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, 2005

[_]      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 [ ]

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

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, 3,664,054
shares as of October 24, 2005.

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


<PAGE>


                           IMAGE SENSING SYSTEMS, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                  PART I.  FINANCIAL INFORMATION                                Page No.
                                                                               ----------
<S>               <C>                                                          <C>

Item 1.           Financial Statements:

                  Condensed Consolidated Balance Sheets as of
                  September 30, 2005 and December 31, 2004                             3

                  Condensed Consolidated Statements of Income for the
                  three- and nine-month periods ended September 30, 2005 and 2004      4

                  Condensed Consolidated Statements of Cash Flows for the
                  three- and nine-month periods ended September 30, 2005 and 2004      5

                  Notes to Condensed Consolidated Financial Statements                 6

Item 2.           Management's Discussion and Analysis or Plan of
                  Operation                                                            8

Item 3.           Controls and Procedures                                             13

                  PART II.  OTHER INFORMATION

Item 6.           Exhibits                                                            14

                  Signatures                                                          15

                  Exhibit Index                                                       16
</TABLE>



                                       2
<PAGE>



PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

                           IMAGE SENSING SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                   September 30                 December 31,
                                                                                       2005                         2004
                                                                                 ---------------               -----------------
ASSETS                                                                              (Unaudited)                    (Note)
<S>                                                                              <C>                            <C>
Current assets:
         Cash and cash equivalents                                                $   5,902,000                   $   1,262,000
         Short-term investments                                                       1,750,000                       5,000,000
         Accounts receivable                                                          3,627,000                       2,176,000
         Inventories                                                                    450,000                         404,000
         Investment in FHLB bond                                                      2,300,000                       2,300,000
         Prepaid expenses                                                               132,000                         275,000
         Deferred income taxes                                                           49,000                          49,000
                                                                                 ---------------                ----------------
Total current assets                                                                 14,210,000                      11,466,000

Property and equipment, net                                                             244,000                         127,000

Other assets:
         Capitalized software development costs, net                                    226,000                         420,000
         Goodwill                                                                     1,050,000                       1,050,000
                                                                                 ---------------                ----------------
                                                                                      1,276,000                       1,470,000

                                                                                 ---------------                ----------------
Total assets                                                                       $ 15,730,000                    $ 13,063,000
                                                                                 ===============                ================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
         Accounts payable                                                          $    382,000                    $    402,000
         Accrued compensation                                                           407,000                         708,000
         Income taxes payable                                                           379,000                          30,000
                                                                                 ---------------                ----------------
Total current liabilites                                                              1,168,000                       1,140,000

Deferred income taxes                                                                   144,000                         144,000

Shareholders' equity:
         Common stock                                                                    37,000                          35,000
         Additional paid-in capital                                                   7,027,000                       6,541,000
         Retained earnings                                                            7,354,000                       5,203,000
                                                                                 ---------------                ----------------
                                                                                     14,418,000                      11,779,000
                                                                                 ---------------                ----------------

Total liabilities and shareholders' equity                                        $ 15,730,000                     $ 13,063,000
                                                                                 ===============                ================
</TABLE>


Note: The balance sheet at December 31, 2004 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
<PAGE>



                           IMAGE SENSING SYSTEMS, INC.
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                  Three-Month Periods Ended       Nine-Month Periods Ended
                                                        September 30                   September 30
                                              ------------------------------ ------------------------------
                                                     2005           2004          2005             2004
                                              --------------- -------------- --------------   -------------
<S>                                           <C>            <C>              <C>             <C>
REVENUE:
       Royalty income                          $   2,669,000  $   2,511,000   $  6,468,000    $   5,698,000
       International sales                           794,000        566,000      1,646,000        2,880,000
                                              --------------- -------------- --------------   --------------
                                                   3,463,000      3,077,000      8,114,000        8,578,000

COSTS OF REVENUE:
       Cost of product sold                          322,000        219,000        653,000        1,415,000
       Royalty fee                                   118,000        102,000        288,000          243,000
                                              --------------- -------------- --------------   --------------
                                                     440,000        321,000        941,000        1,658,000
                                              --------------- -------------- --------------    -------------
Gross profit                                       3,023,000      2,756,000      7,173,000        6,920,000

OPERATING EXPENSES:
       Selling, marketing and product support        480,000        565,000      1,805,000        1,784,000
       General and administrative                    365,000        369,000      1,071,000          947,000
       Research and development                      523,000        331,000      1,151,000          796,000
                                              --------------- -------------- --------------   --------------
                                                   1,368,000      1,265,000      4,027,000        3,527,000
                                              --------------- -------------- --------------   --------------
Income from operations                             1,655,000      1,491,000      3,146,000        3,393,000

Other income, net                                     66,000         21,000        172,000           45,000
                                              --------------- -------------- --------------   --------------
Income before income taxes                         1,721,000      1,512,000      3,318,000        3,438,000
Income taxes                                         576,000        535,000      1,166,000        1,162,000
                                              --------------- -------------- --------------   --------------
Net income                                     $   1,145,000  $     977,000  $   2,152,000    $   2,276,000
                                              =============== ============== ==============   ==============

Net income per common share:
         Basic                                 $        0.32  $        0.28  $        0.60    $       0.67
                                              =============== ============== ==============   ==============
         Diluted                               $        0.30  $        0.26   $       0.56    $       0.60
                                              =============== ============== ==============   ==============

Weighted average number of common shares
  outstanding:
         Basic                                     3,625,000      3,442,000      3,576,000        3,378,000
                                              ============================== ==============   ==============
         Diluted                                   3,851,000      3,818,000      3,865,000        3,798,000
                                              ============================== ==============   ==============

</TABLE>


See accompanying notes




                                       4
<PAGE>



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

<TABLE>
<CAPTION>
                                                                                            Nine-Month Periods Ended
                                                                                                  September 30
                                                                                ---------------------- --- ----------------------
                                                                                        2005                       2004
                                                                                ----------------------     ----------------------
<S>                                                                             <C>                         <C>
OPERATING ACTIVITIES:
          Net income                                                             $    2,152,000                $      2,276,000
          Adjustments to reconcile net income to
             net cash provided by operating activities
                Depreciation and amortization                                           275,000                         247,000
                Change in operating assets and liabilities                           (1,276,000)                       (634,000)
                                                                                ----------------------     ----------------------
          Net cash provided by operating activities                                   1,151,000                       1,889,000


INVESTING ACTIVITIES:
          Purchase of property and equipment                                           (199,000)                        (61,000)
          Sale (purchase) of short-term investments                                   3,250,000                            -
          Purchase of callable FHLB bond                                                  -                          (2,300,000)
                                                                                ----------------------     ----------------------
          Net cash provided by (used in) investing activities                         3,051,000                      (2,361,000)



FINANCING ACTIVITIES:
          Proceeds from exercise of stock options                                       438,000                         472,000
          Net cash provided by financing activities                                     438,000                         472,000
                                                                                ----------------------     ----------------------

Increase in cash and cash equivalents                                                 4,640,000                        -

Cash and cash equivalents, beginning of period                                        1,262,000                       5,384,000
                                                                                ----------------------     ----------------------
Cash and cash equivalents, end of period                                         $    5,902,000             $         5,384,000
                                                                                ======================     ======================

</TABLE>





See accompanying notes



                                       5
<PAGE>


                           IMAGE SENSING SYSTEMS, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                               September 30, 2005

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, 2005 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005. For further information, refer to the financial statements and footnotes
thereto in our Annual Report on Form 10-KSB for the year ended December 31,
2004.

Note B:  Investments
--------------------

Investments, at cost, consisted of the following at September 30, 2005 and
December 31, 2004:

                                                 September 30,  December 31,
                                                     2005           2004
                                                 ------------- -------------
     Short-term investments - Auction Rate
      Securities                                 $1,750,000      $5,000,000
     Callable Federal Home Loan Bonds             2,300,000       2,300,000
                                                 ----------      ----------

     Total                                       $4,050,000      $7,300,000
                                                 ==========      ==========


As of September 30, 2005 and December 31, 2004, 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.

Proceeds from maturities and sales of investments totaled $3,250,000 for the
nine-month period ended September 30, 2005. There were no sales or maturities in
2004. There were no realized gains or losses related to sales or unrealized
gains and losses during the nine-month periods ended September 30, 2005 and
2004.

Note C: 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, 2005 and
2004:

                                       6
<PAGE>

<TABLE>
<CAPTION>
                                                       Three-Month Periods                 Nine-Month Periods
                                                       Ended September 30,                 Ended September 30
                                                       -------------------                 ------------------
                                                    2005                  2004           2005              2004
                                                    ----                  ----           ----              ----
<S>                                              <C>                   <C>            <C>              <C>
Numerator:
   Net income                                    $1,145,000             $977,000      $2,152,000        $2,276,000
                                                 ==========             ========      ==========        ==========
Denominator:
   Shares used in basic income per share
     calculation                                  3,625,000            3,442,000       3,576,000         3,378,000
   Effect of diluted securities:
     Employee and director stock
       options                                      226,000              376,000         289,000           420,000
                                                    -------              -------         -------           -------
Shares used in diluted earnings per share
calculations                                      3,851,000            3,818,000       3,865,000         3,798,000
                                                  =========            =========       =========         =========
Basic earnings per share                               $.32                 $.28            $.60              $.67
                                                       ====                 ====            ====              ====

Diluted earnings per share                             $.30                 $.26            $.56              $.60
                                                       ====                 ====            ====              ====
</TABLE>

Note D: Stock Options
---------------------
Stock options issued to employees are accounted for under the intrinsic value
method as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." No 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 under the provisions of
Financial Accounting Standards Board (FASB) Statement No. 123, "Accounting for
Stock-Based Compensation" (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                            Three-Month Periods            Nine-Month Periods
                                                            Ended September 30,            Ended September 30,
                                                            -------------------            -------------------
                                                             2005         2004              2005         2004
                                                             ----         ----              ----         ----
<S>                                                         <C>          <C>               <C>         <C>
Net income, as reported                                     $1,145        $977             $2,152       $2,276
Deduct:  Total stock-based employee compensation
expense determined under the fair value method for all
awards, net of related tax effects                              51          55                160          165
                                                            ------      ------             ------       ------
Pro-forma net income                                        $1,094        $922             $1,992       $2,111
                                                            ======      ======             ======       ======

Net income per share:
Basic - as reported                                           $.32        $.28               $.60         $.67
                                                              ====        ====               ====         ====
Basic - pro forma                                             $.30        $.27               $.56         $.62
                                                              ====        ====               ====         ====


Diluted - as reported                                         $.30        $.26               $.56         $.60
                                                              ====        ====               ====         ====
Diluted - pro forma                                           $.28        $.24               $.52         $.56
                                                              ====        ====               ====         ====
</TABLE>

                                       7
<PAGE>


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 for all periods presented: zero dividend yield; expected
volatility of 127; risk-free interest rate of 4.27% and expected life of 10
years.

In December 2004, the FASB issued Statement of Financial Accounting Standards
Statement No. 123 (revised 2004), "Share-Based Payment." This statement is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees."
This statement is effective in the first annual period that begins after
December 15, 2005. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services and requires that the compensation cost relating to share-based payment
transactions be measured on the fair value of the equity or liability
instruments issued. The Company will adopt this statement effective January 1,
2006. The effects of adoption on the financial statements have not been
determined, but are not expected to differ materially from the pro-forma effects
disclosed above.

Item 2.           Management's Discussion and Analysis or Plan of Operation

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(R)-based graphical user interface that enables standard video
cameras to work with the Autoscope(R) Wide Area Video Vehicle Detection 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 licensed distributor in those locations. We also sell Autoscope
systems to distributors and end users in Europe and Asia through our European
and Hong Kong subsidiaries, 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. Flow Traffic
Ltd., our Asian subsidiary, also sells loop detection products in Asia.

The majority of our revenue is derived from royalties received from Econolite,
with a second primary source of revenue produced from direct international 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 (1) continued governmental funding of
"Intelligent Transportation Systems", such as machine vision for traffic
control; (2) our ability, through Econolite and our sales representatives in
Europe and Asia, to successfully market the Autoscope System to individual
traffic managers and (3) our ability to develop new machine vision products


                                       8
<PAGE>

and applications that enhance the traffic manager's ability to cost-effectively
improve traffic flow and safety.

Results of Operations: (Comparison of three-and nine-month periods ended
----------------------
September 30, 2005 and 2004)

The following table sets forth for the periods indicated (1) certain statements
of income data as a percent of total revenue and (2) gross profit on royalty
income and international sales as a percentage of royalty income and
international sales, respectively, shown in italics:

<TABLE>
<CAPTION>
                                                   Three-Month                    Nine-Month
                                                  Periods Ended                 Periods Ended
                                                   September 30                  September 30
                                             -------------------------      -----------------------
                                                 2005            2004           2005          2004
                                             ---------      ----------      ---------      --------
<S>                                          <C>            <C>             <C>            <C>
Royalty income                                   71.1  %         81.6  %        79.7  %       66.4  %
International sales                              22.9            18.4           20.3          33.6
     Total revenue                              100.0           100.0          100.0         100.0
GROSS PROFIT - ROYALTY INCOME                    95.6            95.9           95.5          95.7
GROSS PROFIT -INTERNATIONAL SALES                59.4            61.3           60.3          50.9
Operating expenses                               39.5            41.1           49.6          41.1
Income from operations                           47.8            48.4           38.8          39.6
Income taxes                                     16.6            17.4           14.4          13.5
Net income                                       33.1            31.8           26.6          26.6

</TABLE>

Revenues for the third quarter of 2005 were $3,463,000, an increase of 12.5%
from $3,077,000 for the same period a year ago. Royalty income for the third
quarter of 2005 was $2,669,000, an increase of 6.3% from $2,511,000 for the
comparable period in 2004, indicating continued acceptance of our products in
the North American market. International sales revenues for the third quarter of
2005 were $794,000, an increase of 40.3% from $566,000 for the comparable period
in 2004 primarily due to increased sales volume in both Europe and Asia.

Revenues for the nine-month period ended September 30, 2005, were $8,114,000, a
decrease of 5.4% from $8,578,000 a year ago. Royalty income for the nine-month
period ended September 30, 2005 was $6,468,000, an increase of 13.5% from
$5,698,000 for the comparable period in 2004 reflecting Econolite's continued
success in the North American market. International sales for the nine-month
period ended September 30, 2005 were $1,646,000, a decrease of 42.8% from
$2,880,000 for the comparable period in 2004 due primarily to reduced sales of
Autoscope and loop detector products in the Asian market. The decrease in
revenues for the nine-month period was due entirely to a decrease in sales by
our Hong Kong subsidiary, Flow Traffic Ltd. Flow Traffic was unable to repeat a
large Autoscope sale in Korea that it experienced in the second quarter of 2004.
In addition, transition to a new loop detector product for sale in the Asian
market was delayed due to technical issues that have since been corrected.

Competition in the Asian market for machine vision products in the traffic
management industry is increasing and has adversely affected our ability to sell
Autoscope products there. We believe that by improving the functionality of our
Autoscope products we will be able to compete more


                                       9
<PAGE>

effectively in the future. In addition, the transition to a new loop detector
product for the Asian market has been delayed, as the first software release for
the product lacked certain features which appear to have adversely affected
sales of the product. We have added functionality to the loop detector software
and have successfully tested the new version. We are cautiously optimistic that
sales of the loop product will occur in the latter part of the fourth quarter.

Gross profits on royalty income for the three- and nine-month periods ended
September 30, 2005 were $3,023,000 and $7,173,000, respectively, compared to
$2,756,000 and $6,920,000, respectively, for the same periods of 2004. The
increase in the third quarter of 2005 reflects the increases in both royalty
income and international sales over the comparable period in 2004, while the
increase in the nine-month period of 2005 was due to increased royalty income
which more than offset a decrease in gross profit from reduced international
sales. Gross profit margins on royalty income has remained relatively unchanged,
while margins on international sales were 59.4% and 60.3% for the three- and
nine-month periods of 2005, respectively, compared to 61.3% and 50.9% for the
comparable periods in 2004. The decrease in gross profit margins in the third
quarter was due primarily to the mix of products sold, with relatively higher
sales of a lower margin product in 2005 compared to 2004. The increase in
margins for the nine-month period of 2005 over 2004 was due primarily to the
one-time sale in the first quarter of 2004 of low-margin cameras. Gross profit
margins on our primary Autoscope products continue to hold steady and have
increased in Europe in areas where we sell direct to the end user rather than to
a distributor.

Operating expenses were $1,368,000 and $4,027,000, respectively, for the three-
and nine-month periods ended September 30, 2005, or 39.5% and 49.6% of revenue,
compared to $1,265,000 and $3,527,000, or 41.1% of revenue for the same periods
in 2004. Selling, marketing and product support expenses decreased for the third
quarter of 2005 due primarily to more engineering time allocated to research and
development and away from product support while increasing for the nine-month
period of 2005 due to higher payroll and travel costs related to added sales and
support staff in Europe and the United States. General and administrative
expenses decreased marginally in the third quarter of 2005 and increased during
the nine-month period of 2005 due primarily to added performance bonuses,
insurance expense and legal and audit fees incurred in the first-half of the
year. Research and development expenses increased for the three- and nine-month
periods ended September 30, 2005 due to additional engineering staff allocating
time to new product development and more use of outside consultants as part of
product development. We expect that our operating expenses will continue to
increase during the remainder of 2005, compared to 2004, to cover additional
sales and product support hires in Europe and engineering staff in the United
States.

Income from operations in the third quarter of 2005 was $1,655,000, or 47.8% of
revenue, compared to $1,491,000, or 48.4% of revenue, in the comparable quarter
in 2004. Income from operations for the nine-month period ended September 30,
2005 was $3,146,000, or 38.8% of revenue, compared to $3,393,000, or 39.6% of
revenue, in the comparable period in 2004. The increase in income from
operations for the third quarter of 2005 was due primarily from increased
revenue in the quarter while the decrease in the nine-month period was due to
decreases in international sales by Flow Traffic Ltd. in the first half of 2005
and increases in all three categories of operating expense.


                                       10
<PAGE>


Income taxes were $576,000, or 33.5% of pretax income, in the third quarter of
2005, compared to $535,000, or 35.4% of pretax income, in the comparable quarter
of 2004, while income taxes were $1,166,000, or 35.1% of pretax income, in the
nine-month period ended September 30, 2005, compared to $1,162,000, or 33.8% of
pretax income in the comparable period of 2004. The increase in income taxes in
the third quarter of 2005 was due primarily to having more taxable income than
the comparable quarter of 2004 while the increase for the nine-month period of
2005 compared to 2004 was primarily due to the inability to offset losses in
Asia against prior year taxable income. We expect income taxes to remain at
approximately 33-35% of pretax income for the remainder of the year.

Net income was $1,145,000, or 33.1% of revenue, in the third quarter of 2005,
compared to $977,000, or 31.8% of revenue, in the comparable quarter of 2004.
Net income was $2,152,000, or 26.5% of revenue, in the nine-month period ended
September 30, 2005, compared to $2,276,000, or 26.5% of revenue in the
comparable period in 2004. The change in net income and net income as a percent
of revenue is due to the factors discussed above.

Liquidity and Capital Resources:
--------------------------------

At September 30, 2005, we had $5,902,000 in cash and cash equivalents, compared
to $1,262,000 at December 31, 2004. Included in cash equivalents at September
30, 2005 was $4,855,000 in a tax-exempt money market fund. The increase of
$4,640,000 in cash and cash equivalents at September 30, 2005 compared to
December 31, 2004 was due primarily to the sale of short-term investments during
the second and third quarters of 2005 and from cash provided by operating
activities in the first nine months of 2005. Net cash provided by operating
activities was $1,151,000 in the nine-month period ended September 30, 2005,
compared to $1,889,000 in the comparable period of 2004. The decrease was due
primarily to accounts receivable increasing more in the first nine-months of
2005 compared to 2004.

We had working capital of $13,042,000, and a ratio of current assets to current
liabilities of 12.2 to 1 at September 30, 2005, compared to $10,326,000 and 10.1
to 1, respectively, at the end of 2004.

We are accumulating cash in order to obtain the liquidity needed to take
advantage of acquisition opportunities that may become available and to allow
continued investment in product development and expansion of our market reach in
Asian and European. We continue to meet with other businesses in the United
States and Europe that manufacture, sell or distribute other traffic management
products that fit with our long-term strategy of growing world-wide in the
intelligent transportation market. We also are investigating manufacturing
alternatives outside of the United States with the objectives of lowering our
cost of manufacturing and becoming compliant with the new hazardous content and
disposal regulations which become effective in European Union countries as of
July 1, 2006.

We have a credit agreement with Wells Fargo Bank, N. A. that provides up to
$1,000,000 in short-term borrowings at .5% over the prime rate (effective rate
of 7.25% at September 30, 2005). Loans under this agreement would be secured by
receivables, inventories, equipment and general intangibles. We had no
outstanding borrowings under the credit agreement in 2005 or 2004.


                                       11
<PAGE>


We believe that cash and cash equivalents and short-term investments at
September 30, 2005, our $1,000,000 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.

Off-Balance Sheet Arrangements:
-------------------------------

We have no off-balance sheet arrangements.

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 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 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:

o        dependence on a single product for most of our revenue;

o        budget constraints by governmental entities that purchase our products;

o        continuing ability of our licensee to pay royalties owed;

o        dependence on third parties for manufacturing and marketing our
         products;

o        dependence on single-source suppliers to meet manufacturing needs;

o        failure to secure adequate protection for our intellectual property
         rights;

o        our inability to develop new applications and product enhancements;

o        our inability to properly manage a growth in revenue and/or production
         requirements;

o        control of our voting stock by insiders;

o        our inability to retain key scientific and technical personnel;

o        volatility of our stock price;


                                       12
<PAGE>


o        our inability to achieve and maintain effective internal controls;

o        our inability to comply with international regulatory restrictions over
         hazardous substances and electronic waste; and

o        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 1 of our Annual Report on Form 10-KSB for the fiscal year ended December
31, 2004.

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.

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
<PAGE>



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, 2005.


                  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





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<PAGE>



                                   SIGNATURES

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


                                    Image Sensing Systems, Inc.

                                    By:


Dated:  November 9, 2005            /s/ James Murdakes
                                    --------------------------------------------
                                    James Murdakes
                                    Chairman and Chief Executive Officer
                                    (principal executive officer)


Dated:   November 9, 2005           /s/ Arthur J. Bourgeois
                                    --------------------------------------------
                                    Arthur J. Bourgeois
                                    Chief Financial Officer
                                    (principal financial and accounting officer)


<PAGE>


EXHIBIT INDEX TO FORM 10-QSB


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              Chief Executive Officer Certification pursuant to Section 906
                  of the Sarbanes-Oxley Act of 2002, dated November 9, 2005.

32.2              Chief Financial Officer Certification pursuant to Section 906
                  of the Sarbanes-Oxley Act of 2002, dated November 9, 2005.











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