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

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                                   FORM 10-QSB

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

For the period ended March 31, 1999               Commission File Number 0-26056
-----------------------------------               ------------------------------

                           IMAGE SENSING SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

           Minnesota                                       41-1519168
-------------------------------               ----------------------------------
State of other jurisdiction of                I.R.S. Employer Identification No.
incorporation 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


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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate 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 -- 2,479,200 shares as of May 5, 1999.
       -------------------------------------------------------------------

<PAGE>


                           IMAGE SENSING SYSTEMS, INC.

                                      INDEX

          PART I. FINANCIAL INFORMATION                                 Page No.
                                                                        --------
Item 1.   Condensed Consolidated Financial Statements:

          Condensed Consolidated Balance Sheets
          March 31, 1999 and December 31, 1998                              4

          Condensed Consolidated Statements of Operations
          Three-month periods ended March 31, 1999 and 1998                 5

          Condensed Consolidated Statements of Cash Flows
          Three-month periods ended March 31, 1999 and 1998                 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 5.   Other Information                                                10

Item 6.   Exhibits and Reports on Form 8-K                                 10

          Signatures                                                       11


                         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; dependence on third parties for manufacturing and marketing
capabilities and 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


                                       2
<PAGE>


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, under the caption "Cautionary Statement," to this Quarterly
Report.


                                       3
<PAGE>

                         PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

                           IMAGE SENSING SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                           March 31,       December 31,
                                                             1999              1998
                                                         ------------      ------------
ASSETS                                                    (Unaudited)         (Note)
<S>                                                      <C>               <C>         
Current assets:
         Cash and cash equivalents                       $  1,561,000      $  1,326,000
         Accounts receivable                                1,026,000         1,402,000
         Inventories                                           54,000            74,000
         Prepaid expenses                                     102,000            32,000
         Deferred income taxes                                 57,000            57,000
                                                         ------------      ------------
Total current assets                                        2,800,000         2,891,000

Property and equipment, net                                   443,000           470,000

Other assets:
         Capitalized software development costs, net          824,000           856,000
         Deferred income taxes                                318,000           318,000
         Other                                                 88,000
                                                         ------------      ------------
                                                            1,230,000         1,174,000
                                                         ------------      ------------
Total Assets                                             $  4,473,000      $  4,535,000
                                                         ============      ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
         Accounts payable                                $    342,000      $    296,000
         Accrued compensation                                 190,000           270,000
         Deferred income                                       89,000           252,000
                                                         ------------      ------------
Total current liabilites                                      621,000           818,000

Deferred income tax liability                                 366,000           366,000

Minority interest                                              80,000

Shareholders' equity:
         Common stock                                          25,000            25,000
         Additional paid-in capital                         3,890,000         3,890,000
         Retained earnings (deficit)                         (509,000)         (564,000)
                                                         ------------      ------------
                                                            3,406,000         3,351,000
                                                         ------------      ------------

Total liabilities and shareholders' equity               $  4,473,000      $  4,535,000
                                                         ============      ============
</TABLE>


Note: The balance sheet at December 31, 1998 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

                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                        Three-Month Period Ended
                                                               March 31
                                                     -----------------------------
                                                          1999             1998
                                                     -----------------------------
<S>                                                  <C>              <C>         
REVENUE:
        Product sales                                $    334,000     $    275,000
        Royalties                                         760,000          470,000
        Consulting services                                62,000           13,000
                                                     -----------------------------
                                                        1,156,000          758,000
COSTS OF REVENUE:
      Product sales                                       160,000          153,000
      Royalties                                            82,000           53,000
      Consulting services                                  22,000            3,000
                                                     -----------------------------
                                                          264,000          209,000
                                                     -----------------------------
Gross profit                                              892,000          549,000

OPERATING EXPENSES:
      Selling, general and administrative                 664,000          577,000
      Research and development                            189,000               --
                                                     -----------------------------
                                                          853,000          577,000
                                                     -----------------------------
Income (loss) from operations                              39,000          (28,000)

Other income, net                                          16,000           29,000
                                                     -----------------------------
Income before income taxes                                 55,000            1,000
Income taxes                                                   --               --
                                                     -----------------------------
Net income                                           $     55,000     $      1,000
                                                     =============================


Net income per common share-basic and diluted        $       0.02     $       0.00
                                                     =============================

Weighted average number of common
      shares outstanding:
           Basic                                        2,479,000        2,478,000
                                                     =============================
           Diluted                                      2,531,000        2,478,000
                                                     =============================
</TABLE>


See accompanying notes

                                       5
<PAGE>


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

<TABLE>
<CAPTION>
                                                               Three-Month Period Ended
                                                                       March 31
                                                            ------------------------------
                                                                 1999             1998
                                                            ------------------------------
<S>                                                         <C>               <C>         
OPERATING ACTIVITIES:
            Net income                                      $     55,000      $      1,000
            Adjustments to reconcile net income to
              net cash provided by operating activities          217,000           533,000
                                                            ------------------------------
            Net cash provided by operating activities            272,000           534,000


INVESTING ACTIVITIES:
            Purchase of property and equipment                   (27,000)          (12,000)
            Other                                                (10,000)               --
            Capitalized software development costs                    --          (259,000)
                                                            ------------------------------
            Net cash used in investing activities                (37,000)         (271,000)


FINANCING ACTIVITIES:                                                 --                --

                                                            ------------------------------
Increase in cash and cash equivalents                            235,000           263,000

Cash and cash equivalents, beginning of period                 1,326,000         2,000,000
                                                            ------------------------------
Cash and cash equivalents, end of period                    $  1,561,000      $  2,263,000
                                                            ==============================
</TABLE>


See accompanying notes

                                       6
<PAGE>


                           IMAGE SENSING SYSTEMS, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                                   (Unaudited)
                                 March 31, 1999

Note A: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principals 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-month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999. For further information, refer to the financial statements and footnotes
thereto for the year ended December 31, 1998.


                                       7

<PAGE>


Item 2.
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  RESULTS OF OPERATIONS AND FINANCIAL CONDITION

                    (Three Month Period Ended March 31, 1999)


Revenues for the first quarter of 1999 were $1,156,000 up 53% from $758,000 for
the same period a year ago. The increase in first quarter revenues was due
primarily to more sales of Autoscope(R) systems by both Image Sensing Systems,
Inc. (ISS) and its majority owned subsidiary and by its North American
distributor, Econolite Control Products, Inc. Econolite reported a significant
sale that represented a 33 system extension of an existing project in Michigan.
Asian sales were also better than expected with 12 units sold in the first
quarter of 1999 compared to no sales in the first quarter of 1998.

Gross profits were $892,000 in the first quarter of 1999, or 77% of revenue,
compared to $549,000, or 72% of revenue, for the same period a year ago. The
increased margin in 1999 was due primarily to proportionately more revenue from
royalties, which have significantly higher gross profit margins than product
sales or consulting services.

Selling, general and administrative expenses were $664,000 for the first quarter
of 1999 compared to $577,000 for the same period a year ago. The increase was
due primarily to increased efforts in business development.

Research and development expenses were $189,000 in the first quarter of 1999
compared to none for the same period a year ago. The increase resulted because
all development efforts in the first quarter of 1998 were directed toward
software development for the new Autoscope Solo product with associated costs
capitalized in accordance with Statement of Financial Accounting Standards No.
86.

Other income, net was $16,000 in the first quarter of 1999 compared to $29,000
for the same period a year ago. The decrease resulted due to a decrease in
interest bearing cash equivalents during the first quarter on 1999.

The Company expects to avail itself of operating loss and research and
development tax credit carryforwards and incur no income tax expense in 1999.

Liquidity and Capital Resources:

Cash provided by operating activities was $272,000 for the first quarter of
1999, compared to $534,000 for the same period in 1998. The reduced cash flow
from operations in the first quarter of 1999 was primarily due to an unusually
large collection on accounts receivables for the first quarter of 1998 compared
to 1999.


                                       8
<PAGE>


Capital expenditures were $27,000 for the first quarter of 1999, compared to
$12,000 for the same period in 1998. The Company does not expect to make
significant changes to the level of investments in capital expenditures for the
balance of 1999. The Company is no longer incurring software development costs
that should be capitalized, whereas $259,000 in such costs were incurred in the
first quarter of 1998.

Management believes that its 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.

Impact of the Year 2000 Issue

The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Some computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. All of the software produced by the Company has
been analyzed and the Company is not aware of any potential for date recognition
problems in its products. However, the Company also uses off-the-shelf software
(Administrative Software) produced by third parties for use in administrative
functions such as word processing, network administration, voice mail messaging,
billing and record keeping. In the event that any of such programs are
susceptible to date recognition problems, this could result in a system failure
or miscalculations causing disruption of operations, including, among other
things, intra-company communications, preparation of invoices and collection of
accounts receivables, and many other normal business activities.

The Company has made every attempt to identify all relevant software that may
affect the Company's operations through surveys and examination. Based on risk
assessments that have been completed for the majority of the Company's
operations, the Company must replace some of its Administrative Software so that
its computer systems will properly utilize dates beyond December 31, 1999. The
Company expects to convert its business operations to Year 2000 compatible
software during the first half of 1999 by a combination of conversion to new
software and upgrading existing software. The cost of these conversions is
expected to be less than $20,000. However, there can be no guarantee that the
Administrative Software on which the Company's systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.


                                       9
<PAGE>


PART II: OTHER INFORMATION

Item 1.  Legal Proceedings

         Not applicable

Item 2.  Changes in Securities

         Not applicable

Item 3.  Defaults upon Senior Securities

         Not applicable

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

         Not applicable

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 March 31, 1999:

         27      Financial Data Schedule
         99      Cautionary Statement

         (b)  Reports

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


                                       10
<PAGE>


                                   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: May 14, 1999                 /s/ William L. Russell
                                    ----------------------------------------
                                    William L. Russell
                                    President and Chief Executive Officer
                                    (principal executive officer)


Dated: May 14, 1999                 /s/ Arthur J. Bourgeois
                                    ----------------------------------------
                                    Arthur J. Bourgeois
                                    Chief Financial Officer
                                    (principal financial and accounting officer)


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