Overview. We produce film products for novelty, packaging and container applications. These products include metalized balloons, latex balloons and related latex toy products, films for packaging applications, and flexible containers for packaging and storage applications. We produce all of our film products for packaging and container applications at our plant in Barrington, Illinois. We produce all of our latex balloons and latex products at our facility in Guadalajara, Mexico. Substantially all of our film products for packaging applications and flexible containers for packaging and storage are sold to customers in the United States. We market and sell our novelty items - principally metalized balloons and latex balloons - in the United States, Mexico, the United Kingdom and a number of additional countries.

Results of Operations

Net Sales.  For the three months ended June 30, 2009, net sales were $10,779,000
compared to net sales of $12,461,000 for the same period of 2008, a decrease of
13.5%. For the quarters ended June 30, 2009 and 2008, net sales by product
category were as follows:

                                             Three Months Ended
                              June 30, 2009                       June 30, 2008
                            $                % of               $               % of
Product Category      (000) Omitted       Net Sales       (000) Omitted       Net Sales

Metalized Balloons         5,747              53%              4,918              39%

Films                      1,644              15%              2,008              16%

Pouches                    1,577              15%              3,441              28%

Latex Balloons             1,653              15%              1,969              16%

Helium/Other                158                2%               125                1%

Total                      10,779             100%             12,461             100%

Net Sales. For the six months ended June 30, 2009, net sales were $20,382,000 compared to net sales of $23,196,000 for the same period of 2008, a decrease of 12.1%. For the six months ended June 30, 2009 and 2008, net sales by product category were as follows:

                                              Six Months Ended
                              June 30, 2009                       June 30, 2008
                            $               % of                $               % of
Product Category      (000) Omitted       Net Sales       (000) Omitted       Net Sales

Metalized Balloons         10,786             53%              9,516              41%

Films                      3,519              17%              3,951              17%

Pouches                    2,562              13%              5,889              25%

Latex Balloons             3,196              16%              3,471              15%

Helium/Other                319                1%               369                2%

Total                      20,382             100%             23,196             100%

Metalized Balloons. During the three months ended June 30, 2009 revenues from the sale of metalized balloons increased by 16.9% compared to the prior year period from $4,918,000 to $5,747,000. During the six months ended June 30, 2009 revenues from the sale of metalized balloons increased by 13.3% compared to the prior year period from $9,516,000 to $10,786,000. Substantially all of these increases are attributable to increased sales to a principal balloon customer.

Films. During the three months ended June 30, 2009 revenues from the sale of laminated films decreased by 18.1% compared to the prior year period from $2,008,000 to $1,644,000. During the six months ended June 30, 2009 revenues from the sale of laminated films decreased by 10.9% compared to the prior year period from $3,951,000 to $3,519,000. The decrease was the result of reduced sales to a principal film customer.

Pouches. During the three months ended June 30, 2009 revenues from the sale of pouches decreased by 54.2% compared to the prior year period from $3,441,000 to $1,577,000. During the six months ended June 30, 2009 revenues from the sale of pouches decreased by 56.5% compared to the prior year period from 5,889,000 to $2,562,000. The difference between pouch sales for both the second quarter of 2009 and the first six months of 2009, and the higher level of pouch sales for the corresponding periods of 2008 is attributable principally to a lower level of sales during 2009 to a principle pouch customer. The higher level of sales to that customer in the first half of 2008 was due to a pre-launch inventory build by the customer for a new product launch in July 2008. Sales to that customer continue in 2009 but at a lower level than the pre-launch inventory build. Also, some of the decline in pouch sales during 2009 to date compared to 2008 is attributable to a decline in sales to another principle pouch customer. Sales to that customer also continue in 2009 but at a lower rate than in 2008.

Latex Balloons. During the three months ended June 30, 2009 revenues from the sale of latex balloons decreased by 16.0% compared to the prior year period from $1,969,000 to $1,653,000. During the six months ended June 30, 2009 revenues from the sale of latex balloons decreased by 7.9% compared to the prior year period from $3,471,000 to $3,196,000. This decline in the dollar amount of latex balloon sales is attributable to the following causes: (i) a relatively high percentage of our latex balloon sales are with respect to balloons both produced and sold in Mexico, (ii) although the unit volume of latex balloon sales in Mexico during the first six months of 2009 is greater than the unit volume of sales in the first six months of 2008, the dollar volume in 2009 is lower because of the decline in the value of the Mexican peso, (iii) sales in Mexico during the first six months of 2009 were affected by the spread of influenza, and concern about influenza, there.

Sales to a limited number of customers continue to represent a large percentage of our net sales. The table below illustrates the impact on sales of our top three and ten customers for the three and six months ended June 30, 2009 and 2008.

                                                    Three Months Ended                       Six Months Ended
                                                      % of Net Sales                          % of Net Sales
                                            June 30, 2009        June 30, 2008       June 30, 2009       June 30, 2008

Top 3 Customers                                   59.8%                58.9%               54.4%               52.0%

Top 10 Customers                                  75.7%                75.0%               70.2%               73.2%

During the three months ended June 30, 2009, there were two customers whose purchases represented more than 10% of the Company's consolidated net sales. The sales to each of these customers for the three months ended June 30, 2009 were $3,907,000 or 36.3% and $1,538,000 or 14.3% of consolidated net sales, respectively. Sales of these customers in the same period of 2008 were $2,876,000 or 23.1%, and $1,821,000 or 14.6% of consolidated net sales, respectively. During the six months ended June 30, 2009, there were two customers whose purchases represented more than 10% of the Company's consolidated net sales. The sales to each of these customers for the six months ended June 30, 2009 were $6,407,000 or 31.4% and $3,250,000 or 15.9% of consolidated net sales, respectively. Sales of these customers in the same period of 2008 were $4,746,000 or 20.5%, and $3,584,000 or 15.4% of consolidated net sales, respectively. As of June 30, 2009, the total amount owed to the Company by these customers was $1,969,000 or 29.8% and $902,000, or 13.6%, of the Company's consolidated accounts receivables. The amounts owed at June 30, 2008 were $1,627,000, or 23.0% and $747,000, or 10.6% of the Company's consolidated net accounts receivables, respectively.

Cost of Sales. During the three months ended June 30, 2009, the cost of sales represented 75.9% of net sales compared to 76.6% for the three months ended June 30, 2008. During the six months ended June 30, 2009, the cost of sales represented 77.1% of net sales compared to 77.4% for the six months ended June 30, 2008. Cost of sales in the second quarter 2009 and the first six months of 2009 were reduced by the amount of the recovery received by the Company related to the defalcation by a former officer (totaling $199,000 for the second quarter and $394,000 for the six months ended June 30, 2009). Absent the amount of such recovery, the cost of sales for the second quarter 2009 would have been 77.7% of net sales and, for the six months, would have been 79.0% of net sales. Cost of sales (absent the defalcation recovery) were lower during the first six months of 2008 compared to 2009 due to (i) higher production levels in 2008 resulting in production efficiencies and lower unit costs and (ii) a higher level of production and sale of certain products (pouches) having a higher gross margin than others.

General and Administrative. During the three months ended June 30, 2009, general and administrative expenses were $1,301,000 or 12.1% of net sales, compared to $1,456,000 or 11.7% of net sales for the same period in 2008. During the six months ended June 30, 2009, general and administrative expenses were $2,341,000 or 11.5% of net sales, compared to $2,615,000 or 11.3% of net sales for the same period in 2008. The reduction in general and administrative expenses during the first six months of 2009, compared to the corresponding periods of 2008, is attributable to a (i) a reduction in administrative salary expense of $50,000, (ii) a reduction in consulting fees of $51,000, (iii) a reduction in legal expense of $97,000 and (iv) a reduction in bad debt expense of $40,000.

Selling. During the three months ended June 30, 2009, selling expenses were $204,000 or 1.9% of net sales, compared to $277,000 or 2.2% of net sales for the same period in 2008. During the six months ended June 30, 2009, selling expenses were $381,000 or 1.9% of net sales, compared to $464,000 or 2.0% of net sales for the same period in 2008. The reduction in selling expenses during the first six months of 2009, compared to the corresponding period of 2008, is attributable to a (i) reduction in salary expense of $60,000 and (ii) a reduction in travel expense of $33,000.

Advertising and Marketing. During the three months ended June 30, 2009, advertising and marketing expenses were $421,000 or 3.9% of net sales for the period, compared to $425,000 or 3.4% of net sales for the same period of 2008. During the six months ended June 30, 2009, advertising and marketing expenses were $809,000 or 4.0% of net sales for the period, compared to $772,000 or 3.3% of net sales for the same period of 2008.

Other Income (Expense). During the three months ended June 30, 2009, the Company incurred net interest expense of $273,000, compared to net interest expense during the same period of 2008 in the amount of $287,000. During the six months ended June 30, 2009, the Company incurred net interest expense of $568,000, compared to net interest expense during the same period of 2008 in the amount of $558,000.

For the three months ended June 30, 2009, the Company had a foreign currency transaction gain of $3,000 compared to foreign currency transaction gains of $12,000 during the same period of 2008. For the six months ended June 30, 2009, the Company had a foreign currency transaction loss of $19,000 compared to foreign currency transaction gains of $42,000 during the same period of 2008.

Income Taxes. For the three months ended June 30, 2009, the Company reported a consolidated income tax benefit of $4,000, compared to a consolidated income tax benefit of $5,000 for the same period of 2008.

For the six months ended June 30, 2009, the Company reported a consolidated income tax expense of $46,000 compared to a consolidated income tax expense of $116,000 for the six months ended June 30, 2008. For the six months ended June 30, 2009, this income tax provision was composed principally of provisions for income tax on the income of Flexo Universal, our Mexican subsidiary.

Net Income. For the three months ended June 30, 2009, the Company had net income of $409,000 or $0.15 per share (basic and diluted), compared to net income of $485,000 for the same period of 2008 or $0.17 per share (basic and diluted). For the six months ended June 30, 2009, the Company had net income of $502,000 or $0.18 per share (basic and diluted), compared to net income of $764,000 for the same period of 2008 or $0.28 per share basic and $0.26 diluted.

Financial Condition, Liquidity and Capital Resources

Cash Flow Items.

Operating Activities. During the six months ended June 30, 2009, net cash provided by operations was $1,688,000, compared to net cash used in operations during the six months ended June 30, 2008 of $928,000.

Significant changes in working capital items during the six months ended June 30, 2009 consisted of (i) an increase in accounts receivable of $704,000, (ii) depreciation and amortization in the amount of $945,000, (iii) an increase in trade payables of $231,000, (iv) an increase in accrued liabilities of $372,000
(v) an increase of $306,000 in prepaid expenses and other assets and (vi) a decrease in inventories of $436,000.

Investing Activity. During the six months ended June 30, 2009, cash used in investing activity for the purchase of equipment was $433,000, compared to $848,000 in the same period of 2008.

Financing Activities. During the six months ended June 30, 2009, cash used in financing activities was $1,249,000 compared to cash provided by financing activities for the same period of 2008 in the amount of $693,000. During the six months ended June 30, 2009 financing activities included payment of $617,000 on long-term debt obligations and payment of $734,000 on the revolving line of credit.

Liquidity and Capital Resources. At June 30, 2009, the Company had cash balances of $203,000 compared to cash balances of $1,260,000 for the same period in 2008. At June 30, 2009, the Company had a working capital balance of $2,055,000 compared to a working capital balance of $1,466,000 at December 31, 2008.

The Company's current cash management strategy includes utilizing the Company's revolving line of credit for liquidity. Under our line of credit with RBS Citizens N.A. (formerly Charter One Bank), we are entitled to borrow an amount equal to 85% of eligible receivables and 60% of eligible inventory, up to a maximum of $9,000,000. Foreign receivables and inventory held by our foreign subsidiaries are not eligible. In addition, in order to be permitted to make advances under the line of credit, we are required to meet various financial covenants. As of June 30, 2009, we had complied with all applicable financial covenants in the loan agreement. Based on our results to date for the year and our projected results of operations for the balance of this year, we believe we will be in compliance with all applicable financial covenants of the loan agreement for the balance of 2009. Further, we believe that with our present cash and working capital and the amounts available to us under our line of credit and through sales of common stock, we will have sufficient funds to enable us to meet our obligations through the next twelve months.

The loan agreement provides for interest at varying rates in excess of the Bank's prime rate, depending on the level of senior debt to EBITDA over time. As of June 30, 2009, the applicable premium being applied was 0.75%. At June 30, 2009, the effective rate was 4.0%.

Also, under the loan agreement, we were required to purchase a swap agreement with respect to at least 60% of the mortgage and term loan portions of our loan. On April 5, 2006, we entered into a swap arrangement with RBS Citizens N.A. (formerly Charter One Bank) with respect to 60% of the principal amounts of the mortgage loan and the term loan, which had the effect of fixing the interest rate for such portions (totaling $3,780,000) of the loans at 8.49% for the balance of the loan terms. On January 28, 2008 we entered into a swap arrangement with RBS Citizens for an additional $3,000,000 on our revolving line of credit, which had the effect of fixing the interest rate at 6.17%. These swap agreements are designated as a cash flow hedge and hedge the Company's exposure to interest rate fluctuations on the Company's floating rate loans. These swap arrangements are derivative financial instruments with respect to which we determine and record the fair market value each quarter. We record the fair market value of these contracts in the balance sheet, with an offset to other comprehensive loss. The fair market value of these swap agreements as of June 30, 2009 was a liability of $253,000. For the six months ended June 30, 2009, the other comprehensive gain included $88,000 of unrecognized gain representing the change in the mark-to-market value of the Company's interest rate swap agreements for such periods. The swap agreements require monthly settlements of the difference between the amount to be received and paid under the agreements, the amount of which is recognized in current earnings as interest expense.

The revolving loan line of credit matured on January 31, 2009. On that date, we entered into a Fifth Amendment to Loan Agreement under which the revolving loan term was extended to January 31, 2010 and certain of the loan covenants were revised.

Seasonality

In recent years, sales in the metalized balloon product line have historically been seasonal with approximately 45% occurring in the period from December through March and 21% being generated in the period from July through October. The sale of latex balloons and laminated film products have not historically been seasonal.

Critical Accounting Policies

Please see our Annual Report on Form 10-K for the year ended December 31, 2008 presented on pages 35-38, for a description of policies that are critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. No material changes to such information have occurred during the three and six months ended June 30, 2009.

New Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
141(R), Business Combinations ("SFAS141(R)"), which amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in the acquired. It also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for the Company's fiscal year beginning January 1, 2009. Such adoption did not have a material impact on the Company's condensed consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51 ("SFAS 160"), which establishes accounting and reporting standards pertaining to ownership interests in subsidiaries held by parties other than the parent, the amount of net income attributable to the parent and to the noncontrolling interest, changes in the parent's ownership interest, and the valuation of any retained noncontrolling equity investment when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS is effective for the Company's fiscal year beginning on January 1, 2009. The Company adopted SFAS 160 effective January 1, 2009. Such adoption did not have a material impact on the Company's condensed consolidated financial statements.

In December 2008, the FASB issued FASB Staff Positions ("FSP") FIN 46(R)-8, Interests in Variable Interest Entities and FSP FAS 140-4, Disclosures about Transfers of Financial Assets, which will increase disclosure requirements for public reporting companies for reporting periods that end after December 15, 2008. This FSP amends SFAS 140, Disclosures about Transfers of Financial Assets, to require public entities to provide additional disclosures about transfers of financial assets and variable interests in qualifying special-purpose entities. It also amends FIN 46(R) to require public enterprises to provide additional disclosures about their involvement with variable interest entities. The Company adopted the requirements of FSP FAS 140-4 and FSP FIN 46(R) beginning December 31, 2008. The adoption of FSP FAS 140-4 and FSP FIN 46(R) did not have a material impact on the Company's condensed consolidated financial statements.

In April 2008, the FASB issued FSP SFAS 142-3, Determination of Useful Lives in Intangible Assets, on SFAS 142, Goodwill and Other Intangible Assets, to amend one of six factors that should be considered in determining the useful life of an intangible asset, primarily related to changes in the factors considered in the area of renewals or extensions. FSP SFAS 142-3 requires additional disclosures related to renewals and/or extensions of impacted intangible assets. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

In April 2009, the FASB issued FSP SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies, a Staff Position on SFAS 141(R), to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP SFAS 141(R)-1 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008. Such adoption did not have an impact on the Company's condensed consolidated financial statements.

In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events ("SFAS 165"), which was issued to establish principles and requirements for recognition of subsequent events that occur after the balance sheet date but prior to the issuance of the financial statements. Further, it distinguishes between subsequent events that should be recognized in the financial statements and those that should not. SFAS 165 adds additional disclosure requirements; it requires the disclosure of the date through which subsequent events were evaluated, including the rationale for why the date was chosen. Additionally, SFAS 165 stipulates the disclosure for certain non-recognized subsequent events. SFAS 165 is effective for periods ending after June 15, 2009 and shall be applied prospectively. The adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.

In June 2009, the FASB issued FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R), which amends FASB Interpretation No. 46(R) Consolidation of Variable Interest Entities to require an enterprise to perform an analysis to determine whether the enterprise's variable interest gives it controlling financial interest in a variable interest entity and to require ongoing assessments of this nature. SFAS 167 amends certain guidance in FASB Interpretation 46(R) for determining whether an entity is a variable interest entity and adds additional reconsideration for making this determination when facts or circumstances change. The guidance requires enhanced disclosures that will provide for more transparent information about an entity's involvement in a variable interest entity. SFAS 167 is effective for the fiscal year that begins after November 15, 2009. The Company does not expect the adoption of this standard to have a material impact on the Company's condensed consolidated financial statements.

In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which replaces SFAS 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied in the preparation of financial statements. The codification also contains interpretive releases of the SEC under federal securities laws and is a source of authoritative GAAP for SEC registrants. SFAS 168 will be effective for financial statements issued for interim and annual periods ending after September 15, 2009 and shall be applied prospectively. The Company does not expect the adoption of the standard to materially change the presentation of its financial statements.

In April 2009, the FASB issued FSP 107-1, Interim Disclosures About Fair Value of Financial Instruments, on SFAS 107 Disclosures about Fair Value of Financial Instruments, which expands the fair value disclosures required for all financial instruments within the scope of SFAS 107 to interim periods. The FSP also requires entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments in financial statements on an interim basis and to highlight any changes of the methods and significant assumptions from prior periods. It does not require interim disclosures of credit or market risks. FSP SFAS 107-1 is effective for interim and annual periods after June 15, 2009. Such adoption did not have a material impact on the Company's condensed consolidated financial statements.

In September 2006, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, ("SFAS No. 157"). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. Subsequently, the FASB provided for a one-year deferral of the provisions of SFAS No. 157 for non-financial assets and liabilities that are recognized or disclosed at fair value in the condensed consolidated financial statements on a non-recurring basis. We adopted with no impact on our condensed consolidated financial statements all requirements of SFAS No. 157 on January 1, 2008, except as they relate to nonfinancial assets and liabilities, which we adopted on January 1, 2009, as allowed under SFAS . . .