Document:

Exhibit 10.1 to Image Sensing Systems, Inc. Form 10-Q dated June 30, 2006

Exhibit 10.1 

SETTLEMENT AGREEMENT, CONTRACT MODIFICATION

AND MUTUAL RELEASE 

        This Settlement Agreement,
Contract Modification and Mutual Release (the ‘Agreement”) is entered into by and between Econolite Control Products,
Inc. (“Econolite“) and Image Sensing Systems, Inc. (“ISS”). Econolite and ISS are referred to herein
collectively as the “Parties.” 

        WHEREAS, Econolite and ISS
have a contractual relationship memorialized in a series of written agreements; and, 

        WHEREAS, a dispute has arisen
between the Parties, and Econolite has filed an action which (after removal to federal court) is styled Econolite Control
Products, Inc. v. Image Sensing Systems, Inc., Case No. 05-997-JVS (RNBx) in the United States District Court for
the Central District of California (the “Litigation”); and, 

        WHEREAS, the Parties desire
to settle their dispute; 

        NOW THEREFORE, in
consideration of the mutual covenants and undertakings set forth below and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Econolite and ISS agree as follows: 

        1.       ISS
will pay to Econolite the sum of Two Hundred Thousand Dollars ($200,000) within ten days of execution of this Agreement.

        2.       ISS
will pay to Econolite the additional sum of One Hundred Seventy-Five Thousand Dollars ($175,000) if and when Econolite achieves
sales of Autoscope products of $33 million in calendar year 2006. Such additional payment shall be payable within ten days of the
day that Econolite provides ISS with a written notification that it has achieved $33 million in Autoscope sales in calendar year
2006. 

  

        3.       Paragraph 1
of the Modification to Manufacturing, Distributing and Technology License Agreement as of September 1, 2000 is modified as
follows: Beginning as of July 1, 2006, Econolite will calculate and pay royalties to ISS on Solo Pro products so as to split net
profit on sales of Solo Pro between Econolite and ISS 50/50. “Net profit on sales” is defined as sales price to the end
user less distribution commission (if any) and Solo Pro purchase price (calculated as has historically been done by the parties)
plus fifteen percent (15%) of purchase price for overhead: 

        As an example: 

	(Hypothetical) Sale Price to End User	 	 	$	  4,000	 
	(Hypothetical) Distributor Commission (if applicable)	 	 	 	(800	)
		
	
	Net to Econolite	 	 	 	3,200	 
	Less Solo Pro Purchase Price (hypothetical)	 	 	 	(1,000	)
	Less 15% of Solo Pro Purchase Price	 	 	 	(150	)
		
	
	Net Profit on Sales	 	 	 	2,050	 
	ISS Royalty	 	 	 	1,025	 
	Econolite Margin	 	 	 	1,025	 

        4.       The
royalty calculation in the preceding paragraph will apply to future generations of Solo Pro products (e.g., Terra) for the
remaining term of the Parties’ written agreement, unless there is a material change in the manufacturing process, in which
case the Parties will re-negotiate the royalty calculation in good faith with the objective of continuing a fair split of the
profits. 

-2- 

        5.                 Econolite
will, within ten days after receiving the consideration referred to in Paragraph 1 above, dismiss with prejudice all claims
asserted by Econolite against ISS in the Litigation. 

        6.                 For
good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Econolite for itself, its
predecessors, successors, assigns, subsidiaries, affiliates, parents, and divisions, does hereby forever release, acquit, and
discharge ISS, its predecessors, successors, assigns, subsidiaries, affiliates, parents, and divisions, and their respective
current and former officers, directors, shareholders, owners, employees, servants, agents, and attorneys, of and from any and all
claims, demands, obligations, actions, causes of action, rights, damages, costs, expenses, and compensation of any nature
whatsoever, whether at law or in equity, that arise out of the transactions or events described in or forming the basis for the
Litigation. 

        7.                 For
good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, ISS, for itself, its predecessors,
successors, assigns, subsidiaries, affiliates, parents, and divisions, does hereby forever release, acquit, and discharge
Econolite, its predecessors, successors, assigns, subsidiaries, affiliates, parents, and divisions, and their respective current
and former officers, directors, shareholders, owners, employees, servants, agents, and attorneys, of and from any and all claims,
demands, obligations, actions, causes of action, rights, damages, costs, expenses, and compensation of any nature whatsoever,
whether at law or in equity, that arise out of the transactions or events described in or forming the basis for the Litigation.

        8.                 The
parties are not releasing any claims or rights of any kind that do not arise out of the transactions or events described in or
forming the basis for the Litigation. 

-3- 

        9.       The
Parties hereby acknowledge that there is a risk that, subsequent to the execution of this Agreement, they may discover, incur or
suffer from claims which were unknown or unanticipated at the time this Agreement was executed, including without limitation,
unknown or unanticipated claims which arise from, are based upon or are related to the issues and matters raised in the
Litigation, which, if known by the Parties hereto on the date this Agreement was executed, may have materially affected their
decision to execute this Agreement. The Parties hereto acknowledge that they are assuming the risk of such unanticipated claims
and agree that this Agreement applies thereto. The Parties hereto expressly waive the benefits of Section 1542 of the California
Civil Code, which provides: 

	  	A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially
affected his settlement with the debtor. 

The Parties hereto waive and relinquish all rights and benefits which they
have or may have under Section 1542 of the California Civil Code or the law of any other state or jurisdiction to the same or
similar effect to the full extent that they may lawfully waive an relinquish all rights and benefits pertaining to the subject
matter of this Agreement. 

        10.                 Each
party shall bear its own attorneys’ fees and costs arising from the claims that were asserted or that could have been
asserted in the Litigation and arising from the preparation and execution of this Agreement. 

        11.                 The
Parties each represent and warrant that no other persons or entities (other than their affiliates) have or have had any interest
in the claims, demands, obligations, or causes of action referred to in this Agreement. The Parties each further represent and
warrant to each other that they have not sold, assigned, transferred, pledged, conveyed, or otherwise disposed of any of the
claims, demands, obligations, or causes of action referred to in this Agreement. The person or persons who enter into and execute
this Agreement on behalf of each of the Parties warrants and represents that he or she has been duly authorized to do so.

-4- 

        12.                 The
Parties each expressly deny liability, and agree and acknowledge that this Agreement is a full and complete compromise of matters
involving disputed issues of fact and law, and that neither payment of any amounts, nor negotiation for or agreement to this
Agreement (including all statements, admissions, or communications or exchange of documents) by the Parties to this Litigation, or
their respective representatives, shall be considered admissions by the Parties. No past or present wrongdoing on the part of the
Parties shall be implied by such payment or by such negotiations. 

        13.                 The
Parties each expressly warrant and represent that before executing this Agreement they have received independent legal advice from
attorneys of their choice with respect to the advisability of making the above Agreement, or have had full and fair opportunity to
do so, that they have fully informed themselves of its terms, contents, conditions, and effect, and that they voluntarily agree to
the terms of this Agreement. The Parties agree that this instrument is executed as their voluntary act and deed. The Parties
acknowledge that they each may have sustained damages, expenses, and losses arising out of the matters released herein, which are
presently unknown or not suspected, and that such damages, expenses, and losses, if any, give rise to additional claims for
damages, expenses or losses in the future. Nevertheless, each of the Parties acknowledges that this Agreement has been negotiated
and agreed upon in light of this realization and, being fully aware of this situation, expressly releases and waives any and all
rights it may have to any damages or losses which are a result of the causes of action released herein, whether such damages are
now existing, known or unknown, or accrue in the future. This Agreement constitutes a complete compromise of all allegations
asserted in the Litigation, and the Parties fully assume the risk that the facts or the law may be otherwise than believed or
understood. 

-5- 

        14.                 This
Agreement shall be binding upon and inure to the benefit of the representatives, successors, assigns, trustees, agents, attorneys,
and legal representatives of the Parties, as well as their officers, directors, employees, all present and former parents,
successors, subsidiaries, divisions, partners, and affiliated companies. 

        15.                 This
Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which shall
constitute one and the same Agreement. Facsimile copies of signatures on this Agreement shall be deemed valid and original.

        16.                 This
Agreement contains the entire agreement between Econolite and ISS with regard to the matters set forth in it and may only be
amended, modified or waived by a written instrument executed by each of the Parties hereto. The terms of this Agreement are
contractual and not merely recitals. The mutual obligations and undertakings of the Parties expressly set forth in this Agreement
are the sole and only consideration for this Agreement, and no representations, promises, or inducements of any nature whatsoever
have been made by the Parties other than those expressly appearing in this Agreement. Each party and counsel for each party has
reviewed and revised this Agreement, and accordingly the rule of construction that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement. 

        17.                 The
Parties agree that a waiver of any term or condition of this Agreement will not be deemed to be, and may not be construed as, a
waiver of any other term or condition hereof. The Parties agree that if any provision of this Agreement is adjudicated to be
unenforceable or invalid for any reason, that part will be severed from the balance of this Agreement and the validity and
enforceability of the remainder of this Agreement will in no way be affected or impaired. 

-6- 

        18.              All
notices or other communications under this Agreement shall be in writing and deemed to be duly delivered if delivered in person,
by overnight mail, or by certified or registered mail. If to Econolite, such notice or communication shall be delivered to:

	  	Michael C. Doyle, Esq.

Econolite Control Products, Inc.

3360 E. La Palma Avenue

Anaheim, CA 92806-2856 

	  	with a copy to: 

	  	Robert W. Fischer, Jr., Esq.

Fulbright Jaworski L.L.P.

555 South Flower Street, 41st Floor

Los Angeles, CA 90071 

	  	If to ISS, such notice or communication shall be delivered to:

	  	James Murdakes

Image Sensing Systems, Inc.

500 Spruce Tree Centre

1600 University Avenue West

St. Paul, MN 55104-3825 

	  	with a copy to: 

	  	J. Thomas Vitt, Esq.

Dorsey & Whitney, LLP

50 South Sixth Street, Suite 1500

Minneapolis, MN 55406 

-7- 

        19.                 Except
as explicitly stated herein, nothing in this Agreement shall be deemed to modify or amend the parties’ prior agreements,
which shall remain in full force and effect according to their terms. 

	 	Econolite Control Products, Inc. 
	 
	    	By:    	/s/   Michael C. Doyle 
	 	Typed Name:   Michael C. Doyle
Title:   Chief Executive Officer
Dated:   August 1, 2006 
	 
	 
	 	Image Sensing Systems, Inc. 
	 
	    	By:    	/s/   James Murdakes 
	 	Typed Name:   James Murdakes
Title:   Chief Executive Officer
Dated:   August 3, 2006 

-8-Exhibit 10.1

                           AMENDMENT NO. 3 AND WAIVER

                                       to

                                CREDIT AGREEMENT

     This AMENDMENT NO. 3 AND WAIVER dated as of August 8, 2006 (this
"Amendment") is by and among HAMPSHIRE GROUP, LIMITED (the "Borrower"),
HAMPSHIRE DESIGNERS, INC., GLAMOURETTE FASHION MILLS, INC., ITEM-EYES, INC., the
Banks party hereto and HSBC Bank USA, National Association, as Agent for the
Banks.

                                    RECITALS:

     A. The Borrower, the Guarantors, the Banks and the Agent have entered into
a Credit Agreement and Guaranty dated as of August 15, 2003, as amended by
Amendment No. 1 thereto dated as of December 29, 2004 and by Amendment No. 2
thereto dated as of November 10, 2005 (as amended, the "Loan Agreement").

     B. The Borrower has requested that the Banks (i) waive compliance with
Section 8.08(a) of the Loan Agreement to the extent it requires the Borrower to
deliver to the Banks the quarterly financial statements of the Borrower and its
Subsidiaries for the quarter ending July 1, 2006 within 45 days following the
close of such second fiscal quarter of the Borrower, (ii) amend Section 10.04 of
the Loan Agreement to allow the Borrower and its Restricted Subsidiaries, in any
Fiscal Year, to make Consolidated Capital Expenditures in the aggregate amount
up to $3,000,000 and (iii) amend Section 9.08 to clarify the exclusion of real
property leases therefrom.

     C. The Banks are agreeable to such waiver and amendments on the terms and
subject to the conditions set forth herein.

     NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration whose receipt and sufficiency are acknowledged, the
Borrower, the Guarantors, the Banks and the Agent hereby agree as follows:

     Section 1. Definitions. Each capitalized term used but not defined in this
Amendment shall have the meaning ascribed to such term in the Loan Agreement.

     Section 2. Amendments of Loan Agreement.

          2.01 Section 10.4 of the Loan Agreement is hereby amended by deleting
the number "$1,500,000" appearing therein, and substituting the number
"$3,000,000" thererfor.

          2.02 Clause (b) of Section 9.08 of the Loan Agreement is hereby
amended in its entirety to read as follows: "(b) each of the real property
leases, whether retail, office, warehouse or otherwise, in effect on this
date and those real property leases entered into in the future,"

     Section 3. Waiver.

          3.01 The Borrower has requested that the Banks waive compliance with
Section 8.08(a) of the Loan Agreement to the extent it requires the
Borrower to deliver to the Banks the quarterly financial statements of the
Borrower and its Subsidiaries for the quarter ending July 1, 2006 within 45
days following the close of such second fiscal quarter of the Borrower. The
Borrower has informed the Banks that such financial information for the
fiscal quarter ending July 1, 2006 will likely not be delivered within such
45 day period. By its execution hereof, the Banks hereby agree to waive
compliance with such covenant solely for the fiscal quarter ending July 1,
2006 and not for any future periods, so long as the quarterly financial
statements for the fiscal quarter ending July 1, 2006 shall be delivered to
the Banks on or before October 15, 2006. Notwithstanding anything to the
contrary, the foregoing waiver shall apply only provided no other Default
or Event of Default is continuing as of the date hereof.

          3.02 The waiver set forth herein is effective only in this one
instance, and is not intended to waive compliance with such covenant for
any future periods. Such waiver is subject to the satisfaction of the terms
and conditions stated below for the effectiveness hereof. Such waiver is
limited precisely as written and shall not be deemed to (a) be a waiver of
any other term or condition of the Loan Agreement or any of the other Loan
Documents, or (b) prejudice any right or rights which the Banks may have or
may have in the future under or in connection with the Loan Agreement or
any of the other Loan Documents.

     Section 4. Acknowledgments, Confirmations and Consent.

          4.01 The Borrower and the Guarantors acknowledge and confirm that the
Liens granted pursuant to the Security Documents to which it is a party
continue to secure the Obligations.

          4.02 Each Guarantor consents in all respects to the execution by the
Borrower of this Amendment and acknowledges and confirms that the Guaranty by
such Guarantor, as set forth in Article V of the Loan Agreement, guarantees
the full payment and performance of all of the Obligations, and remains in full
force and effect in accordance with its terms.

                                     - 2 -
<PAGE>

     Section 5. Representations and Warranties. The Borrower and each
Guarantor, as the case may be, each represents and warrants to the Lenders and
the Agent as follows:

          5.01 After giving effect to this Amendment, (i) each of the
representations and warranties set forth in Article VII of the Loan Agreement
is true and correct in all respects as if made on the date of this Amendment,
 and (ii) no Default or Event of Default exists under the Loan Agreement.

          5.02 The Borrower and each Guarantor has the power to execute, deliver
and perform, and has taken all necessary action to authorize the execution,
delivery and performance of, this Amendment and the other agreements,
instruments and documents to be executed by it in connection with this
Amendment. No consent or approval of any Person, no waiver of any Lien or
right of distraint or other similar right and no consent, license, certificate
of need, approval, authorization or declaration of, or filing with, any
governmental authority, bureau or agency is or will be required in connection
with the execution, delivery or performance by the Borrower or any Guarantor, or
the validity, enforcement or priority, of this Amendment and the other
agreements, instruments and documents executed in connection with this
Amendment.

          5.03 The execution, delivery and performance by the Borrower and each
Guarantor of this Amendment will not violate any Law, and will not result in,
or require, the creation or imposition of any Lien on any of its properties or
revenues pursuant to any Law except those in favor of the Agent.

          5.04 This Amendment has been duly executed and delivered by the
Borrower or such Guarantor, as the case may be, and constitutes the valid and
legally binding obligation of the Borrower or such Guarantor, as the case may
 be, enforceable in accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, or
other similar laws, now or hereafter in effect, relating to or affecting the
enforcement of creditors' rights generally and except that the remedy of
specific performance and other equitable remedies are subject to judicial
discretion.

Section 6. Miscellaneous.

          6.01 Except as specifically modified by this Amendment, the Loan
Agreement and each of the other Loan Documents shall remain in full force and
effect in accordance with their respective terms.

          6.02 THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED IN
AND TO BE PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK BY RESIDENTS OF
SUCH STATE.

                                     - 3 -
<PAGE>

          6.03 The provisions of this Amendment are severable, and if any clause
or provision shall be held invalid or unenforceable in whole or in part in
any jurisdiction, then such invalidity or unenforceability shall affect
only such clause, provision or part in such jurisdiction and shall not in
any manner affect such clause, provision or part in any other jurisdiction
or any other clause or provision in this Amendment in any jurisdiction.

          6.04 This Amendment may be signed in any number of counterparts with
the same effect as if all parties to this Amendment signed the same counterpart.

          6.05 The Borrower agrees to pay the Agent upon demand all reasonable
expenses, including reasonable fees of attorneys for the Agent, incurred by
the Agent in connection with the preparation, negotiation and execution of
this Amendment and any other agreements, instruments and documents executed
or furnished in connection with this Amendment.

     Section 7. Effectiveness of Waiver. This Amendment shall become effective
as of the date first written above upon receipt by the Agent of (i) original
counterparts of this Amendment duly executed by the Borrower, the Guarantors and
the Required Banks, (ii) payment to the Agent for the account of the Banks of a
non-refundable waiver fee in the amount of $50,000 and (iii) payment of the
Agent's legal fees and expenses.

                            [signature pages follow]

                                     - 4 -

<PAGE>

     IN WITNESS WHEREOF, the Borrower, the Guarantors, the Banks and the Agent
have signed and delivered this Amendment as of the date first written above.

                                  HAMPSHIRE GROUP, LIMITED

                                  By:  /s/ Michael S. Culang
                                       -----------------------------------------
                                  Name: Michael S. Culang
                                  Title: Chief Executive Officer

                                  HAMPSHIRE DESIGNERS, INC.

                                  By:  /s/ Michael S. Culang
                                       -----------------------------------------
                                  Name: Michael S. Culang
                                  Title: Chairman

                                  GLAMOURETTE FASHION MILLS, INC.

                                  By:  /s/ Michael S. Culang
                                       -----------------------------------------
                                  Name: Michael S. Culang
                                  Title: Chairman

                                 ITEM-EYES, INC.

                                 By:  /s/ Michael S. Culang
                                      ------------------------------------------
                                 Name: Michael S. Culang
                                 Title: Chairman

                                 HSBC BANK USA, NATIONAL ASSOCIATION, as a Bank,
                                 as Letter of Credit Issuing Bank (for all
                                 Letters of Credit other than Existing Letters
                                 of Credit) and as Agent

                                 By:  /s/ Ignatius J. Marotta
                                      ------------------------------------------
                                 Name:  Ignatius J. Marotta
                                 Title: FVP
<PAGE>

                                 THE CIT GROUP/COMMERCIAL SERVICES, INC., as a
                                 Bank

                                 By:  /s/ Lizabeth McCartny
                                      ------------------------------------------
                                 Name:  Lizabeth McCartny
                                 Title: Vice President

                                 JPMORGAN CHASE BANK , as a Bank and as Letter
                                 of Credit Issuing Bank (for the Existing Letter
                                 of Credit)

                                 By:  /s/ Joseph J. Nastri
                                      ------------------------------------------
                                 Name:  Joseph J. Nastri
                                 Title: SVP

                                 ISRAEL DISCOUNT BANK OF NEW YORK, as a Bank

                                 By:  /s/ Michael Paul
                                      ------------------------------------------
                                 Name:  Michael Paul
                                 Title: Assistant Vice President

                                 By:  /s/ David A. Acosta
                                      ------------------------------------------
                                 Name:  David A. Acosta
                                 Title: First Vice President

                                  BANK OF AMERICA, N.A., as a Bank

                                 By:  /s/ Joyce Y. Chan
                                      ------------------------------------------
                                 Name:  Joyce Y. Chan
                                 Title: VP

                                 WACHOVIA BANK, NATIONAL ASSOCIATION, as a Bank

                                 By:  /s/ Jeff Reeves
                                      ------------------------------------------
                                 Name:  Jeff Reeves
                                 Title: SVP

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