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, 2010                      
|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 reports), 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 November 3, 2010, was
15,847,357.

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, 2010 and
 December 31, 2009 (unaudited)                          |  | 3 
|         |  |                                                                                                 |  |   
|         |  | Statements of Operations  Three and nine
 months ended September 30, 2010 and 2009 (unaudited) |  | 4 
|         |  |                                                                                                 |  |   
|         |  | Statements of Shareholders Equity  Nine
 months ended September 30, 2010 and 2009 (unaudited) |  | 5 
|         |  |                                                                                                 |  |   
|         |  | Statements of Cash Flows  Nine months
 ended September 30, 2010 and 2009 (unaudited)           |  | 6 
|         |  |                                                                                                 |  |   
|         |  | Notes to Financial Statements  September
 30, 2010 (unaudited)                                 |  | 7 
|         |  |                                                                                                 |  |   
|Item 2.  |  | Managements Discussion and Analysis of Financial
 Condition and Results of Operations          |  | 10
|         |  |                                                                                                 |  |   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market
 Risk                                     |  | 15
|         |  |                                                                                                 |  |   
|Item 4.  |  | Controls and Procedures                                                                         |  | 15
|         |  |                                                                                                 |  |   
|         |  |                                                                                                 |  |   
|PART II. |  | OTHER INFORMATION                                                                               |  | 16
|         |  |                                                                                                 |  |   
|Item 1.  |  | Legal Proceedings                                                                               |  | 16
|         |  |                                                                                                 |  |   
|Item 1A. |  | Risk Factors                                                                                    |  | 17
|         |  |                                                                                                 |  |   
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of
 Proceeds                                    |  | 18
|         |  |                                                                                                 |  |   
|Item 3.  |  | Defaults Upon Senior Securities                                                                 |  | 18
|         |  |                                                                                                 |  |   
|Item 4.  |  | Removed and Reserved                                                                            |  | 18
|         |  |                                                                                                 |  |   
|Item 5.  |  | Other Information                                                                               |  | 18
|         |  |                                                                                                 |  |   
|Item 6.  |  | Exhibits                                                                                        |  | 18

2

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Table of Contents

PART I. FINANCIAL INFORMATION

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

Insignia Systems, Inc. 
BALANCE
SHEETS(Unaudited)

|                                                                                                      |  |                   |             |                  |   |            
|----------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | ---------------- | - | -----------
|                                                                                                      |  | September 30,2010 |             | December 31,2009 |  
|ASSETS                                                                                                |  |                   |             |                  |   |            
|Current Assets:                                                                                       |  |                   |             |                  |   |            
|Cash and cash equivalents                                                                             |  | $                 | 10,057,000  |                  | $ | 8,797,000  
|Short-term investments                                                                                |  |                   | 2,500,000   |                  |   | 4,400,000  
|Accounts receivable, net of allowance for doubtful accounts of $8,000                                 |  |                   | 5,431,000   |                  |   | 2,890,000  
|Inventories                                                                                           |  |                   | 529,000     |                  |   | 389,000    
|Prepaid expenses and other                                                                            |  |                   | 364,000     |                  |   | 394,000    
|Total Current Assets                                                                                  |  |                   | 18,881,000  |                  |   | 16,870,000 
|                                                                                                      |  |                   |             |                  |   |            
|Other Assets:                                                                                         |  |                   |             |                  |   |            
|Property and equipment, net                                                                           |  |                   | 1,046,000   |                  |   | 927,000    
|Other                                                                                                 |  |                   | 246,000     |                  |   | 42,000     
|                                                                                                      |  |                   |             |                  |   |            
|Total Assets                                                                                          |  | $                 | 20,173,000  |                  | $ | 17,839,000 
|                                                                                                      |  |                   |             |                  |   |            
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                  |  |                   |             |                  |   |            
|Current Liabilities:                                                                                  |  |                   |             |                  |   |            
|Current maturities of long-term liabilities                                                           |  | $                 | 219,000     |                  | $ | 219,000    
|Accounts payable                                                                                      |  |                   | 3,031,000   |                  |   | 2,253,000  
|Accrued liabilities                                                                                   |  |                   |             |                  |   |            
|Compensation                                                                                          |  |                   | 1,172,000   |                  |   | 778,000    
|Retailer payments                                                                                     |  |                   | 776,000     |                  |   | 1,022,000  
|Employee stock purchase plan                                                                          |  |                   | 139,000     |                  |   | 131,000    
|Legal                                                                                                 |  |                   | 134,000     |                  |   | 257,000    
|Other                                                                                                 |  |                   | 461,000     |                  |   | 389,000    
|Deferred revenue                                                                                      |  |                   | 604,000     |                  |   | 1,105,000  
|Total Current Liabilities                                                                             |  |                   | 6,536,000   |                  |   | 6,154,000  
|                                                                                                      |  |                   |             |                  |   |            
|Long-Term Liabilities, less current maturities                                                        |  |                   |            |                  |   |           
|                                                                                                      |  |                   |             |                  |   |            
|Commitments and Contingencies                                                                         |  |                   |            |                  |   |           
|                                                                                                      |  |                   |             |                  |   |            
|Shareholders Equity:                                                                                 |  |                   |             |                  |   |            
|Common stock, par value $.01:                                                                         |  |                   |             |                  |   |            
|Authorized shares  40,000,000                                                                        |  |                   |             |                  |   |            
|Issued and outstanding shares  15,842,000 at September 30, 2010 and
 15,181,000 at December 31, 2009 |  |                   | 158,000     |                  |   | 152,000    
|Additional paid-in capital                                                                            |  |                   | 33,373,000  |                  |   | 32,578,000 
|Accumulated deficit                                                                                   |  |                   | (19,894,000 | )                |   | (21,045,000
|Total Shareholders Equity                                                                            |  |                   | 13,637,000  |                  |   | 11,685,000 
|                                                                                                      |  |                   |             |                  |   |            
|Total Liabilities and Shareholders Equity                                                            |  | $                 | 20,173,000  |                  | $ | 17,839,000 
|                                                                                                      |  |                   |             |                  |   |            
|See accompanying notes to financial statements.                                                       |  |                   |             |                 

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Table of Contents

Insignia Systems, Inc. 
STATEMENTS OFOPERATIONS(Unaudited)

|                                                     |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|---------------------------------------------------- |  | --------------------------------- | ---------- | -------------------------------- | - | ---------- | - | ---- | ---------- | - | - | ---------- | -
|                                                     |  | Three Months Ended 
 September 30 |            | Nine Months Ended 
 September 30 |  
|                                                     |  | 2010                              |            | 2009                             |   | 2010       |   | 2009 |           
|Services revenues                                    |  | $                                 | 7,858,000  |                                  | $ | 7,485,000  |   | $    | 20,557,000 |   | $ | 18,401,000 |  
|Products sold                                        |  |                                   | 659,000    |                                  |   | 459,000    |   |      | 2,169,000  |   |   | 1,502,000  |  
|Total Net Sales                                      |  |                                   | 8,517,000  |                                  |   | 7,944,000  |   |      | 22,726,000 |   |   | 19,903,000 |  
|                                                     |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Cost of services                                     |  |                                   | 3,600,000  |                                  |   | 3,486,000  |   |      | 9,518,000  |   |   | 8,491,000  |  
|Cost of products sold                                |  |                                   | 442,000    |                                  |   | 326,000    |   |      | 1,458,000  |   |   | 1,032,000  |  
|Total Cost of Sales                                  |  |                                   | 4,042,000  |                                  |   | 3,812,000  |   |      | 10,976,000 |   |   | 9,523,000  |  
|Gross Profit                                         |  |                                   | 4,475,000  |                                  |   | 4,132,000  |   |      | 11,750,000 |   |   | 10,380,000 |  
|                                                     |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Operating
 Expenses:                                 |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Selling                                              |  |                                   | 1,968,000  |                                  |   | 1,776,000  |   |      | 5,379,000  |   |   | 4,794,000  |  
|Marketing                                            |  |                                   | 429,000    |                                  |   | 391,000    |   |      | 1,235,000  |   |   | 1,125,000  |  
|General and administrative                           |  |                                   | 1,146,000  |                                  |   | 973,000    |   |      | 4,001,000  |   |   | 3,442,000  |  
|Insurance settlement proceeds                        |  |                                   |           |                                  |   |           |   |      |           |   |   | (1,387,000 | )
|Total Operating Expenses                             |  |                                   | 3,543,000  |                                  |   | 3,140,000  |   |      | 10,615,000 |   |   | 7,974,000  |  
|Operating Income                                     |  |                                   | 932,000    |                                  |   | 992,000    |   |      | 1,135,000  |   |   | 2,406,000  |  
|                                                     |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Other
 Income (Expense):                             |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Interest income                                      |  |                                   | 6,000      |                                  |   | 31,000     |   |      | 32,000     |   |   | 100,000    |  
|Interest expense                                     |  |                                   | (6,000     | )                                |   | (10,000    | ) |      | (16,000    | ) |   | (30,000    | )
|Other income (expense)                               |  |                                   |           |                                  |   | (1,000     | ) |      |           |   |   | (1,000     | )
|Total Other Income                                   |  |                                   |           |                                  |   | 20,000     |   |      | 16,000     |   |   | 69,000     |  
|Income Before Taxes                                  |  |                                   | 932,000    |                                  |   | 1,012,000  |   |      | 1,151,000  |   |   | 2,475,000  |  
|                                                     |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Income tax expense                                   |  |                                   |           |                                  |   | 26,000     |   |      |           |   |   | 62,000     |  
|Net Income                                           |  | $                                 | 932,000    |                                  | $ | 986,000    |   | $    | 1,151,000  |   | $ | 2,413,000  |  
|                                                     |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|                                                     |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Net income per share:                                |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Basic                                                |  | $                                 | 0.06       |                                  | $ | 0.07       |   | $    | 0.07       |   | $ | 0.16       |  
|Diluted                                              |  | $                                 | 0.05       |                                  | $ | 0.06       |   | $    | 0.07       |   | $ | 0.15       |  
|                                                     |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Shares used in calculation
 of net income per share: |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|Basic                                                |  |                                   | 15,642,000 |                                  |   | 15,134,000 |   |      | 15,503,000 |   |   | 15,130,000 |  
|Diluted                                              |  |                                   | 16,977,000 |                                  |   | 15,972,000 |   |      | 16,869,000 |   |   | 15,666,000 |  
|                                                     |  |                                   |            |                                  |   |            |   |      |            |   |   |            |  
|See
 accompanying notes to financial statements.     |  |                                   |            |                                  |   |            |  

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Table of Contents

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

|                                                 |  |              |            |        |                       |                                |   |       |            |   |   |             |   |   |            |  
|------------------------------------------------ |  | ------------ | ---------- | ------ | --------------------- | ------------------------------ | - | ----- | ---------- | - | - | ----------- | - | - | ---------- | -
|                                                 |  |              |            |        |                       | Additional 
 Paid-In 
 Capital |   |       |            |   |  
|                                                 |  | Common Stock |            |        | Accumulated 
 Deficit |                                |   |      
|                                                 |  | Shares       |            | Amount |                       |                                |   | Total |           
|                                                 |  |              |            |        |                       |                                |   |       |           
|Nine Months Ended September 30, 2010             |  |              |            |        |                       |                                |   |       |           
|                                                 |  |              |            |        |                       |                                |   |       |           
|Balance at
 December 31, 2009                    |  |              | 15,181,000 |        | $                     | 152,000                        |   | $     | 32,578,000 |   | $ | (21,045,000 | ) | $ | 11,685,000 |  
|Issuance of common stock,
 net                   |  |              | 746,000    |        |                       | 7,000                          |   |       | 706,000    |   |   |            |   |   | 713,000    |  
|Repurchase of common stock,
 net                 |  |              | (85,000    | )      |                       | (1,000                         | ) |       | (468,000   | ) |   |            |   |   | (469,000   | )
|Stock-based compensation                         |  |              |           |        |                       |                               |   |       | 557,000    |   |   |            |   |   | 557,000    |  
|Net income                                       |  |              |           |        |                       |                               |   |       |           |   |   | 1,151,000   |   |   | 1,151,000  |  
|                                                 |  |              |            |        |                       |                                |   |       |            |   |   |             |   |   |            |  
|Balance at
 September 30, 2010                   |  |              | 15,842,000 |        | $                     | 158,000                        |   | $     | 33,373,000 |   | $ | (19,894,000 | ) | $ | 13,637,000 |  
|                                                 |  |              |            |        |                       |                                |   |       |            |   |   |             |   |   |            |  
|                                                 |  |              |            |        |                       |                                |   |       |            |   |   |             |   |   |            |  
|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 |  
|                                                 |  |              |            |        |                       |                                |   |       |            |   |   |             |   |   |            |  
|See
 accompanying notes to financial statements. |  |              |            |        |                       |                                |   |       |           

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Table of Contents

Insignia Systems, Inc.
STATEMENTS
OF CASH FLOWS(Unaudited)

|                                                                               |  |      |            |      |   |            |  
|------------------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ---------- | -
|Nine Months
 Ended September 30                                                |  | 2010 |            | 2009 |  
|Operating
 Activities:                                                         |  |      |            |      |   |            |  
|Net income                                                                     |  | $    | 1,151,000  |      | $ | 2,413,000  |  
|Adjustments to reconcile net income to net cash used in operating
 activities: |  |      |            |      |   |            |  
|Depreciation and amortization                                                  |  |      | 249,000    |      |   | 303,000    |  
|Provision for income taxes                                                     |  |      |           |      |   | 62,000     |  
|Provision for bad debt expense                                                 |  |      |           |      |   | 9,000      |  
|Stock-based compensation                                                       |  |      | 557,000    |      |   | 419,000    |  
|Changes in operating assets and liabilities:                                   |  |      |            |      |   |            |  
|Accounts receivable                                                            |  |      | (2,541,000 | )    |   | (1,224,000 | )
|Inventories                                                                    |  |      | (140,000   | )    |   | (25,000    | )
|Prepaid expenses and other                                                     |  |      | (174,000   | )    |   | (160,000   | )
|Accounts payable                                                               |  |      | 778,000    |      |   | (432,000   | )
|Accrued liabilities                                                            |  |      | 105,000    |      |   | (1,878,000 | )
|Deferred revenue                                                               |  |      | (501,000   | )    |   | 407,000    |  
|Net cash used in operating activities                                          |  |      | (516,000   | )    |   | (106,000   | )
|                                                                               |  |      |            |      |   |            |  
|Investing
 Activities:                                                         |  |      |            |      |   |            |  
|Purchases of property and equipment                                            |  |      | (368,000   | )    |   | (68,000    | )
|Purchases of investments                                                       |  |      | (3,800,000 | )    |   | (3,300,000 | )
|Proceeds from sale of investments                                              |  |      | 5,700,000  |      |   | 1,100,000  |  
|Net cash provided by (used in) investing activities                            |  |      | 1,532,000  |      |   | (2,268,000 | )
|                                                                               |  |      |            |      |   |            |  
|Financing
 Activities:                                                         |  |      |            |      |   |            |  
|Payment of long-term liabilities                                               |  |      |           |      |   | (23,000    | )
|Proceeds from issuance of common stock, net                                    |  |      | 713,000    |      |   | 46,000     |  
|Repurchase of common stock, net                                                |  |      | (469,000   | )    |   |           |  
|Net cash provided by financing activities                                      |  |      | 244,000    |      |   | 23,000     |  
|Increase (decrease) in cash
 and cash equivalents                              |  |      | 1,260,000  |      |   | (2,351,000 | )
|Cash and cash equivalents
 at beginning of period                              |  |      | 8,797,000  |      |   | 11,052,000 |  
|Cash and cash equivalents
 at end of period                                    |  | $    | 10,057,000 |      | $ | 8,701,000  |  
|                                                                               |  |      |            |      |   |            |  
|                                                                               |  |      |            |      |   |            |  
|Supplemental disclosures
 for cash flow information:                           |  |      |            |      |   |            |  
|Cash paid during periods for interest                                          |  | $    |           |      | $ |           |  
|Cash paid during periods for income taxes                                      |  |      | 62,000     |      |   | 16,000     |  
|                                                                               |  |      |            |      |   |            |  
|Non-cash financing
 activities:                                                |  |      |            |      |   |            |  
|Cashless exercise of options and warrants                                      |  | $    | 3,363,000  |      | $ |           |  
|                                                                               |  |      |            |      |   |            |  
|See
 accompanying notes to financial statements.                               |  |      |            |      |   |            |  

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Table of Contents

Insignia Systems, Inc.NOTESTOFINANCIALSTATEMENTS(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 both directly and through the Companys
 strategic partner (Valassis Sales and Marketing Services, Inc.). 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, 2010, its results of operations for
 the three and nine months ended September 30, 2010 and 2009, and its cash
 flows for the nine months ended September 30, 2010 and 2009. 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, 2009.                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The Summary of Significant
 Accounting Policies in the Companys 2009 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:                                                                                                                                                                                                                                                                                                                                                    

|                |  |                     |         |                    |   |         | 
|--------------- |  | ------------------- | ------- | ------------------ | - | ------- | 
|                |  | September 30,
 2010 |         | December 31,
 2009 |  
|Raw materials   |  | $                   | 128,000 |                    | $ | 57,000  | 
|Work-in-process |  |                     | 58,000  |                    |   | 52,000  | 
|Finished goods  |  |                     | 343,000 |                    |   | 280,000 | 
|                |  | $                   | 529,000 |                    | $ | 389,000 | 

7

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Table of Contents

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

|                                             |  |                     |            |                    |   |            |  
|-------------------------------------------- |  | ------------------- | ---------- | ------------------ | - | ---------- | -
|                                             |  | September 30,
 2010 |            | December 31,
 2009 |  
|Production tooling,
 machinery and equipment |  | $                   | 2,343,000  |                    | $ | 2,226,000  |  
|Office furniture and
 fixtures               |  |                     | 258,000    |                    |   | 255,000    |  
|Computer equipment and
 software             |  |                     | 927,000    |                    |   | 758,000    |  
|Web site                                     |  |                     | 38,000     |                    |   | 38,000     |  
|Leasehold improvements                       |  |                     | 351,000    |                    |   | 322,000    |  
|                                             |  |                     | 3,917,000  |                    |   | 3,599,000  |  
|Accumulated depreciation
 and amortization   |  |                     | (2,871,000 | )                  |   | (2,672,000 | )
|Net Property and Equipment                   |  | $                   | 1,046,000  |                    | $ | 927,000    |  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stock-Based Compensation. The Company measures and recognizes
compensation expense for all stock-based payments at fair value using the
Black-Scholes option pricing model to determine the weighted average fair value
of options and employee stock purchase plan rights. The Company recognizes
stock compensation expense on a straight-line method over the requisite service
period of the award.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | There were 334,500 stock
option awards granted during the nine months ended September 30, 2010, and the
Company estimated the fair value of these awards using the following weighted
average assumptions: expected life of 3.5 years, expected volatility of 55%,
dividend yield of 0% and risk-free interest rate of 1.28%. The Company
estimated the fair value of stock-based rights granted during the nine months
ended September 30, 2010, under the employee stock purchase plan using the
following weighted average assumptions: expected life of 1 year, expected volatility
of 55%, dividend yield of 0% and risk-free interest rate of 0.45%. Total
stock-based compensation expense recorded for the nine months ended September
30, 2010 and 2009, was $557,000 and $419,000, 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 656,000 and
2,082,000 shares of common stock with weighted average exercise prices of $7.11
and $4.64 were outstanding at September 30, 2010 and 2009 and were not included
in the computation of common stock equivalents for the three months ended
September 30, 2010 and 2009 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 525,000 and 2,316,000 shares of
common stock with weighted average exercise prices of $7.55 and $4.31 were
outstanding at September 30, 2010 and 2009 and were not included in the
computation of common stock equivalents for the nine months ended September 30,
2010 and 2009 because their exercise prices were higher than the average fair
market value of the common shares during the reporting period.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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Table of Contents

| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Weighted average common
shares outstanding for the three and nine months ended September 30, 2010 and
2009 were as follows:

|                                                                                 |  |                                   |            |                                  |  |            |  |      |            |  |  |            | 
|-------------------------------------------------------------------------------- |  | --------------------------------- | ---------- | -------------------------------- |  | ---------- |  | ---- | ---------- |  |  | ---------- | 
|                                                                                 |  | Three Months Ended 
 September 30 |            | Nine Months Ended 
 September 30 | 
|                                                                                 |  | 2010                              |            | 2009                             |  | 2010       |  | 2009 |           
|Denominator for basic net income per share  weighted average shares             |  |                                   | 15,642,000 |                                  |  | 15,134,000 |  |      | 15,503,000 |  |  | 15,130,000 | 
|                                                                                 |  |                                   |            |                                  |  |            |  |      |            |  |  |            | 
|Effect of dilutive securities:                                                   |  |                                   |            |                                  |  |            |  |      |            |  |  |            | 
|Stock options and warrants                                                       |  |                                   | 1,335,000  |                                  |  | 838,000    |  |      | 1,366,000  |  |  | 536,000    | 
|Denominator for diluted net income per share  adjusted weighted
 average shares |  |                                   | 16,977,000 |                                  |  | 15,972,000 |  |      | 16,869,000 |  |  | 15,666,000 | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | Commitments and Contingencies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Legal.On
 September 23, 2004, the Company brought suit against News America Marketing
 In-Store, Inc. (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 September 20, 2006, the State of Minnesota through
 its Attorney General intervened as a co-plaintiff in the business
 disparagement portion of the case. In December 2006, News America filed
 counterclaims in the case that included claims of alleged interference with
 contracts and alleged libel and slander against Insignia and one of its
 officers. 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. The
 Company received a revised scheduling order on October 22, 2010, which sets
 January 3, 2011, as the starting date for the trial.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | 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.
 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 finished.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | During the
 nine months ended September 30, 2010, the Company incurred legal fees of
 $1,188,000 related to the News America litigation. 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 2010 and into 2011 as trial preparation continues
 and the trial is conducted. A negative outcome of this litigation could
 affect long-term competitive aspects of the Companys business. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | Income Taxes. The Company carried a full
 valuation allowance against its net deferred tax asset at both September 30,
 2010 and 2009. The Company did not record income tax expense for the nine
 months ended September 30, 2010, due to the lack of taxable income for the
 period and the presence of a full valuation allowance against the deferred
 tax asset. The Company recorded income tax expense of $62,000 for the nine
 months ended September 30, 2009, related to alternative minimum tax
 liability. The valuation allowance has been established due to uncertainties
 regarding the realization of deferred tax assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4. | Concentrations.During the nine months ended
 September 30, 2010, Nestle Co., Valassis Sales and Marketing Services, Inc.,
 and General Mills, Inc. accounted for 19%, 19% and 15%, respectively, of the
 Companys total net sales. At September 30, 2010, these customers represented
 34%, 10% and 8%, respectively, of the Companys total accounts receivable.
 During the nine months ended September 30, 2009, Valassis Sales and Marketing
 Services, Inc., General Mills, Inc., Nestle Co. and Kellogg Sales Company
 accounted for 21%, 19%, 14% and 10%, respectively, of the Companys total net
 sales. At September 30, 2009, these customers represented 13%, 12%, 12% and
 20%, respectively, of the Companys total accounts receivable.                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | 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. | New Accounting Pronouncements.In December
 2009, the Financial Accounting Standards Board (FASB) issued Accounting
 Standards Update (ASU) No. 2010-06, Fair
 Value Measurements and Disclosures Topic 820 Improving Disclosures about
 Fair Value Measurements. This ASU requires some new disclosures
 and clarifies some existing disclosure requirements about fair value
 measurement as set forth in Codification Subtopic 820-10. The FASBs
 objective is to improve these disclosures and, thus, increase the
 transparency in financial reporting. Some of the new disclosures are
 effective for reporting periods beginning after December 15, 2009, with the
 remaining new disclosures effective for reporting periods beginning after
 December 15, 2010. The adoption of this ASU will not have a material impact
 on our financial statements.                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | In July
 2010, the FASB issued ASU No. 2010-20,Receivables Topic 310 Disclosures about the Credit Quality of Financing
 Receivables and the Allowance for Credit Losses, to enhance the
 disclosures required for financing receivables (for example, loans, trade
 accounts receivable, notes receivable, and receivables relating to a lessors
 leveraged, direct financing, and sales-type leases) and allowances for credit
 losses. The amended disclosures are designed to provide more information to
 financial statement users regarding the credit quality of a creditors
 financing receivables and the adequacy of its allowance for credit losses.
 The amended guidance is effective for period-end balances beginning with the
 first interim or annual reporting period ending on or after December 15,
 2010. The amended guidance is effective for activity during a reporting period
 beginning on or after December 15, 2010. The Company expects the amended
 guidance to impact its disclosures in future periods, but to otherwise not
 have a significant effect on its financial statements.

|         |                                                                                       
|-------- | --------------------------------------------------------------------------------------
|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 both directly and through
the Companys strategic partner (Valassis Sales and Marketing Services, Inc.).
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

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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 Ended 
 September 30 |       | Nine Months Ended 
 September 30 | 
|                              |  | 2010                              |       | 2009                             |  | 2010  |   | 2009 |      
|Net sales                     |  |                                   | 100.0 | %                                |  | 100.0 | % |      | 100.0 | % |  | 100.0 | %
|Cost of
 sales                |  |                                   | 47.5  |                                  |  | 48.0  |   |      | 48.3  |   |  | 47.8  |  
|Gross profit                  |  |                                   | 52.5  |                                  |  | 52.0  |   |      | 51.7  |   |  | 52.2  |  
|Operating
 expenses:          |  |                                   |       |                                  |  |       |   |      |       |   |  |       |  
|Selling                       |  |                                   | 23.1  |                                  |  | 22.4  |   |      | 23.7  |   |  | 24.1  |  
|Marketing                     |  |                                   | 5.0   |                                  |  | 4.9   |   |      | 5.4   |   |  | 5.7   |  
|General and administrative    |  |                                   | 13.5  |                                  |  | 12.2  |   |      | 17.6  |   |  | 17.3  |  
|Insurance settlement proceeds |  |                                   |      |                                  |  |      |   |      |      |   |  | (7.0  | )
|Total
 operating expenses     |  |                                   | 41.6  |                                  |  | 39.5  |   |      | 46.7  |   |  | 40.1  |  
|Operating
 income             |  |                                   | 10.9  |                                  |  | 12.5  |   |      | 5.0   |   |  | 12.1  |  
|Other income                  |  |                                   |      |                                  |  | 0.2   |   |      | 0.1   |   |  | 0.3   |  
|Income
 before taxes          |  |                                   | 10.9  |                                  |  | 12.7  |   |      | 5.1   |   |  | 12.4  |  
|Income tax
 expense           |  |                                   |      |                                  |  | 0.3   |   |      |      |   |  | 0.3   |  
|Net income                    |  |                                   | 10.9  | %                                |  | 12.4  | % |      | 5.1   | % |  | 12.1  | %

Increased net
sales in the first nine months of 2010 compared to the first nine months of
2009 resulted in increased gross profit in the 2010 period. This increase in
gross profit in the 2010 period was more than offset by increased operating
expense in the 2010 period, resulting in lower net income in the 2010 period
compared to the 2009 period.

The primary
components of the increased operating expense in the 2010 period were:


| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the
 receipt of settlement proceeds in the 2009 period in the Companys lawsuit
 against one of its insurers for defense costs in the News America litigation,
| |  | increased
 sales commissions in the 2010 period (resulting from increased net sales), and                                                                     
| |  | increased
 wages, benefits and staffing in the 2010 period.                                                                                                   

Three and Nine Months ended September 30,
2010, Compared to Three and Nine Months Ended September 30, 2009

Net Sales.Net sales for the three months ended September 30, 2010, increased 7.2% to
$8,517,000 compared to $7,944,000 for the three months ended September 30,
2009. Net sales for the nine months ended September 30, 2010, increased 14.2%
to $22,726,000 compared to $19,903,000 for the nine months ended September 30,
2009.

Service
revenues from our POPSign programs for the three months ended September 30,
2010, increased 5.0% to $7,858,000 compared to $7,485,000 for the three months
ended September 30, 2009, primarily due to an increase in the average sign
price which was partially offset by a decrease in the number of programs
executed for customers. Service revenues from our POPSign programs for the nine
months ended September 30, 2010, increased 11.7% to $20,557,000 compared to
$18,401,000 for the nine months ended September 30, 2009, primarily due to an
increase in the average sign price.

11

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Table of Contents

Product sales
for the three months ended September 30, 2010, increased 43.6% to $659,000
compared to $459,000 for the three months ended September 30, 2009. Product
sales for the nine months ended September 30, 2010, increased 44.4% to
$2,169,000 compared to $1,502,000 for the nine months ended September 30, 2009.
The increases in both periods were primarily due to higher sales of laser
printer supplies based on increased demand for these products from one of our
customers.

Gross Profit.Gross profit for the three months ended September 30, 2010, increased 8.3%
to $4,475,000 compared to $4,132,000 for the three months ended September 30,
2009. Gross profit for the nine months ended September 30, 2010, increased
13.2% to $11,750,000 compared to $10,380,000 for the nine months ended
September 30, 2009. Gross profit as a percentage of total net sales increased
to 52.5% for the three months ended September 30, 2010, compared to 52.0% for
the three months ended September 30, 2009. Gross profit as a percentage of
total net sales decreased to 51.7% for the nine months ended September 30,
2010, compared to 52.2% for the nine months ended September 30, 2009.

Gross profit
from our POPSign program revenues for the three months ended September 30,
2010, increased 6.5% to $4,258,000 compared to $3,999,000 for the three months
ended September 30, 2009. Gross profit from our POPSign program revenues for
the nine months ended September 30, 2010, increased 11.4% to $11,039,000
compared to $9,910,000 for the nine months ended September 30, 2009. The
increases in both 2010 periods were primarily due to increased sales which were
partially offset by increased retailer expenses. Gross profit as a percentage of
POPSign program revenues for the three months ended September 30, 2010,
increased to 54.2% compared to 53.4% for the three months ended September 30,
2009. The increase in the 2010 period was primarily due to increased sales
partially offset by increased retailer expense. Gross profit as a percentage of
POPSign program revenues for the nine months ended September 30, 2010,
decreased to 53.7%, compared to 53.9% for the nine months ended September 30,
2009. The decrease in gross profit as a percentage of POPSign program revenues
in the 2010 period was primarily due to the effect of increased retailer
expenses.

Gross profit
from our product sales for the three months ended September 30, 2010, increased
63.2% to $217,000 compared to $133,000 for the three months ended September 30,
2009. Gross profit from our product sales for the nine months ended September
30, 2010, increased 51.3% to $711,000 compared to $470,000 for the nine months
ended September 30, 2009. The increases in gross profit in both 2010 periods were
primarily due to increased sales combined with fixed costs. Gross profit as a
percentage of product sales increased to 32.9% for the three months ended
September 30, 2010, compared to 29.0% for the three months ended September 30,
2009. Gross profit as a percentage of product sales increased to 32.8% for the
nine months ended September 30, 2010, compared to 31.3% for the nine months
ended September 30, 2009. The increases in gross profit as a percentage of
products sales in the 2010 periods were primarily due to increased sales and
the effect of fixed costs.

Operating Expenses

Selling.Selling expenses for the three months ended September 30, 2010, increased
10.8% to $1,968,000 compared to $1,776,000 for the three months ended September
30, 2009. Selling expenses for the nine months ended September 30, 2010,
increased 12.2% to $5,379,000 compared to $4,794,000 for the nine months ended
September 30, 2009. Increases in the 2010 periods were primarily due to
increased sales commissions and increased POPS staffing levels. The increased
sales commissions were due to increased net sales of POPSign programs.

12

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Table of Contents

Selling
expenses as a percentage of total net sales increased to 23.1% for the three
months ended September 30, 2010, compared to 22.4% for the three months ended
September 30, 2009. Selling expenses as a percentage of total net sales
decreased to 23.7% for the nine months ended September 30, 2010, compared to
24.1% for the nine months ended September 30, 2009. The changes in the selling
expenses as a percentage of total net sales in the 2010 periods were due to the
effect of the increased costs discussed above in combination with the effect of
increased sales.

Marketing.Marketing expenses for the three months ended September 30, 2010, increased
9.7% to $429,000 compared to $391,000 for the three months ended September 30,
2009. Marketing expenses for the nine months ended September 30, 2010,
increased 9.8% to $1,235,000 compared to $1,125,000 for the nine months ended
September 30, 2009. Increased expenses in the 2010 periods were primarily the
result of increased data acquisition expenses and increased staffing related
expenses.

Marketing
expenses as a percentage of total net sales increased to 5.0% for the three
months ended September 30, 2010, compared to 4.9% for the three months ended
September 30, 2009. The increase in marketing expense as a percentage of total
net sales for the three months ended September 30, 2010, was the result of the
increased expenses discussed above in relation to increased sales. Marketing
expenses as a percentage of total net sales decreased to 5.4% for the nine
months ended September 30, 2010, compared to 5.7% for the nine months ended
September 30, 2009. The decrease in marketing expenses as a percentage of total
net sales for the nine months ending September 30, 2010, was the result of the
increased expenses discussed above in relation to increased sales.

General and
administrative.General and administrative
expenses for the three months ended September 30, 2010, increased 17.8% to
$1,146,000 compared to $973,000 for the three months ended September 30, 2009.
General and administrative expenses for the nine months ended September 30,
2010 increased 16.2% to $4,001,000 compared to $3,442,000 for the nine months
ended September 30, 2009. The increases in the 2010 periods were primarily due
to increased staffing levels and increased legal expense.

General and
administrative expenses as a percentage of total net sales increased to 13.5%
for the three months ended September 30, 2010, compared to 12.2% for the three
months ended September 30, 2009. General and administrative expenses as a
percentage of total net sales increased to 17.6% for the nine months ended
September 30, 2010, compared to 17.3% for the nine months ended September 30,
2009. The increases in the 2010 periods were primarily due to the increased
costs discussed above in relation to increased sales.

Legal fees for
the three months ended September 30, 2010, were $288,000 compared to $250,000
for the three months ended September 30, 2009. Legal fees for the nine months
ended September 30, 2010, were $1,377,000 compared to $1,309,000 for the nine
months ended September 30, 2009. 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. 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 2010, and into
2011 as trial preparation continues and the trial is conducted. A negative
outcome of this litigation could affect long-term competitive aspects of the
Companys business.

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

Other Income.Interest income was offset by interest expense resulting in the Company
reporting no other income for the three months ended September 30, 2010, as
compared to other income of $20,000 for the three months ended September 30,
2009. Other income for the nine months ended September 30, 2010, was $16,000
compared to $69,000 for the nine months ended September 30, 2009. Lower other
income in the 2010 periods was primarily due to decreased interest income in
the 2010 periods as a result of lower interest rates which more than offset the
higher cash, cash equivalent and short-term investment balances in the 2010
periods.

13

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Table of Contents

Income Taxes.The Company carried a full valuation allowance against its net deferred tax
asset at both September 30, 2010, and September 30, 2009. The Company did not
record income tax expense for the three and nine months ended September 30,
2010, due to the combination of the full valuation allowance and the lack of
taxable income for the period. The Company recorded income tax expense of $26,000
and $62,000, respectively, for the three and nine months ended September 30,
2009, related to alternative minimum tax liability. The valuation allowance has
been established due to uncertainties regarding the realization of deferred tax
assets. The Company updates its deferred tax asset and valuation allowance
analysis quarterly to confirm the appropriateness of its valuation allowance.

Net Income.
Net income for the three months ended September 30, 2010, was $932,000 compared
to $986,000 for the three months ended September 30, 2009. Net income for the
nine months ended September 30, 2010, was $1,151,000 compared to $2,413,000 for
the nine months ended September 30, 2009.

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, 2010, working capital
was $12,345,000 compared to $10,716,000 at December 31, 2009. During the first
nine months of 2010, cash, cash equivalents and short-term investments
decreased by $640,000 to $12,557,000 at September 30, 2010, as compared to
$13,197,000 at December 31, 2009. The decrease in cash, cash equivalents and
short-term investments was primarily the result of timing of accounts
receivable collections.

Net cash used
in operating activities during the nine months ended September 30, 2010, was
$516,000. Net income of $1,151,000 plus non-cash expense of $806,000 totaling
$1,957,000 for the nine months ended September 30, 2010, were more than offset
by changes in operating assets and liabilities of $2,473,000. The non-cash
expense of $806,000 consisted of stock-based compensation expense and
depreciation expense. Accounts payable and accrued liabilities increased
$883,000 during the nine months ended September 30, 2010, primarily as a result
of amounts due to our strategic partner. Accounts receivable increased
$2,541,000 during the nine months ended September 30, 2010. This increase was
primarily due to the timing of accounts receivable collections, and higher
POPSign billings in the last month of the third quarter of 2010 as compared to
the last month of the fourth quarter of 2009. Deferred revenue decreased
$501,000 during the nine months ended September 30, 2010, primarily due to the
advanced billing to a customer in June 2009 for an eleven month POPSign program
in addition to other advanced billings. The Company expects accounts
receivable, accounts payable, accrued liabilities and deferred revenue to
fluctuate during 2010 depending on the level of quarterly POPSign revenues and
related business activity as well as billing arrangements with customers.

Net cash of
$1,532,000 was provided by investing activities during the nine months ended
September 30, 2010, due to short-term investment activity which was partially
offset by the purchase of property and equipment. Purchases of short-term
investments of $3,800,000 and proceeds of $5,700,000 during the nine months
consisted entirely of purchases and redemptions of twenty-six week certificates
of deposit. Purchases of property and equipment totaled $368,000 during the
nine months ended September 30, 2010.

Net cash of
$244,000 was provided by financing activities during the nine months ended
September 30, 2010. Net proceeds of $713,000 resulting from the issuance of
common stock from the employee stock purchase plan and the employee stock
option plan were partially offset by the repurchase of common stock of $469,000
pursuant to a plan adopted on February 23, 2010. The stock repurchase plan
allows for the repurchase of up to $2,000,000 of the Companys common stock on
or before January 31, 2011.

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The Company
believes that based upon current business conditions, its existing cash balance
and future cash from operations will be sufficient for its cash requirements 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, 2009, included in our Form
10-K filed with the Securities and Exchange Commission on March 31, 2010. We
believe our most critical accounting policies and estimates include the
following:

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

Cautionary Statement Regarding
Forward-Looking Information

Statements
made in this quarterly report on Form 10-Q, in the Companys other SEC filings,
in press releases and in oral statements to shareholders and securities
analysts, which are not statements of historical or current facts, are
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results or performance of the Company to be materially different from the
results or performance expressed or implied by such forward-looking statements.
The words believes, expects, anticipates, seeks and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made. These statements are subject to the risks and
uncertainties that could cause actual results to differ materially and
adversely from the forward-looking statements. These risks and uncertainties
include, but are not limited to, the risks presented in our Annual Report on
Form 10-K for the year ended December 31, 2009, 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 as of the end of the period
covered by this report. Disclosure controls and procedures ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and are designed to ensure that information required to be disclosed by
us in these reports is accumulated and communicated to the Companys
management, including its Chief Executive Office and Chief Financial Officer,
as appropriate to allow timely decisions regarding disclosures.

15

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Table of Contents

(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

On September
23, 2004, the Company brought suit against News America Marketing In-Store,
Inc. (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 September 20, 2006, the State of Minnesota through its Attorney
General intervened as a co-plaintiff in the business disparagement portion of
the case. In December 2006, News America filed counterclaims in the case that
included claims of alleged interference with contracts and alleged libel and
slander against Insignia and one of its officers. 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. The Company received a revised
scheduling order on October 22, 2010, which sets January 3, 2011, as the
starting date for the trial.

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. 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 finished.

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Table of Contents

During the
nine months ended September 30, 2010, the Company incurred legal fees of
$1,188,000 related to the News America litigation. 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 2010 and into 2011 as trial preparation continues and the trial is
conducted. A negative outcome of this litigation could affect long-term
competitive aspects of the Companys business. 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 our report on Form
10-K for the year ended December 31, 2009:

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

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

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

Our current
contract with The Kroger Co. will expire on December 31, 2010, which could have
a material adverse effect on our business.

17

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Table of Contents

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

On February
23, 2010, the Board of Directors authorized the repurchase of up to $2,000,000
of the Companys common stock on or before January 31, 2011. 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, 2010 was:

|                      |  |                                      |   |                                |   |                                                                                        |  |                                                                                                |   |  |   |           | 
|--------------------- |  | ------------------------------------ | - | ------------------------------ | - | -------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- | - |  | - | --------- | 
|                      |  | Total Number
 Of Shares
 Repurchased |   | Average
 Price Paid
 Per Share |   | Total Number Of 
 Shares Purchased As
 Part Of Publicly
 Announced Plans 
 Or Programs |  | Approximate Dollar 
 Value of Shares That
 May Yet Be Purchased
 Under The Plans 
 Or Programs |  
|                      |  |                                      |   |                                |   |                                                                                        |  |                                                                                                |   |  |   |           | 
|July 1-31,
 2010      |  |                                      |  |                                | $ |                                                                                       |  |                                                                                                |  |  | $ | 1,535,000 | 
|August 1-31,
 2010    |  |                                      |  |                                | $ |                                                                                       |  |                                                                                                |  |  | $ | 1,535,000 | 
|September
 1-30, 2010 |  |                                      |  |                                | $ |                                                                                       |  |                                                                                                |  |  | $ | 1,535,000 | 

|        |                                
|------- | -------------------------------
|Item 3. | Defaults Upon Senior Securities
|        |                                
|None.   |                                
|        |                                
|Item 4. | Removed and Reserved           
|        |                                
|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                  

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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:
 November 5, 2010 | 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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