Table of Contents





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 June 30, 2007

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.)




6470 Sycamore Court North

Maple Grove, MN 55369

(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 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




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 July 31, 2007, was 15,425,837.







---

Insignia Systems, Inc.



TABLE OF CONTENTS





PART I.
        FINANCIAL INFORMATIONItem 1.
        Financial StatementsBalance Sheets  June 30, 2007 and December 31, 2006 (unaudited)Statements of Operations  Three and six months ended June 30, 2007 and 2006 (unaudited)Statements of Shareholders Equity  Six months ended June 30, 2007 and 2006 (unaudited)Statements of Cash Flows  Six months ended June 30, 2007 and 2006 (unaudited)Notes to Financial Statements  June 30, 2007 (unaudited)Item 2.
        Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3.
        Quantitative and Qualitative Disclosures About Market RiskItem 4.
        Controls and ProceduresPART II.
        OTHER INFORMATIONItem 1.
        Legal ProceedingsItem 1A.
        Risk FactorsItem 2.
        Unregistered Sales of Equity Securities and Use of ProceedsItem 3.
        Defaults Upon Senior SecuritiesItem 4.
        Submission of Matters to a Vote of Security HoldersItem 5.
        Other InformationItem 6.
        Exhibits






2

---

Table of Contents

PART I.FINANCIAL INFORMATION

Item 1.
        Financial Statements




Insignia Systems, Inc.

BALANCE SHEETS

(Unaudited)



June 30,2007
        
        December 31,2006ASSETSCurrent Assets:Cash and cash equivalents
        
        $
        4,780,000
        
        $
        3,785,000Accounts receivable  net of $10,000 allowance
        
        
        3,981,000
        
        
        2,925,000Inventories
        
        
        590,000
        
        
        452,000Prepaid expenses and other
        
        
        822,000
        
        
        888,000Total Current Assets
        
        
        10,173,000
        
        
        8,050,000Other Assets:Property and equipment, net
        
        
        455,000
        
        
        477,000Other
        
        
        39,000
        
        
        56,000Total Assets
        
        $
        10,667,000
        
        $
        8,583,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Line of credit
        
        $
        
        
        $
        186,000Current maturities of long-term liabilities
        
        
        253,000
        
        
        241,000Accounts payable
        
        
        1,398,000
        
        
        1,345,000Accrued liabilitiesCompensation
        
        
        618,000
        
        
        468,000Employee stock purchase plan
        
        
        76,000
        
        
        98,000Legal
        
        
        251,000
        
        
        105,000Other
        
        
        152,000
        
        
        154,000Deferred revenue
        
        
        542,000
        
        
        436,000Total Current Liabilities
        
        
        3,290,000
        
        
        3,033,000Long-Term Liabilities, less current maturities
        
        
        558,000
        
        
        688,000Commitments and Contingencies
        
        
        
        
        
        Shareholders Equity:Common stock, par value $.01:Authorized shares  40,000,000Issued and outstanding shares  15,347,000 at June 30, 2007 and 15,152,000 at December 31, 2006
        
        
        154,000
        
        
        152,000Additional paid-in capital
        
        
        29,887,000
        
        
        29,557,000Accumulated deficit
        
        
        (23,222,000
        )
        
        (24,847,000
        )Total Shareholders Equity
        
        
        6,819,000
        
        
        4,862,000Total Liabilities and Shareholders Equity
        
        $
        10,667,000
        
        $
        8,583,000




See accompanying notes to financial statements.



3

---

Table of Contents

Insignia Systems, Inc.

STATEMENTS OF OPERATIONS

(Unaudited)



Three Months EndedJune 30
        
        Six Months EndedJune 302007
        
        2006
        
        2007
        
        2006Services revenues
        
        $
        6,193,000
        
        $
        5,122,000
        
        $
        11,563,000
        
        $
        9,842,000Products sold
        
        
        776,000
        
        
        731,000
        
        
        1,471,000
        
        
        1,433,000Total Net Sales
        
        
        6,969,000
        
        
        5,853,000
        
        
        13,034,000
        
        
        11,275,000Cost of services
        
        
        2,349,000
        
        
        2,205,000
        
        
        4,645,000
        
        
        4,247,000Cost of goods sold
        
        
        460,000
        
        
        416,000
        
        
        871,000
        
        
        822,000Total Cost of Sales
        
        
        2,809,000
        
        
        2,621,000
        
        
        5,516,000
        
        
        5,069,000Gross Profit
        
        
        4,160,000
        
        
        3,232,000
        
        
        7,518,000
        
        
        6,206,000Operating Expenses:Selling
        
        
        1,426,000
        
        
        1,224,000
        
        
        2,895,000
        
        
        2,441,000Marketing
        
        
        362,000
        
        
        241,000
        
        
        695,000
        
        
        489,000General and administrative
        
        
        1,195,000
        
        
        902,000
        
        
        2,324,000
        
        
        1,751,000Total Operating Expenses
        
        
        2,983,000
        
        
        2,367,000
        
        
        5,914,000
        
        
        4,681,000Operating Income
        
        
        1,177,000
        
        
        865,000
        
        
        1,604,000
        
        
        1,525,000Other Income (Expense):Interest income
        
        
        51,000
        
        
        23,000
        
        
        95,000
        
        
        44,000Interest expense
        
        
        (24,000
        )
        
        (39,000
        )
        
        (58,000
        )
        
        (81,000
        )Other income
        
        
        
        
        
        100,000
        
        
        
        
        
        100,000Total Other Income
        
        
        27,000
        
        
        84,000
        
        
        37,000
        
        
        63,000Income Before Taxes
        
        
        1,204,000
        
        
        949,000
        
        
        1,641,000
        
        
        1,588,000Income tax expense
        
        
        6,000
        
        
        
        
        
        16,000
        
        
        Net Income
        
        $
        1,198,000
        
        $
        949,000
        
        $
        1,625,000
        
        $
        1,588,000Net income per share:Basic
        
        $
        0.08
        
        $
        0.06
        
        $
        0.11
        
        $
        0.10Diluted
        
        $
        0.07
        
        $
        0.06
        
        $
        0.10
        
        $
        0.10Shares used in calculation of net income per share:Basic
        
        
        15,344,000
        
        
        15,059,000
        
        
        15,323,000
        
        
        15,059,000Diluted
        
        
        16,139,000
        
        
        15,203,000
        
        
        16,080,000
        
        
        15,167,000




See accompanying notes to financial statements.



4

---

Table of Contents

Insignia Systems, Inc.

STATEMENTS OF SHAREHOLDERS EQUITY

(Unaudited)



Common Stock
        
        AdditionalPaid-In
        
        AccumulatedShares
        
        Amount
        
        Capital
        
        Deficit
        
        TotalSix Months June 30, 2007Balance at December 31, 2006
        
        15,152,000
        
        $
        152,000
        
        $
        29,557,000
        
        $
        (24,847,000
        )
        $
        4,862,000Issuance of common stock, net
        
        195,000
        
        
        2,000
        
        
        125,000
        
        
        
        
        
        127,000Stock-based compensation
        
        
        
        
        
        
        
        205,000
        
        
        
        
        
        205,000Net income
        
        
        
        
        
        
        
        
        
        
        1,625,000
        
        
        1,625,000Balance at June 30, 2007
        
        15,347,000
        
        $
        154,000
        
        $
        29,887,000
        
        $
        (23,222,000
        )
        $
        6,819,000Six Months Ended June 30, 2006Balance at December 31, 2005
        
        15,002,000
        
        $
        150,000
        
        $
        29,165,000
        
        $
        (27,243,000
        )
        $
        2,072,000Issuance of common stock, net
        
        57,000
        
        
        1,000
        
        
        32,000
        
        
        
        
        
        33,000Stock-based compensation
        
        
        
        
        
        
        
        151,000
        
        
        
        
        
        151,000Net income
        
        
        
        
        
        
        
        
        
        
        1,588,000
        
        
        1,588,000Balance at June 30, 2006
        
        15,059,000
        
        $
        151,000
        
        $
        29,348,000
        
        $
        (25,655,000
        )
        $
        3,844,000




See accompanying notes to financial statements.



5

---

Table of Contents

Insignia Systems, Inc.

STATEMENTS OF CASH FLOWS

(Unaudited)



Six Months Ended June 30
        
        2007
        
        2006Operating Activities:Net income
        
        $
        1,625,000
        
        $
        1,588,000Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
        
        
        124,000
        
        
        100,000Stock-based compensation
        
        
        205,000
        
        
        151,000Changes in operating assets and liabilities:Accounts receivable
        
        
        (1,056,000
        )
        
        (693,000
        )Inventories
        
        
        (138,000
        )
        
        (33,000
        )Prepaid expenses and other
        
        
        83,000
        
        
        (48,000
        )Accounts payable
        
        
        53,000
        
        
        (430,000
        )Accrued liabilities
        
        
        272,000
        
        
        (232,000
        )Deferred revenue
        
        
        106,000
        
        
        127,000Net cash provided by operating activities
        
        
        1,274,000
        
        
        530,000Investing Activities:Purchases of property and equipment
        
        
        (102,000
        )
        
        (127,000
        )Net cash used in investing activities
        
        
        (102,000
        )
        
        (127,000
        )Financing Activities:Net change in line of credit
        
        
        (186,000
        )
        
        34,000Payment of long-term liabilities
        
        
        (118,000
        )
        
        (90,000
        )Proceeds from issuance of common stock, net
        
        
        127,000
        
        
        33,000Net cash used in financing activities
        
        
        (177,000
        )
        
        (23,000
        )Increase in cash and cash equivalents
        
        
        995,000
        
        
        380,000Cash and cash equivalents at beginning of period
        
        
        3,785,000
        
        
        2,711,000Cash and cash equivalents at end of period
        
        $
        4,780,000
        
        $
        3,091,000Supplemental disclosures for cash flow information:Cash paid during periods for interest
        
        $
        35,000
        
        $
        51,000Cash paid during periods for income taxes
        
        
        16,000
        
        
        




See accompanying notes to financial statements.



6

---

Table of Contents

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 June 30, 2007, and its results of operations for the three and six months ended June 30, 2007 and 2006, and cash flows for the six months ended June 30, 2007 and 2006. 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, 2006.



The Summary of Significant
Accounting Policies in the Companys 2006 Annual Report on Form 10-K describes the Companys accounting policies.



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:

June 30,2007
        
        December 31,2006Raw materials
        
        $
        163,000
        
        $
        162,000Work-in-process
        
        
        48,000
        
        
        8,000Finished goods
        
        
        379,000
        
        
        282,000$
        590,000
        
        $
        452,000




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



June 30,2007
        
        December 31,2006Production tooling, machinery and equipment
        
        $
        1,798,000
        
        $
        1,792,000Office furniture and fixtures
        
        
        191,000
        
        
        191,000Computer equipment and software
        
        
        720,000
        
        
        661,000Leasehold improvements
        
        
        360,000
        
        
        341,0003,069,000
        
        
        2,985,000Accumulated depreciation and amortization
        
        
        (2,614,000
        )
        
        (2,508,000
        )Net Property and Equipment
        
        $
        455,000
        
        $
        477,000




7

---

Table of Contents

Stock-Based Compensation. Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS 123(R)), using the modified prospective transition application method. Under this method, compensation expense is recognized for employee awards granted, modified, or settled subsequent to December 31, 2005, and the unvested portion of awards granted to employees prior to January 1, 2006. We use the straight-line method to recognize compensation expense over the requisite service period of the award.



There were 506,100 stock option awards in the second quarter of 2007. Total stock-based compensation expense recorded for the six months ended June 30, 2007 and 2006, was $205,000 and $151,000, respectively.



Net Income Per Share.Basic net income 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 per share gives effect to all diluted potential common shares outstanding during the period. Options and warrants to purchase approximately 926,000 and 1,962,000 shares of common stock with weighted average exercise prices of $6.81 and $3.98 were outstanding at June 30, 2007 and 2006 and were not included in the computation of common stock equivalents for the three months ended June 30, 2007 and 2006 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 865,000 and 1,953,000 shares of common
stock with weighted average exercise prices of  $7.02 and $4.12 were outstanding at June 30, 2007 and 2006 and were not included in the computation of common stock equivalents for the six months ended June 30, 2007 and 2006 because their exercise prices were higher than the average fair market value of the common shares during the reporting period.



Weighted average common shares outstanding for the three and six months ended June 30, 2007 and 2006 were as follows:



Three Months EndedJune 30
        
        Six Months EndedJune 302007
        
        2006
        
        2007
        
        2006Denominator for basic net income per share  weighted average shares
        
        15,344,000
        
        15,059,000
        
        15,323,000
        
        15,059,000Effect of dilutive securities: Stock options and warrants
        
        795,000
        
        144,000
        
        757,000
        
        108,000Denominator for diluted net income per share  adjusted weighted average shares
        
        16,139,000
        
        15,203,000
        
        16,080,000
        
        15,167,000




2.
        Line of Credit.On September 16, 2004, the Company entered into a Financing Agreement, Security Agreement and Revolving Note (collectively, the Credit Agreement) with Marquette Business Credit, Inc. that initially provided for borrowings up to $1,500,000 for twelve months, subject to collateral availability. The borrowings were secured by all of the Companys assets. The Credit Agreement provided that borrowings would bear interest at 2.5% over prime, with a minimum monthly interest charge of $2,500, and an annual fee of 1% of the Revolving Note payable. On November 22, 2004, the Company entered into an amendment to the Credit Agreement to extend the term to April 30, 2006, and on May 8, 2006, the Company entered into a second amendment to the Credit Agreement to extend the term to April 30, 2007. The Company did not
renew the Credit Agreement  and all borrowings were repaid as of April 30, 2007.




8

---

Table of Contents

3.
        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., and the New York action was subsequently dismissed.



On September 23, 2004, the Company brought suit against News America and Albertsons Inc. 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 similar to the claims in its New York action against Insignia and one of its officers. Motions to dismiss the counterclaims were argued in June 2007, but a ruling has not yet been issued. The parties are now engaged in pre-trial discovery. Pursuant to Court order, all discovery and pre-trial matters must be completed by July 2008. Management believes that the allegations of the counterclaims are without merit. An evaluation of the likelihood of an unfavorable outcome and estimate of the potential liability cannot be rendered at this time. If the Company is required to pay a significant amount in settlement or damages, it will have a material adverse effect on its operations and financial condition. In addition, a negative outcome of this litigation could affect long-term competitive aspects of the Companys business.



Management currently expects the amount of legal fees that will be incurred in connection with the ongoing lawsuit to be significant throughout 2007 and 2008. During the six months ended June 30, 2007, the Company incurred legal fees of $810,000 related to the News America litigation. Legal fees are expensed as incurred.



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.



4.
        Concentrations.During the six months ended June 30, 2007, two customers accounted for 13% and 12% of the Companys total net sales. At June 30, 2007, one of these customers represented 10%, and one other customer represented 16%, of the Companys total accounts receivable. During the six months ended June 30, 2006, one of these customers accounted for 24% of the Companys total net sales and one other customer accounted for 10% 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.



9

---

Table of Contents

5.
        Income Taxes.At December 31, 2006, the Company had net operating loss carryforwards of approximately $23,000,000, which are available to offset future taxable income. These carryforwards are subject to the limitations of Internal Revenue Code Section 382. This Section provides limitations on the availability of net operating losses to offset current taxable income if an ownership change has occurred as defined by Internal Revenue Code Section 382. These carryforwards will begin expiring in 2009. The Company has established a valuation allowance against all deferred tax assets due to the uncertainties regarding the realization of the deferred tax assets based upon the Companys lack of historical earnings. Readers should refer to Note 8 of the Companys Financial Statements on Form 10-K for the year ended December 31, 2006, for
additional information related to income taxes.




The Company believes it has sufficient net operating losses available to offset taxable net income; however, it recorded income tax expense of $6,000 for the quarter ended June 30, 2007, related to alternative minimum tax liability. The Company continues to provide a full valuation allowance against all deferred tax assets as of June 30, 2007.



The Company adopted the provisions of FASB Interpretation 48,Accounting for Uncertainty in Income Taxes, on January 1, 2007. Previously, the Company had accounted for tax contingencies in accordance with Statement of Financial Accounting Standards 5,Accounting for Contingencies. As required by Interpretation 48, which clarifies Statement 109,Accounting for Income Taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-notthreshold, the amount recognized in the financial statements is the largest benefit that has
a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied Interpretation 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of Interpretation 48, the Company recognized no liability for unrecognized tax benefits, which would have been accounted for as a reduction to the January 1, 2007, balance of retained earnings.

The Company is subject to income taxes in the U.S. federal jurisdiction and various states jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local tax examinations by tax authorities for the years before 2003.



6.
        Subsequent Event.On July 2, 2007, the Company and Valassis Sales and Marketing Services, Inc. (Valassis), entered into Amendment No. 2 (the Amendment) to the Exclusive Reseller Agreement between the parties. The Amendment extends the term of the strategic alliance between the parties to December 31, 2017. The Amendment also expands the strategic alliance to increase the role of Valassis in developing and expanding the Companys participating retailer network. Valassis received a five-year warrant to acquire 800,000 shares of Insignias common stock at a price of $4.04 and will be paid a cash commission by the Company on the revenue the Company realizes from POPS programs the consumer packaged goods manufacturers conduct in the new retail chains.




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.



10

---

Table of Contents

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 EndedJune 30
        
        Six Months EndedJune 302007
        
        2006
        
        2007
        
        2006Net sales
        
        100.0
        %
        100.0
        %
        100.0
        %
        100.0
        %Cost of sales
        
        40.3
        
        44.8
        
        42.3
        
        45.0Gross profit
        
        59.7
        
        55.2
        
        57.7
        
        55.0Operating expenses:Selling
        
        20.5
        
        20.9
        
        22.2
        
        21.7Marketing
        
        5.2
        
        4.1
        
        5.3
        
        4.3General and administrative
        
        17.1
        
        15.4
        
        17.9
        
        15.5Total operating expenses
        
        42.8
        
        40.4
        
        45.4
        
        41.5Operating income
        
        16.9
        
        14.8
        
        12.3
        
        13.5Other income
        
        0.4
        
        1.4
        
        0.3
        
        0.6Income before taxes
        
        17.3
        
        16.2
        
        12.6
        
        14.1Income tax expense
        
        (0.1
        )
        
        
        (0.1
        )
        Net income
        
        17.2
        %
        16.2
        %
        12.5
        %
        14.1
        %




A 15.6% increase in net sales for the first six months of 2007 compared to the first six months of 2006 resulted in a 21.1% increase in gross profit in 2007. This increase in gross profit was largely offset by increased operating expense in 2007 and the absence in 2007 of $100,000 of one-time nonoperating income present in 2006, resulting in a 2.3% increase in net income in the first six months of 2007 compared to the first six months of 2006.



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, 2006, included in our Form 10-K filed with the Securities and Exchange Commission on April 2, 2007. We believe our most critical accounting policies and estimates include the following:




        revenue recognition;



        allowance for doubtful accounts;



        inventory valuation;



        accounting for deferred income taxes;



        valuation of long-lived and intangible assets; and



        stock-based compensation.






11

---

Table of Contents

Three and Six Months ended June 30, 2007 Compared to Three and Six Months Ended June 30, 2006



Net Sales.Net sales for the three months ended June 30, 2007 increased 19.1% to $6,969,000 compared to $5,853,000 for the three months ended June 30, 2006. Net sales for the six months ended June 30, 2007 increased 15.6% to $13,034,000 compared to $11,275,000 for the six months ended June 30, 2006.



Service revenues from our POPSign programs for the three months ended June 30, 2007 increased 20.9% to $6,193,000 compared to $5,122,000 for the three months ended June 30, 2006. Service revenues from our POPSign programs for the six months ended June 30, 2007 increased 17.5% to $11,563,000 compared to $9,842,000 for the six months ended June 30, 2006. The increases were primarily due to an increase in the number of POPSign programs sold to customers (consumer packaged goods manufacturers) during the quarter.



Product sales for the three months ended June 30, 2007 increased 6.2% to $776,000 compared to $731,000 for the three months ended June 30, 2006. Product sales for the six months ended June 30, 2007 increased 2.7% to $1,471,000 compared to $1,433,000 for the six months ended June 30, 2006. The increases were primarily due to increased sales of laser label supplies which were partially offset by decreased sales of thermal sign card supplies.



Gross Profit.Gross profit for the three months ended June 30, 2007 increased 28.7% to $4,160,000 compared to $3,232,000 for the three months ended June 30, 2006. Gross profit for the six months ended June 30, 2007 increased 21.1% to $7,518,000 compared to $6,206,000 for the six months ended June 30, 2006. Gross profit as a percentage of total net sales increased to 59.7% for the three months ended June 30, 2007, compared to 55.2% for the three months ended June 30, 2006. Gross profit as a percentage of total net sales increased to 57.7% for the six months ended June 30, 2007, compared to 55.0% for the six months ended June 30, 2006.



Gross profit from our POPSign program revenues for the three months ended June 30, 2007 increased 31.8% to $3,844,000 compared to $2,917,000 for the three months ended June 30, 2006. Gross profit from our POPSign program revenues for the six months ended June 30, 2007 increased 23.6% to $6,918,000 compared to $5,595,000 for the six months ended June 30, 2006. The increases were primarily due to increased sales and the effect of fixed costs. Gross profit as a percentage of POPSign program revenues for the three months ended June 30, 2007 increased to 62.1% compared to 57.0% for the three months ended June 30, 2006. Gross profit as a percentage of POPSign program revenues for the six months ended June 30, 2007 increased to 59.8% compared to 56.9% for the six months ended June 30, 2006. The increases were due to the factors discussed above.



Gross profit from our product sales for the three months ended June 30, 2007 increased 0.3% to $316,000 compared to $315,000 for the three months ended June 30, 2006. Gross profit from our product sales for the six months ended June 30, 2007 decreased 1.8% to $600,000 compared to $611,000 for the six months ended June 30, 2006. The increases and decreases were primarily due to fluctuations in the sales mix. Gross profit as a percentage of product sales was 40.7% for the three months ended June 30, 2007 compared to 43.1% for the three months ended June 30, 2006. Gross profit as a percentage of product sales was 40.8% for the six months ended June 30, 2007 compared to 42.6% for the six months ended June 30, 2006.The decreases were due to changes in the sales mix toward lower margin products.



Operating Expenses



Selling.Selling expenses for the three months ended June 30, 2007 increased 16.5% to $1,426,000 compared to $1,224,000 for the three months ended June 30, 2006, primarily due to increased sales commissions in 2007 as a result of increased sales and increased compliance related costs. Selling expenses for the six months ended June 30, 2007 increased 18.6% to $2,895,000 compared to $2,441,000 for the six months ended June 30, 2006, primarily due to the factors described above as well as increased travel related expense.



12

---

Table of Contents

Selling expenses as a percentage of total net sales decreased to 20.5% for the three months ended June 30, 2007 compared to 20.9% for the three months ended June 30, 2006, due to the factors discussed above, net of the effect of higher net sales during the three months ended June 30, 2007. Selling expenses as a percentage of total net sales increased to 22.2% for the six months ended June 30, 2007 compared to 21.7% for the six months ended June 30, 2006, due to factors described above, net of the effect of higher net sales during the six months ended June 30, 2007.



Marketing.Marketing expenses for the three months ended June 30, 2007 increased 50.2% to $362,000 compared to $241,000 for the three months ended June 30, 2006. Marketing expenses for the six months ended June 30, 2007 increased 42.1% to $695,000 compared to $489,000 for the six months ended June 30, 2006. Increases in both the quarter and six months were primarily due to increased data acquisition costs and increased staffing levels.



Marketing expenses as a percentage of total net sales increased to 5.2% for the three months ended June 30, 2007 compared to 4.1% for the three months ended June 30, 2006. Marketing expenses as a percentage of total net sales increased to 5.3% for the six months ended June 30, 2007 compared to 4.3% for the six months ended June 30, 2006. Increases in both periods were primarily due to the factors discussed above, net of the effect of increased sales in 2007.



General and administrative.General and administrative expenses for the three months ended June 30, 2007 increased 32.5% to $1,195,000 compared to $902,000 for the three months ended June 30, 2006. General and administrative expenses for the six months ended June 30, 2007 increased 32.7% to $2,324,000 compared to $1,751,000 for the six months ended June 30, 2006. The increases for both the three months and six months were primarily due to increased legal fees, increased staff levels and increased stock-based compensation expense.



General and administrative expenses as a percentage of total net sales increased to 17.2% for the three months ended June 30, 2007 compared to 15.4% for the three months ended June 30, 2006. General and administrative expenses as percentage of total net sales increased to 17.8% for the six months ended June 30, 2007 compared to 15.5% for the six months ended June 30, 2006. Increases in both periods were primarily due to the factors discussed above, net of the effect of increased sales in 2007.



Legal fees were $470,000 for the three months ended
June 30, 2007 compared to $279,000 for the three months ended June 30, 2006. Legal fees were $892,000 for the six months ended
June 30, 2007 compared to $511,000 for the six months ended June 30, 2006. The legal fees in each period were incurred primarily
in connection with the News America lawsuit described in Note 3 to the financial statements. Increased legal fees in the 2007
periods reflect that the parties are now engaged in pre-trial discovery. We currently expect the amount of additional legal fees
that will be incurred in connection with the ongoing lawsuit to be significant throughout the remainder of 2007 and 2008. Also, if the
Company is required to pay a significant amount in settlement or damages, it will have a material adverse effect on its operations
and financial condition. In addition, a negative outcome of this litigation could affect long-term competitive aspects of the
Companys business.



Other Income (Expense).Other income  (expense) for the three months ended June 30, 2007 was $27,000 compared to $84,000 for the three months ended June 30, 2006. Other income for the six months ended June 30, 2007 was $37,000 compared to $63,000 for the six months ended June 30, 2006. The difference was due primarily to the presence in 2006 of $100,000 of income from the sale of certain VALUStix assets per the terms of a settlement agreement, increased interest income in 2007 as a result of higher cash balances and higher interest rates, and decreased interest expense in 2007 as a result of the expiration of the line of credit on April 30, 2007.



13

---

Table of Contents

Income Taxes.The Company recorded income tax expense of $6,000 for the quarter ended June 30, 2007 and $16,000 for the six months ended June 30, 2007, related to alternative minimum tax liability.



Net Income.Net income for the three months ended June 30, 2007 was $1,198,000 compared to $949,000 for the three months ended June 30, 2006. Net income for the six months ended June 30, 2007 was $1,625,000 compared to $1,588,000 for the six months ended June 30, 2006.



Liquidity and Capital Resources



The Company has financed its operations with proceeds from public and private stock sales and sales of its services and products. At June 30, 2007, working capital was $6,883,000 compared to $5,017,000 at December 31, 2006. During the six months ended June 30, 2007, cash and cash equivalents increased $995,000.



Net cash provided by operating activities during the six months ended June 30, 2007 was $1,274,000. Net income of $1,625,000 for the six months ended June 30, 2007 was more than offset by changes in operating assets and liabilities, primarily an increase in accounts receivable. Accounts receivable increased $1,056,000 during the six months ended June 30, 2007 due to POPSign billings in June of 2007 being substantially higher than in December of 2006. Accounts payable and accrued liabilities increased $325,000 during the six month period primarily as a result of increased business activity and related expenses. The Company expects accounts receivable and accounts payable to fluctuate during 2007 depending on the level of quarterly POPSign revenues and related business activity.



Net cash of $102,000 was used in investing activities during the six months ended June 30, 2007, due to the purchase of property and equipment, primarily the purchase of computer hardware and software. Capital expenditures for the remainder of 2007 are expected to be comparable to the first half of 2007.



Net cash of $177,000 was used in financing activities during the six months ended June 30, 2007 as a result of $186,000 of pay down on the line of credit and the payment of $118,000 of principal on long-term liabilities, which were partially offset by $127,000 of proceeds from the issuance of common stock from the employee stock purchase plan and stock option exercises. Through April 30, 2007, the Company maintained a line of credit balance sufficient to generate interest charges to cover the required monthly minimum fee. The Company did not renew the line of credit agreement which expired on April 30, 2007.



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.



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, 2006, and updated in Part II, Item 1A of this Quarterly Report on Form 10-Q.



14

---

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.



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., and the New York action was subsequently dismissed.



On September 23, 2004, the Company brought suit against News America and Albertsons Inc. 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
similar to the claims in its New York action against Insignia and one of its officers. Motions to dismiss the counterclaims were argued in June 2007, but a ruling has not yet been issued. The parties are now engaged in pre-trial discovery. Pursuant to Court order, all discovery and pre-trial matters must be completed by July 2008. Management believes that the allegations of the counterclaims are without merit. An evaluation of the likelihood of an unfavorable outcome and estimate of the potential liability cannot be rendered at this time. If the Company is required to pay a significant amount in settlement or damages, it will have a material adverse effect on its operations and financial condition. In addition, a negative outcome of this litigation could affect long-term competitive aspects of the Companys business.



15

---

Table of Contents

Management currently expects the amount of legal fees that will be incurred in connection with the ongoing lawsuit to be significant throughout 2007 and 2008. During the six months ended June 30, 2007, the Company incurred legal fees of $810,000 related to the News America litigation. Legal fees are expensed as incurred.



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




Not applicable.



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




None.



Item 3.
        Defaults upon Senior Securities




None.



Item 4.
        Submission of Matters to a Vote of Security Holders




The Company held its Annual Meeting of Shareholders on May 23, 2007.



The shareholders present in person or by proxy voted to elect Donald J. Kramer, Scott F. Drill, Peter V. Derycz, Reid V. MacDonald, W. Robert Ramsdell and Gordon F. Stofer as directors with each director receiving the following votes:



FOR
        
        WITHHOLD AUTHORITYDonald J. Kramer
        
        14,295,414
        
        109,700Scott F. Drill
        
        14,295,101
        
        110,013Peter V. Derycz
        
        14,213,965
        
        191,149Reid V. MacDonald
        
        14,293,814
        
        111,300W. Robert Ramsdell
        
        14,213,665
        
        191,449Gordon F. Stofer
        
        14,294,014
        
        111,100






16

---

Table of Contents

The shareholders present in person or by proxy voted to approve an amendment to the Companys 2003 Incentive Stock Option Plan to increase the number of shares reserved for issuance under the Plan from 1,625,000 to 1,875,000. The vote consisted of 8,007,091 shares in favor, 280,402 shares against, 28,235 shares abstaining and 6,089,386 broker non-votes.



The shareholders present in person or by proxy voted to ratify the appointment of Grant Thornton LLP as the independent registered public accounting firm for the current year. The vote consisted of 14,391,449 shares in favor, 10,100 shares against and 3,565 shares abstaining.



Item 5.
        Other Information




None.



Item 6.
        Exhibits




The following exhibits are included herewith:



10.1
        Amendment #2 to Exclusive Reseller Agreement(Confidential treatment has been requested for portions of the Amendment pursuant to Rule 24b-2.)


10.2
        Warrant To Valassis Communications, Inc. to Purchase Shares of Common Stock of Insignia Systems, Inc.


31.1
        Certification of Principal Executive Officer


31.2
        Certification of Principal Financial Officer


32
        Section 1350 Certification




17

---

Table of Contents

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:
        August 14, 2007
        Insignia Systems, Inc.(Registrant)/s/  Scott F. DrillScott F. DrillPresident and Chief Executive Officer(principal executive officer)/s/ Justin W. ShiremanJustin W. ShiremanVice President, Finance andChief Financial Officer(principal financial officer)






18

---

Table of Contents

EXHIBIT INDEX





10.1
        Amendment #2 to Exclusive Reseller Agreement(Confidential treatment has been requested for portions of the Amendment pursuant to Rule 24b-2.)




10.2
        Warrant To Valassis Communications, Inc. to Purchase Shares of Common Stock of Insignia Systems, Inc.




31.1
        Certification of Principal Executive Officer




31.2
        Certification of Principal Financial Officer




32
        Section 1350 Certification




19

---