Exhibit
10.18

MODIFICATION AGREEMENT

THIS
AGREEMENT is made as of the 28th day of December, 2009, by and between
ASSOCIATED BANK, NATIONAL ASSOCIATION, a national banking association (Bank),
and IMAGE SENSING SYSTEMS, INC., a Minnesota corporation (Borrower).

RECITALS:

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|i.         Borrower
 and Bank have heretofore entered into a certain Loan Agreement dated as of
 the 1st day of May, 2008 (the Loan Agreement), pursuant to which the Bank
 agreed to provide to Borrower a Line of Credit of up to $5,000,000.00 and a
 Loan in the amount of $3,000,000.00. All capitalized terms not otherwise
 defined herein shall have the meanings given them in the Loan Agreement.
|                                                                                                                                                                                                                                                                                                                                                                                                             
|ii.        The
 Loan has been repaid and the Borrower has requested that the Bank provide a
 new term loan in the amount of $4,000,000.00.                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | 
|iii.        Bank
 is willing to agree to the foregoing request of Borrower but only upon the
 terms and conditions hereinafter set forth and in reliance on the warranties
 and representations of Borrower contained herein.                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | 
|AGREEMENTS:                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | 
|In
 consideration of the matters stated in the foregoing Recitals and the
 covenants hereinafter set forth, the parties hereto agree as follows:                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | 

1.          To induce Bank to enter into this Agreement, Borrower warrants and represents to Bank as follows:



A.       The Recitals set forth above are each true and correct.



B.        The Loan Agreement is, and as modified herein shall be, valid, binding and enforceable.



C.        Borrower has no defenses, set-offs, claims or rights of recoupment against its obligations to pay to Bank the outstanding balance of the Line of Credit.



D.       All of the representations and warranties set forth in Section 3 of the Loan Agreement are true and correct as though made on the date of this Agreement and as though applicable to this Agreement in the same manner as they were applicable to the Loan Agreement.



2.         To provide for a new term loan to Borrower, section 2 of the Loan Agreement is hereby amended and restated to provide in full as follows:



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| | 2.       LOAN.
 Borrower agrees to borrow from Bank and Bank agrees to loan to Borrower the
 sum of Four Million Dollars ($4,000,000.00) (the Loan) pursuant to the
 terms and conditions of this Agreement.
| |                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                      
| |                                                                                                                                                                                                                 | A.          Subject
 to earlier repayment pursuant to the terms of section 2.F below, the Loan
 shall mature and become due and payable in full on December 31, 2012 (the
 Loan Maturity Date).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
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| |                                                                                                                                                                                                                 | B.          Prior
 to the Loan Maturity Date, principal and accrued interest on the Loan shall
 be due and payable in installments commencing on the 31st day of March, 2010,
 and continuing on the last day of each successive June, September, December
 and March thereafter, each of which installments shall be an amount equal to
 the sum of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                      
| |                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | (i) all
 accrued and unpaid interest on the Loan as of the due date of the payment;                                                                                  
| |                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                      
| |                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | (ii) on each
 of March 31, 2010, and June 30, 2010, a principal payment in the amount of
 $100,000.00; and                                                           
| |                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                      
| |                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | (iii)
 commencing with the installment due on September 30, 2010, and continuing for
 each installment thereafter, a principal payment in the amount of
 $380,000.00.
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| |                                                                                                                                                                                                                 | All accrued
 interest and unpaid principal, if any, shall be due and payable in full on
 the aforesaid Loan Maturity Date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
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| |                                                                                                                                                                                                                 | C.          The
 interest rate on the outstanding balance of the Loan shall be an annual rate
 equal to the greater of (i) 4% or (ii) the sum of 3.75% plus the one-month
 LIBOR Rate (as defined below). The initial one-month LIBOR Rate shall be that
 one-month LIBOR Rate in effect on the first business day of the month in
 which this Agreement is dated. The one-month LIBOR Rate shall be reset on the
 first day of each succeeding month thereafter (each a Determination Date).
 The term LIBOR Rate means the per annum rate in the Money Rates column or
 section of The Wall Street Journal (Midwest Edition) as the London Interbank
 Offered Rates (LIBOR) for loans of one month maturities as of the first
 Business Day of each month, and the LIBOR Rate shall change on the first
 Business Day of each month. If The Wall Street Journal ceases publication of
 the LIBOR Rate, the LIBOR Rate shall be determined by the Bank from such
 other source as the Bank reasonably selects. If the LIBOR Rate is not readily
 available to the Bank from another source, the Bank shall have the right to
 choose a reasonably comparable index. If The Wall Street Journal or the
 replacement source publishes: (1) more than one LIBOR Rate, the higher or
 highest of the rates shall apply; or (2) a retraction or correction of a
 previously published LIBOR Rate, the LIBOR Rate reported in the retraction or
 correction shall apply. The determination of the LIBOR Rate shall be made by
 the Bank in its sole judgment and such determination shall be binding and
 conclusive on Borrower.

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|                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                          | 1.          Upon
 the occurrence of and during the continuance of an Event of Default (as
 defined herein) and after the Loan Maturity Date (as defined herein) or such
 earlier date as the Loan shall be due and payable pursuant to section 2.F
 below, interest on the Loan shall be a rate which shall be 3% plus the rate
 which would otherwise be in effect.
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|                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                          | 2.          All
 interest charged on the Loan shall be calculated daily on the basis of
 1/360th of the applicable annual rates.                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                      | 
|                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                 | D.        The
 Loan shall be further evidenced by a promissory note (the Loan Note) in the
 same form as the Promissory Note attached hereto as Exhibit 2.D.                                                                                                                                          
|                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                      | 
|                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                 | E.        The
 Loan may be prepaid, without premium or fee, in whole or in part at any time
 with partial prepayments in the minimum amount of $10,000.00. All prepayments
 of principal shall be applied to the payments due in reverse order of
 maturity commencing with the balance due at maturity.
|                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                      | 
|                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                 | F.        Notwithstanding
 anything contained herein to the contrary, the Loan shall mature and be due
 and payable in full on May 31, 2010, unless all of the conditions set forth
 in Exhibit 2.F attached hereto (the Early Payment Conditions) shall be
 satisfied on or before that date.        
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|3.         The
 Loan Agreement is hereby amended by adding thereto as Exhibit 2.D the
 Promissory Note attached hereto as Exhibit 2.D.                                                                                                     
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|4.         Section
 5 of the Loan Agreement is hereby amended by adding thereto the following new
 section:                                                                                                                                
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|                                                                                                                                                                                                                                            | H.     
 Minimum Liquidity. At all times unless and until all of the Early Payment
 Conditions, as defined in section 2.F of this Agreement, shall be satisfied,
 Borrower shall maintain liquid assets in the minimum amount of $6,000,000.00.
 Liquid assets shall consist only of cash, cash equivalents and marketable
 securities not subject to any liens or encumbrances except in favor of the
 Bank.
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|5.         The
 Bank shall have no obligation to disburse proceeds of the Loan to be made
 pursuant to this Agreement unless and until all of the following conditions
 shall have been fulfilled by Borrower or waived in writing by Bank:
|                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                            | A.        Borrower
 shall have performed and complied with all agreements and conditions required
 by this Agreement to be performed or complied with by it.                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                            | B.        Borrower
 shall execute and deliver to Bank the new Loan Note.                                                                                                                                                                                                                                                                                                                                       

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|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | C.       Borrower
 shall pay to Bank a fee in the amount of $5,000.00, which fee shall be fully
 earned and nonrefundable upon execution of this Agreement by the Bank.                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | D.       Borrower
 shall deliver to Bank certified resolutions of its Board of Directors
 authorizing its obtaining the Loan pursuant to this Agreement, and its performance
 of the covenants contained herein.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                  |  |  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | E.        Borrower
 shall deliver to Bank a certificate of incumbency with respect to the persons
 authorized to execute this Agreement and the Loan Note.                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                  |  |  | 
|6.         All
 references in the Loan Agreement to the Loan shall mean and refer to the
 Loan to be granted pursuant to this Agreement. All references to the Loan
 Agreement in the Master Note, Loan Note and the Security Agreement executed
 by the Borrower shall be deemed to mean the Loan Agreement as amended by this
 Agreement.                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                  |  |  | 
|7.         Except
 as expressly modified and amended herein, all terms and provisions of the
 Loan Agreement shall be and remain in full force and effect.                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                  |  |  | 
|8.         Borrower
 shall, upon demand by Bank, reimburse Bank for all costs and expenses
 incurred by Bank in connection with this Agreement, including, but not
 limited to, the fees of Banks attorneys.                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                  |  |  | 
|9.         This
 Agreement shall be binding upon and shall inure to the benefit of the parties
 hereto and their respective successors and assigns.                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                  |  |  | 
|10.WAIVER
 OF JURY TRIAL: BORROWER AND BANK HEREBY JOINTLY AND SEVERALLY WAIVE ANY AND
 ALL RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING RELATING TO THIS
 AGREEMENT AND TO ANY OF THE DOCUMENTS RELATING HERETO, THE OBLIGATIONS
 HEREUNDER OR THEREUNDER, ANY COLLATERAL SECURING THE OBLIGATIONS, OR ANY
 TRANSACTION ARISING THEREFROM OR CONNECTED THERETO. BORROWER AND BANK EACH
 REPRESENTS TO THE OTHER THAT THIS WAIVER IS KNOWINGLY, WILLINGLY AND VOLUNTARILY GIVEN.

IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.

| |                              |                                        | 
| | ---------------------------- | -------------------------------------- | 
| | IMAGE
 SENSING SYSTEMS, INC. |                                       
| | A Minnesota
 corporation     |                                       
| |                              |                                        | 
| | By:                          | /s/ Gregory R. L.
 Smith               | 
| |                              |                                        | 
| |                              | Gregory R. L.
 Smith,                  | 
| |                              | Treasurer
 and Chief Financial Officer

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| |                                        |                                 | 
| | -------------------------------------- | ------------------------------- | 
| | ASSOCIATED
 BANK, NATIONAL ASSOCIATION
| |                                        |                                 | 
| | By:                                    | /s/ Patrick Pfersch             | 
| |                                        |                                 | 
| |                                        | Patrick Pfersch, Vice President | 

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