<PAGE>
                                                                   EXHIBIT 10.17



THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT
WITH RESPECT TO THE NOTE UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAW
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.





$125,000                                                         JANUARY 7, 2002



                           IMAGE SENSING SYSTEMS, INC.
                      NON-INTEREST BEARING CONVERTIBLE NOTE

                  FOR VALUE RECEIVED, Image Sensing Systems, Inc., a Minnesota
         corporation (the "Company"), promises to pay to Anthony H. Gould, or
         his assigns (the "Holder"), the principal sum of One Hundred
         Twenty-Five Thousand Dollars ($125,000) as set forth below.

         1. PRINCIPAL AND INTEREST. No interest shall accrue on the principal
balance of this Note. If not sooner converted or paid as provided below, the
entire balance of principal shall be due and payable on January 7, 2007 (the
"Maturity Date").

         2. CONVERSION. The Holder, at his option, may convert this Note, in
whole but not in part, at any time, up to and including the Maturity Date, upon
10 days' advance written notice to the Company, into 50,000 shares of Company
common stock, $.01 par value per share (the "Common Stock"), which number of
shares shall be adjusted appropriately in the event of a stock split, stock
dividend, reclassification, recapitalization, or similar event. Within 10 days
after the conversion of this Note, the Company at its expense will issue and
deliver to the Holder, upon surrender of this Note to the Company, a certificate
or certificates for the number of full shares of equity securities issuable upon
such conversion.

         3. REGISTRATION RIGHTS. If requested by the Holder, the Company shall
register under the Securities Act of 1933, as amended, the resale of the shares
of Common Stock issuable upon conversion of the Note, in accordance with the
terms and conditions set forth on Appendix A attached hereto.

         4. NO VOTING RIGHTS. The Note shall not entitle the Holder to any
voting rights or any other rights as a shareholder of the Company or to any
other rights whatsoever except the rights stated herein, and no dividend or
interest shall be payable or shall accrue in respect of Common Stock, until this
Note shall be converted.

         5. PAYMENT. All payments of principal shall be in lawful money of the
United States of America and shall be made by check or telegraphic transfer
delivered to the Holder at the address or account designation furnished to the
Company for that purpose. The Company


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may prepay this Note, upon 10 days' advance written notice to the Holder, (i) at
any time during calendar year 2002, for the face amount and without penalty or
additional fees, or (ii) at any time after April 1, 2003, for the face amount
plus $25,000. The Holder may, upon 10 days' advance written notice to the
Company, demand payment of this Note at any time after April 1, 2003, for the
face amount and without penalty or additional fees. Within 10 days of delivery
of such notice by the Holder or by the Company pursuant to this Section 5, the
Company will pay the Holder the full face amount of $125,000, or, in the case of
prepayment by the Company after April 1, 2003, the face amount plus $25,000.

         6. DEFAULT. If any of the events specified in this Section 6 shall
occur (each, an "Event of Default"), the Holder may, so long a such condition
exists, declare the entire principal amount and unpaid accrued interest hereon
immediately due and payable, by notice in writing to the Company:

                  (a) Failure to Pay Debts; Voluntary Bankruptcy. If the Company
         fails to pay its debts generally as they become due, or if the Company
         files any petition, proceeding, case or action for relief under any
         bankruptcy, reorganization, insolvency or moratorium law, rule,
         regulation, statute or ordinance (collectively, "Laws and Rules"), or
         any other Law and Rule for the relief of, or related to, debtors.

                  (b) Involuntary Bankruptcy. If any involuntary petition is
         filed under any bankruptcy or similar Law or Rule against the Company,
         or a receiver, trustee, liquidator, assignee, custodian, sequestrator
         or other similar official is appointed to take possession of any of the
         assets or properties of the Company or any Guarantor.

                  (c) Governmental Action. If any governmental or regulatory
         authority takes or institutes any action that will materially affect
         the Company's financial condition, operations or ability to pay or
         perform the Company's obligations under this Note.

                  (d) Other Breach or Defaults. If the Company breaches, or
         defaults in any material respect under, any material term, condition,
         provision, representation, warranty or covenant contained in this Note
         that is not specifically referred to in this Section 6.

         7. WAIVER. The Company hereby waives demand, notice, presentment,
protest and notice of dishonor.

         8. MISCELLANEOUS. The terms of this Note shall be construed in
accordance with the laws of the State of Minnesota as applied to contracts
entered into by Minnesota residents within the State of Minnesota, which
contracts are to be performed entirely within the State of Minnesota.


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<PAGE>


         IN WITNESS WHEREOF, the Company has executed this Note as of the date
set forth above.

                                       IMAGE SENSING SYSTEMS, INC.





                                       By:  /s/ William L. Russell
                                          --------------------------------------
                                          Name:   William L. Russell
                                          Title:  Chairman and Chief Executive
                                                  Officer












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<PAGE>
                                   APPENDIX A
                               REGISTRATION RIGHTS

         1. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT.

         1.1 REGISTRATION PROCEDURES AND EXPENSES. THE COMPANY SHALL:

                  (a) within 10 days of the conversion of the Note pursuant to
         Section 2 thereof, commence the preparation of a registration statement
         on Form S-3 (the "REGISTRATION STATEMENT") to enable the resale of the
         Common Stock by the Holder from time to time through the Nasdaq Stock
         Market or in privately negotiated transactions; and, subject to receipt
         of necessary information from the Holder, file the Registration
         Statement with the Securities and Exchange Commission ("SEC") as soon
         thereafter as practicable;

                  (b) use its best efforts, subject to receipt of necessary
         information from the Holder, to cause the Registration Statement to
         become effective as soon as practicable;

                  (c) use its best efforts to prepare and file with the SEC such
         amendments and supplements to the Registration Statement and the
         Prospectus used in connection therewith as may be necessary to keep the
         Registration Statement current and effective for a period not exceeding
         the earlier of (i) the second anniversary of the date on which this
         Note is converted pursuant to Section 2, (ii) the date on which the
         Holder may sell all Shares then held by the Holder without restriction
         by the volume limitations of Rule 144(e) of the Securities Act or (iii)
         such time as all shares of the Common Stock have been sold pursuant to
         a registration statement, and to notify the Holder promptly upon the
         Registration Statement and each post-effective amendment thereto being
         declared effective by the SEC;

                  (d) furnish to the Holder such number of copies of the
         Registration Statement, Prospectuses (including supplemental
         prospectuses) and preliminary versions of the Prospectus filed with the
         SEC ("PRELIMINARY PROSPECTUSES") in conformity with the requirements of
         the Securities Act of 1933 and such other documents as the Holder may
         reasonably request, in order to facilitate the public sale or other
         disposition of all or any of the shares of the Common Stock by the
         Holder; provided, however, that unless waived by the Company in
         writing, the obligation of the Company to deliver copies of
         Prospectuses or Preliminary Prospectuses to the Holder shall be subject
         to the receipt by the Company of reasonable assurances from the Holder
         that the Holder will comply with the applicable provisions of the
         Securities Act and of such other securities or blue sky laws as may be
         applicable in connection with any use of such Prospectuses or
         Preliminary Prospectuses;

                  (e) file documents required of the Company for normal blue sky
         clearance in all states requiring blue sky clearance; provided,
         however, that the Company shall not be required to qualify to do
         business or consent to service of process in any jurisdiction in which
         it is not now so qualified or has not so consented;

                  (f) bear all expenses (other than underwriting discounts and
         commissions, if any) in connection with the procedures in paragraph (a)
         through (e) of this Section 1.1


                                      A-1
<PAGE>

         (including reasonable fees and expenses of one counsel for Holder) and
         the registration of the Common Stock pursuant to the Registration
         Statement; and

                  (g) advise the Holder, promptly after it shall receive notice
         or obtain knowledge of the issuance of any stop order by the SEC
         delaying or suspending the effectiveness of the Registration Statement
         or of the initiation of any proceeding for that purpose; and it will
         promptly use its commercially reasonable efforts to prevent the
         issuance of any stop order or to obtain its withdrawal at the earliest
         possible moment if such stop order should be issued.

                  With a view to making available to the Holder the benefits of
         Rule 144 (or its successor rule) and any other rule or regulation of
         the SEC that may at any time permit the Holder to sell shares of the
         Common Stock to the public without registration, the Company covenants
         and agrees to: (i) make and keep public information available, as those
         terms are understood and defined in Rule 144, until the earlier of (A)
         such date as all of the Holder's shares of Common Stock may be resold
         pursuant to Rule 144(k) or any other rule of similar effect or (B) such
         date as all of the Holder's shares of Common Stock shall have been
         resold; (ii) file with the SEC in a timely manner all reports and other
         documents required of the Company under the Securities Act and under
         the Exchange Act; and (iii) furnish to the Holder upon request, as long
         as the Holder owns any shares of Common Stock, (A) a written statement
         by the Company that it has complied with the reporting requirements of
         the Securities Act and the Exchange Act, (B) a copy of the Company's
         most recent Annual Report on Form 10-KSB or Quarterly Report on Form
         10-QSB, and (C) such other information as may be reasonably requested
         in order to avail the Holder of any rule or regulation of the SEC that
         permits the selling of any such shares of Common Stock without
         registration.

                  It shall be a condition precedent to the obligations of the
         Company to take any action pursuant to this Section 1.1 that the Holder
         shall furnish to the Company such information regarding itself, the
         shares of Common Stock to be sold by the Holder, and the intended
         method of disposition of such securities as shall be required to effect
         the registration of the Common Stock.

         1.2 TRANSFER OF SHARES AFTER REGISTRATION; SUSPENSION.

                  (a) The Holder agrees that it will not effect any disposition
         of the Note or the Common Stock issuable upon conversion of the Note
         that would constitute a sale within the meaning of the Securities Act
         other than transactions exempt from the registration requirements of
         the Securities Act, except as contemplated in the Registration
         Statement referred to in Section 1.1 and as described below, and that
         it will promptly notify the Company of any changes in the information
         set forth in the Registration Statement regarding the Holder or its
         plan of distribution.

                  (b) Except in the event that paragraph (c) below applies, the
         Company shall: (i) if deemed necessary by the Company, prepare and file
         from time to time with the SEC a post-effective amendment to the
         Registration Statement or a supplement to the related Prospectus or a
         supplement or amendment to any document incorporated therein by
         reference or file any other required document so that such Registration
         Statement will not



                                      A-2
<PAGE>

         contain an untrue statement of a material fact or omit to state a
         material fact required to be stated therein or necessary to make the
         statements therein not misleading, and so that, as thereafter delivered
         to purchasers of the Common Stock being sold thereunder, such
         Prospectus will not contain an untrue statement of a material fact or
         omit to state a material fact required to be stated therein or
         necessary to make the statements therein, in light of the circumstances
         under which they were made, not misleading; and (ii) provide the Holder
         copies of any documents filed pursuant to Section 1.2(b)(i).

                  (c) Subject to paragraph (d) below, in the event: (i) of any
         request by the SEC or any other federal or state governmental authority
         during the period of effectiveness of the Registration Statement for
         amendments or supplements to a Registration Statement or related
         Prospectus or for additional information; (ii) of the issuance by the
         SEC or any other federal or state governmental authority of any stop
         order suspending the effectiveness of a Registration Statement or the
         initiation of any proceedings for that purpose; (iii) of the receipt by
         the Company of any notification with respect to the suspension of the
         qualification or exemption from qualification of any of the shares of
         Common Stock for sale in any jurisdiction or the initiation of any
         proceeding for such purpose; or (iv) of any event or circumstance which
         necessitates the making of any changes in the Registration Statement or
         Prospectus, or any document incorporated or deemed to be incorporated
         therein by reference, so that, in the case of the Registration
         Statement, it will not contain any untrue statement of a material fact
         or any omission to state a material fact required to be stated therein
         or necessary to make the statements therein not misleading, and that in
         the case of the Prospectus, it will not contain any untrue statement of
         a material fact or any omission to state a material fact required to be
         stated therein or necessary to make the statements therein, in the
         light of the circumstances under which they were made, not misleading;
         then the Company shall promptly deliver a certificate in writing to the
         Holder (the "SUSPENSION NOTICE") to the effect of the foregoing and,
         upon receipt of such Suspension Notice, the Holder will refrain from
         selling any Common Stock pursuant to the Registration Statement (a
         "SUSPENSION") until the Holder's receipt of copies of a supplemented or
         amended Prospectus prepared and filed by the Company, or until it is
         advised in writing by the Company that the current Prospectus may be
         used, and has received copies of any additional or supplemental filings
         that are incorporated or deemed incorporated by reference in any such
         Prospectus. In the event of any Suspension, the Company will use its
         reasonable best efforts to cause the use of the Prospectus so suspended
         to be resumed as soon as reasonably practicable after delivery of a
         Suspension Notice to the Investors.

                  (d) Notwithstanding the foregoing paragraphs of this Section
         1.2, the Company shall use its best efforts to ensure that the Holder
         shall not be prohibited from selling Common Stock under the
         Registration Statement as a result of Suspensions on more than two
         occasions of not more than 30 days each in any twelve month period.

                  (e) Provided that a Suspension is not then in effect, the
         Holder may sell shares of Common Stock under the Registration
         Statement, provided that it arranges for delivery of a current
         Prospectus to the transferee of such shares of Common Stock. Upon
         receipt of a request therefor, the Company will provide an adequate
         number of current Prospectuses to the Holder and to any other parties
         requiring such Prospectuses. In the event of a sale of shares of Common
         Stock by the Holder, unless such requirement is waived by the Company
         in writing, the Holder must also deliver to the Company's transfer
         agent, with a copy to the Company, such information as may be required
         by the transfer agent so that the shares may be properly transferred.







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