8-K

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

FORM 8-K

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

Date of Report (Date of earliest event reported):   February 20, 2006

IMAGE SENSING SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Minnesota
(State or Other Jurisdiction of Incorporation)

0-26056	41-1519168
(Commission File Number)	(IRS Employer Identification No.)

500 Spruce Tree Centre, 1600 University Avenue West, St. Paul, Minnesota 55104
(Address of Principal Executive Offices, Including Zip Code)

(651) 603-7700
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02   Results of Operations and Financial Condition.

        The following information is being “furnished” in accordance with Item 2.02 of Form 8-K and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act, except as expressly set forth by specific reference in such filing:

On February 20, 2006, Image Sensing Systems, Inc. (the “Company”), issued a press release to report the Company’s results of operations and financial condition for the completed fiscal quarter ended December 31, 2005. The press release is furnished as Exhibit 99.1 hereto and is incorporated herein by reference.

Item 9.01   Financial Statements and Exhibits.

        (c)       The following exhibit is being “furnished” in accordance with Item 2.02 of Form 8-K and shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed to be incorporated by reference in any filing under the Securities Act or the Exchange Act, except as expressly set forth by specific reference in such filing:

        99.1       Press Release, dated February 20, 2006, of Image Sensing Systems, Inc.

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 hereunto duly authorized.

IMAGE SENSING SYSTEMS, INC.
By:	/s/   James Murdakes
	James Murdakes Chief Executive Officer

Dated: February 20, 2006.

EXHIBIT INDEX

Exhibit No. Description

99.1 Press Release, dated February 20, 2006, of Image Sensing Systems, Inc.

EX-99.1

Exhibit 99.1

500 Spruce Tree Centre
1600 University Avenue West
St. Paul, Minnesota 55104-3825 USA
651.603.7700 Fax: 651.603.7795
www.imagesensing.com

NEWS RELEASE

Contacts: Art Bourgeois, Chief Financial Officer
Image Sensing Systems, Inc. Phone: 651.603.7700

Image Sensing Systems Announces Fourth Consecutive Year of Record Financial Results

Saint Paul, Minn., February 20, 2006 – Image Sensing Systems, Inc. (ISS) (NASDAQ Small Cap: ISNS) announced today that its net income for 2005 was a $2,841,000 or $.79 per share ($.73 per diluted share) versus net income of $2,694,000 or $.79 per share ($.71 per diluted share) for 2004. Net income for the fourth quarter was $689,000 or $.19 per share ($.18 per diluted share), versus net income of $418,000 or $.12 per share ($.11 per diluted share) for the comparable period in 2004. The fourth quarter of 2005 marks the fifteenth consecutive quarter of profitability for the company.

Revenues for fiscal year 2005 were $11,002,000, compared to $10,830,000 in fiscal year 2004. Royalty income from sales in North America was $8,595,000, compared to $7,521,000 in 2004, while international sales were $2,407,000, compared to $3,309,000 in 2004. Sales of Autoscope products by the Company’s North American distributor continued to show double-digit sales growth in the fourth quarter and ended the year with 14% growth over 2004. International sales for the fourth quarter were $761,000, an increase of 77% from $429,000 in the comparable quarter of 2004, but decreased to $2,407,000 in 2005 from $3,309,000 in 2004. Sales by the Company’s European subsidiary for both the fourth quarter and fiscal year showed a significant increase over 2004, while its Asian subsidiary continued to have difficulty selling product which impacted both consolidated revenues and profitability. While disappointed with sales results of the Asian subsidiary, the Company’s continued sales growth in North America and Europe, has positioned its Autoscope products as the leader in those markets. The Company has taken remedial steps, and continues to do so, to turn around the Asian market position.

Jim Murdakes, Chairman and CEO commented, “We were very pleased with our continued positive financial results for the year and quarter as we registered our 15th consecutive quarter of profitability. Econolite Control Products, Inc., our North American distributor, had an outstanding year selling our Autoscope products and continued to increase market share in this market. Our European subsidiary also had an exceptional year selling Autoscope products while maintaining profitability even while expanding our territory into Eastern Europe. In Asia we are taking steps to

compete more aggressively in this fast growing market, and plan further technical, sales, manufacturing and organizational efforts to re-establish Autoscope market leadership there. We believe our strong financial position along with our commitment to advanced technology will allow ISS to continue its global market leadership and profitability and are hopeful that all three market segments will contribute to revenue growth and earnings in 2006.”

Headquartered in St. Paul, Minnesota, Image Sensing Systems, Inc. combines expertise in image processing, hardware and software engineering and communications to develop video vehicle detection systems for traffic management and control applications. The Autoscope vehicle detection system is the world leader in video detection for advanced traffic management systems for highways, tunnel incident detection, intersection control, and traffic data collection. The Autoscope system provides traffic managers the means to reduce roadway congestion, improve roadway planning and improve cost efficiencies.

Safe Harbor Statement:   Statements made in this release concerning the Company’s or management’s intentions, expectations, or predictions about future results or events are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management’s current expectations or beliefs, and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations, which variations could be material and adverse. Factors that could produce such a variation include, but are not limited to, the following: the inherent unreliability of earnings, revenue and cash flow predictions due to numerous factors, many of which are beyond the Company’s control; developments in the demand for the Company’s products and services; relationships with the Company’s major customers and suppliers; unanticipated delays, costs and expenses inherent in the development and marketing of new products and services; the impact of governmental laws and regulations; and competitive factors. Our forward-looking statements speak only as of the time made, and we assume no obligation to publicly update any such statements. Additional information concerning these and other factors that could cause actual results and events to differ materially from the Company’s current expectations are contained in the Company’s Form 10-KSB for the year ended December 31, 2004.

Image Sensing Systems, Inc.
Condensed Statement of Income
(in thousands, except per share information):

	Three-Month Periods Ended December 31				Years Ended December 31
	2005		2004		2005		2004
Revenue
Royalty income	$	2,127	$	1,823	$	8,595	$	7,521
International sales		761		429		2,407		3,309
		2,888		2,252		11,002		10,830
Cost of revenue
Royalty fee		95		78		383		321
Cost of sales		389		184		1042		1,599
		484		262		1,425		1,920
Gross profit		2,404		1,990		9,577		8,910
Operating expenses
Selling, marketing and product support		678		739		2,567		2,523
General and administrative		329		370		1,400		1,317
Research and development		449		330		1,516		1,126
		1,456		1,439		5,483		4,966
Income from operations		948		551		4,094		3,944
Other income		80		57		252		102
Income before income taxes		1,048		608		4,346		4,046
Income taxes		339		190		1,505		1,352
Net income	$	689	$	418	$	2,841	$	2,694
Net income per common share
Basic	$	0.19	$	0.12	$	0.79	$	0.79
Diluted	$	0.18	$	0.11	$	0.73	$	0.71
Weighted average shares outstanding
Basic		3,681		3,502		3,602		3,409
Diluted		3,878		3,846		3,868		3,810

Image Sensing Systems, Inc.
Condensed Balance Sheet
(in thousands)

	December 31, 2005		December 31, 2004
Assets
Current assets
Cash and cash equivalents	$	9,006	$	1,262
Investments		2,300		7,300
Receivables		3,514		2,176
Inventories		312		404
Prepaid expenses and deferred taxes		118		324
		15,250		11,466
Property and equipment, net		329		127
Goodwill and capitalized software development costs, net		1,212		1,470
	$	16,791	$	13,063
Liabilities and Shareowners’ Equity
Current liabilities
Accounts payable and accrued expenses	$	923	$	1,110
Income taxes payable		94		30
		1,017		1,140
Deferred income taxes		52		144
Shareholders’ equity		15,722		11,779
	$	16,791	$	13,063

Image Sensing Systems, Inc.
Condensed Statement of Cash Flows
(in thousands)

	Years Ended December 31
	2005			2004
Operating activities
Net income	$	2,841		$	2,694
Adjustments to reconcile net income to net cash provided by operations
Depreciation and amortization		365			344
Changes in operating assets and liabilities		(1,173	)		(475	)
Net cash provided by operating activities		2,033			2,563
Investing activities
Purchase of property and equipment		(323	)		(57	)
Maturities (purchases) of investments, net		5,000			(3,950	)
Net cash provided by (used in) investing activities		4,677			(4,007	)
Financing activity – proceeds from exercise of stock options		1,034			672
Increase (decrease) in cash and cash equivalents		7,744			(772	)
Cash and cash equivalents, beginning of year		1,262			2,034
Cash and cash equivalents, end of year	$	9,006		$	1,262

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