<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                   FORM 10-QSB

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2001     Commission File Number 0-26056

                           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 Identification No.
incorporation or organization

                             500 SPRUCE TREE CENTRE
                             1600 UNIVERSITY AVE. W.
                             ST. PAUL, MN 55104-3825
                    (Address of principal executive offices)
       Registrant's telephone number, including area code: (651) 603-7700


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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practical date.

      Common Stock, $.01 par value - 3,152,777 shares as of June 30, 2001.
<PAGE>   2
                           IMAGE SENSING SYSTEMS, INC.

                                      INDEX


           PART I.  FINANCIAL INFORMATION                               Page No.

Item 1.    Condensed Financial Statements:

           Condensed Consolidated Balance Sheets
           June 30, 2001 and December 31, 2000                               4

           Condensed Statements of Operations
           Three- and six-month periods ended June 30, 2001 and 2000         5

           Condensed Statements of Cash Flows
           Six-month periods ended June 30, 2001 and 2000                    6

           Notes to Condensed Financial Statements                           7


Item 2.    Management's Discussion and Analysis of
           Results of Operations and Financial Condition                     8

           PART II.  OTHER INFORMATION

Item 2.    Changes in Securities                                            10

Item 4.    Submission of Matters to a Vote of Security Holders              10

Item 6.    Exhibits and Reports on Form 8-K                                 11

           Signatures                                                       13

           Exhibit Index                                                    14


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                         SAFE HARBOR STATEMENT UNDER THE
                PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

         This Quarterly Report on Form 10-QSB 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 Act of 1934, as amended.
These forward-looking statements involve risks and uncertainties that may cause
the Company's 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, lack of market acceptance of the Company's
products; the Company's dependence on third parties for manufacturing and
marketing capabilities and its continuing ability to pay royalties owed;
inability of the Company to diversify its product offerings; revenue
fluctuations caused by the Company's dependence on sales to governmental
entities; failure of the Company to secure adequate protection for the Company's
intellectual property rights; failure of the Company to respond to evolving
industry standards and technological changes; inability of the Company to
properly manage growth in revenues and/or production requirements; inability of
the Company to meet its future additional capital requirements; and control of
the voting stock by insiders. The forward-looking statements are qualified in
their entirety by the cautions and risk factors set forth in Exhibit 99.1, under
the caption "Cautionary Statement," to this Quarterly Report.


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<PAGE>   4
                           IMAGE SENSING SYSTEMS, INC.
                             Condensed Balance Sheet

<TABLE>
<CAPTION>
                                                           June 30          December 31
                                                             2001               2000
                                                         -----------        -----------
                                                         (Unaudited)           (Note)
<S>                                                      <C>                <C>
ASSETS
Current assets:
       Cash and cash equivalents                         $ 1,036,000        $ 1,780,000
       Accounts receivable                                 1,689,000            943,000
       Inventories                                           542,000            370,000
       Prepaid expenses                                      105,000            117,000
       Deferred income taxes                                  92,000             92,000
                                                         -----------        -----------
Total current assets                                       3,464,000          3,302,000

Property and equipment, net                                  381,000            383,000

Other assets:
       Capitalized software development costs, net         1,324,000          1,453,000
       Deferred income taxes                                  34,000             34,000
       Other                                                 108,000            110,000
                                                         -----------        -----------
                                                           1,466,000          1,597,000
                                                         -----------        -----------
Total assets                                             $ 5,311,000        $ 5,282,000
                                                         ===========        ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
       Accounts payable                                  $   770,000        $   433,000
       Accrued compensation                                  362,000            365,000
       Deferred income                                       109,000            109,000
                                                         -----------        -----------
Total current liabilities                                  1,241,000            907,000

Minority interest                                             95,000            134,000

Shareholders' equity:
       Common stock                                           32,000             32,000
       Additional paid-in capital                          4,600,000          4,572,000
       Retained earnings (deficit)                          (657,000)          (363,000)
                                                         -----------        -----------
                                                           3,975,000          4,241,000
                                                         -----------        -----------
Total liabilities and shareholders' equity               $ 5,311,000        $ 5,282,000
                                                         ===========        ===========
</TABLE>


Note: The balance sheet at December 31, 2000 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.

See accompanying notes


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<PAGE>   5
                           IMAGE SENSING SYSTEMS, INC.
                                Income Statement
                                   (unaudited)

<TABLE>
<CAPTION>
                                                               Three-Month Period Ended               Six-Month Period Ended
                                                                        June 30                               June 30
                                                                2001               2000               2001               2000
                                                            -----------        -----------        -----------        -----------
<S>                                                         <C>                <C>                <C>                <C>
REVENUE:
      Product sales                                         $   499,000        $   840,000        $   885,000        $ 1,150,000
      Royalties                                                 986,000            652,000          1,998,000          1,412,000
      Consulting services                                        59,000             41,000             94,000             66,000
                                                            -----------        -----------        -----------        -----------
                                                              1,544,000          1,533,000          2,977,000          2,628,000

COSTS OF REVENUE:
      Product sales                                             260,000            442,000            461,000            608,000
      Royalties                                                  57,000             67,000            157,000            142,000
      Consulting services                                        37,000             25,000             67,000             39,000
                                                            -----------        -----------        -----------        -----------
                                                                354,000            534,000            685,000            789,000
                                                            -----------        -----------        -----------        -----------
Gross profit                                                  1,190,000            999,000          2,292,000          1,839,000

OPERATING EXPENSES:
      General and administrative                                670,000            656,000          1,271,000          1,208,000
      Business development                                      410,000            364,000            947,000            713,000
      Research and development                                  199,000                -              412,000                -
                                                            -----------        -----------        -----------        -----------
                                                              1,279,000          1,020,000          2,630,000          1,921,000
                                                            -----------        -----------        -----------        -----------
Income (loss) from operations                                   (89,000)           (21,000)          (338,000)           (82,000)

Other income, net                                                28,000             32,000             55,000             61,000
                                                            -----------        -----------        -----------        -----------
Income (loss) before income taxes                               (61,000)            11,000           (283,000)           (21,000)
Income (taxes) benefits                                             -                  -                  -              117,000
                                                            -----------        -----------        -----------        -----------
Net income (loss) before minority interest                      (61,000)            11,000           (283,000)            96,000
Minority interest                                                (9,000)               -              (11,000)               -
                                                            -----------        -----------        -----------        -----------
Net income (loss)                                           $   (70,000)       $    11,000        $  (294,000)       $    96,000
                                                            ===========        ===========        ===========        ===========

Net income (loss) per common share - basic
      and diluted                                           $     (0.02)       $      0.00        $     (0.09)       $      0.03
                                                            ===========        ===========        ===========        ===========



Weighted average number of common shares outstanding:
         Basic and Diluted                                    3,153,000          3,137,000          3,150,000          3,137,000
                                                            ===========        ===========        ===========        ===========
</TABLE>


See accompanying notes


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                           IMAGE SENSING SYSTEMS, INC.
                                    Cash Flow
                                   (unaudited)


<TABLE>
<CAPTION>
                                                                  Six-Month Period Ended
                                                                        June 30
                                                             ------------------------------
                                                                 2001               2000
                                                             -----------        -----------
<S>                                                          <C>                <C>
OPERATING ACTIVITIES:
         Net income                                          $  (294,000)       $    96,000
         Adjustments to reconcile net income to
             net cash provided by operating activities          (317,000)           (75,000)
         Minority interest                                        11,000                -
                                                             -----------        -----------
         Net cash provided by operating activities              (600,000)            21,000


INVESTING ACTIVITIES:
         Purchase of property and equipment                     (122,000)           (78,000)
         Other                                                       -              (28,000)
         Capitalized software development costs                      -             (306,000)
                                                             -----------        -----------
         Net cash used in investing activities                  (122,000)          (412,000)


FINANCING ACTIVITIES:
         Proceeds from exercise of stock option                   28,000            665,000
         Dividends paid by Flow Traffic                          (50,000)
                                                             -----------        -----------
         Net cash provided by financing activities               (22,000)           665,000

Increase (decrease) in cash and cash equivalents                (744,000)           274,000

Cash and cash equivalents, beginning of period                 1,780,000          1,319,000
                                                             -----------        -----------
Cash and cash equivalents, end of period                     $ 1,036,000        $ 1,593,000
                                                             ===========        ===========
</TABLE>


See accompanying notes



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<PAGE>   7
                           IMAGE SENSING SYSTEMS, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)
                                  June 30, 2001

Note A:  Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three- and six-month periods ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. For further information, refer to the financial statements
and footnotes thereto for the year ended December 31, 2000, included in our
Annual Report on Form 10-KSB for the year ended December 31, 2000.

Note B:

The Company entered into a Distribution Agreement with Wireless Technology, Inc.
on April 27, 2001. This agreement is filed as an exhibit to this Form 10-QSB.


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<PAGE>   8
Item 2.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  RESULTS OF OPERATIONS AND FINANCIAL CONDITION

               (Three- and Six-Month Periods Ended June 30, 2001)

Revenues for the second quarter of 2001 were $1,544,000, an increase of 1% from
$1,533,000 for the same period a year ago, while revenues for the first half of
2001 were $2,977,000, an increase of 13% from $2,628,000 a year ago. The
increase in revenues is a result of an increase in royalties received for these
periods, which in turn was due primarily to increased sales of Autoscope(R)
systems by Econolite Control Products, Inc. (Econolite), the Company's North
American distributor. Unit sales by the Company and Econolite increased 236% for
the second quarter and 193% for the first half of 2001, compared to the same
periods a year ago. Revenue from royalties for the second quarter of 2001
increased 51%, while revenue from direct sales decreased 41%, both as compared
to the second quarter of 2000. Revenue from royalties for the first half of 2001
increased 41%, while revenue from direct sales decreased 23%, both as compared
to the first half of 2000. The decrease in direct sales is due to continued
delays in orders from the European market, complicated by currency valuation
with the Euro.

Gross profit was $1,190,000 in the second quarter of 2001, or 77% of revenue,
compared to $999,000, or 65% of revenue, for the same period a year ago. Gross
profit for the first half of 2001 was $2,292,000, or 77% of revenue, compared to
$1,839,000, or 70% of revenue, for the same period a year ago. The higher margin
in the second quarter and first half of 2001 was due primarily to the Company's
deriving proportionately more revenue from royalties than from direct sales
during these periods, as royalties have a higher gross profit margin.

General and administrative expenses were $670,000 and $1,271,000, respectively,
for the three- and six-month periods ended June 30, 2001, compared to $656,000
and $1,208,000, respectively, for the same periods a year ago. The increase is
due to additional expenses related to the preparation of this year's annual
report and proxy.

Business development expenses were $410,000 and $947,000, respectively, for the
three- and six-month periods ended June 30, 2001, compared to $364,000 and
$713,000, respectively, for the same period a year ago. The increase is
primarily due to the continued development of the Wireless Technology sales,
marketing, and distribution infrastructure.

Research and development expenses were $199,000 and $412,000 for the three- and
six-month periods ended June 30, 2001, compared to none for the same periods a
year ago. The increase is due to the fact that all development efforts in the
first half of 2000 were directed toward software development for the new
Autoscope Solo Release 3, a new


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<PAGE>   9
comserver and the next-generation Autoscope Solo Pro, with associated costs
capitalized in accordance with Statement of Financial Accounting Standards No.
86.

Loss from operations was $89,000 and $338,000, respectively, for the three- and
six-month periods ended June 30, 2001, compared to loss from operations of
$21,000 and $82,000, respectively, for the same periods a year ago. The decrease
in earnings from operations for the three- and six-month periods ended June 30,
2001, compared to the same periods a year ago, are primarily due to increases in
business development expenditures and the amortization of software development
costs.

Other income, net, was $28,000 and $55,000, respectively, for the three- and
six-month periods ended June 30, 2001, compared to $32,000 and $61,000,
respectively, for the same periods a year ago. The decrease is due primarily to
lower cash balances coupled with lower yields on our money market and short-term
investments.

The Company recognized no income tax benefit in 2001, versus a $117,000 benefit
in the first quarter of 2000. Management believes it is more likely than not
that the net deferred tax asset will be realized over the next three years.

The Company has net operating loss carryforwards for income tax purposes of
approximately $1,488,000 and research and development tax credits of $245,000
that expire in the years 2007 through 2019. The Company incurred losses in the
first and second quarter of 2001 and therefore, has not accrued any taxes.

Liquidity and Capital Resources

Cash used by operating activities was $600,000 for the six-month period ended
June 30, 2001, compared to cash provided by operations of $21,000 for the same
period in 2000. The reduced cash flow from operations in the first half of 2001
was primarily due to increases in both accounts receivable and inventory for the
first half of 2001 compared to 2000.

Capital expenditures were $122,000 for the first half of 2001, compared to
$78,000 for the same period in 2000. The Company does not expect to make
significant changes to the level of investments in capital expenditures for the
balance of 2001. The Company did not capitalize software development costs in
the first half of 2001, whereas $306,000 of software development was capitalized
in the first half of 2000.

Management believes that the Company's cash and investment position, anticipated
cash flows from operations, and funds available through its bank line of credit
will be sufficient to meet working capital requirements for current operations
and planned new product introductions for the foreseeable future.


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<PAGE>   10
PART II: OTHER INFORMATION

Item 1.           Legal Proceedings

                  Not applicable

Item 2.           Changes in Securities

                  The Company amended its articles of incorporation on May 30,
                  2001 to increase the number of authorized shares of the
                  Company's common stock from 5,000,000 to 20,000,000 and its
                  authorized shares of preferred stock from 2,000,000 to
                  5,000,000.

Item 3.           Defaults upon Senior Securities

                  Not applicable

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

                  The Company held its annual meeting of shareholders on May 17,
                  2001, in Minneapolis, Minnesota. The Company solicited proxies
                  and filed its definitive proxy statement with the Commission
                  pursuant to Regulation 14A. The matters voted upon at the
                  meeting were (1) the election of directors, (2) a proposal to
                  amend the Company's articles of incorporation to increase its
                  common shares to 20,000,000 and its preferred shares to
                  5,000,000, (3) a proposal to ratify and approve an amendment
                  the Company's 1995 Long-Term Incentive Stock Option Plan to
                  increase the number of shares authorized for issuance by
                  420,000 from 480,000 to 900,000, and (4) to ratify and approve
                  the grant of options to certain non-employee directors.

                  (1) Election of Directors:

<TABLE>
<CAPTION>
                  Director                      For          Withhold Authority
<S>                                         <C>              <C>
                  Panos G. Michalopoulos    2,936,820             36,670
                  William L. Russell        2,969,100              4,390
                  Richard C. Magnuson       2,969,100              4,390
                  Richard P. Braun          2,969,100              4,390
                  James Murdakes            2,969,100              4,390
                  C. (Dino) Xykis           2,921,420             52,070
</TABLE>


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<PAGE>   11
                  (2) Amend articles of incorporation:

<TABLE>
<CAPTION>
                                                                     Broker
         For                Against           Abstain               Non-Vote
<S>                         <C>               <C>                  <C>
         1,818,188           41,130              750               1,113,422
</TABLE>

                  (3) Ratify and approve amendment to the Company's 1995
Long-Term Incentive Stock Option Plan:

<TABLE>
<CAPTION>
                                                                     Broker
         For                Against           Abstain               Non-Vote
<S>                         <C>               <C>                  <C>
         1,785,388          46,060            28,620               1,113,422
</TABLE>

                  (4) Ratify and approve options granted to certain non-employee
Directors:

<TABLE>
<CAPTION>
                                                                    Broker
         For               Against           Abstain               Non-Vote
<S>                        <C>               <C>                  <C>
         1,731,327         108,046           20,695               1,113,422
</TABLE>

Item 5.           Other Information
                  Not applicable

Item 6.           Exhibits and Reports on Form 8-K
                  (a) Exhibits

                  The following exhibits are filed as part of this quarterly
report on Form 10-QSB for the quarterly period ended June 30, 2000:

Exhibit
Number      Description

3.1         Restated Articles of Incorporation of ISS, incorporated by reference
            to ISS's registration statement on Form SB-2 (Registration No.
            90298C) filed with the Commission on March 14, 1995.

3.2         Articles of Amendment to Articles of Incorporation of ISS, dated May
            30, 2001.

3.3         Bylaws of ISS, incorporated by reference to ISS's registration
            statement on Form SB-2 (Registration No. 90298C) filed with the
            Commission on March 14, 1995.


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<PAGE>   12
10.1        Distribution Agreement with Wireless Technology, Inc., dated April
            27, 2001.

99.1        Cautionary Statement, incorporated herein by reference to Exhibit 99
            to the Company's Form 10-KSB for the fiscal year ended December 31,
            2000.

(b)      Reports

No reports on Form 8-K were filed during the quarter covered by this Form
10-QSB.


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                                   SIGNATURES


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


                                    Image Sensing Systems, Inc.
                                    --------------------------------------------
                                    (Registrant)


Dated:  August 13, 2001             /s/ William L. Russell
                                    --------------------------------------------
                                    William L. Russell
                                    Chairman and Chief Executive Officer
                                    (principal executive officer)


Dated:  August 13, 2001             /s/ Jeffrey F. Martin
                                    --------------------------------------------
                                    Jeffrey F. Martin
                                    Chief Financial Officer
                                    (principal financial and accounting officer)


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EXHIBIT INDEX


Exhibit
Number      Description

3.1         Restated Articles of Incorporation of ISS, incorporated by reference
            to ISS's registration statement on Form SB-2 (Registration No.
            90298C) filed with the Commission on March 14, 1995.

3.2         Articles of Amendment to Articles of Incorporation of ISS, dated May
            30, 2001.

3.3         Bylaws of ISS, incorporated by reference to ISS's registration
            statement on Form SB-2 (Registration No. 90298C) filed with the
            Commission on March 14, 1995.

10.1        Distribution Agreement with Wireless Technology, Inc., dated April
            27, 2001.

99.1        Cautionary Statement, incorporated herein by reference to Exhibit 99
            to the Company's Form 10-KSB for the fiscal year ended December 31,
            2000.


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