943034--3/26/2009--IMAGE_SENSING_SYSTEMS

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{customer, product, revenue}

{stock, price, operating}

{stock, price, share}

{acquisition, growth, future}

{operation, international, foreign}

{personnel, key, retain}

{provision, law, control}

{system, service, information}

{condition, economic, financial}

{property, intellectual, protect}

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If governmental entities elect not to use our products due to budgetary constraints, project delays or other reasons, our revenue may fluctuate severely or be substantially diminished. A majority of our revenue has been generated from sales of our Autoscope family of products, and if we do not maintain the market for these products, our business will be harmed. If Econolite s sales volume decreases or if it fails to pay royalties to us in a timely manner or at all, our financial results will suffer. The features and functions in our products have not been as widely utilized as traditional products offered by our competitors, and the failure of our end users to provide greater demand for the features and functions in our products could adversely affect our business and growth prospects. Our operating costs tend to be fixed, while our revenue tends to be seasonal, thereby resulting in operating results that fluctuate from quarter to quarter. Increased competition may make it difficult for us to acquire and retain end users. If we are unsuccessful in developing new applications and product enhancements, our products may become noncompetitive or obsolete. Our dependence on third parties for manufacturing and marketing our products may prevent us from meeting customers needs in a timely manner. We and our third party manufacturers obtain some of the components of our products from a single source, and an interruption in the supply of those components may prevent us from meeting customers needs in a timely manner and could therefore reduce our sales. We may face increased competition if we fail to adequately protect our intellectual property rights, and efforts to protect our intellectual property rights may result in costly litigation. The expiration of the University of Minnesota patent for certain aspects of our Autoscope system may result in additional competition, which could adversely affect our revenue and earnings. We plan to continue introducing new products and technologies and may not realize the degree or timing of benefits we initially anticipated, which could adversely affect our business and results of operations. We price our products at a premium compared to other technologies. As such, we may not be able to quickly respond to emerging low-cost competitors, and our inability to do so could adversely affect revenue and profitability. Our revenue could be adversely affected by the emergence of local competitors and local biases in international markets. Failure to predict technological convergence could harm our business and could reduce our sales. We sell our products internationally and are subject to various risks relating to such international activities, which could harm our international sales and profitability. Our inability to comply with European and Asian regulatory restrictions over hazardous substances and electronic waste could restrict product sales in those markets and reduce profitability in the future. Our inability to manage growth effectively could seriously harm our business. Our business operations will be severely disrupted if we lose key personnel or if we fail to attract and retain qualified personnel. EIS is party to a lawsuit involving assets that we acquired from EIS in December 2007. If the assets are determined to infringe a third party s patent and EIS and its affiliates fail to fulfill their obligation to indemnify us or our affiliates, or if our losses from the allegedly infringing technology exceed the obligations of EIS and its affiliates to indemnify us, our business could suffer. Our stock is thinly traded and our stock price is volatile. We may not be successful in implementing our acquisition strategy. Future acquisitions could result in disruptions to our business by, among other things, distracting management time and diverting financial resources. Further, if we are unsuccessful in integrating acquired companies into our business, it could materially and adversely affect our financial condition and operating results. Amounts recorded for goodwill could be adversely impacted by current market conditions. Difficult and volatile conditions in the capital, credit and commodities markets and in the overall economy could materially adversely affect our financial position, results of operations and cash flows, and we do not know if these conditions will improve in the near future. Our directors and executive officers have substantial control over us and could limit the ability of our other shareholders to influence the outcome of key transactions, including changes of control. Our articles of incorporation and bylaws, Minnesota law and the terms of the EIS asset purchase agreement may inhibit a takeover that shareholders consider favorable. We can issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common shareholders. We do not intend to declare dividends on our stock in the foreseeable future.

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943034--3/26/2009--IMAGE_SENSING_SYSTEMS_INC