Iteris
Annual Report 2003

Plain-text annual report

QuickLinks -- Click here to rapidly navigate through this documentSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KFOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934For the fiscal year ended March 31, 2003ORoTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934For the transition period from to Commission file number 001-08762ODETICS, INC.(Exact Name of Registrant as Specified in Its Charter)Delaware(State or Other Jurisdictionof Incorporation or Organization) 95-2588496(I.R.S. EmployerIdentification No.)1515 South Manchester Avenue, Anaheim, California 92802(Address of Principal Executive Offices) (Zip Code)Registrant's Telephone Number, Including Area Code: (714) 774-5000Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act:Class A common stock, $.10 par valueClass B common stock, $.10 par value(Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days. Yes  No o Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K  Indicate by a check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No  Based on the closing sale price on Nasdaq SmallCap Market on September 30, 2002, the last business day of the registrant's mostrecently completed second fiscal quarter, the aggregate market value of the voting stock held by nonaffiliates of the registrant was$10,081,109. For the purposes of this calculation, shares owned by officers, directors and 10% stockholders known to the registrant havebeen deemed to be owned by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. Odetics has two classes of common stock outstanding, the Class A common stock and the Class B common stock. The rights,preferences and privileges of each class of common stock are identical in all respects, except for voting rights. Each share of Class A commonstock entitles its holder to one-tenth of one vote per share and each share of Class B common stock entitles its holder to one vote per share.As of June 27, 2003, there were 14,112,823 shares of Class A common stock and 1,003,932 shares of Class B common stock outstanding.Unless otherwise indicated, all references to common stock collectively refer to the Class A common stock and the Class B common stock.DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates by reference certain information from the registrant's definitive proxy statement for its Annual Meeting ofStockholders, which is expected to be held on August 28, 2003. Except with respect to the information specifically incorporated by referencein this report, the proxy statement is not deemed to be filed as a part of this report.ODETICS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page PART I ITEM 1. BUSINESS 1ITEM 2. PROPERTIES 6ITEM 3. LEGAL PROCEEDINGS 7ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS 8ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 9ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS 11 RISK FACTORS 21ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 30ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE 30 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 31ITEM 11. EXECUTIVE COMPENSATION 31ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT 31ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 31ITEM 14. CONTROLS AND PROCEDURES 32 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 33 In this report, "Odetics," the "Company," the "Registrant," "we," "us" and "our" collectively refers to Odetics, Inc. and its subsidiaries.PART I ITEM 1. BUSINESS. Overview Odetics, Inc. provides products, systems and services that control and manage the use of public roadways and secure access and safetyof public and private facilities. Our company was founded in 1969 to supply digital recorders for use in the United States space program. Webroadened our information automation product line to include time-lapse videocassette recorders for commercial security and surveillanceapplications through our Gyyr division, which was subsequently incorporated to form our Gyyr Incorporated subsidiary. We formed ourZyfer, Inc. subsidiary to develop and manufacture timing and synchronization products for telecommunication networks. Timing andsynchronization products are devices that contain both hardware and software to synchronize the data streams in telecommunicationsnetworks and are used to increase the reliability and operability of such networks. In the early 1980s, we established our Odetics Broadcast division, which we later incorporated as Broadcast, Inc. Broadcast developedand supplied software-based systems that integrated, controlled and automated the management of multiple classes of equipment used inthe operation of a broadcast studio and satellite uplink facility in the television, cable and satellite industries. Leveraging our expertise in video image processing, we entered into the intelligent transportation systems ("ITS") business with theintroduction of a video-based vehicle detection system in 1993. In June 1997, we acquired certain assets comprising the TransportationSystems business from Rockwell International, creating our ITS division, which expanded our offerings to include advanced trafficmanagement systems and advanced traveler information systems. We incorporated our ITS division as Odetics ITS, Inc. and broadened oursystems offerings by acquiring Meyer, Mohaddes Associates, Inc. in 1998. In January 2000, we reincorporated Odetics ITS in Delaware andchanged its name to Iteris, Inc. As of June 30, 2003, Odetics owned 74.5% of the outstanding common stock of Iteris and 59.1% of thecommon stock assuming full conversion of the outstanding Series A preferred stock of Iteris. We currently operate Meyer, MohaddesAssociates, Inc. as a wholly-owned subsidiary of Iteris. Beginning in late 2001, we began divesting certain of our business units in order to reduce our operating expenses and to focus on whatwe believe to be our core businesses, Iteris, Inc. and MAXxess Systems, Inc. In September 2001, we sold the assets of our Gyyr ClosedCircuit Television ("CCTV") Products line, which included video recorders and equipment that facilitated video switching and multiplexing.Upon completion of this sale, we changed the name of our Gyyr subsidiary to MAXxess Systems, Inc., which currently designs andmanufactures security management systems that feature a broad array of detection, monitoring and management capabilities for bothgovernmental and commercial customers. In March 2003, we decided to cease the development and sale of any new Broadcast products and to sell Zyfer. As a result, we reducedour Broadcast organization to only support existing customer contracts for service and support through their expiration dates. In May 2003, wesold substantially all of the assets of Zyfer. After giving effect to our divestitures and narrowed focus mentioned above, we currently operate in only two business segments: ITS andSecurity Products. Our ITS segment consists of Iteris, our 59.11% owned subsidiary, and our Security Products segment consists ofMAXxess, Inc., our wholly-owned subsidiary.1Iteris, Inc. Iteris, Inc. designs, develops, markets and implements sensors and systems for surface transportation. Using its proprietary softwareand ITS industry expertise, Iteris provides video sensor systems and transportation management and traveler information systems for theITS industry. The ITS industry is comprised of companies applying a variety of technologies to enable the safe and efficient movement ofpeople and goods. Iteris uses its outdoor image recognition software expertise to develop proprietary algorithms for video sensor systems thatimprove vehicle safety and the flow of traffic. Using its knowledge of the ITS industry, Iteris designs and implements transportationmanagement systems that help public agencies reduce traffic congestion and provide greater access to traveler information. Iteris' proprietary image recognition systems include AutoVue™ and Vantage™. AutoVue is a small windshield mounted sensor thatuses proprietary software to detect and warn drivers of unintended lane departures. Iteris has approximately 3,000 production AutoVue unitsthat are in use on truck platforms in the European market and are offered as an option on certain Actros trucks, which are part of the Daimlergroup. Iteris believes that AutoVue is a broad sensor platform that, through additional software development, may be expanded to incorporateadditional safety and convenience features. Vantage is a video vehicle sensing system that detects the presence of vehicles at signalizedintersections enabling a more efficient allocation of green signal time. Iteris' transportation management systems includes the design, development and implementation of its software-based systems thatintegrate sensors, video surveillance, computers and advanced communications equipment to enable public agencies to monitor, control anddirect traffic flow, assist in the quick dispatch of emergency crews and distribute real-time information about traffic conditions. Our servicesinclude planning and other engineering for the implementation of transportation related communications systems, analysis and study relatedto goods movement and commercial vehicle operations, and parking systems designs.to goods movement and commercial vehicle operations, and parking systems designs. Sales, Marketing and Principal Customers. Iteris markets and sells its transportation management systems and services directly togovernment agencies pursuant to negotiated contracts that involve competitive bidding and specific qualification requirements. Most of ourcontracts with federal, state, and municipal customers provide for cancellation or renegotiation at the option of the customer upon reasonablenotice and fees paid for modification. We use selected members of our engineering team divided on a regional basis to serve in sales andbusiness development functions. We do not engage in international ITS sales. Sales of Iteris' systems contracts generally involve long leadtimes and require extensive specification development, evaluation and price negotiations. No single customer of Iteris accounted for morethan 10% of our total net sales and contract revenues. Iteris sells its Vantage vehicle detection systems primarily through indirect sales channels comprised of independent dealers in theUnited States and Canada who sell integrated systems and related products to the traffic intersection market. The independent dealers forIteris are primarily responsible for sales, installation and support of Vantage systems. These dealers maintain an inventory of demonstrationtraffic products including the Vantage vehicle detection systems and sell directly to government agencies and installation contractors. Thesedealers often have long-term arrangements with the government agencies in their territory for the supply of various products for theconstruction and renovation of traffic intersections. Iteris holds technical training classes for its dealers and maintains a full-time staff ofcustomer support technicians to provide technical assistance when needed. The marketing strategy for AutoVue is to establish it as the leading platform for in vehicle video sensing for trucks and passenger cars.AutoVue is sold directly by Iteris to vehicle manufacturers and major automotive suppliers. Iteris also markets to the manufacturers ofautomobiles through a strategic relationship with Valeo.2 Manufacturing and Materials. Iteris uses local manufacturers based near our Anaheim facility to build subassemblies that are usedin its Vantage products. These subassemblies are delivered to our Anaheim facility where they go through a final assembly and test prior tothe shipment to our customers. Iteris' manufacturing activities are conducted in approximately 6,000 square feet of space at our Anaheimfacility. Most subassemblies used in our products are manufactured by subcontractors who are local to our Anaheim, California facilities.Certain of our cameras used in our products have historically been provided by a Japanese supplier who is sole sourced; however, we arecurrently qualifying other sources of supply. Production volume is based upon quarterly forecasts that Iteris readjusts on a monthly basis tocontrol inventory. Iteris subcontracts the manufacture of its AutoVue systems to one manufacturer, and our internal processes are limitedprimarily to testing and final verification. Iteris currently does not manufacture any of the hardware used in the transportation managementand traveler information systems that it designs and implements. The production facility for Iteris is currently ISO 9001 certified. Customer Support and Services. We provide warranty service for each of our products, as well as follow-up service and support, forwhich we typically charge separately. We view customer support services as a critical competitive factor as well as a revenue source.MAXxess Systems, Inc. MAXxess Systems, Inc. designs, develops and manufactures security management systems that include detection, monitoring andmanagement capabilities for both governmental and commercial customers. MAXxess offers software, hardware and other technologies forcreating and using electronic access control products such as identification and access badges that are based on smart cards and otherelectronic devices. These products are principally used to control and manage physical access to facilities. We also provide software-basedsystems and hardware used for detection and response of management to dangerous chemicals and gases in and around facilities. During fiscal 2003, we introduced our Environmental Security Systems, which integrate our legacy AXxess 202 product family withnew detection technologies for toxic chemicals and gases. During fiscal 2003, MAXxess further extended its Environmental SecuritySystems offering by introducing its Safe Cities™ System, which is a software-based management system for use by municipal customersthat integrates disparate information and detection infrastructure within a city in order to provide rapid response for emergency managementagainst threats of terrorism and weapons of mass destruction. MAXxess believes that its Environmental Security Systems provide enhancedlevels of monitoring, control and detection that will be required across a broad cross section of municipal infrastructure and in various publicfacilities including buildings, airports, ports and other potential targets of terrorism. Sales, Marketing and Principal Customers. MAXxess generally markets and sells its products globally through a network of systemintegrators, in addition to selling direct to municipal customers. In the United States, MAXxess has three regional sales managers whooversee three geographical regions and manage the systems integrators. MAXxess operates a full service branch office in BracknellBerkshire U.K., which serves the sales needs of the European, Middle East and Asian regions. The Bracknell office also provides localproduct availability and technical support for the region. MAXxess has also partnered with Draeger Safety of Lubeck, Germany, to market itschemical detectors principally to governmental customers. These chemical detectors are primarily focused on the Immune BuildingProgram, which is sponsored by Defense Advanced Research Projects Agency ("DARPA"). No single customer of MAXxess representedmore than 10% of our total net sales and contract revenues for fiscal 2003. Manufacturing and Materials. Similar to Iteris, MAXxess uses local manufacturers based near our Anaheim manufacturing facility tobuild subassemblies that are used in our final products. These subassemblies and other components are delivered to our Anaheimmanufacturing facility where they3go through a final assembly and test prior to shipment to its customers. MAXxess builds inventory according to our sales forecasts. MAXxessmaintains a dedicated manufacturing area of approximately 2,500 square feet located within our Anaheim facilities. MAXxess maintainsinfrastructure to support production and inventory control, purchasing, quality assurance and manufacturing engineering. Although weconsolidate our materials sourcing and subcontract manufacturing to minimize production costs. We believe that each of our sources arecapable of being substituted for minimal cost and production delay. There are currently no sole sourced raw materials used in our products. Customer Support and Services. We provide warranty service and support for each of our products and follow-up service and support,for which we charge separately. Service revenue accounts for less than 5% of total net sales and contract revenues. Customer support is acritical competitive factor. We provide warranty and customer service internationally from our Bracknell Berkshire offices.Backlog Our backlog of unfulfilled firm orders was approximately $24.0 million as of March 31, 2003 and was approximately $42.7 million as ofMarch 31, 2002. Approximately 67% of our backlog at March 31, 2002 was recognized as revenues in the fiscal year ended March 31, 2003,and approximately 87% of our backlog at March 31, 2003 is expected to be recognized as revenues in the fiscal year ended March 31, 2004.Pursuant to the customary terms of our agreements with government contractors and other customers, customers can generally cancel orreschedule orders with little or no penalties. Lead times for the release of purchase orders depend upon the scheduling and forecastingpractices of our individual customers, which also can affect the timing of the conversion of our backlog into revenues. For these reasons,among others, our backlog at a particular date may not be indicative of our future revenues.Product Development MAXxess and Iteris each direct and staff its own product development activities. Most of our development activities are conducted at ourprincipal facilities in Anaheim, California. Our company-sponsored research and development costs and expenses were approximately$7.5 million in fiscal 2001, $4.4 million in fiscal 2002 and $4.2 million in fiscal 2003. Although spending for product development declinedsharply in fiscal 2002 compared to fiscal 2001, principally due to the discontinuation of development activities related to personalized travelerinformation products in Iteris and the sale of Gyyr's CCTV Products line, we expect to continue to pursue significant product developmentprograms and incur significant research and development expenditures in each of our business units.Competition Our business units generally face significant competition in each of their respective markets. Increased competition may result in pricereductions, reduced gross margins and loss of market share, any of which could have a material adverse effect on our business, financialcondition and results of operations. MAXxess principally competes with Casi-Rusco, Cardkey, Lenel and Northern Computers in the sale of access control systems. Themarket for electronic access control products is highly fragmented, We estimate that there are approximately 100 competitors comprisingapproximately $800 million in annual sales. MAXxess is substantially smaller in terms of annual revenue than its leading competitors. Inthe area of chemical and gas detection, MAXxess primarily competes with Smiths Detection. MAXxess is a smaller company in terms ofannual revenue than Smiths Detection, but MAXxess does not believe there is any direct competitor for its Safe Cities system. MAXxessgenerally competes on the basis of its distributed processing system architecture, which is an open system that readily integrates othersecurity subsystems and new detection capabilities, and a superior operator interface.4 We believe that AutoVue is the only commercially-available lane departure warning system used in the U.S. and in Europe, potentialcompetitors of AutoVue include Delphi Automotive Systems Corporation domestically, NEC Corporation and Hitachi Ltd. in Japan andRobert Bosch Gmbh in Europe, which we suspect are currently developing video sensor technologies for the vehicle industry that could beused for lane departure warning systems. In the market for our Vantage vehicle detection systems, Iteris competes with manufacturers ofother "above ground" video camera detection systems such as Econolite Control Products, Inc., Trafficon, N.V. Peek Traffic Systems, andother non-intrusive detection devices including microwave, infrared, ultrasonic and magnetic detectors, as well as manufacturers andinstallers of in-pavement inductive loop products. Our competitors for Vantage products do not disclose specific sales numbers, eitherbecause they are private companies or because they are part of larger companies. Based on our interface with them in the market, we believethat we are leading our competitors in annual sales volume for video detection products. The transportation management and traveler information systems market is highly fragmented and is subject to evolving national andregional quality and safety standards. Iteris' competitors vary in number, scope and breadth of the products and services they offer. Iteris'competitors in advanced transportation management and traveler information systems include large multi-national corporations such asTranscore, Lockheed Martin Corporation, PB Farradyne Inc., Kimley-Horn and Associates, Inc. and National Engineering Technology, Inc.Iteris' competitors in transportation engineering, planning and design include major firms such as Parsons Brinkerhoff, Inc. and ParsonsTransportation Group Inc., as well as many smaller regional engineering firms. We believe that the transportation management and travelerinformation systems business of Iteris is one of the leading competitors in the ITS market. In general, the markets for the products and services offered by our businesses are highly competitive and are characterized by rapidlychanging technology and evolving standards. Many of our current and prospective competitors have longer operating histories, greater namerecognition, access to larger customer bases and significantly greater financial, technical, manufacturing, distribution and marketingresources than us. As a result, they may be able to adapt more quickly to new or emerging standards or technologies or to devote greaterresources to the promotion and sale of their products. It is also possible that new competitors or alliances among competitors could emergeand rapidly acquire significant market share. We believe that our ability to compete effectively in our target markets will depend on a numberof factors, including the success and timing of our new product development, the compatibility of our products with a broad range ofcomputing systems, product quality and performance, reliability, functionality, price, and service and technical support. Our failure to provideservices and develop and market products that compete successfully with those of other suppliers and consultants in our target marketswould have a material adverse effect on our business, financial condition and results of operations.Intellectual Property and Proprietary Rights Our ability to compete effectively depends in part on our ability to develop and maintain the proprietary aspects of our technology. Ourpolicy is to obtain appropriate proprietary rights protection for any potentially significant new technology acquired or developed each of ourbusiness units. Iteris currently holds six U.S. patents, which expire commencing in 2012, and has eighteen U.S. patent applicationspending, mostly relating to our outdoor image processing techniques used in our AutoVue and Vantage systems. Two of our patents relatespecifically to our AutoVue technology and provide a basis for enhanced functionality for rain sensing and improved performance. We believethat our other patents, while important for our technology platform, are less critical to near term product strategy. We cannot assure you thatany new patents will be granted pursuant to any outstanding or subsequent applications.5 We own a patent and have three patents pending for StealthKey technology, which technology is not currently part of our product family.Our intention is to pursue product development for a high-speed security processor designed around the StealthKey patent. In addition to patent laws, we rely on copyright and trade secret laws to protect our proprietary rights. We attempt to protect our tradesecrets and other proprietary information through agreements with customers and suppliers, proprietary information agreements with ouremployees and consultants, and other similar measures. Iteris does not have any material licenses or trademarks other than those relatingto product names. We cannot be certain that we will be successful in protecting our proprietary rights. While we believe our patents, patentapplications, software and other proprietary know-how have value, changing technology makes our future success dependent principallyupon our employees' technical competence and creative skills for continuing innovation. Litigation has been necessary in the past and may be necessary in the future to enforce our proprietary rights, to determine the validityand scope of the proprietary rights of others, or to defend us against claims of infringement or invalidity by others. An adverse outcome insuch litigation or similar proceedings could subject us to significant liabilities to third parties, require disputed rights to be licensed from othersor require us to cease marketing or using certain products, any of which could have a material adverse effect on our business, financialcondition and results of operations. In addition, the cost of addressing any intellectual property litigation claim, both in legal fees andexpenses, as well as from the diversion of management's resources, regardless of whether the claim is valid, could be significant and couldhave a material adverse effect on our business, financial condition and results of operations.Employees We refer to our employees as associates. As of June 12, 2003, Odetics and its subsidiaries employed an aggregate of 253 associates,including 70 associates in general management, administration and finance; 17 associates in sales and marketing; 119 associates in productdevelopment; 35 associates in operations, manufacturing and quality; and 12 associates in customer service. None of our associates arerepresented by a labor union, and we have never experienced a work stoppage.Government Regulation Our manufacturing operations are subject to various federal, state and local laws and regulations, including those restricting thedischarge of materials into the environment. We are not involved in any pending or, to our knowledge, threatened governmental proceedings,which would require curtailment of our operations because of such laws and regulations. We continue to expend funds in connection with ourcompliance with applicable environmental regulations. These expenditures have not, however, been significant in the past, and we do notexpect any significant expenditure in the near future. Currently, compliance with foreign laws has not had a material impact on our businessand is not expected to have a material impact in the near future. Subsequent to the downsizing and reorganization of our foreign operations,our only international operations are for MAXxess Ltd, a U.K., based subsidiary of our MAXxess Inc. subsidiary in the United States.ITEM 2. PROPERTIES. Our headquarters and principal operations consist of leased facilities located in Southern California and consist of a two buildingcomplex containing approximately 257,900 square feet situated on approximately 14 acres located at 1515 and 1585 South ManchesterBoulevard in Anaheim, California. These facilities house our administrative offices (approximately 20,000 dedicated square feet), as well asthe operations of MAXxess, (approximately 10,000 dedicated square feet), and Iteris (approximately 55,000 dedicated square feet). In addition,FEI-Zyfer, the acquirer of substantially all of6the assets of our subsidiary Zyfer, Inc., subleases 20,000 dedicated square feet in our 1585 South Manchester facility under a two yearsublease. As of March 31, 2003, as a result of substantial downsizing and divestitures or shutdowns of our Broadcast, Gyyr, and MarinerNetworks subsidiaries over the prior two fiscal years, we have approximately 140,000 square feet of idle capacity. In May 2002, we completed the sale and leaseback of our Anaheim facilities for an aggregate sales price of $22.6 million. We enteredinto a 30-month lease for 1585 South Manchester for a monthly rental payments of $57,553, and a ten-year lease for 1515 South Manchesterfor a monthly rental payment of $152,150. Iteris is a sublessee to Odetics for 55,000 square feet under similar terms to the master leasebetween Odetics and the master lessor. We are currently in negotiations with the landlord for our Anaheim facilities to reduce our overalloperating expenses to a level commensurate with our existing operations. We cannot assure you that we will be able to complete thesenegotiations successfully. We also lease approximately 7,400 square feet in Austin, Texas. Subsequent to the discontinuance of Broadcast, we operate a serviceorganization in support of Broadcast customers in this facility. Iteris leases twelve office suites representing an aggregate of approximately20,000 square feet within the United States for its support staff and development teams. We currently operate a single shift in each of our manufacturing and assembly facilities, and we believe that our facilities are adequatefor our needs for at least the next twelve months.ITEM 3. LEGAL PROCEEDINGS. We are not currently a party to any material legal proceedings.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of our security holders during the three months ended March 31, 2003.7PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since April 22, 2002, our Class A common stock and Class B common stock has been listed on the Nasdaq SmallCap Market underthe symbols "ODETA" and "ODETB," respectively. Our Class B common stock was delisted from the Nasdaq SmallCap Market inApril 2003 and is currently quoted on the OTC Bulletin Board. Prior to April 22, 2002, our Class A common stock and Class B commonstock were listed on the Nasdaq National Market. The following table sets forth for the fiscal periods indicated the high and low sales prices forthe Class A common stock and Class B common stock as reported by the Nasdaq SmallCap Market. Class A Common Stock Class B CommonStock High Low High LowFiscal 2002 Quarter Ended June 30, 2001 $4.60 $1.88 $4.64 $2.95Quarter Ended September 30, 2001 2.49 1.24 3.80 1.37Quarter Ended December 31, 2001 2.10 1.05 2.58 1.35Quarter Ended March 31, 2002 1.95 1.34 3.75 1.82Fiscal 2003 Quarter Ended June 30, 2002 1.70 1.27 2.57 1.85Quarter Ended September 30, 2002 1.52 .85 2.00 1.00Quarter Ended December 31, 2002 1.03 .45 1.00 .42Quarter Ended March 31, 2003 .74 .51 .75 .52Fiscal 2004 Quarter Ending June 30, 2003 (through June 27, 2003) .89 .45 .53 .20 As of June 27, 2003, we had 509 holders of record of Class A common stock and 105 holders of record of Class B common stockaccording to information furnished by our transfer agent.Dividend Policy We have never paid or declared cash dividends on either class of our common stock, and have no current plans to pay such dividends inthe foreseeable future. We currently intend to retain any earnings for working capital and general corporate purposes. The payment of anythe foreseeable future. We currently intend to retain any earnings for working capital and general corporate purposes. The payment of anyfuture dividends will be at the discretion of our Board of Directors, and will depend upon a number of factors, including, but not limited to,future earnings, the success of our business, activities, our capital requirements, our general financial condition and future prospects,general business conditions, the consent of our lender and such other factors as the Board may deem relevant.Recent Sales of Unregistered Securities During the quarter ended March 31, 2003, we did not sell or issue any unregistered securities.8ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The following selected consolidated financial data with respect to our consolidated statement of operations for each of the five fiscal yearsin the period ended March 31, 2003 and the consolidated balance sheet data at March 31, 1999, 2000, 2001, 2002 and 2003 are derived fromour audited consolidated financial statements. The consolidated statements of operation data for the fiscal years ended March 31, 1999 and2000 and the consolidated balance sheet data at March 31, 1999, 2000 and 2001 are not included in the consolidated financial statementsincluded elsewhere in this report. The following information should be read in conjunction with "Management's Discussion and Analysis ofFinancial Condition and Results of Operations" and with our consolidated financial statements and the related notes thereto includedelsewhere in this report. Fiscal Year Ended March 31, 1999 2000 2001 2002 2003 (in thousands, except per share data) Consolidated Statement of Operations Data: Net sales $45,291 $44,467 $42,363 $29,343 $22,541 Contract revenues 13,331 18,666 20,039 22,846 25,086 Total net sales and contract revenues 58,622 63,133 62,402 52,189 47,627 Costs and expenses: Cost of net sales 32,245 33,455 31,028 16,769 11,424 Cost of contract revenues 9,007 13,431 13,781 13,132 16,034 Selling, general and administrative expenses 20,119 25,177 25,219 18,491 16,157 Research and development expenses 6,566 6,558 7,549 4,385 4,215 Restructuring charges — — 757 2,189 — Total costs and expenses 67,927 78,621 78,334 54,966 47,830 Loss from operations (9,315) (15,488) (15,932) (2,777) (203)Non-operating income (expense): Royalty income — 38,437 17,825 — — Other income, net 228 — 1,340 2,919 388 Interest expense, net (1,807) (2,048) (1,762) (4,190) (761) Income (loss) before income tax (10,894) 21,007 1,471 (4,048) (576)Income tax benefit — — — 785 — Income (loss) from continuing operations before minority interest (10,894) 21,007 1,471 (3,263) (576)Minority interest in earnings of subsidiary — — — (1,910) (3,818) Income (loss) from continuing operations (10,894) 21,007 1,471 (5,173) (4,394)Loss from discontinued operations, net of income tax (9,224) (23,286) (34,011) (20,965) (8,754)Extraordinary loss from early extinguishment debt, net of tax of $0 — — — (450) — Net loss $(20,118)$(2,279)$(32,540)$(26,588)$(13,148) Basic earnings (loss) per share: Continuing operations $(1.39)$2.31 $0.15 $(0.46)$(0.31) Discontinued operations (1.18) (2.56) (3.41) (1.86) (0.61) Extraordinary loss — — — (0.04) — Basic net loss per share $(2.57)$(0.25)$(3.26)$(2.36)$(0.92) Diluted earnings (loss) per share: Continuing operations $(1.39)$2.22 $0.14 $(0.46)$(0.31)  Discontinued operations $(1.18) (2.47) (3.33) (1.86) (0.61) Extraordinary loss — — — (0.04) — Diluted net loss per share $(2.57)$(0.24)$(3.19)$(2.36)$(0.92) Shares used in calculating basic earnings (loss) per share 7,820 9,089 9,977 11,267 14,276 Shares used in calculating diluted earnings (loss) per share 7,820 9,444 10,209 11,267 14,276 9 At March 31, 1999 2000 2001 2002 2003 (in thousands) Consolidated Balance Sheet Data: Working capital (deficit) $26,066 $22,283 $(3,704)$(7,604)$3,345 Total assets 81,355 81,850 68,061 52,238 34,842 Long-term debt (less current portion) 19,962 11,666 4,800 2,042 1,265 Accumulated deficit (23,913) (26,192) (58,732) (85,320) (98,468)Total stockholders' equity (deficit) 36,323 36,110 20,378 5,255 (4,288)10ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Cautionary Statement This report including the following discussion and analysis contains forward-looking statements that are based on our currentexpectations, estimates and projections about our business and our industry, and reflect management's beliefs and certainassumptions made by us based upon information available to us as of the date of this report. When used in this report and theinformation incorporated herein by reference, the words "expect(s)," "feel(s)," "believe(s)," "should," "will," "may," "anticipate(s),""estimates" and similar expressions or variations of these words are intended to identify forward-looking statements. These forward-looking statements include but are not limited to statements regarding our anticipated revenue, expenses, capital needs,competition, backlog and manufacturing capabilities and the status of our facilities and product development. These statements arenot guarantees of future performance and are subject to certain risks and uncertainties which could cause actual results to differmaterially from those projected. You should not place undue reliance on these forward-looking statements that speak only as of thedate hereof. We undertake no obligation to republish revised forward-looking statements to reflect events or circumstances after thedate hereof or to reflect the occurrence of unanticipated events. We encourage you to carefully review and consider the variousdisclosures made by us which describe certain factors which could affect our business, including in "Risk Factors" set forth at the endof Part II, Item 7 of this report and in "Management's Discussion and Analysis of Financial Condition and Results of Operations"below before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise orupdate publicly any forward-looking statement for any reason.General During the fiscal year ended March 31, 2003 ("fiscal 2003"), we operated in three business segments consisting of ITS, video productsand telecom products. The ITS segment consisted of our majority-owned subsidiary, Iteris, Inc., which designs, develops, markets andimplements video sensor systems and transportation management and traveler information systems for the ITS industry. The videoproducts segment consisted of our wholly-owned subsidiaries, MAXxess Systems, Inc. (previously known as Gyyr Incorporated) andBroadcast, Inc. Our telecom segment consisted of our wholly-owned subsidiary, Zyfer, Inc., which prior to its incorporation was operated asour Communications division. All references to our subsidiaries in this report include the prior business and results of operations of suchsubsidiaries as our business units prior to their incorporation. In April 2001, we bifurcated Gyyr's operations into the Gyyr CCTV Products line, which manufactured analog and digital storagesystems, and the Gyyr Electronic Access Control division, which develops and manufactures enterprise security management systems forfacility security and trace detection of dangerous chemicals. In September 2001, we sold substantially all of the assets and certain liabilities ofthe Gyyr CCTV Products line for $8.8 million. In connection with this sale, we changed the name of Gyyr to MAXxess Systems, Inc. toreflect the focus of this business on electronic access control systems. Broadcast provided software-based systems that integrate, control and automate the management of multiple classes of equipment usedin the operation of a broadcast studio and satellite uplink facility. In March 2003, we decided to discontinue the operations of Broadcast. Zyfer provided GPS-aided precision timing and synchronization products, including its CommSynch II product family and its digitaltiming subsystems for the cellular telephone industry. In May 2003, we sold substantially all of the assets of our Zyfer subsidiary for apurchase price of $2.3 million in cash plus future incentive payments of up to $1 million in each of the years ended April 30, 2004 and 2005.The amount of these future incentive payments will be based on the revenues generated by the sale of Zyfer's products or the license of itstechnologies.11 During the quarter ended December 31, 2000, we began a restructuring to reduce our overall expenses and to focus our business onthose areas that we believe would provide the highest return for our stockholders. This restructuring resulted in a 25% reduction in ourworkforce in the fiscal year ended March 31, 2001 ("fiscal 2001") as compared to the prior year and the discontinuation of certain productlines. In September 2001, in connection with continued cost control efforts and the slowdown in the telecommunications industry, our Boardof Directors approved the immediate discontinuation of Mariner Networks, Inc., our wholly-owned subsidiary, which was historically part ofour telecom segment. Mariner had previously been a manufacturer of telecommunications equipment. As a result of the sale of the Gyyr CCTV Products line and the discontinuation of Mariner Networks, we reorganized our Europeanoperations and reduced our overall staffing levels. The reorganization of the European operations included the discontinuation of our OdeticsEurope Ltd., Gyyr Europe Ltd., Mariner France and Mariner Europe Ltd. operations, and the transition of our Broadcast and MAXxessinternational operations to branch office operations with the intent of lowering our international costs. In connection with this restructuring, 34employees were terminated in the quarter ended December 31, 2001 and 78 employees were terminated in the quarter ended March 31,2002. In fiscal 2003, in order to further align our operations with our objectives of pursuing business opportunities focused in the ITS andsecurity markets, we began the process of selling the assets of Zyfer and discontinuing the manufacturing operations of Broadcast referencedabove. In the fourth quarter of fiscal 2003, we incurred a loss from discontinued operations of $6.3 million related to the wind-down ofBroadcast. The operations of Broadcast currently consist of seven people at March 31, 2003, all of whom are focused solely on servicingexisting customer commitments and contracts for product and system service through their expiration dates. In the fiscal year ending March 31, 2004, we anticipate that we will only be operating in two business segments. ITS and SecurityProducts, consisting of Iteris, Inc. and MAXxess Systems, Inc. respectively. Our financial statements contained in this report have been restated for all periods reported to reflect the discontinuation of the operationsof Broadcast, Mariner Networks and Zyfer and, accordingly, only reflect the operations of Iteris and MAXxess. We have generated net losses from operations of $203,000 in fiscal 2003, $2.8 million in fiscal 2002 and $15.9 million in fiscal 2001.While we have substantially reduced our operating losses in recent periods, we have experienced negative cash flows from operations in theamount of $4.8 million in fiscal 2003, $18.2 million in fiscal 2002 and $20.1 million in fiscal 2001, and had a stockholders' deficit of$4.3 million at March 31, 2003. We expect that our operations will continue to use net cash at least through the end of calendar 2003. Wealso expect to have an ongoing need to raise cash by securing additional debt or equity financing, or by divesting certain assets to fund ouroperations until we return to profitability and positive operating cash flows. We cannot assure you that any additional funding will be availableon a timely basis, on acceptable terms, or at all. These conditions, together with our recurring losses, cash requirements and stockholders'deficiency, raise substantial doubt about our ability to continue as a going concern.Critical Accounting Policies And Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financialstatements included herein, which have been prepared in accordance with accounting principles generally accepted in the United States. Thepreparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts ofassets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amountsof revenues and expenses during the reporting period.12On an ongoing basis, we evaluate these estimates and assumptions, including those related to the collectibility of accounts receivables, thevaluation of inventories, the recoverability of long-lived assets, including goodwill, and reserves for restructuring and related activities. Webase these estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent fromother sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In theevent that any of our estimates or assumptions are inaccurate in any material respect, it could have a material adverse effect on our reportedamounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during thereporting period. The following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidatedfinancial statements. Revenue Recognition. We record product revenues and related cost of sales upon transfer of title, which is generally upon shipmentor, if required, upon acceptance by the customer, provided that we believe collectibility of the net sales amount is probable. Accordingly, at thedate revenue is recognized, the significant uncertainties concerning the sale have been resolved. Unless otherwise stated in our productliterature, we provide a one to two year warranty on all product material and workmanship, and establish reserves for potential warrantyreturns as products are shipped. Defective products are either repaired or replaced, at our option, upon meeting certain criteria. Contract revenue is derived primarily from long-term contracts with governmental agencies. Contract revenue includes costs incurredplus a portion of estimated fees or profits determined on the percentage of completion method of accounting based on the relationship of costsincurred to total estimated costs. We record a charge to earnings for any anticipated losses on contracts in the period in which such losses areidentified. Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contractsettlements, may result in revisions to cost and revenue and are recognized in the period in which the revisions are determined. We includeprofit incentives in revenue in the period in which their realization is reasonably assured. We record revenues from follow-on service and support, for which we charge separately, in the period in which such services areperformed. Accounts Receivable. We estimate the collectibility of customer receivables on an ongoing basis by periodically reviewing invoicesoutstanding over a certain period of time. We have recorded reserves for receivables deemed to be at risk for collection as well as a generalreserve based on our historical collections experience. A considerable amount of judgment is required in assessing the ultimate realization ofthese receivables, including the current credit-worthiness of each customer. If the financial condition of our customers deteriorates, resultingin an impairment of their ability to make required payments, additional allowances may be required which could adversely affect ouroperating results. Inventory. We state our inventories at the lower of cost or market and provide reserves for potentially excess and obsolete inventory. Inassessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare that with the currentor committed inventory levels. Reserves are established for inventory levels that exceed future demand. It is possible that reserves over andabove those already established may be required in the future if market conditions for our products should deteriorate. Impairment of Assets and Restructuring. During fiscal 2003, we recorded reserves and asset write-downs in connection with the saleof substantially all of the assets of Zyfer and the discontinuation of Broadcast. These include estimates pertaining to the fair value of assetsand facility closure costs.13Although we do not anticipate significant changes, the actual assets values and closure costs may differ from the amounts estimated.Results of Operations The following table sets forth certain income statement data as a percentage of total net sales and contract revenues for the periodsindicated and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations. Fiscal Year Ended March 31, 2001 2002 2003 Net sales and contract revenues: Net sales 67.9%56.2%47.3% Contract revenues 32.1 43.8 52.7 Total net sales and contract revenues 100.0%100.0%100.0%Costs and expenses: Cost of net sales 49.7 32.1 24.0 Cost of contract revenues 22.1 25.2 33.7 Selling, general and administrative expense 40.4 35.4 33.8 Research and development expense 12.1 8.4 8.9 Restructuring charges 1.2 4.2 — Total costs and expenses (125.5)(105.3)(100.4) Loss from operations (25.5)(5.3)(0.4)Non-operating income (expense): Royalty income 28.6 — — Other income 2.1 5.5 .8 Interest expense, net (2.8)(8.0)(1.6) Income (loss) before tax 2.4 (7.8)(1.2)Income tax benefit — 1.5 — Income (loss) from continuing operations before minorityinterest 2.4 (6.3)(1.2)Minority interest in earnings of subsidiary — (3.7)(8.0) Income (loss) from continued operations 2.4 (9.9)(9.2)Income (loss) from discontinued operations, net of incometax (54.5)(40.3)(18.4)Extraordinary loss from early extinguishment of debt — (0.8)— Net loss (52.1)%(51.0)%(27.6)% Net Sales and Contract Revenues. Net sales and contract revenues consist of (i) sales of products and services to commercial andmunicipal agencies ("net sales") and (ii) revenues derived from contracts with state, county and municipal agencies for ITS projects ("contractrevenues"). We currently have a diverse customer base and no customer constituted over 10% of our total net sales and contract revenues forfiscal year ended March 31, 2003 ("fiscal 2003"). Total net sales and contract revenues decreased 8.7% to $47.6 million for fiscal 2003compared to $52.2 million for the fiscal year ended March 31, 2002 ("fiscal 2002"), and decreased 16.4% for the fiscal year ended March 31,2002 compared to $62.4 million for the fiscal year ended March 31, 2001 ("fiscal 2001"). Sales of Iteris' transportation management systemsand video sensor systems represented 86.9% of our total net sales14and contract revenues for fiscal 2003, 71.5% in fiscal 2002 and 40.4% in fiscal 2001. We anticipate that Iteris will continue to represent amajority of our total net sales and contract revenues for the fiscal year ending March 31, 2004. Sales of Iteris' Vantage vehicle detectionsystems represented 37.0% of our consolidated net sales and contract revenues in fiscal 2003, 29.4% in fiscal 2002, and 16.0% in fiscal2001. Contract revenues in Iteris systems represented 46.8% of consolidated net sales and contract revenues in fiscal 2003, 38.7% in fiscal2002 and 27.9% in fiscal 2001. Net sales decreased 23.2% to $22.5 million in fiscal 2003 compared to $29.3 million in fiscal 2002. The decrease in net sales in fiscal2003 compared to fiscal 2002 was primarily attributable to our sale of the Gyyr CCTV Products line late in the second quarter of fiscal 2002.Sales from Gyyr's CCTV Products line contributed $8.3 million in fiscal 2002 and $0 in fiscal 2003. After excluding the revenue from Gyyr'sCCTV Products line in fiscal 2002, net sales in fiscal 2003 increased approximately 8.5% over net sales in fiscal 2002, which primarilyreflects an increase in the unit sales of Iteris' Vantage vehicle detection systems, and to a lesser extent increased sales of our Iteris' AutoVuelane departure warning systems. Net sales decreased 30.7% to $29.3 million in fiscal 2002 compared to $42.4 million in fiscal 2001 principally as a result of the sale ofour Gyyr CCTV Products line, and a decrease in MAXxess unit net sales. Gyyr CCTV Products sales comprised $26.4 million and$8.3 million of net sales in fiscal 2001 and fiscal 2002, respectively. Gyyr CCTV Products sales in fiscal 2002 include sales only through thedate of the divestiture. The $18.1 million decline in sales of Gyyr CCTV Products was partially offset by increased unit sales of Vantagevehicle detection systems and AutoVue lane departure warning systems sold. The decrease in MAXxess net sales primarily reflects thedecrease in sales to a major telecommunications customer in fiscal 2002 compared to fiscal 2001. Contract revenues increased 9.8% to $25.1 million in fiscal 2003 compared to $22.8 million in fiscal 2002, and increased 14.0%compared to $20.0 million in fiscal 2000. The increase in contract revenues in both fiscal 2003 and fiscal 2002 primarily reflects an increasein Iteris' contract revenues for ITS projects. Contract revenues derived from Iteris represented 88.8% of total contract revenues in fiscal 2003 compared to 88.4% of total contractrevenues in fiscal 2002, and 87.0% of total contract revenues in fiscal 2001. The balance of the contract revenues were derived from the saleof space-borne recorders and related service and equipment to agencies of the United States Government. In March 2003, we were notifiedthat our contract to provide continued maintenance for space-borne recorders for the United States Government would not be renewed and wedo not anticipate any future revenue from this activity. Gross Profit. Total gross profit decreased 9.5% to $20.2 million in fiscal 2003 compared to $22.3 million in fiscal 2002, and increased26.8% in fiscal 2002 compared to $17.6 million in fiscal 2001. Total gross profit as a percent of net sales and contract revenues decreased to42.3% in fiscal 2003 compared to 42.7% in fiscal 2002 and 28.2% in fiscal 2001. Gross profit as a percentage of net sales increased to49.3% in fiscal 2003 compared to 42.9% in fiscal 2002 and 26.8% in fiscal 2001. The increase in gross profit as a percent of net sales in fiscal 2003 compared to 2002 reflects a 350 basis point increase in gross profit onsales of Iteris' Vantage video detection systems, in conjunction with a 14.8% increase in sales of these products in fiscal 2003 compared to2002. Gross profit on MAXxess sales, as a percent of net sales, was relatively unchanged in fiscal 2003 compared to fiscal 2002. Fiscal 2002revenues and gross profits included revenue contribution from the Gyyr CCTV Products line, at lower gross profits relative to net sales. Thedivestiture of this product line in September 2001 had the effect of increasing our consolidated gross profit performance beginning in the thirdquarter of fiscal 2002, which contributed to an overall increase in gross profit in fiscal 2003 compared to fiscal 2002.15 Gross profit in fiscal 2001 was net of charges of $3.1 million for the write-off of inventories associated with discontinued product lines.Before the effect of these write-offs, gross profit as percent of net sales in fiscal 2001 was 33.2%. The increase in gross profit as a percent ofnet sales in fiscal 2002 compared to fiscal 2001 primarily reflects increased gross profit on Iteris' net sales. Iteris' gross profit improved infiscal 2002 primarily as a result of a 53.5% increase in Vantage sales and related improved manufacturing efficiencies. The increase in grossprofit in fiscal 2002 also reflects the benefit of the divestiture of the Gyyr CCTV Products line, which had historically low gross marginsrelative to net sales in fiscal 2001. Gross profit as a percent of contract revenues decreased to 36.1% in fiscal 2003 compared to 42.5% in fiscal 2002, and compared to31.2% in fiscal 2001. This decrease in fiscal 2003 reflects a mix of lower margin contracts in fiscal 2003 as compared to fiscal 2002.Furthermore, gross profit on contract revenues in fiscal 2002 benefited approximately 610 basis points from a $1.4 million reduction in lossreserves on certain Iteris long-term contracts resulting from changes in the scope of work defined by a major customer, most of which werenonrecurring in fiscal 2003. Net of such adjustments and profit realizations, we anticipate that gross profits as a percent of contract revenuesare typically realized in a range of 31.0% to 35.0%, depending upon the mix and scope of work undertaken during any given reporting period.We recognize contract revenues and related gross profit using percentage of completion contract accounting, and the underlying mix ofcontract activity primarily affects the related gross profit recognized in any given year. As noted above, in March 2003, we were notified thatour contract to provide continued maintenance for space-borne recorders for the United States Government would not be renewed and we donot anticipate any future revenue from this activity. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased 12.6% to $16.2 million (or33.8% of total net sales and contract revenues) in fiscal 2003 compared to $18.5 million (or 35.4% of total net sales and contract revenues) infiscal 2002, and decreased 23.8% in fiscal 2002 compared to $25.2 million (or 40.4% of total net sales and contract revenues) in fiscal 2001.Approximately $1.6 million of the decrease in selling, general and administrative expenses in fiscal 2003 compared to 2002 represents thecost reductions associated with the divestiture of the Gyyr CCTV Products line in the second quarter of fiscal 2002. The decrease in selling,general and administrative expenses in fiscal 2003 also reflects general cost reductions related to staffing and outside services for legal andaccounting expenses, which was partially offset by increased sales and marketing costs in Iteris. The restructuring activities, whichcommenced during the third quarter of fiscal 2001, resulted in substantial decreases in selling, general and administrative expenses inMAXxess and Iteris in fiscal 2002, which were augmented by further cost reductions associated with the divestiture of the Gyyr CCTVProducts line in September 2001. Research and Development Expenses. Research and development expenses decreased 3.9% to $4.2 million (or 8.9% of total netsales and contract revenues) in fiscal 2003 compared to $4.4 million (or 8.4% of total net sales and contract revenues) in fiscal 2002, anddecreased 41.9% in fiscal 2002 compared to $7.6 million (or 12.1% of total net sales and contract revenues) in fiscal 2001. For competitivereasons, we closely guard the confidentiality of specific development projects. The decrease in research and development expenses in fiscal 2003 compared to 2002 reflects the net of increased spending in Iteris andMAXxess, partially offset by cost savings associated with the divestiture of the Gyyr CCTV Products line at the end of the second quarter offiscal 2002. The increases in Iteris relate principally to software algorithm development and new hardware designs for enhancements to itsexisting product family of Video Detection systems, in addition to development of video detection products that are expected to be announcedin fiscal 2004. Increases in research and development expense at MAXxess primarily relate to the software development of new performancefeature for its AXxess 202/NS line of electronic access control systems. The features introduced in fiscal 2003 to the AXxess 202/NS productline include a universal gateway for integrating other manufacturers systems and improved data encryption capabilities.16 The decrease in research and development expenses in fiscal 2002 was associated with the divestiture of the Gyyr CCTV Products lineat the end of the second quarter of fiscal 2002, and with a substantial cost reduction in Iteris related to its development of technology tosupport personalized traveler information systems. The decrease in research and development expense in fiscal 2002 also reflects the fullfiscal year cost benefit of the restructuring, which was begun in the fourth quarter of fiscal 2001. The restructuring resulted in substantialdecreases in research and development expenditures, primarily in the areas of payroll and related benefits, prototype material costs andconsulting fees. Restructuring Charges. We commenced the restructuring of our business to reduce our overall expenses and to focus our businesson those areas that we believe would provide the highest return for our stockholders. The restructuring included a reorganization of ourEuropean operations to lower our international costs. The restructuring charge of $2.2 million in fiscal 2002 reflects charges of approximately$1.5 million related to the reorganization of our European operations and $700,000 in severance charges incurred upon the retirement of theformer Chief Executive Officer of Odetics. In fiscal 2001, we incurred restructuring charges of $0.8 million related to severance payments for staffing reductions across all of ourbusiness units. Royalty Income. During fiscal 2001, in connection with the settlement of patent litigation that Odetics filed against StorageTek, wereceived proceeds, net of expenses and fees, of approximately $17.8 million in full settlement of the amounts due to us. Other Income. Other income, net reflects the following: Year Ended March 31, 2001 2002 2003 (in thousands) Gain on sale of real estate $— $— $640 Loss on sale of Iteris common stock — (1,596) (310)Gain on sale of Gyyr assets — 4,391 — Gain on sale of solid state recorder assets 1,231 — — Other 109 124 58 Other income, net $1,340 $2,919 $388 Other income, net in fiscal 2003 includes a gain of $640,000 recognized on the sale and leaseback of our Anaheim, California facility,which was consummated in May 2002. We sold shares of our Iteris common stock that yielded gross proceeds of $3.8 million and $900,000in fiscal 2002 and 2003, respectively. During fiscal 2002, we sold substantially all of the assets of Gyyr's CCTV Products line and Gyyr'sDome Products line. We realized an aggregate net gain of $4.4 million on these sales. During fiscal 2001, we sold the assets of our solidstate recorder business, which yielded gross proceeds of $1.9 million and a net gain of $1.2 million. Interest Expense, Net. Interest expense, net reflects the net of interest expense and interest income as follows: Year Ended March 31, 2001 2002 2003 (in thousands)Interest expense $2,012 $4,190 $761Interest income 250 — — Interest expense, net $1,762 $4,190 $761 17 Interest expense decreased 87.7% in fiscal 2003 compared to fiscal 2002 and increased 108.3% in fiscal 2002 compared to fiscal 2001.As a result of the sale and leaseback of our Anaheim, California facilities, we repaid a $16.4 million outstanding indebtedness under apromissory note in May 2002. The increase in interest expense in fiscal 2002 reflects an increase in our average outstanding borrowings, anincrease in our cost of borrowing and $1.2 million of amortization of debt discount associated with a warrant issued in connection with certainof our financing transactions. Extraordinary Item. The extraordinary loss incurred in fiscal 2002 relates to a prepayment penalty we incurred in fiscal 2002 inconnection with the retirement of our mortgage note payable resulting from the refinancing of our Anaheim real property. Income Taxes. During fiscal 2002, we recognized an income tax benefit of $785,000 for the recovery of net operating loss carry backsmade available under the Job Creation and Workers Association Act of 2002. We have not provided income tax benefit for the losses incurredin fiscal 2003 due to the uncertainty as to the ultimate realization of the related benefit. Minority Interest in Subsidiary. The minority interest represents the minority stockholders' share of Iteris' net income or loss and theaccretion of the redemption preference of Iteris's Series A preferred stock.Liquidity and Capital Resources During fiscal 2003, we used $4.8 million of cash to fund our operations. Operating cash flow reflects our net loss of $13.1 million infiscal 2003 increased for non-cash gains of $1.7 million related to the sale of our real estate assets, and decreased by $4.9 million in non-cash reserves for asset impairments related to the write-down of the assets of the discontinued operations of Broadcast and Zyfer, by non-cash charges of $3.8 million related to the minority interest in our Iteris subsidiary and $1.1 million for depreciation and amortization. As ofMarch 31, 2003, we had cash of $437,000. In May 2002, we completed the sale and leaseback of our Anaheim, California facilities for an aggregate sale price of $22.6 million.Approximately $16.4 million of the proceeds from this sale were used to repay the outstanding indebtedness under a promissory note, whichwas secured by a first deed of trust on our Anaheim facilities. In connection with the sale and leaseback, we pledged cash of $2.5 million tosecure our obligations under the lease. The pledged amounts will be released to us based upon our continued compliance with financialcovenants and performance under the lease. The balance of the proceeds from this sale was used for general working capital purposes. Wecommitted to lease one of the two buildings on this property for a period of ten years, and to lease the other building for a period of 30 months. On August 16, 2002, we completed a private placement of 2,500,000 of our Class A common stock to an institutional investor for$3.0 million in cash. The transaction, net of expenses, raised net proceeds of approximately $2.7 million. In connection with this offering, wealso issued warrants to the investor to purchase up to another 1,250,000 shares at an exercise price of $1.50 per share, and up to 1,250,000shares at an exercise price of $1.80 per share. The warrants are exercisable at any time by the investor, and are callable by us if the marketprice of our Class A common stock trades for 20 consecutive days at a price equal or greater than two times the exercise price of the warrants.If all of the warrants are exercised, the total gross proceeds from this transaction are expected to be $7.2 million. The proceeds from thetransaction were used to fund general working capital requirements. In May 2003, we completed the sale of substantially all the assets of our wholly-owned subsidiary, Zyfer, Inc., for $2.3 million in cashplus the assumption of liabilities. The cash proceeds were used to fund working capital requirements and pay short-term liabilities. The assetpurchase agreement provides for future incentive payments to us of up to $1.0 million in each of the twelve months ended18April 30, 2004 and 2005 based upon the achievement of certain revenues goals related to the sale of Zyfer products or the licensing of itstechnologies. Our contractual obligations are as follows at March 31, 2003: Payments Due by Period Total One Yearor Less Two to ThreeYears Four to FiveYears AfterFiveYears (in thousands)Lines of credit 1,485 235 1,250 — —Operating leases 17,417 2,171 3,975 3,663 7,608 Total 18,902 2,406 5,225 3,663 7,608 We expect that our operations will continue to use net cash at least through the end of calendar 2003. We also expect to have an ongoingneed to raise cash by securing additional debt or equity financing, or by divesting certain assets to fund our operations until we return toprofitability and positive operating cash flows. We believe that our future ability to obtain additional funding will be dependent upon our abilityto narrow our operating losses and provide a favorable expectation of future operating profitability. We believe our ability to raise additionalcapital may also be adversely affected if Nasdaq determines to delist our Class A common stock from the Nasdaq SmallCap Market. Thesteps undertaken in fiscal 2002 and fiscal 2003 were intended to lower our operating costs, widen our gross profits, and generally providemore opportunity to return to profitability. Furthermore, we believe that a focused business model provides a more compelling opportunity forappreciation in stockholder value. Notwithstanding the recent refinements to our business model and our more defined focus, we cannot becertain that we will be able to secure additional debt or equity financing on terms acceptable to us, on a timely basis, or at all. Our future cash requirements will be highly dependent upon our ability to control expenses, as well as the successful execution of therevenue plans by both Iteris and MAXxess. A critical element of controlling expenses relates to the restructuring of our facilities leasearrangements. We are currently in negotiations with our landlords to restructure our leases for our principal facilities in order to reduce ouroverall operating expenses to a level commensurate with our existing operations. We cannot be assured of the outcome of these negotiationsand, as a result, any projections of future cash requirements and cash flows are subject to substantial uncertainty. These conditions, together with our recurring losses, raise substantial doubt about our ability to continue as a going concern. Ourconsolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification ofassets or liabilities that may result from the outcome of this uncertainty.Recent Accounting Pronouncements In 2003, we adopted Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"). SFAS 141 requiresthat the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also includesguidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completedafter June 30, 2001. Application of this statement did not have a significant effect on our consolidated results of operations or financialposition. In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities("Statement 146"). Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities andnullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring) ("EITF 94-3"). Statement 146 requires that a liability for a cost associated19with an exit or disposal activity be recognized when the liability is incurred. We adopted the provisions of Statement 146 on January 1, 2003. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others ("FIN 45"), effective prospectively for guarantees issued or modified afterDecember 31, 2002. The disclosure requirements of FIN 45 are effective for periods ending after December 15, 2002. Under FIN 45, aguarantor is required to recognize, at the inception of certain guarantees, a fair value liability for the obligations it has undertaken in issuingthe guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specifiedtriggering events or conditions occur. All guarantees subject to the disclosure provisions of FIN 45, such as product warranties, have beendisclosed in the accompanying notes to the consolidated financial statements. We do not have any other outstanding guarantees at March 31,2003 required to be disclosed or recorded as obligations upon adoption of FIN 45. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"). This Interpretationchanges the method of determining whether certain entities should be included in our consolidated financial statements. An entity is subjectto FIN 46 and is called a variable interest entity ("VIE") if it has (1) equity that is insufficient to permit the entity to finance its activities withoutadditional subordinated financial support from other parties, or (2) equity investors that cannot make significant decisions about the entity'soperations, or that do not absorb the expected losses or receive the expected returns of the entity. All other entities are evaluated forconsolidation under SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries. The provisions of FIN 46 are to be appliedimmediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. For VIEs in whichan enterprise holds a variable interest that it acquired before February 1, 2003, FIN 46 applies in the first fiscal period beginning afterJune 15, 2003. We have not yet determined the impact, if any, that the adoption of FIN 46 will have on our financial position, results ofoperations or cash flows.20RISK FACTORS Our business is subject to a number of risks, some of which are discussed below. Other risks are presented elsewhere in thisreport and in the information incorporated by reference into this report. You should consider the following risks carefully in addition tothe together information contained in this report and our other filings with the SEC, including our subsequent reports on Forms 10-Qand 8-K before deciding to buy, sell or hold our common stock. The risks and uncertainties described below are not the only onesfacing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affectour business operations. If any of these risks actually occurs, our business, financial condition or results of operations could beseriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment. We Have Experienced Substantial Losses and May Continue to Experiencing Losses for the Foreseeable Future. Weexperienced losses from continuing operations of $4.4 million in the year ended March 31, 2003 and $5.2 million in the year endedMarch 31, 2002. In the three months ended September 30, 2001, we downsized our business in connection with our sale of the Gyyr CCTVProducts line, the discontinuation of the business of our Mariner Networks subsidiary and the reorganization of our European operations toreduce our operating expenses. In addition, in May 2003, we sold our Zyfer business and we are continuing to explore the divestiture of theassets related to our Broadcast business. We cannot assure you that our efforts to downsize our operations or reduce our operating expensesor sell portions of our business will improve our financial performance, or that we will be able to achieve profitability on a quarterly or annualbasis in the future. Most of our expenses are fixed in advance, and we generally are unable to reduce our expenses significantly in the short-term to compensate for any unexpected delay or decrease in anticipated revenues. As a result, we may continue to experience losses, whichwould make it difficult to fund our operations and achieve our business plan, and could cause the market price of our common stock todecline. We Will Need to Raise Additional Capital in the Future, But We May Not Be Able to Secure Adequate Funds on TermsAcceptable to Us, or at All. We have generated significant net losses in recent periods, and have experienced negative cash flows fromoperations of $4.8 million in the year ended March 31, 2003, $18.2 million in the year ended March 31, 2002 and $20.1 million in the yearended March 31, 2001. Although we completed the sale of our Anaheim, California property in May 2002 and the sale of our Zyfer subsidiaryin May 2003, the majority of the proceeds from such sales were used to pay outstanding debts and accounts payables. In addition,$3.0 million of the proceeds from the sale of the Anaheim property have been pledged to secure our performance under the leases for ourAnaheim facility and we have yet to monetize the assets of our Broadcast subsidiary. As of March 31, 2003, our cash balance wasapproximately $0.4 million and we anticipate that we will need to raise additional capital in the future. Our Iteris subsidiary currentlymaintains a line of credit with a maximum availability of $5.0 million, which expires in August 2004. Substantially all of the assets of Iterishave been pledged to the lender to secure the outstanding indebtedness under this facility (although there were no amounts outstandingunder the line of credit at March 31, 2003). We plan to raise additional capital in the near future, either through bank borrowings, other debt or equity financings, or the divestiture ofadditional business units or select assets. We cannot assure you that any additional capital will be available on a timely basis, on acceptableterms, or at all. These conditions, together with our recurring losses and cash requirements, raise substantial doubt about our ability tocontinue as a going concern. Our capital requirements will depend on many factors, including:•our ability to control costs; •market acceptance of our products and the overall level of sales of our products; •our ability to generate operating income;21•our ability to renegotiate our real property leases; •increased research and development funding, and required investments in our business units; •increased sales and marketing expenses; •technological advancements and our competitors' response to our products; •capital improvements to new and existing facilities; •potential acquisitions of businesses and product lines; •our relationships with customers and suppliers; and •general economic conditions, including the effects of the current economic slowdown and international conflicts. If our capital requirements are materially different from those currently planned, we may need additional capital sooner than anticipated.If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders willbe reduced and such securities may have rights, preferences and privileges senior to our common stock. Additional financing may not beavailable on favorable terms or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable tocontinue our operations as planned, develop or enhance our products, expand our sales and marketing programs, take advantage of futureopportunities or respond to competitive pressures. The Trading Price of Our Common Stock Is Highly Volatile and Our Shares Could be Delisted from the Nasdaq Small CapMarket and You May Not Be Able to Resell Your Shares of Stock at or Above the Price You Paid for Them. The trading price of ourcommon stock has been subject to wide fluctuations in the past. Since January 2000, our Class A common stock has traded at prices as lowas $0.45 per share and as high as $29.44 per share and our Class B common stock has traded at prices as low as $0.20 per share and ashigh as $29.62 per share. In April 2002, because we failed to meet the minimum stockholder's equity requirement for continued listing onthe Nasdaq National Market, both our Class A common stock and Class B common stock were delisted from the Nasdaq National Marketand subsequently approved for listing on the Nasdaq SmallCap Market. In November 2002, we received a Nasdaq Staff Determination thatwe had not maintained compliance with the continued listing criteria and that our common stock was subject to delisting from the NasdaqSmallCap Market. Our Class B common stock was delisted from the Nasdaq SmallCap Market in April 2003. We requested and received anextension of such delisting proceedings but subsequently received, in May 2003, a second Nasdaq Staff Determination stating that we werenot in compliance with the continued listing criteria, and that our Class A common stock was also subject to delisting from the NasdaqSmallCap Market. We participated in a hearing before a Nasdaq Listing Qualifications Panel in June 2003 to appeal the Staff Determinationbut a final determination by the panel has not yet been issued. Odetics' listing status will not change until such final determination has beenissued by the panel. However, there can be no assurance that the panel will grant our request for continued listing on the Nasdaq SmallCapMarket, and if we are unsuccessful in our appeal and are delisted from the Nasdaq SmllCap Market, there may not be an active tradingmarket for our stock. As such, you may not be able to resell your shares of common stock at or above the price you paid for them. In the event our Class A common stock is delisted, trading, if any, in our Class A common stock thereafter may be conducted in theover-the-counter market in the so-called "pink sheets" or the OTC Bulletin Board. In addition, our securities could become subject to "pennystock" restrictions, including Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on broker-dealers,such as requirements pertaining to the suitability of the investment for the purchaser and the delivery of specific disclosure materials andmonthly statements. Consequently, the liquidity of our securities could be impaired, not only in the number of securities which could bebought and sold, but22also through delays in the timing of the transactions, reduction in security analysts' and the news media's coverage of us, adverse effects onthe ability of broker-dealers to sell our securities, and lower prices for our securities than might otherwise be attained. The market price of our common stock could continue to fluctuate in the future in response to various factors, including, but not limitedto:•quarterly variations in operating results; •our ability to control costs and improve cash flow; •shortages announced by suppliers; •announcements of technological innovations or new products by our competitors, customers or us; •acquisitions or businesses, products or technologies; •changes in pending litigation or new litigation; •changes in investor perceptions; •our ability to spin-off any business unit; •applications or product enhancements by us or by our competitors; •changes in earnings estimates or investment recommendations by securities analysts; and •international conflicts and political unrest. The stock market in general has recently experienced volatility, which has particularly affected the market prices of equity securities ofmany high technology companies. This volatility has often been unrelated to the operating performance of these companies. These broadmarket fluctuations may adversely affect the market price of our common stock. In the past, companies that have experienced volatility in themarket price of their securities have been the subject of securities class action litigation. If we were to become the subject of a class actionlawsuit, it could result in substantial losses and divert management's attention and resources from other matters. We Depend on Government Contracts and Subcontracts, and Because Many of our Government Contracts are Fixed PriceContracts, Higher Than Anticipated Costs Will Reduce Our Profit and Could Adversely Impact our Operating Results. Asignificant portion of the sales by Iteris were derived from contracts with governmental agencies, either as a general contractor, subcontractoror supplier. Government contracts represented approximately 26%, 38% and 47% of our total net sales and contract revenues for the yearsended March 31, 2001, 2002 and 2003, respectively. We anticipate that revenue from government contracts will continue to increase in thenear future. Government business is, in general, subject to special risks and challenges, including:•long purchase cycles or approval processes; •competitive bidding and qualification requirements; •performance bond requirements; •changes in government policies and political agendas; •delays in funding, budgetary constraints and cut-backs; and •milestone requirements and liquidated damage provisions for failure to meet contract milestones.23 In addition, a large number of our government contracts are fixed price contracts. As a result, we may not be able to recover for any costoverruns. These fixed price contracts require us to estimate the total project cost based on preliminary projections of the project'srequirements. The financial viability of any given project depends in large part on our ability to estimate these costs accurately and completethe project on a timely basis. In the event our costs on these projects exceed the fixed contractual amount, we will be required to bear theexcess costs. These additional costs adversely affect our financial condition and results of operations. Moreover, certain of our governmentcontracts are subject to termination or renegotiation at the convenience of the government, which could result in a large decline in our netsales in any given quarter. Our inability to address any of the foregoing concerns or the loss or renegotiation of any material governmentcontract could seriously harm our business, financial condition and results of operations. Economic Slowdown and Related Uncertainties Could Adversely Impact the Demand for Our Products. Concerns aboutinflation, decreased consumer confidence, reduced corporate profits and capital spending, and recent international conflicts and terrorist andmilitary actions have resulted in a downturn in worldwide economic conditions, particularly in the United States. As a result of theseunfavorable economic conditions, we have experienced a slowdown in customer orders, cancellations and rescheduling of backlog andhigher overhead costs. In addition, recent political and social turmoil related to international conflicts and terrorist acts can be expected to putfurther pressure on economic conditions in the U.S. and worldwide. These political, social and economic conditions make it extremelydifficult for our customers, our suppliers and us to accurately forecast and plan future business activities. If such conditions continue orworsen, our business, financial condition and results of operations will likely be materially and adversely affected. Our Quarterly Operating Results Fluctuate as a Result of Many Factors. Therefore, We May Fail to Meet or Exceed theExpectations of Securities Analysts and Investors, Which Could Cause Our Stock Price to Decline. Our quarterly revenues andoperating results have fluctuated and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are notwithin our control. Factors that could affect our revenues include, among others, the following:•our ability to raise additional capital; •our significant investment in research and development for our subsidiaries and business units; •our ability to control costs; •international conflicts and acts of terrorism; •our ability to develop, introduce, market and gain market acceptance of new products applications and product enhancementsin a timely manner; •the size, timing, rescheduling or cancellation of significant customer orders; •the introduction of new products by competitors; •the availability of components used in the manufacture of our products; •changes in our pricing policies and the pricing policies by our suppliers and competitors, pricing concessions on volume sales,as well as increased price competition in general; •the long lead times associated with government contracts or required by vehicle manufacturers; •our success in expanding and implementing our sales and marketing programs; •the effects of technological changes in our target markets; •our relatively small level of backlog at any given time; •the mix of sales among our business units;24•deferrals of customer orders in anticipation of new products, applications or product enhancements; •risks and uncertainties associated with our international business; •currency fluctuations and our ability to get currency out of certain foreign countries; and •general economic and political conditions. In addition, our sales in any quarter may consist of a relatively small number of large customer orders. As a result, the timing of a smallnumber of orders may impact our quarter-to-quarter results. The loss of or a substantial reduction in orders from any significant customercould seriously harm our business, financial condition and results of operations. Due to all of the factors listed above and, our future operating results could be below the expectations of securities analysts or investors.If that happens, the trading price of our common stock could decline. As a result of these quarterly variations, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance. We Have Adopted a New Operating Strategy, Which Is Untried and Exposes Us to New Risks. Recently, we divestedourselves of many of our business units and have begun to focus our business on the emerging homeland security opportunities and thebusiness of our Iteris subsidiary. We continue to explore options for the sale of our other business units and continue to change our incubatorstrategy, which required us to make significant investments in our business units with the goal of achieving profitability in each of ourbusiness units, and to a lesser extent, to monetize those business units for the benefit of our stockholders through an initial public offering orsale to a strategic buyer. The new focus of our business may not be profitable and the current climate of international conflicts and politicalunrest may not translate to a profitable market for our products. Our current business strategy is untried there is no assurance that the newbusiness plan or the continued execution of the Iteris business will be successful. If We Do Not Keep Pace with Rapid Technological Changes and Evolving Industry Standards, We Will Not be Able toRemain Competitive and There Will Be No Demand for Our Products. Our target markets are in general characterized by thefollowing factors:•rapid technological advances; •downward price pressure in the marketplace as technologies mature; •changes in customer requirements; •frequent new product introductions and enhancements; and •evolving industry standards and changes in the regulatory environment. Our future success will depend upon our ability to anticipate and adapt to changes in technology and industry standards, and toeffectively develop, introduce, market and gain broad acceptance of new products and product enhancements incorporating the latesttechnological advancements. We believe that we must continue to make substantial investments to support ongoing research and development in order to remaincompetitive. We need to continue to develop and introduce new products that incorporate the latest technological advancements in hardware,storage media, operating system software and applications software in response to evolving customer requirements. Our business andresults of operations could be adversely affected if we do not anticipate or respond adequately to technological developments or changingcustomer requirements. We cannot assure you that any such investments in research and development will lead to any correspondingincrease in revenue.25 If We Are Unable to Develop and Introduce New Products and Product Enhancements Successfully and in a Cost-Effectiveand Timely Manner, or to Achieve Market Acceptance of Our New Products, Our Operating Results Would be AdverselyAffected. We believe our revenue growth and future operating results will depend on our ability to complete development of new productsand enhancements, introduce these products in a timely, cost-effective manner, achieve broad market acceptance of these products andenhancements, and reduce our product costs. We may not be able to introduce any new products or any enhancements to our existingproducts on a timely basis, or at all. In addition, the introduction of any new products could adversely affect the sales of certain of our existingproducts. Our future success will also depend in part on the success of several products including AutoVue, our lane departure warning system.Iteris currently outsources the manufacture of its AutoVue product line to a single manufacturer. This manufacturer may not be able toproduce sufficient quantities of this product in a timely manner or at a reasonable cost, which could materially and adversely affect our abilityto launch or gain market acceptance of AutoVue. MAXxess is expecting its product offering to include chemical detection systems and a security solution for municipalities called SafeCities. Our ability to be successful in this endeavor is dependent upon the completion of software development tasks and the continuedcooperation of Draeger Safety, Inc. Market acceptance of our new products depends upon many factors, including our ability to accurately predict market requirements andevolving industry standards, our ability to resolve technical challenges in a timely and cost-effective manner and achieve manufacturingefficiencies, the perceived advantages of our new products over traditional products and the marketing capabilities of our independentdistributors and strategic partners. Our business and results of operations could be seriously harmed by any significant delays in our newproduct development. Certain of our new products could contain undetected design faults and software errors or "bugs" when first released byus, despite our testing. We may not discover these faults or errors until after a product has been installed and used by our customers. Anyfaults or errors in our existing products or in any new products may cause delays in product introduction and shipments, require designmodifications or harm customer relationships, any of which could adversely affect our business and competitive position. We Have Significant International Sales and Our International Business Operations May be Threatened by Many FactorsThat are Outside of Our Control. Despite the reorganization of our European operations and the resulting reduction in internationalsales, such sales continue to be significant to our business, particularly for our AutoVue and Vantage product lines. International salesrepresented 1.9% of our net sales and contract revenues for the fiscal year ended March 31, 2003, 3.5% of our net sales and contractrevenues for the fiscal year ended March 31, 2002 and 10.3% for the fiscal year ended March 31, 2001. The recent terrorist attacks in theUnited States and abroad and heightened security may adversely impact our international sales and could make our international operationsmore expensive. International business operations are also subject to other inherent risks, including, among others:•unexpected changes in regulatory requirements, tariffs and other trade barriers or restrictions; •longer accounts receivable payment cycles; •difficulties in managing and staffing international operations; •potentially adverse tax consequences; •the burdens of compliance with a wide variety of foreign laws;26•import and export license requirements and restrictions of the United States and each other country in which we operate; •exposure to different legal standards and reduced protection for intellectual property rights in some countries; •currency fluctuations and restrictions; and •political, social and economic instability. We believe that international sales will continue to represent a significant portion of our revenues, and that continued growth andprofitability could require expansion of our international operations. Nearly all of our international sales from this point on are denominated inU.S. dollars. As a result, an increase in the relative value of the dollar could make our products more expensive and potentially less pricecompetitive in international markets. We do not engage in any transactions as a hedge against risks of loss due to foreign currencyfluctuations. Any of the factors mentioned above may adversely affect our future international sales and, consequently, affect our business, financialcondition and operating results. Furthermore, as we increase our international sales, our total revenues may also be affected to a greaterextent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of theworld. Acquisitions of Companies or Technologies May Require Us to Undertake Significant Capital Infusions and Result inDisruptions of Our Business and Diversion of Resources and Management Attention. Over the past few years, we have expandedour operations and made several substantial acquisitions of diverse businesses, including Meyer Mohaddes Associates, Inc., ViggenCorporation, and certain assets of the Transportation Systems business of Rockwell International. We may continue to engage inacquisitions of complementary businesses, products and technologies. Acquisitions may require significant capital infusions and, in general,acquisitions also involve a number of special risks, including:•potential disruption of our ongoing business and the diversion of our resources and management's attention; •the failure to retain or integrate key acquired personnel; •the challenge of assimilating diverse business cultures, and the difficulties in integrating the operations, technologies andinformation system of the acquired companies; •increased costs to improve managerial, operational, financial and administrative systems and to eliminate duplicative services;•the incurrence of unforeseen obligations or liabilities; •potential impairment of relationships with employees or customers as a result of changes in management; and •increased interest expense and amortization of acquired intangible assets. Acquisitions may also materially and adversely affect our operating results due to large write-offs, contingent liabilities, substantialdepreciation, deferred compensation charges or goodwill amortization, or other adverse tax or audit consequences. Our failure to managegrowth and integrate our acquisitions successfully could adversely affect our business, financial condition and results of operations. Our competitors are also soliciting potential acquisition candidates, which could both increase the price of any acquisition targets anddecrease the number of attractive companies available for27acquisition. We cannot assure you that we will be able to consummate any additional acquisitions, successfully integrate any acquisitions orrealize the benefits anticipated from any acquisition. The Markets in Which We Operate Are Highly Competitive and Have Many More Established Competitors, Which CouldAdversely Affect Our Sales or the Market Acceptance of Our Products. We compete with numerous other companies in our targetmarkets and we expect such competition to increase due to technological advancements, industry consolidations and reduced barriers toentry. Increased competition is likely to result in price reductions, reduced gross margins and loss of market share, any of which couldseriously harm our business, financial condition and results of operations. Many of our competitors have far greater name recognition andgreater financial, technological, marketing and customer service resources than we do. This may allow them to respond more quickly to newor emerging technologies and changes in customer requirements. It may also allow them to devote greater resources to the development,promotion, sale and support of their products than we can. Recent consolidations of end users, distributors and manufacturers in our targetmarkets have exacerbated this problem. As a result of the foregoing factors, we may not be able to compete effectively in our target marketsand competitive pressures could adversely affect our business, financial condition and results of operations. We Do Not Have Employment Agreements with Any Key Personnel and We May be Unable to Attract and Retain KeyPersonnel, Which Could Seriously Harm Our Business. Due to the specialized nature of our business, we are highly dependent onthe continued service of our executive officers and other key management, engineering and technical personnel, particularly Joel Slutzky, ourChairman of the Board, who recently retired as our Chief Executive Officer, and Gregory A. Miner, our Chief Executive Officer and ChiefFinancial Officer. We do not have any employment contracts with any of our officers or key employees. The loss of any of these individualscould adversely affect our business, financial condition or results of operations. Our success will also depend in large part upon our ability to continue to attract, retain and motivate qualified engineering and otherhighly skilled technical personnel. Competition for employees, particularly development engineers, is intense. We may not be able tocontinue to attract and retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employeesor the loss of one or more of our current key employees could adversely affect our business, financial condition and results of operations. We May Not be Able to Adequately Protect or Enforce Our Intellectual Property Rights, Which Could Harm Our CompetitivePosition. If we are not able to adequately protect or enforce the proprietary aspects of our technology, competitors could be able to accessour proprietary technology and our business, financial condition and results of operations will likely be seriously harmed. We currentlyattempt to protect our technology through a combination of patent, copyright, trademark and trade secret laws, employee and third partynondisclosure agreements and similar means. Despite our efforts, other parties may attempt to disclose, obtain or use our technologies orsystems. Our competitors may also be able to independently develop products that are substantially equivalent or superior to our products ordesign around our patents. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of theUnited States. As a result, we may not be able to protect our proprietary rights adequately in the United States or abroad. From time to time, we have received notices that claim we have infringed upon the intellectual property of others. Even if these claimsare not valid, they could subject us to significant costs. We have engaged in litigation in the past, and litigation may be necessary in the futureto enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation may also benecessary to defend against claims of infringement or invalidity by others. An adverse outcome in litigation or any similar proceedings couldsubject us to significant liabilities to third parties, require us to license disputed rights from others or require us to cease marketing or using28certain products or technologies. We may not be able to obtain any licenses on terms acceptable to us, or at all. We also may have toindemnify certain customers or strategic partners if it is determined that we have infringed upon or misappropriated another party'sintellectual property. Any of these results could adversely affect our business, financial condition and results of operations. In addition, thecost of addressing any intellectual property litigation claim, both in legal fees and expenses, and the diversion of management resources,regardless of whether the claim is valid, could be significant and could seriously harm our business, financial condition and results ofoperations. Some of Our Directors, Officers and Their Affiliates Can Control the Outcome of Matters that Require the Approval of OurStockholders, and Accordingly We Will Not be Able to Engage in Certain Transactions Without Their Approval. As of June 18,2003, our officers and directors beneficially owned approximately 21% of the total combined voting power of the outstanding shares of ourClass A common stock and Class B common stock. As a result of their stock ownership, our management will be able to significantlyinfluence the election of our directors and the outcome of corporate actions requiring stockholder approval, such as mergers and acquisitions,regardless of how our other stockholders may vote. This concentration of voting control may have a significant effect in delaying, deferring orpreventing a change in our management or change in control and may adversely affect the voting or other rights of other holders of commonstock. Our Stock Structure and Certain Anti-Takeover Provisions May Affect the Price of Our Common Stock and Discourage aThird Party from Acquiring Us. Certain provisions of our certificate of incorporation and our stockholder rights plan could make it difficultfor a third party to acquire us, even though an acquisition might be beneficial to our stockholders. These provisions could limit the price thatinvestors might be willing to pay in the future for shares of our common stock. Our Class A common stock entitles the holder to one-tenth ofone vote per share and our Class B common stock entitles the holder to one vote per share. The disparity in the voting rights between ourcommon stock, as well as our insiders' significant ownership of the Class B common stock, could discourage a proxy contest or make itmore difficult for a third party to effect a change in our management and control. In addition, our Board of Directors is authorized to issue,without stockholder approval, up to 2,000,000 shares of preferred stock with voting, conversion and other rights and preferences superior tothose of our common stock, as well as additional shares of Class B common stock. Our future issuance of preferred stock or Class Bcommon stock could be used to discourage an unsolicited acquisition proposal. In March 1998, we adopted a stockholder rights plan and declared a dividend of preferred stock purchase rights to our stockholders. In theevent a third party acquires more than 15% of the outstanding voting control of our company or 15% of our outstanding common stock, theholders of these rights will be able to purchase the junior participating preferred stock at a substantial discount off of the then current marketprice. The exercise of these rights and purchase of a significant amount of stock at below market prices could cause substantial dilution to aparticular acquiror and discourage the acquiror from pursuing our company. The mere existence of a stockholder rights plan often delays ormakes a merger, tender offer or proxy contest more difficult. We Do Not Pay Cash Dividends. We have never paid cash dividends on our common stock and do not anticipate paying any cashdividends on either class of our common stock in the foreseeable future. We May Be Subject to Additional Risks. The risks and uncertainties described above are not the only ones facing our company.Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our businessoperations.29ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. Our exposure to interest rate risk is limited to our lines of credit. Iteris' and Odetics' lines of credit bear interest at the prevailing primerate, plus 2% and 4%, respectively. Our $16.0 million note payable, prior to its repayment in May 2002, carried a fixed rate of interest. Weestimate that, based on amounts outstanding at March 31, 2003, a 10% increase in the prime rate would result in an increase in interestexpense, on an annualized basis, of less than $0.1 million.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required by Regulation S-X are included in this Form 10-K commencing on page F-1.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable.30PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Directors and Executive Officers (a) Identification of Directors. The information under the caption "Election of Directors," appearing in our proxy statement, isincorporated herein by reference. (b) Identification of Executive Officers. The information under the caption "Executive Compensation and Other Information,"appearing in our proxy statement, is incorporated herein by reference. (c) Compliance with Section 16(a) of the Exchange Act. The information under the caption "Executive Compensation and OtherInformation," appearing in our proxy statement, is incorporated herein by reference.ITEM 11. EXECUTIVE COMPENSATION. The information under the caption "Executive Compensation and Other Information," appearing in our proxy statement, is incorporatedherein by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS. As of March 31, 2003, Odetics had only one plan, the 1997 Stock Incentive Plan, pursuant to which equity securities of Odetics areauthorized for issuance. The following table sets forth certain information regarding this plan: (a) (b) (c) Number ofSecuritiesto be IssuedUpon Exercise ofOutstandingOptions,Warrants andRights Weighted AverageExercise Price ofOutstandingOptions,Warrants andRights Number of SecuritiesRemaining Availableunder EquityCompensationPlans (excluding somesecurities reflectedin column (a))Equity Compensation Plans Approved bySecurity Holders 1997 Stock Incentive Plan 961,920 $3.73 689,000Equity Compensation Plans Not Approved bySecurity Holders None Total 961,920 689,000 The information under the caption "Principal Stockholders and Common Stock Ownership of Certain Beneficial Owners andManagement," appearing in our proxy statement, is incorporated herein by reference.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under the caption "Certain Transactions," appearing in our proxy statement, is incorporated herein by reference.31ITEM 14. CONTROLS AND PROCEDURES. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the ourExchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, andthat such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures. Within 90 days prior to the date of this Report, the Company carried out an evaluation, under the supervision and with the participationof management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controlssubsequent to the date we completed our evaluation.32PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)Documents filed as part of this report: 1. Financial Statements. The following financial statements of Odetics are included in a separate section of this AnnualReport on Form 10-K commencing on the pages referenced below: PageReport of Independent Auditors F-2Consolidated Balance Sheets as of March 31, 2002 and 2003 F-3Consolidated Statements of Operations for the years ended March 31, 2001, 2002 and 2003 F-4Consolidated Statements of Stockholders' Equity for the years ended March 31, 2001, 2002 and 2003 F-5Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2002 and 2003 F-6Notes to Consolidated Financial Statements F-7 2. Financial Statement Schedules.Schedule II—Valuation and Qualifying Accounts S-1 All other schedules have been omitted because they are not required or the required information is included in our consolidated financialstatements and notes thereto.33 3. (a) Exhibits.3.1 Certificate of Incorporation of Odetics, as amended (incorporated by reference to Exhibit 19.2 to Odetics' Quarterly Report onForm 10-Q for the quarter ended September 30, 1987).3.2 Bylaws of Odetics, as amended (incorporated by reference to Exhibit 4.2 to Odetics' Registration Statement on Form S-1 (Reg.No. 033-67932) as filed with the SEC on July 6, 1993).4.1 Specimen of Class A common stock and Class B common stock certificates (incorporated by reference to Exhibit 4.3 toAmendment No. 1 to Odetics' Registration Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC on September30, 1993).4.2 Form of rights certificate for Odetics' preferred stock purchase rights (incorporated by reference to Exhibit A of Exhibit 4 toOdetics' Current Report on Form 8-K as filed with the SEC on May 1, 1998).10.1 Profit Sharing Plan and Trust (incorporated by reference to Exhibit 10.3 to Odetics' Amendment No. 2 to the RegistrationStatement on Form S-8 (Reg. No. 002-98656) as filed with the SEC on May 5, 1988).10.2 Form of Executive Deferral Plan between Odetics and certain employees of Odetics (incorporated by reference to Exhibit 10.4to Odetics' Annual Report on Form 10-K for the year ended March 31, 1988).10.3 Form of Indemnity Agreement entered into by Odetics and certain of its officers and directors (incorporated by reference toExhibit 19.4 to Odetics' Quarterly Report on Form 10-Q for the quarter ended September 30, 1988).10.4 Amendment Nos. 3 and 4 to the Profit Sharing Plan and Trust (incorporated by reference to Exhibits 4.3.1 and 4.3.2,respectively, to Amendment No. 3 to Odetics' Registration Statement on Form S-3 (Reg. No. 002-86220) as filed with the SECon June 13, 1990)10.5 1997 Stock Incentive Plan of Odetics (as amended on May 3, 2002).10.6 Form of Notice of Grant of Stock Option (incorporated by reference to Exhibit 99.2 to Odetics' Registration Statement on FormS-8 (File No. 333-30396) as filed with the SEC on February 14, 2000)10.7 Form of Stock Option Agreement (incorporated by reference to Exhibit 99.3 to Odetics' Registration Statement on Form S-8(File No. 333-30396) as filed with the SEC on February 14, 2000).10.8 Form of Addendum to Stock Option Agreement—Involuntary Termination Following Corporate Transaction or Change inControl (incorporated by reference to Exhibit 99.4 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) asfiled with the SEC on February 14, 2000).10.9 Form of Addendum to Stock Option Agreement—Limited Stock Appreciation Rights (incorporated by reference to Exhibit 99.5to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000).10.10 Form of Stock Issuance Agreement (incorporated by reference to Exhibit 99.6 to Odetics' Registration Statement on Form S-8(File No. 333-30396) as filed with the SEC on February 14, 2000) 3410.11 Form of Addendum to Stock Issuance Agreement—Involuntary Termination Following Corporate Transaction/Change inControl (incorporated by reference to Exhibit 99.7 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) asfiled with the SEC on February 14, 2000).10.12 Form of Notice of Grant of Automatic Stock Option—Initial Grant filed as Exhibit 99.8 filed as Exhibit (incorporated by referenceto Exhibit 99.8 to Odetics' Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14,2000).10.13 Form of Notice of Grant of Automatic Stock Option—Annual Grant (incorporated by reference to Exhibit 99.9 to Odetics'Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000).10.14 Form of Automatic Stock Option Agreement filed as Exhibit 99.10 to the (incorporated by reference to Exhibit 99.10 to Odetics'Registration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 19, 2000).10.15 Rights Agreement dated April 24, 1998 between Odetics and BankBoston, N.A., which includes the form of Certificate ofDesignation for the junior participating preferred stock as Exhibit A, the form of rights certificate as Exhibit B and the summaryof rights to purchase Series A preferred shares as Exhibit C (incorporated by reference to Exhibit 4 to Odetics' Current Reporton Form 8-K as filed with the SEC on May 1, 1998).10.16 1994 Long-Term Equity Plan of Odetics (incorporated by reference to Exhibit 4.3 to Odetics' Registration Statement on FormS-8 (File No. 333-05735) as filed with the SEC on June 11, 1996).10.17 Amendment to Rights Agreement, dated May 21, 2001, by and between Odetics and Fleet National Bank (a.k.a. Bank Boston,N.A.) (incorporated by reference to Exhibit 99.4 to Odetics' Current Report on Form 8-K as filed with the SEC on June 1,2001).10.18 Amended and Restated Agreement of Purchase and Sale and Escrow Instructions, dated February 19, 2002, by and betweenOdetics, Inc. and 1515 South Manchester, LLC (incorporated by reference to Exhibit 2.1 to Odetics' Current Report on Form 8-K as filed with the SEC on June 12, 2002).10.19 Sublease Agreement dated May 7, 2003 by and between Odetics, Inc. and FEI-Zyfer, Inc.21 Subsidiaries of Odetics.23.1 Consent of Independent Auditors.99.1 Section 906 Certification, as furnished by the Chief Executive Officer and Chief Financial Officer pursuant to SEC ReleaseNo. 33-8212, 34-47551. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended March 31, 2003.35SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Reportto be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Anaheim, State of California, on June 27, 2003. ODETICS, INC. By:/s/ GREGORY A. MINER Gregory A. Miner,Chief Executive Officerand Chief Financial OfficerPOWER OF ATTORNEY We, the undersigned officers and directors of Odetics, Inc., do hereby constitute and appoint Gary Smith and Gregory A. Miner, and eachof them, our true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name,place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto, and otherdocuments in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, andeach of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do in person, hereby, ratifying and confirming all that each of saidattorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in thecapacities and on the dates indicated:Signature Title Date /s/ GREGORY A. MINER Gregory A. Miner(principal executive officer andprincipal financial officer) Director, Chief Executive Officer and Chief FinancialOfficer June 27, 2003/s/ JOEL SLUTZKY Joel Slutzky Chairman of the Board June 27, 2003/s/ KEVIN C. DALY Kevin C. Daly, Ph.D Director June 27, 2003/s/ CRANDALL GUDMUNDSON Crandall Gudmundson Director June 27, 2003 36/s/ JERRY MUENCH Jerry Muench Director June 27, 2003/s/ JOHN SEAZHOLTZ John Seazholtz Director June 27, 2003/s/ GARY SMITH Gary Smith Vice President and Controller (principal accountingofficer) June 27, 2003/s/ THOMAS L. THOMAS Thomas L. Thomas Director June 27, 2003/s/ PAUL E. WRIGHT Paul E. Wright Director June 27, 200337CERTIFICATION I, Gregory A. Miner, certify that: 1. I have reviewed this annual report on Form 10-K of Odetics, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material factnecessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present inall material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisannual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annualreport is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filingdate of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based onour evaluation as of the Evaluation Date; 5. I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board ofdirectors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability torecord, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses ininternal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in theregistrant's internal controls; and 6. I have indicated in this annual report whether there were significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses. Date: June 27, 2003 /s/ GREGORY A. MINERGregory A. Miner,Chief Executive Officer and Chief Financial Officer(Principal Executive Officer and Principal Financial Officer)38Odetics, Inc. Index to Consolidated Financial Statements PageReport of Independent Auditors F-2Consolidated Balance Sheets as of March 31, 2002 and 2003 F-3Consolidated Statements of Operations for the years ended March 31, 2001, 2002 and 2003 F-4Consolidated Statements of Stockholders' Equity for the years ended March 31, 2001, 2002 and2003 F-5Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2002 and 2003 F-6Notes to Consolidated Financial Statements F-7F-1Report of Independent Auditors Stockholders and Board of DirectorsOdetics, Inc. We have audited the accompanying consolidated balance sheets of Odetics, Inc. as of March 31, 2002 and 2003, and the relatedconsolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2003.Our audits also included the financial statement schedule listed in Item 15(a). These financial statements and schedule are the responsibilityof the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financialposition of Odetics, Inc. at March 31, 2002 and 2003, and the consolidated results of its operations and its cash flows for each of the threeyears in the period ended March 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in ouropinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presentsfairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. Asdiscussed in Note 1 to the consolidated financial statements, the Company's recurring losses from operations raise substantial doubt aboutits ability to continue as a going concern. Management's plans as to these matters are also described in Note 1. The consolidated financialstatements do not include any adjustments that might result from the outcome of this uncertainty./s/Ernst & Young LLPOrange County, CaliforniaJune 3, 2003F-2Odetics, Inc. Consolidated Balance Sheets (In thousands, except share and per share amounts) March 31, 2002 2003 Assets Current assets: Cash and cash equivalents $408 $437 Trade accounts receivable, net of allowance for doubtful accounts of $115 in 2002 and $156 in 2003 8,617 8,549 Costs and estimated earnings in excess of billings on uncompleted contracts 3,565 2,398 Inventories: Finished goods 155 211 Work in process 25 419 Materials and supplies 3,528 3,634 Prepaid expenses and other 1,621 435 Assets of discontinued operations 8,525 4,392 Total current assets 26,444 20,475 Restricted cash — 2,516 Property, plant and equipment: Land 2,060 — Buildings and improvements 19,005 43 Equipment 7,322 7,256 Allowances for depreciation (12,390) (5,336) 15,997 1,963 Goodwill 9,769 9,807 Other assets 28 81 Total assets $52,238 $34,842 Liabilities and stockholders' equity (deficit) Current liabilities: Trade accounts payable $4,646 $5,862 Accrued payroll and related 4,696 5,731 Accrued expenses 1,761 858 Billings in excess of costs and estimated earnings on uncompleted contracts 2,236 304 Advances under receivables purchase agreement with related party — 235 Liabilities of discontinued operations 4,585 4,139 Current portion of long-term debt 16,124 — Total current liabilities 34,048 17,129 Revolving line of credit 767 — Revolving line of credit with related party 1,250 1,250 Deferred gain on sale of building — 6,025 Other liabilities 25 15 Minority interest 10,893 14,711 Commitments and contingencies Stockholders' equity (deficit): Preferred stock: Authorized shares—2,000,000 Issued and outstanding—none — — Common stock, $.10 par value: Authorized shares—50,000,000 of Class A and 2,600,000 of Class B Issued and outstanding shares—11,490,530 of Class A and 1,035,841 of Class B at March 31,2002; 14,080,914 of Class A and 1,035,841 of Class B at March 31, 2003 1,252 1,512 Paid-in capital 89,134 92,819 Treasury stock, 93 and 93 shares in 2002 and 2003, respectively (1) (1) Notes receivable from employees (51) (51) Accumulated other comprehensive income 241 (99) Accumulated deficit (85,320) (98,468) Total stockholders' equity (deficit) 5,255 (4,288) Total liabilities and stockholders' equity (deficit) $52,238 $34,842 See accompanying notes.F-3Odetics, Inc. Consolidated Statements of Operations (In thousands, except per share information) Year ended March 31, 2001 2002 2003 Net sales and contract revenues: Net sales $42,363 $29,343 $22,541 Contract revenues 20,039 22,846 25,086 62,402 52,189 47,627 Costs and expenses: Cost of sales 31,028 16,769 11,424 Cost of contract revenues 13,781 13,132 16,034 Selling, general and administrative expenses 25,219 18,491 16,157 Research and development expenses 7,549 4,385 4,215 Restructuring charges 757 2,189 — 78,334 54,966 47,830 Loss from operations (15,932) (2,777) (203)Non-operating income (expense) Royalty income 17,825 — — Other income, net 1,340 2,919 388 Interest expense, net (1,762) (4,190) (761) Income (loss) before income tax 1,471 (4,048) (576)Income tax benefit — 785 — Income (loss) from continuing operations before minority interest 1,471 (3,263) (576)Minority interest in earnings of subsidiary — (1,910) (3,818) Income (loss) from continuing operations 1,471 (5,173) (4,394)Loss from discontinued operations, net of taxes of $0 (34,011) (20,965) (8,754)Extraordinary loss from early extinguishment of debt, net of tax of $0 — (450) — Net loss $(32,540)$(26,588)$(13,148) Basic earnings (loss) per share: Continuing operations $0.15 $(0.46)$(0.31) Discontinued operations (3.41) (1.86) (0.61) Extraordinary loss — (0.04) — Basic loss per share $(3.26)$(2.36)$(0.92) Diluted earnings (loss) per share: Continuing operations $0.14 $(0.46)$(0.31) Discontinued operations (3.33) (1.86) (0.61) Extraordinary loss — (0.04) — Diluted loss per share $(3.19)$(2.36)$(0.92) Shares used in computing basic earnings (loss) per share 9,977 11,267 14,276 Shares used in computing diluted earnings (loss) per share 10,209 11,267 14,276 See accompanying notes.F-4Odetics, Inc. Consolidated Statements of Stockholders' Equity (In thousands) Common stock Sharesoutstanding Notesreceivablefromemployees Accumulativeothercomprehensiveincome Class Acommonstock Class Bcommonstock Amount Paid-incapital Treasurystock Accumulateddeficit Total Comprehensiveincome Balance at March 31, 2000 8,183 1,052 $923 $61,200 $(22)$(61)$262 $(26,192)$36,110 $— Issuances of Odetics commonstock 1,270 — 127 17,348 21 — — — 17,496 — Conversion of Class Bcommon stock 16 (16) — — — — — — — — Payments on notes receivable — — — — — 10 — — 10 — Foreign currency translationadjustments — — — — — — (698) — (698) (698) Net loss — — — — — — — (32,540) (32,540) (32,540) Balance at March 31, 2001 9,469 1,036 1,050 78,548 (1) (51) (436) (58,732) 20,378 (33,238) Issuances of Odetics commonstock 2,022 — 202 3,716 — — 3,918 — Issuance of Iteris common — — — 5,513 — — — — 5,513  stock Issuance of warrants — — — 1,357 — — 1,357 — Foreign currency translationadjustments — — — — — — 677 — 677 677 Net loss — — — — — — — (26,588) (26,588) (26,588) Balance at March 31, 2002 11,491 1,036 1,252 89,134 (1) (51) 241 (85,320) 5,255 (25,911) Issuances of Odetics commonstock 2,590 — 260 2,814 — — — — 3,074 — Issuance of Iteris commonstock — — — 871 — — — — 871 Foreign currency translationadjustments — — — — — — (340) — (340) (340) Net loss — — — — — — — (13,148) (13,148) (13,148) Balance at March 31, 2003 14,081 1,036 $1,512 $92,819 $(1)$(51)$(99)$(98,468)$(4,288)$(13,488) See accompanying notes.F-5Odetics, Inc. Consolidated Statements of Cash Flows (In thousands) Year ended March 31, 2001 2002 2003 Operating activities Net loss $(32,540)$(26,588)$(13,148)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,967 3,776 816 Amortization of warrants — 1,230 246 Amortization of deferred gain on sale-leaseback — — (1,665) Write-off of discontinued subsidiaries — 8,361 4,909 Minority interest in earnings of subsidiary — 1,910 3,818 Loss on sale of Iteris common stock — 1,597 310 Loss on disposal of assets — 48 2 Write-off of capitalized software 4,014 — — Gain on sale of product lines (1,230) (3,385) — Provision for losses on accounts receivable 78 102 — Changes in operating assets and liabilities (Note 15) 4,621 (5,284) (77) Net cash provided by (used in) operating activities (20,090) (18,233) (4,789)Investing activities Purchases of property, plant and equipment, net (2,502) (426) (518)Repurchase of real estate option (5,000) — — Proceeds from sale of product lines 1,877 9,884 — Proceeds from sale of building — — 18,951 Purchase of net assets of acquired business (42) (200) — Other (688) 677 (340) Net cash provided by (used in) investing activities (6,355) 9,935 18,093 Financing activities Proceeds from line of credit and long-term borrowings 26,644 28,720 — Principal payments on line of credit and long-term debt (19,857) (30,929) (16,912)Proceeds from sale of Iteris common and preferred stock — 8,697 871 Proceeds from issuance of common stock 16,996 — 2,766 Net cash provided by (used in) financing activities 23,783 6,488 (13,275) Increase (decrease) in cash (2,662) (1,810) 29 Cash and cash equivalents at beginning of year 4,880 2,218 408 Cash and cash equivalents at end of year $2,218 $408 $437 See accompanying notes.F-6Odetics, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2003 1. Formation and Operations Odetics, Inc. (the Company) provides products, systems and services that control and manage the use of public roadways and servicesaccess and safety of public and private facilities. Odetics currently operates through its wholly-owned subsidiaries, MAXxess Systems, Inc.,formally known as Gyyr Incorporated (MAXxess), and its majority-owned subsidiary, Iteris, Inc. (Iteris). During fiscal 2002 and fiscal 2003, the Company incurred net losses of $26.6 million and $13.1 million, respectively. The Companyfinanced its operations in fiscal 2002 and fiscal 2003 largely through cash received from debt and equity financings, the sale of assets and thedivestiture of certain of its subsidiaries. On May 28, 2002, the Company completed the sale and leaseback of its Anaheim, California facility for an aggregate sale price of$22.6 million. Under the terms of the sale and leaseback agreement, the Company will continue to lease one of the two buildings located onthe property for an initial ten-year period at a rate of $152,150 per month and the other building for a period of 30 months at a rate ofapproximately $57,553 per month. Approximately $16.4 million of the proceeds from the sale was used to repay the outstandingindebtedness and accrued interest under a promissory note that was secured by a first deed of trust on the Anaheim facility (Note 6), and$2.5 million is being held in escrow as a security deposit on future lease payments. The balance of the proceeds was available for generalworking capital purposes. The gain on the sale of the facility was approximately $8.2 million, of which $640,000 was recognizedimmediately, and the remainder was deferred and is being amortized against rent expenses over the term of the leases. On August 16, 2002, the Company completed a private placement of 2,500,000 of our Class A common stock to an institutionalinvestor for $3.0 million in cash. The transaction, net of expenses, raised net proceeds of approximately $2.7 million. In connection with thisoffering, the Company also issued warrants to the investor to purchase up to another 1,250,000 shares at an exercise price of $1.50 pershare, and up to 1,250,000 shares at an exercise price of $1.80 per share. The warrants are exercisable at any time by the investor, and arecallable by us if the market price of the Company's Class A common stock trades for 20 consecutive days at a price equal or greater than twotimes the exercise price of the warrants. If all of the warrants are exercised, the total gross proceeds from this transaction are expected to be$7.2 million. The proceeds from the transaction were used to fund general working capital requirements. On May 9, 2003, the Company completed the sale of substantially all of the assets of its Zyfer subsidiary for $2.3 million in cash plusthe assumption of certain liabilities. The asset purchase agreement provides for future incentive payments of up to $1 million in each of thetwelve month periods ended April 30, 2004 and 2005, based on the achievement of certain revenue goals related to the sale of Zyfer productsor the licensing of its technologies. The Company expects that its operations will continue to use net cash at least through the end of calendar 2003. The Company alsoexpects to have an ongoing need to raise cash by securing additional debt or equity financing, or by divesting certain assets to fund itsoperations until the Company returns to profitability and positive operating cash flows. The Company believes that its future ability to obtainadditional funding will be dependent upon its ability to narrow our operating losses and provide a favorable expectation of future operatingprofitability. The Company believes its ability to raise additional capital may also be adversely affected if Nasdaq determines to delist theCompany's Class A common stock from the Nasdaq SmallCap Market. The steps undertaken in fiscal 2002 and fiscal 2003F-7were intended to lower its operating costs, widen its gross profits, and generally provide more opportunity to return to profitability.Furthermore, the Company believes that a focused business model provides a more compelling opportunity for appreciation in stockholdervalue. Notwithstanding the recent refinements to our business model and its more defined focus, the Company cannot be certain that it willbe able to secure additional debt or equity financing on acceptable terms, on a timely basis, or at all. The Company's future cash requirements will be highly dependent upon its ability to control expenses, as well as the successfulexecution of the revenue plans by both Iteris and MAXxess. A critical element of controlling expenses relates to the restructuring of theCompany's facilities lease arrangements. Management is currently in negotiations with the Company's landlords to restructure its leases forits principal facilities in order to reduce the Company's overall operating expenses to a level commensurate with its existing operations. Theoutcome of these negotiations cannot be assured and, as a result, any projections of future cash requirements and cash flows are subject tosubstantial uncertainty. These conditions, together with the Company's recurring losses, raise substantial doubt about its ability to continue as a going concern.The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverabilityand classification of assets or liabilities that may result from the outcome of this uncertainty.Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significantintercompany accounts and transactions have been eliminated in consolidation.Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to makeestimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differfrom those estimates. Significant estimates made in preparing the consolidated financial statements include the allowances for doubtfulaccounts deferred tax assets, inventory reserves, certain accrued liabilities, costs to complete long-term contracts and estimates of future cashflows used to determine the recoverability of long lived assets.Revenue Recognition Product revenues and related cost of sales are recognized upon the transfer of title, which generally occurs upon shipment or, if required,upon acceptance by the customer, provided that the Company believes collectibility of the net sales amount is probable. Accordingly, at thedate revenue is recognized, the significant uncertainties concerning the sale have been resolved. Contract revenues are derived primarily from long-term contracts with governmental agencies. Contract revenue includes costs incurredplus a portion of estimated fees or profits determined on the percentage of completion method of accounting based on the relationship of costsincurred to total estimated costs. Any anticipated losses on contracts are charged to earnings when identified. Changes in job performanceand estimated profitability, including those arising from contract penalty provisionsF-8and final contract settlements may result in revisions to cost and revenue and are recognized in the period in which the revisions aredetermined. Profit incentives are included in revenue when their realization is reasonably assured. Revenues from follow-on service and support, for which the Company charges separately, is recorded in the period in which theservices are performed.Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term investments with initial maturities of less than ninety days.Concentration of Credit Risk The Company maintains reserves for potential credit losses, estimating the collectibility of customer receivables on an ongoing basis byperiodically reviewing invoices outstanding over a certain period of time. The Company has recorded reserves for receivables deemed to be atrisk for collection, as well as a general reserve based on historical collections experience. A considerable amount of judgment is required inassessing the ultimate realization of these receivables, including the current credit-worthiness of each customer. Such losses have beenminimal and within management's estimates. Receivables from customers are generally unsecured. At March 31, 2002 and 2003, accountsreceivable from governmental agencies and prime government contractors were approximately $3,575,000 and $3,362,000, respectively.Fair Values of Financial Instruments Fair values of cash and cash equivalents approximate the carrying value because of the short period of time to maturity. The fair value ofline of credit agreements approximate carrying value because the related rates of interest approximate current market rates.Inventories Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method.Property, Plant and Equipment Property, plant and equipment are recorded at cost. Equipment is depreciated principally by the declining balance method over theirestimated useful lives ranging from four to eight years. Depreciation expense from continuing operations for the years ended March 31,2001, 2002 and 2003 was $1.1 million, $1.1 million and $0.8 million, respectively.Long-Lived Assets Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. The Company believes no impairment of the carrying value of its long-livedassets existed at March 31, 2003. The Company's analysis was based on an estimate of future undiscounted cash flows using forecastscontained in the Company strategic plan. It is at least reasonably possible that the Company's estimate of future undiscounted cash flowsmay change during fiscal 2004. If the Company's estimate ofF-9future undiscounted cash flow should change or if the strategic plan is not achieved, future analyses may indicate insufficient futureundiscounted cash flows to recover the carrying value of the Company's long-lived assets, in which case such assets would be written downto estimated fair value.Goodwill Goodwill, representing the excess of the purchase price over the fair value of the net assets of acquired entities. At March 31, 2003, allgoodwill is attributable to the Company's Intelligent Transportation segment. On April 1, 2002, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 142, Goodwill and OtherIntangible Assets (Statement 142). Under Statement 142, goodwill is no longer amortized but is subject to impairment tests based upon acomparison of the fair value of each of the Company's reporting units, as defined, and the carrying value of the reporting units' net assets,including goodwill. Pursuant to Statement 142, upon adoption the Company tested its goodwill for impairment and, based upon recent salesof equity securities, determined that no impairment existed. Statement 142 requires a review for impairment at least annually or whencircumstances exist that would indicate an impairment of such goodwill. The Company performs the annual impairment review as ofJanuary 1 of each year. The 2003 annual review resulted in no impairment of the carrying value of goodwill. Adjusted net income and therelated earnings per share impact of the adoption of Statement 142 is as follows: Year ended March 31, 2001 2002 2003 Reported income (loss) from continuing operations $1,471 $(5,173)$(4,394) Add back goodwill amortization 1,924 1,516 — Adjusted net income (loss) from continuing operations 3,395 (3,657) (4,394) Loss from discontinued operations, net of income taxes (34,011) (20,965) (8,754) Extraordinary loss on early extinguishment of debt — (450) — Adjusted net income (loss) $(30,616)$(25,072)$(13,148) Basic earnings (loss) per share: Reported income (loss) from continuing operations $0.15 $(0.46)$(0.31) Add back goodwill amortization 0.19 0.13 — Adjusted net income (loss) from continuing operations 0.34 (0.33) (0.31) Loss from discontinued operations, net of income taxes (3.41) (1.86) (0.61) Extraordinary loss on early extinguishment of debt — (0.04) — Adjusted net income (loss) $(3.07)$(2.23)$(0.92) Diluted earnings (loss) per share: Reported income (loss) from continuing operations $0.14 $(0.46)$(0.31) Add back goodwill amortization 0.19 0.13 — Adjusted net income (loss) from continuing operations 0.33 (0.33) (0.31) Loss from discontinued operations, net of income taxes (3.33) (1.86) (0.61) Extraordinary loss on early extinguishment of debt — (0.04) —  Adjusted net income (loss) $(3.00)$(2.23)$(0.92) F-10Research and Development Expenditures Research and development expenditures are charged to expense in the period incurred.Warranty Unless otherwise stated, the Company provides a one-year warranty from the original invoice date on all product material andworkmanship. Products sold to certain original equipment manufacturer customers sometimes carry longer warranties. Defective productswill be either repaired or replaced, generally at the Company's option, upon meeting certain criteria. The Company accrues a provision for theestimated costs that may be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for thatproduct is recognized. The activity in accrued warranty obligations is as follows: March 31, 2001 2002 2003 (in thousands) Balance at beginning of year $321 $209 $274 Additions charged to cost of sales 95 153 323 Warranty claims (207) (88) (316) Balance at end of year $209 $274 $281 Foreign Currency Translation The balance sheet accounts of the Company's foreign based subsidiaries are translated at the current year-end exchange rate andincome statement items are translated at the average exchange rate for the year. Resulting translation adjustments are made directly to aseparate component of stockholders' equity. Gains and losses resulting from transactions of the Company and its subsidiaries which aremade in currencies different from their own are immaterial and are included in income as they occur.Comprehensive Income The only component of accumulated other comprehensive income is the cumulative foreign currency translation adjustment recorded instockholders' equity.Income Taxes Deferred income tax assets and liabilities are computed for differences between financial statement and tax basis of assets and liabilitiesbased on enacted tax laws and rates applicable to the period in which differences are expected to affect taxable income. Valuation allowancesare established when necessary to reduce deferred tax assets to amounts which are more likely than not to be realized. The provision forincome taxes is the taxes payable or refundable for the period plus or minus the change during the period in deferred income tax assets andliabilities.F-11Earnings (Loss) Per Share The following table sets forth the computation of basic and diluted loss per share: Year ended March 31, 2001 2002 2003 Numerator: Net loss $(32,540)$(26,588)$(13,148)Denominator: Denominator for basic loss per share—weighted-average shares 9,977 11,267 14,276 Effect of dilutive securities:  Employee stock options 232 — — Denominator for diluted loss per share 10,209 11,267 14,276 Basic loss per share $(3.26)$(2.36)$(0.92)Diluted loss per share $(3.19)$(2.36)$(0.92)Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with Accounting Principles Board OpinionNo. 25, Accounting for Stock-Issued to Employees (APB No. 25) and related interpretations, and complies with the disclosure provisions ofFASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123). Under APB No. 25, compensation cost isrecognized based on the difference, if any, on the date of the grant between the fair value of the Company's stock and the amount theemployee must pay to acquire the stock. In December 2002, the FASB issued Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure,(Statement 148) providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, Statement 148 amends the disclosure requirements to require prominent disclosures in bothannual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the methodused on reported results. The Company does not currently plan to change its stock-based employee compensation accounting to the fairvalue method. The accompanying financial statements reflect all of the disclosures required by Statement 148. In calculating pro forma information regarding net income and earning per share, as required by Statement No. 123, the fair value wasestimated at the date of grant using a Black-Scholes option pricing model with the following assumption: Years ended March 31, 2001 2002 2003Dividend rate 0.0 0.0 0.0Expected life—years 7.0 7.0 7.0Risk-free interest rate 6.0 4.5 2.0Volatility of common stock 0.4 0.4 0.4F-12 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.The Company's pro forma information for the year ended March 31, 2001, 2002 and 2003 follows (in thousands, except per share data): Year ended March 31, 2001 2002 2003 (In thousands except per share amounts) Net loss—reported $(32,540)$(26,588)$(13,148)Employee compensation expense under fair valuemethod (972) (201) (637) Net loss—pro forma $(33,512)$(26,789)$(13,785)Basic loss per share—reported $(3.26)$(2.36)$(0.92)Basic loss per share—pro forma $(3.36)$(2.38)$(0.97)Diluted loss per share—reported $(3.19)$(2.36)$(0.92)Diluted loss per share—pro forma $(3.28)$(2.38)$(0.97)Advertising Expenses The Company expenses advertising costs as incurred. Advertising expense totaled $1,211,000, $420,000 and $544,000 in the yearsended March 31, 2001, 2002 and 2003, respectively.Discontinued Operations In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). The Statement supersedes FASB Statement No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, however, it retains the fundamentalprovisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be "held and used."SFAS 144 also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, Reporting the Resultsof Operation's—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently OccurringEvents and Transactions (APB 30), for the disposal of a segment of a business. Under SFAS 144, a component of a business that is heldfor sale is reported in discontinued operations if (i) the operations and cash flows will be, or have been, eliminated from the ongoingoperations of the company and, (ii) the company will not have any significant continuing involvement in such operations. In the quarterended September 30, 2001, the Company adopted the provisions of SFAS 144 effective April 1, 2001. In September 2001, the Company's Board of Directors approved a plan to discontinue the operations of Mariner which was part of theCompany's telecom products segment. The aggregate losses recognized to write down the assets of Mariner to their fair value less cost to sellwere approximately $6.7 million. In addition, the Company accrued $1.7 million for severance and other direct costs to exit the operation. In March 2003, the Company decided to divest of its Zyfer, Inc. subsidiary (Zyfer). On May 9, 2003, the Company completed the sale ofsubstantially all of the net assets of Zyfer, with a net bookF-13value of approximately $2.3 million, for $2.3 million. The Company may also receive incentive payments of up to $2 million should Zyfermeet certain revenue targets in the twelve month periods ended April 30, 2004 and 2005. The initial purchase price is subject to adjustmentwithin 45 days of the closing in the event that the assets purchased less the liabilities assumed by the buyer is less than $2.2 million. Inconnection with the Zyfer sale, the Company accrued $1.1 million for certain future lease obligations of Zyfer that were not transferred to thebuyer. In March 2003, the Company ceased the development and sale of products in its Broadcast, Inc. subsidiary (Broadcast) and reduced theheadcount in Broadcast to only support the existing customer contracts for service and support through their expiration dates. The aggregatelosses recognized to write down the assets of Broadcast to their fair value less cost to sell were approximately $3.4 million. In addition, theCompany accrued $0.4 million for employees severed in March 2003 and other direct costs to wind down the operation. The asset write-downs and accrued costs are included in the loss from discontinued operations in the year ending March 31, 2003. Theresults of operations of Mariner, Zyfer and Broadcast for all periods presented have been reclassified and presented as discontinuedoperations in the accompanying consolidated statement of operations. Interest expense was not reclassified to discontinued operationsbecause the discontinuances did not eliminate any of the Company's debt. The net sales and loss from discontinued operations are as follows: Year ended March 31, 2001 2002 2003 Net sales: Zyfer $4,464 $4,475 $6,487 Broadcast 9,292 2,824 3,599 Mariner 910 533 — Total net sales $14,666 $7,832 $10,086 Loss from discontinued operations: Zyfer $(5,284)$(5,100)$(1,718) Broadcast (16,822) (2,941) (2,468) Mariner (11,905) (4,563) — Total loss from discontinued operations (34,011) (12,604) (4,186)Loss recognized upon discontinuance of operations — (8,361) (4,909)Gain on sale of assets of discontinued operations — — 341 $(34,011)$(20,965)$(8,754) F-14 The assets and liabilities of the discontinued operations consisted of the following: March 31, 2002 2003Accounts receivable $1,684 $1,632Inventories 4,704 1,892Prepaid expenses & other assets 211 125Property, plant and equipment, net 1,926 743 Total assets of discontinued operations $8,525 $4,392 Accounts payable $3,223 $2,250Accrued expenses 1,362 1,889 Total liabilities of discontinued operations $4,585 $4,139 Recent Accounting Pronouncements In 2003, the Company adopted Statement of Financial Accounting Standards No. 141, Business Combinations (SFAS 141). SFAS 141requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 141 also includesguidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completedafter June 30, 2001. Application of this statement did not have a significant effect on the Company's consolidated results of operations orfinancial position. In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146).Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF IssueNo. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain CostsIncurred in a Restructuring) (EITF 94-3). Statement 146 requires that a liability for a cost associated with an exit or disposal activity berecognized when the liability is incurred. The Company adopted Statement 146 on January 1, 2003. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others (FIN 45), effective prospectively for guarantees issued or modified afterDecember 31, 2002. The disclosure requirements of FIN 45 are effective for periods ending after December 15, 2002. Under FIN 45, aguarantor is required to recognize, at the inception of certain guarantees, a fair value liability for the obligations it has undertaken in issuingthe guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specifiedtriggering events or conditions occur. All guarantees subject to the disclosure provisions of FIN 45, such as product warranties, have beendisclosed in the accompanying notes to the consolidated financial statements. The Company does not have any other outstandingguarantees at March 31, 2003 required to be disclosed or recorded as obligations upon adoption of FIN 45. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This Interpretationchanges the method of determining whether certain entities should be included in the Company's Consolidated Financial Statements. Anentity is subject to FIN 46 and is called a variable interest entity (VIE) if it has (1) equity that is insufficient to permit the entity toF-15finance its activities without additional subordinated financial support from other parties, or (2) equity investors that cannot make significantdecisions about the entity's operations, or that do not absorb the expected losses or receive the expected returns of the entity. All other entitiesare evaluated for consolidation under SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries. The provisions of FIN 46 are to beapplied immediately to VIEs created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. For VIEs inwhich an enterprise holds a variable interest that it acquired before February 1, 2003, FIN 46 applies in the first fiscal period beginning afterJune 15, 2003. The Company has not yet determined the impact, if any, that the adoption of FIN 46 will have on the Company's financialposition, results of operations or cash flows.Reclassifications Certain amounts in the fiscal 2001 and fiscal 2002 consolidated financial statements have been reclassified to conform with the 2003presentation.3. Acquisitions and Dispositions In October 1998, the Company, through Iteris, acquired Meyer, Mohaddes Associates, Inc., a provider of transportation, engineering andplanning services (MMA). Pursuant to the terms of the merger agreement, the Company purchased all of the issued and outstanding sharesof stock of MMA for $4.3 million, by issuing 55,245 shares of the Company's Class A common stock valued at $250,000 and 810,153shares of Iteris, Inc.'s common stock. The merger agreement provided for MMA shareholders to receive additional shares of the Company's Class A common stock with athen market value of $250,000 at each of April 16, 1999, October 16, 1999, April 16, 2000, October 16, 2000 and April 16, 2001 in the eventthe Company did not consummate an initial public offering of the common stock of Iteris, Inc. by each and any of those dates. Pursuant tothis provision, Odetics issued an additional 219,706 shares of its Class A common stock to the MMA shareholders, which was recorded bythe Company as additional goodwill. In addition, as a result of Iteris' failure to complete an initial public offering by October 2001, the MMAshareholder exercised their rights under the agreement and required Odetics to exchange 1,107,301 shares of Odetics' Class A commonstock for 155,149 shares of Iteris common stock. This transaction resulted in additional goodwill of $2.5 million. During fiscal 2001, the Company sold certain assets of its sold state recording product line of its Zyfer subsidiary for cash proceeds of$1.9 million. In connection with these sales the Company recorded gains aggregating $1.2 million. In April 2001, the Company sold its Vortex Dome and Quarterback Controller product lines for approximately $1.1 million in net cashproceeds. In connection with this transaction, the Company realized a gain of $0.1 million. In September 2001, the Company sold substantially all of the assets of its Gyyr CCTV Products line for $8.8 million in cash, plus theassumption of $1.0 million in debt. In connection with this transaction, the Company wrote-off goodwill with a net book value of $2.3 millionand, net of this write-off, realized a gain of $4.3 million.F-164. Restructuring Charges During fiscal 2001 and 2002, the Company approved a number of actions to reduce operating expenses and improve profitability andcash flows. These actions included a reduction in workforce of 222 and 130 employees in 2001 and 2002 respectively. As a result of theseactions, the Company recorded the following as restructuring charges (in thousands): Severance and relatedcosts 2001 restructuring charge $757 Cash expenditures (757) Balance at March 31, 2001 — 2002 restructuring charge 2,189 Cash expenditures (858) Balance at March 31, 2002 1,331 Cash expenditures (911) Balance at March 31, 2003 $420 F-175. Costs and Estimated Earnings on Uncompleted Contracts Costs incurred, estimated earnings and billings on uncompleted long-term contracts are as follows: March 31, 2002 2003 (In thousands) Costs incurred on uncompleted contracts $17,998 $15,645 Estimated earnings 1,355 1,173 19,353 16,818 Less billings to date 18,024 14,724 $1,329 $2,094 Included in accompanying balance sheets: Costs and estimated earnings in excess of billings onuncompleted contracts $3,565 $2,398 Billings in excess of costs and estimated earnings onuncompleted contracts 2,236 (304) $1,329 $2,094  Costs and estimated earnings in excess of billings at March 31, 2002 and 2003 include $136,114 and $244,172 respectively, that werenot billable as certain milestone objectives specified in the contracts had not been attained. Substantially all costs and estimated earnings inexcess of billings at March 31, 2002 are expected to be billed and collected during the year ending March 31, 2003.6. Revolving Lines of Credit and Long-Term Debt In February 2002, the Company entered into a $1.25 million line of credit with a partnership controlled by the Company's Chairman ofthe Board. The line of credit is collateralized by substantially all of the Company's assets other than real property. Borrowings on the line ofcredit bear interest at the prime rate plus 4% (8.25% at March 31, 2003) and matures in April 2004. Borrowings on the line of credit totaled $1.25 million at March 31, 2002 and 2003. Interest expense under the line of credit totaled $8,000and $110,000 in the years ended March 31, 2002 and 2003. In October 2002, the Company entered into a receivables purchase agreement with a partnership controlled by the Company'sChairman of the Board to sell certain receivables. Under certain conditions of the agreement the Company may be required to buy back anyuncollected receivables. The total amount transferred under the agreement was $1.2 million with $0.4 million uncollected as of March 31,2003. The total fees and interest expense under the agreement was $0.1 million during the year ended March 31, 2003. In August 2001, the Company through Iteris, entered into a loan and security agreement with a maximum available credit line of$5.0 million. At March 31, 2002, there were no outstanding borrowings under this line of credit and amounts available for future borrowingtotalled $4.1 million. Under the terms of the agreement, the Company may borrow against its eligible accounts receivable and the value of itseligible inventory, as defined. Interest on borrowed amounts is payable monthly at the prime rate plus 2% (6.25% at March 31, 2003).Additionally, Iteris is obligated to pay an unused line fee of 0.5% per annum applied to the amount by which the maximum credit amountexceeds the average daily principal balance during the preceding month, and a monthly collateral management fee of $2,000. The agreementis secured by substantially all of Iteris' assets and expires in August 2004. Either party can terminate the agreement with thirty days writtennotice. Should Iteris elect toF-18terminate the agreement, a one-time termination fee of 3%, 2% and 1% of the maximum credit limit would apply in years 1 through 3,respectively. In January 2000, the Company through Iteris, entered into a joint venture agreement, pursuant to which Iteris obtained a SubordinatedConvertible Promissory Note in the amount of $3.75 million. In July 2001, the note holder converted the note and related accrued interestinto common and preferred stock of Iteris (Note 11). In May 2001, the Company entered into a $16 million promissory note secured by a first trust deed on its principal facilities in Anaheim,California, which bore interest at 10% per annum. The promissory note was paid in full at its scheduled maturity date in May 2002 (Note 1).In connection with the note the Company issued warrants to the lender to purchase 426,667 shares of Class A common stock at an exerciseprice of $4.00 per share. The Company repriced the warrants to $3.00 per share, in connection with a forbearance agreement negotiated inNovember 2001. The issuance of the warrant represented a discount on the note totaling $1,357,000, which was amortized over the life ofthe note. Approximately $6.0 million of the proceeds of the promissory note was used to retire the pre-existing note payable on the Anaheimfacility, which included a prepayment penalty of $450,000. This prepayment penalty is reflected as an extraordinary item in the accompanyingconsolidated statement of operations. Long-term debt consisted of the following: March 31, 2002 2003 (In thousands)Note payable, net of discount of $244,000 at March 31, 2002, paid inMay 2002 $15,756 $—Notes payable, accruing interest at 7.55% to 17.08%, collateralized byequipment, payable in monthly installments through fiscal 2003 402 — 16,158 —Less current portion 16,133 — $25 $— 7. Income Taxes The reconciliation of the income tax benefit from continuing operations to taxes computed at U.S. federal statutory rates is as follows: Year ended March 31, 2001 2002 2003 (In thousands) Income tax benefit at statutory rates $500 $(1,376)$(196)State income taxes net of federal benefit — — 4 Increase in valuation allowance associated with federal deferred tax assets (2,138) (208) (273)Foreign losses recorded without benefit 1,185 347 310 Nondeductible goodwill amortization 153 176 — Other 303 276 155 $— $(785)$— F-19 United States and foreign income (loss) from continuing operations before income taxes are as follows: Year ended March 31, 2001 2002 2003 (In thousands) Pretax income (loss): Domestic $4,960 $(3,603)$(182) Foreign (3,489) (1,021) (394) $1,471 $(4,048)$(576) The components of deferred tax assets and liabilities are as follows: March 31, 2002 2003 (In thousands) Deferred tax assets: Net operating losses $21,267 $19,289 Book over tax depreciation — 6,025 Credit carryforwards 1,503 1,999 Deferred compensation and payroll 1,192 1,231 Bad debt allowances and other reserves 357 265 Other, net 1,121 406 Total deferred tax assets 25,440 29,215 Valuation allowance (23,557) (28,748) Net deferred tax assets 1,883 467 Deferred tax liabilities: Tax over book depreciation (1,416) — Capitalized interest and taxes (421) (421) Other, net (46) (46) Total deferred tax liabilities (1,883) (467) Net deferred taxes $— $— At March 31, 2003, the Company had approximately $1,299,000 in federal general business credit carryforwards that begin to expire in2006 and $700,000 in state general business credit carryforwards that can be carried forward indefinitely. The Company had $48,231,000 offederal net operating loss carryforwards that begin to expire in 2019 and $31,000,000 of state net operating loss carryforwards that begin toexpire in 2003. For financial reporting purposes, a valuation allowance has been recorded to offset the deferred tax asset related to thesecredits and net operating losses. Any future benefits recognized from the reduction of the valuation allowance related to these carryforwardswill result in a reduction of income tax expense. In December 2001, the Company's ownership interest in Iteris fell below the threshold required for the Company to file a consolidatedtax return. As a result, Iteris will no longer be included in the Odetics consolidated group for income tax purposes, and instead will berequired to file a separate tax return. At March 31, 2003, for federal income tax purposes, Iteris had approximately $583,000 of the netoperating loss carryforwards described above. Iteris's portion of the net operating losses begins to expire in 2021.F-20 On September 11, 2003, the Governor of California signed into law new tax legislation that suspends the use of net operating losscarryforward into tax years beginning on or after January 1, 2002 and 2003. Should the Company have taxable income for the year endingMarch 31, 2003 and 2004, it may not look to California net operating losses generated in prior years to offset taxable income. Thissuspension will not apply to tax years beginning in 2004 and beyond. Because of the "change of ownership" provision of the Tax Reform Act of 1986, utilization of the Company's net operating losscarryforwards may be subject to an annual limitation against taxable income in future periods. As a result of the annual limitation, a portion ofthese carryforwards may expire before ultimately becoming available to reduce future income tax liabilities.8. Associate Incentive Programs Under the terms of a Profit Sharing Plan, the Company contributes to a trust fund such amounts as are determined annually by theBoard of Directors. No contributions were made in 2001, 2002 or 2003. In May 1990, the Company adopted a 401(k) Plan as an amendment and replacement of the former Associate Stock Purchase Plan thatwas an additional feature of the Profit Sharing Plan. Under the 401(k) Plan, eligible associates voluntarily contribute to the plan up to 15% oftheir salary through payroll deductions. The Company matches 50% of contributions up to a stated limit. Under the provisions of the 401(k)Plan, associates have four investment choices, one of which is the purchase of Odetics, Class A common stock at market price. Companymatching contributions were approximately $812,000, $722,000 and $544,000 in 2001, 2002 and 2003, respectively.9. Deferred Compensation Plans During 1986, the Company adopted an Executive Deferral Plan under which certain executives may defer a portion of their annualcompensation. All deferred amounts earn interest, generally with no guaranteed rate of return. Compensation charged to operations anddeferred under the plan totaled $128,000, $66,000, and $43,000 for 2001, 2002 and 2003, respectively.10. Iteris Preferred and Common Stock In July 2001, Iteris issued 1,781,268 shares of its Series A preferred stock (Iteris preferred stock) to an institutional investor in exchangefor $5.0 million in cash. In addition, Iteris issued 1,343,645 shares of its Iteris preferred stock and 547,893 shares of its common stock inexchange for $500,000 in cash and the retirement of its $3.75 million Subordinated Convertible Promissory Note plus related accruedinterest of $0.4 million. Shares of Iteris preferred stock are convertible into shares of Iteris common stock at the conversion rate in effect at the time, as defined.Each share of Iteris preferred stock will automatically convert into shares of Iteris common stock immediately upon the closing of a firmlyunderwritten public offering pursuant to an effective registration statement under the Securities Act of 1933 with aggregate gross proceeds tothe Company of not less than $30 million and price per share of not less than two times the original Iteris preferred stock issue price of $2.80per share. In the event that the Company fails to consummate an initial public offering of Iteris common stock or complete a sale of Iteris to a thirdparty with aggregate proceeds of $25 million by January 1, 2004 and/or the holders of Iteris preferred stock elect not to exercise their rights toconvert into common stock, the Company will be obligated to redeem the Iteris preferred stock at a sum equal to two times the original Iterispreferred stock issue price. At March 31, 2002, the liquidation preference on Iteris preferred stock totals $17.5 million. The difference between the initial issue price,net of related issuance costs, and the liquidation preference isF-21being amortized over the redemption period and is reflected in minority interest in earnings of subsidiary in the accompanying consolidatedstatement of operations. In August and December 2001, Odetics sold 1,539,241 shares of Iteris common stock that it held at an aggregate purchase price of$3.8 million to a group of investors, which included certain members of management of Odetics and Iteris. In connection with thistransaction, Odetics realized a loss of $1.6 million which is reflected in other income (net) in the accompanying consolidated statement ofoperations. In April 2002 and February 2003, the Company sold 322,581 shares of Iteris common stock that it held at an aggregate purchase priceof $0.9 million to a group of investors, which included certain members of management of Odetics and Iteris. In connection with thistransaction, the Company realized a loss of $0.3 million that is reflected in other income (net) in the accompanying consolidated statement ofoperations. In February 2003 Iteris purchased back from the Company 288,500 shares of Iteris common stock that the Company held.Odetics realized a loss of $310,000 on this transaction, which is reflected in other income, net in the accompanying consolidated statement ofoperations. At March 31, 2003, the Company held 75.1% of the outstanding common stock of Iteris.11. Stock Option Plans The Company has adopted an Associate Stock Option Plan which provides that options for shares of the Company's unissued Class Acommon stock may be granted to directors and associates of the Company. Options granted enable the option holder to purchase one shareof Class A common stock at prices which are equal to or greater than the fair market value of the shares at the date of grant. Options expireten years after date of grant or 90 days after termination of employment and vest ratably at 33% on each of the first three anniversaries of thegrant date. A summary of all Company stock option activity is as follows: Year ended March 31, 2001 2002 2003 Options WeightedAverageExercisePrice Options WeightedAverageExercisePrice Options WeightedAverageExercisePrice (In thousands, except per share data)Options outstanding at beginning of year 801 $7.68 804 $8.44 329 $8.37 Granted 120 13.47 30 2.28 659 1.38 Exercised (24) 7.95 — — — — Cancelled (93) 8.21 (505) 8.06 (26) 4.29 Options outstanding at end of year 804 $8.44 329 $8.37 962 $3.73 Exercisable at end of year 531 237 879 Available for grant at end of year 487 1,322 689 Weighted average fair value of options granted $7.03 $1.20 $0.68 The exercise price for options outstanding as of March 31, 2003, ranged from $1.02 to $15.625. The weighted-average remainingcontractual life of those options is 8.8 years.Iteris, Inc.'s Stock Options In September 1997, Iteris granted options to purchase up to 899,960 shares of its common stock to certain members of its seniormanagement at an exercise price of $1.07 per share. As of March 31, 2002, options to purchase 759,345 shares of common stock wereoutstanding.F-22 Subsequently, Iteris' Board of Directors adopted and approved the 1998 Stock Incentive Plan (the Plan), as amended in February 2000,authorized 3,000,000 shares of Iteris' common stock for issuance under the Plan. Options to purchase 2,228,492 shares of common stock,at exercise prices ranging from $1.60 to $9.07 per share, were outstanding at March 31, 2002. Under the Plan, options expire ten years afterdate of grant or 90 days after termination of employment. The options granted vested ratably at 25% on each of the first four anniversaries ofthe grant date.12. Commitments The Company has lease commitments for facilities in various locations throughout the United States. The annual commitment underthese noncancelable operating leases at March 31, 2003 is as follows:Fiscal Year (in thousands)2004 $2,1712005 2,0472006 1,9282007 1,8372008 1,826Thereafter 7,608 Rent expense under operating leases totaled $1,040,000, $1,139,000 and $2,597,000, respectively for the years ended March 31, 2001,2002 and 2003. Common stock reserved for future issuance at March 31, 2003:Issuable under stock options plans 1,651,000Issuable upon the exercise of warrants 2,926,66713. Business Segment and Geographic Information The Company operates in three reportable segments: intelligent transportation systems, video products, which includes products for thetelevision broadcast and video security markets, and telecom products. The accounting policies of the reportable segments are the same asthose described in the summary of significant accounting policies except that certain expenses, such as interest, amortization of certainintangibles and certain corporate expenses are not allocated to the segments. In addition, certain assets including cash and cash equivalents,deferred taxes and certain long-lived and intangible assets are not allocated to the segments. Intersegment sales are recorded at the sellingsegment's cost plus profit. The reportable segments are each managed separately because they manufacture and distribute distinct products or provide serviceswith different processes.F-23 Selected financial information for the Company's reportable segments as of and for the years ended March 31, 2001, 2002 and 2003follows: IntelligenceTransportation VideoProducts TelecomProducts Total (In thousands) Year ended March 31, 2001 Revenue from external customers $28,057 $31,736 $2,609 $62,402 Depreciation and amortization 1,502 922 125 2,549 Segment income (loss) (3,942) (4,526) 1,120 (7,348)Segment assets 18,709 15,438 375 34,522 Expenditure for long-lived assets 1,392 253 50 1,695 Year ended March 31, 2002 Revenue from external customers $37,308 $12,240 $2,641 $52,189 Depreciation and amortization 1,759 83 75 1,917 Segment income (loss) 2,979 (420) 1,316 3,875 Segment assets 25,736 1,519 250 27,505 Expenditure for long-lived assets, net 272 17 25 314 Year ended March 31, 2003 Revenue from external customers $41,395 $3,231 $3,001 $47,627 Depreciation and amortization 705 14 60 779 Segment income (loss) 2,459 (872) 1,706 3,293 Segment assets 26,005 806 — 26,811 Expenditure for long-lived assets, net 309 — — 309 F-24 The following reconciles segment income to consolidated income before income taxes and segment assets and deprecation andamortization to consolidated assets and consolidated depreciation and amortization: March 31, 2001 2002 2003 (In thousands) Segment Income (loss) Total income (loss) for reportable segments $(7,348)$3,875 $3,293 Other income 1,340 2,919 388 Unallocated amounts: Corporate and other expenses (7,827) (4,463) (3,496) Royalty income 17,825 — — Restructuring charges (757) (2,189) — Interest expense (1,762) (4,190) (761) Income (loss) from continuing operations before income taxes $1,471 $(4,048)$(576) Assets Total assets for reportable segments $34,522 $27,505 $26,811 Assets held at Corporate 33,539 24,733 8,031 Total assets $68,061 $52,238 $34,842 Depreciation and Amortization Depreciation and amortization for reportable segments $2,549 $1,917 $779 Other 2,418 1,859 37 Total depreciation and amortization $4,967 $3,776 $816 Selected financial information for the Company's continuing operations by geographic segment is as follows: March 31, 2001 2002 2003 (In thousands)Geographic Area Revenue United States $55,968 $50,376 $46,716Europe 6,434 1,813 911 Total net revenue $62,402 $52,189 $47,627 Geographic Area Long-Lived Assets United States $28,275 $25,773 $11,830Europe 23 21 21 Total long-lived assets $28,298 $25,794 $11,851 F-2514. Supplemental Cash Flow Information Year ended March 31, 200120022003 (In thousands) Net cash used in changes in operating assets and liabilities, net of acquisitions: (Increase) decrease in accounts receivable $(882)$3,897 $68 (Increase) decrease in net costs and estimated earnings in excess of billings 1,259 (608) (704) (Increase) decrease in inventories 4,499 (1,542) (556) Increase in prepaids and other assets 861 (735) 1,051 Increase (decrease) in accounts payable and accrued expenses (1,116) (3,170) 1,348 Change in net operating assets of discontinued operations — (3,126) (1,284) Net cash used in changes in operating assets and liabilities $4,621 $(5,284)$(77) Cash paid (received) during the year: Interest $1,768 $2,514 $507 Income taxes paid (refunded) 86 — — Noncash transactions during the year: Proceeds from sale leaseback held in escrow $ $ $2,516 Contribution of common stock to 401(k) Plan — 791 141 Exchange of note payable and accrued interest for Iteris stock — 4,203 — Stock issuance to former MMA shareholders 500 2,737 — Issuance of common stock in settlement of accounts payable — 390 — 15. Legal Proceedings On October 11, 1999, the Company settled a patent infringement case it had brought against Storage Technology Corporation(StorageTek). Through an agreement, StorageTek agreed to pay the Company a license fee totaling $100.0 million for use of the Company'sUnited States Patent No. 4,779,151. Under the agreement, the license fee was payable in three installments: $80.0 million upon signing ofthe agreement, and two annual installments of $10.0 million payable in each of October 2000 and 2001. On June 12, 2000, the Companyand StorageTek amended the agreement, whereby StorageTek agreed to pay a final discounted payment of $17.8 million immediately in fullsettlement of the $20.0 million otherwise due to complete the settlement, which is reflected in the accompanying consolidated financialstatements as royalty income. From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course ofbusiness. The Company currently is not a party to any legal proceedings, the adverse outcome of which, in management's opinion,individually or in the aggregate, would have a material adverse effect on its consolidated results of operations, financial position or cash flows.F-2616. Supplementary Quarterly Consolidated Financial Data (Unaudited) All quarters presented in the following schedule have been restated for the discontinuance of Mariner, Zyfer and Broadcast. NetSales GrossProfit Loss fromContinuingOperations NetLoss Loss perShare fromContinuingOperations June 30, 2001 $14,268 4,819 (2,168)(7,775)$(0.21)September 30, 2001(1) 14,609 5,900 (2,077)(15,164) (0.20)December 31, 2001 11,435 4,893 (964)(2,331) (0.08)March 31, 2002 11,877 6,676 36 (1,318) (0.00)June 30, 2002 11,945 5,124 (485)(1,300) (0.04)September 30, 2002 11,168 4,575 (1,306)(2,617) (0.09)December 31, 2002 12,452 5,496 (384)(905) (0.03)March 31, 2003(2) 12,062 4,974 (2,219)(8,326) (0.16)(1)During the quarter ended September 30, 2001, the Company discontinued the operations of its Mariner subsidiary and restructuredits European operations. In connection with these actions, the Company recorded severance and other charges and wrote downassets totaling $9.9 million. (2)During the quarter ended March 31, 2003, the Company discontinued the operations of its Zyfer and Broadcast subsidiaries. Inconnection with those actions, the Company recorded severance payments and other charges and wrote down assets totaling$4.9 million.F-27Schedule II Valuation and Qualifying Accounts Description Balance atBeginning ofPeriod Charged toCosts andExpenses Charged toAccounts DeductionsDescribe Balance atEnd of PeriodYear ended March 31, 2001 Deducted from asset accounts: Allowance for doubtful accounts $990,000 $78,000 $(502,000)$— $1,644,000 Reserve for inventory obsolescence 1,184,000 4,925,000 (4,443,000) — 3,968,000Year ended March 31, 2002 Deducted from asset accounts: Allowance for doubtful accounts $600,000 $— $(485,000)$— $115,000 Reserve for inventory obsolescence 2,048,000 65,000 (1,735,000) — 378,000Year ended March 31, 2003 Deducted from asset accounts: Allowance for doubtful accounts $115,000 $78,000 $(37,000)$— $156,000 Reserve for inventory obsolescence 378,000 — (130,000) — 248,000S-1QuickLinksODETICS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTSPART IITEM 1. BUSINESS.ITEM 2. PROPERTIES.ITEM 3. LEGAL PROCEEDINGS.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.PART IIITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.RISK FACTORSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.PART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.ITEM 11. EXECUTIVE COMPENSATION.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.ITEM 14. CONTROLS AND PROCEDURES.PART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.SIGNATURESPOWER OF ATTORNEYCERTIFICATIONOdetics, Inc. Index to Consolidated Financial StatementsReport of Independent AuditorsOdetics, Inc. Consolidated Balance Sheets (In thousands, except share and per share amounts)Odetics, Inc. Consolidated Statements of Operations (In thousands, except per share information)Odetics, Inc. Consolidated Statements of Stockholders' Equity (In thousands)Odetics, Inc. Consolidated Statements of Cash Flows (In thousands)Odetics, Inc. and Subsidiary Notes to Consolidated Financial Statements March 31, 2003Schedule II Valuation and Qualifying AccountsQuickLinks -- Click here to rapidly navigate through this documentExhibit 10.5ODETICS, INC.1997 STOCK INCENTIVE PLAN(Amended and Restated as of May 3, 2002) ARTICLE ONEGENERAL PROVISIONSI. PURPOSE OF THE PLAN This 1997 Stock Incentive Plan is intended to promote the interests of Odetics, Inc., a Delaware corporation, by providing eligiblepersons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as anincentive for them to remain in the service of the Corporation. Capitalized terms shall have the meanings assigned to such terms in the attached Appendix.II. STRUCTURE OF THE PLAN A. The Plan shall be divided into three separate equity programs:•The Discretionary Option Grant Program under which eligible person may, at the discretion of the Plan Administrator, begranted options to purchase shares of Class A Common Stock, •the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares ofClass A Common Stock directly, either through the immediate purchase of such shares or as a bonus for services renderedthe Corporation (or any Parent or Subsidiary), and •the Automatic Option Grant Program under which eligible non-employee Board members shall automatically receive optiongrants at periodic intervals to purchase shares of Class A Common Stock. B. The provisions of Articles One and Five shall apply to all equity programs under the Plan and shall govern the interests of allpersons under the Plan.III. ADMINISTRATION OF THE PLAN A. The Primary Committee shall have sole and exclusive authority to administer the Discretionary Option Grant and Stock IssuancePrograms with respect to Section 16 Insiders. Administration of the Discretionary Option Grant and Stock Issuance Programs with respect toall other persons eligible to participate in those programs may, at the Board's discretion, be vested in the Primary Committee or a SecondaryCommittee, or the Board may retain the power to administer those programs with respect to all such persons. B. Members of the Primary Committee or any Secondary Committee shall serve for such period of time as the Board may determineand may be removed by the Board at any time. The Board may also at any time terminate the functions of any Secondary Committee andreassume all powers and authority previously delegated to such committee. C. Each Plan Administrator shall, within the scope of its administrative functions under the Plan, have full power and authority(subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of theDiscretionary Option Grant and Stock Issuance Programs and to make such determinations under, and issue such interpretations of, theprovisions of such programs and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisionsof the Plan Administrator within the scope of its administrative functions under the Plan shall be final and binding on all parties who have aninterest in theDiscretionary Option Grant and Stock Issuance Programs under its jurisdiction or any option or stock issuance thereunder. D. Service on the Primary Committee or the Secondary Committee shall constitute service as a Board member, and members of eachsuch committee shall accordingly be entitled to full indemnification and reimbursement as Board members for their service on suchcommittee. No member of the Primary Committee or the Secondary Committee shall be liable for any act or omission made in good faithwith respect to the Plan or any option grants or stock issuances under the Plan. E. Administration of the Automatic Option Grant Program shall be self-executing in accordance with the terms of that program, and noPlan Administrator shall exercise any discretionary functions with respect to any option grants or stock issuances made under such program.IV. ELIGIBILITY A. The persons eligible to participate in the Discretionary Option Grant and Stock Issuance Programs are as follows: (i) employees, (ii) non-employee members of the Board or the board of directors of any Parent or Subsidiary, and (iii) consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. Each Plan Administrator shall, within the scope of its administrative jurisdiction under the Plan, have full authority to determine,(i) with respect to the option grants under the Discretionary Option Grant Program, which eligible persons are to receive option grants, thetime or times when such option grants are to be made, the number of shares to be covered by each such grant, the status of the grantedoption as either an Incentive Option or a Nonstatutory Option, the time or times when each option is to become exercisable, the vestingschedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding and (ii) with respect tostock issuances under the Stock Issuance Program, which eligible persons are to receive stock issuances, the time or times when suchissuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued sharesand the consideration to be paid for such shares. C. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Discretionary Option GrantProgram or to effect stock issuances in accordance with the Stock Issuance Program. D. The individuals who shall be eligible to participate in the Automatic Option Grant Program shall be limited to (i) those individualsserving as non- employee Board members on the Plan Effective Date, (ii) those individuals who first become non-employee Board memberson or after the Plan Effective Date, whether through appointment by the Board or election by the Corporation's stockholders, and (ii) thoseindividuals who continue to serve as non-employee Board members at one or more Annual Stockholders Meetings held after the PlanEffective Date.V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Class A Common Stock, includingshares repurchased by the Corporation on the open market. The maximum number of shares of Class A Common Stock reserved forissuance over the term of the Plan shall not exceed 1,805,000 shares. This reserve includes (i) the 530,000 shares originally reserved forissuance under the Plan, (ii) the 400,000 share increased approved by the Corporation's stockholders at2the 1999 Annual Meeting, (iii) the 400,000 share increase approved by the Corporation's stockholders at the 2000 Annual Meeting, and(iv) the 475,000 share increase approved by the Corporation's stockholders at the 2001 Annual Meeting. B. No one person participating in the Plan may receive options, separately exercisable stock appreciation rights and direct stockissuances for more than 80,000 shares of Class A Common Stock in the aggregate per calendar year, beginning with the 1997 calendar year. C. Shares of Class A Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to theextent (i) those options expire or terminate for any reason prior to exercise in full or (ii) those options are cancelled in accordance with theoption cancellation/regrant provisions of Section IV of Article Two. Unvested shares issued under the Plan and subsequently cancelled orrepurchased by the Corporation, at the original exercise or direct issue price paid per share, pursuant to the Corporation's repurchase rightsunder the Plan shall be added back to the number of shares of Class A Common Stock reserved for issuance under the Plan and shallaccordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. However,shares subject to any options surrendered in connection with the stock appreciation right provisions of the Plan shall not be available forreissuance. Should the exercise price of an option under the Plan be paid with shares of Class A Common Stock or should shares of Class ACommon Stock otherwise issuable under the Plan be withheld by the Corporation in satisfaction of the withholding taxes incurred inconnection with the exercise of an option or the vesting of a stock issuance under the Plan, then the number of shares of Class A CommonStock available for issuance under the Plan shall be reduced by the gross number of shares for which the option is exercised or which vestunder the stock issuance, and not by the net number of shares of Class A Common Stock issued to the holder of such option or stockissuance. D. If any change is made to the Class A Common Stock by reason of any stock split, reverse stock split, stock dividend, distribution,recapitalization, combination or reclassification of shares, exchange of shares or other change affecting the outstanding Class A CommonStock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum numberand/or class of securities issuable under the Plan, (ii) the number and/or class of securities for which any one person may be granted stockoptions, separately exercisable stock appreciation rights and direct stock issuances under the Plan per calendar year, (iii) the number and/orclass of securities for which grants are subsequently to be made under the Automatic Option Grant Program to new and continuing non-employee Board members, and (iv) the number and/or class of securities and the exercise price per share in effect under each outstandingoption under the Plan. Such adjustments to the outstanding options are to be effected in a manner which shall preclude the enlargement ordilution of rights and benefits under such options. The adjustments determined by the Plan Administrator shall be final, binding andconclusive. E. Should the Corporation effect a divestiture of one or more Subsidiaries through a distribution or spin-off to the Corporation'sstockholders of the securities of the Subsidiary held by the Corporation ("Divestiture"), then the Plan Administrator may, in its solediscretion, make appropriate adjustments to the number and/or class of securities subject to each outstanding option and the exercise pricepayable per share in order to reflect the effect of the Divestiture on the Corporation's capital structure and the relative Fair Market Values of theClass A Common Stock and the distributed securities of the Subsidiary following the Divestiture. Such adjustment may include the divisionof the option into two separate options, one for the shares of Class A Common Stock at the time subject to the option and a second option forthe securities of the Subsidiary distributable with respect to those shares. The Plan Administrator may also, in its sole discretion, acceleratethe vesting and exercisability of the option (or any separated option) with respect to one or more shares of the Class A Common Stock ordistributed securities at the time subject to such option (or the separated option), if and to the extent the Optionee is to remain in theCorporation's Service following such Divestiture or is otherwise to provide services to the divested Subsidiary.3ARTICLE TWODISCRETIONARY OPTION GRANT PROGRAMI. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided, however, that eachsuch document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject tothe provisions of the Plan applicable to such options. A. Exercise Price. 1. The exercise price per share shall be fixed by the Plan Administrator but shall not be less than one hundred percent (100%)of the Fair Market Value per share of Class A Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section Iof Article Five and the documents evidencing the option, be payable in one or more of the forms specified below: (i) cash or check made payable to the Corporation, (ii) shares of Class A Common Stock held for the requisite period necessary to avoid a charge to the Corporation'searnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (iii) to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant towhich the Optionee shall concurrently provide irrevocable instructions to (a) a Corporation designated brokerage firm to effectthe immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlementdate, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, stateand local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (b) theCorporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must bemade on the Exercise Date. B. Exercise and Term of Options. Each option shall be exercisable at such time or times, during such period and for such numberof shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option. However, no option shallhave a term in excess of ten (10) years measured from the option grant date. C. Effect of Termination of Service. 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service ordeath: (i) Any option outstanding at the time of the Optionee's cessation of Service for any reason shall remain exercisable forsuch period of time thereafter as shall be determined by the Plan Administrator and set forth in the documents evidencing theoption, but no such option shall be exercisable after the expiration of the option term. (ii) Any option exercisable in whole or in part by the Optionee at the time of death may be subsequently exercised by thepersonal representative of the Optionee's estate or by the4person or persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descentand distribution. (iii) During the applicable exercise period following termination of Service, the option may not be exercised in theaggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessationof Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the optionshall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, theoption shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding to the extent theoption is not otherwise at that time exercisable for vested shares. (iv) Should the Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shallterminate immediately and cease to be outstanding. 2. The Plan Administrator shall have complete discretion, exercisable either at the time an option is granted or at any timewhile the option remains outstanding, to: (i) extend the period of time for which the option is to remain exercisable following the Optionee's cessation of Servicefrom the limited exercise period otherwise in effect for that option to such greater period of time as the Plan Administrator shalldeem appropriate, but in no event beyond the expiration of the option term, and/or (ii) permit the option to be exercised, during the applicable Service exercise period following termination of service, notonly with respect to the number of vested shares of Class A Common Stock for which such option is exercisable at the time ofthe Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee wouldhave vested had the Optionee continued in Service. D. Stockholder Rights. The holder of an option shall have no stockholder rights with respect to the shares subject to the option untilsuch person shall have exercised the option, paid the exercise price and become a holder of record of the purchased shares. E. Repurchase Rights. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested sharesof Class A Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right torepurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall beexercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall beestablished by the Plan Administrator and set forth in the document evidencing such repurchase right. F. Limited Transferability of Options. During the lifetime of the Optionee, Incentive Options shall be exercisable only by theOptionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee'sdeath. However, a Nonstatutory Option may be assigned in whole or in part during the Optionee's lifetime to one or more "family members"(as defined in Rule 701 of the 1933 Act) of the Optionee if such assignment is a gift or pursuant to a domestic relations order. The termsapplicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be setforth in such documents issued to the assignee as the Plan Administrator may deem appropriate.II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all theprovisions of Articles One, Two and Five shall be applicable to5Incentive Options. Options which are specifically designated as Nonstatutory Options when issued under the Plan shall not be subject to theterms of this Section II. A. Eligibility. Incentive Options may only be granted to Employees. B. Dollar Limitation. The aggregate Fair Market Value of the shares of Class A Common Stock (determined as of the respective dateor dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or anyParent or Subsidiary) may for the first time become exercisable as Incentive Options during any one calendar year shall not exceed the sumof One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable forthe first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied onthe basis of the order in which such options are granted. C. 10% Stockholder. If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the exercise price pershare shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Class A Common Stock on the optiongrant date, and the option term shall not exceed five (5) years measured from the option grant date.III. CORPORATE TRANSACTION/CHANGE IN CONTROL A. In the event of any Corporate Transaction, each outstanding option shall automatically accelerate so that each such option shall,immediately prior to the effective date of the Corporate Transaction, become fully exercisable with respect to the total number of shares ofClass A Common Stock at the time subject to such option and may be exercised for any or all of those shares as fully vested shares ofClass A Common Stock. However, an outstanding option shall not become exercisable on such an accelerated basis if and to the extent:(i) such option is, in connection with the Corporate Transaction, to be assumed by the successor corporation (or parent thereof) or (ii) suchoption is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing at the time of theCorporate Transaction on any shares for which the option is not otherwise at that time exercisable and provides for subsequent payout inaccordance with the same exercise/vesting schedule applicable to those option shares or (iii) the acceleration of such option is subject to otherlimitations imposed by the Plan Administrator at the time of the option grant. B. All outstanding repurchase rights shall automatically terminate, and the shares of Class A Common Stock subject to thoseterminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights areto be assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vestingis precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to beoutstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after suchCorporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation ofsuch Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments toreflect such Corporate Transaction shall also be made to (i) the exercise price payable per share under each outstanding option, provided theaggregate exercise price payable for such securities shall remain the same, (ii) the maximum number and/or class of securities available forissuance over the remaining term of the Plan and (iii) the maximum number and/or class of6securities for which any one person may be granted stock options, separately exercisable stock appreciation rights and direct stock issuancesunder the Plan per calendar year. E. The Plan Administrator shall have the discretionary authority to provide for the automatic acceleration of one or more outstandingoptions under the Discretionary Option Grant Program upon the occurrence of a Corporate Transaction, whether or not those options are tobe assumed in the Corporate Transaction, so that each such option shall, immediately prior to the effect date of such Corporate Transaction,become fully exercisable with respect to the total number of shares of Class A Common Stock at the time subject to that option and may beexercised for any or all of those shares as fully vested shares of Class A Common Stock. In addition, the Plan Administrator shall have thediscretionary authority to structure one or more of the Corporation's repurchase rights under the Discretionary Option Grant Program so thatthose rights shall not be assignable in connection with such Corporate Transaction and shall accordingly terminate upon the consummationof such Corporate Transaction, and the shares subject to those terminated rights shall thereupon vest in full. F. The Plan Administrator shall have full power and authority, exercisable either at the time the option is granted or at any time whilethe option remains outstanding, to provide for the automatic acceleration of one or more outstanding options under the Discretionary OptionGrant Program in the event the Optionee's Service is subsequently terminated by reason of an Involuntary Termination within a designatedperiod (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those options are assumed anddo not otherwise accelerate. Any options so accelerated shall remain exercisable for fully vested shares until the earlier of (i) the expiration ofthe option term or (ii) the expiration of the one (1) year period measured from the effective date of the Involuntary Termination. In addition, thePlan Administrator may provide that one or more of the Corporation's outstanding repurchase rights with respect to shares held by theOptionee at the time of such Involuntary Termination shall immediately terminate, and the shares subject to those terminated repurchaserights shall accordingly vest in full. G. The Plan Administrator shall have the discretionary authority to provide for the automatic acceleration of one or more outstandingoptions under the Discretionary Option Grant Program upon the occurrence of a Change in Control so that each such option shall,immediately prior to the effect date of such Change in Control, become fully exercisable with respect to the total number of shares of Class ACommon Stock at the time subject to that option and may be exercised for any or all of those shares as fully vested shares of Class ACommon Stock. Each such accelerated option shall remain exercisable until the expiration or sooner termination of the option term. Inaddition, the Plan Administrator shall have the discretionary authority to structure one or more of the Corporation's repurchase rights underthe Discretionary Option Grant Program so that those rights shall terminate automatically upon the consummation of such Change inControl, and the shares subject to those terminated rights shall thereupon vest in full. Alternatively, the Plan Administrator may condition theautomatic acceleration of one or more outstanding options under the Discretionary Option Grant Program and the termination of one or moreof the Corporation's outstanding repurchase rights under such program upon the subsequent termination of the Optionee's Service byreason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of suchChange in Control. Each option so accelerated shall remain exercisable for fully vested shares until the earlier of (i) the expiration of theoption term or (ii) the expiration of the one (1) year period measured from the effective date of such Involuntary Termination. H. The portion of any Incentive Option accelerated in connection with a Corporate Transaction or Change in Control shall remainexercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. Tothe extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Nonstatutory Option under theFederal tax laws.7 I. The outstanding options shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change itscapital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected optionholders, the cancellation of any or all outstanding options under the Discretionary Option Grant Program and to grant in substitution newoptions covering the same or different number of shares of Class A Common Stock but with an exercise price per share equal to the FairMarket Value per share of Class A Common Stock on the new grant date.V. STOCK APPRECIATION RIGHTS A. The Plan Administrator shall have the authority to grant to selected Optionees tandem stock appreciation rights and/or limited stockappreciation rights. B. The following terms shall govern the grant and exercise of tandem stock appreciation rights: (i) One or more Optionees may be granted the right, exercisable upon such terms as the Plan Administrator may establish, toelect between the exercise of the underlying option for shares Class A Common Stock and the surrender of that option in exchange fora distribution from the Corporation in an amount equal to the excess of (a) the Fair Market Value (on the option surrender date) of thenumber of shares in which the Optionee is at the time vested under the surrendered option (or surrendered portion) over (b) theaggregate exercise price payable for those shares. (ii) No such option surrender shall be effective unless it is approved by the Plan Administrator, either at the time of the actualoption surrender or at any earlier time. If the surrender is so approved, then the distribution to which the Optionee shall be entitledmay be made in shares of Class A Common Stock valued at Fair Market Value on the option surrender date, in cash, or partly inshares and partly in cash, as the Plan Administrator shall in its sole discretion deem appropriate. (iii) If the surrender of an option is not approved by the Plan Administrator, then the Optionee shall retain whatever rights theOptionee had under the surrendered option (or surrendered portion) on the option surrender date and may exercise such rights at anytime prior to the later of (a) five (5) business days after the receipt of the rejection notice or (b) the last day on which the option isotherwise exercisable in accordance with the terms of the documents evidencing such option, but in no event may such rights beexercised more than ten (10) years after the option grant date. 2. The following terms shall govern the grant and exercise of limited stock appreciation rights: (i) One or more Section 16 Insiders may be granted limited stock appreciation rights with respect to their outstanding options. (ii) Upon the occurrence of a Hostile Takeover, each individual holding one or more options with such a limited stockappreciation right shall have the unconditional right (exercisable for a thirty (30) day period following such Hostile Takeover) tosurrender each such option to the Corporation, to the extent the option is at the time exercisable for vested shares of Class ACommon Stock. In return for the surrendered option, the Optionee shall receive a cash distribution from the Corporation in anamount equal to the excess of (A) the Takeover Price of the shares of Class A Common Stock which are at the time vested under eachsurrendered option8(or surrendered portion) over (B) the aggregate exercise price payable for those shares. Such cash distribution shall be paid within five(5) days following the option surrender date. (iii) The Plan Administrator shall pre-approve, at the time the limited right is granted, the subsequent exercise of that right inaccordance with the terms of the grant and the provisions of this Section V. No additional approval of the Plan Administrator or theBoard shall be required at the time of the actual option surrender and cash distribution. (iv) The balance of the option (if any) shall remain outstanding and exercisable in accordance with the documents evidencingsuch option.9ARTICLE THREESTOCK ISSUANCE PROGRAMI. STOCK ISSUANCE TERMS Shares of Class A Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances withoutany intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the termsspecified below. A. Purchase Price. 1. The purchase price per share shall be fixed by the Plan Administrator, but shall not be less than one hundred percent (100%)of the Fair Market Value per share of Class A Common Stock on the issuance date. 2. Subject to the provisions of Section I of Article Five, shares of Class A Common Stock may be issued under the StockIssuance Program for any combination of the following items of consideration which the Plan Administrator may deem appropriate ineach individual instance: (i) cash or check made payable to the Corporation, or (ii) past services rendered to the Corporation (or any Parent or Subsidiary). B. Vesting Provisions. 1. Shares of Class A Common Stock issued under the Stock Issuance Program may, in the discretion of the PlanAdministrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period ofService or upon attainment of specified performance objectives. The elements of the vesting schedule applicable to any unvestedshares of Class A Common Stock issued under the Stock Issuance Program shall be determined by the Plan Administrator andincorporated into the Stock Issuance Agreement. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend)which the Participant may have the right to receive with respect to the Participant's unvested shares of Class A Common Stock byreason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting theoutstanding Class A Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) thesame vesting requirements applicable to the Participant's unvested shares of Class A Common Stock and (ii) such escrowarrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full stockholder rights with respect to any shares of Class A Common Stock issued to theParticipant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, theParticipant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Class A Common Stockissued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more suchunvested shares of Class A Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation,and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares werepreviously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase moneyindebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancelthe unpaid principal balance of any outstanding purchase money note of the Participant attributable to the surrendered shares.10 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares ofClass A Common Stock which would otherwise occur upon the cessation of the Participant's Service or the non attainment of theperformance objectives applicable to those shares. Such waiver shall result in the immediate vesting of the Participant's interest in theshares as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation ofService or the attainment or non-attainment of the applicable performance objectives. C. Nontransferability of Rights to Purchase. During the lifetime of the Participant, the right to purchase shares of Class ACommon Stock pursuant to the Stock Issuance Program shall be exercisable only by the Participant and shall not be assignable ortransferable other than by will or by the laws of descent and distribution following the Participant's death.II. CORPORATE TRANSACTION/CHANGE IN CONTROL A. All of the Corporation's outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and all theshares of Class A Common Stock subject to those terminated rights shall immediately vest in full, in the event of any CorporateTransaction, except to the extent (i) those repurchase rights are to be assigned to the successor corporation (or parent thereof) in connectionwith such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed in the Stock Issuance Agreement. B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued underthe Stock Issuance Program or any time while the Corporation's repurchase rights with respect to those shares remain outstanding, tostructure one or more of those repurchase rights so that such rights shall not be assignable in connection with a Corporate Transaction andshall accordingly terminate upon the consummation of such Corporate Transaction, and the shares subject to those terminated repurchaserights shall thereupon vest in full. C. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or anytime while the Corporation's repurchase rights remain outstanding under the Stock Issuance Program, to provide that those rights shallautomatically terminate in whole or in part, and the shares of Class A Common Stock subject to those terminated rights shall immediatelyvest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within a designatedperiod (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase rights areassigned to the successor corporation (or parent thereof). D. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or anytime while the Corporation's repurchase rights with respect to those shares remain outstanding under the Stock Issuance Program, tostructure one or more of those repurchase rights so that such rights shall automatically terminate in whole or in part, and the shares ofClass A Common Stock subject to those terminated rights shall immediately vest, upon (i) a Change in Control or (ii) the subsequenttermination of the Participant's Service by reason of an Involuntary Termination within a designated period (not to exceed eighteen(18) months) following the effective date of such Change in Control or Involuntary Termination.III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest insuch shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares.11ARTICLE FOURAUTOMATIC OPTION GRANT PROGRAMI. OPTION TERMS A. Grant Dates. Option grants shall be made on the dates specified below: 1. Each individual serving as a non-employee Board member on the Plan Effective Date shall automatically be granted at thattime a Nonstatutory Option to purchase 5,000 shares of Class A Common Stock, provided that individual has not previously been inthe employ of the Corporation or any Parent or Subsidiary. 2. Each individual who is first elected or appointed as a non-employee Board member on or after the Plan Effective Date shallautomatically be granted, on the date of such initial election or appointment, a Nonstatutory Option to purchase 20,000 shares ofClass A Common Stock, provided that individual has not previously been in the employ of the Corporation or any Parent orSubsidiary. 3. In the date of each Annual Stockholders Meeting, beginning with the 1998 Annual Stockholders Meeting, each individualwho is to continue to serve as a non-employee Board member, whether or not that individual is standing for reelection to the Board atthat particular Annual Meeting, shall automatically be granted a Nonstatutory Option to purchase 5,000 shares of Class A CommonStock, provided such individual has served as a non-employee Board member for at least six (6) months. There shall be no limit onthe number of such 5,000 share option grants any one non-employee Board member may receive over his or her period of Boardservice, and non-employee Board members who have previously been in the employ of the Corporation (or any Parent or Subsidiary)shall be eligible to receive one or more such annual option grants over their period of continued Board service. B. Exercise Price. 1. The exercise price per share shall be equal to one hundred percent (100%) of the Fair Market Value per share of Class ACommon Stock on the option grant date. 2. The exercise price shall be payable in one or more of the alternative forms authorized under the Discretionary Option GrantProgram. Except to the extent the sale and remittance procedure specified thereunder is utilized, payment of the exercise price for thepurchased shares must be made on the Exercise Date. C. Option Term. Each option shall have a term of ten (10) years measured from the option grant date. D. Exercise and Vesting of Options. Each initial 20,000 share option grant shall be immediately exercisable for any or all of theoption shares as fully vested shares of Class A Common Stock and shall remain so exercisable until the expiration or sooner termination ofthe option term. Each annual 5,000 share grant shall also be immediately exercisable for any or all of the option shares. However, the sharesof Class A Common Stock purchased under each annual 5,000 share grant shall be subject to repurchase by the Corporation, at the exerciseprice paid per share, upon the Optionee's cessation of Board service prior to vesting in those shares. Each annual 5,000 share grant shallvest, and the Corporation's repurchase right shall lapse, in a series of four (4) successive equal annual installments upon the Optionee'scompletion of each year of Board service over the four (4) year period measured from the automatic grant date.12 E. Termination of Board Service. The following provisions shall govern the exercise of any options held by the Optionee at thetime the Optionee ceases to serve as a Board member: (i) The Optionee (or, in the event of Optionee's death, the personal representative of the Optionee's estate or the personor persons to whom the option is transferred pursuant to the Optionee's will or in accordance with the laws of descent anddistribution) shall have a twelve (12) month period following the date of such cessation of Board service in which to exerciseeach such option. (ii) During the twelve (12) month exercise period, the option may not be exercised in the aggregate for more than thenumber of vested shares of Class A Common Stock for which the option is exercisable at the time of the Optionee's cessationof Board service. (iii) Should the Optionee cease to serve as a Board member by reason of death or Permanent Disability, then all sharesat the time subject to the option shall immediately vest so that such option may, during the twelve (12) month exercise periodfollowing such cessation of Board service, be exercised for all or any portion of those shares as fully vested shares of Class ACommon Stock. (iv) In no event shall the option remain exercisable after the expiration of the option term. Upon the expiration of thetwelve (12) month exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease tobe outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediatelyupon the Optionee's cessation of Board service for any reason other than death or Permanent Disability, terminate and ceaseto be outstanding to the extent the option is not otherwise at that time exercisable for vested shares.II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKEOVER A. The shares of Class A Common Stock subject to each option outstanding under this Article Four at the time of a CorporateTransaction but not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date ofthe Corporate Transaction, become fully exercisable for all of the shares of Class A Common Stock at the time subject to such option andmay be exercised for all or any portion of those shares as fully vested shares of Class A Common Stock. Immediately following theconsummation of the Corporate Transaction, each automatic option grant shall terminate and cease to be outstanding, except to the extentassumed by the successor corporation (or parent thereof). B. The shares of Class A Common Stock subject to each option outstanding under this Article Four at the time of a Change in Controlbut not otherwise vested shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change inControl, become fully exercisable for all of the shares of Class A Common Stock at the time subject to such option and may be exercised forall or any portion of those shares as fully vested shares of Class A Common Stock. Each such option shall remain exercisable for such fullyvested option shares until the expiration or sooner termination of the option term or the surrender of the option in connection with a HostileTakeover. C. All outstanding repurchase rights under the Automatic Option Grant Program shall automatically terminate, and the unvestedshares of Class A Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transactionor Change in Control. D. Upon the occurrence of a Hostile Takeover, the Optionee shall have a thirty (30) day period in which to surrender to the Corporationeach of his or her outstanding automatic option grants. The Optionee shall in return be entitled to a cash distribution from the Corporation inan amount equal to the excess of (i) the Takeover Price of the shares of Class A Common Stock at the time subject to each13surrendered option (whether or not the Optionee is otherwise at the time vested in those shares) over (ii) the aggregate exercise price payablefor such shares. Such cash distribution shall be paid within five (5) days following the surrender of the option to the Corporation. Stockholderapproval of the Plan on the Plan Effective Date shall constitute pre-approval of the grant of each such option surrender right under thisAutomatic Option Grant Program and the subsequent exercise of that right in accordance with the terms and provisions of this Section II. E. No additional approval or consent of the Plan Administrator or the Board shall be required at the time of the actual option surrenderand cash distribution. F. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after suchCorporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation ofsuch Corporate Transaction had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shallalso be made to the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for suchsecurities shall remain the same. G. The grant of options under the Automatic Option Grant Program shall in no way affect the right of the Corporation to adjust,reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all orany part of its business or assets.III. REMAINING TERMS The remaining terms of each option granted under the Automatic Option Grant Program shall be the same as the terms in effect foroption grants made under the Discretionary Option Grant Program.14ARTICLE FIVEMISCELLANEOUSI. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Discretionary Option GrantProgram or the purchase price of shares issued under the Stock Issuance Program by delivering a full recourse, interest bearing promissorynote payable in one or more installments. The terms of any such promissory note (including the interest rate and the terms of repayment)shall be established by the Plan Administrator in its sole discretion. In no event may the maximum credit available to the Optionee orParticipant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares (less the par value ofthose shares) plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant inconnection with the option exercise or share purchase.II. TAX WITHHOLDING A. The Corporation's obligation to deliver shares of Class A Common Stock upon the exercise of options or the issuance or vesting ofsuch shares under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment taxwithholding requirements. B. The Plan Administrator may, in its discretion, provide any or all holders of Nonstatutory Options or unvested shares of Class ACommon Stock under the Plan (other than the options granted or the shares issued under the Automatic Option Grant Program) with theright to use shares of Class A Common Stock in satisfaction of all or part of the Taxes incurred by such holders in connection with theexercise of their options or the vesting of their shares. Such right may be provided to any such holder in either or both of the followingformats: 1. Stock Withholding: The election to have the Corporation withhold, from the shares of Class A Common Stock otherwiseissuable upon the exercise of such Nonstatutory Option or the vesting of such shares, a portion of those shares with an aggregate FairMarket Value equal to the percentage of the Taxes (not to exceed one hundred percent (100%)) designated by the holder. 2. Stock Delivery: The election to deliver to the Corporation, at the time the Nonstatutory Option is exercised or the sharesvest, one or more shares of Class A Common Stock previously acquired by such holder (other than in connection with the optionexercise or share vesting triggering the Taxes) with an aggregate Fair Market Value equal to the percentage of the Taxes (not to exceedone hundred percent (100%)) designated by the holder.III. EFFECTIVE DATE AND TERM OF THE PLAN A. The Plan was adopted by the Board on July 25, 1997 and shall become effective upon approval by the Corporation's stockholders atthe 1997 Annual Meeting held on the Plan Effective Date. B. The Plan shall terminate upon the earliest to occur of (i) July 25, 2007, (ii) the date on which all shares available for issuance underthe Plan shall have been issued as fully vested shares or (iii) the termination of all outstanding options in connection with a CorporateTransaction. Upon such plan termination, all outstanding option grants and unvested stock issuances shall thereafter continue to have forceand effect in accordance with the provisions of the documents evidencing those grants or issuances.15IV. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, nosuch amendment or modification shall adversely affect the rights and obligations with respect to stock options or unvested stock issuances atthe time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certainamendments may require stockholder approval pursuant to applicable laws or regulations. B. The Board amended the Plan in 1999 to increase the number of shares of Class A Common Stock reserved for issuance under thePlan from 530,000 to 930,000. The Plan was amended in 2000 to (1) increase the number of shares of Class A Common Stock reserved forissuance under the Plan by an additional 400,000 shares, (2) increase the number of shares of Class A Common Stock subject to the initialautomatic option grant pursuant to the Automatic Option Grant Program from 5,000 shares to 20,000 shares and (3) increase the number ofshares of Class A Common Stock subject to the annual automatic option grant pursuant to the Automatic Option Grant Program from 4,000shares to 5,000 shares. In 2001, the Plan was amended to increase the number of shares of Class A Common Stock reserved for issuanceunder the Plan by 475,000 shares. In 2002, the Plan was amended to comply with the requirements of the California Department ofCorporations. C. Options to purchase shares of Class A Common Stock may be granted under the Discretionary Option Grant Program and sharesof Class A Common Stock may be issued under the Stock Issuance Program that are in each instance in excess of the number of sharesthen available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow untilthere is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Class A Common Stock available forissuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess issuancesare made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and(ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess sharesissued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares wereheld in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding.V. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Class A Common Stock under the Plan shall be used forgeneral corporate purposes.VI. REGULATORY APPROVALS A. The implementation of the Plan, the granting of any stock option under the Plan and the issuance of any shares of Class ACommon Stock (i) upon the exercise of any granted option or (ii) under the Stock Issuance Program shall be subject to the Corporation'sprocurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the stock options granted underit and the shares of Class A Common Stock issued pursuant to it. B. No shares of Class A Common Stock or other assets shall be issued or delivered under the Plan unless and until there shall havebeen compliance with all applicable requirements of Federal and state securities laws, including the filing and effectiveness of the Form S-8registration statement for the shares of Class A Common Stock issuable under the Plan, and all applicable listing requirements of any stockexchange (or the Nasdaq National Market, if applicable) on which Class A Common Stock is then listed for trading.16VII. NO EMPLOYMENT/SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration orinterfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person)or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time forany reason, with or without cause.VIII. CALIFORNIA BLUE SKY PROVISIONS If the Class A Common Stock is not exempt from California securities laws, the following provisions shall apply to any sale of Class ACommon Stock or any option grant to an individual who is eligible to receive such grants pursuant to the Plan who resides in the State ofCalifornia. A. Option Grant Program. 1. If the person to whom the option is granted is a 10% Stockholder, then the exercise price per share shall not be less than110% of the Fair Market Value per share of Class A Common Stock on the date the option is granted. 2. The Plan Administrator may not impose a vesting schedule upon any option grant or the shares of Class A Common Stocksubject to that option which is more restrictive than 20% per year vesting, with the initial vesting to occur not later than one year afterthe option grant date. However, such limitation shall not be applicable to any option grants made to individuals who are officers of theCorporation, non-employee Board members or consultants. 3. Unless the Optionee's Service is terminated for Misconduct (in which case the option shall terminate immediately), theoption (to the extent it was vested and exercisable at that the time Optionee's Service ceased) must remain exercisable, followingOptionee's termination of Service, for at least (a) six months if Optionee's Service terminates due to death or Permanent Disability or(b) thirty days in all other cases. B. Stock Issuance Program. The Plan Administrator may not impose a vesting schedule upon any stock issuance effected underthe Stock Issuance Program which is more restrictive than 20% per year vesting, with initial vesting to occur not later than one year after theissuance date. Such limitation shall not apply to any Class A Common Stock issuances made to the officers of the Corporation, non-employee Board members or consultants. C. Repurchase Rights. To the extent specified in a stock purchase agreement or stock issuance agreement, the Corporation and/orits stockholders shall have the right to repurchase any or all of the unvested shares of Class A Common Stock held by an Optionee orParticipant when such person's Service ceases. However, except with respect to grants to officers, non-employee Board members, andconsultants of the Corporation, the repurchase right must satisfy the following conditions: 1. The Corporation's right to repurchase the unvested shares of Class A Common Stock must lapse at the rate of at least 20%per year over five years from the date the option was granted or the shares were issued under the Plan. 2. The Corporation's repurchase right must be exercised within ninety days of the date that Service ceased (or the date theshares were purchased, if later). 3. The purchase price must be paid in the form of cash or cancellation of the purchase money indebtedness for the shares ofClass A Common Stock.17 D. Information Requirements. Annually, the Corporation shall deliver or cause to be delivered to each Optionee or Participant, nolater than such information is delivered to the Corporation's security holders, one of the following: 1. The Corporation's annual report to security holders containing the information required by Rule 14a-3(b) under the 1934 Actfor its latest fiscal year; 2. The Corporation's annual report on Form 10-K for its latest fiscal year; 3. The Corporation's latest prospectus filed pursuant to 424(b) under the 1933 Act that contains audited financial statements forthe latest fiscal year, provided that the financial statements are not incorporated by reference from another filing, and provided furtherthat such prospectus contains substantially the information required by Rule 14a-3(b); or 4. The Corporations' effective 1934 Act registration statement containing audited financial statements for the latest fiscal year.18APPENDIX The following definitions shall be in effect under the Plan: A. Automatic Option Grant Program shall mean the automatic option grant program in effect under the Plan. B. Board shall mean the Corporation's Board of Directors. C. Change in Control shall mean a change in ownership or control of the Corporation effected through either of the followingtransactions: (i) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a personthat directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership(within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combinedvoting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to theCorporation's stockholders, or (ii) a change in the composition of the Board over a period of thirty-six (36) consecutive months or less such that amajority of the Board members ceases, by reason of one or more contested elections for Board membership, to be comprisedof individuals who either (A) have been Board members continuously since the beginning of such period or (B) have beenelected or nominated for election as Board members during such period by at least a majority of the Board members describedin clause (A) who were still in office at the time the Board approved such election or nomination. D. Class A Common Stock shall mean the Corporation's Class A Common Stock, which shall be registered underSection 12(g) of the 1934 Act and shall be entitled to one-tenth of one vote per share on all matters subject to stockholder approval. E. Code shall mean the Internal Revenue Code of 1986, as amended. F. Corporate Transaction shall mean either of the following stockholder approved transactions to which the Corporation is aparty: (i) a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined votingpower of the Corporation's outstanding securities are transferred to a person or persons different from the persons holdingthose securities immediately prior to such transaction, or (ii) the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation ordissolution of the Corporation. G. Corporation shall mean Odetics, Inc., a Delaware corporation, and its successors. H. Discretionary Option Grant Program shall mean the discretionary option grant program in effect under the Plan. I. Eligible Director shall mean a non-employee Board member eligible to participate in the Automatic Option Grant Programin accordance with the eligibility provisions of Article One. J. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to thecontrol and direction of the employer entity as to both the work to be performed and the manner and method of performance. K. Exercise Date shall mean the date on which the Corporation shall have received written notice of the option exercise.19 L. Fair Market Value per share of Class A Common Stock on any relevant date shall be determined in accordance with thefollowing provisions: (i) If the Class A Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shallbe deemed equal to the closing selling price per share of Class A Common Stock on the date in question, as such price isreported on the Nasdaq National Market or any successor system. If there is no closing selling price for the Class A CommonStock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for whichsuch quotation exists. (ii) If the Class A Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall bedeemed equal to the closing selling price per share of Class A Common Stock on the date in question on the Stock Exchangedetermined by the Plan Administrator to be the primary market for the Class A Common Stock, as such price is officiallyquoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Class A CommonStock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for whichsuch quotation exists. M. Hostile Takeover shall mean the acquisition, directly or indirectly, by any person or related group of persons (other than theCorporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation) ofbeneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of thetotal combined voting power of the Corporation's outstanding securities pursuant to a tender or exchange offer made directly to theCorporation's stockholders which the Board does not recommend such stockholders to accept. N. Incentive Option shall mean an option which satisfies the requirements of Code Section 422. O. Involuntary Termination shall mean the termination of the Service of any individual which occurs by reason of: (i) such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii) such individual's voluntary resignation following (A) a change in his or her position with the Corporation whichmaterially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reductionin his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate performancebased bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place ofemployment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by theCorporation without the individual's consent. P. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant,any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent orSubsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or anyParent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissionswhich the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee,Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). Q. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.20 R. 1933 Act shall mean the Securities Act of 1933, as amended. S. Nonstatutory Option shall mean an option not intended to satisfy the requirements of Code Section 422. T. Optionee shall mean any person to whom an option is granted under the Discretionary Option Grant or Automatic OptionGrant Program. U. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with theCorporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination,stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporationsin such chain. V. Participant shall mean any person who is issued shares of Class A Common Stock under the Stock Issuance Program. W. Permanent Disability or Permanently Disabled shall mean the inability of the Optionee or the Participant to engage inany substantial gainful activity by reason of any medically determinable physical or mental impairment expected to result in death orto be of continuous duration of twelve (12) months or more. However, solely for purposes of the Automatic Option Grant Program,Permanent Disability or Permanently Disabled shall mean the inability of the non-employee Board member to perform his or herusual duties as a Board member by reason of any medically determinable physical or mental impairment expected to result in deathor to be of continuous duration of twelve (12) months or more. X. Plan shall mean the Corporation's 1997 Stock Incentive Plan, as set forth in this document. Y. Plan Administrator shall mean the particular entity, whether the Primary Committee, the Board or the SecondaryCommittee, which is authorized to administer the Discretionary Option Grant and Stock Issuance Programs with respect to one ormore classes of eligible persons, to the extent such entity is carrying out its administrative functions under those programs withrespect to the persons under its jurisdiction. Z. Plan Effective Date shall mean September 5, 1997, the date of the 1997 Annual Stockholders Meeting at which the Planis approved by the Corporation's stockholders. AA. Primary Committee shall mean the committee of two (2) or more non- employee Board members appointed by the Board toadminister the Discretionary Option Grant and Stock Issuance Programs with respect to Section 16 Insiders. BB. Secondary Committee shall mean a committee of one (1) or more Board members appointed by the Board to administerthe Discretionary Option Grant and Stock Issuance Programs with respect to eligible persons other than Section 16 Insiders. CC. Section 16 Insider shall mean an officer or director of the Corporation subject to the short swing profit liabilities ofSection 16 of the 1934 Act. DD. Service shall mean the performance of services for the Corporation (or any Parent or Subsidiary) by a person in the capacityof an Employee, a non- employee member of the board of directors or a consultant or independent advisor, except to the extentotherwise specifically provided in the documents evidencing the option grant or stock issuance. EE. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange.21 FF. Stock Issuance Agreement shall mean the agreement entered into by the Corporation and the Participant at the time ofissuance of shares of Class A Common Stock under the Stock Issuance Program. GG. Stock Issuance Program shall mean the stock issuance program in effect under the Plan. HH. Subsidiary shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning withthe Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of thedetermination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of theother corporations in such chain. II. Takeover Price shall mean the greater of (i) the Fair Market Value per share of Class A Common Stock on the date theoption is surrendered to the Corporation in connection with a Hostile Takeover or (ii) the highest reported price per share of Class ACommon Stock paid by the tender offeror in effecting such Hostile Takeover. However, if the surrendered option is an IncentiveOption, the Takeover Price shall not exceed the clause (i) price per share. JJ. Taxes shall mean the Federal, state and local income and employment tax liabilities incurred by the holder of NonstatutoryOptions or unvested shares of Class A Common Stock in connection with the exercise of those options or the vesting of those shares. KK. 10% Stockholder shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than tenpercent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary).22QuickLinksODETICS, INC. 1997 STOCK INCENTIVE PLAN (Amended and Restated as of May 3, 2002)QuickLinks -- Click here to rapidly navigate through this documentExhibit 10.19[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATIONSTANDARD SUBLEASEMULTI-TENANT 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Sublease ("Sublease"), dated for reference purposes only May 7, 2003, is made by and between Odetics, Inc, a Delaware corporation ("Sublessor")and FEI-Zyfer, Inc., a Delaware corporation ("Sublessee"), (collectively the "Parties", or individually a "Party"). 1.2(a) Premises: That certain portion of the Project (as defined below), known as 1515-1585 S. Manchester Ave., Anaheim, consisting of approximately 20,000 squarefeet, currently occupied by Zyfer, Inc. ("Premises"). The Premises are located at: 1585 S. Manchester Ave., in the City of Anaheim, County of Orange, State of California,with zip code 92802. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have nonexclusive rights to the Common Areas (asdefined below) as hereinafter specified, but shall not have any rights to the roof, the exterior walls, or the utility raceways of the building containing the Premises("Building") or to any other buildings in the Project. The Premises, the Building, the Common Areas, the land upon which they are located, along with all otherbuildings and improvements thereon, are herein collectively referred to as the "Project." 1.2(b) Parking: 50 unreserved and 0 reserved vehicle parking spaces. 1.3 Term: two years and zero months commencing see Addendum 22 ("Commencement Date") and ending see Addedum 23 ("Expiration Date"). 1.4 Early Possession: n/a ("Early Possession Date"). 1.5 Base Rent: $20,400.00 per month ("Base Rent)", payable on the day of each month commencing .o If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted. 1.6 Lessee's Share of Operating Expenses: 0 percent (0%) ("Lessee's Share"). 1.7 Base Rent and Other Monies Paid Upon Execution:(a)Base Rent: $20,400.00 for the period .(b)Security Deposit: $20,400.00 ("Security Deposit").(c)Other: $0.00 for n/a.(d)Total Due Upon Execution of this Lease: $40,800.00. 1.8 Agreed Use: The design, manufacture, testing and assembly of electrical components and related legal uses. 1.9 Real Estate Brokers: 1.10 Guarantor. The obligations of the Sublessee under this Sublease shall be guaranteed by Frequency Electronics, Inc. ("Guarantor"). 1.11 Attachments. Attached hereto are the following, all of which constitute a part of this Sublease: an Addendum consisting of Paragraphs 14 through 23;o a plot plan depicting the Premises and/or Project;o a current set of the Rules and Regulations;o a Work Letter; a copy of the Master Lease;o other (specify):2.Premises. 2.1 Letting. Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor, the Premises, for the term, at the rental, and upon all ofthe terms, covenants and conditions set forth in this Sublease. Unless otherwise provided herein, any statement of size set forth in this Sublease, or that may have beenused in calculating Rent, is an approximation which the Parties agree is reasonable and any payments based thereon are not subject to revision whether or not theactual size is more or less. Note: Sublessee is advised to verify the actual size prior to executing this Sublease. 2.2 Condition. Sublessor shall deliver the Premises to Sublessee broom clean and free of debris on the Commencement Date or the Early Possession Date,whichever first occurs ("Start Date"), and warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems("HVAC"), and any items which the Lessor is obligated to construct pursuant to the Work Letter attached hereto, if any, other than those constructed by Lessee, shall be ingood operating condition on said date. If a noncompliance with such warranty exists as of the Start Date, or if one of such systems or elements should malfunction or failwithin the appropriate warranty period, Sublessor shall, as Sublessor's sole obligation with respect to such matter, except as otherwise provided in this Sublease, promptlyafter receipt of written notice from Sublessee setting forth with specificity the nature and extent of such noncompliance, malfunction or failure, rectify same at Sublessor'sexpense. The warranty periods shall be as follows: Coterminus with the term of this Sublease. 2.3 Compliance. Sublessor warrants that any improvements, alterations or utility installations made or installed by or on behalf of Sublessor to or on the Premisescomply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances ("Applicable Requirements") in effect on the datethat they were made or installed. Sublessor makes no warranty as to the use to which Sublessee will put the Premises or to modifications which may be required by theAmericans with Disabilities Act or any similar laws as a result of Sublessee's use. If the Premises do not comply with said warranty, Sublessor shall, except as otherwiseprovided, promptly after receipt of written notice from Sublessee setting forth with specificity the nature and extent of such noncompliance, rectify the same. Initials Page 1 of 6 Initials©2001—American Industrial Real Estate Association REVISED FORM SBMT-0-4/01E 2.4 Acknowledgements. Sublessee acknowledges that: (a) it has been advised by Sublessor and/or Brokers to satisfy itself with respect to the condition of the Premises(including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements and theAmericans with Disabilities Act), and their suitability for Sublessee's intended use, (b) Except as specified herein, Sublessee has made such investigation as it deemsnecessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Sublessor,Sublessor's agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Sublease. Inaddition, Sublessor acknowledges that: (i) Brokers have made no representations, promises or warranties concerning Sublessee's ability to honor the Sublease orsuitability to occupy the Premises, and (ii) it is Sublessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants. 2.5 Americans with Disabilities Act. In the event that as a result of Sublessee's use, or intended use, of the Premises the Americans with Disabilities Act or anysimilar law requires modifications or the construction or installation of improvements in or to the Premises, Building, Project and/or Common Areas, the Parties agreethat such modifications, construction or improvements shall be made at: Sublessor's expense o Sublessee's expense. 2.6 Vehicle Parking. Sublessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) onthose portions of the Common Areas designated from time to time for parking. Sublessee shall not use more parking spaces than said number. Said parking spaces shallbe used for parking by vehicles no larger than fullsize passenger automobiles or pickup trucks, herein called "Permitted Size Vehicles." Sublessor may regulate theloading and unloading of vehicles by adopting Rules and Regulations as provided in Paragraph 2.9. No vehicles other than Permitted Size Vehicles may be parked inthe Common Area without the prior written permission of Sublessor. (a) Sublessee shall not permit or allow any vehicles that belong to or are controlled by Sublessee or Sublessee's employees, suppliers, shippers, customers,contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Sublessor for such activities. (b) Sublessee shall not service or store any vehicles in the Common Areas. (c) If Sublessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Sublessor shall have the right, without notice, inaddition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Sublessee, which cost shall beimmediately payable upon demand by Sublessor. 2.7 Common Areas—Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of theProject and interior utility raceways and installations within the Premises that are provided and designated by the Sublessor from time to time for the generalnonexclusive use of Sublessor, Sublessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees,including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas. 2.8 Common Areas—Sublessee's Rights. Sublessor grants to Sublessee, for the benefit of Sublessee and its employees, suppliers, shippers, contractors, customersand invitees, during the term of this Sublease, the nonexclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time totime, subject to any rights, powers, and privileges reserved by Sublessor under the terms hereof or under the terms of any rules and regulations or restrictionsgoverning the use of the Project. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property,temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Sublessor or Sublessor's designated agent,which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Sublessor shall have the right, without notice, in addition to suchother rights and remedies that it may have, to remove the property and charge the cost to Sublessee, which cost shall be immediately payable upon demand bySublessor. 2.9 Common Areas—Rules and Regulations. Sublessor or such other person(s) as Sublessor may appoint shall have the exclusive control and management of theCommon Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable and non-discriminatory rules and regulations ("Rulesand Regulations") for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well asfor the convenience of other occupants or tenants of the Building and the Project and their invitees. Sublessee agrees to abide by and conform to all such Rules andRegulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Sublessor shall not be responsible to Sublesseefor the noncompliance with said Rules and Regulations by other tenants of the Project. 2.10 Common Areas—Changes. Sublessor shall have the right, in Sublessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances,parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways which does notimpar in any material manner Sublessee's prior use; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To add additional buildings and improvements to the Common Areas; (d) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof; and (e) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Sublessor may, in theexercise of sound business judgment, deem to be appropriate. Initials Page 2 of 6 Initials©2001—American Industrial Real Estate Association REVISED FORM SBMT-0-4/01E3.Possession. 3.1 Early Possession. If Sublessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for theperiod of such early possession. All other terms of this Sublease (including but not limited to the obligations to pay Sublessee's Share of Common Area OperatingExpenses, Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shallnot affect the Expiration Date. 3.2 Delay in Commencement. Sublessor shall deliver possession of the Premises by the Commencement Date. 3.4 Sublessee Compliance. Sublessor shall not be required to tender possession of the Premises to Sublessee until Sublessee complies with its obligation to provideevidence of insurance. Pending delivery of such evidence, Sublessee shall be required to perform all of its obligations under this Sublease from and after the Start Date,including the payment of Rent, notwithstanding Sublessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Sublessee isrequired to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Sublessor may elect to withhold possession until suchconditions are satisfied.4.Rent and Other Charges. 4.1 Rent Defined. All monetary obligations of Sublessee to Sublessor under the terms of this Sublease (except for the Security Deposit) are deemed to be rent("Rent"). Rent shall be payable in lawful money of the United States to Sublessor at the address stated herein or to such other persons or at such other places as Sublessormay designate in writing. 4.3 Utilities. Sublessor Sublessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services excluding janitorialservices supplied to the Premises, together with any taxes thereon.5.Security Deposit. The rights and obligations of Sublessor and Sublessee as to said Security Deposit shall be as set forth in Paragraph 5 of the Master Lease (asmodified by Paragraph 7.3 of this Sublease). As if that language had not been stricken, as modified by Addendum 17. 6.Agreed Use. The Premises shall be used and occupied only for the design, manufacture, testing and assembly of electrical components and related legal usesand for no other purpose. 7.Master Lease. See Addendum 18. 7.1 Sublessor is the lessee of the Premises by virtue of a lease, hereinafter the "Master Lease", wherein 1515 S. Manchester, LLC is the lessor, hereinafter the"Master Lessor". 7.2 This Sublease is and shall be at all times subject and subordinate to the Master Lease. 7.3 The terms, conditions and respective obligations of Sublessor and Sublessee to each other under this Sublease shall be the terms and conditions of the MasterLease except for those provisions of the Master Lease which are directly contradicted by this Sublease in which event the terms of this Sublease document shall controlover the Master Lease. Therefore, for the purposes of this Sublease, wherever in the Master Lease the word "Lessor" is used it shall be deemed to mean the Sublessorherein and wherever in the Master Lease the word "Lessee" is used it shall be deemed to mean the Sublessee herein. 7.4 During the term of this Sublease and for all periods subsequent for obligations which have arisen prior to the termination of this Sublease, Sublessee doeshereby expressly assume and agree to perform and comply with, for the benefit of Sublessor and Master Lessor, each and every obligation of Sublessor under the MasterLease, with respect to the Premises hereunder only, except for the following paragraphs which are excluded therefrom: 1.2, 1.3, 1.5, 1.6, 3.1, 4.3, 6.2(e), 6.2(f), 7.1(b),7.2, 7.4(b), the parenthetical clause in 7.4 (c), 8.1, 8.2, 8.3, 10, 11, 13.1(c)(ii), 20, 22, 25, 30, 42, 51, 52(C), 52(E), 52(F) 52(G). 7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessee's Assumed Obligations". The obligationsthat sublessee has not assumed under paragraph 7.4 hereof are hereinafter referred to as the "Sublessor's Remaining Obligations". 7.6 Sublessee shall hold Sublessor free and harmless from all liability, judgments, costs, damages, claims or demands, including reasonable attorneys fees,arising out of Sublessee's failure to comply with or perform Sublessee's Assumed Obligations. 7.7 Sublessor agrees to maintain the Master Lease during the entire term of this Sublease, subject, however, to any earlier termination of the Master Lease withoutthe fault of the Sublessor, and to comply with or perform Sublessor's Remaining Obligations and to hold Sublessee free and harmless from all liability, judgments, costs,damages, claims or demands arising out of Sublessor's failure to comply with or perform Sublessor's Remaining Obligations. 7.8 Sublessor represents to Sublessee that the Master Lease is in full force and effect and that no default exists on the part of any Party to the Master Lease.8.Assignment of Sublease and Default. 8.1 Sublessor hereby assigns and transfers to Master Lessor the Sublessor's interest in this Sublease, subject however to the provisions of Paragraph 8.2 hereof. 8.2 Master Lessor, by executing this document, agrees that until a Default (as defined in the Master Lease) shall occur under the Master Lease, that Sublessor mayreceive, collect and enjoy the Rent accruing under this Sublease. However, if a Default (as defined in the Master Lease) shall occur in the Master Lease then MasterLessor may, at its option, receive and collect, directly from Sublessee, all Rent owing and to be owed under this Sublease. Master Lessor shall not, by reason of thisassignment of the Sublease nor by reason of the collection of the Rent from the Sublessee, be deemed liable to Sublessee for any failure of the Sublessor to perform andcomply with Sublessor's Remaining Obligations. Initials Page 3 of 6 Initials©2001—American Industrial Real Estate Association REVISED FORM SBMT-0-4/01E 8.3 Sublessor hereby irrevocably authorizes and directs Sublessee upon receipt of any written notice from the Master Lessor stating that a Default exists under theMaster Lease, to pay to Master Lessor the Rent due and to become due under the Sublease. Sublessor agrees that Sublessee shall have the right to rely upon any suchstatement and request from Master Lessor, and that Sublessee shall pay such Rent to Master Lessor without any obligation or right to inquire as to whether such Defaultexists and notwithstanding any notice from or claim from Sublessor to the contrary and Sublessor shall have no right or claim against Sublessee for any such Rent sopaid by Sublessee. 8.4 No changes or modifications shall be made to this Sublease without the consent of Master Lessor.9.Consent of Master Lessor. 9.1 In the event that the Master Lease requires that Sublessor obtain the consent of Master Lessor to any subletting by Sublessor then, this Sublease shall not beeffective unless, within 10 days of the date hereof, Master Lessor signs this Sublease thereby giving its consent to this Subletting. 9.2 In the event that the obligations of the Sublessor under the Master Lease have been guaranteed by third parties then neither this Sublease, nor the MasterLessor's consent, shall be effective unless, within 10 days of the date hereof, said guarantors sign this Sublease thereby giving their consent to this Sublease. 9.3 In the event that Master Lessor does give such consent then: (a) Such consent shall not release Sublessor of its obligations or alter the primary liability of Sublessor to pay the Rent and perform and comply with all ofthe obligations of Sublessor to be performed under the Master Lease. (b) The acceptance of Rent by Master Lessor from Sublessee or any one else liable under the Master Lease shall not be deemed a waiver by Master Lessorof any provisions of the Master Lease. (c) The consent to this Sublease shall not constitute a consent to any subsequent subletting or assignment. (d) In the event of any Default of Sublessor under the Master Lease, Master Lessor may proceed directly against Sublessor, any guarantors or any one elseliable under the Master Lease or this Sublease without first exhausting Master Lessor's remedies against any other person or entity liable thereon to MasterLessor. (e) Master Lessor may consent to subsequent sublettings and assignments of the Master Lease or this Sublease or any amendments or modifications theretowithout notifying Sublessor or any one else liable under the Master Lease and without obtaining their consent and such action shall not relieve such personsfrom liability. (f) In the event of a Default (as defined in the Master Lease) under the Master Lease, then Master Lessor may exercise any or all of its rights and remedies (f) In the event of a Default (as defined in the Master Lease) under the Master Lease, then Master Lessor may exercise any or all of its rights and remediesunder the Master Lease without regard to the existence of this Sublease or, at its option and without being obligated to do so, may require Sublessee to attorn toMaster Lessor on the terms and conditions of this Sublease in which event Master Lessor shall undertake the obligations of Sublessor under this Sublease fromthe time of the exercise of said option to termination of this Sublease but Master Lessor shall not be liable for any prepaid Rent nor any Security Deposit paid bySublessee, nor shall Master Lessor be liable for any other Defaults of the Sublessor under the Sublease. See Addendum 19. 9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at the end of this document shall constitute their consent to the terms of this Sublease. 9.5 Master Lessor acknowledges that, to the best of Master Lessor's knowledge, no Default presently exists under the Master Lease of obligations to be performed bySublessor and that the Master Lease is in full force and effect. 9.6 Such consent, and this Sublease, shall not be construed to modify, waive or affect any of the terms or provisions of the Master Lease, regardless of anyinconsistency between this Sublease and the Master Lease. Without limiting the foregoing, this Sublease and Master Lessor's consent to it do not create any obligations ofMaster Lessor to Sublessee or any rights of Sublessee enforceable against Master Lessor. 11. Representations and Indemnities of Broker Relationships. The Parties each represent and warrant to the other that it has had no dealings with any person,firm, broker or finder (other than the Brokers, if any) in connection with this Sublease, and that no one other than said named Brokers is entitled to any commission orfinder's fee in connection herewith. Sublessee and Sublessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liabilityfor compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifyingParty, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto. 12. Attorney's fees. If any Party or Broker brings an action or proceeding involving the Premises whether founded in tort, contract or equity, or to declare rightshereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees maybe awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party"shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement,judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court feeschedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. In addition, Sublessor shall be entitled to attorneys' fees, costs and expensesincurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced inconnection with such Default or resulting Breach ($200 is a reasonable minimum per occurrence for such services and consultation). Initials Page 4 of 6 Initials©2001—American Industrial Real Estate Association REVISED FORM SBMT-0-4/01E 13. No Prior or Other Agreements; Broker Disclaimer. This Sublease contains all agreements between the Parties with respect to any matter mentioned herein,and no other prior or contemporaneous agreement or understanding shall be effective. 14. Janitorial services (including supplies) shall be provided by Sublessor to Sublessee for a cost of $2000.00 per month, payable monthly. 15. Sublessee and Sublessor acknowledge that Sublessee may be required to move to operating space within 1515 S. Manchester during the term of the 2 yearagreement contemplated by the Sublease. Sublessor and Sublessee agree to cooperate with such move to achieve minimal business disruption to FEI-Zyfer andOdetics, Inc. As of the date of this Sublease, Sublessor and Sublessee have separately agreed on the floor plan of the suitable space for the move to 1515 S. Manchester,should one occur. Sublessor agrees to provide FEI-Zyfer with the space as specified, and to provide tenant improvement, at Sublessor's expense, for adequate power,HVAC, communication, paint and floor coverings to meet normal commerically acceptable standards for the operation of FEI-Zyfer (including executive offices andengineering, manufacturing, administrative and lobby facilities comparable to that existing in the prior premises) in the 1515 S. Manchester facilities should the movebe required. Furthermore, Sublessor agrees that any move will not occur prior to four months subsequent to the date the Sublease is entered into by the parties. 16. Sublessee shall be granted access to the gymnasium and cafeteria located in 1515 S. Manchester Ave., Anaheim. 17. Security Deposit: Sublessor shall return 1/2 of the Security Deposit to Sublessee upon payment of the 12th monthly rental payments due under this Sublease,provided that Sublessee is not in default under any economic obligations under this Sublease beyond any grace or cure period and Sublessor shall return the balance ofthis Security Deposit to the Sublessee upon receipt of the 24th monthly payment of this Sublease, provided that Sublessee is not in default under any economic obligationsunder this Sublease beyond any grace or cure period. 18. Since the Master Lease is a net lease of an entire building, the insurance requirements applicable to the tenant are inappropriate as applied to the Sublesseewhen these provisions are incorporated into the Sublease. Accordingly, Sublessee shall be obligated to insure the contents of it's space (i.e., it's trade fixtures, furniture,and equipment), and that the Sublessor shall be required to maintain the insurance it currently maintains. Sublessee agrees to maintain reasonable liability coveragefor occurance in it's premises, and to name Master Lessor as an additional insured. 19. If Sublessee relocates to 1515 S. Manchester, then prior to such move Sublessor and Sublessee shall enter into a new Sublease with respect to such space andshall submit the Sublease to Master Lessor for its consent, which consent Master Lessor agrees to provide, so long as the new Sublease is substantially similar to thisSublease and there is no Default under the Master Lease. Should Sublessee enter into a new Sublease on 1515 S. Manchester, and if Master Lessor does not requireSublessee to attorn and such Sublease terminates, provided Sublessee is not in Default of such Sublease beyond any grace or cure period, then Sublessee shall be givenninety (90) days from the date of such termination to vacate the Premises, (but Master Lessor shall not assume Sublessor's obligations during said Sublease during saidperiod). During the period that Sublessee occupies the premises of 1585 S. Manchester, and if Master Lessor does not require Sublessee to attorn and such Subleaseterminates, provided Sublessee is not in Default of such Sublease beyond any grace or cure period, then Sublessee shall be given sixty (60) days from the date of suchtermination to vacate the Premises, consistant with the terms provided in the underlying Master Lease (but Master Lessor shall not assume Sublessor's obligations duringsaid Sublease during said period). 20. The following Addendum modifies Paragraph 7.4 of this Sublease. Except that with respect to Paragraphs 30 and 42 of the Master Lease the obligations ofSublessor to the Master Lessor shall also be obligations of Sublessee to the Master Lessor. 21. Sublessee may sublet the premises with the prior consent of Sublessor and Master Lessor, which consent shall not be unreasonably withheld. 22. In the event that all or a portion of 1585 S. Manchester Ave. Building not covered by this Sublease is occupied by someone other than Sublessee the Sublessoragrees at it's expense to modify the facility to provide adequate separation and security for the Sublessee, and the Sublessee shall be granted access to lobby, break-room,and other common areas of that building. 23. If Sublessee has not relocated to 1515 S. Manchester prior to the termination of the Master Lease on 1585 S. Manchester, then this Sublease shall expireconcurrent with the expiration of the Master Lease on 1585 S. Manchester in November 2004.ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATEBROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE TRANSACTION TO WHICH IT RELATES. THEPARTIES ARE URGED TO:1.SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE. 2.RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDEBUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL INTEGRITY,THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND Initials Page 5 of 6 Initials©2001—American Industrial Real Estate Association REVISED FORM SBMT-0-4/01ETHE SUITABILITY OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BEREVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.Executed at: Executed at:on: on:By SUBLESSOR: By SUBLESSEE:Odetics, Inc., a Delaware corporation FEI-Zyfer, Inc., a Delaware CorporationBy: By:Name Printed: Gregory Miner Name Printed:Title: Chief Executive Officer Title:By: By:Name Printed: Name Printed:Title: Title:Address: 1515 S. Manchester Ave. Address: 1585 S. Manchester Ave.Anaheim, CA 92802 Anaheim, CA 92802Telephone/Facsimile: Telephone/Facsimile:Federal ID No. Federal ID No.Consent to the above Sublease is hereby given.Executed at: Executed At:on: on:By MASTER LESSOR: By GUARANTOR(S): Frequency Electronics, Inc., a DelawareCorporation1515 S. Manchester, LLC By: Name Printed:By: Address:Name Printed: William McFarland Title: By:By: Name Printed:Name Printed: Address:Title: Address: 18800 Von Karman Ave., Ste. 100Irvine, CA 92612 Telephone/Facsimile: Federal ID No. NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the mostcurrent form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower St., Suite 600, Los Angeles, CA 90017. (213) 687-8777. Initials Page 6 of 6 Initials©2001—American Industrial Real Estate Association REVISED FORM SBMT-0-4/01EQuickLinksSTANDARD SUBLEASE MULTI-TENANTQuickLinks -- Click here to rapidly navigate through this documentExhibit 21List of Subsidiaries Name of Subsidiary State of Other Jurisdiction ofIncorporation orOrganizationMAXxess Systems, Inc. formally known as Gyyr Incorporated CaliforniaIteris, Inc., formally known as Odetics ITS, Inc.(63.7% subsidiary of Odetics, Inc.) DelawareBroadcast, Inc. CaliforniaMeyer, Mohaddes Associates, Inc.(100% owned subsidiary of Iteris, Inc.) CaliforniaOdetics Europe Limited England and WalesOdetics Asia Pacific Pte. Ltd SingaporeMAXxess EUROPE Ltd(100% owned subsidiary of MAXxess Systems, Inc.) England and WalesZyfer, Inc. DelawareQuickLinksList of SubsidiariesQuickLinks -- Click here to rapidly navigate through this documentExhibit 23.1Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-3 Nos. 333-100994, 333-99213, 333-90416, 333-40555, 333-63911, 333-66448, 333-66717, 333-69677, 333-74509, 333-74654, 333-91903, 333-88185, 333-40726, 333-46420, 333-65735 and 333-63983) of Odetics, Inc. and in the related Prospectuses, and in the Registration Statements (Form S-8 Nos. 333-75728,333-05735, 333-44907, 333-30396, 333-90416) of our report dated June 3, 2003 with respect to the consolidated financial statements andschedule of Odetics, Inc. included in this Annual Report (Form10-K) for the year ended March 31, 2003./s/ Ernst & Young LLPOrange County, CaliforniaJune 23, 2003QuickLinksConsent of Independent AuditorsQuickLinks -- Click here to rapidly navigate through this documentExhibit 99.1 This certification accompanies this report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to theextent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the SecuritiesExchange Act of 1934 or incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except asshall be expressly set forth by specific reference in such a filing.CERTIFICATION PURSUANT TO18 U.S.C. §1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Odetics, Inc. (the "Company") on Form 10-K for the fiscal year ended March 31, 2003 as filedwith the Securities and Exchange Commission on the date hereof (the "Report"), I, Gregory A. Miner, Chief Executive Officer and ChiefFinancial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002, that:1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2.The information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of the Company. /s/ GREGORY A. MINER Gregory A. MinerChief Executive Officer and Chief FinancialOfficer June 27, 2003 A signed original of this written statement required by Section 906, or any other document authenticating, acknowledging, or otherwiseadopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has beenprovided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff uponrequest.QuickLinksCERTIFICATION PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACTOF 2002

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