LENDWAY, INC. - Annual Report 2008

10-K 1 insignia091381_10-k.htm FORM 10-K FOR YEAR ENDED DECEMBER 31, 2008 Insignia Systems, Inc. Form 10-K for year ended 12-31-2008

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2008 Commission File Number 1-13471

INSIGNIA SYSTEMS, INC.
(Exact
name of registrant as specified in its charter)

Minnesota	41-1656308
(State
or other jurisdiction of incorporation or organization)	(IRS
Employer Identification No.)

8799 Brooklyn Blvd. Minneapolis, MN 55445 (Address of principal executive offices)

(763) 392-6200
(Registrants
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
Title
of each class:	Name
of each exchange on which registered:
Common
Stock, $.01 par value	The
NASDAQ Stock Market LLC
Securities
Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the second quarter (June 30, 2008) was approximately $23,726,000 based upon the last sale price of the registrants Common Stock on such date.

Number of shares outstanding of Common Stock, $.01 par value, as of March 23, 2009, was 15,129,098.

DOCUMENTS INCORPORATED BY REFERENCE: Insignia Systems, Inc. Proxy Statement to be filed for the Annual Meeting of Shareholders to be held on May 20, 2009 (Part III Items 10, 11, 12, 13 and 14)

MARKER FORMAT-SHEET="Page Break" FSL="Workstation"

TABLE OF CONTENTS

PART I. — Item 1.	Business	3
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	11
Item 4.	Submission of Matters to a Vote of Security Holders	12
PART II.
Item 5.	Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	15
Item 7.	Managements Discussion and Analysis of Financial Condition and
Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 8.	Financial Statements and Supplementary Data	23
Item 9.	Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures	40
Item 9A.	Controls and Procedures	41
Item 9B.	Other Information	41
PART III.
Item 10.	Directors, Executive Officers and Corporate Governance	42
Item 11.	Executive Compensation	42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters	42
Item 13.	Certain Relationships and Related Transactions and Director
Independence	42
Item 14.	Principal Accounting Fees and Services	42
Item 15.	Exhibits and Financial Statement Schedules	43

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Cautionary Statement Regarding Forward-Looking Information

Statements made in this Annual Report on Form 10-K, in the Companys 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 described in Part I, Item 1A.

P ART I.

I tem 1. Business

General

Insignia Systems, Inc., (the Company) markets in-store advertising products, programs and services to retailers and consumer packaged goods manufacturers. The Company has been in business since 1990. Since 1998, the Company has been focusing on providing in-store services through the Insignia Point-Of-Purchase Services (POPS) in-store advertising program. Insignia POPS ® includes the Insignia POPSign ® program.

Insignias POPSign is a national, account-specific, in-store, shelf-edge advertising program that has been shown to deliver significant sales increases. Funded by consumer packaged goods manufacturers, the program allows manufacturers to deliver vital product information to consumers at the point-of-purchase. The brand information is combined with each retailers store-specific prices and is displayed on the retailers unique sign format. The combining of manufacturer and retailer information produces a complete call to action that gets consumers the information they want and need to make purchasing decisions, while building store and brand equity.

For retailers, Insignias POPSign program is a source of incremental revenue and is the first in-store advertising program that delivers a complete call to action on a product-specific and store-specific basis, with all participating retail stores updated weekly. For consumer goods manufacturers, Insignias POPSign program provides access to the optimum retail advertising site for their products the retail shelf-edge. In addition, manufacturers benefit from significant sales increases, short lead times, micro-marketing capabilities, such as store-specific and multiple language options, and a wide variety of program features and enhancements that provide unique advertising advantages.

The Companys Internet address is www.insigniasystems.com. The Company has made available on its Web site all of the reports it files with the SEC. The Companys Web site is not incorporated by reference into this Report on Form 10-K. Copies of reports can also be obtained free of charge by requesting them from Insignia Systems, Inc., 8799 Brooklyn Blvd., Minnesota 55445; Attention: CFO; telephone 763-392-6200.

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Industry and Market Background

According to Point-Of-Purchase Advertising International (POPAI), an industry non-profit trade association, more than 70% of brand purchase decisions are being made in-store. As a result, product manufacturers are constantly seeking in-store vehicles to motivate consumers to buy their branded products. The Companys market studies indicate that the shelf-edge sign represents the final and best opportunity for manufacturers to convince the consumer to buy. In fact, a 2005 industry study concluded that shelf signs are the most effective type of in-store advertising vehicle after end-aisle displays and in-store leaflets.

Many consumers seek product information beyond price in order to make educated buying decisions. The Companys marketing studies indicate the most effective sign contains information supplied by the product manufacturer in combination with the retailers price and design look.

Company Products

Insignias POPSign Program

Insignias POPSign program is an in-store, shelf-edge, point-of-purchase advertising program that enables manufacturers to deliver product-specific messages quickly and accurately in designs and formats that have been pre-approved and supported by participating retailers. Insignia POPSigns deliver vital product selling information from manufacturers, such as product uses and features, nutritional information, advertising tag lines and product images. The brand information is combined with the retailers store-specific prices and is displayed on the retailers unique sign format that includes its logo, headline and store colors. Each sign is displayed directly in front of the manufacturers product in the participating retailers stores. Insignias POPSign program offers special features and enhancements, such as Advantage and Custom Advantage headers that allow manufacturers to add visibility and highlight their brand message at-shelf. Insignia offers Color POPSigns with customizable, image-building full-color graphics. Insignia UltraColor ® POPSigns offer 75% more area for the full-color creative than Color POPSigns.

Utilizing proprietary technology, the Company collects and organizes the data from both manufacturers and retailers, then formats, prints and delivers the signs to retailers for distribution and display. Store personnel place the signs at the shelf for two-week display cycles. The Company charges manufacturers for the signs placed in stores for each cycle. Retailers are paid a fee to display the signs and for product movement data provided to Insignia.

The Impulse Retail System and SIGNright Sign System

Prior to 1996, the Companys primary product offering was the Impulse Retail System, a system developed by an independent product design and development firm (the Developer). In 1996, the Company replaced the Impulse Retail System with the SIGNright Sign System. In 1998, the Company ceased the active domestic sales of the SIGNright Sign System.

Cardstock for the two systems is sold by the Company in a variety of sizes and colors that can be customized to include pre-printed custom artwork, such as a retailers logo. Approximately 3% of 2008 revenues came from the sale of cardstock. The Company expects this percentage to be comparable in the future.

Stylus Software

In late 1993, the Company introduced Stylus, a PC-based software application used by retailers to produce signs, labels, and posters. The Stylus software allows retailers to create signs, labels and posters by manually entering the information or by importing information from a database. Approximately 1% of 2008 revenues came from the sale of Stylus products and maintenance. The Company expects this percentage to be comparable in the future.

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Marketing and Sales

The Company directly markets the Insignia POPSign program to food and drug manufacturers and retailers. By utilizing the Insignia POPSign program, these manufacturers and retailers can easily accomplish what had previously been either impossible or extremely difficult: tailoring national in-store advertising programs to regional and local needs with minimal effort. In addition to the benefits provided to manufacturers and retailers, Insignias POPSign program provides consumers more information and clearer messages to aid in purchasing decisions. The Company believes its POPSign program is the most complete in-store advertising sign program available, benefiting consumer, retailer, and manufacturer.

On June 12, 2006, the Company entered into an Exclusive Reseller Agreement with Valassis Sales and Marketing Services, Inc. (Valassis). The agreement had an initial term of one year with the objective of increasing the Companys sales of Insignia POPSigns. On December 6, 2006, the Company and Valassis executed Amendment No. 1 to the agreement which finalized certain appendices, made certain other modifications to the agreement and extended the initial term through December 31, 2007. On July 2, 2007 the Company and Valassis executed Amendment No. 2 to the agreement which extended the term of the agreement to December 31, 2017 and expanded the strategic alliance to increase the role of Valassis to include developing and expanding the Companys participating retailer network. In conjunction with Amendment No. 2 Valassis received a five-year warrant to acquire 800,000 shares of Insignias common stock at a price of $4.04 and will be paid cash commissions 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 during the year ended December 31, 2007 related to the fair value of the warrant.

Prior to April 1998, the Company marketed the Impulse Retail System and the SIGNright Sign System through telemarketing by in-house sales personnel and independent sales representatives. In May 1998, the Company discontinued the active marketing of the systems. The Company sells cardstock and supplies related to these systems to U.S. and international customers.

The Company markets its Stylus software in the United States and internationally primarily through resellers that integrate Stylus as an Open Database Connectivity design and publishing component into their retail data and information management software applications.

During 2008, 2007 and 2006, foreign sales accounted for less than 1% of total net sales each year. The Company expects sales to foreign distributors will be less than 1% of total net sales in 2009.

Competition

Insignias POPSign Program

The Insignia POPSign program is competing for the marketing expenditures of branded product manufacturers for at-shelf advertising-related signage. The Insignia POPSign program has one major competitor in its market, which is News America Marketing In-Store ® , Inc. (News America).

News America offers a network for in-store advertising, promotion and sales merchandising services. News America has branded its in-store shelf signage products as SmartSource Shelftalk sm , SmartSource Shelfvision sm and SmartSource Price Pop ® .

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We believe the main strengths of the Insignia POPSign program in relation to its competitors are:

| - | the linking
of manufacturers to retailers at a central coordination point |
| --- | --- |
| - | providing a
complete call to action |
| - | supplying
product-specific and store-specific messages at the retail shelf |
| - | delivering vital
product information and store-specific prices |
| - | short lead
times |
| - | significant
sales increases |

Patents and Trademarks

The Company has developed and is using a number of trademarks, service marks, slogans, logos and other commercial symbols to advertise and sell its products. The Company owns U.S. registered trademarks for Insignia Systems, Inc. ® (and Design), Insignia POPS ® , POPS Select ® , Insignia Color POPS ® , Insignia POPSign ®, UltraColor ® , Stylus ® , Stylus Work Center ® , SIGNright ® , Impulse ® , DuraSign ® , I-Care ® , and Check This Out. ®

The Company is in the process of obtaining trademark registrations in the United States for the trademarks Insignia E-POPS and Insignia ShelfPOPS.

The barcode which the Company uses on the sign cards for the Impulse and SIGNright Sign Systems was also developed by the Developer, which has granted the Company an exclusive worldwide license of its rights to the barcode. The license requires the Company to pay a royalty of 1% of the net sales price received by the Company on cardstock or other supply items that bear the barcode used by the Impulse and SIGNright Sign Systems. Although a patent has been issued to the Developer, which covers the use of the barcode, there is no assurance that the Company will be able to prevent other suppliers of cardstock from copying the barcode used by the Company. However, the Company believes that the number, relatively small size and geographic dispersal of Impulse and SIGNright users, their relationship with the Company and the Companys retention of its customer list as a trade secret will discourage other sign card suppliers from offering bar-coded sign cards for use on the Impulse and SIGNright machines.

Key employees are required to enter into nondisclosure and invention assignment agreements, and customers, vendors and other third parties also must agree to nondisclosure restrictions prior to disclosure of our trade secrets or other confidential or proprietary information.

Product Development

Product development for Insignias POPSign program has been conducted internally and includes the proprietary data management and operations system, as well as the current offering of point-of-purchase and other advertising products. Ongoing internal systems enhancements, as well as the development of point-of-purchase and other advertising or promotional products, will be conducted utilizing both internal and external resources as appropriate.

Product development on the SIGNright Sign System was primarily conducted by the Developer on a contract basis.

The Stylus software product line remains a viable application for the Companys retailer customers. The Company performs development to keep Stylus current and updated to meet industry requirements.

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Customers

Two customers accounted for 19% and 10% of the Companys total net sales for the year ended December 31, 2008. Two other customers accounted for 13% and 11%, 15% and 11%, and 26% and 10% of the Companys total net sales for the years ended December 31, 2008, 2007 and 2006.

Backlog

Sales backlog at March 2, 2009 was approximately $11.7 million, of which $11.3 million is for delivery during 2009 and $400,000 is for delivery during 2010. The orders are believed to be firm but there is no assurance that all of the backlog will actually result in revenues. Sales backlog at February 29, 2008 was approximately $16.9 million.

Seasonality

The Companys results of operations have fluctuated from quarter to quarter due to variations in net sales and operating expenses. There is no seasonal pattern to these fluctuations.

The results of operations fluctuate from quarter to quarter as a result of the following:

| | The timing of seasonal
events for customers; |
| --- | --- |
| | Variations in the specific
products which customers choose to advertise; |
| | Fluctuations in
advertising budgets of customers and the amounts they commit to in-store
advertising; |
| | Variations in the number
of retailers in the Companys network; |
| | Sales incentives to sales
staff and strategic partners; |
| | Minimum program level
commitments to retailers; and |
| | Professional fees related
to litigation. |

Employees

As of February 27, 2009, the Company had 114 employees, including all full-time and part-time employees.

Segment Reporting

The Company operates in a single reportable segment.

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I tem 1A. Risk Factors

Our business faces significant risks, including the risks described below. Additional risks that we do not yet know of or that we currently believe are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks occurs, our business, financial condition or results of operations could suffer, and the trading price of our common stock could decline.

Our Customers And Retailers May Be Susceptible To Changes In General Economic Conditions

Our revenues are affected by our customers marketing and advertising spending and our revenues and results of operations may be subject to fluctuations based upon general economic conditions. A continued economic downturn may reduce demand for our products and services or depress pricing of those products and services and have an adverse effect on our results of operations. Retailers may be impacted by changes in consumer spending as well, which may adversely impact our ability to renew contracts with our existing retailers as well as contract with new retailers on terms which are acceptable. In addition, if we are unable to successfully anticipate changing economic conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected.

We Have Had Significant Losses In Prior Periods

Although we had net income of $2,343,000 and $2,396,000 for the years ended December 31, 2007 and 2006 respectively, we have had significant net losses for all of the other years since the year ended December 31, 2003. There can be no assurance that we will be profitable on a quarterly or annual basis. If we are unable to generate net income from operations our business will be adversely affected and our stock price will likely decline.

We Are Involved In Major Litigation

In August 2000, News America Marketing In-Store, Inc. (News America), brought suit against the Company in U.S. District Court in New York, New York. The case was settled in November 2002. The terms of the settlement agreement are confidential. The settlement did not impact the Companys operating results.

In October 2003, News America brought suit against the Company in U.S. District Court in New York, New York, alleging that the Company has engaged in deceptive acts and practices, has interfered with existing business relationships with retailers and prospective economic advantage, and has engaged in unfair competition. The suit sought unspecified damages and injunctive relief. In February 2007 the U.S. District Court in New York transferred this action to Minnesota where the claims became part of the lawsuit the Company filed against News America and Albertsons Inc. in 2004 (described below), and the New York action was subsequently dismissed.

On September 23, 2004, the Company brought suit against News America and Albertsons Inc. (Albertsons) in Federal District Court in Minneapolis, Minnesota, for violations of federal and state antitrust and false advertising laws, alleging that News America has acquired and maintained monopoly power through various wrongful acts designed to harm the Company in the in-store advertising and promotion products and services market. The suit seeks injunctive relief sufficient to prevent further antitrust injury and an award of treble damages to be determined at trial for the harm caused to the Company. On June 30, 2006 the Court denied the motions of News America and Albertsons to dismiss the suit. On September 20, 2006, the State of Minnesota through its Attorney General intervened as a co-plaintiff in the business disparagement portion of the Minnesota case. In December 2006, News America filed counterclaims in the Minnesota case that included claims similar to those in its New York action against Insignia and one of its officers, plus claims for damages for two alleged incidents of libel and slander. Motions to dismiss the counterclaims were argued in June 2007, and on September 28, 2007 the Court denied the motions to dismiss the counterclaims. The parties are now engaged in pre-trial discovery.

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Pursuant to Court order, all discovery and pre-trial matters must be completed by May 1, 2009. On February 4, 2008, the Court approved a Consent Decree entered into by News America and the State of Minnesota under which News America agreed to not violate Minnesotas statutes prohibiting commercial disparagement. On July 29, 2008, the Company and Albertsons entered into a Settlement Agreement and Mutual Release, in which they each agreed to release all claims against the other, and the Company agreed to dismiss its lawsuit against Albertsons.

The Company filed claims in December 2006 and January 2007 with its directors and officers liability and general liability insurers related to the defense costs and insurance coverage for claims asserted against the Company and one of its officers in News Americas counterclaims. On August 9, 2007, the Company filed a complaint against the insurers in Hennepin County District Court, State of Minnesota requesting a declaratory judgment that the insurers owe the Company and its officer such defense costs and insurance coverage. In December 2007, the Company settled its claim against one of the insurers, and in March 2009, the Company settled with the other insurer and received a payment of $1,387,000 as part of the settlement.

Although management believes that News Americas counterclaims are without merit, an evaluation of the likelihood of an unfavorable outcome and an estimate of the potential liability cannot be rendered at this time. 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 Companys business.

Management currently expects the amount of legal fees and expenses that will be incurred in connection with the ongoing lawsuits to be significant throughout 2009. During the years ended December 31, 2008, 2007 and 2006, the Company incurred legal fees and expenses of $4,086,000, $1,758,000 and $935,000 related to the ongoing lawsuits. Legal fees and expenses are expensed as incurred and are included in general and administrative expenses in the statements of operations.

The Company is subject to various other legal proceedings in the normal course of business. Management believes the outcome of these proceedings will not have a material adverse effect on the Companys financial position or results of operations.

We Are Dependent On Our Contracts With Retailers And Our Ability To Renew Those Contracts When Their Terms Expire

On an ongoing basis, we negotiate renewals of various retailer contracts. Some of our retailer contracts require us to guarantee minimum payments to our retailers. If we are unable to offer guarantees at the required levels in the new contracts, and the contracts are not renewed because of that or because of other reasons, it will have a material adverse effect on our operations and financial condition.

Our POPS business and results of operations could be adversely affected if the number of retailer partners decreases significantly or if the retailer partners fail to continue to provide good service including performing their duties in placing and maintaining POPSigns at the shelf in their stores and providing product movement data to us.

Our contract with Safeway Stores expired on December 31, 2008, which could have a material adverse effect on our business.

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Our Results Of Operations May Be Subject To Significant Fluctuations Which May Result In A Decrease In Our Stock Price

Our quarterly and annual operating results have fluctuated in the past and may vary in the future due to a wide variety of factors including:

| | the loss of contracts with
retailers; |
| --- | --- |
| | the continued impact of
significant litigation on our business; |
| | the timing of seasonal
events for customers or the loss of customers; |
| | the timing of new retail
stores being added; |
| | the timing of additional
selling, marketing and general and administrative expenses; and |
| | competitive conditions in
our industry. |

Due to these factors, our quarterly net sales, expenses and results of operations could vary significantly in the future and this could adversely affect the market price of our common stock.

We Have Significant Competitors

We face significant competition from other providers of at-shelf advertising or promotional signage. Some of these competitors have significantly greater financial resources that can be used to market their products. Should our competitors succeed in obtaining more of the at-shelf advertising business from our current customers, our revenues and related operations would be adversely affected.

Our Results Are Dependent On The Success Of Our Insignia POPS Program Which Represents A Very Significant Part Of Our Business

We are largely dependent on our POPS program, which represented approximately 92%, 88% and 88% of total net sales for fiscal 2008, 2007 and 2006, respectively. We expect the POPS program to represent a higher percentage in fiscal 2009 and future periods. Should brand manufacturers no longer perceive value in the POPS program, our business and results of operations would be adversely affected due to our heavy dependence on this program.

Our Results Are Dependent On The Level Of Spending By Branded Product Manufacturers For Advertising And Promotional Expenditures

We are largely dependent on the net sales from our POPSigns, which are purchased by branded product manufacturers. Changes in economic conditions could result in reductions in advertising and promotional expenditures by branded product manufacturers. Should these reductions occur, our revenues and related results of operations would be adversely affected.

Our Results Are Dependent On Our Manufacturer Partners Continuing To Achieve Sales Increases

Our product manufacturer customers use our POPS program to motivate consumers to buy their branded products. Use of our POPS program has historically resulted in sales increases for that particular product. If our POPS program does not continue to result in these product sales increases, our marketing success and sales levels could be adversely affected.

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Our Stock Price Has Been And May Continue To Be Volatile

During 2008 our common stock has traded between $2.95 and $0.75 per share. The market price of our common stock may continue to be volatile and may be significantly affected by:

| | the loss or addition of
contracts with major retailers; |
| --- | --- |
| | the continued impact of
significant litigation on our business; |
| | actual or anticipated
fluctuations in our operating results; |
| | announcements of new
services by us or our competitors; |
| | developments with respect
to conditions and trends in our industry or in the industries we serve; |
| | general market conditions;
and |
| | other factors, many of
which are beyond our control. |

I tem 1B. Unresolved Staff Comments

Not applicable.

I tem 2. Properties

The Company currently leases approximately 41,000 square feet of office and warehouse space in suburban Minneapolis, Minnesota, through February 29, 2016. The Company believes that the 41,000 square feet of space will meet the Companys foreseeable needs.

I tem 3. Legal Proceedings

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Management currently expects the amount of legal fees and expenses that will be incurred in connection with the ongoing lawsuits to be significant throughout 2009. During the year ended December 31, 2008, the Company incurred legal fees and expenses of $4,086,000 related to the ongoing lawsuits. Legal fees and expenses are expensed as incurred and are included in general and administrative expenses in the statements of operations.

I tem 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2008.

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P ART II.

I tem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The Companys common stock trades on the NASDAQ Capital Market® under the symbol ISIG. The following table sets forth the range of high and low bid prices reported on the Nasdaq System. These quotations represent prices between dealers and do not reflect retail mark-ups, mark-downs or commissions.

2008	High	Low	2007	High	Low
First Quarter	$ 2.95	$ 1.71	First Quarter	$ 3.64	$ 2.69
Second Quarter	2.50	1.64	Second Quarter	4.27	3.00
Third Quarter	2.24	1.50	Third Quarter	5.08	4.00
Fourth Quarter	1.94	0.75	Fourth Quarter	4.74	2.25

Approximate Number of Holders of Common Stock

As of February 27, 2009, the Company had one class of Common Stock beneficially held by approximately 1,700 owners.

Dividends

The Company has never paid cash dividends on its common stock. The Board of Directors presently intends to retain all earnings for use in the Companys business and does not anticipate paying cash dividends in the foreseeable future.

Stock Repurchase Plan

On August 19, 2008, the Board of Directors authorized the repurchase of up to $2,000,000 of the Companys common stock on or before July 31, 2009. The plan does not obligate the Company to repurchase any particular number of shares, and may be suspended at any time at the Companys discretion.

Our share repurchase program activity for the three months ended December 31, 2008 was:

October 1-31, 2008		$		$ 1,541,000
November 1-30, 2008	300,000	$ 0.90	300,000	$ 1,271,000
December 1-31, 2008		$		$ 1,271,000

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Stock Performance Graph

The following graph compares the cumulative total shareholder return on the Companys Common Stock for the five fiscal years beginning December 31, 2003 and ending December 31, 2008, with the cumulative total return on the NASDAQ Stock Market U.S. Index and the Russell 2000 Index over the same period (assuming the investment of $100 in the Companys Stock, the NASDAQ Stock Market U. S. Index and the Russell 2000 Index on December 31, 2003 and the reinvestment of all dividends).

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I tem 6. Selected Financial Data

(In thousands, except per share amounts.)

| For the
Years Ended December 31 — Net sales | 2008 — $ 31,406 | | 2007 — $ 24,431 | $ | 21,894 | 2005 — $ 19,598 | | 2004 — $ 20,992 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Operating income (loss) | (299 | ) | 81 | (2) | 2,314 | (3,331 | ) | (4,875 | ) (4) |
| Net income (loss) | (2,257 | ) (1) | 2,343 | (3) | 2,396 | (3,308 | ) | (4,858 | ) |
| Net income (loss) per share: | | | | | | | | | |
| Basic | $ (0.15 | ) | $ 0.15 | $ | 0.16 | $ (0.22 | ) | $ (0.38 | ) |
| Diluted | $ (0.15 | ) | $ 0.14 | $ | 0.15 | $ (0.22 | ) | $ (0.38 | ) |
| Shares used in calculation of net income
(loss) per share: | | | | | | | | | |
| Basic | 15,484 | | 15,411 | | 15,093 | 15,002 | | 12,687 | |
| Diluted | 15,484 | | 16,186 | | 15,556 | 15,002 | | 12,687 | |
| Working capital | $ 6,396 | | $ 7,751 | $ | 5,017 | $ 2,592 | | $ 4,813 | |
| Total assets | 15,593 | | 13,340 | | 8,583 | 6,673 | | 9,921 | |
| Total shareholders equity | 7,271 | | 9,677 | | 4,862 | 2,072 | | 5,333 | |

| (1) | Includes tax expense of
$2,131 related to the increase of the valuation allowance against deferred
tax assets more fully described in Note 7 to the financial statements. |
| --- | --- |
| (2) | Includes a one-time
non-cash charge of $1,521 for the warrant granted to Valassis more fully
described in Note 6 to the financial statements. |
| (3) | Includes a tax benefit of
$2,131 related to the reduction of the valuation allowance against deferred
tax assets more fully described in Note 7 to the financial statements. |
| (4) | Includes a
$960 impairment of goodwill in 2004 and a $2,133 impairment of goodwill in
2003 related to the acquisition of VALUStix. During 2006 the Company ceased
all business activities related to VALUStix. |

I tem 7. Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the financial statements and the related notes included in this Report. This Report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those in such forward-looking statements as a result of many factors, including those discussed in Cautionary Statements Regarding Forward-Looking Information and elsewhere in this Report.

Impact Of The Current Economic Environment

The Company does not believe that the recession which began in 2008 had a significant effect on its results of operations for the year ended December 31, 2008. POPSign service revenues for the year ended December 31, 2008, increased 34% over the year ended December 31, 2007. Products sales for the year ended December 31, 2008, decreased 12.9% from the year ended December 31, 2007, which reflects a historical trend of decreases due to decreased demand for thermal sign card supplies and laser supplies. The Company may be adversely affected by the economic environment in the future if spending levels of its customers are reduced or it is unable to renew contracts with existing retailers or contract with new retailers on terms which are acceptable.

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Results of Operations

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

| Year ended
December 31 — Net sales | 100.0 | % | 100.0 % | 100.0 % |
| --- | --- | --- | --- | --- |
| Cost of sales | 46.2 | | 44.6 | 45.9 |
| Gross profit | 53.8 | | 55.4 | 54.1 |
| Operating expenses: | | | | |
| Selling | 27.1 | | 23.2 | 22.1 |
| Marketing | 5.1 | | 5.8 | 4.8 |
| Warrant expense | | | 6.2 | |
| General and administrative | 22.6 | | 19.9 | 16.6 |
| Total operating expenses | 54.8 | | 55.1 | 43.5 |
| Operating income (loss) | (1.0 | ) | 0.3 | 10.6 |
| Other income | 0.6 | | 0.6 | 0.3 |
| Income (loss) before taxes | (0.4 | ) | 0.9 | 10.9 |
| Income tax (expense) benefit | (6.8 | ) | 8.7 | |
| Net income (loss) | (7.2 | )% | 9.6 % | 10.9 % |

Critical Accounting Policies

Our discussion of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, income taxes, and stock-based compensation expense. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:

Revenue Recognition . The Company recognizes revenue from Insignia POPSigns ratably over the period of service, which is either a two-week or four-week display cycle. We recognize revenue related to equipment, software and sign card sales at the time the products are shipped to customers. Revenue associated with maintenance agreements is recognized ratably over the life of the contract. Revenue that has been billed and not yet recognized is reflected as deferred revenue on our balance sheet.

Allowance for Doubtful Accounts . An allowance is established for estimated uncollectible accounts receivable. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Companys previous loss history, the customers current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole and other relevant facts and circumstances. Unexpected changes in the aforementioned factors could result in materially different amounts.

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Income Taxes . We account for income taxes in accordance with Statement of Financial Accounting Standard No. 109, or FAS 109, Accounting for Income Taxes, as clarified by FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Under this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the more likely than not criteria of FAS No. 109.

FIN 48 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.

At December 31, 2008, all of the Companys net deferred tax assets were offset with a valuation allowance, which amounted to approximately $8.6 million. The Company does not believe it is more likely than not that these deferred tax assets will be realized in future years.

Stock-Based Compensation . Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. We use the Black-Scholes option pricing model to determine the weighted average fair value of options and employee stock purchase plan rights. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors.

The expected terms of the options and employee stock purchase plan rights are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility is based on historical and expected future volatility of the Companys stock. The Company has not historically issued any dividends and does not expect to in the future. SFAS 123R requires forfeitures to be estimated at the time of the grant and revised, if necessary, in subsequent periods if actual forfeitures differ from estimates.

If factors change and we employ different assumptions in the application of SFAS 123R to grants in future periods, the compensation expense that we record under SFAS 123R may differ significantly from what we have recorded in the current periods.

Fiscal 2008 Compared to Fiscal 2007

Net Sales. Net sales for the year ended December 31, 2008 increased 28.6% to $31,406,000 compared to $24,431,000 for the year ended December 31, 2007.

Service revenues from our POPSign programs for the year ended December 31, 2008 increased 34% to $28,931,000 compared to $21,589,000 for the year ended December 31, 2007. The increase was primarily due to an increase in the number of POPSign programs executed for customers (consumer packaged goods manufacturers) during the 2008 period which more than offset a reduction in the average sign price during the 2008 period. The Company expects that service revenues from POPSign programs for the year ending December 31, 2009 will be lower than for the year ended December 31, 2008 as a result of the loss of Safeway, Inc. from its network of retailers at December 31, 2008 when the contract with Safeway Inc. expired. Additionally, current economic conditions may have an adverse effect on spending levels by our customers, which could negatively impact service revenues for the year ending December 31, 2009.

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Product sales for the year ended December 31, 2008 decreased 12.9% to $2,475,000 compared to $2,842,000 for the year ended December 31, 2007. The decrease was primarily due to decreased sales of both thermal sign card supplies and laser supplies based upon decreased demand for these products from our customers. The Company expects further declines in sales of thermal and laser sign card supplies for the year ending December 31, 2009.

Gross Profit. Gross profit for the year ended December 31, 2008 increased 24.7% to $16,884,000 compared to $13,542,000 for the year ended December 31, 2007. Gross profit as a percentage of total net sales decreased to 53.8% for 2008 compared to 55.4% for 2007.

Gross profit from our POPSign program revenues for the year ended December 31, 2008 increased 28.9% to $16,002,000 compared to $12,419,000 for the year ended December 31, 2007. The increase in gross profit of $3,583,000 resulted from $7,342,000 of increased revenues offset by an increase in retailer expenses of $2,652,000 and an increase in all other costs of services (labor, overhead and material) of $1,107,000. Gross profit as a percentage of POPSign program revenues decreased to 55.3% for 2008 compared to 57.5% for 2007, due primarily to lower average revenue per sign combined with higher average cost per sign (primarily retailer expenses) in the 2008 period.

Gross profit from our product sales for the year ended December 31, 2008 decreased 21.5% to $882,000 compared to $1,123,000 for the year ended December 31, 2007. Gross profit as a percentage of product sales decreased to 35.6% for 2008 compared to 39.5% for 2007. The decreases 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 year ended December 31, 2008 increased 50.4% to $8,521,000 compared to $5,664,000 for the year ended December 31, 2007, primarily due to increased sales commissions, staffing levels and meals/entertainment/travel costs. 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 as a percentage of total net sales increased to 27.1% in 2008 compared to 23.2% in 2007, primarily due to the factors described above offset partially by the effect of increased sales in 2008.

Marketing. Marketing expenses (exclusive of marketing related warrant expense) for the year ended December 31, 2008 increased 13.5% to $1,602,000 compared to $1,412,000 for the year ended December 31, 2007, primarily due to increased labor and benefit costs (as a result of increased staffing levels) partially offset by decreased data acquisition and analysis costs. Marketing expenses as a percentage of total net sales decreased to 5.1% in 2008 compared to 5.8% in 2007, primarily due to the factors described which were more than offset by the effect of increased sales in 2008.

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 the selling and marketing efforts of developing and expanding the Companys participating retailer network. Valassis received a five-year warrant to acquire 800,000 shares of the Companys 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. For the year ended December 31, 2007, the Company recorded $1,521,000 of expense related to the fair value of the warrant.

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General and Administrative. General and administrative expenses for the year ended December 31, 2008 increased 45.1% to $7,060,000 compared to $4,864,000 for the year ended December 31, 2007, primarily due to increased legal costs related to the News America litigation and increased staffing levels which were partially offset by the receipt of a lease termination payment. The Company received a payment of $400,000 of 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 22.6% in 2008 compared to 19.9% in 2007, primarily due to the factors described above offset partially by the effect of increased sales in 2008. Legal fees were $4,234,000 for the year ended December 31, 2008 compared to $1,883,000 for the year ended December 31, 2007. The legal fees in each year were incurred primarily in connection with two News America lawsuits described elsewhere herein. Legal fees increased in 2008 primarily due to the increased in activity in the News America litigation as the parties prepare to be trial-ready by May 1, 2009. We currently expect the amount of legal fees that will be incurred in connection with the ongoing lawsuit to be significant in 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 Companys business.

Other Income (Expense). Other income (net) for the year ended December 31, 2008 was $180,000 compared to other income (net) of $153,000 for the year ended December 31, 2007. Included in other income (net) was interest income of $234,000 for the year ended December 31, 2008 versus interest income of $247,000 for the year ended December 31, 2007. Interest income for the 2008 year was lower due to lower interest rates which more than offset the effect of higher average cash balances in 2008. Lower interest expense of $57,000 for the year ended December 31, 2008 versus $95,000 for the year ended December 31, 2007 was primarily due to the expiration of the line of credit on April 30, 2007.

Income Taxes. The Company recorded income tax expense for the year ended December 31, 2008 of $2,138,000 as a result of increasing the valuation allowance against the deferred tax assets by $1,930,000, recording expense of $201,000 from changes in the deferred tax assets and recognizing $7,000 of current income tax expense related to state tax liabilities. The Company recorded an income tax benefit for the year ended December 31, 2007 of $2,109,000 as a result of the reversal of $2,337,000 of the valuation allowance against the deferred tax asset which offset expense from a change in deferred tax assets of $206,000 and $22,000 of current income tax expense related to Federal alternative minimum tax liability and other state tax liabilities.

Net Income (Loss). The net loss for the year ended December 31, 2008 was $(2,257,000) compared to net income of $2,343,000 for the year ended December 31, 2007.

Fiscal 2007 Compared to Fiscal 2006

Net Sales. Net sales for the year ended December 31, 2007 increased 11.6% to $24,431,000 compared to $21,894,000 for the year ended December 31, 2006.

Service revenues from our POPSign programs for the year ended December 31, 2007 increased 12.3% to $21,589,000 compared to $19,219,000 for the year ended December 31, 2006. The increase was primarily due to an increase in the number of POPSign programs sold to consumer packaged goods manufacturers.

Product sales for the year ended December 31, 2007 increased 6.2% to $2,842,000 compared to $2,675,000 for the year ended December 31, 2006. The increase was primarily due to increased sales of laser label supplies which were partially offset by decreased sales of thermal sign card supplies.

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Gross Profit. Gross profit for the year ended December 31, 2007 increased 14.4% to $13,542,000 compared to $11,840,000 for the year ended December 31, 2006. Gross profit as a percentage of total net sales increased to 55.4% for 2007 compared to 54.1% for 2006.

Gross profit from our POPSign program revenues for the year ended December 31, 2007 increased 15.8% to $12,419,000 compared to $10,725,000 for the year ended December 31, 2006. The increase was primarily due to increased sales and the effect of fixed costs. Gross profit as a percentage of POPSign program revenues increased to 57.5% for 2007 compared to 55.8% for 2006, due to the factors discussed above.

Gross profit from our product sales for the year ended December 31, 2007 increased 0.7% to $1,123,000 compared to $1,115,000 for the year ended December 31, 2006. Gross profit as a percentage of product sales decreased to 39.5% for 2007 compared to 41.7% for 2006. The decrease was primarily due to a change in the sales mix toward lower margin products.

Operating Expenses

Selling. Selling expenses (exclusive of selling related warrant expense) for the year ended December 31, 2007 increased 17.1% to $5,664,000 compared to $4,838,000 for the year ended December 31, 2006, primarily due to increased sales commissions as a result of increased sales, increased labor and benefit costs as a result of increased headcount and salary adjustments, and increased travel related costs. Selling expenses as a percentage of total net sales increased to 23.2% in 2007 compared to 22.1% in 2006, primarily due to the factors described above offset partially by the effect of increased sales in 2007.

Marketing. Marketing expenses (exclusive of marketing related warrant expense) for the year ended December 31, 2007 increased 34.3% to $1,412,000 compared to $1,051,000 for the year ended December 31, 2006, primarily due to increased labor and benefit costs (as a result of increased headcount and salary adjustments) and increased data acquisition and analysis costs. Marketing expenses as a percentage of total net sales increased to 5.8% in 2007 compared to 4.8% in 2006, primarily due to the factors described above offset partially by the effect of increased sales in 2007.

Warrant expense (selling and marketing). On July 2, 2007, the Company and Valassis Sales and Marketing Services, Inc. (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 the selling and marketing efforts of developing and expanding the Companys participating retailer network. Valassis received a five-year warrant to acquire 800,000 shares of the Companys 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. For the year ended December 31, 2007, the Company recorded $1,521,000 of expense related to the fair value of the warrant.

General and Administrative. General and administrative expenses for the year ended December 31, 2007 increased 33.7% to $4,864,000 compared to $3,637,000 for the year ended December 31, 2006, primarily due to increased legal costs and increased labor and benefit costs (resulting from increased headcount, salary adjustments and increased stock-based compensation costs). General and administrative expenses as a percentage of total net sales increased to 19.9% in 2007 compared to 16.6% in 2006, primarily due to the factors described above offset partially by the effect of increased sales in 2007. Legal fees were $1,883,000 for the year ended December 31, 2007 compared to $1,143,000 for the year ended December 31, 2006. The legal fees in each year were incurred primarily in connection with two News America lawsuits described elsewhere herein. Legal fees increased in 2007 primarily due to the increase in activity in the News America litigation as the parties prepared to be trial-ready.

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Other Income (Expense). Other income (net) for the year ended December 31, 2007 was $153,000 compared to other income (net) of $82,000 for the year ended December 31, 2006. Interest income of $247,000 for the year ended December 31, 2007 versus interest income of $123,000 for the year ended December 31, 2006 was the result of higher interest rates and higher cash balances during the 2007 period. Interest expense of $95,000 for the year ended December 31, 2007 versus $146,000 for the year ended December 31, 2006 was primarily due to the expiration of the line of credit on April 30, 2007. Other income for the year ended December 31, 2006 also included $100,000 of income from the sale of certain VALUStix assets. During 2006, the Company ceased all business activities related to VALUStix.

Income Taxes. The Company recorded an income tax benefit for the year ended December 31, 2007 of $2,109,000 as a result of the reversal of $2,337,000 of the valuation allowance against the deferred tax asset, change in deferred tax assets of $206,000 and $22,000 of current income tax expense related to Federal alternative minimum tax liability and other state tax liabilities. The Company recorded no income tax expense for the year ended December 31, 2006 primarily due to the deduction for tax purposes in 2006 of the remaining unamortized goodwill associated with the VALUStix acquisition and the full valuation allowance provided against the net deferred tax asset. For financial statement purposes the goodwill was determined to be impaired in 2003 and 2004 and was written-off during those periods. During 2006, the Company ceased all business activities related to VALUStix and abandoned the VALUSTIX trademark.

Net Income. Net income for the year ended December 31, 2007 was $2,343,000 compared to $2,396,000 for the year ended December 31, 2006.

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 December 31, 2008, working capital was $6,396,000 compared to $7,751,000 at December 31, 2007. During the same period total cash and cash equivalents increased $3,659,000 to $11,052,000.

Net cash provided by operating activities during 2008 was $5,615,000. The increase in cash and cash equivalents resulted from the net loss $(2,257,000), non-cash expense of $2,992,000 (for depreciation, amortization, deferred income tax expense and stock-based compensation) and $4,880,000 of cash provided by changes in operating assets and liabilities. Accounts receivable increased $612,000 during 2008 primarily due to higher net sales in the last two months of 2008 compared to the last two months of 2007. Prepaid expenses decreased by $611,000 during 2008 primarily due to the absence of prepayments to a retailer at December 31, 2008 which were present at December 31, 2007. Accounts payable and accrued liabilities increased $4,073,000 during 2008 primarily as a result of increased commissions, legal expense and retailer expense payable at December 31, 2008. The Company expects accounts receivable, accounts payable and accrued liabilities to fluctuate during future periods depending on the level of quarterly POPSign revenues and legal activity related to the News America litigation.

Net cash of $1,049,000 was used in investing activities in 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. The Company expects that 2009 capital expenditures will at a minimum be $100,000 and could reach $500,000 if the Company decides to proceed with additional purchases of digital printing equipment for increased product quality and lower cost per sign.

Net cash of $907,000 was used in financing activities for the year ended December 31, 2008. The Company used $738,000 (including fees) of cash to repurchase 525,000 shares of common stock as part of the stock repurchase plan adopted in August 2008. The Company also used $267,000 of cash for the payment of long-term liabilities due to a retailer. 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.

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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 during 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.

New Accounting Pronouncements

Fair Value Measurements In September 2006, the FASB Statement issued FASB No. 157, Fair Value Measurements (SFAS 157) which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value, and expands the related disclosure requirements. However, on December 14, 2007, the FASB issued proposed FSP FAS 157-2 which would delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This proposed FSP partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. Furthermore, in October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active, and was effective upon issuance. Effective for 2008, we adopted SFAS 157 except as it applies to those nonfinancial assets and nonfinancial liabilities as noted in proposed FSP FAS 157-2. The partial adoption of SFAS 157, FSP FAS 157-2 or FSP FAS 157-3 did not have a material impact on our consolidated financial position, results of operations or cash flows and we do not believe the adoption of FSP FAS 157-2 will be material to our consolidated financial statements.

Business Combinations In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141 (R)). SFAS No. 141 (R) requires an acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141 (R) is effective for fiscal years after December 15, 2008. We expect to adopt SFAS No. 141 (R) on January 1, 2009, and we do not expect it to have a material effect on its financial position or results of operations.

Noncontrolling Interests in Consolidated Financial Statements In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statement-amendments of ARB No. 51 (SFAS No. 160). SFAS No. 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. The SFAS No. 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This statement is effective as of the beginning of an entitys first fiscal year beginning after December 15, 2008, which corresponds to the Companys year beginning January 1, 2009. The Company currently believes that the adoption of SFAS No. 160 will have no material impact on its financial position or results of operations.

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Contractual Obligations

The following table summarizes the Companys contractual obligations and commercial commitments as of December 31, 2008:

Payments due by Period

	Total	Less than 1 Year	2-3 Years	4-5 Years	After 5 years
Contractual Obligations:
Operating leases, excluding operating
costs	$ 3,340,000	$ 441,000	$ 902,000	$ 939,000	$ 1,058,000
Payments to retailers*	6,036,000	2,988,000	3,048,000
Long-term liabilities	422,000	202,000	220,000
Purchase commitments	300,000	300,000
Total contractual obligations	$ 10,098,000	$ 3,931,000	$ 4,170,000	$ 939,000	$ 1,058,000

*On an ongoing basis, the Company negotiates renewals of various retailer agreements, some of which provide for fixed or store-based payments rather than sign placement-based payments. Upon the completion of renewals, the annual commitment amounts could be in excess of the amounts above.

Off-Balance Sheet Transactions

None.

I tem 7A. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

I tem 8. Financial Statements and Supplementary Data

I NDEX TO F INANCIAL S TATEMENTS

The following are included on the pages indicated:

| Report of
Independent Registered Public Accounting Firm | 24 |
| --- | --- |
| Balance
Sheets as of December 31, 2008 and 2007 | 25 |
| Statements
of Operations for the years ended December 31, 2008, 2007 and 2006 | 26 |
| Statements
of Shareholders Equity for the years ended December 31, 2008, 2007 and 2006 | 27 |
| Statements
of Cash Flows for the years ended December 31, 2008, 2007 and 2006 | 28 |
| Notes to
Financial Statements | 29 |

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R EPORT OF I NDEPENDENT REGISTERED P UBLIC A CCOUNTING FIRM

To the Board of Directors and Shareholders Insignia Systems, Inc.

We have audited the accompanying balance sheets of Insignia Systems, Inc. (a Minnesota corporation) (the Company) as of December 31, 2008 and 2007, and the related statements of operations, shareholders equity and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Insignia Systems, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.


Minneapolis, Minnesota March 27, 2009

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Insignia Systems, Inc. B ALANCE S HEETS

| As of
December 31 | 2008 | | | |
| --- | --- | --- | --- | --- |
| ASSETS | | | | |
| Current Assets: | | | | |
| Cash and cash equivalents | $ 11,052,000 | $ | 7,393,000 | |
| Accounts receivable, net | 2,767,000 | | 2,155,000 | |
| Inventories | 442,000 | | 397,000 | |
| Deferred tax assets, net | | | 164,000 | |
| Prepaid expenses and other | 238,000 | | 883,000 | |
| Total Current Assets | 14,499,000 | | 10,992,000 | |
| Other Assets: | | | | |
| Property and equipment, net | 1,054,000 | | 375,000 | |
| Non-current deferred tax assets, net | | | 1,967,000 | |
| Other | 40,000 | | 6,000 | |
| Total Assets | $ 15,593,000 | $ | 13,340,000 | |
| LIABILITIES AND SHAREHOLDERS EQUITY | | | | |
| Current Liabilities: | | | | |
| Current maturities of long-term liabilities | $ 202,000 | $ | 266,000 | |
| Accounts payable | 2,770,000 | | 1,369,000 | |
| Accrued liabilities | | | | |
| Compensation | 820,000 | | 622,000 | |
| Employee stock purchase plan | 65,000 | | 98,000 | |
| Legal | 365,000 | | 208,000 | |
| Other commissions | 1,742,000 | | 152,000 | |
| Other | 981,000 | | 221,000 | |
| Deferred revenue | 1,158,000 | | 305,000 | |
| Total Current Liabilities | 8,103,000 | | 3,241,000 | |
| Long-Term Liabilities, less current maturities | 219,000 | | 422,000 | |
| Commitments and Contingencies | | | | |
| Shareholders Equity: | | | | |
| Common stock, par value $.01: | | | | |
| Authorized shares 40,000,000 | | | | |
| Issued and outstanding shares 15,069,000 in 2008 and
15,550,000 in
2007 | 151,000 | | 156,000 | |
| Additional paid-in capital | 31,881,000 | | 32,025,000 | |
| Accumulated deficit | (24,761,000 | ) | (22,504,000 | ) |
| Total Shareholders Equity | 7,271,000 | | 9,677,000 | |
| Total Liabilities and Shareholders Equity | $ 15,593,000 | $ | 13,340,000 | |

See accompanying notes to financial statements.

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Insignia Systems, Inc.

S TATEMENTS OF O PERATIONS

| Year Ended
December 31 — Services revenues | 2008 — $ 28,931,000 | | 2007 — $ 21,589,000 | $ | 19,219,000 | |
| --- | --- | --- | --- | --- | --- | --- |
| Products sold | 2,475,000 | | 2,842,000 | | 2,675,000 | |
| Total Net Sales | 31,406,000 | | 24,431,000 | | 21,894,000 | |
| Cost of services | 12,929,000 | | 9,170,000 | | 8,494,000 | |
| Cost of goods sold | 1,593,000 | | 1,719,000 | | 1,560,000 | |
| Total Cost of Sales | 14,522,000 | | 10,889,000 | | 10,054,000 | |
| Gross Profit | 16,884,000 | | 13,542,000 | | 11,840,000 | |
| Operating
Expenses: | | | | | | |
| Selling | 8,521,000 | | 5,664,000 | | 4,838,000 | |
| Marketing | 1,602,000 | | 1,412,000 | | 1,051,000 | |
| Warrant expense | | | 1,521,000 | | | |
| General and administrative | 7,060,000 | | 4,864,000 | | 3,637,000 | |
| Total Operating Expenses | 17,183,000 | | 13,461,000 | | 9,526,000 | |
| Operating Income (Loss) | (299,000 | ) | 81,000 | | 2,314,000 | |
| Other
Income (Expense): | | | | | | |
| Interest income | 234,000 | | 247,000 | | 123,000 | |
| Interest expense | (57,000 | ) | (95,000 | ) | (146,000 | ) |
| Other income | 3,000 | | 1,000 | | 105,000 | |
| Total Other Income | 180,000 | | 153,000 | | 82,000 | |
| Income (Loss) Before Taxes | (119,000 | ) | 234,000 | | 2,396,000 | |
| Income tax (expense)
benefit | (2,138,000 | ) | 2,109,000 | | | |
| Net Income (Loss) | $ (2,257,000 | ) | $ 2,343,000 | $ | 2,396,000 | |
| Net income (loss) per
share: | | | | | | |
| Basic | $ (0.15 | ) | $ 0.15 | $ | 0.16 | |
| Diluted | $ (0.15 | ) | $ 0.14 | $ | 0.15 | |
| Shares used in calculation
of net income (loss) per share: | | | | | | |
| Basic | 15,484,000 | | 15,411,000 | | 15,093,000 | |
| Diluted | 15,484,000 | | 16,186,000 | | 15,556,000 | |

See accompanying notes to financial statements.

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Insignia Systems, Inc. S TATEMENTS OF S HAREHOLDERS  E QUITY


Shares		Amount						Total
Balance at December 31, 2005	15,002,000	$	150,000	$	29,165,000	$ (27,243,000	)	$ 2,072,000
Issuance of
common stock, net	150,000		2,000		133,000			135,000
Value of
stock-based compensation					259,000			259,000
Net income						2,396,000		2,396,000
Balance at December 31, 2006	15,152,000		152,000		29,557,000	(24,847,000	)	4,862,000
Issuance of
common stock, net	398,000		4,000		471,000			475,000
Value of
stock-based compensation					476,000			476,000
Value of
warrants issued for services					1,521,000			1,521,000
Net income						2,343,000		2,343,000
Balance at December 31, 2007	15,550,000		156,000		32,025,000	(22,504,000	)	9,677,000
Issuance of
common stock, net	44,000				98,000			98,000
Repurchase
of common stock, net	(525,000	)	(5,000	)	(733,000	)		(738,000	)
Value of
stock-based compensation					491,000			491,000
Net loss						(2,257,000	)	(2,257,000	)
Balance at December 31, 2008	15,069,000	$	151,000	$	31,881,000	$ (24,761,000	)	$ 7,271,000

See accompanying notes to financial statements.

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Insignia Systems, Inc. S TATEMENTS OF C ASH F LOWS

Year Ended December 31	2008		2007
Operating
Activities:
Net income (loss)	$ (2,257,000	)	$ 2,343,000	$	2,396,000
Adjustments to reconcile net
income (loss) to net cash provided by
operating activities:
Depreciation and
amortization	370,000		266,000		207,000
Deferred income tax expense
(benefit)	2,131,000		(2,131,000	)
Provision for bad debt
expense					(31,000	)
Stock-based
compensation	491,000		476,000		259,000
Warrant expense			1,521,000
Changes in operating assets and
liabilities:
Accounts receivable	(612,000	)	770,000		(600,000	)
Inventories	(45,000	)	55,000		(4,000	)
Prepaid expenses and
other	611,000		55,000		(133,000	)
Accounts payable	1,401,000		24,000		(425,000	)
Accrued liabilities	2,672,000		476,000		(132,000	)
Deferred revenue	853,000		(131,000	)	(176,000	)
Net cash provided by operating
activities	5,615,000		3,724,000		1,361,000
Investing Activities:
Purchases of property and
equipment	(1,049,000	)	(164,000	)	(275,000	)
Net cash used in investing
activities	(1,049,000	)	(164,000	)	(275,000	)
Financing Activities:
Net change in line of
credit			(186,000	)	54,000
Payment of long-term
liabilities	(267,000	)	(241,000	)	(201,000	)
Proceeds from issuance of common
stock, net	98,000		475,000		135,000
Repurchase of common stock,
net	(738,000	)
Net cash provided by (used in)
financing activities	(907,000	)	48,000		(12,000	)
Increase in cash and cash equivalents	3,659,000		3,608,000		1,074,000
Cash and cash equivalents at beginning of
year	7,393,000		3,785,000		2,711,000
Cash and cash equivalents at end of
year	$ 11,052,000		$ 7,393,000	$	3,785,000
Supplemental disclosures for cash flow
information:
Cash paid during the year for interest	$ 17,000		$ 53,000	$	103,000
Cash paid during the year for income
taxes	$ 8,000		$ 60,000	$

See accompanying notes to financial statements.

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Insignia Systems, Inc. N OTES TO F INANCIAL S TATEMENTS

| 1. |
| --- |
| Description of Business. Insignia Systems, Inc. (the Company)
markets in-store advertising products, programs and services to retailers and
consumer packaged goods manufacturers. The Companys products include the
Insignia Point-of-Purchase Services (POPS) in-store advertising program,
thermal sign card supplies for the Companys SIGNright and Impulse systems,
Stylus software and laser printable cardstock and label supplies. |
| Revenue Recognition . The Company recognizes revenue from Insignia POPSigns ratably over the period
of service. The Company recognizes revenue related to equipment, software and
sign card sales at the time the products are shipped to customers. Revenue
associated with maintenance agreements is recognized ratably over the life of
the contract. Revenue that has been billed and not yet earned is reflected as
deferred revenue on the Balance Sheet. Revenues are recognized by the Company
when persuasive evidence of an arrangement exists, shipment has occurred, the
price is fixed, and collectability is reasonably assured. |
| Cash and Cash Equivalents . The Company considers all highly liquid
investments with an original maturity date of three months or less to be cash
equivalents. Cash equivalents are stated at cost, which approximates fair
value. At December 31, 2008, $213,000 was invested in an overnight repurchase
account, $7,000,000 was invested in certificates of deposit and $3,858,000
was invested in a short-term money market account. At December 31, 2007,
$1,345,000 was invested in an overnight repurchase account, $6,000,000 was
invested in certificates of deposit and $5,000 was invested in a short-term
money market account. |
| Fair Value of Financial Instruments. The financial statements include the
following financial instruments: cash and cash equivalents, accounts
receivable, accounts payable and long-term liabilities. The fair value of the
long-term liabilities is estimated based on the use of discounted cash flow
analysis using interest rates for other debt offered to the Company. The
Company estimates the carrying value of the long-term liabilities
approximates fair value. All other financial instruments approximate fair
value because of the short-term nature of these instruments. |
| Accounts Receivable. The
majority of the Companys accounts receivable is due from companies in the
consumer packaged goods industry. Credit is extended based on evaluation of a
customers financial condition and, generally, collateral is not required.
Accounts receivable are due within 30-60 days and are stated at amounts due
from customers net of an allowance for doubtful accounts. Accounts receivable
outstanding longer than the contractual payment terms are considered past
due. The Company determines its allowance by considering a number of factors,
including the length of time trade accounts receivable are past due, the
Companys previous loss history, the customers current ability to pay its
obligation to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable when they
become uncollectible, and payments subsequently received on such receivables
are credited to the allowance for doubtful accounts. |
| Changes in the Companys
allowance for doubtful accounts are as follows: |

December 31 — Beginning balance	2008 — $ 10,000	$	10,000
Bad debt provision
(recovery)
Accounts written-off	(3,000	)
Ending balance	$ 7,000	$	10,000

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Inventories . Inventories are primarily comprised of parts and supplies for Impulse and SIGNright machines, sign cards, and rollstock. Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method, and consists of the following:

December 31	2008	2007
Raw materials	$ 107,000	$ 82,000
Work-in-process	64,000	36,000
Finished goods	271,000	279,000
	$ 442,000	$ 397,000

Property and Equipment . Property and equipment is recorded at cost. Significant additions or improvements extending asset lives are capitalized, while repairs and maintenance are charged to expense when incurred. Depreciation is provided in amounts sufficient to relate the cost of assets to operations over their estimated useful lives. The straight-line method of depreciation is used for financial reporting purposes and accelerated methods are used for tax purposes. Estimated useful lives of the assets are as follows:

Production tooling	1-3 years
Machinery and equipment	5 years
Office furniture and
fixtures	3 years
Computer equipment and
software	3 years

| Leasehold improvements are
amortized over the shorter of the remaining term of the lease or estimated
life of the asset. |
| --- |
| Impairment of Long-Lived Assets . The Company records impairment losses on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amount. Impaired assets are then
recorded at their estimated fair market value. There were no impairments during
the years ended December 31, 2008, 2007 and 2006. |
| Income Taxes . Income taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial reporting
and tax basis of assets and liabilities. Deferred taxes are reduced by a
valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax asset will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of the enactment. It is the
Companys policy to provide for uncertain tax positions and the related
interest and penalties based upon managements assessment of whether a tax
benefit is more likely than not to be sustained upon examination by tax
authorities. |
| Stock-Based Compensation. Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which
requires companies to measure and recognize compensation expense for all
stock-based payments at fair value. We use the Black-Scholes option pricing
model to determine the weighted average fair value of options and employee
stock purchase plan rights. The determination of fair value of share-based
payment awards on the date of grant using an option-pricing model is affected
by our stock price as well as by assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not
limited to, the expected stock price volatility over the term of the awards,
and actual and projected employee stock option exercise behaviors. |

Table of Contents

| The expected terms of the
options and employee stock purchase plan rights are based on evaluations of
historical and expected future employee exercise behavior. The risk-free
interest rate is based on the U.S. Treasury rates at the date of grant with
maturity dates approximately equal to the expected life at grant date.
Volatility is based on historical and expected future volatility of the
Companys stock. The Company has not historically issued any dividends and
does not expect to in the future. SFAS 123R requires forfeitures to be
estimated at the time of the grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from estimates. |
| --- |
| If factors change and we
employ different assumptions in the application of SFAS 123R to grants in
future periods, the related compensation expense that we record under SFAS
123R may differ significantly from what we have recorded in the current
periods. |
| Advertising Costs . Advertising
costs are charged to operations as incurred. Advertising expenses were
approximately $11,000, $9,000 and $8,000 during the years ended December 31,
2008, 2007 and 2006. |
| Net
Income (Loss) Per Share . Basic net income (loss) per share is computed by dividing net income
(loss) by the weighted average shares outstanding and excludes any dilutive
effects of options, warrants and convertible securities. Diluted net income
per share gives effect to all diluted potential common shares outstanding
during the year. Options and warrants to purchase approximately 2,186,000,
1,396,000 and 1,086,000 shares of common stock with weighted average exercise
prices of $4.89, $5.81 and $6.29 were outstanding at December 31, 2008, 2007
and 2006 and were not included in the computation of common stock equivalents
because their exercise prices were higher than the average fair market value
of the common shares during the reporting periods. |
| For the year ended December
31, 2008, the effect of options and warrants was anti-dilutive due to the net
loss incurred during the period. Had net income been achieved, approximately
381,000 of common stock equivalents would have been included in the computation
of diluted net income per share for the year ended December 31, 2008. |
| Weighted average common
share outstanding for the years ended December 31, 2008, 2007 and 2006 were
as follows: |

| Year ended December 31 — Denominator for basic net income (loss) per share
weighted average
shares | 15,484,000 | 15,411,000 | 15,093,000 |
| --- | --- | --- | --- |
| Effect of dilutive securities: | | | |
| Stock options | | 775,000 | 460,000 |
| Denominator for diluted net income (loss) per
share adjusted
weighted average shares | 15,484,000 | 16,186,000 | 15,556,000 |

Use of Estimates . The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Table of Contents

| New Accounting Pronouncements. |
| --- |
| Fair
Value Measurements: In September 2006, the FASB Statement issued FASB No. 157, Fair Value Measurements (SFAS 157)
which is effective for fiscal years beginning after November 15, 2007 and for
interim periods within those years. This statement defines fair value,
establishes a framework for measuring fair value, and expands the related
disclosure requirements. However, on December 14, 2007, the FASB issued
proposed FSP FAS 157-2 which would delay the effective date of SFAS 157 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). This proposed FSP partially defers the
effective date of SFAS 157 to fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years for items within the scope of
this FSP. Furthermore, in October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset
When the Market for that Asset is Not Active, and was effective
upon issuance. Effective for 2008, we adopted SFAS 157 except as it applies to those nonfinancial assets and nonfinancial
liabilities as noted in proposed FSP FAS 157-2. The partial adoption of SFAS
157, FSP FAS 157-2 or FSP FAS 157-3 did not have a material impact on our
consolidated financial position, results of operations or cash flows and we
do not believe the adoption of FSP FAS 157-2 will be material to our
consolidated financial statements. |
| Business
Combinations: In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141
(R)). SFAS No. 141 (R) requires an acquiring entity in a business combination
to recognize all (and only) the assets acquired and liabilities assumed in
the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and financial
effect of the business combination. SFAS No. 141 (R) is effective for fiscal
years after December 15, 2008. We expect to adopt SFAS No. 141 (R) on January
1, 2009, and we do not expect it to have a material effect on its financial
position or results of operations. |
| Noncontrolling
Interests in Consolidated Financial Statements: In December 2007, the FASB issued SFAS No.
160, Noncontrolling Interests in
Consolidated Financial Statement-amendments of ARB No. 51 (SFAS
No. 160). SFAS No. 160 states that accounting and reporting for minority
interests will be recharacterized as noncontrolling interests and classified
as a component of equity. The SFAS No. 160 also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. This statement is effective as of the beginning of an
entitys first fiscal year beginning after December 15, 2008, which
corresponds to the Companys year beginning January 1, 2009. The Company
currently believes that the adoption of SFAS No. 160 will have no material
impact on its financial position or results of operations. |

Table of Contents

Property and Equipment . Property and equipment consists of the following at December 31:

	2008
Property and Equipment:
Production tooling, machinery and
equipment	$ 2,115,000	$	1,725,000
Office furniture and fixtures	250,000		191,000
Computer equipment and software	719,000		698,000
Web site	38,000
Leasehold improvements	255,000		368,000
	3,377,000		2,982,000
Accumulated depreciation and amortization	(2,323,000	)	(2,607,000	)
Net Property and Equipment	$ 1,054,000	$	375,000

| 3 . | Line of Credit . The Company had a Financing
Agreement, Security Agreement and Revolving Note (collectively, the Credit
Agreement) with Marquette Business Credit, Inc. which was in effect through
April 30, 2007. The Company did not renew the Credit Agreement and all
borrowings were repaid as of April 30, 2007. |
| --- | --- |
| 4. | Long-Term Liabilities . In prior periods, the
Company reached an agreement with a retailer for the deferred payment of
certain obligations on an interest-free basis. These obligations are recorded
as long-term liabilities with an imputed annual interest rate of 10.0%. |

| December 31 — Uncollateralized three year liability,
payable in monthly installments | 2008 — $ 23,000 | $ | 290,000 | |
| --- | --- | --- | --- | --- |
| Uncollateralized liability, due December
31, 2009 | 179,000 | | 179,000 | |
| Uncollateralized liability, due December
31, 2010 | 219,000 | | 219,000 | |
| Total | 421,000 | | 688,000 | |
| Less current maturities | (202,000 | ) | (266,000 | ) |
| | $ 219,000 | $ | 422,000 | |

| 5. |
| --- |
| Operating Leases .
The Company conducts its operations in a leased facility. In October 2007 the
Company entered into agreements to terminate its previous facility lease and
sublease effective July 31, 2008. On March 27, 2008, the Company entered into
an operating lease for its current facility which is in effect from August
2008 through February 2016. The Company also leases equipment under operating
lease agreements effective through September 2009. Rent expense under all of
these leases, net of sub-lease rental income, was approximately $546,000,
$527,000 and $527,000 for the years ended December 31, 2008, 2007 and 2006. |
| Minimum
future lease obligations under these leases, excluding operating costs, are
approximately as follows for the years ending December 31: |

2009	441,000
2010	446,000
2011	456,000
2012	465,000
2013	474,000
Thereafter	1,058,000

Table of Contents

| Legal . In
August 2000, News America Marketing In-Store, Inc. (News America), brought
suit against the Company in U.S. District Court in New York, New York. The
case was settled in November 2002. The terms of the settlement agreement are
confidential. The settlement did not impact the Companys operating results. |
| --- |
| In October
2003, News America brought suit against the Company in U.S. District Court in
New York, New York, alleging that the Company has engaged in deceptive acts
and practices, has interfered with existing business relationships with
retailers and prospective economic advantage, and has engaged in unfair
competition. The suit sought unspecified damages and injunctive relief. In
February 2007 the U.S. District Court in New York transferred this action to
Minnesota where the claims became part of the lawsuit the Company filed
against News America and Albertsons Inc. in 2004 (described below), and the
New York action was subsequently dismissed. |
| On September
23, 2004, the Company brought suit against News America and Albertsons Inc.
(Albertsons) in Federal District Court in Minneapolis, Minnesota, for
violations of federal and state antitrust and false advertising laws,
alleging that News America has acquired and maintained monopoly power through
various wrongful acts designed to harm the Company in the in-store
advertising and promotion products and services market. The suit seeks
injunctive relief sufficient to prevent further antitrust injury and an award
of treble damages to be determined at trial for the harm caused to the
Company. On June 30, 2006 the Court denied the motions of News America and
Albertsons to dismiss the suit. On September 20, 2006, the State of
Minnesota through its Attorney General intervened as a co-plaintiff in the
business disparagement portion of the Minnesota case. In December 2006, News
America filed counterclaims in the Minnesota case that included claims
similar to those in its New York action against Insignia and one of its
officers, plus claims for damages for two alleged incidents of libel and
slander. Motions to dismiss the counterclaims were argued in June 2007, and
on September 28, 2007 the Court denied the motions to dismiss the
counterclaims. The parties are now engaged in pre-trial discovery. Pursuant
to Court order, all discovery and pre-trial matters must be completed by May
1, 2009. On February 4, 2008, the Court approved a consent decree entered
into by News America and the State of Minnesota under which News America
agreed to not violate Minnesotas statutes prohibiting commercial
disparagement. On July 29, 2008, the Company and Albertsons entered into a
settlement agreement and mutual release, in which they each agreed to release
all claims against the other, and the Company agreed to dismiss its lawsuit
against Albertsons. |
| The Company
filed claims in December 2006 and January 2007 with its directors and
officers liability and general liability insurers related to the defense
costs and insurance coverage for claims asserted against the Company and one
of its officers in News Americas counterclaims. On August 9, 2007, the
Company filed a complaint against the insurers in Hennepin County District
Court, State of Minnesota requesting a declaratory judgment that the insurers
owe the Company and its officer such defense costs and insurance coverage. In
December 2007, the Company settled its claim against one of the insurers, and
in March 2009, the Company settled with the other insurer and received a
payment of $1,387,000 as part of the settlement. |
| Although
management believes that News Americas counterclaims are without merit, an
evaluation of the likelihood of an unfavorable outcome and an estimate of the
potential liability cannot be rendered at this time. 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 Companys business. |
| Management
currently expects the amount of legal fees and expenses that will be incurred
in connection with the ongoing lawsuits to be significant throughout 2009.
During the year ended December 31, 2008, the Company incurred legal fees and
expenses of $4,086,000 related to the ongoing lawsuits. Legal fees and expenses
are expensed as incurred and are included in general and administrative
expenses in the statements of operations. |

Table of Contents

| The Company
is subject to various other legal proceedings in the normal course of
business. Management believes the outcome of these proceedings will not have
a material adverse effect on the Companys financial position or results of
operations. |
| --- |
| Retailer Agreements .
The Company has contracts in the normal course of business with various
retailers, some of which provide for fixed or store-based payments rather
than sign placement-based payments. During the years ended December 31, 2008,
2007 and 2006, the Company incurred $4,935,000, $3,730,000 and $3,502,000 of
costs related to fixed and store-based payments. The amounts were recorded in
Cost of Services in the Statements of Operations. |
| Aggregate
commitment amounts under agreements with retailers are approximately as
follows for the years ending December 31: |

2009	2,988,000
2010	2,907,000
2011	141,000

| | On an
ongoing basis the Company negotiates renewals of various retailer agreements.
Upon the completion of future contract renewals, the annual commitment
amounts for 2009 and thereafter could be in excess of the amounts above. |
| --- | --- |
| 6. | Shareholders Equity . |
| | Private Placements and Warrants. On December 18, 2002, the Company closed a private placement of $7,500,000 of
common stock to a small group of accredited investors at a price of $9.19 per
share, pursuant to a Securities Purchase Agreement. The price represented a
15% discount from the average closing bid price of the Companys common stock
over the five days prior to the closing. As part of this offering, the
Company also issued warrants to the investors entitling them to purchase an
additional 244,827 shares of the Companys common stock at an initial
exercise price of $12.44 per share for a five-year period. Additionally, a
warrant to purchase 40,805 shares with the same terms was issued to the
Placement Agent. The warrant agreements were amended, effective December 29,
2003, to adjust the exercise price of the warrants to $2.75 per share in
exchange for certain terms of the warrant agreement being deleted in their
entirety. During the year ended December 31, 2007, 110,122 of the warrants were
exercised and the remaining 175,510 warrants expired on December 18, 2007. |
| | On July 2,
2007, the Company issued a warrant to purchase 800,000 shares of the
Companys common stock to Valassis Sales and Marketing Services, Inc.
(Valassis) at a price of $4.04 for a term of five years. The warrant was
issued for services to develop and expand the Companys participating
retailer network in conjunction with Amendment No. 2 to the Exclusive
Reseller Agreement which defines the terms of the strategic sales alliance
between the Company and Valassis. The Company recorded $1,521,000 of expense
related to the fair value of the warrant. The Black-Scholes option-pricing
model was used to estimate the fair value of the warrant using an expected
life of 5 years, volatility of 40%, a dividend yield of 0% and a risk-free
interest rate of 4.9%. At December 31, 2008, the entire warrant was
outstanding and exercisable. |
| | Stock-Based Compensation .
The Companys stock-based compensation plans are administered by the
Compensation Committee of the Board of Directors, which selects persons to
receive awards and determines the number of shares subject to each award and
the terms, conditions, performance measures and other provisions of the
award. |
| | Effective
January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123R, Share-Based Payment (SFAS 123R), which requires companies to measure and recognize compensation
expense for all stock-based payments at fair value. SFAS 123R is being applied
on the modified prospective basis. Under the modified prospective approach,
SFAS 123R applies to new awards and to awards that were outstanding on
January 1, 2006 that are subsequently modified, repurchased or cancelled. |

Table of Contents

| Under the
modified prospective approach, compensation cost recognized beginning in the
first quarter of fiscal 2006 includes compensation cost for all share-based
payments granted prior to, but not yet vested on January 1, 2006, and
compensation cost for all share-based payments granted subsequent to January
1, 2006 based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R. Prior periods were not restated to reflect the
impact of adopting the new standard. |
| --- |
| The following
table summarizes the stock-based compensation expense which was recognized in
the Statements of Operations for the years ended December 31, 2008, 2007 and
2006: |

| Year ended
December 31 | 2008 | 2007 | 2006 |
| --- | --- | --- | --- |
| Cost of
sales | $ 86,000 | $ 91,000 | $ 61,000 |
| Selling | 95,000 | 80,000 | 55,000 |
| Marketing | 65,000 | 58,000 | 32,000 |
| General and
administrative | 245,000 | 247,000 | 111,000 |
| | $ 491,000 | $ 476,000 | $ 259,000 |

The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards with the following weighted average assumptions:


Stock Options:
Expected
life (years)	3.38	3.92	2.64
Expected
volatility	75 %	40 %	63 %
Dividend
yield	0 %	0 %	0 %
Risk-free
interest rate	2.67 %	4.77 %	4.91 %

| The Company
uses the straight-line attribution method to recognize expense for unvested
options. The amount of share-based compensation recognized during a period is
based on the value of the awards that are ultimately expected to vest. SFAS
123R requires forfeitures to be estimated at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those
estimates. The Company will re-evaluate the forfeiture rate annually and
adjust it as necessary. |
| --- |
| As of
December 31, 2008, there was $273,000 of total unrecognized compensation
costs related to the outstanding stock options which is expected to be
recognized over a weighted average period of 1.0 years. |
| Stock Options .
Prior to 2003 the Company had a stock option plan (the 1990 Plan) for its
employees and directors under which substantially all of the shares reserved
for issuance had been issued. During May 2003, the Companys shareholders
approved the 2003 Incentive Stock Option Plan (the 2003 Plan) and an
aggregate of 350,000 shares of common stock were reserved for issuance. The
shareholders approved an additional 650,000 shares for issuance in May of
2004, an additional 625,000 shares for issuance in May of 2005, an additional
250,000 for issuance in May of 2007 and an additional 500,000 for issuance in
May of 2008. The 2003 Plan replaced the 1990 Plan. Options granted under the
1990 Plan will remain in effect until they are exercised or expire according
to their terms. All current option grants are made under the 2003 Plan. |
| Under the
terms of the stock option plans, the Company grants incentive or
non-qualified stock options to employees and directors generally at an
exercise price at or above 100% of fair market value at the close of business
on the date of grant. The stock options expire five or ten years after the
date of grant and generally vest over three years. |

Table of Contents

The following table summarizes activity under the Option Plans:

| Balance at
December 31, 2005 | 563,366 | | 1,859,329 | $ | 4.22 | Aggregate Intrinsic Value |
| --- | --- | --- | --- | --- | --- | --- |
| Reserved | | | | | | |
| Granted | (615,100 | ) | 615,100 | | 1.24 | |
| Exercised | | | (113,331 | ) | 1.52 | $ 179,000 |
| Cancelled 2003 Plan | 252,934 | | (252,934 | ) | 2.44 | |
| Cancelled 1990 Plan | | | (61,066 | ) | 7.66 | |
| Balance at
December 31, 2006 | 201,200 | | 2,047,098 | | 3.59 | |
| Reserved | 250,000 | | | | | |
| Granted | (513,100 | ) | 513,100 | | 3.74 | |
| Exercised | | | (142,616 | ) | 1.23 | $ 478,000 |
| Cancelled 2003 Plan | 96,968 | | (96,968 | ) | 1.60 | |
| Cancelled 1990 Plan | | | (66,400 | ) | 8.17 | |
| Balance at
December 31, 2007 | 35,068 | | 2,254,214 | | 3.73 | |
| Reserved | 500,000 | | | | | |
| Granted | (321,000 | ) | 321,000 | | 1.93 | |
| Exercised | | | (4,367 | ) | 1.24 | $ 3,000 |
| Cancelled 2003 Plan | 49,936 | | (49,936 | ) | 2.47 | |
| Cancelled 1990 Plan | | | (23,200 | ) | 6.10 | |
| Balance at
December 31, 2008 | 264,004 | | 2,497,711 | $ | 3.50 | |

| The numbers
of options exercisable under the Option Plans were: | |
| --- | --- |
| December 31, 2006 | 1,242,487 |
| December 31, 2007 | 1,372,417 |
| December 31, 2008 | 1,751,837 |

The following table summarizes information about the stock options outstanding at December 31, 2008:

Ranges of Exercise Prices			Options Outstanding — Number Outstanding	Weighted Average Remaining Contractual Life
$0.58		$ 0.96	310,401	6.51
years	$ 0.91	302,067	$ 0.91
0.97		1.31	656,433	6.70
years	1.24	511,305	1.25
1.32		1.95	350,547	8.91
years	1.92	67,047	1.94
1.96		3.32	42,067	4.71
years	3.09	29,406	3.19
3.33		4.28	551,331	7.58
years	3.80	255,745	3.86
4.29		5.80	84,999	4.27
years	5.74	84,334	5.75
5.81		8.90	309,933	1.81
years	7.82	309,933	7.82
8.91		11.36	192,000	2.72
years	9.61	192,000	9.61
$0.58		$ 11.36	2,497,711	6.15
years	$ 3.50	1,751,837	$ 3.93

Options outstanding under the Option Plans expire at various dates during the period October 2009 through May 2018. Options outstanding at December 31, 2008 had a weighted average remaining life of 6.15 years and an aggregate intrinsic value of $21,000. Options exercisable at December 31, 2008 had a weighted average remaining life of 5.13 years and an aggregate intrinsic value of $21,000. The weighted average grant-date fair value of options granted during the years ended December 31, 2008, 2007 and 2006, were $1.01, $1.38 and $0.52.

Table of Contents

| | Employee Stock Purchase Plan. The
Company has an Employee Stock Purchase Plan (the Plan) that enables
employees to contribute up to 10% of their compensation toward the purchase
of the Companys common stock at 85% of market value. During the years ended
December 31, 2008, 2007 and 2006, employees purchased 39,914, 164,040 and
57,460 shares under the Plan. At December 31, 2008, 155,663 shares are
reserved for future employee purchases of common stock under the Plan. For
the year ended December 31, 2008, the Company recognized $67,000 of
stock-based compensation expense related to the Plan. |
| --- | --- |
| 7. | Income Taxes . The (provision) benefit for
income taxes consists of the following: |

| Year Ended
December 31 | 2008 | | 2007 | | 2006 |
| --- | --- | --- | --- | --- | --- |
| Current
taxes - Federal | $ | | $ (7,000 | ) | $ |
| Current
taxes - State | (7,000 | ) | (15,000 | ) | |
| Deferred
taxes - Federal | (185,000 | ) | (189,000 | ) | |
| Deferred
taxes - State | (16,000 | ) | (17,000 | ) | |
| (Expense) benefit from adjustment of
valuation allowance | (1,930,000 | ) | 2,337,000 | | |
| (Provision)
benefit for income taxes | $ (2,138,000 | ) | $ 2,109,000 | | $ |

Significant components of the deferred taxes are as follows:

| As of
December 31 | | | 2007 | |
| --- | --- | --- | --- | --- |
| Current Deferred Tax Assets : | | | | |
| Net
operating loss carryforwards | $ | $ | 550,000 | |
| Accrued
expenses | 99,000 | | 96,000 | |
| Inventory
reserve | 27,000 | | 27,000 | |
| Other | 2,000 | | 4,000 | |
| Current deferred tax assets before
valuation allowance | 128,000 | | 677,000 | |
| Less
valuation allowance | (128,000 | ) | (513,000 | ) |
| Current
deferred tax assets | $ | $ | 164,000 | |
| Long -Term Deferred Tax Assets : | | | | |
| Net
operating loss carryforwards | $ 7,632,000 | $ | 7,182,000 | |
| Warrant
expense | 563,000 | | 563,000 | |
| Accrued
expenses | 147,000 | | 215,000 | |
| Depreciation | 31,000 | | 96,000 | |
| Stock
options | 78,000 | | 52,000 | |
| Alternative
minimum tax credits | 34,000 | | 31,000 | |
| Other | 1,000 | | | |
| Long-term
deferred tax assets before valuation allowance | 8,486,000 | | 8,139,000 | |
| Less
valuation allowance | (8,486,000 | ) | (6,172,000 | ) |
| Long-term
deferred tax assets | $ | $ | 1,967,000 | |

Table of Contents

| At December 31,
2008, the Company had net operating loss carryforwards of approximately
$21,463,000, which are available to offset future taxable income. The Company
has determined that these carryforwards are not currently subject to the
limitations of Internal Revenue Code Section 382 which provides limitations
on the availability of net operating losses to offset current taxable income
if an ownership change has occurred. These carryforwards will begin expiring
in 2010. |
| --- |
| At December
31, 2008, the Company had indefinite-lived alternative minimum tax credit
carryforwards of $34,000. |
| The Company
has established a valuation allowance due to uncertainties regarding the
realization of deferred tax assets. During the year ended December 31, 2008,
the Company recorded a $1,930,000 net increase to the valuation allowance due
to changes in the Companys expectations regarding its ability to realize
certain deferred tax assets, which resulted from a determination that it was
more likely than not that none of the deferred tax assets would be realized.
During the year ended December 31, 2007, the Company recorded a $2,337,000
net release to the valuation allowance due to changes in the Companys
expectations regarding its ability to realize certain deferred tax assets, which
resulted from a determination that it was more likely than not that a portion
of the net deferred tax assets would be realized. The Company evaluates all
significant available positive and negative evidence, including the existence
of losses in recent years and its forecast of future taxable income, in
assessing the need for a valuation allowance. The underlying assumptions the
Company uses in forecasting future taxable income require significant
judgment and take into account the Companys recent performance. |
| The Company
will continue to assess the valuation allowance and to the extent it is
determined that said allowance is no longer required, the tax benefit of the
remaining deferred tax assets will be recognized in the future. Included as
part of the Companys net operating loss carryforwards are approximately
$2,700,000 in tax deductions that resulted from the exercise of stock
options. When these loss carryforwards are realized the corresponding changes
in the valuation allowance will be recorded as additional paid-in capital. |
| The actual
tax expense attributable to income from continuing operations differs from
the expected tax expense (benefit) computed by applying the U.S. federal
corporate income tax rate of 34% to the net income (loss) as follows: |

| Year Ended
December 31 — Federal
statutory rate | (34.0 | )% | 34.0 | % | 34.0 | % |
| --- | --- | --- | --- | --- | --- | --- |
| Change in
valuation allowance | 1,618.3 | | (961.0 | ) | (48.2 | ) |
| Stock
options | 116.5 | | 56.8 | | 0.5 | |
| State taxes | 79.9 | | (41.9 | ) | (0.4 | ) |
| Meals &
entertainment | 21.0 | | 9.4 | | 0.8 | |
| Expiration
of carryforwards | | | | | 13.3 | |
| Effective
federal income tax rate | 1,801.7 | % | (902.7 | )% | 0.0 | % |

On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No 109 (FIN 48). As a result of implementation of FIN 48, the Company has determined that no liability is required to be recognized. The Company files income tax returns in the United States and numerous state and local tax jurisdictions. Tax years that are open for examination and assessment by the Internal Revenue Service are 2005 through 2008. With limited exceptions, tax years prior to 2004 are no longer open in major state and local tax jurisdictions.

Table of Contents

| 8. | Employee Benefit Plans . The Company has a
Retirement Profit Sharing and Savings Plan under Section 401(k) of the
Internal Revenue Code. The plan allows employees to defer up to 50% of their
wages, subject to Federal limitations, on a pre-tax basis through
contributions to the plan. During the years ended December 31, 2008 and 2007
the Company made a matching contribution of $71,000 and $66,000,
respectively. During the year ended December 31, 2006 the Company made no
matching contributions. |
| --- | --- |
| 9. | Concentrations. |
| | Major Customers . During the year ended December 31, 2008, four customers accounted for 19%,
13%, 11% and 10% of the Companys total net sales. At December 31, 2008,
these four customers represented 12%, 2%, 7% and 24% of the Companys total
accounts receivable. During the year ended December 31, 2007, two customers
accounted for 15% and 11% of the Companys total net sales. At December 31,
2007, these two customers represented 23% and 4% of the Companys total
accounts receivable. |
| | Although
there are a number of customers that the Company sells to, the loss of a
major customer could adversely affect operating results. Additionally, the
loss of a major retailer from the Companys retail network could adversely
affect operating results. |
| | Export Sales .
Export sales accounted for less than 1% of total net sales during the years
ended December 31, 2008, 2007 and 2006. |
| 10. | Quarterly Financial Data . (Unaudited) |
| | Quarterly
data for the years ended December 31, 2008 and 2007 was as follows: |

| Year Ended
December 31, 2008 | 1 st Quarter | | 2 nd Quarter | 3 rd Quarter | | 4 th Quarter | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Net sales | $ 6,563,000 | | $ 7,578,000 | $ 8,597,000 | | $ 8,668,000 | |
| Gross profit | 3,534,000 | | 4,294,000 | 4,499,000 | | 4,557,000 | |
| Net income (loss) | (240,000 | ) | 410,000 | (254,000 | ) | (2,173,000 | ) |
| Net income (loss) per share: | | | | | | | |
| Basic | $ (0.02 | ) | $ 0.03 | $ (0.02 | ) | $ (0.14 | ) |
| Diluted | $ (0.02 | ) | $ 0.03 | $ (0.02 | ) | $ (0.14 | ) |
| Year Ended
December 31, 2007 | 1 st Quarter | | 2 nd Quarter | 3 rd Quarter | | 4 th Quarter | |
| Net sales | $ 6,065,000 | | $ 6,969,000 | $ 6,461,000 | | $ 4,936,000 | |
| Gross profit | 3,358,000 | | 4,160,000 | 3,608,000 | | 2,416,000 | |
| Net income (loss) | 427,000 | | 1,198,000 | (907,000 | ) | 1,625,000 | |
| Net income (loss) per share: | | | | | | | |
| Basic | $ 0.03 | | $ 0.08 | $ (0.06 | ) | $ 0.10 | |
| Diluted | $ 0.03 | | $ 0.07 | $ (0.06 | ) | $ 0.10 | |

I tem 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures

Not applicable.

Table of Contents

I tem 9A. Controls and Procedures

Disclosure Controls and Procedures

The Companys management carried out an evaluation, under the supervision and with the participation of the Companys Chief Executive Officer and the Companys Chief Financial Officer (principal financial officer), of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of December 31, 2008, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Companys Chief Executive Officer and the Companys Chief Financial Officer (principal financial officer) concluded that the Companys disclosure controls and procedures as of December 31, 2008 were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and are designed to ensure that information required to be disclosed by us in these reports is accumulated and communicated to our management, as appropriate to allow timely decisions regarding disclosures.

We will consider further actions and continue to evaluate the effectiveness of our disclosure controls and internal controls and procedures on an ongoing basis, taking corrective action as appropriate. Management does not expect that disclosure controls and procedures or internal controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable and not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. While management believes that its disclosure controls and procedures provide reasonable assurance that fraud can be detected and prevented, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Managements Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008. In conducting its evaluation, our management used the criteria set forth by the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management believes our internal control over financial reporting was effective as of December 31, 2008.

The certification of the Companys Principal Executive Officer and Principal Financial Officer attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K include, in paragraph 4 of such certifications, information concerning the Companys disclosure controls and procedures and internal controls over financial reporting. Such certifications should be read in conjunction with the information contained in the Item 9A for a more complete understanding of the matters covered by such certifications.

This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.

Changes in Internal Control Over Financial Reporting

No changes in the Companys internal control over financial reporting have occurred during the fourth quarter of 2008 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

I tem 9B. Other Information

None.

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P ART III.

I tem 10. Directors, Executive Officers and Corporate Governance

The information required by Item 10 concerning the directors and executive officers of the Company and corporate governance is incorporated herein by reference to the Companys proxy statement for its 2009 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed.

I tem 11. Executive Compensation

The information required by Item 11 is incorporated herein by reference to the Companys proxy statement for its 2009 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed.

I tem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is incorporated herein by reference to the Companys proxy statement for its 2009 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed.

I tem 13. Certain Relationships and Related Transactions and Director Independence

The information required by Item 13 is incorporated herein by reference to the Companys proxy statement for its 2009 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed.

I tem 14. Principal Accounting Fees and Services

The information required by Item 14 is incorporated herein by reference to the Companys proxy statement for its 2009 Annual Meeting of Shareholders which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the close of the fiscal year for which this report is filed.

Table of Contents

I tem 15. Exhibits and Financial Statement Schedules

The following financial statements of Insignia Systems, Inc. are included in Item 8:

| Report of
Independent Registered Public Accounting Firm |
| --- |
| Balance
Sheets as of December 31, 2008 and 2007 |
| Statements
of Operations for the years ended December 31, 2008, 2007 and 2006 |
| Statements
of Shareholders Equity for the years ended December 31, 2008, 2007 and 2006 |
| Statements
of Cash Flows for the years ended December 31, 2008, 2007 and 2006 |
| Notes to
Financial Statements |

(a) Exhibits

| Exhibit Number | Description | Incorporation By Reference
To |
| --- | --- | --- |
| 3.1 | Articles of Incorporation
of Registrant, as amended to date | Exhibit 3.1 of the
Registrants Registration Statement on Form S-18, Reg. No. 33-40765C |
| 3.2 | Bylaws, as amended to date | Exhibit 3.1 of the
Registrants Form 8-K filed February 23, 2007 |
| 4.1 | Specimen Common Stock
Certificate of Registrant | Exhibit 4.1 of the
Registrants Registration Statement on Form S-18, Reg. No. 33-40765C |
| 10.1 | The Companys 1990 Stock
Plan, as amended | Exhibit 10.3 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2001 |
| 10.2 | Employee Stock Purchase
Plan, as amended | Exhibit 4.1 of the
Registrants Registration Statement on Form S-8, Reg. No. 333-136591 |
| 10.3 | The Companys 2003
Incentive Stock Option Plan, as amended | Exhibit 4.1 of the
Registrants Registration Statement on Form S-8, Reg. No. 333-153031 |
| 10.4 | Amended Change in Control
Severance Agreement with Scott F. Drill dated December 20, 2005 | Exhibit 10.10 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2005 |
| 10.5 | Amended Change in Control
Severance Agreement with Justin W. Shireman dated December 20, 2005 | Exhibit 10.11 of the Registrants
Annual Report on Form 10-K for the year ended December 31, 2005 |
| 10.6 | Consulting Agreement,
effective February 1, 2006, between Gary L. Vars and the Company | Exhibit 4.1 of the
Registrants Form 8-K filed February 1, 2006 |
| 10.7 | Nonqualified Stock Option
Agreement, effective February 1, 2006, between Gary L. Vars and the Company | Exhibit 4.2 of the
Registrants Form 8-K filed February 1, 2006 |
| 10.8 | Exclusive Reseller
Agreement between Valassis Sales & Marketing Services, Inc. and the
Company entered into as of June 12, 2006 | Exhibit 10.1 of the
Registrants Form 10-Q for the quarterly period ended June 30, 2006 |
| 10.9 | Amended Change in Control
Severance Agreement with Scott J. Simcox dated February 20, 2007 | Exhibit 10.1 of the
Registrants Form 8-K filed February 23, 2007 |

Table of Contents

| Exhibit Number | Description | Incorporation By Reference
To |
| --- | --- | --- |
| 10.10 | Amended Change in Control
Severance Agreement with Alan Jones dated May 23, 2007 | Exhibit 10.1 of the
Registrants Form 8-K filed May 30, 2007 |
| 10.11 | Amended Change in Control
Severance Agreement with A. Thomas Lucas dated May 23, 2007 | Exhibit 10.2 of the
Registrants Form 8-K filed May 30, 2007 |
| 10.12 | Amendment #2 dated July 2,
2007 to Exclusive Reseller Agreement dated June 12, 2006 between Valassis
Sales & Marketing Services, Inc. and the Company | Exhibit 10.1 of the
Registrants Form 10-Q for the quarterly period ended June 30, 2007 |
| 10.13 | Form of Warrant dated July
2, 2007 to purchase shares of common stock issued to Valassis Sales &
Marketing Services, Inc. by the Company per Amendment #2 to the Exclusive
Reseller Agreement | Exhibit 10.2 of the
Registrants Form 10-Q for the quarterly period ended June 30, 2007 |
| 10.14 | Lease Termination Agreement
between the Company and the Landlord, dated October 12, 2007 | Exhibit 10.20 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2007 |
| 10.15 | Sublease Termination
Agreement between the Company and the Sublessee dated October 12, 2007 | Exhibit 10.21 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2007 |
| 10.16 | Lease Agreement between the
Company and the Landlord (Opus Northwest L.L.C.) dated March 27, 2008
(Exhibits Omitted) | Exhibit 10.22 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2007 |
| 10.17 | 2008 CEO Bonus Plan | Exhibit 10.23 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2007 |
| 10.18 | 2008 Executive Bonus Plan | Exhibit 10.24 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2007 |
| 10.19 | Senior Management
Litigation Incentive Plan | Exhibit 10.1 of the
Registrants Form 8-K filed May 23, 2008 |
| 14 | Code of Ethics | Exhibit 14 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 2003 |
| 23.1 | Consent of Independent
Registered Public Accounting Firm | Filed herewith |
| 31.1 | Certification of Principal
Executive Officer | Filed herewith |
| 31.2 | Certification of Principal
Financial Officer | Filed herewith |
| 32 | Section 1350 Certification | Filed herewith |

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Scott F.
Drill
President
and CEO
Dated: March
27, 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Scott F. Drill	President, Chief Executive
Officer (principal executive officer) Secretary and Director	March 27, 2009
Scott F. Drill
/s/ Justin W. Shireman	Vice President of Finance,
Chief Financial Officer (principal financial and accounting officer) and
Treasurer	March 27, 2009
Justin W. Shireman
/s/ Peter V. Derycz	Director	March 27, 2009
Peter V. Derycz
/s/ Donald J. Kramer	Director	March 27, 2009
Donald J. Kramer
/s/ Reid V. MacDonald	Director	March 27, 2009
Reid V. MacDonald
/s/ Gordon F. Stofer	Director	March 27, 2009
Gordon F. Stofer

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LENDWAY, INC. — Annual Report 2008

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