Image Sensing Systems Incorporated (ISNS)
Interview with: James Murdakes, Chairman, Interim President and CEO
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and Information on their Autoscope(R) for Machine Vision technology for Traffic Management

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Image Sensing Systems – now with their stock price up and looking at future markets for their Machine Vision technology



Technology
Scientific & Technical Instruments
NASD: ISNS

Image Sensing Systems Incorporated

500 Spruce Tree Centre
Saint Paul, MN 55104
Phone: 651-603-7700



James Murdakes
Chairman, Interim
President and
Chief Executive Officer

Interview conducted by:
Walter Banks
Co-Publisher

CEOCFOinterviews.com
October 2002

Bio of CEO,
James Murdakes - CEO and President (70)
Mr. Murdakes has been a Director of the Company since May 1995.  Mr. Murdakes was elected Chairman of the Board in February 2002 and was appointed interim Chief Executive Officer and President of ISS in April 2002.  He served as President and CEO of LSC, Inc., a Minneapolis-based software company for computer network storage servers, from 1993 through 1996, and was Chairman of the Board of Directors and a management consultant to LSC in 1997.  He retired from full-time employment in 1998.

Company Profile:
Based in Saint Paul, Minnesota, Image Sensing Systems, Inc. is the world leader in products applying video imaging technology for implementation in advanced traffic management systems (ATMS), freeway incident detection and traffic data collection to help reduce traffic congestion, improve roadway planning, reduce travel time, accidents, delays, air pollution, and fuel consumption. The Company’s cornerstone Autoscope^® products provide traffic managers the means to reduce roadway congestion, improve roadway planning, and increase cost efficiencies. Econolite Control Products, Inc., based in Anaheim, California, has been the exclusive distributor of Autoscope products throughout North America since 1991 and recently was awarded exclusive sales distribution for Latin America. Image Sensing Systems, Inc. and Econolite Control Products, Inc. are particularly suited to provide technical solutions to the emerging intelligent transportation systems and security markets worldwide. Autoscope operating software is now available in multiple languages.  All products are FCC Type (Grantee code "PA5"), CE, and NEMA-certified and/or approved.

Video image processing, also known as machine vision or artificial vision, is a technology that analyzes video images through specialized systems that emulate the function of the human eye.  ISS has combined its proprietary machine vision technology, consisting of complex algorithms, software and special purpose hardware to create a product suite that collects, processes, and analyzes real-time video images. In addition to system design and integration services, the company's principal product offering is the Autoscope^® system, which processes images from one to eight video cameras for the primary purpose of vehicular control, traffic data collection, and automatic incident detection.

With 16 years of development experience, more than 7,500 Autoscope systems processing real-time images from more than 16,000 video cameras in more than 40 countries and major U.S. cities. The customers of the Company include the federal, state, city and county departments of transportation, road commissions and other transportation authorities.

Newest Product Development:
Autoscope Solo® Software Suite version 5.11: The software suite offers a significant number of new features, enhancements, and bug solutions. Most significantly, the new software comes with a new Video Player that plays and records digitized streaming video from the new video compression option of the Autoscope Solo® Pro introduced earlier this year at a number of trade shows. Version 5.11 also introduces enhanced lighting control for improved detection performance that continues to set the standard for video-based traffic detection systems. Autoscope communications, always at the forefront, has now been expanded to provide connection over the Internet via wireless CDPD modems and to support customers who are extending Ethernet connectivity to their field cabinets.  Current hardware products include Autoscope Solo Pro II and Solo Pro NC.  In development are two new hardware products with upgraded Autoscope software all to be available for shipment in Q1 2003.

CEOCFOinterviews: Mr. Murdakes, I noticed that you are listed as the Interim CEO; can you explain your history with Image Sensing Systems?

Mr. Murdakes: “I joined ISS Board in May 1995 when we held our public offering.  I’ve been on the Board ever since.  As a Board member I’ve been on the Audit Committee, Compensation Committee, I am the Board Secretary and the Chairman.”

CEOCFOinterviews: Can you tell us about your management team, and its background?

Mr. Murdakes: “I have been in the computer business since 1962.  Our CFO, Art Bourgeois, was a partner at Ernst & Young.  Craig A. Anderson, VP Marketing & Technical Services has been with the company eleven years and Jake Jacobson our VP Engineering has been with the company for more than 12 years.  Dr. Durga Panda is our Director of Special Projects and Strategic Alliance.  Graham Heywood is Managing Director for Europe/Middle East and Johan Billow is the Managing Director for our Asian subsidiary, Flow Traffic Ltd.”

CEOCFOinterviews: Is it necessary for the success of your business to have a succession plan?

Mr. Murdakes: “Yes, it’s always good to have a Succession Plan for all levels of Senior Management. 

CEOCFOinterviews: How long has your technology been around?

Mr. Murdakes: “This technology goes back to 1985 beginning with a feasibility study at the University of Minnesota.  They did some breadboard fabricating testing in 1986 with a prototype working in 1987 and finally, a patent two years later in 1989.  We had our first installation in 1990.  It has been about ten years that we have had a product that we can say does machine vision.  What we are selling today is Autoscope Solo^® Pro II, and Autoscope^® 2004.  We pay the University of Minnesota a royalty on all the Autoscopes that are sold in the world.  In fact, through the second quarter of 2002 we have paid the University of Minnesota $2.3 million in royalties.”

CEOCFOinterviews: Who was the founder of the technology for using video image processing (Machine Vision) technology for advanced traffic management?

Mr. Murdakes: “The founder of the Autoscope technology for using video image processing (Machine Vision) technology for advanced traffic management is a professor at the University of Minnesota, Dr. Panos Michalopoulos, who conceptualized this technology. To help develop the technology, he brought in three contractors using funds from the University of Minnesota.  Hence, the University owns the technology and ISS has the worldwide perpetual license to market and support that technology.”

CEOCFOinterviews: How did you manage to get involved?

Mr. Murdakes: “Dr. Panos Michalopoulos’ wife worked for me at Control Data.  She introduced me to Panos.”

CEOCFOinterviews: How do you market and sell your products?

Mr. Murdakes: “In the Americas, our products are marketed through an exclusive arrangement that we have with Econolite Control Products, Inc. based in Anaheim, CA..”

CEOCFOinterviews: How many countries are you in?

Mr. Murdakes: “We have representation through local distributors in over 40 countries worldwide and have an Asian subsidiary headquartered in Hong Kong which supports our Asian distributors.”

CEOCFOinterviews: Does Econolite take care of most of your marketing?

Mr. Murdakes: “Econolite handles all of the marketing in the Americas. We handle the marketing outside of the contiguous 48 states.”

CEOCFOinterviews: Can you give us a picture of the marketplace, what you need to do to grow your business and what you are up against with regards to competition?

Mr. Murdakes: “We are replacing Loop technology.  Loops are under ground.  When a vehicle passes over, it causes an electronic impulse.  The bad news is, it doesn’t give you real-time data and you have to rip up a road to be able to install these loops.  It is old technology.

The market for Machine Vision Technology is probably less than 50-100 million (guessing) worldwide.  It is a niche market and a replacement market of loop technology that has been around for years.  New technology allows cameras to see and interpret scenes, just as a trained human operator would.  Digital cameras, computers, and communications are all tied together.  Communication could be hard wire or wireless.  The machine vision is for traffic applications, such as traffic management. It could be used for License Plate reading, however at this point we are not involved with that application.”

CEOCFOinterviews: Do they use that to control traffic signal lights, such as Stop Lights?

Mr. Murdakes: “No, our products are not applied this way.  Econolite builds a number of these products.  Different controllers are used for managing traffic lights or anything that relates to traffic.  The challenge we have is how to take the basic machine vision technology, the camera, the computer and communications, and apply them in other applications, to solve other problems.”

CEOCFOinterviews: Can you give us an example of another area where your video image processing (machine vision) technology might be useful?

Mr. Murdakes: “A case in point would be flame detection; we are working with DetTronics a division of Kiddie PLC, a company based is England.  DetTronics is in the flame detection business.  They will take our technology and encapsulate it in an explosion proof housing.  Our Machine Vision technology has the potential to be taken far beyond just using it for monitoring and managing traffic congestion.  In addition to flame detection, we are looking at homeland security applications.”

CEOCFOinterviews: What else are you doing to increase shareholder value?

Mr. Murdakes: “When people ask me what I am doing to increase shareholder value, my answer is simple; grow revenue and be profitable quarter by quarter.  One can also add to this simplistic statement, stay focused with what your good at, manage cash and expenses, as well as create an environment for your people that allows for creativity and fun in what they are doing.  That’s a growth game plan and the result is increased shareholder value.  It’s not too complicated.”

CEOCFOinterviews: What are your plans to increase your product offering and give a better price performance?

Mr. Murdakes: “We have products today that can operate with or without cameras.  In some international markets, we are successful with our Autoscope products that can incorporate other manufacturers cameras.  We are also in product development for new hardware and software products slated to be introduced and deliverable next year. 

CEOCFOinterviews: So that’s the job and focus of your R&D this year.

Mr. Murdakes: “Yes, we do product development along with second level customer support.  The first level of support is the distributor; and Econolite.”

CEOCFOinterviews: Can you tell us about your revenue model, and whether you have contracts or just sell product?

Mr. Murdakes: “We sell products in the Americas and Europe through distributors and in Asia through our subsidiary, Flow Traffic who likewise uses distributors but in some countries, sells directly to the end user.  We have no plans to mount a direct sales force anywhere in the world.  Our arrangement with Econolite is exclusive for sales and distribution in North America and Latin America.   We are a R & D hardware and software provider for Autoscope products”

CEOCFOinterviews: Partners with a vision for incorporating Machine Vision into their products.

Mr. Murdakes: “Yes, we need a few more applications like flame detection, where they sell the product and we provide technology.  They provide the marketing and selling and in return we receive a royalty.  To me, that is the best of all worlds.  If we do that, we can control our costs and manage our growth, live within our cash flow, and return a good investment to our shareholders. I believe we can have consistent growth, and make sure that our employees know that they have a good place to work.  Our engineers want to do creative things.  The question for us is how can we apply our basic technology to solve problems in society. It may sound a bit far reaching, but that’s what it is all about.

CEOCFOinterviews: What is your cash and credit position going forward?

Mr. Murdakes: “Our game plan is to manage cash.   We have eliminated a lot of costs.  We are constantly watching costs.  We can manage and grow the Company on the cash that is being generated.   If we plan to grow outside our traditional markets, we would have to merge, acquire, or be acquired.  Those are decisions that the Board is going to have to make.”

CEOCFOinterviews: What would you say is your biggest challenge that your distributors face in presenting, implementing or selling your product and getting it out there?

Mr. Murdakes: “We are replacing Loop technology.   Machine vision as a technology has not been readily accepted. Loop technology has been around for years; there are probably millions of Loop systems worldwide.  The Loop technology will be replaced with machine vision.  We are now, pushing the envelope into new ways to improve global traffic detection. Not every state has accepted that.  We have to sell the benefits that machine vision is more efficient and cost effective; you don’t have to tear up roadway and you get instant data. That is the challenge of a distributor. The other challenge, you are selling to a public institution, so the sales cycle is long and you are in the queue for public money.”

CEOCFOinterviews: You seem to be gunning for the best days ahead.

Mr. Murdakes: “One of our shareholders told me exactly the same thing; he flew in to the shareholders meeting and said “ it’s been a tough ten years but your best years are ahead of you.” He was really turned on with flame detection as well.  The fact is that this technology can be applied to solve a lot of problems we have in society; it is a matter of finding those, and finding the right partners that can help fund this effort.  Partners like Econolite, Wireless and DetTronics, are key to our continued growth.”

CEOCFOinterviews: In closing, what would you like to say to your shareholders and potential investors?