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February 29, 2012

Image Sensing Systems Announces Fourth-Quarter 2011 Earnings and Fiscal 2011 Financial Results

Autoscope Duo provides highest levels of detection accuracy at lowest total cost of ownership

Contacts: Greg Smith, Chief Financial Officer
Image Sensing Systems, Inc., Phone: 651.603.7700

Saint Paul, Minn., February 29, 2012 – Image Sensing Systems, Inc. (NASDAQ: ISNS), announced today the results for its fiscal year and fourth quarter ended December 31, 2011. The results include the previously announced restructuring charge and an adjustment for the CitySync earn-out and, for the year, they also include the non-cash goodwill impairment charge incurred in the third quarter.

Revenue for the year ended December 31, 2011 was $30.5 million compared to $31.7 million for 2010, while revenue for the fourth quarter of 2011 was $8.9 million compared to $10.6 million for the same period a year ago. Revenue from royalties was $13.0 million for 2011 compared to $12.5 million in 2010 and $4.0 million in the fourth quarter of 2011 compared to $3.3 million in the same period of 2010. Product sales were $17.5 million for 2011 compared to $19.2 million in 2010 and were $4.9 million in the fourth quarter of 2011 compared to $7.3 million in the same period in 2010. World-wide, RTMS and CitySync product sales for the year ended December 31, 2011 were $7.4 million and $5.7 million, respectively, and for the fourth quarter of 2011 were $1.6 million and $1.0 million, respectively.

Net loss for the 2011 year was $(10.0) million or $(2.07) per share compared to net income of $3.0 million or $0.64 per diluted share for the same period in 2010. Net loss for the 2011 fourth quarter was $(689,000) or $(0.14) per diluted share compared to net income of $1.1 million or $0.23 per diluted share for the same period in 2010. On a non-GAAP basis, excluding the goodwill impairment, restructuring, earn-out adjustment and intangible asset amortization, all net of tax, net income for 2011 was $361,000 or $0.07 per diluted share and net loss for the fourth quarter was $(169,000) or $(0.03) per diluted share.

The previously announced restructuring relates to business model changes, most of which impact the RTMS segment in North America. In the fourth quarter of 2011, we recognized $735,000 in total restructuring expense. Also, in the fourth quarter, we took into income the remaining liability of $618,000 for the CitySync earnout as the results for CitySync did not achieve the level required for the sellers to receive additional consideration. Income taxes were negatively impacted by changes in estimates for research and development credits and future state income tax rates.

Ken Aubrey, CEO, said, “Our results for the fourth quarter were mixed and remain reflective of an uncertain economic environment, especially in Europe, coupled with the restructuring and right-sizing activities which we had underway internally. On the one hand, we were encouraged that revenues were strong for royalties and in our Eastern European business, although in the latter a large project sale produced a gross margin percentage that was well below our historic levels as the sale came with significant third party content. In contrast, we fell short of expectations in our CitySync product line and across Autoscope and RTMS in Asia. Associated with the short-fall, product gross margins were depressed due mostly to the lower volume and, to a lesser degree, unfavorable product mix. Research and development expense for the quarter was higher as we made an accelerated final push to be able to successfully accomplish the introduction of our game-changing hybrid product, Autoscope®Duo™, in the first quarter of 2012.

“As we announced in December, we are reducing expenses to achieve substantially improved profit levels for 2012 in spite of an uncertain future revenue outlook, while preserving operational flexibility. Excluding restructuring, we expect that transitioning RTMS North American distribution to Econolite will be accretive to earnings in 2012 and that it will also have positive free cash flow implications over the year through lower receivables and inventory balances. Although the year was difficult, we leave 2011 with the Duo commercialized and subsequently introduced, and an outlook to conclude 2012 with improved profitability and higher cash and investment balances. Duo gives us an entrée to significantly expand our accessible market by driving a step-function change acceleration in the conversion from legacy loop detection to above ground detection. We conservatively estimate the annual loop market in North America to be still at least double that of above ground detection.

“Our first quarter is typically seasonal due to winter weather conditions in our main markets. We are working diligently to transition RTMS North American manufacturing and distribution to Econolite and this is likely to continue well into 2012. As we noted previously, this will result in additional restructuring charges in 2012 anticipated to be in the range of $100,000 to $150,000,” continued Mr. Aubrey.

Non-GAAP Information

We provide certain non-GAAP financial information as supplemental information to GAAP amounts. This non-GAAP information excludes the impact, net of tax, of amortizing the intangible assets from the 2007 EIS asset acquisition and the 2010 CitySync acquisition and may exclude other non-recurring items. Management believes that this presentation facilitates the comparison of our current operating results to historical operating results. Management uses this non-GAAP information to evaluate short-term and long-term operating trends in our core operations. Non-GAAP information is not prepared in accordance with GAAP and should not be considered a substitute for or an alternative to GAAP financial measures and may not be computed the same as similarly titled measures used by other companies.

About ISS

Image Sensing Systems, Inc. is a provider of software-based detection solutions for the Intelligent Transportation Systems (ITS) sector and adjacent markets including security, police and parking. We have sold more than 120,000 units of our industry leading Autoscope® machine-vision, RTMS® radar and CitySync automatic number plate recognition (ANPR) products in over 60 countries worldwide. The depth of our experience coupled with the breadth of our product portfolio uniquely positions us to provide powerful hybrid technology solutions and to exploit the convergence of the traffic, security and environmental management markets. We are headquartered in St. Paul, Minnesota.

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