Table of Contents

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|                                                                                            |           | 
|------------------------------------------------------------------------------------------- | --------- | 
|UNITED
 STATES SECURITIES AND EXCHANGE COMMISSION                                          
|Washington, D. C. 20549                                                                    
|                                                                                            |           | 
|                                                                                            |           | 
|                                                                                            | FORM 10-Q | 
|                                                                                            |           | 
|                                                                                           
|xQUARTERLY REPORT PURSUANT TO SECTION
 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934 
|                                                                                           
|for the quarterly period ended
 September 30, 2009                                         
|                                                                                            | or        | 
|oTRANSITION REPORT PURSUANT TO SECTION
 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934
|for the transition
 period from ___________________ to _________________                   
|                                                                                           
|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                                                                    
|(Registrants
 telephone number, including area code)                             
|                                                                                  
|Not applicable.                                                                   
|(Former
 name, former address and former fiscal year if changed since last report)
|                                                                                  
|                                                                                   |  | 

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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). 
Yes o
No o

Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer 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

Number
of shares outstanding of Common Stock, $.01 par value, as of October 31, 2009,
was 15,155,131.

1

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Insignia Systems, Inc.

TABLE OF CONTENTS

|         |                                                                                                 |  |   
|-------- | ----------------------------------------------------------------------------------------------- |  | --
|PART I.  | FINANCIAL INFORMATION                                                                           |  | 3 
|         |                                                                                                 |  |   
|Item 1.  | Financial Statements                                                                            |  | 3 
|         |                                                                                                 |  |   
|         | Balance Sheets  September 30, 2009 and
 December 31, 2008 (unaudited)                          |  | 3 
|         |                                                                                                 |  |   
|         | Statements of Operations  Three and nine
 months ended September 30, 2009 and 2008 (unaudited) |  | 4 
|         |                                                                                                 |  |   
|         | Statements of Shareholders Equity  Nine
 months ended September 30, 2009 and 2008 (unaudited) |  | 5 
|         |                                                                                                 |  |   
|         | Statements of Cash Flows  Nine months
 ended September 30, 2009 and 2008 (unaudited)           |  | 6 
|         |                                                                                                 |  |   
|         | Notes to Financial Statements  September
 30, 2009 (unaudited)                                 |  | 7 
|         |                                                                                                 |  |   
|Item 2.  | Managements Discussion and Analysis of
 Financial Condition and Results of Operations          |  | 11
|         |                                                                                                 |  |   
|Item 3.  | Quantitative and Qualitative Disclosures
 About Market Risk                                     |  | 16
|         |                                                                                                 |  |   
|Item 4.  | Controls and Procedures                                                                         |  | 16
|         |                                                                                                 |  |   
|PART II. | OTHER INFORMATION                                                                               |  | 17
|         |                                                                                                 |  |   
|Item 1.  | Legal Proceedings                                                                               |  | 17
|         |                                                                                                 |  |   
|Item 1A. | Risk Factors                                                                                    |  | 18
|         |                                                                                                 |  |   
|Item 2.  | Unregistered Sales of Equity Securities and
 Use of Proceeds                                    |  | 18
|         |                                                                                                 |  |   
|Item 3.  | Defaults Upon Senior Securities                                                                 |  | 19
|         |                                                                                                 |  |   
|Item 4.  | Submission of Matters to a Vote of Security
 Holders                                            |  | 19
|         |                                                                                                 |  |   
|Item 5.  | Other Information                                                                               |  | 19
|         |                                                                                                 |  |   
|Item 6.  | Exhibits                                                                                        |  | 19

2

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Table of Contents

PART I.
FINANCIAL INFORMATION

|        |                      
|------- | ---------------------
|Item 1. | Financial
 Statements

Insignia Systems, Inc.BALANCESHEETS(Unaudited)

|                                                                                                      |  |                   |             |                  |   |             |  
|----------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | ---------------- | - | ----------- | -
|                                                                                                      |  | September 30,2009 |             | December 31,2008 |  
|ASSETS                                                                                                |  |                   |             |                  |   |             |  
|Current Assets:                                                                                       |  |                   |             |                  |   |             |  
|Cash and cash equivalents                                                                             |  | $                 | 8,701,000   |                  | $ | 11,052,000  |  
|Short-term investments                                                                                |  |                   | 2,200,000   |                  |   | ─           |  
|Accounts receivable  net of allowance for doubtful accounts of
 $11,000 and $7,000, respectively     |  |                   | 3,982,000   |                  |   | 2,767,000   |  
|Inventories                                                                                           |  |                   | 467,000     |                  |   | 442,000     |  
|Prepaid expenses and other                                                                            |  |                   | 359,000     |                  |   | 238,000     |  
|Total Current Assets                                                                                  |  |                   | 15,709,000  |                  |   | 14,499,000  |  
|                                                                                                      |  |                   |             |                  |   |             |  
|Other Assets:                                                                                         |  |                   |             |                  |   |             |  
|Property and equipment, net                                                                           |  |                   | 819,000     |                  |   | 1,054,000   |  
|Other                                                                                                 |  |                   | 42,000      |                  |   | 40,000      |  
|                                                                                                      |  |                   |             |                  |   |             |  
|Total Assets                                                                                          |  | $                 | 16,570,000  |                  | $ | 15,593,000  |  
|                                                                                                      |  |                   |             |                  |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                  |  |                   |             |                  |   |             |  
|Current Liabilities:                                                                                  |  |                   |             |                  |   |             |  
|Current maturities of long-term liabilities                                                           |  | $                 | 179,000     |                  | $ | 202,000     |  
|Accounts payable                                                                                      |  |                   | 2,338,000   |                  |   | 2,770,000   |  
|Accrued liabilities                                                                                   |  |                   |             |                  |   |             |  
|Compensation                                                                                          |  |                   | 893,000     |                  |   | 820,000     |  
|Employee stock purchase plan                                                                          |  |                   | 99,000      |                  |   | 65,000      |  
|Legal                                                                                                 |  |                   | 90,000      |                  |   | 365,000     |  
|Other commissions                                                                                     |  |                   | ─           |                  |   | 1,742,000   |  
|Other                                                                                                 |  |                   | 1,013,000   |                  |   | 981,000     |  
|Income taxes payable                                                                                  |  |                   | 25,000      |                  |   | ─           |  
|Deferred revenue                                                                                      |  |                   | 1,565,000   |                  |   | 1,158,000   |  
|Total Current Liabilities                                                                             |  |                   | 6,202,000   |                  |   | 8,103,000   |  
|                                                                                                      |  |                   |             |                  |   |             |  
|Long-Term Liabilities, less current maturities                                                        |  |                   | 219,000     |                  |   | 219,000     |  
|                                                                                                      |  |                   |             |                  |   |             |  
|Commitments and Contingencies                                                                         |  |                   | ─           |                  |   | ─           |  
|                                                                                                      |  |                   |             |                  |   |             |  
|Shareholders Equity:                                                                                 |  |                   |             |                  |   |             |  
|Common stock, par value $.01:                                                                         |  |                   |             |                  |   |             |  
|Authorized shares  40,000,000                                                                        |  |                   |             |                  |   |             |  
|Issued and outstanding shares  15,135,000 at September 30, 2009 and
 15,069,000 at December 31, 2008 |  |                   | 151,000     |                  |   | 151,000     |  
|Additional paid-in capital                                                                            |  |                   | 32,346,000  |                  |   | 31,881,000  |  
|Accumulated deficit                                                                                   |  |                   | (22,348,000 | )                |   | (24,761,000 | )
|Total Shareholders Equity                                                                            |  |                   | 10,149,000  |                  |   | 7,271,000   |  
|                                                                                                      |  |                   |             |                  |   |             |  
|Total Liabilities and Shareholders Equity                                                            |  | $                 | 16,570,000  |                  | $ | 15,593,000  |  

See accompanying notes to financial statements.

3

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Table of Contents

Insignia Systems, Inc.STATEMENTS OFOPERATIONS(Unaudited)

|                                                           |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|---------------------------------------------------------- |  | -------------------------------- | ---------- | ------------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                           |  | Three Months Ended
 September 30 |            | Nine Months Ended
 September 30 |  
|                                                           |  | 2009                             |            | 2008                            |   | 2009       |   | 2008 |           
|Services revenues                                          |  | $                                | 7,485,000  |                                 | $ | 7,999,000  |   | $    | 18,401,000 |   | $ | 20,830,000 |  
|Products sold                                              |  |                                  | 459,000    |                                 |   | 598,000    |   |      | 1,502,000  |   |   | 1,908,000  |  
|Total Net Sales                                            |  |                                  | 7,944,000  |                                 |   | 8,597,000  |   |      | 19,903,000 |   |   | 22,738,000 |  
|                                                           |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|Cost of services                                           |  |                                  | 3,486,000  |                                 |   | 3,699,000  |   |      | 8,491,000  |   |   | 9,190,000  |  
|Cost of products sold                                      |  |                                  | 326,000    |                                 |   | 399,000    |   |      | 1,032,000  |   |   | 1,221,000  |  
|Total Cost of Sales                                        |  |                                  | 3,812,000  |                                 |   | 4,098,000  |   |      | 9,523,000  |   |   | 10,411,000 |  
|Gross Profit                                               |  |                                  | 4,132,000  |                                 |   | 4,499,000  |   |      | 10,380,000 |   |   | 12,327,000 |  
|                                                           |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|Operating Expenses:                                        |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|Selling                                                    |  |                                  | 1,776,000  |                                 |   | 2,561,000  |   |      | 4,794,000  |   |   | 5,878,000  |  
|Marketing                                                  |  |                                  | 391,000    |                                 |   | 451,000    |   |      | 1,125,000  |   |   | 1,211,000  |  
|General and administrative                                 |  |                                  | 973,000    |                                 |   | 1,992,000  |   |      | 3,442,000  |   |   | 5,457,000  |  
|Insurance settlement proceeds                              |  |                                  |           |                                 |   |           |   |      | (1,387,000 | ) |   |           |  
|Total Operating Expenses                                   |  |                                  | 3,140,000  |                                 |   | 5,004,000  |   |      | 7,974,000  |   |   | 12,546,000 |  
|Operating Income (Loss)                                    |  |                                  | 992,000    |                                 |   | (505,000   | ) |      | 2,406,000  |   |   | (219,000   | )
|                                                           |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|Other Income (Expense):                                    |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|Interest income                                            |  |                                  | 31,000     |                                 |   | 55,000     |   |      | 100,000    |   |   | 178,000    |  
|Interest expense                                           |  |                                  | (10,000    | )                               |   | (13,000    | ) |      | (30,000    | ) |   | (43,000    | )
|Other income (expense)                                     |  |                                  | (1,000     | )                               |   | 2,000      |   |      | (1,000     | ) |   |           |  
|Total Other Income                                         |  |                                  | 20,000     |                                 |   | 44,000     |   |      | 69,000     |   |   | 135,000    |  
|Income (Loss) Before Taxes                                 |  |                                  | 1,012,000  |                                 |   | (461,000   | ) |      | 2,475,000  |   |   | (84,000    | )
|                                                           |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|Income tax expense (benefit)                               |  |                                  | 26,000     |                                 |   | (207,000   | ) |      | 62,000     |   |   |           |  
|Net Income (Loss)                                          |  | $                                | 986,000    |                                 | $ | (254,000   | ) | $    | 2,413,000  |   | $ | (84,000    | )
|                                                           |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|Net income (loss) per share:                               |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|Basic                                                      |  | $                                | 0.07       |                                 | $ | (0.02      | ) | $    | 0.16       |   | $ | (0.01      | )
|Diluted                                                    |  | $                                | 0.06       |                                 | $ | (0.02      | ) | $    | 0.15       |   | $ | (0.01      | )
|                                                           |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|Shares used in calculation of net income (loss) per share: |  |                                  |            |                                 |   |            |   |      |            |   |   |            |  
|Basic                                                      |  |                                  | 15,134,000 |                                 |   | 15,527,000 |   |      | 15,130,000 |   |   | 15,569,000 |  
|Diluted                                                    |  |                                  | 15,972,000 |                                 |   | 15,527,000 |   |      | 15,666,000 |   |   | 15,569,000 |  

See accompanying notes to financial statements.

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Table of Contents

Insignia Systems, Inc.Statements of Shareholders Equity
(Unaudited)

|                                     |  |              |            |                              |   |                    |   |       |            |   |   |             |   |   |            |  
|------------------------------------ |  | ------------ | ---------- | ---------------------------- | - | ------------------ | - | ----- | ---------- | - | - | ----------- | - | - | ---------- | -
|                                     |  | Common Stock |            | Additional
 Paid-In
 Capital |   | AccumulatedDeficit |   |       |           
|                                     |  | Shares       |            | Amount                       |   |                    |   | Total |           
|                                    
|Nine Months Ended September 30, 2009 |  |              |            |                              |   |                    |   |       |            |   |   |             |   |   |            |  
|                                     |  |              |            |                              |   |                    |   |       |            |   |   |             |   |   |            |  
|Balance at December 31, 2008         |  |              | 15,069,000 |                              | $ | 151,000            |   | $     | 31,881,000 |   | $ | (24,761,000 | ) | $ | 7,271,000  |  
|Issuance of common stock, net        |  |              | 66,000     |                              |   |                   |   |       | 46,000     |   |   |            |   |   | 46,000     |  
|Stock-based compensation             |  |              |           |                              |   |                   |   |       | 419,000    |   |   |            |   |   | 419,000    |  
|Net income                           |  |              |           |                              |   |                   |   |       |           |   |   | 2,413,000   |   |   | 2,413,000  |  
|                                     |  |              |            |                              |   |                    |   |       |            |   |   |             |   |   |            |  
|Balance at September 30, 2009        |  |              | 15,135,000 |                              | $ | 151,000            |   | $     | 32,346,000 |   | $ | (22,348,000 | ) | $ | 10,149,000 |  
|                                     |  |              |            |                              |   |                    |   |       |            |   |   |             |   |   |            |  
|Nine Months Ended September 30, 2008 |  |              |            |                              |   |                    |   |       |            |   |   |             |   |   |            |  
|                                     |  |              |            |                              |   |                    |   |       |            |   |   |             |   |   |            |  
|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     |  
|Stock-based compensation             |  |              |           |                              |   |                   |   |       | 393,000    |   |   |            |   |   | 393,000    |  
|Repurchase of common stock, net      |  |              | (225,000   | )                            |   | (2,000             | ) |       | (462,000   | ) |   |            |   |   | (464,000   | )
|Net loss                             |  |              |           |                              |   |                   |   |       |           |   |   | (84,000     | ) |   | (84,000    | )
|                                     |  |              |            |                              |   |                    |   |       |            |   |   |             |   |   |            |  
|Balance at September 30, 2008        |  |              | 15,369,000 |                              | $ | 154,000            |   | $     | 32,054,000 |   | $ | (22,588,000 | ) | $ | 9,620,000  |  

See accompanying notes to financial statements.

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Table of Contents

Insignia Systems, Inc.STATEMENTS OFCASHFLOWS(Unaudited)

|                                                                                                    |  |   |            |   |      |            |   | 
|--------------------------------------------------------------------------------------------------- |  | - | ---------- | - | ---- | ---------- | - | 
|Nine
 Months Ended September 30                                                                     |  |   | 2009       |   | 2008 |           
|Operating Activities:                                                                               |  |   |            |   |      |            |  
|Net income (loss)                                                                                   |  | $ | 2,413,000  |   | $    | (84,000    | )
|Adjustments to reconcile net income (loss) to net cash provided by
 (used in) operating activities: |  |   |            |   |      |            |  
|Depreciation and amortization                                                                       |  |   | 303,000    |   |      | 267,000    |  
|Provision for income taxes                                                                          |  |   | 62,000     |   |      |           |  
|Provision for bad debt expense                                                                      |  |   | 9,000      |   |      |           |  
|Stock-based compensation                                                                            |  |   | 419,000    |   |      | 393,000    |  
|Changes in operating assets and liabilities:                                                        |  |   |            |   |      |            |  
|Accounts receivable                                                                                 |  |   | (1,224,000 | ) |      | (1,852,000 | )
|Inventories                                                                                         |  |   | (25,000    | ) |      | (118,000   | )
|Prepaid expenses and other                                                                          |  |   | (160,000   | ) |      | 51,000     |  
|Accounts payable                                                                                    |  |   | (432,000   | ) |      | 731,000    |  
|Accrued liabilities                                                                                 |  |   | (1,878,000 | ) |      | 2,395,000  |  
|Deferred revenue                                                                                    |  |   | 407,000    |   |      | 710,000    |  
|Net cash provided by (used in) operating activities                                                 |  |   | (106,000   | ) |      | 2,493,000  |  
|                                                                                                    |  |   |            |   |      |            |  
|Investing Activities:                                                                               |  |   |            |   |      |            |  
|Purchases of property and equipment                                                                 |  |   | (68,000    | ) |      | (987,000   | )
|Purchases of investments                                                                            |  |   | (3,300,000 | ) |      |           |  
|Proceeds from sale of investments                                                                   |  |   | 1,100,000  |   |      |           |  
|Net cash used in investing activities                                                               |  |   | (2,268,000 | ) |      | (987,000   | )
|                                                                                                    |  |   |            |   |      |            |  
|Financing Activities:                                                                               |  |   |            |   |      |            |  
|Payment of long-term liabilities                                                                    |  |   | (23,000    | ) |      | (197,000   | )
|Proceeds from issuance of common stock, net                                                         |  |   | 46,000     |   |      | 98,000     |  
|Repurchase of common stock, net                                                                     |  |   |           |   |      | (464,000   | )
|Net cash provided by (used in) financing activities                                                 |  |   | 23,000     |   |      | (563,000   | )
|Increase (decrease) in cash and cash equivalents                                                    |  |   | (2,351,000 | ) |      | 943,000    |  
|Cash and cash equivalents at beginning of period                                                    |  |   | 11,052,000 |   |      | 7,393,000  |  
|Cash and cash equivalents at end of period                                                          |  | $ | 8,701,000  |   | $    | 8,336,000  |  
|                                                                                                    |  |   |            |   |      |            |  
|Supplemental disclosures for cash flow information:                                                 |  |   |            |   |      |            |  
|Cash paid during periods for interest                                                               |  | $ |           |   | $    | 14,000     |  
|Cash paid during periods for income taxes                                                           |  |   | 16,000     |   |      | 8,000      |  

See accompanying notes to financial statements.

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Insignia Systems, Inc.
NOTES TO FINANCIAL STATEMENTS(Unaudited)

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | Summary of
 Significant Accounting Policies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Description of Business. Insignia Systems, Inc. (the Company)
 markets in-store advertising programs, services and products to retailers and
 consumer packaged goods manufacturers. The Companys services and products
 include the Insignia Point-of-Purchase Services (POPS) in-store advertising
 program, thermal sign card supplies for the Companys SIGNright and Impulse
 systems, Stylus software and laser printable cardstock and label supplies.                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Basis of Presentation. Financial statements for the interim periods
 included herein are unaudited; however, they contain all adjustments,
 including normal recurring accruals, which in the opinion of management, are
 necessary to present fairly the financial position of the Company at
 September 30, 2009, and its results of operations and cash flows for the
 three and nine months ended September 30, 2009 and 2008. Results of
 operations for the periods presented are not necessarily indicative of the
 results to be expected for the full year.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The financial statements do
 not include certain footnote disclosures and financial information normally
 included in financial statements prepared in accordance with accounting
 principles generally accepted in the United States of America and, therefore,
 should be read in conjunction with the financial statements and notes
 included in the Companys Annual Report on Form 10-K for the year ended
 December 31, 2008.                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Summary of Significant
 Accounting Policies in the Companys 2008 Annual Report on Form 10-K
 describes the Companys accounting policies.                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Short-term Investments. Short-term investments consist of short-term bank certificates of
 deposit with original maturities of between three and twelve months. These
 short-term investments are classified as held to maturity and are valued at
 cost which approximates fair value. These investments are considered Level 2
 investments under Financial Accounting Standards Board (FASB) Accounting
 Standards Codification Topic (ASC) 820, Fair
 Value Measurements and Disclosures.                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | 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:                                                                                                                                                                                                                                                                                            

|                |  |                     |         |                    |  
|--------------- |  | ------------------- | ------- | ------------------ | -
|                |  | September 30,
 2009 |         | December 31,
 2008 |  
|Raw materials   |  | $                   | 71,000  |                    | $
|Work-in-process |  |                     | 83,000  |                    |  
|Finished goods  |  |                     | 313,000 |                    |  
|                |  | $                   | 467,000 |                    | $

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| |                                                                           
| | --------------------------------------------------------------------------
| | Property and Equipment. Property and equipment consists of the
 following:

|                                             |  |                     |            |                    |   |            |  
|-------------------------------------------- |  | ------------------- | ---------- | ------------------ | - | ---------- | -
|                                             |  | September 30,
 2009 |            | December 31,
 2008 |  
|Production tooling, machinery
 and equipment |  | $                   | 2,111,000  |                    | $ | 2,115,000  |  
|Office furniture and
 fixtures               |  |                     | 255,000    |                    |   | 250,000    |  
|Computer equipment and
 software             |  |                     | 728,000    |                    |   | 719,000    |  
|Web site                                     |  |                     | 38,000     |                    |   | 38,000     |  
|Leasehold improvements                       |  |                     | 257,000    |                    |   | 255,000    |  
|                                             |  |                     | 3,389,000  |                    |   | 3,377,000  |  
|Accumulated depreciation
 and amortization   |  |                     | (2,570,000 | )                  |   | (2,323,000 | )
|Net Property and Equipment                   |  | $                   | 819,000    |                    | $ | 1,054,000  |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stock-Based Compensation. The Company accounts for its stock-based
 compensation in accordance with the provisions of ASC 718, Compensation  Stock Compensation. The
 Company recognizes stock compensation expense on a straight-line method over
 the requisite service period of the award.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | There were 348,500 stock
 option awards granted during the nine months ended September 30, 2009. Total
 stock-based compensation expense recorded for the nine months ended September
 30, 2009 and 2008, was $419,000 and $393,000, respectively. The Company uses
 the Black-Scholes option-pricing model to estimate the fair value of
 stock-based awards with the following weighted average assumptions for the
 stock option awards granted during the nine months ended September 30, 2009:
 expected life of 3.58 years, expected volatility of 77%, dividend yield of 0%
 and a risk-free interest rate of 1.32%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Net Income (Loss) Per Share. Basic net income (loss) per share is
 computed by dividing net income by the weighted average shares outstanding
 and excludes any dilutive effects of options, warrants and convertible
 securities. Diluted net income (loss) per share gives effect to all diluted
 potential common shares outstanding during the period. Options and warrants
 to purchase approximately 2,082,000 and 2,292,000 shares of common stock with
 weighted average exercise prices of $4.64 and $4.74 were outstanding at
 September 30, 2009 and 2008 and were not included in the computation of
 common stock equivalents for the three months ended September 30, 2009 and
 2008 because their exercise prices were higher than the average fair market
 value of the common shares during the reporting period. Options and warrants
 to purchase approximately 2,316,000 and 2,154,000 shares of common stock with
 weighted average exercise prices of $4.31 and $4.95 were outstanding at
 September 30, 2009 and 2008 and were not included in the computation of
 common stock equivalents for the nine months ended September 30, 2009 and
 2008 because their exercise prices were higher than the average fair market
 value of the common shares during the reporting period. During the three
 months and nine months ended September 30, 2008, the effect of options and
 warrants outstanding was anti-dilutive due to the net losses incurred during
 the periods. Had net income been achieved, approximately 392,000 and 440,000,
 respectively, of common stock equivalents would have been included in the
 computation of diluted net income per share.

8

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Table of Contents

| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Weighted average common
 shares outstanding for the three and nine months ended September 30, 2009 and
 2008 were as follows:

|                                                                                        |  |                                  |            |                                 |  |            |  |      |            |  |  |            | 
|--------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | ------------------------------- |  | ---------- |  | ---- | ---------- |  |  | ---------- | 
|                                                                                        |  | Three Months Ended
 September 30 |            | Nine Months Ended
 September 30 | 
|                                                                                        |  | 2009                             |            | 2008                            |  | 2009       |  | 2008 |           
|Denominator for basic net income (loss) per share  weighted average
 shares            |  |                                  | 15,134,000 |                                 |  | 15,527,000 |  |      | 15,130,000 |  |  | 15,569,000 | 
|                                                                                        |  |                                  |            |                                 |  |            |  |      |            |  |  |            | 
|Effect of dilutive securities:                                                          |  |                                  |            |                                 |  |            |  |      |            |  |  |            | 
|Stock options and warrants                                                              |  |                                  | 838,000    |                                 |  |           |  |      | 536,000    |  |  |           | 
|Denominator for diluted net income (loss) per share  adjusted
 weighted average shares |  |                                  | 15,972,000 |                                 |  | 15,527,000 |  |      | 15,666,000 |  |  | 15,569,000 | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Commitments
 and Contingencies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | 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 Companys 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 Albertsons 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 Albertsons Inc. (Albertsons)
 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 Albertsons 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. 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 Minnesotas statutes
 prohibiting commercial disparagement. On July 29, 2008, the Company and
 Albertsons 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 Albertsons. On September 30, 2009, the
 Court ruled on motions by both the Company and News America for Summary
 Judgment. The Court awarded Summary Judgment to the Company and one of its executive
 officers on all of News Americas counterclaims and third-party claims. The
 Court also denied News Americas Motion for Summary Judgment on the Companys
 claims against News America other than granting News Americas uncontested
 motion on one claim in the Amended Complaint related to retailers. The
 Courts rulings set the stage for a trial on the Companys antitrust and
 unfair-competition claims against News America; however, a trial date has not
 yet been set.

9

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Table of Contents

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The Company filed claims in
 December 2006 and January 2007 with its directors and officers 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 Americas 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 owed the
 Company and its officer such defense costs and insurance coverage. In December
 2007, the Company settled its claim against one of the insurers. Also, in
 March 2009, the Company settled with the other insurer and received a payment
 of $1,387,000 as part of the settlement. The Company recorded the payment in
 general and administrative expenses for the quarter ended March 31, 2009, and
 the litigation with the insurers is now concluded.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Management currently
 expects the amount of legal fees and expenses that will be incurred in
 connection with the ongoing lawsuit against News America to be significant
 throughout the remainder of 2009, 2010 and possibly future years. During the
 nine months ended September 30, 2009, the Company
 incurred legal fees of $1,254,000 related to the News America litigation
 which were offset by the $1,387,000 payment received from settlement of its
 claim against one of its insurers during the first quarter of 2009. 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 Companys financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|3. | Income
 Taxes. The Company
 continues to carry a full valuation allowance against its net deferred tax
 asset at September 30, 2009, and has therefore recorded income tax expense of
 $26,000 and $62,000 for the three and nine months ended September 30, 2009,
 respectively, related to alternative minimum tax liability. The valuation
 allowance has been established due to uncertainties regarding the realization
 of deferred tax assets. The Company did not record a cumulative income tax
 benefit for the nine months ended September 30, 2008, as a result of the net
 loss for the nine months and its analysis of future taxable income levels and
 the amount of net deferred tax assets recorded at September 30, 2008.                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4. | Concentrations. During the nine months ended September 30,
 2009, four customers accounted for 20.5%, 18.7%, 13.5% and 10.1% of the
 Companys total net sales. At September 30, 2009 these four customers
 represented 13.4%, 11.9%, 12.2% and 19.8% of the Companys total accounts
 receivable. During the nine months ended September 30, 2008, two customers
 accounted for 15.8% and 12.8% of the Companys total net sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Although there are a number
 of customers that the Company sells to, the loss of a major customer could
 cause a delay in and possible loss of sales, which would adversely affect
 operating results. Additionally, the loss of a major retailer from the
 Companys retail network could adversely affect operating results.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|5. | Subsequent
 Events. The Company
 evaluated its September 30, 2009 financial statements for subsequent events
 through November 13, 2009, the date the financial statements were issued. The
 Company is not aware of any subsequent events which would require recognition
 or disclosure in the financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|6. | New
 Accounting Pronouncements. In June 2009, the FASB issued guidance that establishes the FASB
 Accounting Standards Codification  (the Codification) as the source of
 authoritative accounting principles recognized by the FASB to be applied by
 nongovernmental entities in the preparation of financial statements in
 conformity with generally accepted accounting principles (GAAP). Use of the
 new Codification is effective for interim and annual periods ending after
 September 15, 2009. The Company has used the new Codification in reference to
 GAAP in this quarterly report on Form 10-Q and such use has not impacted the
 results of the Company.                                                                                                                                                                                                                                                                        

10

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Table of Contents

|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 2. | Managements
 Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

Results of Operations

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

|                              |  |                                  |       |                                 |  |       |    |      |       |   |  |       |   
|----------------------------- |  | -------------------------------- | ----- | ------------------------------- |  | ----- | -- | ---- | ----- | - |  | ----- | --
|                              |  | Three Months Ended
 September 30 |       | Nine Months Ended
 September 30 | 
|                              |  | 2009                             |       | 2008                            |  | 2009  |    | 2008 |      
|Net sales                     |  |                                  | 100.0 | %                               |  | 100.0 | %  |      | 100.0 | % |  | 100.0 | % 
|Cost of sales                 |  |                                  | 48.0  |                                 |  | 47.7  |    |      | 47.8  |   |  | 45.8  |   
|Gross profit                  |  |                                  | 52.0  |                                 |  | 52.3  |    |      | 52.2  |   |  | 54.2  |   
|Operating expenses:           |  |                                  |       |                                 |  |       |    |      |       |   |  |       |   
|Selling                       |  |                                  | 22.4  |                                 |  | 29.8  |    |      | 24.1  |   |  | 25.9  |   
|Marketing                     |  |                                  | 4.9   |                                 |  | 5.2   |    |      | 5.7   |   |  | 5.3   |   
|General and administrative    |  |                                  | 12.2  |                                 |  | 23.2  |    |      | 17.3  |   |  | 24.0  |   
|Insurance settlement proceeds |  |                                  |      |                                 |  |      |    |      | (7.0  | ) |  |      |   
|Total operating expenses      |  |                                  | 39.5  |                                 |  | 58.2  |    |      | 40.1  |   |  | 55.2  |   
|Operating income (loss)       |  |                                  | 12.5  |                                 |  | (5.9  | )  |      | 12.1  |   |  | (1.0  | ) 
|Other income (expense)        |  |                                  | 0.3   |                                 |  | 0.5   |    |      | 0.3   |   |  | 0.6   |   
|Income (loss) before taxes    |  |                                  | 12.7  |                                 |  | (5.4  | )  |      | 12.4  |   |  | (0.4  | ) 
|Income tax expense (benefit)  |  |                                  | 0.3   |                                 |  | (2.4  | )  |      | 0.3   |   |  | 0.0   |   
|Net income (loss)             |  |                                  | 12.4  | %                               |  | (3.0  | )% |      | 12.1  | % |  | (0.4  | )%

Decreased net sales in the
first nine months of 2009 compared to the first nine months of 2008 combined
with fixed costs of sales resulted in a decrease in gross profit in the 2009
period. This decrease in gross profit in the 2009 period was more than offset
by decreased operating expense in the 2009 period, resulting in higher net
income in the 2009 period compared to the 2008 period. The primary components
of the decreased operating expense in the 2009 period were lower News America
related legal expense in the 2009 period, the receipt of a settlement in the
2009 period in the Companys lawsuit against one of its insurers for defense
cost in the News America litigation and decreased sales commissions in the 2009
period. The decreased sales commissions resulted from decreased net sales in
the 2009 period and a sales incentive to our strategic partner present only in
2008 which was triggered by a year-over-year increase in sales to specific
customers.

11

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Table of Contents

Three and Nine Months ended September 30,
2009 Compared to Three and Nine Months Ended September 30, 2008

Net Sales. Net sales for the three months ended September 30, 2009, decreased 7.6% to
$7,944,000 compared to $8,597,000 for the three months ended September 30,
2008. Net sales for the nine months ended September 30, 2009, decreased 12.5%
to $19,903,000 compared to $22,738,000 for the nine months ended September 30,
2008.

Service
revenues from our POPSign programs for the three months ended September 30,
2009, decreased 6.4% to $7,485,000 compared to $7,999,000 for the three months
ended September 30, 2008. Service revenues from our POPSign programs for the
nine months ended September 30, 2009, decreased 11.7% to $18,401,000 compared
to $20,830,000 for the nine months ended September 30, 2008. The decreases in
both 2009 periods were primarily due to decreases in the number of POPSign
programs executed for customers (consumer packaged goods manufacturers) at
stores in the Companys retail network. The loss of Safeway, Inc. from the
Companys retail network when the contract expired on December 31, 2008 was a
significant factor in the decreased number of sign placements in the 2009
periods.

Product sales
for the three months ended September 30, 2009, decreased 23.2% to $459,000
compared to $598,000 for the three months ended September 30, 2008. Product
sales for the nine months ended September 30, 2009, decreased 21.3% to
$1,502,000 compared to $1,908,000 for the nine months ended September 30, 2008.
The decreases were primarily due to lower sales of thermal supplies, laser sign
card supplies and Stylus software based on decreased demand for those products
from our customers.

Gross Profit. Gross profit for the three months ended September 30, 2009, decreased 8.2%
to $4,132,000 compared to $4,499,000 for the three months ended September 30,
2008. Gross profit for the nine months ended September 30, 2009, decreased
15.8% to $10,380,000 compared to $12,327,000 for the nine months ended
September 30, 2008. Gross profit as a percentage of total net sales decreased
to 52.0% for the three months ended September 30, 2009, compared to 52.3% for
the three months ended September 30, 2008. Gross profit as a percentage of
total net sales decreased to 52.2% for the nine months ended September 30,
2009, compared to 54.2% for the nine months ended September 30, 2008.

Gross profit
from our POPSign program revenues for the three months ended September 30,
2009, decreased 7.0% to $3,999,000 compared to $4,300,000 for the three months
ended September 30, 2008. Gross profit from our POPSign program revenues for
the nine months ended September 30, 2009, decreased 14.9% to $9,910,000
compared to $11,640,000 for the nine months ended September 30, 2008. The
decreases in both 2009 periods were primarily due to decreased sales which were
partially offset by decreased retailer expenses and printing expenses. Gross
profit as a percentage of POPSign program revenues for the three months ended
September 30, 2009, decreased to 53.4% compared to 53.8% for the three months
ended September 30, 2008. Gross profit as a percentage of POPSign program
revenues for the nine months ended September 30, 2009 decreased to 53.9%,
compared to 55.9% for the nine months ended September 30, 2008. The decreases in
gross profit as a percentage of POPSign program revenues in both 2009 periods
were primarily due to the effect of fixed costs and the effect of retailer
expenses which did not decrease as significantly as sales.

Gross profit
from our product sales for the three months ended September 30, 2009, decreased
33.2% to $133,000 compared to $199,000 for the three months ended September 30,
2008. Gross profit from our product sales for the nine months ended September
30, 2009, decreased 31.6% to $470,000 compared to $687,000 for the nine months
ended September 30, 2008. The decreases in gross profit in the 2009 periods
were primarily due to decreased sales combined with fixed costs. Gross profit
as a percentage of product sales was 29.0% for the three months ended September
30, 2009, compared to 33.3% for the three months ended September 30, 2008.
Gross profit as a percentage of product sales was 31.3% for the nine months
ended September 30, 2009, compared to 36.0% for the nine months ended September
30, 2008. The decreases in gross profit as a percentage of products sales in
the 2009 periods were primarily due to decreased sales and the effect of fixed
costs.

12

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Table of Contents

Operating Expenses

Selling.
Selling expenses for the three months ended September 30, 2009, decreased 30.7%
to $1,776,000 compared to $2,561,000 for the three months ended September 30,
2008. Selling expenses for the nine months ended September 30, 2009, decreased
18.4% to $4,794,000 compared to $5,878,000 for the nine months ended September
30, 2008. Decreases in the 2009 periods were primarily due to decreased sales
commissions. The decreased sales commissions were due to decreased POPSign
program sales and a sales incentive to our strategic partner present only in
2008 which was triggered by a year-over-year increase in sales to specific
customers.

Selling
expenses as a percentage of total net sales decreased to 22.4% for the three
months ended September 30, 2009, compared to 29.8% for the three months ended
September 30, 2008. Selling expenses as a percentage of total net sales
decreased to 24.1% for the nine months ended September 30, 2009, compared to
25.9% for the nine months ended September 30, 2008. The decreases in selling
expenses as a percentage of total net sales in the 2009 periods were due to the
factors described above.

Marketing.
Marketing expenses for the three months ended September 30, 2009, decreased
13.3% to $391,000 compared to $451,000 for the three months ended September 30,
2008. Marketing expenses for the nine months ended September 30, 2009,
decreased 7.1% to $1,125,000 compared to $1,211,000 for the nine months ended
September 30, 2008. Decreased expenses in the 2009 periods were primarily the
result of decreased data acquisition expenses and no staff recruitment costs in
2009.

Marketing
expenses as a percentage of total net sales decreased to 4.9% for the three
months ended September 30, 2009, compared to 5.2% for the three months ended
September 30, 2008. The decrease in marketing expense as a percentage of total
net sales for the three months ended September 30, 2009, was the result of the
decreased expenses discussed above in relation to decreased sales. Marketing
expenses as a percentage of total net sales increased to 5.7% for the nine
months ended September 30, 2009, compared to 5.3% for the nine months ended
September 30, 2008. The increase in marketing expenses as a percentage of total
net sales for the nine months ending September 30, 2009, was the result of the
decreased expenses discussed above in relation to decreased sales.

General and
administrative. General and administrative
expenses for the three months ended September 30, 2009, decreased 51.2% to
$973,000 compared to $1,992,000 for the three months ended September 30, 2008.
General and administrative expenses for the nine months ended September 30,
2009 decreased 36.9% to $3,442,000 compared to $5,457,000 for the nine months
ended September 30, 2008. The decreases in the 2009 periods were primarily due
to decreased legal expense and decreased facility related expenses. The Company
also received an early lease termination payment from its previous landlord in
the third quarter of 2008 ($285,000 net of moving expense). The Company
recorded lower legal expense in the 2009 periods as there was more activity in
the 2008 periods related to trial preparation in the News America litigation.

General and
administrative expenses as a percentage of total net sales decreased to 12.2%
for the three months ended September 30, 2009, compared to 23.2% for the three
months ended September 30, 2008. General and administrative expenses as a
percentage of total net sales decreased to 17.3% for the nine months ended
September 30, 2009, compared to 24.0% for the nine months ended September 30,
2008. The decreases in the 2009 periods were primarily due to the decreased
costs discussed above in relation to decreased sales.

13

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Table of Contents

Legal fees for
the three months ended September 30, 2009, were $250,000 compared to $1,526,000
for the three months ended September 30, 2008. Legal fees for the nine months
ended September 30, 2009, were $1,309,000 compared to $3,406,000 for the nine
months ended September 30, 2008. The legal fees and expenses in each period
were incurred primarily in connection with the News America lawsuit described
in Note 2 to the financial statements. Decreased legal fees and expenses in the
2009 periods reflect decreased trial preparation and other activity. We
currently expect the amount of additional legal fees and expenses that will be
incurred in connection with the ongoing lawsuit to be significant throughout
the remainder of 2009, 2010 and possibly future years.

Insurance settlement
proceeds. The Company received a payment of
$1,387,000 in the first quarter of 2009 from an insurer as part of a settlement
of the Companys claim that the insurer owed the Company defense costs for
claims asserted against the Company and one of its officers in the News America
litigation.

Other Income.
Other income for the three months ended September 30, 2009, was $20,000
compared to $44,000 for the three months ended September 30, 2008. Other income
for the nine months ended September 30, 2009, was $69,000 compared to $135,000
for the nine months ended September 30, 2008. Lower other income in the 2009
periods was primarily due to decreased interest income in the 2009 periods as a
result of lower interest rates which more than offset the higher cash balances
in the 2009 periods.

Income Taxes.
The Company continues to carry a full valuation allowance against its net
deferred tax asset at September 30, 2009, and has therefore recorded income tax
expense of $26,000 and $62,000 for the three and nine months ended September
30, 2009, respectively, which was related to alternative minimum taxes. The
Company did not record a cumulative income tax benefit for the nine months
ended September 30, 2008, as a result of the net loss for the nine months and
its analysis of future taxable income levels and the amount of net deferred tax
assets recorded at September 30, 2008. For the three months ended September 30,
2008, the Company recorded an income tax benefit of $207,000 in order to adjust
the cumulative income tax expense/benefit to $0 for the nine month period.

Net Income (Loss).
The net income for the three months ended September 30, 2009, was $986,000
compared to a net loss of $(254,000) for the three months ended September 30,
2008. The net income for the nine months ended September 30, 2009, was
$2,413,000 compared to a net loss of $(84,000) for the nine months ended
September 30, 2008.

Liquidity and Capital Resources

The Company
has financed its operations with proceeds from public and private stock sales
and sales of its services and products. At September 30, 2009, working capital
was $9,507,000 compared to $6,396,000 at December 31, 2008. During the first nine
months of 2009, cash and cash equivalents decreased by $2,351,000 from
$11,052,000 at December 31, 2008 to $8,701,000 at September 30, 2009. The
decrease in cash and cash equivalents was primarily the result of investments
made during the first nine months in certificates of deposit with twenty-six
week maturities which were classified as short-term investments. During the
first nine months of 2009, cash, cash equivalents and short-term investments
decreased by $151,000 to $10,901,000 at September 30, 2009, as compared to
$11,052,000 at December 31, 2008.

Net cash used
in operating activities during the nine months ended September 30, 2009, was
$106,000. Net income of $2,413,000 plus non-cash expense of $793,000 totaling
$3,206,000 for the nine months ended September 30, 2009, were more than offset
by changes in operating assets and liabilities of $3,312,000. The non-cash
expense of $793,000 consisted of stock-based compensation expense,
depreciation, amortization, provision for income taxes and provision for bad
debt expense. Accounts payable and accrued liabilities decreased $2,310,000
during the nine months ended September 30, 2009, primarily as a result of the
payment in January 2009 of accrued commissions, retailer payments and legal
fees which had accrued during 2008 and were payable after December 31, 2008.
Accounts receivable increased $1,224,000 during the nine months ended September
30, 2009. This increase was primarily due to the return to historical payment
patterns at September 30, 2009, and higher POPSign billings in the last month
of the third quarter of 2009 as compared to the last month of the fourth
quarter of 2008. During December 2008, a significant POPSign customer
accelerated their payments resulting in lower accounts receivable at December
31, 2008 than historically experienced. Deferred revenue increased $407,000
during the nine months ended September 30, 2009, primarily due to the advanced
billing to a customer in June 2009 for an eleven month POPSign program which
was partially offset by decreases in other advanced billings. The Company
expects accounts receivable, accounts payable, accrued liabilities and deferred
revenue to fluctuate during future periods depending on the level of POPSign
revenues and related business activity as well as billing arrangements with
customers and payment terms with retailers.

14

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Table of Contents

Net cash of
$2,268,000 was used in investing activities during the nine months ended
September 30, 2009, due to short-term investment activity and the purchase of
property and equipment. Purchases of short-term investments of $3,300,000 and
proceeds of $1,100,000 during the nine months consisted entirely of purchases
and redemptions of twenty-six week certificates of deposit. Purchases of
property and equipment totaled $68,000 during the nine months ended September
30, 2009. The Company expects to make capital expenditures of approximately
$400,000 in the fourth quarter of 2009 consisting primarily of digital printing
equipment.

Net cash of
$23,000 was provided by financing activities during the nine months ended
September 30, 2009. Proceeds (net) of $46,000 resulting from the issuance of
common stock from the employee stock purchase plan and the employee stock
option plan were partially offset by the payment of $23,000 of principal on
long-term liabilities. The Company will use $179,000 of cash in the fourth
quarter of 2009 for an additional principal payment on its long-term
liabilities which is due on December 31, 2009.

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

Critical Accounting Policies

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

Our
significant accounting policies are described in Note 1 to the annual financial
statements as of and for the year ended December 31, 2008, included in our Form
10-K filed with the Securities and Exchange Commission on March 30, 2009. We
believe our most critical accounting policies and estimates include the
following:

| |   |                                           
| | - | ------------------------------------------
| |  | revenue
 recognition;                     
| |   |                                           
| |  | allowance
 for doubtful accounts;         
| |   |                                           
| |  | accounting
 for deferred income taxes; and
| |   |                                           
| |  | stock-based
 compensation.                

15

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Table of Contents

Cautionary Statement Regarding
Forward-Looking Information

Statements
made in this quarterly report on Form 10-Q, in the Companys other SEC filings,
in press releases and in oral statements to shareholders and securities
analysts, which are not statements of historical or current facts, are
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results or performance of the Company to be materially different from the
results or performance expressed or implied by such forward-looking statements.
The words believes, expects, anticipates, seeks and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made. These statements are subject to the risks and
uncertainties that could cause actual results to differ materially and
adversely from the forward-looking statements. These risks and uncertainties
include, but are not limited to, the risks presented in our Annual Report on
Form 10-K for the year ended December 31, 2008, and updated in
Part II, Item 1A of this Quarterly Report on Form 10-Q.

|                 |                                                            
|---------------- | -----------------------------------------------------------
|Item 3.          | Quantitative
 and Qualitative Disclosures About Market Risk
|                 |                                                            
|Not
 applicable.
|                 |                                                            
|Item 4.          | Controls
 and Procedures                                   

(a) Evaluation
of Disclosure Controls and Procedures

The Companys management carried out an
evaluation, under the supervision and with the participation of the Companys
Chief Executive Officer and the Companys Chief Financial Officer, of the
effectiveness of the design and operation of the Companys 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 the end of the period
covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Companys Chief Executive Officer and the Companys Chief
Financial Officer concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Companys periodic
filings under the Exchange Act.

(b) Changes in
Internal Controls Over Financial Reporting

There was no
change in our internal controls over financial reporting that occurred during
the last fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.

16

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Table of Contents

PART II.      OTHER INFORMATION

|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

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 Companys 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
Albertsons 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 Albertsons Inc. (Albertsons) 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 Albertsons 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. 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 Minnesotas statutes prohibiting commercial disparagement. On
July 29, 2008, the Company and Albertsons 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 Albertsons. On
September 30, 2009, the Court ruled on motions by both the Company and News
America for Summary Judgment. The Court awarded Summary Judgment to the Company
and one of its executive officers on all of News Americas counterclaims and
third-party claims. The Court also denied News Americas Motion for Summary
Judgment on the Companys claims against News America other than granting News
Americas uncontested motion on one claim in the Amended Complaint related to
retailers. The Courts rulings set the stage for a trial on the Companys
antitrust and unfair-competition claims against News America; however, a trial
date has not yet been set.

The Company filed claims in
December 2006 and January 2007 with its directors and officers 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
Americas 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 owed the Company and its
officer such defense costs and insurance coverage. In December 2007, the
Company settled its claim against one of the insurers. Also, in March 2009, the
Company settled with the other insurer and received a payment of $1,387,000 as
part of the settlement. The Company recorded the payment in general and
administrative expenses for the quarter ended March 31, 2009, and the
litigation with the insurers is now concluded.

17

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Table of Contents

Management currently expects
the amount of legal fees and expenses that will be incurred in connection with
the ongoing lawsuit against News America to be significant throughout the
remainder of 2009, 2010 and possibly future years. During the nine months ended
September 30, 2009,
the Company incurred legal fees of $1,254,000 related to the News America
litigation which were offset by the $1,387,000 payment received from settlement
of its claim against one of its insurers during the first quarter of 2009.
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 Companys financial position or results of operations.

|         |              
|-------- | -------------
|Item 1A. | Risk
 Factors

Set forth below is an update
to one of the Risk Factors contained in the Companys Form 10-K Annual Report
for the year ended December 31, 2008.

We Are Involved In Major Litigation

As discussed in Part II,
Item 1, Legal Proceedings, of this Form 10-Q, we have been involved in major
litigation with News America since 2003. Although all of News Americas claims
against the Company in the litigation were recently dismissed, we expect the
amount of legal fees and expenses that will be incurred in connection with the
ongoing lawsuit by the Company against News America to be significant
throughout the remainder of 2009, 2010, and possibly future years.

|        |                                                             
|------- | ------------------------------------------------------------
|Item 2. | Unregistered Sales of Equity
 Securities and Use of Proceeds

On August 19,
2008, the Board of Directors authorized the repurchase of up to $2,000,000 of
the Companys 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 Companys discretion.

Our share
repurchase program activity for the three months ended September 30, 2009 was:

|                     |  |                                      |  |                            |   |                                                                                      |  |                                                                                      |   |  |  |   |           |  | 
|-------------------- |  | ------------------------------------ |  | -------------------------- | - | ------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------ | - |  |  | - | --------- |  | 
|                     |  | Total Number
 Of Shares
 Repurchased |  | AveragePrice PaidPer Share |   | Total Number Of
 Shares Purchased As
 Part Of Publicly
 Announced Plans
 Or Programs |  | Approximate DollarValue of Shares ThatMay Yet Be PurchasedUnder The PlansOr Programs |  
|                     |  |                                      |  |                            |   |                                                                                      |  |                                                                                      |   |  |  |   |           |  | 
|July 1-31, 2009      |  |                                     |  |                            | $ |                                                                                     |  |                                                                                      |  |  |  | $ | 1,271,000 |  | 
|August 1-31, 2009    |  |                                     |  |                            | $ |                                                                                     |  |                                                                                      |  |  |  | $ | 1,271,000 |  | 
|September 1-30, 2009 |  |                                     |  |                            | $ |                                                                                     |  |                                                                                      |  |  |  | $ | 1,271,000 |  | 

18

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Table of Contents

|        |                                                     
|------- | ----------------------------------------------------
|Item 3. | Defaults Upon Senior Securities                     
|        |                                                     
|None.   |                                                     
|        |                                                     
|Item 4. | Submission of Matters to a Vote of
 Security Holders
|        |                                                     
|None.   |                                                     
|        |                                                     
|Item 5. | Other Information                                   
|        |                                                     
|None.   |                                                     
|        |                                                     
|Item 6. | Exhibits                                            

The following
exhibits are included herewith:

| |      |                                              
| | ---- | ---------------------------------------------
| | 31.1 | Certification
 of Principal Executive Officer
| |      |                                              
| | 31.2 | Certification
 of Principal Financial Officer
| |      |                                              
| | 32   | Section 1350
 Certification                  

SIGNATURES

Pursuant to
the requirements 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.

|                          |                                       
|------------------------- | --------------------------------------
|Dated:
 November 13, 2009 | Insignia Systems, Inc.                
|                          | (Registrant)                          
|                          |                                       
|                          | /s/ Scott F.
 Drill                   
|                          | Scott F.
 Drill                       
|                          | President
 and Chief Executive Officer
|                          | (principal
 executive officer)        
|                          |                                       
|                          | /s/ Justin
 W. Shireman               
|                          | Justin W.
 Shireman                   
|                          | Vice
 President, Finance and          
|                          | Chief
 Financial Officer              
|                          | (principal
 financial officer)        

19

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Table of Contents

EXHIBIT
INDEX

| |      |                                              
| | ---- | ---------------------------------------------
| | 31.1 | Certification
 of Principal Executive Officer
| |      |                                              
| | 31.2 | Certification
 of Principal Financial Officer
| |      |                                              
| | 32   | Section 1350
 Certification                  

20

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