Exhibit 10.7 to Image Sensing Systems, Inc. Form 10-K for fiscal year ended December 31, 2007







Exhibit 10.7



PROMISSORY NOTE


	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 


	
Principal 

	
Loan Date 

	
Maturity 

	
Loan
No 

	
Call / Coll 

	
Account 

	
Officer 

	
Initials 


	
$3,000,000.00 

	
12-04-2007 

	
05-31-2008 

	
3757618353-109 

	
 

	
592182 

	
Z1154 

	
 


	
References in the boxes above are for Lender’s use only and do not limit the applicability of
this document to any particular loan or item. 
Any item above containing “***” has been omitted due to text length
limitations.








	
 

	
 

	
 

	
 

	
 


	
Borrower: 

	
Image
Sensing Systems, Inc.

1600 University Avenue
W, Ste 500

Saint Paul, MN 55104 

	
 

	
Lender: 

	
Wells
Fargo Bank, National Association

McKnight Business
Banking

670 McKnight Road N. 

St. Paul, MN 55119 


	
 

	
 

	
 

	
 

	
 








	
 

	
 

	
 


	
Principal Amount:  
$3,000,000.00 

	
Initial Rate:  7.500% 

	
Date of Note:  December 4,
2007 





PROMISE TO PAY. Image Sensing Systems,
Inc. (“Borrower”) promises to pay to Wells Fargo Bank, National Association (“
Lender”), or order, in lawful money of the United States of
America, the principal amount of Three Million & 00/100 Dollars
($3,000,000.00) or so much as may be outstanding, together with
interest on the unpaid outstanding principal balance of each advance. Interest
shall be calculated from the date of each advance until repayment of
each advance.


PAYMENT. Borrower will pay this loan in
one payment of all outstanding principal plus all accrued unpaid interest on May
31, 2008. In addition, Borrower will pay regular
monthly payments of all accrued unpaid interest due as of each payment date,
beginning December 30, 2007, with all subsequent interest
payments to be due on the same day of each month after that. Unless otherwise
agreed or required by applicable law, payments will be applied
first to any accrued unpaid interest; then to principal; and then to any late
charges. The annual interest rate for this Note is computed on
a 365/360 basis; that is, by applying the ratio of the annual interest rate
over a year of 360 days, multiplied by the outstanding principal
balance, multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender’s address shown above or at
such other place as Lender may designate in writing.


VARIABLE INTEREST RATE. The interest rate on this
Note is subject to change from time to time based on changes in an index which
is the floating
rate equal to the Prime Rate set from time to time by Lender that serves as the
basis upon which effective rates of interest are calculated for those loans making reference thereto
(the “Index”). The Index is not necessarily the lowest rate charged by Lender
on its loans and is set by Lender in its sole discretion. If the Index becomes
unavailable during the term of this loan, Lender may designate a substitute index after notifying
Borrower. Lender will tell Borrower the current Index rate upon Borrower’s
request. The interest rate change will not occur more often than each time the Index changes. Each
change in the Prime Rate of interest hereunder shall become effective on the
date each Prime
Rate change is announced within Lender. The “initial rate” is the rate per
annum which Borrower and Lender agree shall be the initial rate of this Note, and the
“Index currently” is the Index amount upon which said initial rate is based;
they do not necessarily reflect the Index in effect on the date of this Note. Borrower
understands that Lender may make loans based on other rates as well. The Index
currently is 7.500% per annum. The interest rate to be applied to the unpaid principal balance
during this Note will be at a rate equal to the Index, resulting in an initial
rate of 7.500% per annum. NOTICE: Under no circumstances will the interest rate
on this Note be more than the maximum rate allowed by applicable law. 


PREPAYMENT. Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower’s obligation to continue to make payments of accrued unpaid interest.
Rather, early payments
will reduce the principal balance due. Borrower agrees not to send Lender
payments marked “paid in full”, “without recourse”, or similar language. If
Borrower sends such a payment, Lender may accept it without losing any of
Lender’s rights under this Note, and Borrower will remain obligated to pay any further amount
owed to Lender. All written communications concerning disputed amounts, including
any check or
other payment instrument that indicates that the payment constitutes “payment
in full” of the amount owed or that is tendered with other conditions or limitations
or as full satisfaction of a disputed amount must be mailed or delivered to:
Wells Fargo Bank, National Association, 730 2nd Avenue South, Suite 1000 Minneapolis, MN 55479.


LATE CHARGE. If a payment is 15 days
or more late, Borrower will be charged 5.000%
of the unpaid portion of the regularly scheduled payment or $15.00, whichever
is greater.


INTEREST AFTER DEFAULT. Upon default, including
failure to pay upon final maturity, the interest rate on this Note shall be
increased by adding
a 4.000 percentage point margin (“Default Rate Margin”). The Default Rate
Margin shall also apply to each succeeding interest rate change that would have
applied had there been no default. However, in no event will the interest rate
exceed the maximum interest rate limitations under applicable law.


DEFAULT. Each of the following shall constitute an event of default (“Event of
Default”) under this Note: 


	
 

	
 


	
 

	
Payment Default. Borrower fails to make any payment when due under
 this Note.


	
 

	
 


	
 

	
Other Defaults. Borrower fails to comply with or to perform any
 other term, obligation, covenant or condition contained in this Note or in any of the related
 documents or to comply with or to perform any term, obligation, covenant or
 condition contained in any other agreement between Lender and Borrower.


	
 

	
 


	
 

	
Default in Favor of Third Parties. Borrower or any Grantor
 defaults under any loan, extension of credit, security agreement, purchase or
 sales
 agreement, or any other agreement, in favor of any other creditor or person
 that may materially affect any of Borrower’s property or Borrower’s ability to
 repay this Note or perform Borrower’s obligations under this Note or any of
 the related documents.


	
 

	
 


	
 

	
False Statements. Any warranty, representation or statement made or
 furnished to Lender by Borrower or on Borrower’s behalf under this Note or
 the related documents is false or misleading in any material respect, either
 now or at the time made or furnished or becomes false or misleading at any
 time thereafter.


	
 

	
 


	
 

	
Insolvency. The dissolution or termination of Borrower’s
 existence as a going business, the insolvency of Borrower, the appointment of
 a receiver
 for any part of Borrower’s property, any assignment for the benefit of
 creditors, any type of creditor workout, or the commencement of any
 proceeding under any bankruptcy or insolvency laws by or against Borrower.


	
 

	
 


	
 

	
Creditor or Forfeiture Proceedings. Commencement of
 foreclosure or forfeiture proceedings, whether by judicial proceeding,
 self-help, repossession
 or any other method, by any creditor of Borrower or by any governmental
 agency against any collateral securing the loan. This includes a
 garnishment of any of Borrower’s accounts, including deposit accounts, with
 Lender. However, this Event of Default shall











	
 

	
 

	
 


	
Loan No: 3757618353-109

	
PROMISSORY NOTE

 (Continued)

	
Page 2


	
 

	
 

	
 








	
 

	
 


	
 

	
not
 apply if there is a good faith
 dispute by Borrower as to the validity or reasonableness of the claim which
 is the basis of the creditor or forfeiture proceeding and if Borrower gives
 Lender written notice of the creditor or forfeiture proceeding and deposits
 with Lender monies or a surety bond for the creditor or forfeiture proceeding,
 in an amount determined by Lender, in its sole discretion, as being an
 adequate reserve or bond for the dispute.


	
 

	
 


	
 

	
Events Affecting Guarantor. Any of the preceding
 events occurs with respect to any guarantor, endorser, surety, or
 accommodation party of any of the indebtedness or any guarantor, endorser, surety, or
 accommodation party dies or becomes incompetent, or revokes or disputes the validity
 of, or liability under, any guaranty of the indebtedness evidenced by this
 Note.


	
 

	
 


	
 

	
Change In Ownership. Any change in ownership
 of twenty-five percent (25%) or more of the common stock of Borrower.


	
 

	
 


	
 

	
Adverse Change. A material adverse change occurs in Borrower’s
 financial condition, or Lender believes the prospect of payment or performance of this Note
 is impaired.


	
 

	
 


	
 

	
Insecurity. Lender in good faith believes itself insecure.





LENDER’S RIGHTS. Upon default, Lender may
declare the entire unpaid principal balance under this Note and all accrued unpaid
interest immediately
due, and then Borrower will pay that amount.


ATTORNEYS’ FEES; EXPENSES. Lender may hire or pay
someone else to help collect this Note if Borrower does not pay. Borrower will
pay Lender that amount. This includes, subject to any limits under applicable
law, Lender’s reasonable attorneys’ fees and Lender’s legal expenses, whether or not there is a
lawsuit, including reasonable attorneys’ fees, expenses for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay or injunction), and
appeals. If not prohibited by applicable law, Borrower also will pay any court
costs, in addition to all other sums provided by law.


GOVERNING LAW. This Note will be governed
by federal law applicable to Lender and, to the extent not preempted by federal
law, the laws of the State of Minnesota without regard to
its conflicts of law provisions. This Note has been accepted by Lender in the
State of Minnesota.


RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of
setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts
Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include
any IRA or Keogh accounts, or any trust accounts for which setoff would be
prohibited by law. Borrower
authorizes Lender, to the extent permitted by applicable law, to charge or
setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to
administratively freeze all such accounts to allow Lender to protect Lender’s
charge and setoff rights provided in
this paragraph.


LINE OF CREDIT. This Note evidences a
revolving line of credit. Advances under this Note may be requested either
orally or in writing by Borrower or by an authorized person. Lender may, but
need not, require that all oral requests be confirmed in writing. All
communications, instructions, or directions by telephone or otherwise to Lender are to be
directed to Lender’s office shown above. Borrower agrees to be liable for all sums either: (A)
advanced in accordance with the instructions of an authorized person or (B)
credited to any of Borrower’s accounts with Lender. The unpaid principal
balance owing on this Note at any time may be evidenced by endorsements on this
Note or by Lender’s internal records, including daily computer print-outs.


PAYMENT DUE DATE DEFERRAL. Payment invoices will be
sent on a date (the “billing date”) which is prior to each payment due date. If
this Note is
booked after the billing date for the first scheduled payment, Lender may defer
each scheduled payment date and the maturity date by one month.


FINANCIAL STATEMENTS. Borrower agrees to
provide to Lender, upon request, financial statements prepared in a manner and
form acceptable to Lender, and copies of such tax returns and other financial information
and statements as may be requested by Lender. Borrower shall also furnish such
information regarding Borrower or the Collateral as may be requested by Lender.
Borrower warrants that all financial statements and information provided to Lender are and will be
accurate, correct and complete.


AUTOMATIC DEBIT OF PAYMENTS. Borrower agrees to
maintain Borrower’s deposit with Lender, account number 3971599400, from which
Lender is
authorized to debit loan payments, fees and such other sums as may be payable
under the Note or related loan documents as they become due with respect to this loan and any
renewals and extensions of this loan, and shall keep such deposit account in
good standing at all times. This authorization shall remain in full force and effect until
discontinued by Lender, or until written revocation from Borrower has been
received and processed by Lender at the address of Lender set out in the
“PREPAYMENT” or “PREPAYMENT PENALTY” paragraph of the Promissory Note. If this
authorization is revoked, or if the account is not maintained in good standing,
or if Lender is not able to collect such amounts from the account as they become due for any
reason, then Lender may increase the pre-maturity interest rate applicable to
this Credit immediately
and without notice by one quarter percent (1/4%).


PRIMARY DEPOSIT ACCOUNT. Borrower agrees to
maintain Borrower’s primary deposit account with Lender or any banking
affiliate of Lender (defined as the deposit account into which substantially all of
Borrower’s receipts from its operations are deposited and from which
substantially all of Borrower’s disbursements for its operations are made), and
shall keep it at all times in good standing.


EXTENSION AND RENEWAL. Lender may, at Lender’s
discretion, renew or extend this Note by written notice (“Renewal Notice”) to
Borrower. Such renewal or extension shall be effective as of the maturity date
of this Note, and may be conditioned among other things on modification of
Borrower’s obligations hereunder, including but not limited to a decrease in
the amount available under this Note, an increase in the interest rate applicable to this Note
and/or payment of a fee for such renewal or extension. In addition, Lender may
increase the principal amount available under the Note at any time. Borrower shall be
deemed to have accepted the terms of each Renewal Notice, including any notice
of an increase in availability, if Borrower does not deliver to Lender written
rejection of such renewal or extension within 10 days following receipt of such
Renewal
Notice, or if Borrower draws additional funds following the date of
notification. After any renewal or extension of Borrower’s obligations under this
Note, the term “maturity date” as used in this Note shall mean the new maturity
date set forth in the Renewal Notice. This Note may be renewed and extended repeatedly in
this manner.


LINE ADVANCES. Notwithstanding anything
to the contrary, requests for advances communicated to any office of Lender by
any person believed
by Lender in good faith to be authorized to make the request, whether written,
verbal, telephonic or electronic, may be acted upon by Lender, and Borrower will
be liable for sums advanced by Lender pursuant to such request. Such requests
for advances shall be deemed authorized by Borrower, and Lender shall not be
liable for such advances made in good faith, and with respect to advances
deposited to the credit of any deposit account of Borrower, such advances, when so
deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. Borrower agrees to indemnify and hold
Lender harmless from and against all damages, liabilities, costs and expenses
(including attorney’s fees) arising out of any claim by Borrower or any third party against Lender
in connection with Lender’s performance of transfers as described above.


CREDIT BUREAU INQUIRIES. The parties hereto, and
each individual signing below in a representative capacity, agree that Lender
may obtain business
and/or personal credit reports and tax returns on each of them in their
individual capacities.







	
 

	
 

	
 


	
Loan No: 3757618353-109

	
PROMISSORY NOTE

 (Continued)

	
Page 3


	
 

	
 

	
 





APPLICATION OF PAYMENTS. Notwithstanding the
application of payment provided in the Payment section of this Note, unless
otherwise agreed, all sums received from Borrower may be applied to interest,
fees, principal, or any other amounts due to Lender in any order at Lender’s sole discretion. If a
final payment amount is set out in the Payment section of this Note, Borrower
understands that it is an estimate, and that the actual final payment amount will depend upon
when payments are received and other factors.


ADDITIONAL EVENTS OF DEFAULT. In addition to the Events
of Default described above, the following shall be an Event of Default, if
applicable: (i) any change in ownership of an aggregate of twenty-five percent
(25%) or more of the common stock, members’ equity or other ownership interest in
Borrower, (ii) the withdrawal, resignation or expulsion of any one or more of
the general partners in Borrower with an aggregate ownership interest in Borrower of
twenty-five percent (25%) or more, or (iii) any of the preceding events occurs with respect to any general partner of
Borrower or guarantor of any indebtedness of Borrower under this Note.


DEFAULT RATE. At Lender’s option and
without prior notice, upon default or at any time during the pendency of any
event of default under this Note or any related loan documents, Lender may increase
the interest rate applicable to the Note by four percent (4.0%) (the “Default
Rate”), not
to exceed the maximum lawful rate. (If the applicable rate is a floating or variable rate, then
the Default Rate will be a varying rate equal to the sum of the normally
applicable Index and spread, plus four percent.) The Default Rate shall remain
in effect until the default has been cured and that fact has been communicated
to and confirmed by Lender. Lender shall give written notice to Borrower of
Lender’s imposition of the Default Rate. If the Note is not paid at maturity, Lender
may impose the Default Rate from the maturity date to the date paid in full
without notice.
Lender’s imposition of the Default Rate shall not constitute an election of
remedies or otherwise limit Lender’s rights concerning other remedies available to
Lender as a result of the occurrence of an event of default. In the event of a
conflict between the provisions of this paragraph and any other provision of
this Note or any related agreement, the provisions of this paragraph shall
control. If a default rate is prohibited by applicable law, then the interest rate
applicable after default or maturity shall be the prematurity rate which would
be applicable in the absence of any default.


FURTHER ASSURANCES. The parties hereto agree
to do all things deemed necessary by Lender in order to fully document the loan
evidenced by
this Note and any related agreements, and will fully cooperate concerning the
execution and delivery of security agreements, stock powers, instructions and/or other
documents pertaining to any collateral intended to secure the Indebtedness. The
undersigned agree to assist in the cure of any defects in the execution, delivery or
substance of the Note and related agreements, and in the creation and
perfection of any liens, security interests or other collateral rights securing
the Note.


CONSENT TO SELL LOAN. The parties hereto agree:
(a) Lender may sell or transfer all or part of this loan to one or more
purchasers, whether related or unrelated to Lender; (b) Lender may provide to
any purchaser, or potential purchaser, any information or knowledge Lender may
have about
the parties or about any other matter relating to this loan obligation, and the
parties waive any rights to privacy it may have with respect to such matters;
(c) the purchaser of a loan will be considered its absolute owner and will have
all the rights granted under the loan documents or agreements governing the sale of the loan; and
(d) the purchaser of a loan may enforce its interests irrespective of any
claims or defenses that the parties may have against Lender.


FACSIMILE AND COUNTERPART. This document may be
signed in any number of separate copies, each of which shall be effective as an
original,
but all of which taken together shall constitute a single document. An electronic
transmission or other facsimile of this document or any related document shall
be deemed an original and shall be admissible as evidence of the document and
the signer’s execution.


ADDITIONAL SECURITY. Notwithstanding anything
to the contrary in this or any related agreement, to further secure the
indebtedness and obligations of the Note and related loan documents, Borrower pledges and
grants to Lender a security interest in Borrower’s accounts with Lender, including without
limitation, checking, savings, investment, general and special accounts, and
accounts held for safekeeping, held jointly with others, and accounts opened in the future,
excluding however all IRAs, Keogh accounts, and trust accounts to the extent a
security interest
would be invalid or prohibited by law.


LOAN FEE AUTHORIZATION. Borrower shall pay to
Lender any and all fees as specified in the “Disbursement Request and
Authorization” executed by Borrower in connection with this Note. Such fees are
non-refundable and shall be due and payable in full immediately upon Borrower’s execution of
this Note.


LETTERS OF CREDIT AND FOREIGN EXCHANGE. Borrower shall have
available a Letter of Credit Subfeature and a Foreign Exchange Subfeature as described in this
section, in a total amount not to exceed the available principal amount of the
line of credit evidenced by this Note.


A. Letter of
Credit Subfeature. As a subfeature this Note, Lender may from time to time issue or cause
to be issued by a Wells Fargo Affiliate (such Lender or Wells Fargo Affiliate being referred
to herein as the “Issuer”) for your account, commercial and/or standby letters
of credit (each individually, a “Letter of Credit” and collectively “Letters of Credit”);
provided however, that the form and substance of each Letter of Credit shall be subject to
approval by the Issuer in its sole discretion. Each Letter of Credit shall be
issued for a term designated by Borrower; provided however, that no Letter of
Credit shall have an expiration subsequent to the maturity of the Note. Each
Letter of Credit shall be subject to the terms and conditions of a Letter of
Credit Agreement and related documents, if any, required by Issuer in
connection with the issuance of such Letter of Credit (each individually a “Letter of
Credit Agreement” and collectively, the “Letter of Credit Agreements”). Each
draft paid by Issuer under a Letter of Credit and reimbursed by Lender shall be paid with an
advance under the Note and shall be repaid by Borrower in accordance with the
terms and conditions of the Note applicable to such advances; provided however,
that if advances under the Note are not available, for any reason whatsoever,
at the time any amount is paid by Lender, then the full amount of such advance
shall be immediately due and payable, together with interest thereon, from the date such
amount is paid by Issuer or Lender to the date such amount is fully repaid by
Borrower, at the rate of interest applicable to advances under the Note. In such event,
Borrower agrees that Issuer or Lender, at Issuer’s or Lender’s sole discretion, may debit
Borrower’s deposit account(s) with Lender or a Wells Fargo Affiliate for the
amount of any such draft. Upon the issuance of an amendment to a Letter of Credit, upon the
reimbursement by Lender of a draft under any Letter of Credit, and otherwise as
agreed by Borrower
and Issuer pursuant to the Letter of Credit Agreements, Borrower shall pay to
Issuer or Lender fees determined in accordance with Issuer’s/Lender’s standard
fees and charges at such time.


B. Foreign
Exchange Subfeature. As a subfeature of this Note, Lender or a Wells Fargo
Affiliate (such Lender or Wells Fargo Affiliate being referred to herein as the
“Exchanger”) may make available to Borrower a foreign exchange facility under
which Exchanger, from time to time up to and including the maturity date of the Note,
will enter into foreign exchange contracts for the account of Borrower for the
purchase and/or sale by Borrower in United States Dollars of the foreign
currency or currencies specified in the foreign exchange agreement establishing
the foreign exchange facility. Each foreign exchange transaction shall be
subject to the terms and conditions of the foreign exchange agreement, the form and substance of
which must be acceptable to the Exchanger in all respects in its sole
discretion.


C. Subfeature
Limits.
The outstanding amount of all Letters of Credit and foreign exchange contracts,
plus the reserve percentage applicable to foreign exchange contracts, shall be reserved under
the Note and shall not be available for Note advances. The amount of all
outstanding foreign
exchange contracts plus a reserve percentage of 20% of said amount, plus the
aggregate principal amount of all outstanding Letters of Credit, plus the
principal amounts of any advances outstanding under the Note, shall not at any
time exceed the principal amount of the Note, unless allowed by Lender at Lender’s full
discretion. Any excess amount shall be fully due and payable immediately
without notice. As used herein, Wells Fargo Affiliate means any present or
future subsidiary of Wells Fargo & Company, any subsidiary thereof, and any
successors of such
financial service companies.







	
 

	
 

	
 


	
Loan No:
 3757618353-109

	
PROMISSORY NOTE

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Page 4


	
 

	
 

	
 





ARBITRATION AGREEMENT. Arbitration -
Binding Arbitration. Lender and each party to this agreement hereby agree,
upon demand by any party, to submit any Dispute to binding arbitration in accordance with
the terms of this Arbitration Program. A “Dispute” shall include any dispute, claim or
controversy of any kind, whether in contract or in tort, Legal or equitable,
now existing or hereafter arising, relating in any way to this Agreement or any
related agreement incorporating this Arbitration Program (the “Documents”), or
any past, present, or future loans, transactions, contracts, agreements, relationships,
incidents or injuries of any kind whatsoever relating to or involving Business
Banking, Regional Banking, or any
successor group or department of Lender. DISPUTES SUBMITTED TO ARBITRATION ARE
NOT RESOLVED IN COURT BY A JUDGE OR JURY.


Governing Rules. Any arbitration
proceeding will (i) be governed by the Federal Arbitration Act (Title 9 of the
United States Code), notwithstanding any conflicting choice of law provision in any of the
documents between the parties; and (ii) be conducted by the AAA (American
Arbitration Association), or such other administrator as the parties shall
mutually agree upon, in accordance with the AAA’s commercial dispute
resolution procedures, unless the claim or counterclaim is at least
$1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which
case the arbitration shall be conducted in accordance with the AAA’s optional
procedures for large, complex commercial disputes (the commercial dispute resolution procedures
or the optional procedures for large, complex commercial disputes to be
referred to, as applicable, as the “Rules”). If there is any inconsistency
between the terms hereof and the Rules, the terms and procedures set forth herein shall
control. Arbitration proceedings hereunder shall be conducted at a location
mutually agreeable to the parties, or if they cannot agree, then at a location
selected by the AAA in the state of the applicable substantive law primarily
governing the Credit. Any party who fails or refuses to submit to arbitration
following a demand by any other party shall bear all costs and expenses
incurred by such other party in compelling arbitration of any Dispute. Arbitration may be
demanded at any time, and may be compelled by summary proceedings in Court. The
institution
and maintenance of an action for judicial relief or pursuit of a provisional or
ancillary remedy shall not constitute a waiver of the right of any party, including
the plaintiff, to submit the controversy or claim to arbitration if any other
party contests such action for judicial relief. The arbitrator shall award all costs and expenses
of the arbitration proceeding. Nothing contained herein shall be deemed to be a
waiver by any party that is a Bank of the protections afforded to it under 12
U.S.C. °91 or any similar applicable state law.


No Waiver of Provisional Remedies,
Self-Help and Foreclosure. The arbitration requirement does not limit the
right of any party to (i) foreclose against real or personal property collateral; (ii)
exercise self-help remedies relating to collateral or proceeds of collateral
such as setoff or repossession; or (iii) obtain provisional or ancillary
remedies such as replevin, injunctive relief, attachment or the appointment of
a receiver, before during or after the pendency of any arbitration proceeding.
This exclusion does not constitute a waiver of the right or obligation of any party to submit any
Dispute to arbitration or reference hereunder, including those arising from the
exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph.


Arbitrator Qualifications and Powers. Any arbitration
proceeding in which the amount in controversy is $5,000,000.00 or less will be
decided by a single arbitrator selected according to the Rules, and who shall
not render an award of greater than $5,000,000.00. Any Dispute in which the
amount in controversy exceeds $5,000,000.00 shall be decided by majority vote
of a panel of three arbitrators; provided however, that all three arbitrators must
actively participate in all hearings and deliberations. Every arbitrator must
be a practicing attorney or a retired member of the state or federal judiciary, in either case with
a minimum of ten years experience in the substantive law applicable to the
subject matter of the Dispute. The arbitrator will determine whether or not an issue is
arbitratable and will give effect to the statutes of limitation in determining
any claim. In
any arbitration proceeding the arbitrator will decide (by documents only or
with a hearing at the arbitrator’s discretion) any pre-hearing motions which
are similar to motions to dismiss for failure to state a claim or motions for
summary adjudication. The arbitrator shall resolve all Disputes in accordance
with the applicable substantive law and may grant any remedy or relief that a
court of such state could order or grant within the scope hereof and such ancillary relief as
is necessary to make effective any award. The arbitrator shall also have the
power to award recovery of all costs and fees, to impose sanctions and to take such
other action as the arbitrator deems necessary to the same extent a judge could pursuant to the
Federal Rules of Civil Procedure, the applicable State Rules of Civil
Procedure, or other applicable law. Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction.


Discovery. In any arbitration
proceeding discovery will be permitted in accordance with the Rules. All
discovery shall be expressly limited to matters directly relevant to the Dispute being
arbitrated and must be completed no later than 20 days before the hearing date
and within 180 days of the filing of the Dispute with the AAA. Any requests for an
extension of the discovery periods, or any discovery disputes, will be subject to final
determination by the arbitrator upon a showing that the request for discovery
is essential for the party’s presentation and that no alternative means for
obtaining information is available.


Miscellaneous. To the maximum extent
practicable, the AAA, the arbitrators and the parties shall take all action
required to conclude any arbitration proceeding within 180 days of the filing of
the Dispute with the AAA. The resolution of any Dispute shall be determined by
a separate arbitration
proceeding and such Dispute shall not be consolidated with other disputes or
included in any class proceeding. No arbitrator or other party to an arbitration proceeding may
disclose the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business or by applicable
law or regulation. If more than one agreement for arbitration by or between the parties potentially
applies to a Dispute, the arbitration provision most directly related to the
documents between the parties or the subject matter of the Dispute shall control. This
arbitration provision shall survive termination, amendment or expiration of any
of the documents or any relationship between the parties.


State-Specific Provisions.


If California law governs the Dispute, the
following provision is included:


Real Property Collateral; Judicial
Reference. Notwithstanding anything herein to the contrary, no Dispute shall be
submitted to arbitration if the Dispute concerns indebtedness secured directly
or indirectly, in whole or in part, by any real property unless the holder of
the mortgage, lien or security interest specifically elects in writing to proceed with the
arbitration. If any such Dispute is not submitted to arbitration, the Dispute shall, at the election of
any party, be referred to a referee in accordance with California Code of Civil
Procedure Section 638 et seq., and this general reference agreement is intended
to be specifically enforceable in accordance with said Section 638. A referee
with the qualifications required herein for arbitrators shall be selected
pursuant to the AAA’s selection procedures. Judgment upon the decision rendered
by a referee shall
be entered in the court in which such proceeding was commenced in accordance
with California Code of Civil Procedure Sections 644 and 645.


If Idaho law governs the Dispute, the
following provision is included:


Real Property Collateral; Judicial
Reference. Notwithstanding anything herein to the contrary, no dispute shall be
submitted to arbitration if the dispute concerns indebtedness secured directly or
indirectly, in whole or in part, by any real property unless (i) the holder of the
mortgage, lien or security interest specifically elects in writing to proceed
with the arbitration, or (iii) all parties to the arbitration waive any rights or
benefits that
might accrue to them by virtue of the single action rule statute of Idaho,
thereby agreeing that all indebtedness and obligations of the parties, and all
mortgages, liens and security interests securing such indebtedness and
obligations, shall remain fully valid and enforceable.


If Montana law governs the Dispute, the
following provision is included:







	
 

	
 

	
 


	
Loan No:
 3757618353-109

	
PROMISSORY NOTE

 (Continued)

	
Page 5


	
 

	
 

	
 





Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no dispute
shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any
real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single
action rule statute of Montana, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens
and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.


If Nevada law governs the Dispute, the following provision is included:


Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no dispute
shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any
real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single
action rule statute of Nevada, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and
security interests securing such indebtedness and obligations, shall remain fully valid and enforceable.


If Utah law governs the Dispute, the following provision is included:


Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no Dispute
shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any
real property unless the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the
arbitration. If any such Dispute is not submitted to arbitration, the Dispute shall, at the election of any party, be referred to
a master in accordance with Utah Rule of Civil Procedure 53, and this general reference agreement is intended to be specifically
enforceable. A master with the qualifications required herein for arbitrators shall be selected pursuant to the AAA’s
selection procedures. Judgment upon the decision rendered by a master shall be entered in the court in which such proceeding was
commenced in accordance with Utah Rule of Civil Procedure 53(e).


PRIOR NOTE. This Note is given as a replacement for and not satisfaction of Note dated May 31, 2006 in the
amount of $1,000,000.00.


SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower’s heirs,
personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and
assigns.


GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the
Note. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. In addition, Lender
shall have all the rights and remedies provided in the related documents or available at law, in equity, or otherwise. Except as
may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly
or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Borrower shall not affect Lender’s right to declare a default and
to exercise its rights and remedies. Borrower and any other person who signs, guarantees or endorses this Note, to the extent
allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and
unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length
of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender’s
security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to
anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the
party with whom the modification is made. The obligations under this Note are joint and several.


SECTION DISCLOSURE. To the extent not preempted by federal law, this loan is made under Minnesota Statutes,
Section 334.01.


PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE
VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.


BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. 


BORROWER:


IMAGE SENSING SYSTEMS, INC.


	
 

	
 

	
 

	
 

	
 

	
 


	
By:  

	
 

	
 

	
By:  

	
/s/ Greg Smith
	
 

	
 

	
Kenneth R. Aubrey, President and CEO of Image
 Sensing Systems, Inc. 

	
 

	
 

	
Gregory R. L. Smith, CFO of Image Sensing 
 Systems, Inc. 

	
 


	
 


	
LASER PRO Landing, Ver. 5.38, 10.001 Copr. Harland
 Financial Solutions, Inc. 1997, 2007. All Rights Reserved.
MN
 X:\LPROD\CFI\LPL\D20.FC TR-48697 PR-689












RIDER TO 
PROMISSORY NOTE


          This Rider is made this 4th day of December 2007, by
and between Image Sensing Systems, Inc. (the “Borrower”) and Wells Fargo Bank, National Association (the
“Lender”).


          Reference is hereby made to that certain Promissory
Note dated of even date hereof in the original principal amount of $3,000,000.00 made between the Borrower and the Lender.
Capitalized terms not otherwise defined herein have the same meaning as set forth in the above described Promissory Note. This
Rider shall be read consecutively with, and deemed incorporated into such Promissory Note.


          NOW, THEREFORE, in consideration of the premises and
other good and valuable consideration, each paid to the other, it is agreed that the Promissory Note is amended by the addition of
the following:


          1. The DEFAULT section of the
Promissory Note is amended by the deleting therefrom the Change in Ownership clause as provided therein and the following
substituted therefor:  


	
 

	
 


	
 

	
“Change in Ownership. Any change in ownership of forty percent
 (40%) or more of the common stock
of Borrower.” 





          2. The ADDITIONAL EVENTS
OF DEFAULT section of the Promissory Note is amended by the deleting it in its entirety and the following
substituted therefor:  


	
 

	
 


	
 

	
ADDITIONAL EVENTS OF DEFAULT. In addition to the Events of Default described above, the following shall be
an Event of Default, if applicable: (i) any change in ownership of an aggregate of forty percent (40%) or more of the common
stock, members’ equity or other ownership interest in Borrower, (ii) the withdrawal, resignation or expulsion of any one or
more of the general partners in Borrower with an aggregate ownership interest in Borrower of forty (40%) or more, or (iii) any of
the preceding events occurs with respect to any general partner of Borrower or guarantor of any indebtedness of Borrower under
this Note.”





          Except as modified by this Rider, the Promissory Note
remains unchanged and in full force and effect.


IN WITNESS WHEREOF, the Borrower and the Lender have executed this Rider as of the date and year first above
written.


	
 

	
 


	
“BORROWER”

	
“LENDER”


	
 

	
 


	
IMAGE SENSING SYSTEMS, INC.

	
WELLS FARGO BANK,


	
 

	
NATIONAL ASSOCIATION








	
 

	
 

	
 

	
 

	
 

	
 


	
By:  

	
 

	
 

	
By:  

	
/s/ Christine K. Warner
	
 

	
 

	
Kenneth R. Aubrey

	
 

	
 

	
 

	
 


	 
	
Its: 

	
President and Chief Executive Officer

	
 

	
Its: 

	
VP

	
 


	
 

	
 

	
 

	
 

	
 


	 
	
By: 
	
/s/ Greg Smith
	
 

	
 

	
 


	
 

	
Gregory R. L. Smith

	
 

	
 

	
 

	
 


	 
	
Its: 

	
Chief Financial Officer

	
 

	
 

	
 

	
 





Rider - Mg l3l3vl(MK)