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       Six Months Ended
                                              June 30                 June 30
                                          2009         2008        2009       2008
       Net sales                            100.0 %     100.0 %      100.0 %   100.0 %
       Cost of sales                         47.6        43.3         47.8      44.6
       Gross profit                          52.4        56.7         52.2      55.4
       Operating expenses:
       Selling                               26.1        22.0         25.2      23.5
       Marketing                              6.0         5.3          6.1       5.4
       General and administrative            18.1        21.7         20.7      24.5
       Insurance settlement proceeds            ?           ?        (11.6 )       ?
       Total operating expenses              50.2        49.0         40.4      53.4
       Operating income                       2.2         7.7         11.8       2.0
       Other income                           0.3         0.4          0.4       0.7
       Income before taxes                    2.5         8.1         12.2       2.7
       Income tax expense                     0.6         2.7          0.3       1.5
       Net income                             1.9 %       5.4 %       11.9 %     1.2 %

Decreased net sales in the first six months of 2009 compared to the first six 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 higher net income in the 2009 period compared to the 2008 period.

Three and Six Months ended June 30, 2009 Compared to Three and Six Months Ended June 30, 2008

Net Sales.Net sales for the three months ended June 30, 2009 decreased 23.8% to $5,773,000 compared to $7,578,000 for the three months ended June 30, 2008. Net sales for the six months ended June 30, 2009 decreased 15.4% to $11,959,000 compared to $14,141,000 for the six months ended June 30, 2008.

Service revenues from our POPSign programs for the three months ended June 30, 2009 decreased 23.2% to $5,285,000 compared to $6,883,000 for the three months ended June 30, 2008. Service revenues from our POPSign programs for the six months ended June 30, 2009 decreased 14.9% to $10,916,000 compared to $12,831,000 for the six months ended June 30, 2008. The decreases in both 2009 periods were primarily due to decreases in the number of POPSign programs executed 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 on December 31, 2008 was a significant factor in the decreased number of sign placements in the 2009 periods.

Product sales for the three months ended June 30, 2009 decreased 29.8% to $488,000 compared to $695,000 for the three months ended June 30, 2008. Product sales for the six months ended June 30, 2009 decreased 20.4% to $1,043,000 compared to $1,310,000 for the six months ended June 30, 2008. The decreases in both 2009 periods were primarily due to lower sales of thermal sign card supplies, laser sign card supplies and Stylus software based on decreased demand for those products from our customers.

Gross Profit.Gross profit for the three months ended June 30, 2009 decreased 29.6% to $3,025,000 compared to $4,294,000 for the three months ended June 30, 2008. Gross profit for the six months ended June 30, 2009 decreased 20.2% to $6,248,000 compared to $7,828,000 for the six months ended June 30, 2008. Gross profit as a percentage of total net sales decreased to 52.4% for the three months ended June 30, 2009, compared to 56.7% for the three months ended June 30, 2008. Gross profit as a percentage of total net sales decreased to 52.2% for the six months ended June 30, 2009, compared to 55.4% for the six months ended June 30, 2008.

Gross profit from our POPSign program revenues for the three months ended June 30, 2009 decreased 28.5% to $2,863,000 compared to $4,004,000 for the three months ended June 30, 2008. Gross profit from our POPSign program revenues for the six months ended June 30, 2009 decreased 19.5% to $5,911,000 compared to $7,340,000 for the six months ended June 30, 2008. The decreases in both 2009 periods were primarily due to decreased sales which were partially offset by decreased retailer expenses. Gross profit as a percentage of POPSign program revenues for the three months ended June 30, 2009 decreased to 54.2% compared to 58.2% for the three months ended June 30, 2008. Gross profit as a percentage of POPSign program revenues for the six months ended June 30, 2009 decreased to 54.2% compared to 57.2% for the six months ended June 30, 2008. The decreases in gross profit as a percentage of POPSign program revenues in both 2009 periods were primarily due the effect of fixed costs and the effect of retailer expenses which did not decrease as significantly as sales.

Gross profit from our product sales for the three months ended June 30, 2009 decreased 44.1% to $162,000 compared to $290,000 for the three months ended June 30, 2008. Gross profit from our product sales for the six months ended June 30, 2009 decreased 30.9% to $337,000 compared to $488,000 for the six months ended June 30, 2008. The decreases in both 2009 periods were primarily due to decreased sales combined with fixed costs. Gross profit as a percentage of product sales was 33.2% for the three months ended June 30, 2009 compared to 41.7% for the three months ended June 30, 2008. Gross profit as a percentage of product sales was 32.3% for the six months ended June 30, 2009 compared to 37.3% for the six months ended June 30, 2008. The decreases in both 2009 periods were was due to decreased sales and the effect of fixed costs.

Operating Expenses

Selling.Selling expenses for the three months ended June 30, 2009 decreased 9.5% to $1,511,000 compared to $1,669,000 for the three months ended June 30, 2008. Selling expenses for the six months ended June 30, 2009 decreased 9.0% to $3,018,000 compared to $3,317,000 for the six months ended June 30, 2008. Decreases in the 2009 periods were primarily due to decreased sales commissions. The decreased sales commissions were due to decreased POPSign program sales.

Selling expenses as a percentage of total net sales increased to 26.1% for the three months ended June 30, 2009 compared to 22.0% for the three months ended June 30, 2008. Selling expenses as a percentage of total net sales increased to 25.2% for the six months ended June 30, 2009 compared to 23.5% for the six months ended June 30, 2008. The increases in the selling expenses as a percentage of total net sales in the 2009 periods were due to the effect of fixed or flat costs (salaries and benefits, facility costs, travel, lodging, meals and entertainment) in relation to the effect of decreased sales in the 2009 periods.

Marketing.Marketing expenses for the three months ended June 30, 2009 decreased 13.5% to $345,000 compared to $399,000 for the three months ended June 30, 2008. Marketing expenses for the six months ended June 30, 2009 decreased 3.4% to $734,000 compared to $760,000 for the six months ended June 30, 2008. Decreased expenses in the 2009 periods were primarily the result of decreased data acquisition expenses.

Marketing expenses as a percentage of total net sales increased to 6.0% for the three months ended June 30, 2009 compared to 5.3% for the three months ended June 30, 2008. Marketing expenses as a percentage of total net sales increased to 6.1% for the six months ended June 30, 2009 compared to 5.4% for the six months ended June 30, 2008. The increases in marketing expenses as a percentage of total net sales in the 2009 periods were primarily due to the effect of flat costs in relation to the effect of decreased sales in the 2009 periods.

General and administrative. General and administrative expenses for the three months ended June 30, 2009 decreased 36.5% to $1,044,000 compared to $1,643,000 for the three months ended June 30, 2008. General and administrative expenses for the six months ended June 30, 2009 decreased 32.6% to $2,469,000 compared to $3,465,000 for the six months ended June 30, 2008. The decreases in the 2009 periods were primarily due to decreased legal expense and decreased facility related expenses. The Company recorded lower legal expense in the 2009 periods as there was more activity in the 2008 periods related to trial preparation.

General and administrative expenses as a percentage of total net sales decreased to 18.1% for the three months ended June 30, 2009 compared to 21.7% for the three months ended June 30, 2008. General and administrative expenses as percentage of total net sales decreased to 20.7% for the six months ended June 30, 2009 compared to 24.5% for the six months ended June 30, 2008. The decreases in the 2009 periods were primarily due to the decreased costs discussed above in relation to decreased sales.

Legal fees and expenses were $317,000 for the three months ended June 30, 2009 compared to $849,000 for the three months ended June 30, 2008. Legal fees and expenses were $1,059,000 for the six months ended June 30, 2009 compared to $1,880,000 for the six months ended June 30, 2008. The legal fees and expenses in each period were incurred primarily in connection with the News America lawsuit described in Note 2 to the financial statements. Decreased legal fees and expenses in the 2009 periods reflect decreased trial preparation and other activity. We currently expect the amount of additional legal fees and expenses that will be incurred in connection with the ongoing lawsuit to be significant throughout the remainder of 2009 and possibly future years. 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.

Insurance settlement proceeds. 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.

Other Income.Other income for the three months ended June 30, 2009 was $21,000 compared to $34,000 for the three months ended June 30, 2008. Other income for the six months ended June 30, 2009 was $49,000 compared to $91,000 for the six months ended June 30, 2008. Lower other income in the 2009 periods was primarily due to decreased interest income in the 2009 periods as a result of lower interest rates which more than offset the higher cash balances in the 2009 periods.

Income Taxes.The Company continues to carry a full valuation allowance against its net deferred tax asset at June 30, 2009, and has therefore only recorded income tax expense of $36,000 for the six months ended June 30, 2009 related to alternative minimum tax liability. The valuation allowance has been established due to uncertainties regarding the realization of deferred tax assets. Income tax expense was $207,000 for the six months ended June 30, 2008 which was based upon an effective rate of 55% which incorporated a statutory rate of 37% and the effect of nondeductible expenses for tax purposes related to stock-based compensation and meals and entertainment.

Net Income.Net income for the three months ended June 30, 2009 was $110,000 compared to $410,000 for the three months ended June 30, 2008. Net income for the six months ended June 30, 2009 was $1,427,000 compared to $170,000 for the six months ended June 30, 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 June 30, 2009, working capital was $8,330,000 compared to $6,396,000 at December 31, 2008. During the six months ended June 30, 2009, cash, cash equivalents and short-term investments decreased $2,450,000 from $11,052,000 at December 31, 2008 to $8,602,000 at June 30, 2009.

Net cash used in operating activities during the six months ended June 30, 2009 was $2,433,000. Net income of $1,427,000 for the six months ended June 30, 2009 was more than offset by changes in operating assets and liabilities, primarily decreases in accrued liabilities and accounts payable and an increase in accounts receivable. Accounts payable and accrued liabilities decreased $3,397,000 during the six month period primarily as a result of 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. Accounts receivable increased $1,323,000 during the six months ended June 30, 2009 primarily due to an advanced billing in June 2009 to a customer for an eleven month POPSign program contract. Deferred revenue increased $358,000 during the six months ended June 30, 2009 primarily due to the advanced billing to a customer described above which was partially offset by decreases in other advanced billings. The Company expects accounts receivable, accounts payable, accrued liabilities and deferred revenue to fluctuate during 2009 depending on the level of quarterly POPSign revenues and related business activity as well as billing arrangements with customers.

Net cash of $1,938,000 was used in investing activities during the six months ended June 30, 2009, due to the purchase of $1,900,000 of short-term investments (certificates of deposit with twenty-six week maturities) and $38,000 of expenditures for property and equipment. The Company expects capital expenditures for the remainder of 2009 to be higher due to planned capital equipment expenditures.

Net cash of $21,000 was provided by financing activities during the six months ended June 30, 2009 as a result of $44,000 of proceeds (net) 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 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.

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.