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): August 8, 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 2.02Results 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 August 8, 2006, Image Sensing Systems, Inc. (the “Company”), issued a press release to report the settlement of a lawsuit filed against the Company by its North American distributor, Econolite. In the press release the Company discussed how the Company has revised its previously announced quarterly financial statements for the second quarter as a result of the settlement. The press release is furnished as Exhibit 99.1 hereto and is incorporated herein by reference.

Item 9.01Financial Statements and Exhibits.

(d)       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 August 8, 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: August 8, 2006.

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press Release, dated August 8, 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

FOR IMMEDIATE RELEASE

Image Sensing Systems Settles Lawsuit With Econolite

Saint Paul, Minnesota – August 8, 2006. Image Sensing Systems, Inc. (“ISS”) (NASDAQ: ISNS) has entered into a Settlement Agreement with Econolite Control Products, Inc., the exclusive distributor of its Autoscope products in North America. In the Agreement ISS agrees to pay Econolite $200,000 within ten days of execution of the Agreement and an additional $175,000 if Econolite achieves sales of Autoscope products of $33 million in calendar year 2006. In addition, effective July 1, 2006 and going forward, Econolite will calculate and pay royalty to ISS on the sale of SoloPro products so as to split the net profit on sales 50/50. Net profit is defined as sales price minus the purchase price plus 15%, with the 15% added to cover Econolite’s overhead costs. Previously, Econolite was adding 10% for overhead. Econolite had claimed that it should be allowed to add 20-24% for overhead costs, and also sought $1.6 million for past damages. The settlement caused ISS to revise its previously announced quarterly financial statements. Net income was reduced by $144,000, representing the $200,000 settlement, net of income taxes, and net income per share for the quarter and six-month periods ended June 30, 2006 was reduced by $.04 per share.

Jim Murdakes, the President and CEO of ISS said, “We felt that we had solid contractual agreements with Econolite and could successfully defend the claim they filed against us. However, the legal and forensic accounting costs we would incur to be successful in court, the distraction the claim causes, and the harm that an acrimonious victory in court could mean led us to this settlement.”

Murdakes added, “We want to put this issue behind us and work with Econolite to continue growing Autoscope market share in North America. Furthermore, the added 5% overhead will reduce royalty income by less than 1.5% per year and is more than offset by the elimination of royalty fees to the University of Minnesota that ceased on July 11, 2006.”

Headquartered in St. Paul, Minnesota, ISS 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, 2005.

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