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 March 31                                     2009         2008
Net sales                                                        100.0 %      100.0 %
Cost of sales                                                     47.9         46.1
Gross profit                                                      52.1         53.9
Operating expenses:
Selling                                                           24.4         25.1
Marketing                                                          6.3          5.5
General and administrative                                        23.0         27.8
General and administrative (insurance settlement proceeds)       (22.4 )          -
Total operating expenses                                          31.3         58.4
Operating income (loss)                                           20.8         (4.5 )
Other income                                                       0.5          0.8
Net income (loss)                                                 21.3 %       (3.7 )%

Decreased net sales in the first three months of 2009 compared to the first three months of 2008 combined with fixed costs of sales resulted in a decrease in gross profit in the 2009 period. This decrease in gross profit in the 2009 period was more than offset by the receipt of a settlement in the Company's claims against one of its insurers for defense cost in the News America litigation and decreased News America related legal fees in the 2009 period resulting in net income in the 2009 period compared to a net loss in the 2008 period.

Three Months ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Net Sales. Net sales for the three months ended March 31, 2009 decreased 5.7% to $6,186,000 compared to $6,563,000 for the three months ended March 31, 2008.

Service revenues from our POPSign programs for the three months ended March 31, 2009 decreased 5.3% to $5,631,000 compared to $5,948,000 for the three months ended March 31, 2008. The decrease was due to a decrease in the average price per sign and a decrease in the number of POPS signs displayed for customers (consumer packaged goods manufacturers) at stores in the Company's retail network. The loss of Safeway, Inc. from the Company's retail network when the contract expired at December 31, 2008, was a significant factor in the decreased number of signs displayed.

Product sales for the three months ended March 31, 2009 decreased 9.8% to $555,000 compared to $615,000 for the three months ended March 31, 2008. This was 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 March 31, 2009 decreased 8.8% to $3,223,000 compared to $3,534,000 for the three months ended March 31, 2008. Gross profit as a percentage of total net sales decreased to 52.1% for 2009 compared to 53.9% for 2008.

Gross profit from our POPSign program revenues for the three months ended March 31, 2009 decreased 8.6% to $3,048,000 compared to $3,336,000 for the three months ended March 31, 2008. The decrease was primarily due to decreased sales in 2009 combined with the effect of fixed costs. Gross profit as a percentage of POPSign program revenues decreased to 54.1% for 2009 compared to 56.1% for 2008, primarily due to the effect of fixed costs against decreased revenues.

Gross profit from our product sales for the three months ended March 31, 2009 decreased 11.6% to $175,000 compared to $198,000 for the three months ended March 31, 2008. The decrease was primarily due to decreased sales combined with fixed costs. Gross profit as a percentage of product sales decreased to 31.5% for 2009 compared to 32.2% for 2008, due to the factors discussed above.

Operating Expenses

Selling. Selling expenses for the three months ended March 31, 2009 decreased 8.6% to $1,507,000 compared to $1,648,000 for the three months ended March 31, 2008, primarily due to decreased sales commissions in 2009 due to decreased sales. Selling expenses as a percentage of total net sales decreased to 24.4% in 2009 compared to 25.1% in 2008, due to the decreased costs discussed above.

Marketing. Marketing expenses for the three months ended March 31, 2009 increased 7.8% to $389,000 compared to $361,000 for the three months ended March 31, 2008, due to overall increased spending. Marketing expenses as a percentage of total net sales was 6.3% in 2009 compared to 5.5% in 2008, due to the increased costs discussed above combined with the effect of decreased revenues.

General and administrative. General and administrative expenses for the three months ended March 31, 2009 decreased 97.9% to $38,000 compared to $1,822,000 for the three months ended March 31, 2008, primarily due to a payment to the Company from an insurer for settlement of a claim against the insurer for defense costs, decreased legal expense and decreased facility related expenses. The Company received a payment of $1,387,000 in the first quarter of 2009 from an insurer as part of a settlement of the Company's claim that the insurer owed the Company defense costs for claims asserted against the Company and one of its officers in the News America litigation. General and administrative expenses as a percentage of total net sales decreased to 0.6% in 2009 compared to 27.8% in 2008, due to the settlement payment and decreased costs discussed above. Legal fees were $742,000 for the three months ended March 31, 2009 compared to $1,031,000 for the three months ended March 31, 2008. The legal fees in each quarter were incurred primarily in connection with the News America lawsuit described in Note 2 to the financial statements. We currently expect the amount of additional legal fees that will be incurred in connection with the ongoing lawsuit to be significant throughout the remainder of 2009 as trial preparation continues and as the trial is conducted. 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. Other income for the three months ended March 31, 2009 was $28,000 compared to $57,000 for the three months ended March 31, 2008. The difference was due primarily to decreased interest income in the 2009 period as a result of lower interest rates which more than offset the higher cash balances in the 2009 period.

Income Taxes. The Company did not record income tax expense for the three months ended March 31, 2009, due to the continued full valuation allowance against its net deferred tax asset. The Company did not record an income tax benefit for the three months ended March 31, 2008, as a result of its pre-tax loss for the period and its valuation allowance position. The Company updates its deferred tax asset and valuation allowance analysis quarterly to confirm the appropriateness of its valuation allowance.

Net Income (Loss). Our net income for the three months ended March 31, 2009 was $1,317,000 compared to a net loss of $(240,000) for the three months ended March 31, 2008.

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 March 31, 2009, working capital was $7,944,000 compared to $6,396,000 at December 31, 2008. During the three months ended March 31, 2009, cash and cash equivalents decreased $2,878,000 from $11,052,000 at December 31, 2008 to $8,174,000 at March 31, 2009. During the three months ended March 31, 2009 the Company invested $1,100,000 of its cash and cash equivalents in certificates of deposit with twenty-six week maturities which are classified as short-term investments at March 31, 2009.

Net cash used in operating activities during the three months ended March 31, 2009 was $1,787,000. The decrease in cash and cash equivalents from operating activities primarily resulted from net income of $1,317,000 which was more than offset by $2,981,000 of reductions in accrued liabilities and accounts payable. The reductions in accrued liabilities and accounts payable were primarily the payment in January 2009 of accrued commissions, retailer payments and legal fees which had accrued during 2008 and were payable after December 31, 2008.

Net cash of $1,117,000 was used in investing activities during the three months ended March 31, 2009, due to the purchase of $1,100,000 of short-term investments (certificates of deposit with twenty-six week maturities) and $17,000 of expenditures for property and equipment. Capital expenditures for each of the remaining quarters of 2009 are expected to be higher due to planned capital equipment expenditures.

Net cash of $26,000 was provided by financing activities during the three months ended March 31, 2009 as a result of $49,000 of proceeds from the issuance of common stock from the employee stock purchase plan which was partially offset by the payment of $23,000 of principal on 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 for the remainder of 2009. 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.

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, 2008, included in our Form 10-K filed with the Securities and Exchange Commission on March 30, 2009. 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.

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, 2008, and updated in Part II, Item 1A of this Quarterly Report on Form 10-Q.