# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

# FORM 10-QSB

|[X] |  | QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934          For the
quarterly period ended September 30, 2004
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|[_] |  | TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT          For the transition period
from _________ to _________
|--- |  | ------------------------------------------------------------------------------------------------------------------------------

Commission file number: 0-26056




IMAGE SENSING SYSTEMS,
INC.(Exact name of small business issuer 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)(651) 603-7700
(Issuers telephone number)

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

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

State the number of shares
outstanding of each of the issuers classes of common equity, as of the latest practical
date:  Common Stock, $.01 par value, 3,456,722 shares as of October 18, 2004.

Transitional Small Business
Disclosure Format: Yes  [  ]   No  [X]

---

IMAGE SENSING SYSTEMS,
INC.

TABLE OF CONTENTS

|       | PART I.  FINANCIAL INFORMATION                                  | Page No.
|------ | --------------------------------------------------------------- | --------
|      
|Item 1 | Financial Statements:                                           |         
|      
|       | Condensed Consolidated Balance Sheets as of                    
|       | September 30, 2004 and December 31, 2003                        | 3       
|      
|       | Condensed Consolidated Statements of Income for the            
|       | three- and nine-month periods ended September 30, 2004 and 2003 | 4       
|      
|       | Condensed Consolidated Statements of Cash Flows for the        
|       | nine month periods ended September 30, 2004 and 2003            | 5       
|      
|       | Notes to Condensed Consolidated Financial Statements            | 6       
|      
|Item 2 | Managements Discussion and Analysis of Financial              
|       | Condition and Results of Operations                             | 8       
|      
|Item 3 | Controls and Procedures                                         | 12      
|      
|       | PART II. OTHER INFORMATION                                     
|      
|Item 6 | Exhibits                                                        | 14      
|      
|       | Signatures                                                      | 15      
|      
|       | Exhibit Index                                                   | 16      

---

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

# IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                            | September 30,2004 | December 31,2003
|------------------------------------------- | ----------------- | ----------------
|                                           
|Assets                                      |                   | (Unaudited)     
|Current assets:                             |                  
|Cash and cash equivalents                   |                   | $  5,384,000    
|Accounts receivable                         |                   | 2,521,000       
|Inventories                                 |                   | 488,000         
|Investment in callable FHLB bonds           |                   | 2,300,000       
|Prepaid expenses                            |                   | 165,000         
|Deferred income taxes                       |                   | 61,000          
|                                            |                   |                 
|Total current assets                        |                   | 10,919,000      
|                                            |                  
|Property and equipment, net                 |                   | 133,000         
|                                            |                  
|Other assets:                               |                  
|Capitalized software development costs, net |                   | 485,000         
|Goodwill                                    |                   | 1,050,000       
|Other                                       |                   | 29,000          
|                                            |                   |                 
|                                            |                   | 1,564,000       
|                                            |                   |                 
|Total assets                                |                   | $12,616,000     
|                                            |                   |                 
|                                            |                  
|Liabilities and Shareholders' Equity        |                  
|Current liabilities:                        |                  
|Accounts payable                            |                   | $     472,000   
|Accrued compensation                        |                   | 597,000         
|Income taxes payable                        |                   | 810,000         
|                                            |                   |                 
|Total current liabilites                    |                   | 1,879,000       
|                                            |                  
|Deferred income taxes                       |                   | 229,000         
|                                            |                  
|Shareholders' equity:                       |                  
|Common stock                                |                   | 35,000          
|Additional paid-in capital                  |                   | 5,688,000       
|Retained earnings                           |                   | 4,785,000       
|                                            |                   |                 
|                                            |                   | 10,508,000      
|                                            |                   |                 
|                                            |                  
|Total liabilities and shareholders' equity  |                   | $12,616,000     
|                                            |                   |                 

Note: The balance sheet at December
31, 2003 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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# IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

|                                         | Three-Month Periods EndedSeptember 30 | Nine-Month Periods EndedSeptember 30
|---------------------------------------- | ------------------------------------- | ------------------------------------
|                                         |                                       |                                     
|                                         |                                       |                                     
|                                         |                                       |                                     
|Revenue:                                 |                                       |                                     
|Product sales                            |                                       | $   566,000                         
|Royalties                                |                                       | 2,511,000                           
|Consulting services                      |                                       |                                    
|                                         |                                       |                                     
|                                         |                                       | 3,077,000                           
|                                         |                                      
|Costs of revenue:                        |                                      
|Product sales                            |                                       | 219,000                             
|Royalties                                |                                       | 102,000                             
|Consulting services                      |                                       |                                    
|                                         |                                       |                                     
|                                         |                                       | 321,000                             
|                                         |                                       |                                     
|Gross profit                             |                                       | 2,756,000                           
|                                         |                                      
|Operating expenses:                      |                                      
|Selling, marketing and product support   |                                       | 565,000                             
|General and administrative               |                                       | 369,000                             
|Research and development                 |                                       | 331,000                             
|                                         |                                       |                                     
|                                         |                                       | 1,265,000                           
|                                         |                                       |                                     
|Income  from operations                  |                                       | 1,491,000                           
|                                         |                                      
|Other income, net                        |                                       | 21,000                              
|                                         |                                       |                                     
|Income  before income taxes              |                                       | 1,512,000                           
|Income taxes                             |                                       | 535,000                             
|                                         |                                       |                                     
|Net income                               |                                       | $   977,000                         
|                                         |                                       |                                     
|                                         |                                      
|Net income  per common share:            |                                      
|Basic                                    |                                       | $         0.28                      
|                                         |                                       |                                     
|Diluted                                  |                                       | $         0.26                      
|                                         |                                       |                                     
|                                         |                                      
|Weighted average number of common shares |                                      
|outstanding:                             |                                      
|Basic                                    |                                       | 3,442,000                           
|                                         |                                       |                                     
|Diluted                                  |                                       | 3,818,000                           
|                                         |                                       |                                     

See accompanying notes

4

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# IMAGE SENSING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)

|                                                    | Nine-Month Periods EndedSeptember 30
|--------------------------------------------------- | ------------------------------------
|                                                    |                                     
|                                                   
|                                                    |                                     
|Operating activities:                               |                                     
|Net income                                          |                                     
|Adjustments to reconcile net income to net cash     |                                     
|provided by operating activities                    |                                     
|                                                    |                                     
|Net cash provided by operating activities           |                                     
|                                                    |                                     
|Investing activities:                               |                                     
|Purchase of property and equipment                  |                                     
|Purchase of callable FHLB bonds                     |                                     
|                                                    |                                     
|Net cash used in investing activities               |                                     
|                                                    |                                     
|Financing activities:                               |                                     
|Proceeds from exercise of stock options             |                                     
|Payment to former shareholders of subsidiary        |                                     
|                                                    |                                     
|Net cash provided by (used in) financing activities |                                     
|                                                    |                                     
|                                                    |                                     
|Increase (decrease) in cash and cash equivalents    |                                     
|                                                    |                                     
|Cash and cash equivalents, beginning of period      |                                     
|                                                    |                                     
|Cash and cash equivalents, end of period            |                                     
|                                                    |                                     

See accompanying notes

5

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IMAGE SENSING SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2004

Note A: Basis of Presentation

The accompanying unaudited condensed
consolidated financial statements 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-QSB. 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. 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 nine
month period ended September 30, 2004 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004. For further information, refer to
the financial statements and accompanying footnotes in our Form 10-KSB for the fiscal
year ended December 31, 2003.

Note B: Earnings Per Share

The following table sets forth the
computations of basic and diluted earnings per share for the three- and nine month
periods ended September 30, 2004 and 2003 (dollars and share amounts in thousands):

|                              | Three-Month PeriodsEnded September 30 | Nine-Month PeriodsEnded September 30
|----------------------------- | ------------------------------------- | ------------------------------------
|                              |                                       |                                     
|
|                              |                                       |                                     
|Numerator:                    |                                       |                                     
|Net income                    |                                       | $   977                             
|                              |                                       |                                     
|Denominator:                  |                                      
|Shares used in basic net      |                                      
|income per share              |                                      
|calculations:                 |                                       | 3,442                               
|Effect of diluted securities: |                                      
|Employee and director         |                                      
|stock options                 |                                       | 376                                 
|                              |                                       |                                     
|Shares used in diluted        |                                      
|net income per share          |                                      
|calculations                  |                                       | 3,818                               
|                              |                                       |                                     
|                              |                                      
|Basic net income per share    |                                       | $   .28                             
|                              |                                       |                                     
|                              |                                      
|Diluted net income per share  |                                       | $   .26                             
|                              |                                       |                                     

6

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Note C: Investment in Callable FHLB Bonds

In accordance with the Statement of
Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt
and Equity Securities, and based on our intention regarding these instruments, we
classify all debt securities as held-to-maturity and account for these investments at
amortized cost. These securities mature in 2007. The amortized principal amount
approximates fair value at September 30, 2004.

Note D: Stock Options

Stock options issued to employees
are accounted for under the intrinsic value method. Accordingly, stock-based employee
compensation cost is reflected in net income, as all options granted had an exercise
price equal to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and net income per share if we had
applied the fair value method of accounting for stock options (dollars in thousands):

|                                          | Three-Month PeriodsEnded September 30, | Nine-Month PeriodsEnded September 30,
|----------------------------------------- | -------------------------------------- | -------------------------------------
|                                          |                                        |                                      
|                                          |                                        |                                      
|                                          |                                        |                                      
|Net income, as reported                   |                                        | $977                                 
|Deduct:  Total stock-based employee       |                                       
|compensation expense determined under the |                                       
|fair value method for all awards, net of  |                                       
|related tax effects                       |                                        | 55                                   
|                                          |                                        |                                      
|Pro-forma net income                      |                                        | $922                                 
|                                          |                                        |                                      
|                                          |                                       
|Net income per share:                     |                                       
|Basic - as reported                       |                                        | $.28                                 
|                                          |                                        |                                      
|Basic - pro forma                         |                                        | $.27                                 
|                                          |                                        |                                      
|                                          |                                       
|Diluted - as reported                     |                                        | $.26                                 
|                                          |                                        |                                      
|Diluted - pro forma                       |                                        | $.24                                 
|                                          |                                        |                                      

The fair value of each stock option
granted is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used: zero dividend yield; expected
volatility of 137%; risk-free interest rate of 4.25% and expected life of 10 years for
all years presented.

7

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|Item 2. |  | Managements
Discussion and Analysis of Financial Condition andResults 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.
Our technology uses standard video and computer equipment, combined with proprietary
technology, including complex detection algorithms, computer software, special purpose
hardware, and a Microsoft Windows®-based graphical user interface that enables
standard video cameras to work with the Autoscope system.

Autoscope systems are sold to
distributors and end users of traffic management products in North America and Latin
America by Econolite Control Products, Inc., (Econolite), our distribution partner in
those locations. We also sell Autoscope products to distributors and end users in Asia
and Europe through our Hong Kong subsidiary, Flow Traffic Ltd. and our United Kingdom
subsidiary, Image Sensing Systems Europe Ltd, respectively. 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. The majority of our
North American revenue is derived from royalties received from Econolite. A second
primary source of revenue is produced from direct product sales in Asia and Europe. 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 (i) continued governmental funding of Intelligent Transportation Systems,
such as machine vision for traffic control; (ii) our ability, through Econolite and our
sales representatives in Asia and Europe, to successfully market the Autoscope System to
individual traffic managers; and (iii) our ability to develop new machine vision products
and applications that enhance traffic managers ability to cost effectively improve
traffic flow and safety.

Results of Operations: (Comparison
of three- and nine month periods ended September 30, 2004 and 2003)

The following table sets forth for
the periods indicated, (i) certain statements of income data as a percent of total
revenue and (ii) gross profit on product sales and royalties as a percentage of product
sales and royalties, respectively, shown in italics:

8

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|                             | Three-MonthPeriod EndedSeptember 30 | Nine-MonthPeriod EndedSeptember 30
|---------------------------- | ----------------------------------- | ----------------------------------
|                             |                                     |                                   
|                             |                                     |                                   
|                             |                                     |                                   
|Product sales                |                                     | 18.4                              
|Royalties                    |                                     | 81.6                              
|Consulting services          |                                     |                                  
|Total revenue                |                                     | 100.0                             
|Gross profit - product sales |                                     | 61.3                              
|Gross profit - royalties     |                                     | 95.9                              
|Operating expenses           |                                     | 41.1                              
|Income from operations       |                                     | 48.5                              
|Income taxes                 |                                     | 17.4                              
|Net income                   |                                     | 31.8                              

Revenues for the third quarter of
2004 were $3,077,000, up 15.3% from $2,669,000 for the comparable period a year ago. The
increase in revenues for the third quarter was due primarily to a 37.3% increase in
royalty income over the comparable period in 2003 offset in part by a 32.6% decrease in
product sales. Royalty income for the third quarter of 2004 increased 37.3% over the
comparable period in 2003 reflecting Econolites increase in sales of Autoscope
products using our technology. Product sales for the third quarter were 32.6% less than
the comparable period in 2003 as several large sales orders in Asia did not repeat in
2004.

Revenues for the nine month period
ended September 30, 2004, were $8,578,000, an increase of 25.7% from $6,822,000 a year
ago. Revenue from product sales and royalties increased 25.3% and 26.1%, respectively,
over the comparable nine month period of 2003. The increases resulted primarily from
further acceptance of our Autoscope products in both the Asian and European markets and
increases in North American sales by Econolite. Revenues tend to be seasonal with the
first and fourth quarters of the calendar year historically less than the second and
third quarters. We expect this trend to continue with revenues for the fourth quarter of
2004 and the first quarter of 2005 to be less than the second and third quarters of 2004.

Gross profits for the third quarter
of 2004 were $2,756,000, or 89.6% of revenue, compared to $2,189,000, or 82.0% of
revenue, for the same period a year ago. Gross profits for the nine month period ended
September 30, 2004 were $6,920,000, or 80.7% of revenue, compared to $5,595,000, or 82.0%
of revenue, a year ago. The increase in gross profit for the third quarter in 2004 over
the comparable period in 2003 was due to increased revenue from royalty income, which
more than offset a decrease in gross profit from product sales. The increase in gross
profit for the nine month period ended September 30, 2004 over the comparable period in
2003 was due to an increase in both product sales and royalty income. The changes in
gross profit margins for the third quarter of 2004 and nine month period ended September
30, 2004 relative to the comparable periods in 2003 are due primarily to changes in the
mix of high margin royalties as a percentage of total revenue. Gross profit margins on
product sales increased to 61.3% in the third quarter of 2004 compared to 52.7% for the
comparable quarter in 2003, due primarily to a greater mix of high margin products sold
in the current quarter. Gross profit margins on product

9

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sales for the nine month period
ended September 30, 2004 decreased to 50.9% from 55.9% for the comparable period in 2003,
due primarily to an unusually large mix of sales of certain products which complement our
technology but carry lower margins. Margins on our primary products have not changed
significantly in 2004, and we do not expect that our cost of product sales relative to
product sales, or royalty costs relative to royalty income, will change appreciably
during the balance of 2004.

Operating expenses were $1,265,000,
or 41.1% of revenue, for the third quarter of 2004 compared to $1,157,000, or 43.3% of
revenue, for the same period a year ago. For the nine month period ended September 30,
2004, operating expenses were $3,527,000, or 41.1% of revenue, compared to $3,166,000, or
46.4% of revenue, for the comparable period in 2003. The increases in operating expenses
are due primarily to the hiring of technical staff for research and development projects
in the fourth quarter of 2003. Other increases in operating expenses relate primarily to
additional sales and marketing initiatives in 2004 over 2003. Operating expenses as a
percentage of revenue decreased in the third quarter of 2004 and nine month period ended
September 30, 2004 compared to 2003, an indication that our operating expenses tend to be
fixed and are not rising in relation to revenues. We expect that our operating expenses
will increase marginally during the remainder of 2004 to cover additional technical staff
in the United States. However, we also expect that seasonal revenue fluctuations combined
with fixed operating expenses will increase operating expenses as a percentage of total
revenue in the fourth quarter of 2004 and first quarter of 2005.

Income from operations in the third
quarter of 2004 was $1,491,000, or 48.5% of revenue, compared to $1,032,000, or 38.7% of
revenue, in the comparable quarter of 2003, an increase of 44.5%. Income from operations
for the nine month period ended September 30, 2004 was $3,393,000, or 39.6% of revenue,
compared to $2,429,000, or 35.6% of revenue, in the comparable quarter of 2003, an
increase of 39.7%. The increases in income from operations for both the third quarter of
2004 and nine month period ended September 30, 2004 over the comparable periods of 2003
resulted primarily from revenue growing at a higher rate (15.3% and 25.7% for the third
quarter and nine month period, respectively) than operating expenses (9.3% and 11.4%,
respectively).

Income taxes were $535,000, or 35.4%
of pretax income, in the third quarter of 2004, compared to $365,000, or 34.9% of pretax
income, in the comparable quarter of 2003, while income taxes were $1,162,000, or 33.8%
of pretax income, in the nine month period ended September 30, 2004, compared to
$684,000, or 28.0% of pretax income in the comparable period of 2003. The increase in
income taxes was due primarily to having more taxable income in 2004 and less benefit
from utilization of tax loss and tax credit carryforwards than the previous year. We
expect income taxes will approximate 34% of pretax income for the remainder of the year.

Net income was $977,000, or 31.8% of
revenue, in the third quarter of 2004, a 43.5% increase compared to $681,000, or 25.5% of
revenue, in the comparable quarter of 2003. Net income was $2,276,000, or 26.5% of
revenue, in the nine month period ended September 30, 2004, a 29.4% increase compared to
$1,759,000, or 25.8% of revenue in the comparable period of 2003. The increase in net
income is due to the factors discussed above.

10

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Liquidity and Capital Resources:

At September 30, 2004, we had
$5,384,000 in cash and cash equivalents, the same that we had at December 31, 2003, and
$2,300,000 invested in callable Federal Home Loan Bank bonds purchased in the nine month
period ended September 30, 2004. We had working capital of $9,040,000, and a ratio of
current assets to current liabilities of 5.8 to 1 at September 30, 2004, compared to
$6,105,000 and 4.8 to 1, respectively, at the end of 2003.

Net cash provided by operating
activities was $1,889,000 in the nine month period ended September 30, 2004, compared to
$2,122,000 in the comparable period of 2003. The decrease in cash provided by operating
activities was due primarily to increases in accounts receivable and inventory balances
over the comparable period in 2003, which more than offset the increase in net income for
the current year over 2003. We reduced cash and cash equivalents by investing $2.3
million in Federal Home Loan Bank bonds in order to increase our interest income. The
bonds are callable in 2004 and mature in 2007. Proceeds of $472,000 from stock option
exercises were the only other significant source of cash in 2004.

We have a credit agreement that
provides up to $1,000,000 in short-term borrowings at .5% over the prime rate (effective
rate of 5.25% at September 30, 2004). Substantially all assets are pledged as collateral
on the borrowings. The credit agreement further includes a covenant that restricts
payment of a cash dividend if an event of default has occurred or would occur as a result
of paying a dividend. We had no outstanding borrowings under the credit agreement in 2004
or 2003.

We believe that cash and cash
equivalents on hand at September 30, 2004, our $1,000,000 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.

Off-Balance Sheet Arrangements:

We have no off-balance sheet
arrangements.

Critical Accounting Policies:

Our critical accounting policies are
described in Managements Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10-KSB for the fiscal year ended December 31,
2003. The accounting policies used in preparing our interim 2004 consolidated condensed
financial statements are the same as those described in our Annual Report.

Cautionary Statement:

| | 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

11

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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, or
anticipates or other comparable terminology. Forward-looking statements are
subject to 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:

| |  |  | dependence
on a single product for most of our revenue;
| | - |  | -------------------------------------------------------

| |  |  | budget
constraints by 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;
| | - |  | -------------------------------------------------------------------------

| |  |  | dependence
on single-source suppliers to meet manufacturing needs;
| | - |  | ------------------------------------------------------------------

| |  |  | failure
to secure adequate protection for our intellectual property rights;
| | - |  | ---------------------------------------------------------------------------

| |  |  | our
inability to develop new applications and product enhancements;
| | - |  | -------------------------------------------------------------------

| |  |  | our
inability to properly manage growth in revenue and/or production requirements;
| | - |  | ----------------------------------------------------------------------------------

| |  |  | our
inability to retain key scientific and technical personnel;
| | - |  | ---------------------------------------------------------------

| |  |  | control
of our voting stock by insiders; and
| | - |  | --------------------------------------------

| |  |  | conditions
beyond our control such as war, terrorist attacks, severe acute respiratory syndrome
(SARS) epidemic and economic recession.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

We caution that the forward-looking
statements made in this report or in other announcements made by the Company are further
qualified by the risk factors set forth in Item 1 to the Companys Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2003.

|Item 3. |  | 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) or 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act)). Based upon that
evaluation, the 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 in timely

12

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alerting them to the material
information relating to us (or our consolidated subsidiaries) required to be included in
the reports we file or submit under the Exchange Act.

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) or 15d-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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PART II: OTHER INFORMATION

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

The following exhibits are filed as
part of this Quarterly Report on Form 10-QSB for the quarterly period ended September 30,
2004.

|ExhibitNumber | Description
|------------- | -----------
|              |            
|31.1          |            
|              |            
|              |            
|31.2          |            
|              |            
|              |            
|32.1          |            
|              |            
|              |            
|32.2          |            
|              |            

14

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SIGNATURES

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

|                         |  | Image Sensing Systems, Inc.                  |  |  | 
|------------------------ |  | -------------------------------------------- |  |  | 
|                         | 
|                         |  | By:                                          | 
|                         | 
|                         | 
|Dated:  October 28, 2004 |  | /s/ James Murdakes                           | 
|                         | 
|                         |  | James Murdakes                               | 
|                         |  | Chairman and Chief Executive Officer         | 
|                         |  | (principal executive officer)                | 
|                         | 
|                         | 
|Dated: October 28, 2004  |  | /s/ Arthur J. Bourgeois                      |  |  | 
|                         | 
|                         |  | Arthur J. Bourgeois                          | 
|                         |  | Chief Financial Officer                      | 
|                         |  | (principal financial and accounting officer) | 

15

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EXHIBIT INDEX TO FORM 10-QSB

|Exhibit No. | Description
|----------- | -----------
|            |            
|31.1        |            
|            |            
|            |            
|31.2        |            
|            |            
|            |            
|32.1        |            
|            |            
|            |            
|32.2        |            
|            |            

16

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