10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended June 30, 2006

or

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

for the transition period from ___________________ to _________________

Commission File Number: 1-13471

INSIGNIA SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

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

6470 Sycamore Court North

Maple Grove, MN 55369

(Address of principal executive offices)

(763) 392-6200

(Registrant’s telephone number, including area code)

Not applicable.

(Former name, former address and former fiscal year if changed since last report)

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

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

Large accelerated filer  o   Accelerated filer  o   Non-accelerated filer  x

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

Number of shares outstanding of Common Stock, $.01 par value, as of July 31, 2006, was 15,100,646.

Insignia Systems, Inc.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Balance Sheets – June 30, 2006 and December 31, 2005 (unaudited)
	Statements of Operations – Three and six months ended June 30, 2006 and 2005 (unaudited)
	Statements of Cash Flows – Six months ended June 30, 2006 and 2005 (unaudited)
	Notes to Financial Statements – June 30, 2006 (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Insignia Systems, Inc.

BALANCE SHEETS

(Unaudited)

	June 30, 2006			December 31, 2005
ASSETS
Current Assets:
Cash and cash equivalents	$	3,091,000		$	2,711,000
Accounts receivable, net		2,987,000			2,294,000
Inventories		481,000			448,000
Prepaid expenses and other		859,000			811,000
Total Current Assets		7,418,000			6,264,000
Property and Equipment:
Production tooling, machinery and equipment		1,765,000			1,657,000
Office furniture and fixtures		191,000			191,000
Computer equipment and software		575,000			564,000
Leasehold improvements		330,000			327,000
		2,861,000			2,739,000
Accumulated depreciation and amortization		(2,425,000	)		(2,330,000	)
Net Property and Equipment		436,000			409,000
Total Assets	$	7,854,000		$	6,673,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Line of credit	$	166,000		$	132,000
Current maturities of long-term liabilities		229,000			201,000
Accounts payable		1,340,000			1,770,000
Accrued liabilities
Compensation		495,000			496,000
Employee stock purchase plan		49,000			35,000
Legal		70,000			92,000
Retailer guarantees		—			271,000
Other		111,000			63,000
Deferred revenue		739,000			612,000
Total Current Liabilities		3,199,000			3,672,000
Long-Term Liabilities, less current maturities		811,000			929,000
Shareholders’ Equity:
Common stock, par value $.01;
Authorized shares — 40,000,000 at June 30, 2006
and 20,000,000 at December 31, 2005
Issued and outstanding shares — 15,059,000 at June 30, 2006
and 15,002,000 at December 31, 2005		151,000			150,000
Additional paid-in capital		29,348,000			29,165,000
Accumulated deficit		(25,655,000	)		(27,243,000	)
Total Shareholders’ Equity		3,844,000			2,072,000
Total Liabilities and Shareholders’ Equity	$	7,854,000		$	6,673,000

See accompanying notes to financial statements.

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Insignia Systems, Inc.

STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30						Six Months Ended June 30
	2006			2005			2006			2005
Services revenues	$	5,122,000		$	4,641,000		$	9,842,000		$	8,778,000
Products sold		731,000			755,000			1,433,000			1,590,000
Total Net Sales		5,853,000			5,396,000			11,275,000			10,368,000
Cost of services		2,205,000			2,869,000			4,247,000			5,686,000
Cost of goods sold		416,000			419,000			822,000			842,000
Total Cost of Sales		2,621,000			3,288,000			5,069,000			6,528,000
Gross Profit		3,232,000			2,108,000			6,206,000			3,840,000
Operating Expenses:
Selling		1,224,000			1,438,000			2,441,000			2,878,000
Marketing		241,000			332,000			489,000			665,000
General and administrative		902,000			851,000			1,751,000			1,876,000
Total Operating Expenses		2,367,000			2,621,000			4,681,000			5,419,000
Operating Income (Loss)		865,000			(513,000	)		1,525,000			(1,579,000	)
Other Income (Expense):
Interest income		23,000			16,000			44,000			37,000
Interest expense		(39,000	)		(12,000	)		(81,000	)		(24,000	)
Other income		100,000			1,000			100,000			1,000
Total Other Income (Expense)		84,000			5,000			63,000			14,000
Net Income (Loss)	$	949,000		$	(508,000	)	$	1,588,000		$	(1,565,000	)
Net income (loss) per share:
Basic	$	0.06		$	(0.03	)	$	0.10		$	(0.10	)
Diluted	$	0.06		$	(0.03	)	$	0.10		$	(0.10	)
Shares used in calculation of net income (loss) per share:
Basic		15,059,000			15,002,000			15,059,000			15,002,000
Diluted		15,203,000			15,002,000			15,167,000			15,002,000

See accompanying notes to financial statements.

4

Insignia Systems, Inc.

STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months ended June 30	2006			2005
Operating Activities:
Net income (loss)	$	1,588,000		$	(1,565,000	)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization		100,000			124,000
Stock-based compensation		151,000			—
Changes in operating assets and liabilities:
Accounts receivable		(693,000	)		(902,000	)
Inventories		(33,000	)		(3,000	)
Prepaid expenses and other		(48,000	)		(383,000	)
Accounts payable		(430,000	)		(137,000	)
Accrued liabilities		(232,000	)		(545,000	)
Deferred revenue		127,000			50,000
Net cash provided by (used in) operating activities		530,000			(3,361,000	)
Investing Activities:
Purchases of property and equipment		(127,000	)		(81,000	)
Net cash used in investing activities		(127,000	)		(81,000	)
Financing Activities:
Net change in line of credit		34,000			4,000
Payment of long-term liabilities		(90,000	)		—
Proceeds from issuance of common stock, net		33,000			52,000
Net cash provided by (used in) financing activities		(23,000	)		56,000
Increase (decrease) in cash and cash equivalents		380,000			(3,386,000	)
Cash and cash equivalents at beginning of period		2,711,000			6,156,000
Cash and cash equivalents at end of period	$	3,091,000		$	2,770,000
Supplemental disclosures for cash flow information:    Cash paid during periods for interest	$	51,000		$	16,000

See accompanying notes to financial statements.

5

Insignia Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies.

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

Basis of Presentation. Financial statements for the interim periods included herein are unaudited; however, they contain all adjustments, including normal recurring accruals, which in the opinion of management, are necessary to present fairly the financial position of the Company at June 30, 2006, and its results of operations and cash flows for the three and six months ended June 30, 2006 and 2005. 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, 2005.

The Summary of Significant Accounting Policies in the Company’s 2005 Annual Report on Form

10-K describes the Company’s accounting policies.

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

	June 30, 2006		December 31, 2005
Raw materials	$	178,000	$	164,000
Work-in-process		25,000		14,000
Finished goods		278,000		270,000
	$	481,000	$	448,000

Stock-Based Compensation. The Company has various types of stock-based compensation plans. These plans are administered by the Compensation Committee of the Board of Directors, which selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award. Readers should refer to Notes 1 and 6 of the Company’s Financial Statements on Form 10-K for the year ended December 31, 2005, for additional information related to these stock-based compensation plans.

Effective January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is being applied on the modified prospective basis. Prior to the adoption of SFAS 123R, the Company accounted for its stock-based compensation plans under the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and accordingly, recognized no compensation expense related to the stock-based plans where the exercise price of options granted equaled the market value of the underlying common stock on the date of grant.

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Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized beginning in the first quarter of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested on January 1, 2006, and compensation cost for all share based payments granted subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Prior periods were not restated to reflect the impact of adopting the new standard.

As a result of adopting SFAS 123R on January 1, 2006, the net income for the three months and six months ended June 30, 2006 were $64,000 and $151,000 lower, and net income per share for the three months and six months ended June 30, 2006 were unchanged, than if the Company had continued to account for stock-based compensation under APB Opinion No. 25. No deferred tax benefits were recognized for these costs due to a valuation allowance which has been established due to uncertainties regarding the realization of deferred tax assets based on the Company’s lack of historical earrnings.

The below table summarizes the stock-based compensation expense which was recognized in the Statements of Operations for the three months and six months ended June 30, 2006:

	Three Months Ended June 30, 2006		Six Months Ended June 30, 2006
Cost of sales	$	14,000	$	28,000
Selling		16,000		47,000
Marketing		8,000		15,000
General and administrative		26,000		61,000
	$	64,000	$	151,000

The following table illustrates the effect on net loss and net loss per share had the Company accounted for stock-based compensation in accordance with SFAS 123R for the three months and six months ended June 30, 2005:

	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net loss, as reported	$	(508,000	)	$	(1,565,000	)
Deduct:   Total stock-based employee compensation
expense determined under fair value
based methods for all awards		145,000			314,000
Pro forma net loss	$	(653,000	)	$	(1,879,000	)
Basic and diluted net loss per share:
As reported	$	(0.03	)	$	(0.10	)
Pro forma	$	(0.05	)	$	(0.13	)

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

Six Months Ended June 30	2006			2005
Stock Options:
Expected life (years)		2.90			3.00
Expected volatility		62	%		70	%
Dividend yield		0	%		0	%
Risk-free interest rate		4.96	%		3.67	%

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The expected terms of the options and employee stock purchase plan rights are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the US Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility is based on historical and expected future volatility of the Company’s stock. The Company has not historically issued any dividends and does not expect to in the future.

Stock option activity is summarized as follows:

	Plan Options Oustanding			Exercise Price Range		Weighted Average Exercise Price Per Share
Balance at December 31, 2005		1,859,329		$	0.58 – $ 11.36	$	4.22
Granted		583,100		$	0.84 – $ 1.30	$	1.14
Exercised		—			—		—
Cancellations		(313,600	)	$	0.96 – $ 8.25	$	3.45
Balance at June 30, 2006		2,128,829		$	0.58 – $ 11.36	$	3.49

The following table summarizes information about the stock options outstanding at June 30, 2006:

		Options Outstanding						Options Exercisable
Ranges of Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price Per Share		Number Exercisable at June 30, 2006		Weighted Average Exercise Price Per share
$	0.58 -  $ 0.96		495,800		8.09 years	$	0.88		193,528	$	0.91
	0.97 -     1.31		725,800		9.19 years		1.24		220,065		1.30
	1.32 -     4.00		158,031		3.80 years		2.01		158,031		2.01
	4.01 -     4.97		82,499		3.82 years		4.31		82,499		4.31
	4.98 -     7.87		360,499		5.44 years		7.12		360,499		7.12
	8.00 -   11.36		306,200		5.91 years		9.31		306,200		9.31
$	0.58 - $11.36		2,128,829		7.22 years	$	3.49		1,320,822	$	4.96

Options outstanding under the Option Plans expire at various dates during the period September 2006 through June 2016.

As of June 30, 2006, there was $296,000 of total unrecognized compensation costs related to the outstanding stock options which is expected to be recognized over a weighted average period of 1.65 years.

At June 30, 2006, a total of 232,800 shares were available for grant under the stock option plans.

Net Income (Loss) Per Share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding and excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share gives effect to all diluted potential common shares outstanding during the period. Options and warrants to purchase approximately 1,962,000 and 1,748,000 shares of common stock with weighted average exercise prices of $3.98 and $4.91 were outstanding at June 30, 2006 and 2005 and were not included in the computation of common stock equivalents for the three months ended June 30, 2006 and 2005 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 1,953,000 and 1,391,000 shares of common stock with weighted average exercise prices of $4.12 and $5.84 were outstanding at June 30, 2006 and 2005 and were not included in the computation of common stock equivalents for the six months ended June 30, 2006 and 2005 because their exercise prices were higher than the average fair market value of the common shares during the reporting period. For the three months and six months ended June 30, 2005, the effect of options and warrants was anti-dilutive due to the net loss incurred during the period. Had net income been achieved, approximately 211,000 and 413,000 of common stock equivalents would have been included in the computation of diluted net income per share.

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Weighted average common shares outstanding for the three and six months ended June 30, 2006 and 2005 were as follows:

	Three Months Ended June 30				Six Months Ended June 30
	2006		2005		2006		2005
Denominator for basic net income (loss)
per share – weighted average shares		15,059,000		15,002,000		15,059,000		15,002,000
Effect of dilutive securities:
Stock options and warrants		144,000		—		108,000		—
Denominator for diluted net income (loss) per
share – adjusted weighted average shares		15,203,000		15,002,000		15,167,000		15,002,000

2. Line of Credit. On September 16, 2004, the Company entered into a Financing Agreement, Security Agreement and Revolving Note (collectively, “the Credit Agreement”) with Marquette Business Credit, Inc. that initially provided for borrowings up to $1,500,000 for twelve months, subject to collateral availability. The borrowings are secured by all of the Company’s assets. The Credit Agreement provides that borrowings will bear interest at 2.5% over prime, with a minimum monthly interest charge of $2,500, and an annual fee of 1% of the Revolving Note payable. The Credit Agreement includes various other customary terms and conditions. On November 22, 2004 the Company entered into an amendment to the Credit Agreement to extend the term to April 30, 2006, and on May 8, 2006 the Company entered into a second amendment to the Credit Agreement to extend the term to April 30, 2007. Borrowings of $166,000 were outstanding with an effective rate of 10.75% as of June 30, 2006.

3. Commitments and Contingencies.

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

In October 2003, News America brought suit against the Company in U.S. District Court in New York, New York, alleging that the Company has engaged in deceptive acts and practices, has interfered with existing business relationships with retailers and prospective economic advantage, and has engaged in unfair competition. The suit seeks unspecified damages and injunctive relief. The Company filed a motion to dismiss in February 2004. In June 2004 News America amended the suit against the Company and the Company filed an amended motion to dismiss in August 2004. The Company is awaiting decision by the Court. Discovery has been stayed in this action. If the Company is required to pay a significant amount in settlement or damages, it will have a material adverse effect on its operations and financial condition. In addition, a negative outcome of this litigation could affect long-term competitive aspects of the Company’s business. Management believes the allegations are without merit and that the Company will prevail.

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On September 23, 2004, the Company brought suit against News America, and Albertson’s Inc. in Federal District Court in Minneapolis, Minnesota, for violations of federal and state antitrust and false advertising laws, alleging that News America has acquired and maintained monopoly power through various wrongful acts designed to harm the Company in the in-store advertising and promotion products and services market. The suit seeks injunctive relief sufficient to prevent further antitrust injury and an award of treble damages to be determined at trial for the harm caused to the Company. In August 2005 the Court dismissed the suit, but permitted the Company to file an amended complaint with more specific allegations regarding the illegal actions taken by the defendants. The Company filed the amended complaint on September 23, 2005 and News America and Albertson’s Inc. refiled their motions to dismiss. The motions were heard on February 17, 2006 and on June 30, 2006 the Court denied the motions of News America and Albertson’s to dismiss the suit.

Management currently expects the amount of legal fees that will be incurred in connection with the ongoing lawsuits to be significant throughout 2006. During the six months ended June 30, 2006, the Company incurred legal fees of $423,000 related to the News America litigation.

In September 2005, the Company brought a suit against Paul A. Richards and his company in Federal District Court in Minneapolis, Minnesota, alleging fraud and misrepresentation related to the 2002 VALUStix acquisition and asking that the acquisition be rescinded and all parties restored to their pre-acquisition status. The Company wrote off all of the goodwill associated with the acquisition in the fourth quarter of 2003 and the second quarter of 2004. The suit was settled in June 2006 with terms including mutual releases and payment of $100,000 to the Company in exchange for certain assets.

The Company is subject to various 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.

Retailer Agreements. The Company has contracts in the normal course of business with various retailers, some of which provide for minimum annual program levels. If those minimum levels are not met, the Company is obligated to pay the contractual difference to the retailers. The Company calculates these estimated minimum payments based on actual activity to date. Due to the annual nature of these contracts, increased activity with these retailers in subsequent fiscal quarters could decrease the estimated payment amounts recorded in the current period. During the six months ended June 30, 2005 the Company incurred approximately $1,170,000 of costs related to these minimums. There was no expense in 2006 related to these minimums as the Company had met the minimum requirements. The amounts were recorded in Cost of Services in the Statements of Operations.

4. Concentrations. During the six months ended June 30, 2006 two customers accounted for 24% and 10% of the Company’s total net sales. At June 30, 2006 these customers each represented 14% of the Company’s total accounts receivable. During the six months ended June 30, 2005 these two customers accounted for 16% and 14% of the Company’s total net sales and one other customer accounted for 11% of the Company’s total net sales.

Although there are a number of customers that the Company sells to, the loss of a major customer could cause a delay in and possible loss of sales, which would adversely affect operating results.

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5. Income Taxes. At December 31, 2005 the Company had net operating loss carryforwards of approximately $24,000,000, which are available to offset future taxable income. These carryforwards are subject to the limitations of Internal Revenue Code Section 382 which provides limitations on the availability of net operating losses to offset current taxable income if an ownership change has occurred as defined by the Code. The Company has established a valuation allowance against all deferred tax assets due to the uncertainties regarding the realization of the deferred tax assets based upon the Company’s lack of historical earnings. Readers should refer to Note 7 of the Company’s Financial Statements on Form 10-K for the year ended December 31, 2005, for additional information related to income taxes.

The Company recorded no income tax expense for the quarter and six months ended June 30, 2006 as it believes it has sufficient net operating losses available to offset taxable net income and continues to provide a full valuation allowance against all deferred tax assets as of June 30, 2006.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

Results of Operations

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

	Three Months Ended June 30						Six Months Ended June 30
	2006			2005			2006			2005
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		44.8			60.9			45.0			63.0
Gross profit		55.2			39.1			55.0			37.0
Operating expenses:
Selling		20.9			26.6			21.7			27.8
Marketing		4.1			6.2			4.3			6.4
General and administrative		15.4			15.8			15.5			18.1
Total operating expenses		40.4			48.6			41.5			52.3
Operating income (loss)		14.8			(9.5	)		13.5			(15.3	)
Other income		1.4			0.1			0.6			0.2
Net income (loss)		16.2	%		(9.4	)%		14.1	%		(15.1	)%

The Company experienced an increase in net sales in the first and second quarters of 2006 compared to the first and second quarters of 2005 due primarily to change in the sales mix towards higher-priced custom POPSign programs during the quarters which offset declines in products sold. Additionally, the Company instituted a number of cost reduction measures in late 2005 and renewed several retailer agreements in 2006 which resulted in reduced retailer payments. All of these factors contributed to profitability during the six months ended June 30, 2006, as compared to losses in the previous year.

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, 2005, included in our Form 10-K filed with the Securities and Exchange Commission on March 30, 2006. We believe our most critical accounting policies and estimates include the following:

• revenue recognition;

• allowance for doubtful accounts;

• inventory valuation;

• accounting for deferred income taxes;

• valuation of long-lived and intangible assets;

• accounting for accrued retailer guarantees; and

• stock-based compensation.

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Three and Six Months ended June 30, 2006 Compared to Three and Six Months Ended June 30, 2005

Net Sales. Net sales for the three months ended June 30, 2006 increased 8.5% to $5,853,000 compared to $5,396,000 for the three months ended June 30, 2005. Net sales for the six months ended June 30, 2006 increased 8.7% to $11,275,000 compared to $10,368,000 for the six months ended June 30, 2005.

Service revenues from our POPSign programs for the three months ended June 30, 2006 increased 10.4% to $5,122,000 compared to $4,641,000 for the three months ended June 30, 2005. Service revenues from our POPSign programs for the six months ended June 30, 2006 increased 12.1% to $9,842,000 compared to $8,778,000 for the six months ended June 30, 2005. The increases were primarily due to a change in the sales mix towards higher-priced custom POPSign programs sold to customers (consumer packaged goods manufacturers) during the periods.

Product sales for the three months ended June 30, 2006 decreased 3.2% to $731,000 compared to $755,000 for the three months ended June 30, 2005. Product sales for the six months ended June 30, 2006 decreased 9.9% to $1,433,000 compared to $1,590,000 for the six months ended June 30, 2005. The decreases were primarily due to decreasing sales of our other product categories based on decreased demand for those products from our customers.

Gross Profit.Gross profit for the three months ended June 30, 2006 increased 53.3% to $3,232,000 compared to $2,108,000 for the three months ended June 30, 2005. Gross profit for the six months ended June 30, 2006 increased 61.6% to $6,206,000 compared to $3,840,000 for the six months ended June 30, 2005. Gross profit as a percentage of total net sales increased to 55.2% for the three months ended June 30, 2006, compared to 39.1% for the three months ended June 30, 2005. Gross profit as a percentage of total net sales increased to 55.0% for the six months ended June 30, 2006, compared to 37.0% for the six months ended June 30, 2005.

Gross profit from our POPSign program revenues for the three months ended June 30, 2006 increased 64.6% to $2,917,000 compared to $1,772,000 for the three months ended June 30, 2005. Gross profit from our POPSign program revenues for the six months ended June 30, 2006 increased 81.0% to $5,595,000 compared to $3,092,000 for the six months ended June 30, 2005. The increases were primarily due to the effect of reduced retailer expense and other cost reductions combined with increased revenues. Gross profit as a percentage of POPSign program revenues for the three months ended June 30, 2006 increased to 57.0% compared to 38.2% for the three months ended June 30, 2005. Gross profit as a percentage of POPSign program revenues for the six months ended June 30, 2006 increased to 56.9%, compared to 35.2% for the six months ended June 30, 2005. The increases were due to the factors discussed above.

Gross profit from our product sales for the three months ended June 30, 2006 decreased 6.3% to $315,000 compared to $336,000 for the three months ended June 30, 2005. Gross profit from our product sales for the six months ended June 30, 2006 decreased 18.3% to $611,000 compared to $748,000 for the six months ended June 30, 2005. The decreases in gross profit were primarily due to decreased sales from our other product categories based on decreased demand for those products from our customers. Gross profit as a percentage of product sales was 43.1% for the three months ended June 30, 2006 compared to 44.5% for the three months ended June 30, 2005. Gross profit as a percentage of product sales was 42.6% for the six months ended June 30, 2006 compared to 47.0% for the six months ended June 30, 2005.

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Operating Expenses

Selling. Selling expenses for the three months ended June 30, 2006 decreased 14.9% to $1,224,000 compared to $1,438,000 for the three months ended June 30, 2005, primarily due to sales force reductions in December of 2005 and decreased third-party compliance costs, partially offset by increased sales commissions in 2006 due to increased sales and stock-based compensation costs recognized in 2006 due to the adoption of Statement of Financial Accounting Standards No. 123R (SFAS 123R). Selling expenses for the six months ended June 30, 2006 decreased 15.2% to $2,441,000 compared to $2,878,000 for the six months ended June 30, 2005, primarily due to the factors described above.

Selling expenses as a percentage of total net sales decreased to 20.9% for the three months ended June 30, 2006 compared to 26.6% for the three months ended June 30, 2005, due to the factors discussed above, net of the effect of higher net sales during the quarter. Selling expenses as a percentage of total net sales decreased to 21.7% for the six months ended June 30, 2006 compared to 27.8% for the six months ended June 30, 2005, due to factors described above.

Marketing. Marketing expenses for the three months ended June 30, 2006 decreased 27.4% to $241,000 compared to $332,000 for the three months ended June 30, 2005. Marketing expenses for the six months ended June 30, 2006 decreased 26.5% to $489,000 compared to $665,000 for the six months ended June 30, 2005. Decreases in both the quarter and six months were primarily due to reductions in staff, decreased data analysis and reduced advertising expense.

Marketing expenses as a percentage of total net sales decreased to 4.1% for the three months ended June 30, 2006 compared to 6.2% for the three months ended June 30, 2005. Marketing expenses as a percentage of total net sales decreased to 4.3% for the six months ended June 30, 2006 compared to 6.4% for the six months ended June 30, 2005. Decreases in both periods were primarily due to the factors discussed above, net of the effect of higher net sales during the quarter.

General and administrative. General and administrative expenses for the three months ended June 30, 2006 increased 6.0% to $902,000 compared to $851,000 for the three months ended June 30, 2005, primarily due to increased public relations expense and stock-based compensation costs recognized in 2006 due to the adoption of SFAS 123R. General and administrative expenses for the six months ended June 30, 2006 decreased 6.7% to $1,751,000 compared to $1,876,000 for the six months ended June 30, 2005, primarily due to decreased legal expense offset by increased public relations expense and stock-based compensation costs recognized in 2006 due to the adoption of SFAS 123R.

General and administrative expenses as a percentage of total net sales decreased to 15.4% for the three months ended June 30, 2006 compared to 15.8% for the three months ended June 30, 2005. General and administrative expenses as a percentage of total net sales decreased to15.5% for the six months ended June 30, 2006 compared to 18.1% for the six months ended June 30, 2005. Decreases in both periods were primarily due to factors discussed above and the effect of higher net sales during the quarter.

Legal fees for the three months ended June 30, 2006 were $279,000 compared to $270,000 for the three months ended June 30, 2005. Legal fees for the six months ended June 30, 2006 were $511,000 compared to $760,000 for the six months ended June 30, 2005. The legal fees in each period were incurred primarily in connection with two News America lawsuits described in Note 3 to the financial statements. We currently expect the amount of additional legal fees that will be incurred in connection with the ongoing lawsuits to be significant throughout the remainder of 2006. Also, if the Company is required to pay a significant amount in settlement or damages, it will have a material adverse effect on its operations and financial condition. In addition, a negative outcome of this litigation could affect long-term competitive aspects of the Company’s business.

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Other Income (Expense). Other income for the three months ended June 30, 2006 was $84,000 compared to $5,000 for the three months ended June 30, 2005. Other income for the six months ended June 30, 2006 was $63,000 compared to $14,000 for the six months ended June 30, 2005. Other income for the three months and six months ended June 30, 2006 includes $100,000 from the sale of certain assets per the terms of the settlement agreement with Paul Richards and his company (see Note 3 to the financial statements). Interest expense in the three months and six months ended June 30, 2006 also includes interest expense related to an agreement reached with a retailer effective December 31, 2005 for the deferred payment of certain obligations.

Net Income (Loss). Our net income for the three months ended June 30, 2006 was $949,000 compared to a net loss of $(508,000) for the three months ended June 30, 2005. Our net income for the six months ended June 30, 2006 was $1,588,000 compared to a net loss of $(1,565,000) for the six months ended June 30, 2005.

Liquidity and Capital Resources

The Company has financed its operations with proceeds from public and private stock sales and sales of its services and products. At June 30, 2006, working capital was $4,219,000 compared to $2,592,000 at December 31, 2005. During the six months ended June 30, 2006, cash and cash equivalents increased $380,000 to $3,091,000.

Net cash provided by operating activities during the six months ended June 30, 2006 was $530,000. The increase was primarily due to net income during the period partially offset by the payment of retailer obligations which were recorded at December 31, 2005 and other changes in working capital items. Accounts receivable increased $693,000 during the six months ended June 30, 2006 due to higher net sales in May and June of 2006 compared to November and December of 2005. Accounts payable and accrued liabilities decreased $662,000 during the six month period primarily as a result of the payment of retailer obligations which were recorded at December 31, 2005. The Company expects accounts receivable and accounts payable to fluctuate during 2006 depending on the level of quarterly POPSign revenues.

Net cash of $127,000 was used in investing activities during the six months ended June 30, 2006 due to the purchase of property and equipment, primarily the purchase of two previously leased digital printers. The company expects to make capital expenditures in the second half of 2006 of between $100,000 to $150,000, primarily related to information technology hardware and software investments.

Net cash of $23,000 was used in financing activities during the six months ended June 30, 2006 as a result of the payment of $90,000 of principal on long-term liabilities offset partially by $34,000 of additional advances on the line of credit and $33,000 of proceeds from the issuance of common stock, net of expenses. The Company has maintained a line of credit balance sufficient to generate interest charges to cover the required monthly minimum fee. The issuance of common stock related to the issuance of shares related to the Employee Stock Purchase Plan.

The Company anticipates that its working capital needs for the remainder of 2006 will remain consistent with the first half of 2006. The Company believes that based upon current business conditions, its existing cash balance, future cash from operations and borrowings on the line of credit 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.

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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, 2005 and updated in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic filings under the Exchange Act.

(b) Changes in Internal Controls Over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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In October 2003, News America brought suit against the Company in U.S. District Court in New York, New York, alleging that the Company has engaged in deceptive acts and practices, has interfered with existing business relationships with certain retailers and prospective economic advantage, and has engaged in unfair competition. The suit seeks unspecified damages and injunctive relief. The Company filed a motion to dismiss in February 2004. In June 2004 News America amended the suit against the Company and the Company filed an amended motion to dismiss in August 2004. The Company is awaiting decision by the Court. Discovery has been stayed in this action. Management believes the allegations are without merit and that the Company will prevail.

On September 23, 2004, the Company brought suit against News America and Albertson’s Inc. in Federal District Court in Minneapolis, Minnesota, for violations of federal and state antitrust and false advertising laws, alleging that News America has acquired and maintained monopoly power through various wrongful acts designed to harm the Company in the in-store advertising and promotion products and services market. The suit seeks injunctive relief sufficient to prevent further antitrust injury and an award of treble damages to be determined at trial for the harm caused to the Company. In August 2005 the Court dismissed the suit, but permitted the Company to file an amended complaint with more specific allegations regarding the illegal actions taken by the defendants. The Company filed the amended complaint on September 23, 2005 and News America and Albertson’s Inc. refiled their motions to dismiss. The motions were heard on February 17, 2006 and on June 30, 2006 the Court denied the motions of News America and Albertson’s to dismiss the suit.

In September 2005, the Company brought a suit against Paul A. Richards and his company in Federal District Court in Minneapolis, Minnesota, alleging fraud and misrepresentation related to the VALUStix acquisition and asking that the acquisition be rescinded and all parties restored to their pre-acquisition status. The suit was settled in June 2006 with terms including mutual releases and payment of $100,000 to the Company in exchange for certain assets.

Item 1A. Risk Factors

Not applicable.

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

None.

Item 3. Defaults upon Senior Securities

None.

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

The Company held its Annual Meeting of Shareholders on May 16, 2006.

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

		FOR	WITHHOLD AUTHORITY
Donald J. Kramer	12,662,488			309,434
Scott F. Drill	12,727,781			244,141
Gary L. Vars	12,728,231			243,691
W. Robert Ramsdell	12,706,876			265,046
Gordon F. Stofer	12,769,246			202,676
Peter V. Derycz	12,758,226			213,696

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The shareholders present in person or by proxy voted to approve an amendment to Article III of the Company’s Articles of Incorporation to increase the number of authorized shares of Common Stock from 20,000,000 to 40,000,000 shares. The vote consisted of 12,169,240 shares in favor, 754,467 shares against and 48,215 shares abstaining.

The shareholders present in person or by proxy voted to approve an amendment to the Company’s Employee Stock Purchase Plan to increase the number of shares reserved for issuance under the Plan from 700,000 to 950,000. The vote consisted of 4,890,209 shares in favor, 601,039 shares against, 46,435 shares abstaining and 7,434,239 broker non-votes.

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are included herewith:

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

10.2 Settlement Agreement and Mutual Release

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:	August 11, 2006	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)

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EXHIBIT INDEX

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

10.2 Settlement Agreement and Mutual Release

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

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EX-10.1

EXHIBIT 10.1

CONFIDENTIAL TREATMENT REQUESTED

EXCLUSIVE RESELLER AGREEMENT

This EXCLUSIVE RESELLER AGREEMENT (this “Agreement”) is made and entered into as of June 12, 2006 (the “Effective Date”) by and between Insignia Systems, Inc., a Minnesota corporation (the “Company”), with its principal place of business at 6470 Sycamore Court North, Maple Grove, Minnesota 55369, and Valassis Sales & Marketing Services, Inc., a Delaware corporation (the “Reseller”), with its principal place of business at 19975 Victor Parkway, Livonia, MI 48152.

RECITALS

The Company develops, manufactures and distributes certain products and services which may be sold through the Reseller channel to grocery and drug retailers. The Reseller is experienced and intends to be engaged in the business of distributing the kinds of products and services sold by the Company to customers and providing them additional or complementary services or products and integrated solutions. The parties desire to set forth the terms and conditions under which the Reseller will acquire from the Company and distribute to Customers the Products in the Territory and provide to Customers the Services (as such terms are defined below).

AGREEMENT

In consideration of the foregoing and the agreements contained herein, the parties agree as follows:

1.Definitions. For purposes of this Agreement, the terms below shall have the meanings set forth below:

(a)“Confidential Information” of a party shall mean any information disclosed by that party to the other pursuant to this Agreement which is in written, graphic, machine readable or other tangible form and is marked “Confidential,” “Proprietary” or in some other manner to indicate its confidential nature. Confidential Information may also include oral information disclosed by one party to the other pursuant to this Agreement, provided that such information is designated as confidential at the time of disclosure and is reduced to writing by the disclosing party within a reasonable time (not to exceed 30 days) after its oral disclosure, and such writing is marked in a manner to indicate its confidential nature and delivered to the receiving party.

(b)“Customer” shall mean any customer who purchases a Product or the Services from Reseller or the Company.

(c)“Customer Program” shall mean Products or Services sold to a Customer.

(d)“Product” shall mean the Company’s POPSigns for display at grocery and drug retailers, as more particularly described in Exhibit A attached hereto.

(e)“Proprietary Rights” shall mean all rights in the Products and Services and the Company’s Confidential Information, including, but not limited to, patents, copyrights, trademarks, service marks, tradenames, know-how and trade secrets, irrespective of whether such rights arise under U.S. or international intellectual property, unfair competition or trade secret laws.

(f)“Reseller Products” shall mean products and services of the Reseller marketed to Customers.

(g)“Services” shall mean the services provided by the Company to the Reseller, as more particularly described in Exhibit A attached hereto, which Reseller shall have the right to resell to Customers.

	(h)	“Territory” shall mean North America.
2.	Distribution Rights.

(a)Grant. Subject to the terms, conditions, and restrictions of this Agreement, and conditioned on the Reseller’s timely payment of all amounts payable hereunder (other than those amounts being contested in good faith), the Company hereby grants to the Reseller an exclusive license in the Territory to (i) market, offer to sell and sell Products or Services to Customers in the Territory, separately or integrated with Reseller Products, and to (ii) use, perform or display the Products or Services to provide the Products, Services or Reseller Products to Customers pursuant to this Agreement. Further, the Company shall work with the Reseller to provide modifications to the Products and Services as necessary or desirable to provide integrated solutions as requested by the Reseller and determined to be appropriate in the Company’s reasonable discretion.

(b)Limitation. Except for the limited rights granted to the Reseller under Section 2(a), the Company reserves all Proprietary Rights in the Products and Services. The Reseller shall not (i) modify the Products or Services, (ii) sell the Services or the Products to third parties who are not Customers listed on Exhibits B1 and B2, or, without the Company’s consent, to Customers identified on Exhibit B3, (iii) market, offer to sell or sell the Products or Services outside the Territory or (iv) infringe upon, or use, any of the Proprietary Rights except as specifically permitted under the terms and conditions of this Agreement.

3. Company Responsibilities.

(a)Production, Distribution and Execution. From time to time, if requested by the Reseller, the Company shall provide to the Reseller samples of the Product prior to printing a program order. The Company shall make such modifications reasonably requested by the Reseller consistent with the applicable Customer Program. The Company shall produce all Products using materials and processes of highest quality consistent with industry practice to produce Products at least in conformance with the Company’s historical standards. The Company timely shall distribute the Products directly to grocery and drug retailers as required by

the applicable Customer Program, and shall ship using its standard packing and containers and in conformance with its standard shipping procedures. The Company is responsible to investigate and agrees to satisfy all import formalities pertaining to shipment of units of the Product to destinations outside the United States. The Company shall ensure that all Customer Programs are carried out in a timely, professional and accurate manner and according to Customer specifications. The Company shall be responsible for removal of any Products after the end run of the applicable Customer Programs in conformance with the Company’s standards.

(b)Training. From time to time, the Company agrees to train the technical and/or sales personnel designated by the Reseller for training provided by the Company on the Products and Services. The Company will provide the Reseller with such training free of charge at the Reseller’s Michigan office. The scope and amount of training time will be reasonable and appropriate in the Company’s judgment. The Company shall be responsible for all travel and living expenses for its personnel sent to the Reseller to conduct training.

(c) Insurance.

(i)Format; Time. Each party hereto shall provide the other with Certificates of Insurance for insurance coverages as further described in this Section 3(c), and endorsements affecting such coverages required by this Agreement, within 20 calendar days after the execution of the Agreement. All Certificates of Insurance and endorsements shall be signed by a person authorized by each party’s respective licensed insurance agent. All required aggregate limits shall be disclosed and amounts entered on the Certificates of Insurance, and shall be maintained without interruption during the term of the Agreement and for at least three years following termination or expiration of the Agreement.

(ii)Certificate of Insurance Information and Instructions. All Certificates of Insurance shall be sent to the other party at the appropriate address set forth in Section 12(f). All Certificates of Insurance shall be completed by each party’s respective insurance agent and shall include the following information:

1. Insurance agent’s name, complete address, phone and fax numbers.

2. The Company’s name, complete address, phone and fax numbers.

3. Commercial General Liability.

• Policy number

• Policy effective date

• Policy expiration date

• General aggregate ($2,000,000)

• Each occurrence ($1,000,000)

• Products-completed operations aggregate ($2,000,000)

• Personal and advertising injury ($1,000,000)

• Fire Damage ($50,000)

• Medical Expenses ($5,000)

4. Certify Worker’s Compensation and Employer’s Liability.

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5. Certificate Holder and named insured statement:

“Valassis Communications, Inc.

19975 Victor Parkway

Livonia, MI 48152”

(iii)Best Key Rating. Each party’s insurance carrier shall maintain during the time period that each party is required to comply with this Section 3(c) a Best Key Rating of A-VIII or higher, which shall be fully disclosed to the other party if not entered on the Certificate of Insurance.

(iv)Additional Insured; Endorsement; Cancellation; Failure to Maintain Coverage. Each party, its officers, directors and employees shall be expressly covered on the other party’s insurance policies as additional insureds, except on worker’s compensation and professional liability insurance coverage. With respect to each party, its officers, directors and employees, the other party’s insurance policies shall be primary. Each party’s general liability insurance policy shall be endorsed to recognize specifically that party’s contractual obligation of additional insured to the other party and shall note that the other party shall be given 15 calendar days advance written notice by regular mail for nonpayment and 45 calendar days advance written notice by regular mail for any other reason, including without limitation, any insurance policy changes, cancellations, or any erosion of insurance limits. If either party fails to maintain any of the insurance coverages required herein, the other party may suspend performance under this Agreement, declare the other party in material breach of the Agreement, or may purchase replacement insurance or pay insurance premiums due on existing policies. That party may collect any replacement insurance costs or premium payments made from the other party or deduct the amount paid from any sums due under the Agreement.

(v)Aggregate Limits; Deductibles. If aggregate limits are imposed on bodily injury and property damage, then the amount of such limits shall not be less than $2,000,000. All deductibles and self-insured retentions shall be fully disclosed in the Certificates of Insurance and may not exceed $10,000 without the express written permission of the other party.

(vi)Commercial General Liability. The Company and the Reseller shall each maintain limits of no less than $1,000,000 combined single limit per occurrence for bodily injury (including death), personal injury and property damage. Commercial general liability coverage shall be on a “per occurrence” basis only, not “claims made,” and be provided either on a Commercial General Liability or a Broad Form Comprehensive General Liability (including a Broad Form CGL endorsement) insurance form.

(vii)Professional Liability. The Company and the Reseller shall each maintain limits of no less than $1,000,000 in the aggregate for professional liability. Any retroactive date must coincide with or predate the Effective Date and may not be advanced without the prior written consent of the other party.

(viii)Worker’s Compensation and Employer’s Liability. The Company and the Reseller shall each obtain and maintain pursuant to Section 3(c)(i) hereof, a

4

work certificate and/or a certificate issued by an issuer qualified to underwrite workers’ compensation and employer’s liability insurance, regardless of whether the Company or the Reseller has any employees, and regardless of whether the insurer has determined that the Company or the Reseller is exempt from the provisions of the workers’ compensation statutes.

(ix)Cost; Damages. The Company and the Reseller shall each pay all associated costs for the specified insurance, respectively. The Company is required to remedy all injuries to persons and damage or loss to any property of the Reseller, Customers or grocery or drug retailers, their employees and consumers caused in whole or in part by the Company, its subcontractors or anyone employed, directed or supervised by the Company. The Reseller is required to remedy all injuries to persons and damage or loss to any property of the Reseller, Customers or grocery or drug retailers, their employees and consumers caused in whole or in part by the Reseller, its subcontractors or anyone employed, directed or supervised by the Reseller so long as the Company is not deemed a subcontractor for this purpose.

(x)Insurance Submittal Address. All Certificates of Insurance shall be sent to the address of the Reseller set forth in Section 12(f) hereof.

4. Prices and Payment.

(a)Price. Products and Services shall be provided by the Company to the Reseller at the prices set forth on Exhibits A and B hereto. All prices for Products and Services are inclusive of customs duties, freight, insurance and other shipping expenses, and any and all costs in connection with processing orders for and execution of the Customer Programs. The Company shall submit invoices to the Reseller for the Products and Services within 30 days after the applicable Customer Program runs.

(b)Payment Terms. The Reseller shall remit to the Company payment for all amounts due within 30 days of the date of receipt of the Company invoice to the Reseller. All payments shall be in U.S. Dollars.

(c)Company Payments. The Company shall calculate all amounts due to the Reseller for Joint Sales on a monthly basis, and remit payment to Reseller, along with an accounting of the amount due, within 30 days after the end of each month. All payments shall be made in U.S. Dollars.

(d)Order Fulfillment. The Company shall use best efforts to fulfill and ship all orders on the schedule desired by the Reseller and/or the Customer.

(e)Taxes. All Products and Services fees are inclusive of any export, withholding, federal, state and local taxes, duties, excises or services taxes (including any universal service assessment). The Company shall bear all such taxes in respect of its performance under this Agreement.

(f) Recordkeeping; Audit Rights.

(i)Record Keeping. Each of the Company and the Reseller shall keep accurate and complete records relating to the Products and sales of fixed rate and joint

5

sales Services to Customers in the Territory and to such party’s performance of its obligations under this Agreement.

(ii)Examination. From time to time during the term of this Agreement, and for a period of two years thereafter, the Company will permit and fully cooperate with agents of the Reseller to examine the portion of the Company’s books and records that relate to the Company’s activities under this Agreement. The Company will be given reasonable notice and such examination will take place during such party’s normal business hours.

(iii) Dispute.

1. If any mutual mistakes, including without limitation, any erroneous mathematical calculations, are made in any invoices or payments thereon, the Company and the Reseller shall promptly correct said mistakes and make any payment required to produce an accurate payment. If any party believes a mistake has been made in prior invoices under this Agreement, such party (the “Requesting Party”) shall present a detailed accounting in writing, together with supporting documentation of all fees required by this Section 4 within 45 days after the detection of such error. If a party disputes the Requesting Party’s accounting, the disputing party shall provide written notice (the “Dispute Notice”) to the Requesting Party of such dispute (the “Dispute”) together with all necessary detail and supporting documentation within 15 days of receipt of the proposed accounting. All Disputes shall be resolved by the parties in good faith.

2. In the event that the Company and the Reseller are unable to resolve any Dispute within 10 days following delivery of the Dispute Notice, the Company and the Reseller shall together designate a third-party accounting firm (the “Mediating Accountants”) to act as mediator with respect to any such Dispute. In the event that the Company and the Reseller are unable to agree as to the identity of such Mediating Accountants, each of the Company and the Reseller shall identify a third-party accounting firm, and the two accounting firms so designated shall themselves identify the Mediating Accountants.

3. In the event of a Dispute, as aforesaid, the Mediating Accountants shall be instructed to review the accounting required by subsection (1) above, meet with the Company and the Reseller to review the extent of any Dispute, and resolve any such Disputes as promptly as possible. The determination of the Mediating Accountants shall be final and binding upon the Company and the Reseller. The costs of the Mediating Accountants shall be borne equally by the Company and the Reseller.

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5. Company Performance.

(a)Reimbursement. In the event the Reseller, with the Company’s written consent which cannot be unreasonably withheld or delayed, offers a discount, rebate or refund to a Customer in respect of the Company’s failure to duly perform under this Agreement (by way of example and without limitation, in respect of failure to ship the Products in accordance with the applicable schedule, inaccurate printing on the Product, delivery of poor quality Product, inferior execution of the applicable program or lost, damaged or destroyed Product whether before or after delivery to the grocery or drug retailer), the Company shall promptly reimburse the Reseller for such discount, rebate or refund. The amount, type or timing of any such discount, rebate or refund to a Customer shall be in a manner mutually agreeable to the Company and the Reseller.

(b)Performance Audit. From time to time during the term of this Agreement, the Company will permit and fully cooperate with agents of the Reseller to audit the Company’s execution of the Customer Programs and other activities under this Agreement in a manner mutually agreeable to the Company and the Reseller.

6. Ownership.

(a)Acknowledgement. The Company and the Reseller acknowledge and agree that the Company owns all of the Proprietary Rights. The use by the Reseller of the Proprietary Rights is authorized only for the purposes herein set forth and, except as otherwise set forth herein, upon termination of this Agreement for any reason, such authorization will cease.

(b)Use of Company Trademarks. During the term of this Agreement, subject to obtaining approval under Section 7(f), the Reseller may advertise that the Company is partner of the Reseller in respect of the combined Product/Services/Reseller Product solution, and advertise the Products and Services under the trademarks, marks, and trade names that the Company may adopt from time to time (the “Company Trademarks”), and the Reseller may co-brand the Products, Services and Reseller Products as mutually agreed by the parties in advance. The Company shall provide the Reseller the Company Trademarks on disk or camera-ready art for production. Nothing herein will grant to the Reseller any right, title or interest in the Company Trademarks. The Reseller will follow the reasonable trademark usage guidelines communicated in writing by the Company, will provide examples of its usage of Company Trademarks upon request by the Company, and will, as promptly as reasonably practicable, correct any deviations from such guidelines upon notification by the Company of such deviations.

(c)Use of Reseller Trademarks. During the term of this Agreement, subject to obtaining approval under Section 7(f), the Company may advertise that Reseller is a partner of the Company in respect of the combined Product/Services/Reseller Product solution, and may use certain trademarks, marks and tradenames that Reseller may adopt from time to time (the “Reseller Trademarks”) on the Products distributed under this Agreement, in each case upon prior written consent of the Reseller and provided that the Company submits all media to the Reseller with reasonable time for review and approval prior to use. Reseller shall provide the Company the Reseller Trademarks on disk or camera-ready art for production. Nothing herein

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will grant to the Company any right, title or interest in the Reseller Trademarks. The Company will follow the reasonable trademark usage guidelines communicated in writing by the Reseller, will provide its usage of Reseller Trademarks upon request by the Reseller, and will, as promptly as reasonably practicable, correct any deviations from such guidelines upon notification by the Reseller of such deviations.

(d) Use of Trade Names; Cessation of Use.

(i)The Reseller may use the Company’s product names in the Reseller’s advertising and promotional media provided (1) that the Reseller conspicuously indicates in all such media that such names are trademarks of the Company and (2) that the Reseller submits all such media to the Company prior to use and satisfies the requirements set forth in Section 6(b) above. Except as otherwise provided in this Agreement, upon termination of this Agreement for any reason, the Reseller will immediately cease all use of Products’ and Services’ names and the Company Trademarks and, at the Reseller’s election, destroy (and certify to the Company in writing the destruction thereof) or deliver to the Company all materials in the Reseller’s control or possession which bear such names and trademarks, including any sales literature.

(ii)Except as otherwise provided in this Agreement, upon termination of this Agreement for any reason, the Company will immediately cease all use of Reseller Trademarks and, at the Company’s election, destroy (and certify to the Reseller in writing the destruction thereof) or deliver to the Reseller all materials in the Company’s control or possession which bear such trademarks, including any sales literature.

(e)Covenant. At no time during or after the term of this Agreement will either party challenge or assist others to challenge the trademarks owned by the other party or the registration thereof or attempt to register any trademarks, marks or tradenames confusing similar to those owned by the other party. Neither party will challenge any intellectual property rights claimed by the other party in such party’s trademarks.

7. Confidentiality; Non-Solicitation.

(a)Nondisclosure. Each party shall treat as confidential all Confidential Information of the other party, shall not use such Confidential Information except as set forth herein, and shall use reasonable efforts not to disclose such Confidential Information to any third party. Without limiting the foregoing, each of the parties shall use at least the same degree of care which it uses to prevent the disclosure of its own confidential information of like importance to prevent the disclosure of Confidential Information disclosed to it by the other party under this Agreement. Each party shall promptly notify the other party of any actual or suspected misuse or unauthorized disclosure of the other party’s Confidential Information.

(b)Exceptions. Notwithstanding the above, neither party shall have liability to the other with regard to any Confidential Information of the other which the receiving party can prove:

(i)was in the public domain at the time it was disclosed or has entered the public domain through no fault of the receiving party;

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(ii)was known to the receiving party, without restriction, at the time of disclosure, as demonstrated by files in existence at the time of disclosure;

(iii)is disclosed with the prior written approval of the disclosing party;

(iv)was independently developed by the receiving party without any use of the Confidential Information, as demonstrated by files created at the time of such independent development;

(v)becomes known to the receiving party, without restriction, from a source other than the disclosing party without breach of this Agreement by the receiving party and otherwise not in violation of the disclosing party’s rights; or

(vi)is disclosed pursuant to the order or requirement of a court, administrative agency, or other governmental body; provided, however, that the receiving party shall provide prompt notice thereof to the disclosing party to enable the disclosing party to seek a protective order or otherwise prevent or restrict such disclosure.

(c)Return of Confidential Information. Upon expiration or termination of this Agreement, each party, at its election, shall destroy (and certify to the other party in writing of the destruction thereof) or return to the disclosing party all Confidential Information received from the other party.

(d)Confidentiality of Agreement. Each party agrees that the existence and terms and conditions of this Agreement shall be treated as Confidential Information and shall not be disclosed to any third party; provided, however, that each party may disclose the existence and terms and conditions of this Agreement:

(i) as required by any court or other governmental body;

(ii)as otherwise required by law or any listing or trading agreement concerning its publicly-traded securities;

(iii) to legal counsel of the parties;

(iv)in confidence, to accountants, banks, and financing sources and their advisors;

(v)in connection with the enforcement of this Agreement or rights under this Agreement; or

(vi)in confidence, in connection with an actual or proposed merger, acquisition, or similar transaction of, with or by such party.

(e)No Solicitation. Each of the parties agrees that it and its subsidiaries will not, directly or indirectly, during the initial or renewal terms of the Agreement and for eighteen

9

(18) months thereafter, recruit, solicit or hire any officers or employees of the other or any of the other’s subsidiaries.

(f)Disclosure. During the term of the Agreement, no party shall make, or cause to be made, any press release or public announcement in respect of this arrangement or otherwise communicate with news media without the prior consent of the other party, except as may be otherwise required by applicable law or regulation, by any authorized administrative or governmental agency or pursuant to applicable requirements of any listing agreement with or the rules of any applicable securities exchange. The parties shall cooperate as to the timing and contents of any such press releases or public announcements.

(g)Remedies. Any breach of the restrictions contained in this Section 7 is a breach of this Agreement which may cause irreparable harm to the nonbreaching party. Any such breach shall entitle the nonbreaching party to injunctive relief in addition to all legal remedies.

8. Indemnification.

(a)By Reseller. The Reseller shall defend, indemnify and hold harmless the Company and its officers, directors, shareholders, employees, accountants, attorneys, agents, affiliates, subsidiaries, successors and assigns from and against any and all claims, losses, liabilities, damages, costs and expenses (including, without limitation, reasonable legal fees and expenses) (collectively, “Liabilities”), arising out of or related to the sale and marketing of Products, Services or Reseller Products by the Reseller; provided, however, that such indemnity shall not apply to any portion of any such Liability that is the result of the gross negligence, willful misconduct or bad faith of the Company; and provided, further, that the Reseller shall have sole control of any such action or settlement negotiations, and further provided that the Company shall notify the Reseller promptly in writing of such claim and shall give the Reseller all authority, information and assistance reasonably necessary to settle or defend such claim. The Reseller shall reimburse the Company for incidental out-of-pocket expenses incurred by the Company in providing such assistance. The Reseller shall not be responsible for costs or expenses incurred without its prior written authorization.

(b) By Company.

(i)Indemnity. The Company shall defend, indemnify and hold harmless Reseller and its officers, directors, shareholders, employees, accountants, attorneys, agents, affiliates, subsidiaries, successors and assigns from and against any and all Liabilities arising out of or relating to the sale and marketing by the Company or use of the Products or Services, including without limitation any claim that the Products or Services, as distributed or used within the scope of this Agreement, directly infringe a U.S. or foreign patent; provided, however, that such indemnity shall not apply to any portion of any such Liability that is the result of the gross negligence, willful misconduct or bad faith of the Reseller; and provided, further, that the Company shall have sole control of any such action or settlement negotiations, and further provided that the Reseller shall notify the Company promptly in writing of such claim and shall give the Company all authority, information and assistance reasonably necessary to settle or defend such claim. The Company shall reimburse Reseller for incidental

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out-of-pocket expenses incurred by Reseller in providing such assistance. The Company shall not be liable for any costs or expenses incurred without its prior written authorization.

(ii)Company Options. If the Products or Services become the subject of a claim of infringement of any U.S. patent, the Company may, at its option: (a) procure for the Reseller the right to use the Products or Services free of any liability; (b) replace or modify the Products or Services to make it/them non-infringing; or (c) terminate this Agreement; provided, however, that nothing contained in this section shall affect the Company’s indemnification obligations pursuant to Section 8(b)(i) hereof.

9. Representations and Warranties.

(a)Power and Authority. Each party represents and warrants that (i) it has the full right, power and authority to enter into this Agreement and to discharge its obligations hereunder, and (ii) it has not entered into any agreement inconsistent with this Agreement or otherwise granted any third party any rights inconsistent with the rights granted to the other party under this Agreement.

(b)Warranty. The Company warrants that all Products and Services furnished under the Agreement (i) will be free from defects in materials and workmanship, (ii) will substantially conform to the specifications for such Products and (iii) will not infringe third party intellectual party rights.

(c)Intellectual Property. The Company represents and warrants that, to its knowledge, the Products or Services do not infringe any intellectual property rights owned or controlled by any third party.

10. Term and Termination.

(a)Term. The term of this Agreement shall commence on the Effective Date and shall continue for 12 calendar months unless terminated earlier pursuant to the provisions of this Section 10. At the end of the initial term, this Agreement shall renew automatically for additional 12 month periods upon the same sales targets set during the first 12 month period of the Agreement for joint sales customers in accordance with Exhibit B unless prior to that time, and at the end of each renewal term, either party gives the other party 30 days’ written notice of non-renewal.

(b)Termination for Cause. Except as set forth in the last sentence of this Section 10(b), if either party defaults in the performance of any material provision of this Agreement, then the non-defaulting party may, in addition to any other remedies it may have, give written notice to the defaulting party that if the default is not cured within 30 days the Agreement will be terminated. If the non-defaulting party gives such notice and (i) the default is not cured during the 30-day period and (ii) the defaulting party does not notify the non-defaulting party of such cure during the 30-day period, then the Agreement shall automatically terminate at the end of that period. Notwithstanding the foregoing, if a party breaches the provisions of Section 7 hereof, then the non-breaching party shall be entitled to terminate this Agreement effective immediately upon delivery of written notice to the other party.

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(c)Termination for Insolvency and Related Events. This Agreement shall terminate without notice (i) upon the institution by or against either party of insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of such party’s debts, (ii) upon either party’s making an assignment for the benefit of creditors, or (iii) upon either party’s dissolution or ceasing to do business.

(d)Termination for Convenience. The Reseller may terminate this Agreement without penalty at any time during the initial 12 month term by giving at least 90 calendar days’ prior written notice to the Company.

(e)Effect of Termination. If this Agreement is terminated, then all of the Reseller’s rights with respect to the Products and Services shall terminate, provided that the rights of each Customer granted in accordance with this Agreement shall survive for the duration of the applicable program in accordance with its terms, subject to termination for default in accordance with its terms. Upon termination, all payments due by either party under this Agreement will be due and payable in the ordinary course.

(f)Limitation of Liability. In the event of termination by either party in accordance with any of the provisions of this Agreement, neither party shall be liable to the other because of such termination, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases or commitments in connection with the business or goodwill of either party. Termination shall not, however, relieve either party of any obligations incurred prior to the termination, including, without limitation, the obligation of the Reseller to pay the Company for, and of the Company to deliver, Products and Services ordered prior to such termination.

(g)Survival of Certain Terms. The provisions of Sections 1, 3(c), 4, 6(e), 7, 8, 9, 10, 11 and 12 of this Agreement, and all payment or delivery obligations incurred during the term of this Agreement, shall survive the expiration or termination of this Agreement for any reason. All other rights and obligations of the parties shall cease upon termination of this Agreement.

11.Limitation of Liability. IN NO EVENT SHALL ANY PARTY BE LIABLE FOR COSTS OF PROCUREMENT OF SUBSTITUTE PRODUCTS OR SERVICES, LOST PROFITS OR ANY CONSEQUENTIAL, SPECIAL, INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY (INCLUDING NEGLIGENCE OR STRICT LIABILITY), ARISING OUT OF THIS AGREEMENT. THE PARTIES ACKNOWLEDGE AND AGREE THAT THE AMOUNTS PAYABLE HEREUNDER BY THE RESELLER ARE BASED IN PART UPON THESE LIMITATIONS, AND FURTHER AGREE THAT THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. THE FOREGOING LIMITATIONS OF LIABILITY DO NOT APPLY TO ANY BREACH OF SECTIONS 7 AND 8(b)(ii) OF THIS AGREEMENT.

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12. Miscellaneous.

(a)Independent Contractor. Neither party shall, for any purpose, be deemed to be an agent of the other party and the relationship between the parties shall only be that of independent contractors. Except as provided in this Agreement, neither party shall have any right or authority to assume or create any obligations or to make any representations or warranties on behalf of any other party, whether express or implied, or to bind the other party in any respect whatsoever.

(b)Amendments and Waivers. Any term of this Agreement may be amended or waived only with the written consent of the parties or their respective permitted successors and assigns. Any amendment or waiver effected in accordance with this Section 12(b) shall be binding upon the parties and their respective successors and assigns.

(c)Successors and Assigns. The rights, obligations or privileges of a party under this Agreement may not be transferred or assigned, by operation of law or otherwise, without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed. Subject to the foregoing, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.

(d)GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE GOVERNED, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.

(e)Attorney’s Fees. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney’s fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.

(f)Notices. Unless otherwise set forth herein, any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient upon receipt, when delivered personally or by courier, overnight delivery service or confirmed facsimile, or 48 hours after being deposited in the regular mail as certified or registered mail (airmail if sent internationally) with postage prepaid, if such notice is addressed to the party to be notified at such party’s address, facsimile number or electronic mail address as set forth below, or as subsequently modified by written notice.

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The Company:	The Reseller:
6470 Sycamore Court North	19975 Victor Parkway
Maple Grove, Minnesota 55369	Livonia, Michigan 48152
Attn: Scott Drill	Attn: Barry P. Hoffman
Phone: 763-392-6200	Phone: 734-691-7386
Fax: 763-392-6300	Fax: 734-591-4460

(g)Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith, in order to maintain the economic position enjoyed by each party as close as possible to that under the provision rendered unenforceable. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms.

(h)Entire Agreement. This Agreement is the product of both of the parties hereto, and constitutes the entire agreement between such parties pertaining to the subject matter hereof, and merges all prior negotiations and drafts of the parties with regard to the transactions contemplated herein. Any and all other written or oral agreements existing between the parties hereto regarding such transactions are expressly canceled.

(i)Advice of Legal Counsel. Each party acknowledges and represents that, in executing this Agreement, it has had the opportunity to seek advice as to its legal rights from legal counsel and that the person signing on its behalf has read and understood all of the terms and provisions of this Agreement. This Agreement shall not be construed against any party by reason of the drafting or preparation thereof.

(j)Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.

(k)Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

(l)Expenses. Each party will bear its own costs and expenses (including legal fees and expenses) incurred in connection with the negotiation, preparation and execution of this Agreement and, except as explicitly provided herein, the transactions contemplated hereby.

(m)Failure to Pursue Remedies. The failure of any party to seek redress for violation of, or to insist upon the strict performance of, any provision of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation.

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(n)Cumulative Remedies. The rights and remedies provided by this Agreement are cumulative and the use of any one (1) right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law or otherwise.

(o)No Implied Rights or Remedies. Nothing expressed or implied shall be construed to confer upon any person, except a party hereto or Customers, any rights or remedies under or by reason of this Agreement.

[Signature Pages Follow]

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IN WITNESS WHEREOF, each of the parties has executed this Reseller Agreement as of the Effective Date.

COMPANY:
INSIGNIA SYSTEMS, INC.
By:	/s/ Scott Drill	By:	/s/ Steven Mitzel
Name:	Scott Drill	Name:	Steven Mitzel
Title:	CEO	Title:	Secretary

Exhibit A

Company Products and Services  

VCI POPSign Rates	See Exhibit B (a)
- rate is inclusive of POPSign production fees
VCI POPSign Standard and Custom Header Rate per Sign per Store per Cycle	[ * ]
- rate is inclusive of POPSign Insert production fees
VCI Controlled Store Test Rate per Retail Division	[ * ]
- custom category matching will require additional charge
* for VCI-managed Strategic and Coverage Accounts

Other Company products and services and their associated rates and fees may be added from time to time upon the mutual agreement of the Company and the Reseller.

* Confidential treatment requested for this portion.

E-1

Exhibit B

Fees

(a)Fixed Rate Customers. The Company will provide to the Reseller a fixed rate card during the term of the Agreement under which the Reseller can purchase POPSign services from the Company and then the Reseller can resell such services to (A) certain Customers that are solely Reseller-strategic accounts to be identified on Exhibit B1 and determined by the parties in good faith by July 5, 2006, (B) certain accounts that the parties mutually agree will be Reseller-only coverage accounts will be identified on Exhibit B2 by the parties in good faith by July 5, 2006 and (C) all accounts when sales are made by the Reseller’s retail sales team to Customer field offices. The fixed rate card will be based upon the [ * ] sold by the Reseller per each 12 month period commencing on the Effective Date as follows:

[ * ]

For purposes of this Agreement, “Unit” means one billed sign per two-week cycle per store location.

The pricing that the Reseller sets for the strategic accounts and Reseller-only coverage accounts shall be in the Reseller’s sole and absolute discretion. The Reseller will be responsible for billing and collecting all amounts due from the Customer in respect of strategic accounts and Reseller-only coverage accounts. The Reseller will be responsible for paying any commissions owed to its sales personnel for these sales.

(b)Joint Sales Customers. For customers that the Reseller and the Company agree to sell together, the parties will agree to share the profit of any business that exceeds the mutually agreed sales target for any such customer. The parties agree to mutually agree in good faith by July 5, 2006 to the joint sales customers and the applicable sales targets for each joint sales customer to be listed on Exhibit B3 based upon [ * ]. Such sales targets will specify the measuring period to which each target relates. For illustrative purposes, if the mutually agreed sales target for Customer X is $2 million and sales for such customer increase to $3 million, the Reseller and the Company will share the “Profit” on the difference ($1 million) on [ * ]. For purposes of this Agreement, “Profit” means the difference between (x) the actual revenue attributed to such customer minus the expected revenue previously agreed upon and (y) the Company’s POPSign Cost times the number of signs. The Company’s POPSign Cost will be based upon the total incremental joint revenue between the parties as follows:

[ * ]

The Company will be responsible for billing and collecting all amounts due from the Customer in respect of joint sales accounts, and all sales will be using Company purchase orders or other documentation.

* Confidential treatment requested for this portion.

E-2

(c)Other Customers. All other potential customers not listed on Exhibits B-1, B-2 or B-3 will be added to the appropriate list, if prior to a sale, either party gets the written consent of the other party.

E-3

Exhibit B1

Strategic Accounts

[ * ]

* Confidential treatment requested for this portion.

E-4

Exhibit B2

Reseller-Only Coverage Accounts

[ * ]

* Confidential treatment requested for this portion.

E-5

Exhibit B3

Joint Sales Accounts

[ * ]

* Confidential treatment requested for this portion.

E-6

EX-10.2

EXHIBIT 10.2

SETTLEMENT AGREEMENT AND MUTUAL RELEASE

THIS SETTLEMENT AGREEMENT AND MUTUAL RELEASE (“Agreement”), effective as of June 22, 2006 (the “Effective Date”), is entered into by and among (i) Insignia Systems, Inc. (“Insignia”), on the one hand; and (ii) Paul A. Richards, Inc., (“Richards, Inc.”); and (iii) Paul Richards (“Richards”), on the other hand. Insignia, Richards, Inc., and Richards are referred to sometimes herein collectively as “Settling Parties” or “parties,” and each individually as a “Settling Party” or “party.” Richards, Inc. and Richards are sometimes referred to as “the Richards Parties.”

BACKGROUND

A.In 2002, Richards, Inc. sold to Insignia a business known as “ValuStix,” consisting of multiple-coupon “on-package” folder booklets to affix to in-store products (the “ValuStix Transaction”).

B.Insignia sued the Richards Parties in the United States District Court for the District of Minnesota in an action captioned Insignia Systems, Inc. v. Paul A. Richards, Inc. et al., Civil No. 05-2136 (the “Action”), claiming in part that the Richards Parties made negligent representations and engaged in fraudulent conduct in connection with the sale of ValuStix to Insignia. The Richards Parties counterclaimed against Insignia, claiming, among other things, breach of an agreement between Richards and Insignia dated on or about December 23, 2002 (the “Employment Agreement”). Each of Insignia and the Richards Parties has denied the substantive allegations against it, and denies all liability as alleged in the Action.

C.Insignia has also explored, and has rights to, a business, sometimes called “RxStix.” Similar to ValuStix, the RxStix product concept was developed by Richards while he was an employee of Insignia, and involves affixing to pharmacy bags or packaged-good consumer products pressure-sensitive materials containing healthcare information and/or related promotional offers. All of the assets, both tangible and intangible, heretofore owned or used by Insignia for creating, developing, marketing and selling such health-care-related pressure-sensitive materials are listed on Exhibit A and referred to in this Agreement as “RxStix Assets.”

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D.Insignia and the Richards Parties desire to settle all claims and disputes between them as set forth in this Agreement, including without limitation: (i) the Action, including all its claims and counterclaims, and (ii) all claims Insignia and the Richards Parties may have against each other arising out of all business relationships between them before the date of this Agreement, as well as any claims that Insignia has or may have against the Richards Parties in connection with RxStix Assets. As part of this Agreement, Richards, Inc. intends to purchase RxStix Assets, as defined herein, from Insignia.

NOW THEREFORE, in consideration of the premises and the mutual agreements herein contained and for good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties agree as follows:

ARTICLE I

PURCHASE AND SALE OF BUSINESS ASSETS

Section 1.1Purchase and Sale of RxStix. Insignia hereby sells to Richards, Inc., and Richards, Inc. hereby buys from Insignia, all RxStix Assets, as of the Effective Date. Richards, Inc. will not assume any obligations, commitments or liabilities of Insignia in connection with any RxStix Assets.

Section 1.2Price. Richards, Inc. agrees to pay to Insignia $100,000 on the Effective Date in consideration for the RxStix Assets.

Section 1.3Representations and Warranties of Insignia. Insignia hereby represents and warrants to Richards, Inc. that (a) Insignia hereby conveys to Richards, Inc. good and valid title to the RxStix Assets, free of any mortgages, security interests, pledges, liens easements, encumbrances, or claims of any kind whatsoever; and except for the RxStix Assets, Insignia is not aware of any other assets owned or used by it and which are intended to be used primarily for RxStix; (b) Insignia is not in default under any material contract, agreement, lease, or other instrument relating to RxStix. In all other respects, the RxStix Assets are hereby conveyed to Richards, Inc. “AS-IS.”

Section 1.4Non Compete. Insignia hereby agrees that, beginning on the Effective Date, it will not intentionally interfere with any communications or business relationships relating solely to the RxStix business that Richards, Inc. may hereafter establish with customers or manufacturers with which Insignia has a business relationship. Insignia also hereby agrees that it will not, for a period of six (6) years after the Effective Date, enter into or complete in the business involving the affixing to pharmacy bags or packaged consumer products pressure-sensitive materials containing healthcare information and/or related promotional offers.

Section 1.5Further Assurances. Insignia and Richards, Inc. will cooperate with each other from and after the Effective Date to take such steps as either party reasonably requests to effect the transfer of the RxStix Assets and to further the intent of the provision in this Article I.

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Section 1.6Termination of Contracts. With the exception of this Agreement, all contracts between Insignia and the Richards Parties, or either of them, including without limitation the Employment Agreement, are hereby terminated as of the Effective Date.

ARTICLE II

MUTUAL RELEASES

Section 2.1Release by Insignia. Insignia hereby releases and discharges the Richards Parties from all actions, causes of action, claims, costs, damages, debts, demands, expenses, fees (including, without limitation, attorneys’ fees and expenses), liabilities, obligations, and suits, of every kind, from the beginning of time to the end of time, whether known or unknown, suspected or unsuspected, arising out of or relating to agreements, business relationships, contracts, employment, statutory violations, torts, or any actions or inactions of any kind prior to the date hereof (collectively, “Claims”). “Claims” also includes all claims that Insignia has or may have relating to the RxStix Assets.

Section 2.2Release by Richards Parties. The Richards Parties hereby release and discharge Insignia from all Claims; provided, however, that the Richards Parties do not release or discharge Insignia from any claims arising from the purchase of the RxStix Assets by Richards, Inc. as described in Article I of this Agreement.

ARTICLE III

UNDERTAKINGS

Section 3.1Dismissal of Action. The Settling Parties agree to dismiss forthwith the Action, including all claims and counterclaims, with prejudice and without costs to any party, and to execute, file, and deliver all documents necessary to effect such dismissal.

Section 3.2Further Acts. Each Settling Party agrees it shall promptly, upon request, perform all further actions that may be necessary to fully effectuate the terms of this Agreement, including but not limited to execution and tender of any further documents required to carry out its terms.

ARTICLE IV

OTHER TERMS

Section 4.1No Admission. This Agreement includes a full, final, and complete compromise, settlement, and release of all claims described herein. It is not an admission of fault, wrongdoing, or liability by any Settling Party.

Section 4.2Finality. It is the intention of each Settling Party, with and upon the advice of counsel, to fully, finally, and forever settle and release all claims and disputes described herein, notwithstanding the possibility of discovering later any additional claims or facts relating thereto. Each Settling Party hereby waives any right to assert hereafter that any matter or claim released by this Agreement has been released through ignorance, oversight, or error.

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ARTICLE V

REPRESENTATIONS AND WARRANTIES

Section 5.1Insignia’s Representations and Warranties. Insignia warrants that each individual executing this Agreement on behalf of Insignia has the capacity and has been duly authorized to execute on behalf of Insignia. Insignia represents to the Richards Parties as follows:

(a)Insignia is a corporation duly organized and validly existing in good standing under the laws of its jurisdiction of incorporation.

(b)It has the power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder.

(c)It has taken all action necessary, corporate or otherwise, to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder.

(d)This Agreement is being duly executed and delivered by Insignia and constitutes the legal, valid, and binding obligation of Insignia enforceable against Insignia in accordance with its terms.

(e)Insignia’s execution and performance of this Agreement do not violate any other agreement, contract, or understanding to which Insignia is a party.

(f)There are no corporate, third party, regulatory, or other consents, authorizations, or approvals that have not been obtained that are necessary for Insignia to execute and deliver this Agreement or to perform its obligations hereunder.

(g)Insignia has entered into this Agreement based solely upon its own investigation and, other than as expressly set forth in this Agreement, not in reliance on any representations or warranties of any other person, including any other Settling Party.

(h)Insignia is assuming the risk that the facts or the law may be different from what Insignia understands them to be.

Section 5.2Richards Parties’ Representations and Warranties. Richards warrants that each individual executing this Agreement on behalf of Richards has the capacity and has been duly authorized to execute on behalf of Richards. Each of the Richards Parties represents to Insignia as follows:

(a)Richards, Inc. is a corporation duly organized and validly existing in good standing under the laws of its jurisdiction of incorporation.

(b)Each of the Richards Parties has the power and authority to execute and deliver this Agreement and to perform all of its obligations hereunder.

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(c)Richards, Inc. has taken all action necessary, corporate or otherwise, to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder.

(d)This Agreement is being duly executed and delivered by each of the Richards Parties and constitutes the legal, valid, and binding obligation of such party enforceable against such party in accordance with its terms.

(e)The Richards Parties’ execution and performance of this Agreement do not violate any other agreement, contract, or understanding to which either of them is a party.

(f)There are no corporate, third party, regulatory, or other consents, authorizations, or approvals that have not been obtained that are necessary for the Richards Parties to execute and deliver this Agreement or to perform their obligations hereunder.

(g)Each of the Richards Parties has entered into this Agreement based solely upon his or its own investigation and, other than as expressly set forth in this Agreement, not in reliance on any representations or warranties of any other person, including any other Settling Party.

(h)The Richards Parties are assuming the risk that the facts or the law may be different from what they understand them to be.

ARTICLE VI

MISCELLANEOUS

Section 6.1Entire Agreement. This Agreement contains the entire agreement of the Settling Parties with respect to the subject matter hereof. It is intended to be final and binding upon the Settling Parties. There are no agreements or understandings between Insignia, on the one hand, and the Richards Parties, or any of them, on the other hand, relating to the matters referred to in this Agreement other than as set forth herein.

Section 6.2Successors. This Agreement shall be binding upon and inure to the benefit of the Settling Parties and their respective affiliates, agents, assigns, business units, directors, divisions, employees, executors, heirs, officers, owners, parent companies, partners, predecessors, representatives, servants, shareholders, subsidiaries, and successors.

Section 6.3Construction. The terms of this Agreement are contractual and are the result of negotiation. Each party has cooperated in drafting and preparing this Agreement; accordingly, this Agreement shall not be construed against any party.

Section 6.4Governing Law. This Agreement shall be interpreted and enforced in accord with the internal laws of the State of Minnesota, without regard to its principles of conflicts of laws.

Section 6.5Modification. This Agreement may not be amended, canceled, revoked, or otherwise modified except by written agreement signed by the parties.

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Section 6.6Attorneys’ Fees. The Settling Parties agree to pay reasonable attorneys’ fees incurred by the prevailing party in connection with any legal action to enforce.

Section 6.7Counterparts. This Agreement may be executed in one or more counterparts, each of which when executed and delivered shall be an original, and all of which when executed shall constitute one instrument. Signed copies of this Agreement may be delivered by facsimile or other electronic transmission.

[Signature page follows immediately]

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IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below.

INSIGNIA SYSTEMS, INC.
By:	/s/ Scott Drill
Name:	Scott Drill
Title:	CEO
Date:	6/22/06

PAUL A. RICHARDS, INC.
By:	/s/ Paul A. Richards
Name:	Paul A. Richards
Title:	President
Date:	June 23, 2006

PAUL A. RICHARDS
/s/ Paul A. Richards
Date:	June 23, 2006

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EXHIBIT A

ASSETS

1. Right to develop and market pressure sensitive material containing health care information and/or related promotional offers , and to affix those materials to pharmacy bags and packaged consumer products (the “Business”).

2. All trademarks, trade dress, logos and related artwork owned or used by Insignia, which relates solely and directly to the Business (but not any of the foregoing that relates solely to ValuStix®).

3. All trade secrets and other confidential and/or proprietary information relating solely to the Business, including plans, designs, specifications, drawings and similar or related data of every kind.

4. All other tangible personal property of every kind and nature whatsoever used or useable in connection with the Business wherever located which is owned by and in the possession of Insignia to the extent listed below:

a. copies of the specific promotions and sales presentations of the Business; and

b. hard and electronic copies of the pressure sensitive material containing health care information and/or related promotional offers that were used in the Business.

5. Rights to the following telephone numbers: (914) 722-6400; (914) 722-6401; (914) 722 6402.

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EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Scott F. Drill, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Insignia Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within the Registrant, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation.

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably like to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:  August 11, 2006	/s/ Scott F. Drill
	Scott F. Drill
	President and Chief Executive Officer (principal executive officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Justin W. Shireman, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Insignia Systems, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant is made known to us by others within the Registrant, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation.

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably like to materially affect, the registrant’s internal control over financial reporting.

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date:  August 11, 2006	/s/ Justin W. Shireman
	Justin W. Shireman Vice President, Finance and Chief Financial Officer (principal financial officer)

EX-32

Exhibit 32

SECTION 1350 CERTIFICATION

The undersigned certify that:

(1) The accompanying Quarterly Report on Form 10-Q for the period ended June 30, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the accompanying Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  August 11, 2006
	/s/ Scott F. Drill
	Scott F. Drill
	President and Chief Executive Officer (principal executive officer)

Date:  August 11, 2006	/s/ Justin W. Shireman
	Justin W. Shireman Vice President, Finance and Chief Financial Officer (principal financial officer)