Impart Media 10QSB 2007 Q2 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-QSB

(Mark One)

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

o TRANSITION REPORT UNDER SECTION 13 OR 15(d)  OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______.

Commission File Number: 0-09358

IMPART MEDIA GROUP, INC.

(Exact name of small business issuer as specified in its charter)

Nevada	88-0441338
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1300 North Northlake Way

Seattle, WA 98103

(Address of principal executive offices)

(206) 633-1852

(Issuer's telephone number)

N/A

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

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

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

As of August 6, 2007, 24,085,417 shares of our common stock, par value $0.001 per share, and 2,903,229 shares of our Series A preferred stock, par value $0.001 per share, which shares of Series A preferred stock, were, at August 6, 2007, convertible into an aggregate of 8,653,856 shares of our common stock, were outstanding. Our common stock currently trades on the OTC Bulletin Board under the symbol “IMMG”.

Transitional Small Business Disclosure Format (check one): Yes o No x

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-QSB and the documents incorporated herein by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, an amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include, without limitation, statements regarding planned or expected contracts that we may enter into with regard to our proprietary hardware, including without limitation, our Impart IQ product line; advertising contracts originated by our wholly-owned subsidiary, Impart Media Advertising, Inc.; the potential market size for our products; advantages of our products; variation in actual savings and operating improvements resulting from restructurings; and the sufficiency of our available capital resources to meet our funding needs. These forward-looking statements reflect our current views with respect to future events or our financial performance, and involve certain known and unknown risks, uncertainties and other factors, including those identified below, which may cause our or our industry’s actual or future results, levels of activity, performance or achievements to differ materially from those expressed or implied by any forward-looking statements or from historical results. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include information concerning our possible or assumed future results of operations and statements preceded by, followed by, or that include the words “may,” “will,” “could,” “would,” “should,” “believe,” “expect,” “plan,” “anticipate,” “intend,” “estimate,” “predict,” “potential” or similar expressions.

Forward-looking statements are inherently subject to risks and uncertainties, many of which we cannot predict with accuracy and some of which we might not even anticipate. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions at the time made, we can give no assurance that such expectations will be achieved. Future events and actual results, financial and otherwise, may differ materially from the results discussed in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. We have no duty to update or revise any forward-looking statements after the date of this report or to conform them to actual results, new information, future events or otherwise.

The following factors, among others, could cause our or our industry’s future results to differ materially from historical results or those anticipated: (1) the availability of additional funds to enable us to successfully pursue our business plan; (2) the uncertainties related to the effectiveness of our technologies and the development of our products and services; (3) our ability to maintain, attract and integrate management personnel; (4) our ability to complete the development of our proposed services in a timely manner; (5) our ability to effectively market and sell our services to current and new customers; (6) our ability to negotiate and maintain suitable strategic licenses and corporate relationships; (7) the intensity of competition; and (8) general economic conditions. As a result of these and other factors, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect our business, financial condition, operating results and stock price.

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ITEM 1. FINANCIAL STATEMENTS

IMPART MEDIA GROUP, INC.

CONSOLIDATED BALANCE SHEET

June 30, 2007

(UNAUDITED)

ASSETS
Current assets
Cash	$	525,312
Restricted cash		49,939
Accounts receivable, net		4,226,755
Inventory		363,466
Prepaid expenses and other current assets		144,655
Total current assets		5,310,127
Fixed assets, net		1,491,312
Other Assets
Goodwill		2,359,418
Intangible assets, net		2,162,887
Deferred financing costs, net		1,705,537
Other assets		165,266
Total other assets		6,393,108
Total assets	$	13,194,547
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable	$	7,059,744
Accrued liabilities		180,528
Customer deposits		(14,077	)
Lines of credit		1,448,560
Note payable - related parties - current portion		39,785
Capital lease obligation - current portion		46,606
Convertible debentures - current portion		438,618
Amounts payable to former E&M owner		200,000
Other liabilities		102,061
Total current liabilities		9,501,825
Long-term liabilities
Notes payable - related parties - long-term portion		150,000
Convertible debentures		1,026,686
Capital lease obligation - long-term portion		53,690
Total long-term liabilities		1,230,376
Total liabilities		10,732,201
Commitments and contingencies
Stockholders' equity
Preferred stock - $.001 par value, 25,000,000 shares authorized, 2,903,229 shares issued and outstanding		2,903
Common stock - $.001 par value, 100,000,000 shares authorized, 23,959,148  shares issued and outstanding		23,959
Additional paid-in capital		20,502,345
Accumulated deficit		(18,066,861	)
Total stockholders' equity		2,462,346
Total liabilities and stockholders' equity	$	13,194,547

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IMPART MEDIA GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
	For the Three			For the Three			For the six			For the six
	Months Ended			Months Ended			Months Ended			Months Ended
	June 30, 2007			June 30, 2006			June 30, 2007			June 30, 2006
Revenues
Equipment sales	$	388,279		$	634,553		$	1,163,011		$	1,159,189
Managed subscriptions		69,741			108,031			166,928			261,130
Consulting and design services		20,410			100,565			63,182			206,428
Media services		1,280,723			583,188			2,545,265			1,022,334
Total revenues		1,759,153			1,426,337			3,938,386			2,649,081
Cost of revenues		560,884			703,288			1,428,023			1,291,728
Gross profit		1,198,269			723,049			2,510,363			1,357,353
Other operating expenses
Wages and salaries		1,250,283			1,027,150			2,592,713			2,372,031
Selling and marketing		84,964			266,175			183,197			336,372
General and administrative expenses		1,139,474			1,665,823			2,520,897			3,065,238
Depreciation and amortization		193,452			321,521			383,939			544,602
Total other operating expenses		2,668,173			3,280,669			5,680,746			6,318,243
Loss from operations		(1,469,904	)		(2,557,620	)		(3,170,383	)		(4,960,890	)
Other income (expense)
Other income and expense, net		107			(14,052	)		107			--
Gain on extinguishment of notes payable		--			--			--			106,423
Interest expense		(371,632	)		(269,436	)		(613,463	)		(715,277	)
Net Loss	$	(1,841,429	)	$	(2,841,108	)	$	(3,783,739	)	$	(5,569,744	)
Net Loss - Common Stockholders:
Net Loss	$	(1,841,429	)	$	(2,841,108	)	$	(3,783,739	)	$	(5,569,744	)
Beneficial conversion feature of Series A preferred stock		--			--			--			(933,873	)
Revaluation of Series A preferred - conversion price reduction		(2,447,310	)		--			(2,447,310	)
Accretion of dividends on Series A preferred stock		--			(80,675	)		--			(104,125	)
Net loss - available to common stockholders	$	(4,288,739	)	$	(2,921,783	)	$	(6,231,049	)	$	(6,607,742	)
Basic and diluted loss per common share	$	(0.18	)	$	(0.13	)	$	(0.27	)	$	(0.33	)
Basic and diluted weighted average common shares
outstanding		23,718,683			21,750,103			23,177,470			20,097,470

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IMPART MEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Six Months Ended June 30, 2007			For the Six Months Ended June 30, 2006
Cash flows from operating activities:
Net loss	$	(3,783,739	)	$	(5,569,744	)
Adjustments to reconcile net loss to net cash used by operating activities:
Non-cash wages and salaries expense:
Incentive stock options granted to employees		585,750			91,022
Common stock issued to senior executives for services		--			355,637
Non-cash general and administrative expense:
Amortization of prepaid consulting expense		482,408
Common Stock issued for non-cash consulting services		--			1,000,000
Warrants issued for earned consulting services		--			124,890
Non-cash interest expense:
Warrants issued to bridge lenders		--			206,186
Common stock issued to senior executives upon conversion of notes payable		--			39,628
Amortization of deferred financing costs on line of credit:
Warrants		336,227			239,256
Other deferred financing costs		81,238			50,079
Amortization of convertible debentures discount		59,004			--
Common stock issued to Laurus for extended filing date		--			51,900
Other non-cash interest expense		10,939			27,219
Gain on retirement of notes payable		--			(106,423	)
Loss disposal of assets		5,688			--
Bad debt expense		17,951			--
Depreciation and amortization		383,939			537,602
Other adjustments		--			(118,204	)
Changes in operating assets and liabilities, excluding assets and liabilities from acquisitions:
Accounts receivable		1,046,457			(3,869,596	)
Inventory		116,232			6,172
Prepaid expenses and other current assets		476,467			(1,457,702	)
Other assets		(115,345	)		440,527
Accounts payable		(776,591	)		3,975,794
Accrued liabilities		(1,062,398	)		1,975,520
Customer deposits		(37,052	)
Net cash used by operating activities		(2,172,825	)		(2,000,237	)
Cash flows from investing activities:
Purchase of fixed assets		(25,196	)		(222,303	)
Purchase of Intransit assets		--			(500,000	)
Acquisition of E&M		--			(600,000	)
Net cash used by investing activities		(25,196	)		(1,322,303	)
Cash flows from financing activities:
Proceeds from sale of common stock		--			681,501
Net proceeds from sale of convertible preferred stock and issuance of warrants		--			3,910,505
Issuance of common stock for exercise of warrants		--			22,750
Dividends on Series A Preferred		(104,125	)		--
Issuance of convertible debentures		2,100,000			--
Payment for deferred financing costs for convertible debenture		(50,838	)		--
Net borrowings on lines of credit		535,311			(38,294	)
Principal payments on notes payable		--			(607,600	)
Deferred financing costs and commitment fees		--			(428,000	)
Proceeds from notes payable - related parties		--			150,000
Principal payments on capital lease obligations		(20,620	)		(28,504	)
Net cash provided by financing activities		2,459,728			3,662,358
Net change in cash		261,707			339,818
Cash, beginning of period		263,605			66,641
Cash, end of period	$	525,312		$	406,459
Supplemental cash flow information
Income taxes paid	$	--		$	--
Interest Expense:
Interest Paid	$	185,059		$	101,009
Non-cash Interest:
Amortization deferred financing costs		417,465			289,335
Common stock issued to Laurus for extended filing date		--			51,900
Warrants issued to bridge and other lenders		--			206,186
Common stock issued to senior executives upon conversion of notes payable		--			39,628
Other non-cash interest expense		10,939			27,219
Total Interest Expense	$	613,463		$	715,277
Noncash investing and financing activities
Convertible debt deferred financing expenses
Deferred financing costs incurred  in connection with issuance of convertible debentures	$	(302,396	)	$	--
Issuance of common stock warrants to placement agent		151,558			--
Fee paid to placement agent in prior year		100,000			--
Fee paid to placement agent	$	(50,838	)	$	--
Conversion of related party and other debt:
Issuance of common stock to repay debt, interest and wages and salaries expense	$	--		$	2,270,848
Gain on extinguishment of debt		--			106,423
Interest expense/accrued interest		--			(39,628	)
Compensation expense due to related parties		--			(355,637	)
Retirement of debt		--			(1,982,006	)
Net cash effect from conversion of related party debt	$	--		$	--
InTransit asset purchase:
Intangible assets acquired	$	--		$	(1,072,372	)
Common stock issued		--			572,372
Net cash paid in asset purchase	$	--		$	(500,000	)
E&M Acquisition:
Current assets acquired	$	--		$	(324,892	)
Fixed assets acquired		--			(147,000	)
Intangible assets acquired		--			(2,969,582	)
Other long term assets acquired		--			(44,750	)
Current liabilities assumed		--			328,970
Goodwill from acquisition		--			(2,359,418	)
Common stock issued		--			4,441,874
Note payable issued		--			200,000
Stock issuance payable		--			274,798
Net cash paid in acquisition	$	--		$	(600,000	)

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business and History

Description of Business. Impart Media Group, Inc. (the “Company”), headquartered in Seattle, Washington U.S.A., provides digital signage and information networks in the business-to-consumer media sector. The Company’s digital signage and interactive kiosk solutions consist of flat panel monitors, media players/servers, audio-video accessory components, enclosures/mounts/fixtures, web services, and software. The Company also provides consulting, design, integration, fabrication, assembly, IP connectivity, quality assurance, creative production, installation, onsite maintenance, web-data hosting, network monitoring and content management services throughout the United States (and in global markets through its authorized distributors). As a result of the Company’s acquisition of E&M Advertising, Inc. and its affiliates (E&M) in February 2006, the Company also provides offline and online direct response advertising capabilities.

Note 2. Going Concern

The Company’s financial statements are prepared consistent with accounting principles generally accepted in the United States applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, as shown in the financial statements, the Company has sustained substantial losses and has relied primarily on sales of securities and proceeds from borrowings for operating capital, which raise substantial doubt about its ability to continue as a going concern.

The Company anticipates that its existing capital resources, including amounts available under its revolving credit facility, will enable it to continue operations through June 30, 2008, assuming the Company meets its sales projections for such period. If the Company materially fails to meet such sales projections and does not raise additional capital, then the Company may be forced to severely curtail or cease operations. Consequently, the Company is actively working with investment banks and institutional investors to obtain additional capital through various financing options; however, the Company does not have any financing agreements at this time. There can be no assurance that financing will be available on favorable terms or at all. If the Company raises additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders.

The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company have to curtail operations or be unable to continue in existence.

Note 3. Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries. All material intercompany balances and transactions have been eliminated. The interim financial statements reflect all adjustments, consisting only of normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year. The Condensed Consolidated Balance Sheet as of June 30, 2007 has been derived from the unaudited financial statements at that date. However, it does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements should be read in conjunction with the audited Consolidated Financial Statements for the fiscal year ended December 31, 2006, included in our Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 12, 2007.

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In February 2006, the Company completed its acquisition of E&M. E&M’s results of operations and cash flows are included in the Company’s Condensed Consolidated Statements of Operations and Cash Flows from this date.

Certain prior period balances in the Consolidated Statement of Operations for the three and six months ended June 30, 2006, have been reclassified to conform to current period presentation by combining Professional and consulting, Rent expense, and Other general and administrative expenses and reporting these expenses together as General and administrative expenses. Certain prior period balances in the Net cash used by operating activities section of the Consolidated Statements of Cash Flows were also reclassified. Total balance in Net cash used by operating activities remains unchanged.

Note 4. Summary of Significant Accounting Policies

The significant accounting policies used in the preparation of our audited Consolidated Financial Statements are disclosed in our Annual Report on Form 10-KSB for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on April 12, 2007. Updated disclosures regarding such policies are set forth below.

Loss per Share. Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of common stock shares outstanding during the period. Diluted loss per share, which would include the effect of the conversion of unexercised stock options, unexercised warrants to purchase common stock, and convertible Preferred Stock, is not separately computed because inclusion of such conversions is antidilutive. In these cases, basic and diluted loss per share is the same.

Basic and diluted weighted average common shares outstanding, and the potentially dilutive securities excluded from loss per share computations because they are antidilutive, are as follows for the three and six month periods ended June 30,

	2007				2006
	Three Months		Six Months		Three Months		Six Months
Basic and diluted weighted average common stock shares outstanding		23,718,683		23,177,470		21,750,103		20,097,470
Potentially dilutive securities excluded from loss per share computations:
Convertible Preferred Stock		8,653,855		8,653,855		2,903,229		2,903,229
Common stock options		4,160,000		4,160,000		1,295,000		1,295,000
Common stock purchase warrants		5,539,678		5,539,678		5,195,443		5,195,443

Revenue Recognition. The Company recognizes revenue when it has persuasive evidence of an arrangement, the product has been shipped or the services have been provided to the customer, title and risk of loss for products has passed to the customer, the sale price is fixed and determinable, no significant unfulfilled Company obligations exist, and collectibility is reasonable assured.

Revenue from equipment sales is generally recognized when products are shipped and/or the revenue is fully earned and ownership has passed to the customer. Revenue from management subscriptions is recorded in the month the service is provided. Revenue from consulting and design services, which are all short-term, is recognized using the completed-contract method. There were no significant contracts in process at June 30, 2007.

Revenues from media services consist of sales of brokered advertising and certain other consulting, content creation, and Internet-based advertising fees. Because the Company typically acts as an agent on behalf of its advertising clients, brokered advertising revenues are recorded based on the net commissions earned. Media services revenues from consulting, content creation, and Internet-based advertising fees are recorded at their gross billing amounts.

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The gross and net billing amounts included in operating revenues for the three and six month periods ended June 30, 2007 and 2006 are follows:

	Three Months Ended June 30, 2007			Six Months Ended June 30, 2007			Three Months Ended June 30, 2006			Six Months Ended June 30, 2007
Consolidated gross revenues	$	10,300,622		$	20,711,843		$	6,242,225		$	8,463,000
Direct cost of sales		(8,541,469	)		(16,773,457	)		(4,815,888	)		(5,813,919	)
Consolidated net revenues	$	1,759,153		$	3,938,386		$	1,426,337		$	2,649,081

Note 5. Convertible Notes Payable

Effective May 25, 2007, the Company borrowed $2.1 million pursuant to the issuance of a series of unsecured convertible debentures (the “Convertible Debentures) with a two year maturity to a group of institutional lenders (the “Purchasers”.) Interest is recorded at 6% per annum. The Convertible Debentures are convertible, at the option of the purchasers, into shares of common stock, par value $0.001 per share, at a conversion price of $0.75 per share (the “Conversion Price”). Purchasers of the Convertible Debentures will receive registration rights pursuant to a Registration Rights Agreement that requires the Company to file a registration statement under the Securities Act of 1933 covering the resale the shares of common stock issuable upon conversion of the principal amount and interest payable. This registration was filed with the SEC on July 10, 2007.

Each Purchaser may, at any time, convert all or any portion of the outstanding principal amount and/or accrued interest under its Convertible Debenture into fully paid and nonassessable shares of the Company’s common stock at the Conversion Price. Unless waived by the Purchaser, neither the Company nor such Purchaser may convert such Purchaser’s Convertible Debenture if, as a result of the issuance of the underlying shares of common stock, such Purchaser would beneficially own more than 4.99% of the issued and outstanding shares of the Company’s common stock. If so waived, such Purchaser’s Convertible Debenture may not be converted if, as a result of the issuance of the underlying shares of common stock, such Purchaser would beneficially own more than 9.99% of the issued and outstanding shares of the Company’s common stock.

Beginning on the six month anniversary of the issuance date of the Convertible Debentures, the Company is required to begin making monthly repayments of principal and accrued interest. The amount of the principal payments will be equal to 1/18 of the aggregate principal amount of Convertible Debentures issued in the offering ($116,666 per month).

Subject to certain customary exceptions, if the Company issues common stock or other securities convertible into or exercisable for common stock at per share less than the Conversion Price then in effect, the Conversion Price will be reduced to a price equal to the price per share of such issued securities. The Conversion Price is also subject to adjustment upon stock splits, stock dividends and the like.

Subject to certain notice and other provisions, the Company may prepay each Convertible Debenture at any time.

If an event of default occurs under the Convertible Debentures, each Purchaser has the option to declare immediately due and payable all obligations under the Convertible Debenture at an amount equal to all costs, fees and liquidated damages plus the greater of (i) 130% of the outstanding principal amount of the Convertible Debenture plus accrued interest thereon or (ii) the outstanding principal amount of the Convertible Debenture plus accrued interest thereon divided by the Conversion Price on the date of the default. Such events of default include, without limitation, the following:

· a failure to make payments of principal or interest under the Convertible Debenture when due, subject to a three trading day cure period in the case of late interest payments only;

· a breach by the Company of any covenant of the Convertible Debenture which continues for five trading days without cure after notice thereof by the Purchaser or ten trading days after the Company becomes (or should have become) aware of such breach;

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· if the Company’s common stock is not eligible for listing or quotation for five trading (5) consecutive days; and

· if the Registration Statement shall not have been declared effective on or prior to the 270th day after the closing date for the sale of Convertible Debentures

In connection with the Convertible Debentures, the Company issued to the Purchasers five-year warrants (the “Warrants”) granting the right to purchase for cash (or through a “cashless exercise” feature) up to 1,400,000 shares of common stock (representing 50% of the number of shares initially issuable upon conversion of the Convertible Debentures), at an initial exercise price of $0.52. The Warrants expire on May 24, 2012. Subject to certain customary exceptions, if the Company issues common stock or other securities convertible into or exercisable for common stock at per share less than the exercise price of the Warrants, the exercise price will be reduced to a price equal to the price per share of such issued securities. The Conversion Price is also subject to adjustment upon stock splits, stock dividends and the like. Unless waived by the Purchaser, such Purchaser may not exercise its Warrant if, as a result of the issuance of the underlying shares of common stock, such Purchaser would beneficially own more than 4.99% of the issued and outstanding shares of the Company’s common stock.  If so waived, such Purchaser may not exercise its Warrant if, as a result of the issuance of the underlying shares of common stock, such Purchaser would beneficially own more than 9.99% of the issued and outstanding shares of common stock.

In connection with its role as placement agent with respect to the Convertible Debentures, the Company issued to the placement agent (and its designees) five-year warrants to purchase an aggregate of 280,000 shares of common stock with an exercise price of $0.52 per share. These warrants expire on May 24, 2012.  The value of these warrants on the date of grant was approximately $152,000.  The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: expected divided yield of 0%, risk-free interest rate of 4.8%, volatility of 139%, and a contractual life of 5 years.  The value of the warrants was recorded as deferred finance costs, and will be amortized over the life of the loan.

Proceeds from the issuance of $2.1 million convertible promissory notes and warrants were allocated between the notes and warrants on a relative fair value basis. The value allocated to the warrants on the date of the grant was approximately $557,000. The fair value of the warrants was determined using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%, risk-free interest rate of 4.8%, volatility of 139%, and a contractual life of 5 years. The value of the warrants was recorded as a deferred debt discount against the $2.1 million proceeds of the notes. In addition, a beneficial conversion feature related to the notes was determined to be approximately $137,000. As a result, the total discount on the notes equaled $694,000 which is being amortized over the three year term of the notes. Amortization of deferred debt discount of approximately $59,000 was recorded for the three and six months ended June 30, 2007. Interest expense on the notes of approximately $13,000 was recorded for the three and six months ended June 30, 2007.

Note 6. Lines of Credit

On January 27, 2006, the Company entered into an agreement with Laurus Master Fund, Ltd. (“Laurus”) pursuant to which Laurus agreed to provide the Company with a revolving credit facility of up to $6 million (the “Facility”). The term of the Facility is three years and borrowings accrue interest on the unpaid principal and interest at a rate per annum equal to the “prime rate” published in The Wall Street Journal from time to time, plus three percent (11.25% at June 30, 2007). The maximum principal amount of all borrowings under the Facility cannot exceed ninety percent (90%) of the Company’s eligible accounts receivable minus such reserves that Laurus may in good faith deem necessary and appropriate.

Note 7. Series A Preferred Stock

During March 2006, the Company sold 2,903,229 shares of Series A Preferred Stock at a price of $1.55 per share for total gross proceeds of $4.5 million. Further, the purchasers of the Series A Preferred Stock received three-year warrants to purchase 2,903,229 shares of common stock at $2.25 per share. The Company registered the shares of common stock underlying the Series A Preferred Stock and warrants in a Form SB-2 which was declared effective by the Securities and Exchange Commission on September 1, 2006. On December 13, 2006, the Company issued a stop order for sales pursuant to the registration statement in order to allow the Company to restate certain financial statements. As a result, the Series A Preferred Stock was determined to be subject to mandatory redemption. In addition, the holders of the Series A Preferred Stock became entitled to certain liquidated damages.

9

Effective March 23, 2007, the holders of the Series A Preferred Stock granted certain waivers to the Company in consideration for a decrease in the conversion price of the Series A Preferred Stock from $1.55 to $1.00 and a reduction in the warrant exercise price from $2.25 to $0.01. This waiver also extended the time period the Company has in order to file a post effective amendment to the registration statement.

In return for the consideration described above, the holders of the Series A Preferred Stock:

•           Waived their right to receive convertible preferred stock as a one-time dividend to holders of the stock in the event of the Company’s failure to achieve aggregate gross revenues of $50,000,000 or more during the four (4) calendar quarters commencing on April 1, 2006, and ending on March 31, 2007;

•           Waived any and all breaches and the right to receive liquidated damages and redemption rights related to the Company’s failure to obtain an effective registration statement as mandated by the original registration rights agreement that was executed in connection with the issuance of the Series A Preferred Stock;

•           Agreed to a reduction in the Series A Preferred Stock redemption price from 200% of the liquidation preference amount to 100% of such amount; and

•           Waived their right to any dividends with respect to the Series A Preferred Stock up to and including accruals through March 2, 2007, but will be entitled to dividends thereafter. As of July1, 2007, the Company has declared and paid dividends through June 30, 2007.

As a result of the reduction in the conversion price, the holders of the Series A Preferred Stock can convert the preferred shares into an additional 1,596,777 shares. The value related to the reduction in the conversion price was determined to be $974,033 and was recorded as of December 31, 2006.

On May 22, 2007, the Company filed a Post Effective Amendment to Form SB-2 covering the shares of common stock underlying the Series A Preferred Stock and the warrants issued to the purchasers of the Series A Preferred Stock. The registration statement was declared effective as of June 26, 2007.

In connection with the issuance of the Convertible Debentures on May 25, 2007, an additional reduction in the conversion price was triggered. Accordingly, the holders of the Series A Preferred Stock can convert the preferred shares into an additional 4,153,850 shares. The value related to this further reduction in the Series A Preferred Stock conversion price was determined to be $2,447,310 and was recorded during the quarter ended June 30, 2007.

The value of the reduction of the exercise price of the warrants was determined to be $934,856. This incremental value is measured as the difference between (a) the fair value of the modified warrant and (b) the value of the old warrant immediately before the terms were modified, determined based on the remaining expected life of the warrant and was recorded as of December 31, 2006.

The values of the reductions of the Series A Preferred Stock conversion price and the exercise price of the warrants increase additional paid-in capital attributable to the holders of the Series A Preferred Stock and, at the same time, are considered to be deemed dividends to those holders. Because the Company has an accumulated deficit, these dividends reduce additional paid-in capital rather than increase the accumulated deficit. These amounts also increase net loss attributable to common stockholders.

The Series A Preferred Stock provides that dividends are cumulatively payable at an annual rate of seven percent (7%) of the gross issuance price of the stock ($4.5 million), payable semi-annually on January 1 and July 1 of each year. Dividends on the Series A Preferred Stock are payable in either cash or shares of common stock at the Company’s discretion, provided that the Company has an effective registration statement providing for the resale of the shares of its common stock that would be paid as a dividend.  The amount of dividends paid prior to or on June 30, 2007 was $104,125.

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Note 8. Share-Based Payments

During the three and six months ended June 30, 2007, the Company made share-based payments in the form of:

• Incentive stock options (“options”) under its 2006 Equity Incentive Plan (“the Plan”), to employees, directors, and others;

• Issuances of common stock to consultants

• Issuances of remaining common stock payable in connection with the 2006 purchase of E&M Advertising, Inc.

Incentive Stock Options

During the second quarter 2007, the Company granted 300,000 options under the Plan at an exercise price of $0.56 per common share.  The total fair value of the options as of the grant date was $165,000.

During the first quarter 2007, the Company granted 2,182,500 options under the Plan at an exercise price of $0.40 per common share. The total fair value of the options as of the grant date was $814,000.

During the three and six months ended June 30, 2007, $226,746 and $585,750, respectively, was expensed as General and Administrative Expenses.

The fair value for options granted during the six months ended June 30, 2007 was estimated using the Black-Scholes option valuation model with the following weighted average assumptions:

	2007
Expected life in years		7.2
Volatility		146.3	%
Interest rate		4.9	%
Yield rate		0	%

There were no options granted in the six months ended June 30, 2006.

Issuances of Common Stock

During the first six months of 2007, the Company issued 127,000 shares of common stock pursuant to two consulting agreements. The shares had a fair value of $196,850 and were recorded as prepaid expenses, of which $145,183 was recognized as non-cash general and administrative expenses in the six month period ended June 30, 2007.

Note 9. Common Stock

During the six months ended June 30, 2007, the Company issued 1,269,497 shares of common stock upon the cashless exercise of 1,290,324 $0.01 warrants held by certain holders of Series A Preferred Stock.

Note 10. Commitments and Contingencies

In March 2007, the Company received notice of a possible lawsuit against it by a former employee and consultant to the Company alleging breach of contract and wrongful termination, among other claims. In May, the Company settled with the claimant in the amount of $45,000 which has been recorded as General and Administrative Expenses in the six month period ended June 30, 2007.

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In February 2006, the Company was assigned an agreement (the “PATH Contract”), dated as of December 2, 2002, between Black Experience, Inc., BX Media Group, Inc. and Port-Authority Trans-Hudson Corporation (“PATH”), as amended, pursuant to which the Company obtained the rights to provide PATH with certain advertising and marketing services in connection with its PATHVision system. Effective February 2007, the Company and PATH mutually agreed to terminate the PATH Contract.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our financial statements and notes appearing elsewhere in this Quarterly Report. We do not undertake any obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results or achievements to be materially different from any future results or achievements expressed or implied by such forward-looking statements. Such factors include the factors described in our Annual Report on Form 10-KSB for the year ending December 31, 2006 under the caption “Management’s Discussion and Analysis or Plan of Operation” and the other factors discussed in connection with any forward-looking statements.

Critical Accounting Estimates and New Accounting Pronouncements

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if it:

• requires assumptions to be made that were uncertain at the time the estimate was made; and

• changes the estimate or different estimates that could have been selected may have made a material impact on our consolidated results of operations or financial condition.

Share-Based Payments - Prior to January 1, 2006, we accounted for stock options to employees under the fair value provision of SFAS 123. On January 1, 2006, we adopted SFAS 123(R), “Share-Based Payment”, which establishes standards for share-based transactions in which an entity receives employee’s services for (a) equity instruments of the entity, such as stock options, or (b) liabilities that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) supersedes the option of accounting for share-based compensation transactions using APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and requires that companies expense the fair value of stock options and similar awards, as measured on the awards’ grant date. SFAS 123(R) applies to all awards granted after the date of adoption, and to awards modified, repurchased or cancelled after that date. We have elected to apply SFAS 123(R) using the modified prospective application, under which compensation cost is recognized only for the portion of awards outstanding for which the requisite service has not been rendered as of the adoption date.

We grant options to purchase our common stock to our employees and directors under our 2006 Equity Incentive Plan. The benefits provided under this plan are share-based payments subject to the provisions of SFAS 123(R). Share-based compensation expense recognized under SFAS 123(R) through the first six months of 2007 and 2006 was $585,750 and $91,000, respectively. At June 30, 2007, total unrecognized estimated compensation expense related to unvested stock options granted prior to that date was $1.6 million.

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We estimate the value of stock option awards on the date of grant using the Black-Scholes option-pricing model (the “Black-Scholes model”). The determination of the fair value of share-based payment awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, expected term, risk-free interest rate, expected dividends and expected forfeiture rates.

If factors change and we employ different assumptions in the application of SFAS 123(R) in future periods, the compensation expense that we record under SFAS 123(R) may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation under SFAS 123(R). Consequently, there is a risk that our estimates of the fair values of our share-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Employee stock options may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments which is significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements.

The guidance in SFAS 123(R) and the Commission’s Staff Accounting Bulletin No. 107 (SAB 107) is relatively new and best practices are not well established. There are significant differences among valuation models, and there is a possibility that we will adopt a different valuation model in the future. Theoretical valuation models are evolving and may result in lower or higher fair value estimates for share-based compensation. The timing, readiness, adoption, general acceptance, reliability and testing of these methods is uncertain. Sophisticated mathematical models may require voluminous historical information, modeling expertise, financial analyses, correlation analyses, integrated software and databases, consulting fees, customization and testing for adequacy of internal controls. The uncertainties and costs of these extensive valuation efforts may outweigh the benefits to investors.

Revenue Recognition - Revenue from design and installation contracts is recognized using the completed-contract method under which the amount of revenue recognized is the lower of the percentage complete applied to expected contractual payments or the total non-refundable cash received to date. Changes in the projected hours or cost to complete the project could significantly change the amount of revenue recognized. There were no significant contracts in process during the three months and six months ended June 30, 2007.

In addition, after consultation with our auditors, we account for revenue attributable to contracts acquired in conjunction with our acquisition of E&M on a net basis, as opposed to gross basis. Historically, over a twenty year period, E&M’s management had recorded revenue on a gross basis, but to insure compliance with GAAP and upon other accounting considerations, we have elected to utilize the net revenue recognition calculations. This method of net revenue recognition will have no effect on net income or loss. Although we recorded revenues on a net basis, we do record accounts receivable invoices and vendor payables at gross because these are legitimate receivables and payables in those amounts.

The gross and net billing amounts included in operating revenues for the three and six months ended June 30, 2007 and 2006 are follows:

	Three Months Ended June 30, 2007			Six Months Ended June 30, 2007			Three Months Ended June 30, 2006			Six Months Ended June 30, 2007
Consolidated gross revenues	$	10,300,622		$	20,711,843		$	6,242,225		$	8,463,000
Direct cost of sales		(8,541,469	)		(16,773,457	)		(4,815,888	)		(5,813,919	)
Consolidated net revenues	$	1,759,153		$	3,938,386		$	1,426,337		$	2,649,081

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Results of Operations

Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006

Three Months Ended June 30,
	2007		2006		Change			%Change
	(in thousands)
Revenue	$	1,759	$	1,426	$	333			23	%
Cost of revenue		561		703		(142	)		(20	%)
Other operating expenses		2,668		3,281		(613	)		(19	%)
Interest expense		371		269		102			38	%
Other (income) and expenses		0		14		(14	)		-
Net Loss		1,841		2,841		(1,000	)		(35	%)

Revenue. Revenue increased by $333,000, or 23%, from $1.4 million to $1.8 million for the three months ended June 30, 2007 and 2006, respectively. Approximately $698,000 of that increase was derived from additional media services revenue generated by our direct response media advertising division whose assets we acquired in February 2006. This was offset by a $247,000 decrease in equipment sales and an $118,000 decrease in managed subscriptions and consulting design services related to legacy products that we discontinued.

We derive our revenues from (i) equipment sales (e.g., sales of digital signage displays, Impart IQ media players and servers, audio-video-data accessories, touch screens and enclosures), (ii) managed subscription revenues (e.g., monthly recurring fees for contracted digital signage serviced network sites, content management, status monitoring, Impart IQ Streams infotainment web service, and web/server data hosting), (iii) consulting and design services (e.g., fees for creative production, project consulting, installation, and onsite servicing) and (iv)  media services (e.g., media sales and direct response).

Equipment Sales.  During the three months ended June 30, 2007, equipment sales decreased by 39% compared with the same period in 2006. We attribute this decrease primarily to fewer sales of our legacy audio-video business products. We expect overall equipment sales to increase each succeeding quarter in 2007 and to represent a larger percentage of our total revenues, due to anticipated demand and increased sales of our new Concierge kiosk system, our upgraded iPoint system, the economical and expanded IQ mini product line, and newly designed graphical user interfaces for print system kiosks and other, to be announced, product applications.

            Managed Subscriptions. During the three months ended June 30, 2007, managed subscription fees decreased by 35% compared with the same period in 2006. We attribute this decrease primarily to the natural, end-of-life attrition of legacy eyeFRAMES platform dial-up networks at the end of 2006. With recent subscription renewals and anticipated increases in managed services for the IQ platform, including Concierge, we expect the overall subscription revenue category to increase in the remaining two quarters of 2007.

Consulting and Design Services.  During the three months ended June 30, 2007, consulting and design services fees decreased by 80% as compared with the same period in 2006. We attribute this decrease primarily to the higher non-recurring creative and content production activity occurring during the three months ended June 30, 2006. In recent deployments of our Impart IQ digital signage and interactive kiosks, clients have elected to manage much of the creative and content production. However, we anticipate an increase in creative design and content production services in the second half of 2007 in conjunction with the release of specialized web portal user interfaces such as our Concierge and related print system products. We also anticipate, as Impart High IQ enterprise development efforts in 2007 translate into sales, that ancillary consulting revenues will increase in 2008.

Media Services.  During the three months ended June 30, 2007, revenues from media and direct response services increased by 120% compared with the same period in 2006. We attribute this increase primarily to an increase in sales staff and aggressive business development efforts. The direct response advertising market has been strong and we expect revenues to continue at current levels for the remainder of 2007. Media and direct response services represented 73% of total revenues this quarter. We anticipate that revenues from media and direct response services will represent a smaller percentage of our overall revenues for the remaining two quarters of 2007 as a result of an expected increase in equipment sales connected with our new Concierge & related print system kiosks, 3D displays, IQ mini, and IQ interactive systems.

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Cost of Revenues. Our cost of revenues decreased by $142,000 during the three months ended June 30, 2007 compared with the same period in 2006 primarily as a result of lower equipment sales. Cost of revenues primarily consists of amounts we pay for hardware (i.e., video displays, media players and servers) that we integrate and install for our customers. Our direct response advertising division’s cost of revenues were relatively low as a percentage of sales due to the manner in which we recognize revenue where most sales are recorded at the net amount billed, rather than gross, on revenues earned from a fee or commission. As these media sales became a greater portion of our sales in the second quarter of 2007, the resulting cost of revenues fell as a percentage of total sales when compared with the same period in 2006.

Other Operating Expenses. General and administrative expenses for the three months ended June 30, 2007 decreased by 32% from the same period in 2006 to $1.1 million. Within general and administrative expenses, professional and consulting expenses declined by $563,000 mainly due to reduced legal and consulting expenses in conjunction with certain acquisition and financing activities in 2006.

Selling and marketing expenses for the three months ended June 30, 2007 decreased by $181,000 as compared to the same period in 2006 primarily due to PATHvision (“PATHvision) related expenses incurred in 2006, but not in 2007. As reported in our 2006 Annual Report on Form 10-KSB, the PATHvision intangible asset was determined to be entirely impaired in 2006.

Wages and salaries expenses in the three months ended June 30, 2007 were $1.3 million, an increase of $223,000 as compared to the same period in 2006. This was primarily due to additional executive compensation plus increased wages expenses in the direct response media advertising business.

Depreciation and amortization expenses for the three months ended June 30, 2007 were $193,000, a decrease of $128,000 from the same period in 2006. This was primarily due to expenses related to PATHvision amortization that were incurred in 2006, but not in 2007.

Other Expenses. Interest expense for the three months ended June 30, 2007 were $372,000, an increase of $102,000 over the same period in 2006. The increase was primarily due to a higher interest rate, higher average credit line balances, plus interest recorded in connection with our convertible debt financing.

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Six Months Ended June 30,
	2007		2006			Change			%Change
	(in thousands)
Revenue	$	3,938	$	2,649		$	1,289			49	%
Cost of revenue		1,428		1,292			136			(11	%)
Other operating expenses		5,681		6,318			(637	)		(10	%)
Interest expense		613		715			(102	)		(14	%)
Other (income) and expenses		0		(106	)		106			-
Net Loss		3,784		5,570			(1,786	)		(32	%)

Revenue. Revenue increased by $1.3 million, or 49%, from $2.6 million to $3.9 million for the six months ended June 30, 2007 and 2006, respectively. Approximately $1.5 million of that increase was derived from additional media services revenue generated by our direct response media advertising division whose assets we acquired in February 2006. This was offset by a $237,000 decrease in managed subscriptions and consulting design services mainly related to legacy products that we discontinued.

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Equipment Sales.  During the six months ended June 30, 2007, equipment sales were level compared with the same period in 2006. This was primarily a combination of additional sales resulting from the product release and sales of the IQ miniZ product line and reduced sales of our legacy audio-video business products

Managed Subscriptions. During the six months ended June 30, 2007, managed subscription fees decreased by 36% compared with the same period in 2006. We attribute this decrease primarily to the natural, end-of-life attrition of legacy eyeFRAMES platform dial-up networks at the end of 2006. 

Consulting and Design Services.  During the six months ended June 30, 2007, consulting and design services fees decreased by 69% as compared with the same period in 2006. We attribute this decrease primarily to the higher non-recurring creative and content production activity occurring during the six months ended June 30, 2006.

Media Services.  During the six months ended June 30, 2007, revenues from media and direct response services increased by 149% compared with the same period in 2006. We attribute this increase primarily to an increase in sales staff and aggressive business development efforts. Also, we began our media services division in February 2006 and, thus, revenues for the six months ended June 30, 2006 did not reflect a comparable time period as in 2007. Media and direct response services represented 65% of total revenues during the six months ended June 30, 2007.

Cost of Revenues. Our cost of revenues increased by $136,000 during the six months ended 2007 compared with the same period in 2006 primarily as a result of the increased cost of services connected with increased media services revenues. This amount was offset somewhat by lower equipment costs of sales as a percentage of total equipment sales. Cost of revenues primarily consists of amounts we pay for hardware (i.e., video displays, media players and servers) that we integrate and install for our customers. Our direct response advertising division’s cost of revenues were relatively low as a percentage of sales due to the manner in which we recognize revenue where most sales are recorded at the net amount billed, rather than gross, on revenues earned from a fee or commission. As these media sales became a greater portion of our sales for the six months ended June 30, 2007, the resulting cost of revenues fell as a percentage of total sales when compared with the same period in 2006.

Other Operating Expenses. General and administrative expenses for the six months ended June 30, 2007 decreased by 18% from the same period in 2006 to $2.5 million. Within general and administrative expenses, professional and consulting expenses declined by $886,000 mainly due to reduced legal and consulting expenses in conjunction with certain acquisition and financing activities in 2006.

Selling and marketing expenses for the six months ended June 30, 2007 decreased by $153,000 as compared to the same period in 2006 primarily due to PATHvision (“PATHvision) related expenses incurred in 2006, but not in 2007. As reported in our 2006 Annual Report on Form 10-KSB, the PATHvision intangible asset was determined to be entirely impaired in 2006.

Wages and salaries expenses in the six months ended June 30, 2007 were $2.6 million, an increase of $221,000 as compared to the same period in 2006. This was primarily due to additional executive compensation plus increased wages expenses in the direct response media advertising business.

Depreciation and amortization expenses for the six months ended 2007 were $384,000, a decrease of $160,000 from the same period in 2006. This was primarily due to expenses related to PATHvision amortization that were incurred in 2006, but not in 2007.

Other Expenses. Interest expense for the six months ended June 30, 2007 was $613,000 a decrease of $102,000 from the same period 2006. Although we experienced a higher interest rate, higher average credit line balances, and interest connected with our convertible debt financing in the second quarter 2007, the resulting increase in interest expense was more than offset by the increased first quarter interest expense in 2006 that resulted from the issuance of common stock warrants in lieu of the payment of accrued interest on loans payable.

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Cash Sources and Uses

The following table summarizes the Company’s 2007 and 2006 cash flow activity for the six months ended June 30, 2007 and 2006, respectively.

	June 30,
	2007		2006
	(in thousands)
Cash Sources
Proceeds from issuance of equity securities	$	-	$	4,615
Net borrowings from line of credit		535		-
Net proceeds from issuance of convertible debentures		2,049		-
Proceeds from notes payable – related parties				150
Total cash sources	$	2,584	$	4,765
Cash Uses
Cash used in operating activates	$	2,173	$	2,000
Cash used in acquisitions		-		1,100
Net pay downs on line of credit				38
Repayment of debt obligations		-		608
Deferred financing costs		-		428
Capital expenditures		25		222
Other cash uses		124		29
Total cash uses	$	2,322	$	4,425
Increase in cash	$	262	$	340

At June 30, 2007, we had current assets of approximately $5.3 million consisting of restricted and unrestricted cash in the amount of $575,000, accounts receivable in the amount of $4.2 million, prepaid expenses and other current assets of $144,000, and inventory in the amount of $363,000. Long-term assets of $7.9 million consisted primarily of goodwill and intangible assets of $4.5 million, deferred financing costs of $1.7 million and fixed assets of $1.5 million, including computer servers, media players and video display equipment used in operations.

Our current liabilities of $9.6 million at June 30, 2007 consisted primarily of $7.1 million of accounts payable, $282,000 of accrued and other liabilities, $1.4 million due under the Laurus Facility, $438,000 for the current portion of convertible debentures outstanding, and $200,000 of amounts payable to a former E&M owner.

Long term liabilities consist primarily of $1.0 million convertible debentures, long-term portion and $150,000 of a long-term related-party note payable.

Our working capital deficit was approximately $4.2 million as of June 30, 2007.

Financing Activities

Effective May 25, 2007, we borrowed $2.1 million pursuant to the issuance of a series of unsecured convertible debentures (the “Convertible Debentures) with a two year maturity to a group of institutional lenders (the “Purchasers”). Interest is recorded at 6% per annum. The Convertible Debentures are convertible, at the option of the purchasers, into shares of common stock, par value $0.001 per share, at a conversion price of $0.75 per share (the “Conversion Price”). Purchasers of the Convertible Debentures  received registration rights pursuant to a Registration Rights Agreement that required us to file a registration statement under the Securities Act of 1933 covering the resale the shares of common stock issuable upon conversion of the principal amount and interest payable. We filed the registration statement Form SB-2 with the SEC on July 10, 2007. This registration is yet to be declared effective by the SEC.

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Each Purchaser may, at any time, convert all or any portion of the outstanding principal amount and/or accrued interest under its Convertible Debenture into fully paid and nonassessable shares of our common stock at the Conversion Price. Unless waived by the Purchaser, neither we nor the Purchaser may convert the Purchaser’s Convertible Debenture if, as a result of the issuance of the underlying shares of common stock, the holder would beneficially own more than 4.99% of the issued and outstanding shares of our common stock. If so waived, the Purchaser’s Convertible Debenture may not be converted if, as a result of the issuance of the underlying shares of common stock, the Purchaser would beneficially own more than 9.99% of the issued and outstanding shares of our common stock.

Beginning on the six month anniversary of the issuance date of the Convertible Debentures, we are required to begin making monthly repayments of principal and accrued interest. The amount of the principal payments will be equal to 1/18 of the aggregate principal amount of Convertible Debentures issued in the offering, which is $116,666 per month.

Subject to certain customary exceptions, if we issue common stock or other securities convertible into or exercisable for common stock at a per share price less than the Conversion Price then in effect, the Conversion Price will be reduced to a price equal to the price per share of such issued securities. The Conversion Price is also subject to adjustment upon stock splits and stock dividends.

Subject to certain notice and other provisions, we may prepay each Convertible Debenture at any time.

If an event of default occurs under the Convertible Debentures, each Purchaser has the option to declare immediately due and payable all obligations under the Convertible Debenture at an amount equal to all costs, fees and liquidated damages plus the greater of (i) 130% of the outstanding principal amount of the Convertible Debenture plus accrued interest thereon or (ii) the outstanding principal amount of the Convertible Debenture plus accrued interest thereon divided by the Conversion Price on the date of the default. Such events of default include, without limitation, the following:

· a failure to make payments of principal or interest under the Convertible Debenture when due, subject to a three trading day cure period in the case of late interest payments only;

· a breach by us of any covenant of the Convertible Debenture which continues for five trading days without cure after notice thereof by the Purchaser or ten trading days after we become (or should have become) aware of such breach;

· if our common stock is not eligible for listing or quotation for five trading (5) consecutive days; and

· if the registration statement shall not have been declared effective on or prior to the 270th day after the closing date for the sale of Convertible Debentures

In connection with our Convertible Debentures, we also issued to the Purchasers five-year warrants (the “Warrants”) granting the right to purchase for cash (or through a “cashless exercise” feature) up to an aggregate of 1,400,000 shares of our common stock (representing 50% of the number of shares initially issuable upon conversion of the Convertible Debentures), at an initial exercise price of $0.52. The Warrants expire on May 24, 2012. Subject to certain customary exceptions, if we issue common stock or other securities convertible into or exercisable for common stock at per share less than the exercise price of the Warrants, the exercise price will be reduced to a price equal to the price per share of such issued securities. The Conversion Price is also subject to adjustment upon stock splits, stock dividends and similar adjustments. Unless waived by the Purchaser, such Purchaser may not exercise its Warrant if, as a result of the issuance of the underlying shares of common stock, such Purchaser would beneficially own more than 4.99% of the issued and outstanding shares of our common stock.  If so waived, such Purchaser may not exercise its Warrant if, as a result of the issuance of the underlying shares of common stock, such Purchaser would beneficially own more than 9.99% of the issued and outstanding shares of our common stock.

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In connection with its role as placement agent with respect to our Convertible Debentures, we issued to the placement agent (and its designees) five-year warrants to purchase an aggregate of 280,000 shares of our common stock with an exercise price of $0.52 per share. These warrants expire on May 24, 2012.

On January 27, 2006, we entered into a Security Agreement with Laurus, pursuant to which Laurus agreed to provide us with a revolving credit facility of up to $6 million. The Laurus Facility has a term of three years and borrowings under the Laurus Facility accrue interest on the unpaid principal and interest at a rate per annum equal to the “prime rate” published in The Wall Street Journal from time to time, plus three percent (3%). Interest on borrowings under the Laurus Facility is payable monthly on the first day of each month during the term of the facility. All outstanding principal amounts must be paid on January 27, 2009. The maximum principal amount of all borrowings under the Laurus Facility cannot exceed ninety percent of our eligible accounts receivable minus such reserves that Laurus may in good faith deem necessary and appropriate. Outstanding amounts payable under the Laurus Facility are secured by a lien on substantially all of our assets and our subsidiaries pursuant to the terms of a Security Agreement. In addition, we pledged the ownership interests in our subsidiaries pursuant to a stock pledge agreement executed in favor of Laurus securing our obligations under the Laurus Facility.

The Security Agreement and related documents provide that an event of default shall be deemed to have occurred if we default on the payment of any obligation or indebtedness when due, we suffer a bankruptcy or similar insolvency event or proceeding, we materially breach a representation or warranty or fail to observe any covenant or agreement, we suffer and do not discharge in a timely manner a final judgment for the payment of a sum in excess of a certain materiality threshold, our common stock has been delisted or trading has been suspended, we sell a substantial portion of our assets, we merge with another entity or we fail to timely deliver shares of our Common Stock to Laurus when due upon exercise of the warrants issued to Laurus in connection with the financing transaction. If an event of default occurs, Laurus has the right to accelerate payments under the Laurus Facility and, in addition to any other remedies available to it, foreclose upon the assets securing any outstanding amounts due to Laurus. If an event of default occurs, one hundred twenty-five percent (125%) of the unpaid principal balance, plus accrued interest and fees, will become immediately due and payable. Laurus shall also be entitled to payment of a default interest rate of two percent (2%) per month on all amounts due and such other remedies specified in the relevant transaction documents and under the Uniform Commercial Code.

During March 2006, we sold 2.9 million shares of our Series A preferred stock, par value $0.001 per share (the “Series A Preferred Stock”), at $1.55 per share for total gross proceeds of $4.5 million. In addition, the purchasers of the Series A Preferred Stock received warrants to purchase an aggregate of 2.9 million shares of our common stock with an exercise price of $2.25 per share and for a term of three years. In March 2007, we entered into a Waiver and Amendment to the Series A Preferred Stock agreement whereby we agreed to reduce the exercise price of such warrants to $0.01 per share in consideration of certain waivers granted by the holders of Series A Preferred Stock.

Each Series A Preferred Stock share is convertible by the holder at any time. As a result of the Convertible Debentures issuance in the second quarter of 2007, the conversion price for each Series A Preferred Stock share was adjusted to $0.52 per share. Therefore, each Series A Preferred Stock share is convertible into 2.98 shares of common stock. The Series A Preferred Stock will automatically convert into shares of our common stock at the conversion price of $0.52 (subject to certain adjustments) on the third anniversary of the issuance date or upon the date of a consummation of a bona fide firm underwritten public offering of our securities of at least $20 million in which the price per share is at least $4.00 (subject to certain restrictions).

The terms of the Certificate of Designation of the Series A Preferred Stock provides that dividends will accrue at an annual rate of seven percent (7%) of the gross issuance price of the stock ($4.5 million), payable semi-annually on January 1 and July 1 of each year. In March 2007, the Series A Preferred Stock holders waived their right to any dividends with respect to the Series A Preferred Stock up to and including accruals through March 2, 2007, but will be entitled to dividends thereafter.

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On May 22, 2007, we filed a Post Effective Amendment to Form SB-2 covering the shares of common stock underlying the Series A Preferred Stock and the warrants issued to the purchasers of the Series A Preferred Stock. The registration statement was declared effective as of June 26, 2007.

In the event of our liquidation, dissolution or winding up, the holders of Series A Shares, are generally entitled to receive a liquidation preference over the holders of common stock equal to $0.52 per share of Series A Share held and any declared but unpaid dividends.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, liquidity, or capital expenditures.

Liquidity and Capital Resources

We have limited capital resources. At June 30, 2007, total unrestricted cash was approximately $525,000. In the six months ended June 30, 2007, we funded operations with the proceeds from sales and services, borrowings on our $6 million accounts receivable-based credit facility from Laurus (the “Laurus Facility”), and the proceeds from our $2.1 million debenture offering. At June 30, 2007, the balance under the Laurus Facility was $1.45 million with $274,000 available for additional draw-down.

We anticipate that our existing capital resources, including amounts available under the Laurus Facility, will enable us to continue operations through June 30, 2008, assuming we meet our sales projections for the year. If we materially fail to meet such sales projections and we do not raise additional capital, then we may be forced to severely curtail or cease operations by June 30, 2008. Consequently, we are actively working with investment banks, institutional investors, and strategic investors to obtain additional capital through various financing options; however, we currently do not have any such financing agreements. There can be no assurance that financing will be available to us on favorable terms or at all. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders.

As of June 30, 2007, our accumulated deficit was $18.1 million. Our net loss was $1.9 million for the quarter ended June 30, 2007 and $3.8 million and $5.6 million for the six months ended June 30, 2007 and 2006, respectively. Additionally, we anticipate that we will incur significant losses from operations through the end of 2007. However, many of the expense items that generated these losses are non-cash charges such as non-cash interest, depreciation and amortization. Accordingly, if we meet our sales forecast for 2007, we anticipate that we will generate positive earnings before interest, taxes, depreciation, and amortization (EBITDA) during the last three months of 2007.

Our limited capital resources and recurring losses from operations raise substantial doubt about our ability to continue as a going concern and may adversely affect our ability to raise additional capital. The audit report prepared by our independent registered public accounting firm relating to our consolidated financial statements for the year ended December 31, 2006 includes an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

ITEM 3. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our company’s management, with the participation of our chief executive officer and our chief financial officer, has evaluated the effectiveness of our 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 (the “Exchange Act”)) as of June 30, 2007, the end of the period covered by this Report. Based on such evaluation, our chief executive officer and our chief financial officer have concluded that, as of June 30, 2007, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by our company in the reports that we file or submit under the Exchange Act.

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Internal Control Over Financial Reporting.  There have not been any material changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Act) during the second quarter of 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Claims and lawsuits have been filed against us and our subsidiaries from time to time. Although the results of pending claims are always uncertain, we do not believe the results of any such actions, individually or in the aggregate, will have a material adverse effect on our financial position or results of operation. Additionally, we believe that we have insurance coverage in respect of these claims, but no assurance can be given as to the sufficiency of such insurance in the event of any unfavorable outcome resulting from these actions.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

In April 2007, we issued 951,879 shares of common stock upon the cashless exercise of warrants having a $0.01 per share exercise price. These shares were issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Act.

ITEM 4– SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 Our stockholders approved the following proposals of our Annual Meeting of Stockholders held on Thursday, June 14, 2007:

1) The election of the following five (5) directors, each to hold office for a term of one (1) year or until their respective successors have been duly elected or appointed:

Nominee	Votes FOR	Votes WITHHELD
Joseph F. Martinez	16,794,397	1,636,142
Laird Laabs	18,235,026	195,513
Larry Calkins	18,342,802	87,737
Ronald Elgin	18,342,802	87,737
Joachim Kempin	17,755,216	643,408

2) The appointment of Peterson Sullivan PLLC as our independent registered public accountants for the year ending December 31, 2007:

 

Votes FOR	Votes AGAINST	Votes ABSTAINED
18,330,514	69,827	27,346

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3) The approval of our 2006 Equity Incentive Plan:

Votes FOR	Votes AGAINST	Votes ABSTAINED
12,403,155	1,069,659	63,930

ITEM 5.  OTHER INFORMATION

None.

ITEM 6. EXHIBITS.

The exhibits required by this item are listed on the Exhibit Index attached hereto.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: August 8, 2007	IMPART MEDIA GROUP, INC.
	By:	/s/Joseph F. Martinez
		Joseph F. Martinez
		Chief Executive Officer
		(principal executive officer)

Dated: August 8, 2007	IMPART MEDIA GROUP, INC.
	By:	/s/Stephen M. Wilson
		Stephen M. Wilson
		Chief Accounting Officer
		(principal financial officer)

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EXHIBIT INDEX

31.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.