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                                                                   EXHIBIT 10.12


        EXTENSION AND SECOND MODIFICATION TO MANUFACTURING, DISTRIBUTING
                        AND TECHNOLOGY LICENSE AGREEMENT


         This EXTENSION AND SECOND MODIFICATION TO MANUFACTURING, DISTRIBUTING
AND TECHNOLOGY LICENSE AGREEMENT (this "Second Modification") is made and
entered into as of the 13th day of July, 2001 by and between Image Sensing
Systems, Inc., a Delaware corporation located at 500 Spruce Tree Centre, 1600
University Avenue West, St. Paul, Minnesota 55104 (hereinafter, "ISS") and
Econolite Control Products, Inc., a California corporation located at 3360 E. La
Palma Avenue, Anaheim, California 92806 (hereinafter, "Econolite"). ISS and
Econolite were the parties to the original MANUFACTURING, DISTRIBUTING AND
TECHNOLOGY LICENSE AGREEMENT dated June 11, 1991 (the "Agreement") which was
subsequently modified, in part, in a MODIFICATION TO MANUFACTURING, DISTRIBUTING
AND TECHNOLOGY LICENSE AGREEMENT dated September 1, 2000 (the "Modification")
and a Letter Agreement dated June 19, 1997 (the "Letter Agreement").

                                    Recitals

         A. The parties have operated successfully under the Agreement, as
modified, for more than 10 years.

         B. The Agreement, as modified, will, under its terms, terminate on June
11, 2006.

         C. The parties acknowledge that significant planning is required to
insure continued success of joint efforts, and the planning horizon exceeds five
years from the date hereof.

         D. The parties hereto desire to extend the term of the Agreement and to
add or modify certain provisions.

         NOW, THEREFORE, for and in consideration of the foregoing premises, and
the mutual covenants and agreements contained herein, the parties hereto agree
as follows:

         1. ARTICLE VIII. DURATION AND TERMINATION is hereby modified to provide
that the "initial term" is increased by five additional years, to a total of 20
years from the Effective Date, which the parties agree was June 11, 1991. The
Agreement shall be automatically renewed thereafter for additional one year
extension terms unless terminated by either party giving advance written notice
at least sixty (60) days prior to the expiration of the initial term, as
modified, or any extension term.

         2. Section H of ARTICLE II. RESPONSIBILITIES OF ECONOLITE is deleted in
its entirety and a new Section H of ARTICLE II is adopted as follows:

                  "H. Econolite will designate one or more employees to assume
         responsibility as product line marketing manager or managers for the
         Products, and one or more employees to assume responsibility for
         hardware engineering







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         tasks associated with the Products, and give ISS written notice of
         these designations. The parties will hold quarterly business and
         engineering meetings at places to be determined by the parties from
         time to time. In addition, on or before December 1 of each calendar
         year, an annual Joint Business Plan for development, promotion and sale
         of the Products will be developed among the senior executives of
         Econolite and ISS, including the Chief Executive Officers of each
         company."

         3. A new Section L of ARTICLE II. RESPONSIBILITIES OF ECONOLITE shall
be added, containing the same terms as Section B of ARTICLE III.
RESPONSIBILITIES OF ISS as follows:

                  "L. Econolite shall provide, support, protect and maintain
         documentation for all Econolite created Product-related hardware and
         software designs and codes at the sole expense of Econolite. Copies of
         the documentation will be deposited in safekeeping at a location
         outside the facilities of Econolite, and the location disclosed to
         ISS."

         4. Except as modified herein, each and every other provision of the
Agreement, as modified by the Modification and the Letter Agreement are
confirmed and reaffirmed.

         IN WITNESS WHEREOF, the parties hereto have executed this Modification
effective as of the date first set out above.

IMAGE SENSING SYSTEMS, INC.             ECONOLITE CONTROL PRODUCTS, INC.


By:      /s/ William L. Russell         By:     /s/ Gary Dunn
     -------------------------------            --------------------------------
Title:   President & CEO                Title:  Senior Vice President, Product
        ----------------------------            Development
                                                --------------------------------




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