nine months ended September 30, 2008, compared to 18.3% for the nine months ended September 30, 2007. The increases in the 2008 periods were primarily due to factors discussed above partially mitigated by the effect of higher net sales during the 2008 periods.

Legal fees for the three months ended September 30, 2008, were $1,526,000 compared to $496,000 for the three months ended September 30, 2007. Legal fees for the nine months ended September 30, 2008, were $3,406,000 compared to $1,388,000 for the nine months ended September 30, 2007. The legal fees in each period were incurred primarily in connection with the News America lawsuit described in Note 2 to the financial statements. Legal fees increased in the 2008 periods primarily due to the increase in activity in the News America litigation as the parties prepare for trial scheduled to commence in 2009. We currently expect the amount of additional legal fees that will be incurred in connection with the ongoing lawsuits to be significant throughout the remainder of 2008 and 2009. Also, if the Company is required to pay a significant amount in settlement or damages, it will have a material adverse effect on its operations and financial condition. In addition, a negative outcome of this litigation could affect long-term competitive aspects of the Company's business.

Other Income (Expense). Other income for the three months ended September 30, 2008, was $44,000 compared to $52,000 for the three months ended September 30, 2007, primarily due to lower interest income. Lower interest income rates in the 2008 period more than offset the effect of higher cash balances in the 2008 period. Other income for the nine months ended September 30, 2008, was $135,000 compared to $89,000 for the nine months ended September 30, 2007, due to higher interest income and lower interest expense during the 2008 period. During the first nine months of 2008 the effect on interest income of higher cash balances was partially offset by lower interest rates, especially in the second and third quarter of 2008. Interest expense was lower in the nine months ended September 30, 2008, as a result of the expiration of the line of credit on April 30, 2007.

Income Taxes. The Company did not record a cumulative income tax benefit for the nine months ended September 30, 2008, as a result of the net loss for the nine months and its continued analysis of future taxable income levels and the amount of net deferred tax assets recorded at September 30, 2008. For the three months ended September 30, 2008, the Company recorded an income tax benefit of $207,000 in order to adjust the cumulative income expense/benefit to $0 for the nine month period. The Company recorded income tax expense of $44,000 and $60,000 for the three and nine months ended September 30, 2007, respectively, which was related to alternative minimum taxes.

Net Income (Loss). The net loss for the three months ended September 30, 2008, was $(254,000) compared to a net loss of $(907,000) for the three months ended September 30, 2007. The net loss for the nine months ended September 30, 2008, was $(84,000) compared to net income of $718,000 for the nine months ended September 30, 2007.

Liquidity and Capital Resources

The Company has financed its operations with proceeds from public and private stock sales and sales of its services and products. At September 30, 2008, working capital was $6,916,000 compared to $7,751,000 at December 31, 2007. During the first nine months of 2008, cash and cash equivalents increased by $943,000 to $8,336,000 at September 30, 2008, compared to $7,393,000 at December 31, 2007.

Net cash provided by operating activities during the nine months ended September 30, 2008, was $2,493,000. The increase in cash and cash equivalents resulted from the net loss of $(84,000), non-cash expense of $660,000 for depreciation, amortization and stock-based compensation expense, and $1,917,000 of changes to operating assets and liabilities during the nine months ended September 30, 2008.

Net cash of $987,000 was used in investing activities during the nine months ended September 30, 2008, due to the purchase of property and equipment, primarily the purchase of digital printing equipment, computer hardware and software and leasehold improvements in the new facility. Capital expenditures for the remainder of 2008 are expected to be minimal.

Net cash of $563,000 was used in financing activities during the nine months ended September 30, 2008. The Company received $98,000 of proceeds (net of expenses) from the issuance of common stock related to the employee stock purchase plan and exercises of stock options. The Company used $464,000 (including fees) of cash to repurchase 225,000 shares of common stock as part of the stock repurchase plan adopted in August 2008. The Company also used $197,000 of cash for the payment of long-term liabilities.

The Company believes that based upon current business conditions, its existing cash balance and future cash from operations will be sufficient for its cash requirements in the foreseeable future. However, there can be no assurances that this will occur or that the Company will be able to secure additional financing from public or private stock sales or from other financing agreements if needed.

Cautionary Statement Regarding Forward-Looking Information

Statements made in this quarterly report on Form 10-Q, in the Company's other SEC filings, in press releases and in oral statements to shareholders and securities analysts, which are not statements of historical or current facts, are "forward-looking statements." Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward-looking statements. The words "believes," "expects," "anticipates," "seeks" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. These statements are subject to the risks and uncertainties that could cause actual results to differ materially and adversely from the forward-looking statements. These risks and uncertainties include, but are not limited to, the risks presented in our Annual Report on Form 10-K for the year ended December 31, 2007, and updated in Part II, Item 1A of this Quarterly Report on Form 10-Q.