Table of Contents





UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

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|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|x | QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  |                                                                                           
|  | For the quarterly period
  ended June 30, 2007                                            
|  |                                                                                           
|  | 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: 0-26056

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Image Sensing Systems, Inc.(Exact name of registrant
as specified in its charter)

|                                           |  |                      
|------------------------------------------ |  | ---------------------
|Minnesota                                  |  | 41-1519168           
|(State
  or other jurisdiction of          |  | (I.R.S.
  Employer   
|incorporation
  or organization)           |  | Identification
  No.)
|                                           |  |                      
|500 Spruce Tree Centre                     |  |                      
|1600 University Avenue West                |  |                      
|St. Paul, MN                               |  | 55104                
|(Address
  of principal executive offices) |  | (Zip
  Code)         

(651) 603-7700(Registrants
telephone number, including area code)

Not Applicable(Former name, former
address and former fiscal year, if changed since last report)

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Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. 
Yes xNo o

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

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

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes oNo x

Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date.

|                                          |  |                             
|----------------------------------------- |  | ----------------------------
|Class                                     |  | Outstanding
at July 31, 2007
|                                          |  |                             
|Common
  Stock, $0.01 par value per share |  | 3,779,604
  shares          





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IMAGE SENSING SYSTEMS, INC.

TABLE OF CONTENTS

|                              |                                                                                         |         
|----------------------------- | --------------------------------------------------------------------------------------- | --------
|                              |                                                                                         | Page No.
|                              |                                                                                         |         
|                              |                                                                                         |         
|PART I. FINANCIAL INFORMATION | 3                                                                                      
|                              |                                                                                        
|Item 1.                       | Financial Statements:                                                                   | 3       
|                              |                                                                                         |         
|                              | Condensed Consolidated Balance Sheets                                                   | 3       
|                              |                                                                                         |         
|                              | Condensed Consolidated Statements of Income                                             | 4       
|                              |                                                                                         |         
|                              | Condensed Consolidated Statements of Cash Flows                                         | 5       
|                              |                                                                                         |         
|                              | Notes To Condensed Consolidated Financial Statements                                    | 6       
|                              |                                                                                         |         
|Item 2.                       | Managements Discussion and Analysis of Financial Condition and
  Results of Operations | 9       
|                              |                                                                                         |         
|Item 3.                       | Quantitative and Qualitative Disclosures About Market Risk                              | 13      
|                              |                                                                                         |         
|Item 4T.                      | Controls and Procedures                                                                 | 13      
|                              |                                                                                         |         
|PART II. OTHER INFORMATION    | 14                                                                                     
|                              |                                                                                        
|Item 1.                       | Legal Proceedings                                                                       | 14      
|                              |                                                                                         |         
|Item 1A.                      | Risk Factors                                                                            | 14      
|                              |                                                                                         |         
|Item 2.                       | Unregistered Sales of Equity Securities and Use of Proceeds                             | 14      
|                              |                                                                                         |         
|Item 3.                       | Defaults Upon Senior Securities                                                         | 14      
|                              |                                                                                         |         
|Item 4.                       | Submission of Matters to a Vote of Security Holders                                     | 14      
|                              |                                                                                         |         
|Item 5.                       | Other Information                                                                       | 15      
|                              |                                                                                         |         
|Item 6.                       | Exhibits                                                                                | 15      
|                              |                                                                                         |         
|SIGNATURES                    | 16                                                                                     
|                              |                                                                                        
|EXHIBIT INDEX                 | 17                                                                                     

2

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Table of Contents

PART I. FINANCIAL
INFORMATION

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

Image Sensing Systems, Inc.Condensed Consolidated Balance Sheets
as of June 30, 2007 and December 31, 2006
(in thousands)

|                                           |  |                 |        |                     |   |        | 
|------------------------------------------ |  | --------------- | ------ | ------------------- | - | ------ | 
|                                           |  | June 30,
  2007 |        | December 31,
  2006 |  
|                                           |  |                 |        |                     |  
|                                           |  | (Unaudited)     |        | (Note)              |  
|Assets                                     |  |                 |        |                     |   |        | 
|Current assets:                            |  |                 |        |                     |   |        | 
|Cash and cash equivalents                  |  | $               | 11,608 |                     | $ | 11,626 | 
|Short-term investments                     |  |                 | 2,000  |                     |   | 1,800  | 
|Accounts receivable                        |  |                 | 3,900  |                     |   | 2,957  | 
|Inventories                                |  |                 | 1,423  |                     |   | 670    | 
|Investment in FHLB bond                    |  |                 | 1,100  |                     |   | 2,300  | 
|Prepaid expenses                           |  |                 | 181    |                     |   | 126    | 
|Deferred income taxes                      |  |                 | 193    |                     |   | 173    | 
|                                           |  |                 |        |                     |   |        | 
|Total current assets                       |  |                 | 20,405 |                     |   | 19,652 | 
|                                           |  |                 |        |                     |   |        | 
|Property and equipment, net                |  |                 | 421    |                     |   | 522    | 
|                                           |  |                 |        |                     |   |        | 
|Goodwill                                   |  |                 | 1,050  |                     |   | 1,050  | 
|                                           |  |                 |        |                     |   |        | 
|                                           |  |                 |        |                     |   |        | 
|Total assets                               |  | $               | 21,876 |                     | $ | 21,224 | 
|                                           |  |                 |        |                     |   |        | 
|                                           |  |                 |        |                     |   |        | 
|Liabilities and Shareholders Equity       |  |                 |        |                     |   |        | 
|Current liabilities:                       |  |                 |        |                     |   |        | 
|Accounts payable                           |  | $               | 376    |                     | $ | 616    | 
|Accrued compensation                       |  |                 | 268    |                     |   | 587    | 
|Accrued warranty and other                 |  |                 | 372    |                     |   | 449    | 
|Income taxes payable                       |  |                 | 119    |                     |   | 231    | 
|                                           |  |                 |        |                     |   |        | 
|Total current liabilities                  |  |                 | 1,135  |                     |   | 1,883  | 
|                                           |  |                 |        |                     |   |        | 
|Deferred income taxes                      |  |                 | 28     |                     |   | 8      | 
|                                           |  |                 |        |                     |   |        | 
|Shareholders equity:                      |  |                 |        |                     |   |        | 
|Common stock                               |  |                 | 38     |                     |   | 38     | 
|Additional paid-in capital                 |  |                 | 8,235  |                     |   | 8,130  | 
|Accumulated other comprehensive income     |  |                 | 33     |                     |   | 16     | 
|Retained earnings                          |  |                 | 12,407 |                     |   | 11,149 | 
|                                           |  |                 |        |                     |   |        | 
|                                           |  |                 | 20,713 |                     |   | 19,333 | 
|                                           |  |                 |        |                     |   |        | 
|Total liabilities and shareholders equity |  | $               | 21,876 |                     | $ | 21,224 | 
|                                           |  |                 |        |                     |   |        | 

Note: The balance sheet at
December 31, 2006 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements.

See accompanying notes.

3

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Table of Contents

Image Sensing Systems, Inc.Consolidated Statements of Income
for the three-month and six-month periods ended June 30, 2007 and 2006
(Unaudited)
(in thousands, except per share data)

|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|----------------------------------------------------- |  | --------------------------------- | ----- | ---------------------------------- | - | ----- | - | ---- | ----- |  | - | ----- | 
|                                                      |  | Three-Month Periods EndedJune 30, |       | Six-Month Periods Ended
  June 30, |  
|                                                      |  |                                   |       |                                    |  
|                                                      |  | 2007                              |       | 2006                               |   | 2007  |   | 2006 |      
|                                                      |  |                                   |       |                                    |   |       |   |      |      
|Revenue:                                              |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|International sales                                   |  | $                                 | 736   |                                    | $ | 898   |   | $    | 1,089 |  | $ | 1,311 | 
|Royalties                                             |  |                                   | 2,304 |                                    |   | 2,508 |   |      | 4,595 |  |   | 4,684 | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|                                                      |  |                                   | 3,040 |                                    |   | 3,406 |   |      | 5,684 |  |   | 5,995 | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Costs of revenue:                                     |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Cost of product sold                                  |  |                                   | 288   |                                    |   | 368   |   |      | 415   |  |   | 545   | 
|Royalties                                             |  |                                   |      |                                    |   | 116   |   |      |      |  |   | 219   | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|                                                      |  |                                   | 288   |                                    |   | 484   |   |      | 415   |  |   | 764   | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Gross profit                                          |  |                                   | 2,752 |                                    |   | 2,922 |   |      | 5,269 |  |   | 5,231 | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Operating expenses:                                   |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Selling, marketing and product support                |  |                                   | 876   |                                    |   | 792   |   |      | 1,561 |  |   | 1,414 | 
|General and administrative                            |  |                                   | 552   |                                    |   | 571   |   |      | 1,122 |  |   | 1,133 | 
|Research and development                              |  |                                   | 534   |                                    |   | 510   |   |      | 1,128 |  |   | 992   | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|                                                      |  |                                   | 1,962 |                                    |   | 1,873 |   |      | 3,811 |  |   | 3,539 | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Income from operations                                |  |                                   | 790   |                                    |   | 1,049 |   |      | 1,458 |  |   | 1,692 | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Other income (expense), net                           |  |                                   | 142   |                                    |   | (75   | ) |      | 280   |  |   | 22    | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Income before income taxes                            |  |                                   | 932   |                                    |   | 974   |   |      | 1,738 |  |   | 1,714 | 
|Income taxes                                          |  |                                   | 230   |                                    |   | 263   |   |      | 480   |  |   | 500   | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Net income                                            |  | $                                 | 702   |                                    | $ | 711   |   | $    | 1,258 |  | $ | 1,214 | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Net income per common share:                          |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Basic                                                 |  | $                                 | 0.18  |                                    | $ | 0.19  |   | $    | 0.33  |  | $ | 0.33  | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Diluted                                               |  | $                                 | 0.18  |                                    | $ | 0.18  |   | $    | 0.32  |  | $ | 0.31  | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Weighted average number of common shares outstanding: |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Basic                                                 |  |                                   | 3,779 |                                    |   | 3,717 |   |      | 3,776 |  |   | 3,711 | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 
|Diluted                                               |  |                                   | 3,874 |                                    |   | 3,881 |   |      | 3,880 |  |   | 3,886 | 
|                                                      |  |                                   |       |                                    |   |       |   |      |       |  |   |       | 

See accompanying notes.

4

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Table of Contents

Image Sensing Systems, Inc. Condensed Consolidated Statements of Cash Flows 
for the six-month periods ended June 30, 2007 and 2006
(Unaudited) 
(in thousands)

|                                                                                             |  |                                    |        |      |   |        |  
|-------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | ---- | - | ------ | -
|                                                                                             |  | Six-Month Periods Ended
  June 30, |       
|                                                                                             |  |                                    |       
|                                                                                             |  | 2007                               |        | 2006 |  
|                                                                                             |  |                                    |        |      |  
|Operating activities:                                                                        |  |                                    |        |      |   |        |  
|Net income                                                                                   |  | $                                  | 1,258  |      | $ | 1,214  |  
|Adjustments to reconcile net income to net
  cash provided by (used in) operating activities |  |                                    |        |      |   |        |  
|Depreciation and amortization                                                                |  |                                    | 123    |      |   | 195    |  
|Stock option expense                                                                         |  |                                    | 73     |      |   | 137    |  
|Change in operating assets and
liabilities                                                   |  |                                    | (2,483 | )    |   | 1,103  |  
|                                                                                             |  |                                    |        |      |   |        |  
|Net cash provided by (used in) operating
  activities                                        |  |                                    | (1,029 | )    |   | 2,649  |  
|                                                                                             |  |                                    |        |      |   |        |  
|Investing activities:                                                                        |  |                                    |        |      |   |        |  
|Net (purchases) disposals of property and
  equipment                                        |  |                                    | (22    | )    |   | (253   | )
|Net (purchases) sales of investments                                                         |  |                                    | 1,000  |      |   | (1,800 | )
|                                                                                             |  |                                    |        |      |   |        |  
|Net cash provided by (used in) investing
  activities                                        |  |                                    | 978    |      |   | (2,053 | )
|                                                                                             |  |                                    |        |      |   |        |  
|Financing activities:                                                                        |  |                                    |        |      |   |        |  
|Proceeds from exercise of stock options                                                      |  |                                    | 33     |      |   | 59     |  
|                                                                                             |  |                                    |        |      |   |        |  
|Net cash provided by financing activities                                                    |  |                                    | 33     |      |   | 59     |  
|                                                                                             |  |                                    |        |      |   |        |  
|                                                                                             |  |                                    |        |      |   |        |  
|Increase (decrease) in cash and cash
  equivalents                                           |  |                                    | (18    | )    |   | 655    |  
|                                                                                             |  |                                    |        |      |   |        |  
|Cash and cash equivalents, beginning of
  period                                             |  |                                    | 11,626 |      |   | 9,006  |  
|                                                                                             |  |                                    |        |      |   |        |  
|Cash and cash equivalents, end of period                                                     |  | $                                  | 11,608 |      | $ | 9,661  |  
|                                                                                             |  |                                    |        |      |   |        |  

See
accompanying notes.

5

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Table of Contents

IMAGE SENSING SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
June 30, 2007

Note A: Basis of Presentation

The
accompanying unaudited condensed consolidated financial statements of Image
Sensing Systems, Inc. (referred to herein as we, us, our and the
Company) have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. It is the opinion of management that the unaudited condensed
consolidated financial statements include all adjustments consisting of normal
recurring accruals considered necessary for a fair presentation. Operating
results for the six-month period ended June 30, 2007 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2007. For further information, refer to the consolidated financial statements
and footnotes thereto in our Annual Report on Form 10-K for the year ended
December 31, 2006.

Note B: Investments

Investments,
at cost, consisted of the following at June 30, 2007 and December 31, 2006 (in
thousands):

|                                                   |  |                 |       |                     |   |       | 
|-------------------------------------------------- |  | --------------- | ----- | ------------------- | - | ----- | 
|                                                   |  | June 30,
  2007 |       | December 31,
  2006 |  
|                                                   |  |                 |       |                     |  
|Short-term
  investments - auction rate securities |  | $               | 2,000 |                     | $ | 1,800 | 
|Callable
  Federal Home Loan Bonds                 |  |                 | 1,100 |                     |   | 2,300 | 
|                                                   |  |                 |       |                     |   |       | 
|                                                   |  |                 |       |                     |   |       | 
|Total                                              |  | $               | 3,100 |                     | $ | 4,100 | 
|                                                   |  |                 |       |                     |   |       | 

As of June 30,
2007 and December 31, 2006, investments are classified as available-for-sale.
The cost of investments approximate market value and therefore no amount is
recorded in accumulated other comprehensive income. The cost of securities sold
is based on the specific identification method.

There were no
sales or maturities in the three-month period ended June 30, 2007.

6

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Table of Contents

Note C: Net Income Per Common Share

The following
table sets forth the computations of basic and diluted net income per common
share for the three-month and six-month periods ended June 30, 2007 and 2006
(in thousands, except per share data ):

|                                                                  |  |                                      |       |                                    |   |       |  |      |       |  |   |       | 
|----------------------------------------------------------------- |  | ------------------------------------ | ----- | ---------------------------------- | - | ----- |  | ---- | ----- |  | - | ----- | 
|                                                                  |  | Three-Month Periods
  Ended June 30, |       | Six-Month Periods
  Ended June 30, |  
|                                                                  |  |                                      |       |                                    |  
|                                                                  |  | 2007                                 |       | 2006                               |   | 2007  |  | 2006 |      
|                                                                  |  |                                      |       |                                    |   |       |  |      |      
|Numerator:                                                        |  |                                      |       |                                    |   |       |  |      |       |  |   |       | 
|Net income                                                        |  | $                                    | 702   |                                    | $ | 711   |  | $    | 1,258 |  | $ | 1,214 | 
|                                                                  |  |                                      |       |                                    |   |       |  |      |       |  |   |       | 
|Denominator:                                                      |  |                                      |       |                                    |   |       |  |      |       |  |   |       | 
|Shares used in basic net income per common
  share calculation    |  |                                      | 3,779 |                                    |   | 3,717 |  |      | 3,776 |  |   | 3,711 | 
|Effect of diluted securities:                                     |  |                                      |       |                                    |   |       |  |      |       |  |   |       | 
|Employee and director stock options                               |  |                                      | 95    |                                    |   | 164   |  |      | 104   |  |   | 175   | 
|                                                                  |  |                                      |       |                                    |   |       |  |      |       |  |   |       | 
|Shares used in diluted net income per
  common share calculations |  |                                      | 3,874 |                                    |   | 3,881 |  |      | 3,880 |  |   | 3,886 | 
|                                                                  |  |                                      |       |                                    |   |       |  |      |       |  |   |       | 
|Basic net income per common share                                 |  | $                                    | 0.18  |                                    | $ | 0.19  |  | $    | 0.33  |  | $ | 0.33  | 
|                                                                  |  |                                      |       |                                    |   |       |  |      |       |  |   |       | 
|Diluted net income per common share                               |  | $                                    | 0.18  |                                    | $ | 0.18  |  | $    | 0.32  |  | $ | 0.31  | 
|                                                                  |  |                                      |       |                                    |   |       |  |      |       |  |   |       | 

Note D: Stock-based Compensation

In 2006, we
adopted Statement of Financial Accounting Standard (SFAS) No. 123(R), Share Based Payment, which requires all
share-based payments, including grants of stock options, to be recognized in
the income statement as an operating expense, based on their fair value over
the requisite service period. We recorded $73,000 and $137,000 of related
compensation expense included in general and administrative expense for the
six-month periods ended June 30, 2007 and 2006, respectively. Options to
purchase 31,000 shares and 106,000 shares at the weighted average exercise
price of $15.85 and $14.68 and options to purchase -0- shares and -0- shares
were granted for the three-month and six-month periods ended June 30, 2007 and
2006, respectively. As of June 30, 2007, $626,000 of total unrecognized
compensation expense related to non-vested stock option awards is expected to
be recognized over a weighted average period of 3.0 years.

We used the
Black-Scholes option pricing model to determine the weighted average fair value
of options during the three-month and six-month periods ended June 30, 2007.

Our stock
options generally vest over one to five years of service and have a contractual
life of four to ten years. We have 157,200 shares available for grants under
our 2005 Stock Incentive Plan. The following table summarizes information about
the stock options outstanding at June 30, 2007:

|                          |  |                      |         |                                                     |  |                              |  |                      |  |                                       |       |  |  |         |  |  |  |   |      |  | 
|------------------------- |  | -------------------- | ------- | --------------------------------------------------- |  | ---------------------------- |  | -------------------- |  | ------------------------------------- | ----- |  |  | ------- |  |  |  | - | ---- |  | 
|                          |  | Options Outstanding  |         | Options Exercisable                                 | 
|                          |  |                      |         |                                                     | 
|Range of
  Exercise Price |  | Number
  Outstanding |         | Weighted
  Average
  Remaining
  Contractual
  Life |  | WeightedAverageExercisePrice |  | Number
  Exercisable |  | Weighted
  Average
  Exercise
  Price |      
|                          |  |                      |         |                                                     |  |                              |  |                      |  |                                       |      
|$1.301.99                |  |                      | 72,600  |                                                     |  | 5.0
  years                  |  |                      |  | $                                     | 1.34  |  |  | 72,600  |  |  |  | $ | 1.34 |  | 
|2.002.99                 |  |                      | 52,200  |                                                     |  | 2.5
  years                  |  |                      |  |                                       | 2.38  |  |  | 52,200  |  |  |  |   | 2.38 |  | 
|3.003.99                 |  |                      | 38,933  |                                                     |  | 5.3
  years                  |  |                      |  |                                       | 3.15  |  |  | 38,333  |  |  |  |   | 3.13 |  | 
|7.007.93                 |  |                      | 16,000  |                                                     |  | 1.8
  years                  |  |                      |  |                                       | 7.77  |  |  | 16,000  |  |  |  |   | 7.77 |  | 
|12.00-12.99               |  |                      | 18,000  |                                                     |  | 9.3
  years                  |  |                      |  |                                       | 12.61 |  |  |        |  |  |  |   |     |  | 
|14.00-14.99               |  |                      | 75,000  |                                                     |  | 5.6
  years                  |  |                      |  |                                       | 14.19 |  |  |        |  |  |  |   |     |  | 
|15.00-15.99               |  |                      | 16,000  |                                                     |  | 3.9
  years                  |  |                      |  |                                       | 15.70 |  |  |        |  |  |  |   |     |  | 
|16.00-16.99               |  |                      | 15,000  |                                                     |  | 5.9
  years                  |  |                      |  |                                       | 16.00 |  |  |        |  |  |  |   |     |  | 
|                          |  |                      |         |                                                     |  |                              |  |                      |  |                                       |       |  |  |         |  |  |  |   |      |  | 
|                          |  |                      | 303,733 |                                                     |  | 4.8
  years                  |  |                      |  |                                       | 7.41  |  |  | 179,133 |  |  |  |   | 2.60 |  | 
|                          |  |                      |         |                                                     |  |                              |  |                      |  |                                       |       |  |  |         |  |  |  |   |      |  | 

7

---

Table of Contents

Note E: Income Taxes

In June 2006,
the Financial Accounting Standards Bound (FASB) issued FIN No. 48, Accounting for Uncertainty in Income Taxes
 an Interpretation of FASB Statement No.
109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48
clarifies the application of SFAS No. 109 by defining a criterion that an
individual tax position must meet for any part of the benefit of that position
to be recognized in an enterprises financial statements. Additionally, FIN 48
provides guidance on measurement, derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. FIN 48 was
effective for us on January 1, 2007.

We adopted the
provisions of FIN 48 on January 1, 2007. Previously, we had accounted for tax
contingencies in accordance with SFAS No. 5, Accounting
for Contingencies. As required by FIN 48, which clarifies SFAS No.
109, Accounting for Income Taxes,
we recognize the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement with the relevant tax authority. At
the adoption date, we applied FIN 48 to all tax positions for which the statute
of limitations remained open. At January 1, 2007, our existing reserve for
income tax uncertainties was not material. We recognized no additional
liabilities for unrecognized tax benefits as a result of the implementation of
FIN 48.

We are subject
to income taxes in the U.S. federal jurisdiction, various state jurisdictions
and certain international tax jurisdictions. Tax regulations within each
jurisdiction are subject to the interpretation of the related tax laws and
regulations and require significant judgment to apply. Generally, the statute
of limitations is closed for tax years preceding 2003.

Note F: New Accounting Pronouncements:

On February
15, 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities  Including an
Amendment of FASB No. 115. SFAS No. 159 permits an entity to choose
to measure many financial instruments and certain other items at fair value.
The fair value option established by SFAS No. 159 permits all entities to
choose to measure eligible items at fair value at specified election dates.
SFAS No. 159 will be effective for us as of December 31, 2007. We are currently
evaluating the impact this pronouncement will have on our consolidated
statement of financial position.

In September
2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurement but does not require any new fair value measurements. SFAS No. 157
will be effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. We have
not evaluated the impact of SFAS No. 157 on our financial reporting.

8

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Table of Contents

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

Overview:

We have
developed proprietary machine vision technology that converts real world
information into digital electronic signals for processing by computer and have
applied it to traffic management problems. We use a proprietary version of
machine vision technology and commercially available components and video
cameras to create our core family of products - the Autoscope® Video
Vehicle Detection System. The Autoscope system is used by traffic managers
primarily to improve the flow of vehicle traffic and to enhance safety at
intersections, main thoroughfares, freeways and tunnels.

Autoscope
systems are sold to distributors and end users of traffic management products
in North America, the Caribbean and Latin America by Econolite Control
Products, Inc. (Econolite), our licensee in those locations. We also sell
Autoscope products to distributors and end users in Europe and Asia through our
European and Hong Kong subsidiaries, respectively.

The majority
of our revenue is derived from royalties received from Econolite, with a second
primary source of revenue received from product sales in Europe and Asia. End
users of the Autoscope system throughout the world are generally funded by
government agencies responsible for traffic management and/or traffic law
enforcement.

Our success is
primarily dependent upon continued governmental funding of Intelligent
Transportation Systems, such as machine vision, for traffic control; our
ability, through Econolite and our sales representatives in Europe and Asia, to
successfully market the Autoscope System to individual traffic managers; and
our ability to develop new machine vision products and applications that enhance
the traffic managers ability to cost-effectively improve traffic flow, safety
and security.

Our quarterly
revenues and operating results have varied significantly in the past due to the
seasonality of our business, with the second and third quarters being the
strongest and the first and fourth quarters being the weakest, generally due to
weather conditions that make roadway construction more difficult. We expect
such seasonality to continue for the foreseeable future. Our international
revenues have a significant large project component resulting in a varying
revenue stream. Accordingly, we believe that quarter-to-quarter comparisons of
our financial results should not be relied upon as an indication of our future
performance. No assurance can be given that we will be able to achieve or
maintain profitability on a quarterly or annual basis in the future.

Critical Accounting Policies:

Goodwill.Goodwill
and other intangible assets with indefinite lives are not amortized but are
tested for impairment annually or whenever an impairment indicator arises. Our
recorded goodwill relates to our subsidiary, Flow Traffic Ltd. (Flow Traffic),
and is tested for impairment on December 31 of each year. The impairment test
requires us to estimate the fair value of our subsidiary and then compare it to
the carrying value of the subsidiary. If the carrying value exceeds the fair
value, further analysis is performed to determine if there is an impairment
loss. We estimate the fair value by using the income approach, where fair value
is dependent on the present value of projected future economic benefits to be
derived from ownership of Flow Traffic. If Flow Traffic does not provide the
future economic benefits we project, the fair value of this subsidiary may
become impaired, and we would need to record an impairment loss.

Revenue recognition.Royalty
income is recognized based upon a monthly royalty report provided to us by
Econolite. This report is prepared by Econolite based on its sales of products
we developed and is based on sales delivered and accepted by its customers. We
recognize revenue from international sales at

9

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the time of
delivery and acceptance and when the selling price is fixed or determinable and
collectibility is reasonably assured.

Results of Operations:

The following
tables set forth, for the periods indicated, certain statements of income data
as a percent of total revenue; gross profit on product sales and royalties as a
percentage of product sales and royalties, respectively; and period-to-period changes
of items in the consolidated statements of income from 2007 to 2006:

|                                                  |  |                                     |       |                                          |  |       |   |        |    | 
|------------------------------------------------- |  | ----------------------------------- | ----- | ---------------------------------------- |  | ----- | - | ------ | -- | 
|                                                  |  | Three-Month Period
  Ended June 30, |       | Quarter Over
  Quarter
  Change          | 
|                                                  |  |                                     |       |                                         
|                                                  |  | 2007                                |       | 2006                                     |  |      
|                                                  |  |                                     |       |                                          |  |       |  
|International
  sales                             |  |                                     | 24.2  | %                                        |  | 26.4  | % | (18.0  | )% | 
|Royalties                                         |  |                                     | 75.8  |                                          |  | 73.6  |   | (8.1   | )  | 
|                                                  |  |                                     |       |                                          |  |       |   |        |    | 
|Total revenue                                     |  |                                     | 100.0 |                                          |  | 100.0 |   | (10.7  | )  | 
|Gross profit
  - international sales              |  |                                     | 60.9  |                                          |  | 59.0  |   | (15.5  | )  | 
|Gross profit
   royalties                        |  |                                     | 100.0 |                                          |  | 95.4  |   | (3.7   | )  | 
|Selling,
  marketing and product support expenses |  |                                     | 28.8  |                                          |  | 23.3  |   | 10.6   |    | 
|General and
  administrative expenses             |  |                                     | 18.2  |                                          |  | 16.8  |   | (3.3   | )  | 
|Research and
  development expenses               |  |                                     | 17.6  |                                          |  | 15.0  |   | 4.7    |    | 
|Income from
  operations                          |  |                                     | 26.0  |                                          |  | 30.8  |   | (24.7  | )  | 
|Other
  income, net                               |  |                                     | 4.7   |                                          |  | (2.2  | ) |       |    | 
|Income taxes                                      |  |                                     | 7.6   |                                          |  | 7.7   |   | (12.5  | )  | 
|Net income                                        |  |                                     | 23.1  |                                          |  | 20.9  |   | (1.3   | )  | 
|                                                 
|                                                  |  | Six-Month Period
  Ended June 30,   |       | Six-months
  Over Six-
  months
  Change | 
|                                                  |  |                                     |      
|                                                  |  | 2007                                |       | 2006                                     | 
|                                                  |  |                                     |       |                                          |  |       |  
|International
  sales                             |  |                                     | 19.2  | %                                        |  | 21.9  | % | (16.9  | )% | 
|Royalties                                         |  |                                     | 80.8  |                                          |  | 78.1  |   | (1.9   | )  | 
|                                                  |  |                                     |       |                                          |  |       |   |        |    | 
|Total revenue                                     |  |                                     | 100.0 |                                          |  | 100.0 |   | (5.2   | )  | 
|Gross profit
  - international sales              |  |                                     | 61.9  |                                          |  | 58.4  |   | (12.0  | )  | 
|Gross profit
   royalties                        |  |                                     | 100.0 |                                          |  | 95.3  |   | 2.9    |    | 
|Selling,
  marketing and product support expenses |  |                                     | 27.5  |                                          |  | 23.6  |   | 10.4   |    | 
|General and
  administrative expenses             |  |                                     | 19.7  |                                          |  | 18.9  |   | (1.0   | )  | 
|Research and
  development expenses               |  |                                     | 19.8  |                                          |  | 16.5  |   | 13.7   |    | 
|Income from
  operations                          |  |                                     | 25.7  |                                          |  | 28.2  |   | (13.8  | )  | 
|Other
  income, net                               |  |                                     | 4.9   |                                          |  | 0.4   |   | 1172.7 |    | 
|Income taxes                                      |  |                                     | 8.4   |                                          |  | 8.3   |   | (4.0   | )  | 
|Net income                                        |  |                                     | 22.1  |                                          |  | 20.3  |   | 3.6    |    | 

International
sales decreased 18.0% for the second quarter of 2007 versus the comparable
quarter of 2006 and 16.9% for the first half of 2007 over the comparable period
of 2006 primarily due to two large sales in the Asian market made in 2006.
Royalty income decreased 8.1% for the 2007 second quarter and 1.9% for the 2007
first half versus the comparable periods in 2006. We believe this is due in
part to our

10

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transition to
the Autoscope Terra line of products and its probable impact on the timing of end
customer purchases. Although we cannot predict how long the transition will
impact end customer decisions, we do not expect the impact to be long-term in
nature.

Gross profit
declines for international sales are due to the decrease in sales in these
markets. The gross profit margin on international sales increased modestly in
the second quarter and first half of 2007 from comparable periods in 2006 due
to a change in mix of international sales. Gross profit on royalties decreased
3.7% in the first quarter of 2007 versus the comparable period in 2006. The
decrease was due to lower royalties, but it was partially offset by the
expiration of royalties to the University of Minnesota, which ceased in July
2006. For the first half, gross profit on royalties increased 2.9% in 2007
versus 2006, with lower royalty revenue being more than offset by the end of
royalty expense to the University of Minnesota. We anticipate for the second
half of 2007 that royalty gross profit margins will be 100% and that gross
profit margins on international sales will decrease due to higher manufacturing
costs and pricing concessions on non-Terra inventory.

Operating
expenses increased 4.8% and 7.7%, respectively, in the second quarter and first
half of 2007 over the comparable periods in 2006 primarily due to added staff
in each category of operating expense along with related payroll taxes,
benefits and infrastructure to support the added staff. Secondarily, we
incurred costs in 2007 to promote the launch of the Terra line. These increases
were partially offset by lower legal and stock option expense in 2007 versus
2006. Income from operations decreased 24.7% and 13.8% in the second quarter
and first half of 2007, respectively, versus comparable periods in 2006 mainly
due to decreased revenue and, to a lesser extent, increases in operating
expenses. We anticipate that operating expenses for the second half of 2007
will continue to run ahead of 2006 levels in each of the categories.

Other income,
net for the second quarter and first half of 2007 increased significantly over
the comparable periods in 2006. This is primarily due to the Econolite
settlement made in 2006, which offset most interest income in that year. Other
income, net for the second quarter and first half of 2007 is substantially all
interest income and is predominantly tax-exempt interest. Income taxes
decreased in the second quarter and first half of 2007 compared to 2006
primarily due to a credit carryback recognized in 2007.

Net income for
the second quarter of 2007 was $702,000, a decrease of 1.3% from the comparable
quarter of 2006, and $1.3 million for the first half of 2007, an increase of
3.6% over the comparable period of 2006, due to the factors discussed above.

Liquidity and Capital Resources:

At June 30,
2007, we had $11.6 million in cash and cash equivalents and $3.1 million in
investments, compared to $11.6 million in cash and cash equivalents and $4.1
million in investments at December 31, 2006.

Net cash used
in operating activities was $1.0 million in the first half of 2007, compared to
net cash provided of $2.6 million in 2006. The primary reason for the change
was that we received unusually large royalty payments on accounts receivable
from Econolite in 2006 for sales it made in the fourth quarter of 2005.
Additionally, in the first half of 2007, inventory increased by $753,000
primarily due to the Terra product transition. We sold $1.0 million in
investments, net, in 2007 as opposed to purchasing $1.8 million in investments
in 2006.

We have a
credit agreement that provides up to $1.0 million in short-term borrowings at
prime rate (effective rate of 8.25% at June 30, 2007), expiring May 31, 2008.
Loans would be secured by inventories, accounts receivable and equipment, and
the bank would have the right of setoff against checking, savings and other
accounts we have with the bank. We had no outstanding borrowings under

11

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the credit
agreement in 2007 or 2006. We expect to renew the agreement at substantially
the same terms and conditions prior to expiration.

We believe
that cash and cash equivalents on hand at June 30, 2007, our $1.0 million
revolving line of credit and cash provided by operating activities will satisfy
our projected working capital needs, investing activities and other cash
requirements in the foreseeable future.

Income Taxes:

In June 2006,
the Financial Accounting Standards Bound (FASB) issued FIN No. 48, Accounting for Uncertainty in Income Taxes
 an Interpretation of FASB Statement No.
109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with Statement of Accounting
Standard (SFAS) No. 109, Accounting for
Income Taxes. FIN 48 clarifies the application of SFAS No. 109 by
defining a criterion that an individual tax position must meet for any part of
the benefit of that position to be recognized in an enterprises financial
statements. Additionally, FIN 48 provides guidance on measurement,
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 was effective for us on January 1,
2007.

We adopted the
provisions of FIN 48 on January 1, 2007. Previously, we had accounted for tax
contingencies in accordance with SFAS No. 5, Accounting
for Contingencies. As required by FIN 48, which clarifies SFAS No.
109, Accounting for Income Taxes,
we recognize the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the financial
statements is the largest benefit that has a greater than 50 % likelihood of
being realized upon ultimate settlement with the relevant tax authority. At the
adoption date, we applied FIN 48 to all tax positions for which the statute of
limitations remained open. At January 1, 2007, our existing reserve for income
tax uncertainties was not material. We recognized no additional liabilities for
unrecognized tax benefits as a result of the implementation of FIN 48.

We are subject
to income taxes in the U.S. federal jurisdiction, various state jurisdictions
and certain international tax jurisdictions. Tax regulations within each
jurisdiction are subject to the interpretation of the related tax laws and
regulations and require significant judgment to apply. Generally, the statute
of limitations is closed for tax years preceding 2003.

Cautionary Statement:

This Quarterly
Report on Form 10-Q contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange of 1934, as amended. Forward-looking statements represent
our expectations or beliefs concerning future events and can be identified by
the use of forward-looking words such as expects, believes, may, will,
should, intends, plans, estimates, anticipates or other comparable
terminology. Forward-looking statements are subject to risks and uncertainties
that may cause our actual results to differ materially from the results
discussed in the forward-looking statements. Factors that might cause such
differences include, but are not limited to:

| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | dependence
  on a single product for most of our revenue;                  
| |   |                                                                            
| |  | budget
  constraints of governmental entities that purchase our products;  
| |   |                                                                            
| |  | continuing ability of our licensee to pay royalties owed;                  
| |   |                                                                            
| |  | dependence on third parties for manufacturing and marketing our
  products;

12

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Table of Contents

| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dependence
  on single-source suppliers to meet manufacturing needs;                                                                                                                        
| |   |                                                                                                                                                                                             
| |  | failure to
  secure adequate protection for our intellectual property rights;                                                                                                               
| |   |                                                                                                                                                                                             
| |  | development
  of a competing product by another business using the underlying technology included
  in the patent we had licensed from the University of Minnesota, which expired
  in 2006;
| |   |                                                                                                                                                                                             
| |  | our
  inability to develop new applications and product enhancements;                                                                                                                       
| |   |                                                                                                                                                                                             
| |  | our
  inability to effectively respond to low-cost local competitors in Asia and
  elsewhere;                                                                                               
| |   |                                                                                                                                                                                             
| |  | our
  inability to properly manage any growth in revenue and/or production
  requirements;                                                                                                  
| |   |                                                                                                                                                                                             
| |  | the
  influence over our voting stock by insiders;                                                                                                                                          
| |   |                                                                                                                                                                                             
| |  | our
  inability to hire and retain key scientific and technical personnel;                                                                                                                  
| |   |                                                                                                                                                                                             
| |  | our inability to achieve and maintain effective internal
  controls;                                                                                                                        
| |   |                                                                                                                                                                                             
| |  | our
  inability to comply with international regulatory restrictions over hazardous
  substances and electronic waste; and                                                                  
| |   |                                                                                                                                                                                             
| |  | conditions
  beyond our control such as war, terrorist attacks, health epidemics and
  economic recession.                                                                                  

We caution
that the forward-looking statements made in this report or in other
announcements made by us are further qualified by the risk factors set forth in
Item 1A. to our Annual Report on Form 10-K for the fiscal year ended December
31, 2006.

|        |                                                             
|------- | ------------------------------------------------------------
|Item 3. | Quantitative
  and Qualitative Disclosures About Market Risk

Our foreign
sales and results of operations are subject to the impact of foreign currency
fluctuations. We have not hedged our exposure to translation gains and losses.
A 10% adverse change in foreign currency rates would not have a material effect
on our results of operations or financial position.

|         |                          
|-------- | -------------------------
|Item 4T. | Controls and
  Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)).
Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the
fiscal quarter covered by this report, there has been no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

13

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Table of Contents

PART II. OTHER INFORMATION

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

None.

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

Some of the
risk factors to which we and our business are subject are described in the
section entitled Item 1A. Risk Factors in our Annual Report on Form 10-K for
the year ended December 31, 2006. The risks and uncertainties described in our
Annual Report are not the only risks we face. Additional risks and
uncertainties not presently known to us or that our management currently deems
immaterial also may impair our business operations. If any of the risks
described were to occur, our business, financial condition, operating results
and cash flows could be materially adversely affected.

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

(a) We issued
the following equity securities in the following transactions, which were not
registered under the Securities Act of 1933 (Securities Act): in October 2006,
we granted options to purchase 18,000 shares of our common stock to one
Director with an exercise price of $12.61 per share; and in January 2007, we
granted options to one executive officer to purchase 50,000 shares of our common
stock at an exercise price of $14.24 per share and options to another executive
officer to purchase 25,000 shares at an exercise price of $14.10 per share. All
of these options were granted under the Image Sensing Systems, Inc. 2005 Stock
Incentive Plan (Plan). We received no proceeds upon making these grants. The
grants were made in reliance on the exemption provided by Section 4(2) of and
Rule 506 of Regulation D under the Securities Act. On and after April 30, 2007,
grants of options under the Plan are registered under our Registration
Statement on Form S-8 filed with the Securities and Exchange Commission on that
date.

|        |                                  
|------- | ---------------------------------
|Item 3. | Defaults
  Upon Senior Securities

None.

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

We held our
Annual Meeting of Shareholders on May 31, 2007 in St. Paul, Minnesota. In
connection with the Annual Meeting, we filed our definitive proxy statement
with the Securities and Exchange Commission pursuant to Regulation 14A under
the Exchange Act and solicited proxies. The only matters voted on at the Annual
Meeting were the election of directors and the approval of Grant Thornton LLP
as our independent registered public accounting firm for 2007. The votes on
these were as follows:

| |    |                         
| | -- | ------------------------
| | 1. | Election of
  directors:

|                         |  |     |           |                    |  |  |         |  | 
|------------------------ |  | --- | --------- | ------------------ |  |  | ------- |  | 
|Director                 |  | For |           | Withhold Authority | 
|                         |  |     |           |                    | 
|                         |  |     |           |                    |  |  |         |  | 
|Kenneth R.
  Aubrey      |  |     | 3,010,488 |                    |  |  | 312,514 |  | 
|Michael G.
  Eleftheriou |  |     | 3,137,993 |                    |  |  | 185,009 |  | 
|Richard
  Magnuson       |  |     | 3,002,735 |                    |  |  | 320,267 |  | 
|Panos G.
  Michalopoulos |  |     | 3,178,823 |                    |  |  | 144,179 |  | 
|James
  Murdakes         |  |     | 3,181,754 |                    |  |  | 141,248 |  | 
|Sven A.
  Wehrwein       |  |     | 3,308,611 |                    |  |  | 14,391  |  | 

14

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| |    |                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------
| | 2. | Approval of
  Grant Thornton LLP as our independent registered public accounting firm for
  fiscal year 2007:

|          |  |         |  |        
|--------- |  | ------- |  | -------
|For       |  | Against |  | Abstain
|          |  |         |  |        
|3,213,778 |  | 105,195 |  | 4,029  

|        |                    
|------- | -------------------
|Item 5. | Other
  Information

None.

|        |         
|------- | --------
|Item 6. | Exhibits

The following
exhibits are filed as part of this quarterly report on Form 10-Q for the
quarterly period ended June 30, 2007:

|                 |  |                                                                                                        
|---------------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit
  Number |  | Description                                                                                            
|                 |  |                                                                                                        
|31.1             |  | Certification
  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
  of 2002.
|                 |  |                                                                                                        
|31.2             |  | Certification
  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
  of 2002.
|                 |  |                                                                                                        
|32.1             |  | Certification
  of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
  of 2002.
|                 |  |                                                                                                        
|32.2             |  | Certification
  of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
  of 2002.

15

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Table of Contents

SIGNATURES

In accordance
with 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.

|                        |                                               
|----------------------- | ----------------------------------------------
|                        | Image
  Sensing Systems, Inc.                 
|                        |                                               
|                        | By:                                           
|                        |                                               
|Dated: August
  9, 2007 | /s/ Kenneth
  R. Aubrey                       
|                        |                                               
|                        | Kenneth R.
  Aubrey                           
|                        | President
  and Chief Executive Officer       
|                        | (principal
  executive officer)               
|                        |                                               
|                       
|Dated: August
  9, 2007 | /s/ Gregory
  R.L. Smith                      
|                        |                                               
|                        | Gregory R.L.
  Smith                          
|                        | Chief
  Financial Officer                     
|                        | (principal
  financial and accounting officer)

16

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EXHIBIT INDEX

|            |  |                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                            
|            |  |                                                                                                        
|            |  |                                                                                                        
|31.1        |  | Certification
  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
  of 2002.
|            |  |                                                                                                        
|31.2        |  | Certification
  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
  of 2002.
|            |  |                                                                                                        
|32.1        |  | Certification
  of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
  of 2002.
|            |  |                                                                                                        
|32.2        |  | Certification
  of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
  of 2002.

17

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