Iteris
Annual Report 2011

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One) xx ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2011 OR oo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-08762 ITERIS, INC.(Exact Name of Registrant as Specified in Its Charter) Delaware95-2588496(State or Other Jurisdictionof Incorporation or Organization)(I.R.S. EmployerIdentification No.) 1700 Carnegie Ave., Santa Ana, California 92705(Address of Principal Executive Offices) (Zip Code) Registrant’s Telephone Number, Including Area Code: (949) 270-9400 Securities registered pursuant to Section 12(b) of the Act: Title of each className of each exchange on which registeredCommon Stock, $0.10 par valueNYSE Amex Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 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 x 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 be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required tosubmit and post such files). Yes o No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer oAccelerated filer o Non-accelerated filer oSmaller reporting company x(Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x Based on the closing sale price of the registrant’s common stock on the last business day of the registrant’s most recently completed second fiscal quarter, the aggregatemarket value of the voting common stock held by nonaffiliates of the registrant was approximately $33,247,000. For the purposes of this calculation, shares owned by officers,directors and 10% stockholders known to the registrant have been deemed to be owned by affiliates. This determination of affiliate status is not necessarily a conclusivedetermination for other purposes. As of May 20, 2011, there were 34,365,743 shares of our common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates by reference certain information from the registrant’s definitive proxy statement for the 2011 Annual Meeting of Stockholders, which will be filed withthe Securities and Exchange Commission not later than 120 days after the end of the fiscal year ended March 31, 2011. Except with respect to information specificallyincorporated by reference in this report, the registrant’s proxy statement is not deemed to be filed as a part hereof. Table of Contents ITERIS, INC.ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED MARCH 31, 2011TABLE OF CONTENTS PART I ITEM 1.BUSINESS2 ITEM 1A.RISK FACTORS7 ITEM 1B.UNRESOLVED STAFF COMMENTS16 ITEM 2.PROPERTIES16 ITEM 3.LEGAL PROCEEDINGS16 ITEM 4.(REMOVED AND RESERVED)16 PART II17 ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES17 ITEM 6.SELECTED FINANCIAL DATA17 ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS17 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK32 ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA32 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE32 ITEM 9A.CONTROLS AND PROCEDURES32 ITEM 9B.OTHER INFORMATION33 PART III33 ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE33 ITEM 11.EXECUTIVE COMPENSATION33 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS33 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE33 ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES34 PART IV34 ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES34 Unless otherwise indicated in this report, the “Company,” “we,” “us” and “our” refer to Iteris, Inc. and our wholly-owned subsidiaries. AutoVue, Iteris, Vantage, VantageView™, VersiCam™, SafetyDirect™ and Abacus™ are among the trademarks of Iteris, Inc. Any other trademarks ortrade names mentioned herein are the property of their respective owners. 1®®®Table of Contents Cautionary Statement This report, including the following discussion and analysis, contains forward-looking statements (within the meaning of the Private SecuritiesLitigation Reform Act of 1995) that are based on our current expectations, estimates and projections about our business and our industry, and reflectmanagement’s beliefs and certain assumptions made by us based upon information available to us as of the date of this report. When used in thisreport and the information incorporated herein by reference, the words “expect(s),” “feel(s),” “believe(s),” “should,” “would,” “could,” “may,”“anticipate(s),” “estimate(s)” and similar expressions or variations of these words are intended to identify forward-looking statements. Theseforward-looking statements include but are not limited to statements regarding our anticipated sales, revenue, expenses, profits, capital needs,competition, backlog and manufacturing capabilities, the practical market applications, future applications and acceptance of our products andservices, the status of our facilities and product development. These statements are not guarantees of future performance and are subject to certainrisks and uncertainties which could cause actual results to differ materially from those projected. You should not place undue reliance on theseforward-looking statements that speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflectevents or circumstances after the date hereof or to reflect the occurrence of unanticipated events. We encourage you to carefully review and considerthe various disclosures made by us which describe certain factors which could affect our business, including those in “Risk Factors” in Item 1A of thisreport, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publiclyany forward-looking statement for any reason. PART I ITEM 1. BUSINESS Overview We are a leader in the traffic management market focused on the development and application of advanced technologies that reduce traffic congestionand improve the safety of surface transportation systems infrastructure. Additionally, we believe that our products and services, in conjunction with soundtraffic management, minimize the environmental impact of traffic congestion. By combining outdoor image processing, traffic engineering and informationtechnology, we offer a broad range of Intelligent Transportation Systems (“ITS”) and driver safety solutions to customers worldwide. We were originally incorporated in Delaware in 1987. Our principal executive offices are located at 1700 Carnegie Avenue, Santa Ana, California92705, and our telephone number at that location is (949) 270-9400. Our Internet website address is www.iteris.com. Our annual reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form 8-K, together with amendments to these reports, are available on the “Investors” section of ourwebsite, free of charge, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and ExchangeCommission (“SEC”). The inclusion of our website address in this report does not include or incorporate by reference into this report any information on ourwebsite. Products and Services We currently operate in four reportable segments: Roadway Sensors, Vehicle Sensors, Transportation Systems and Environmental Technology. TheRoadway Sensors segment includes, among other products, our Vantage, Versicam and Pico vehicle detection systems for traffic intersection control, incidentdetection and certain highway traffic data collection applications. The Vehicle Sensors segment includes our lane departure warning (“LDW”) products,including our AutoVue LDW system, and is comprised of all activities related to in-vehicle safety. The Transportation Systems segment includestransportation engineering and consulting services, and the development of transportation management and traveler information systems for the ITS industry.The Environmental Technology segment was created in connection with our acquisition of Meridian Environmental Technology, Inc. (“MET”) inJanuary 2011, and specializes in 511 advanced traveler information systems by offering a unique range of customer-specific environmental and operationalforecasting products and services, as well as Maintenance Decision Support System (“MDSS”) management tools that allow users to create solutions to meetroadway maintenance decision needs. See Note 11 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report, for further detailson our reportable segments. Roadway Sensors. Our Roadway Sensors segment product line uses advanced image processing technology to capture and analyze video imagesthrough sophisticated algorithms, enabling vehicle detection and transmission of both video images and data using a wide range of communicationtechnologies. Our Vantage video detection systems detect vehicle presence, count, speed, occupancy and other traffic data used in traffic management systems.Our Vantage systems give traffic managers the ability to mitigate roadway congestion by modifying traffic signal timing or detecting incidents quickly. OurVantageView software supplements our Vantage video detection systems by providing an integrated platform to manage and “see” video detection assetsremotely over a network connection. Vantage video detection systems have been deployed by hundreds of agencies and are currently sold through a network ofindependent dealers in the United States (“U.S.”), Asia, Latin America, Europe and the Middle East. 2Table of Contents VersiCam, our integrated camera and processor video detection system, is a cost-efficient video detection system for smaller intersections that require only afew detection points. Pico is a compact video detection system that delivers superior vehicle detection in a small and economical framework, and wasdeveloped primarily to address international video detection needs. We anticipate that future growth domestically and internationally, particularly in developingcountries, will be dependent in part on the continued adoption of above-ground video detection technologies, instead of in-pavement loop technology, to managetraffic. Our Roadway Sensors product line also includes the Abacus family of products, which has been designed with a blend of artificial intelligence andvideo detection algorithms that allow either fixed or pan-tilt-zoom cameras to be used for data collection and incident detection. Our Abacus products takeadvantage of the large number of existing installed closed-circuit television video feeds monitoring roadways, tunnels and bridges and at signalizedintersections. This flexibility of using a broad range of cameras with an appropriate perspective allows for accurate data collection without the set-up andcalibration required with other systems. We have historically experienced seasonality, particularly with respect to our Roadway Sensors net sales in the third and fourth fiscal quarters due toa reduction in road construction and repairs during the winter months due to inclement weather conditions. Vehicle Sensors. Our Vehicle Sensors segment addresses the leading causes of roadway fatalities: lane change, roadway departure and rear-endcollision accidents. Early estimates by the NHTSA of U.S. motor vehicle traffic fatalities in 2010 were approximately 33,000. We developed the world’s first production LDW system and offer a proven system that is available as an original equipment manufacturer (“OEM”)and aftermarket option on heavy trucks worldwide and as an option in certain passenger cars. Our LDW products utilize video detection technology to detectwhen a vehicle begins to drift toward an unintended lane change. When this occurs, the system automatically emits a distinctive rumble strip or other audiblewarning sound, alerting the driver to make a correction. Through March 31, 2011, we have sold slightly more than 91,000 LDW systems into the heavytruck market in Europe, North America and Asia. Our LDW systems are standard on certain FUSO heavy truck models, and are currently qualified as anoption on certain heavy trucks, including Mercedes-Benz, MAN, Iveco, DAF, Scania and Freightliner, as well as EvoBus, Neoplan and VanHool luxury busand coach lines. In North America, our LDW systems are sold both as factory-installed OEM options, as well as directly to truck fleets as a retrofitinstallation. In 2009, the European Union (“EU”) introduced a mandate, which is expected to be finalized and approved sometime in 2011, that sets betterstandards to improve road safety in Europe. The new mandated rules for safety technology are expected to include systems such as electronic stability control,advanced emergency braking and LDW systems to be compulsory on heavy-duty trucks and buses to further reduce accident risks. LDW systems areexpected to be mandatory in Europe on all new heavy truck models beginning in 2013. Additionally, by 2015, every new truck produced will be required tohave LDW systems. We believe that in order for the EU mandate for active safety systems to have a positive impact on our sales, we need to establish long-term supplier agreements with our European OEM heavy truck customers. To date we have agreements to supply certain of our European heavy truckcustomers through 2014, and are currently working on agreements with certain other heavy truck OEMs and our existing customer base to extend contractsfurther in the future in order to meet the anticipated increase in demand. However, we cannot assure you that our efforts will be successful or that the expectedincrease in demand will occur. We believe that the expected EU mandate for LDW and other active safety systems, and an increasing general awareness of thepotential benefits of LDW, helps validate the long-term market opportunity for LDW systems in commercial vehicles. Additionally, in North America we planto develop partnerships with other manufacturers and suppliers of safety devices for heavy trucks to jointly sell our LDW systems and provide ourSafetyDirect software tool to North American trucking fleets. For the passenger car market, we have exclusively licensed our LDW technology to our strategic partner, Valeo Schalter and Sensoren GmbH(“Valeo”), resulting in sales to date through March 31, 2011 of approximately 108,000 LDW systems for passenger cars. We and our partner have recentlyexperienced a greater degree of competition in the passenger car market as several passenger car OEMs have introduced vehicle platforms with competing LDWsystems. However, Valeo continues to pursue opportunities in the passenger car market. In addition to our LDW systems, our Vehicle Sensors portfolio includes radar-based Forward Collision Warning (“FCW”) and Blind Spot Warning(“BSW”) systems for the North American truck market. We offer the FCW and BSW features through the resale of Delphi’s radar based systems, for whichwe are the exclusive North American dealer. Our portfolio also includes our internally-developed SafetyDirect software system, which can provide a singlepoint of access to monitor and synchronize driver performance data on braking, stability control, following distances, and lane departure warnings forindividual drivers as well as entire fleets. SafetyDirect uses information transmitted from the vehicle by the fleet’s onboard mobile communications system toprovide fleet operators with a comprehensive view of the entire fleet, as well as the ability to drill down to detailed information on individual drivers and events.These products, together with our LDW products, combine to create a broad suite of active safety driver assistance features designed to help reduce thenumber of motor vehicle crashes and the severity of crash-related injuries. 3Table of Contents Additionally, in collaboration with Audiovox Electronics Corporation, during the fiscal year ended March 31, 2011 (“Fiscal 2011”), we developedand introduced an Advanced Driver Assistance System for the consumer automobile aftermarket. The new system provides consumers an opportunity tobenefit from life-saving features that were previously only available on new premium cars or commercial Class 8 trucks, and incorporates our LDW andFCW systems developed for the OEM market. We anticipate the system to be available in the marketplace by the end of our fiscal year ending March 31,2012. Transportation Systems. Our Transportation Systems segment includes transportation engineering and consulting services focused on theplanning, design, development and implementation of software-based systems that integrate sensors, video surveillance, computers and advancedcommunications equipment to enable public agencies to monitor, control and direct traffic flow, assist in the quick dispatch of emergency crews and distributereal-time information about traffic conditions. Our services include transportation and ITS planning, design and implementation of surface transportationinfrastructure systems. We perform analysis and study goods movement, commercial vehicle operations, travel demand forecasting and systems engineering,and identify mitigation measures to reduce traffic congestion. These services and systems have historically been primarily sold to local, state and nationaltransportation agencies in the U.S.; however, during the last two years, we have been awarded several contracts in the United Arab Emirates, and plan tocontinue to pursue additional international opportunities in the Middle East and other regions. Our Transportation Systems segment is largely dependent upongovernmental funding, and is affected by federal, state and local budgetary issues. Environmental Technology. In January 2011, we acquired MET, a privately-held company based in Grand Forks, North Dakota. METspecializes in 511 advanced traveler information systems by offering a unique range of customer-specific environmental and operational forecasting productsand services. MET utilizes certain internally developed systems and tools as the model for the 511 National Guidelines, and currently delivers a combinationof customized route-specific surface weather, travel times and road condition reports statewide across various states in the U.S. MET also provides MDSSmanagement tools that allow users to create solutions to meet roadway maintenance decision needs. MDSS provides detailed and accurate information at theroute level that enables the efficient maintenance of roads and highways while optimizing resource use and reducing costs. Sales, Marketing and Principal Customers We sell our Roadway Sensors products through indirect sales channels comprised of a strong network of independent dealers in the U.S. and certainforeign locations, who sell integrated systems and related products to the traffic management market, as well as directly to the traffic management marketusing a combination of our own sales personnel and an outside sales organization. Our independent dealers are well-trained in, and primarily responsible for,sales, installation, set-up and support of our products, and maintain an inventory of demonstration traffic products from various manufacturers, includingour vehicle detection systems, and sell directly to government agencies and installation contractors. These dealers often have long-term arrangements with localgovernment agencies in their respective territories for the supply of various products for the construction and renovation of traffic intersections, and aregenerally well-known suppliers of high-quality ITS products to the traffic management market. We periodically hold technical training classes for our dealersand end users and maintain a full-time expert staff of customer support technicians throughout the U.S. to provide technical assistance when needed. Whenappropriate, we have the ability to modify or make changes to our dealer network to best suit the needs of the market and our customer base. In the stateswhere we sell directly, we use our own expert staff to sell, oversee installations and set-up issues and support our products. Our marketing strategy for our Vehicle Sensors segment is to establish our LDW products as the leading platform for in-vehicle video sensing forheavy trucks and passenger cars. We sell LDW systems directly to heavy truck manufacturers and to U.S. truck fleets. We market the licensing of our LDWtechnology to manufacturers of passenger automobiles through an exclusive strategic relationship with Valeo. In connection with this marketing effort, weprovide specific contract engineering services, technical marketing and sales support to Valeo, which to date has enabled the launch of our LDW technology onfour Infiniti car platforms. We plan to continue to provide technical marketing and sales support to Valeo in our efforts to win new OEM customers for thepassenger car market, as well as contract engineering services related to the possible launch of new platforms that include our LDW system. With respect to the Vehicle Sensors segment, during Fiscal 2011, we also entered into a strategic alliance with MeritorWabco for integration,marketing and sales of our SafetyDirect system. This alliance provides us access to the North American sales force of MeritorWabco and Meritor, andprovides the market with a leading comprehensive safety system for heavy trucks available today. We market and sell our Transportation Systems and Environmental Technology services directly to government agencies pursuant to negotiatedcontracts that involve competitive bidding and specific qualification requirements. Most of our contracts are with federal, state and municipal customers andgenerally provide for cancellation or renegotiation at the option of the customer upon reasonable notice and fees paid for modification. We generally use selectedmembers of our engineering, science and information technology teams on a regional basis to serve in sales and business development functions. Our contractsgenerally involve long lead times and require extensive specification development, evaluation and price negotiations. 4Table of Contents A large portion of our revenues are derived from sales to federal, state and local government agencies. We currently have a diverse customer base withno individual customer representing greater than 10% of our total net sales and contract revenues in Fiscal 2011, or in the fiscal years ended March 31, 2010(“Fiscal 2010”) and March 31, 2009 (“Fiscal 2009”). Also refer to Note 11 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of thisreport. Manufacturing and Materials We use contract manufacturers to build subassemblies that are used in our sensors products. Additionally, we procure certain components fromqualified suppliers, both globally and locally, and generally use multi-sourcing strategies when technically and economically feasible to mitigate supply risk.These subassemblies and components are delivered to our Santa Ana, California facility where they go through final assembly and testing prior to shipment toour customers. Certain of our key suppliers include CTS Electronics Manufacturing Solutions, Inc., Total Electronics LLC, Sony Electronics, Inc. and LGElectronics, Inc. Our manufacturing activities are conducted in approximately 9,000 square feet of space at our Santa Ana facility. Production volume at oursubcontractors is based upon quarterly forecasts that we generally adjust on a monthly basis to control inventory levels. For LDW products sales to thepassenger car market, all manufacturing has been and is expected to be performed by Valeo; however, we plan to continue to provide engineering support toValeo. We typically do not manufacture any of the hardware used in the transportation management and traveler information systems that we design andimplement. Our production facility is currently ISO 9001 certified. Customer Support and Services We provide warranty service and support for our products, as well as follow-up service and support for which we charge separately. Such servicerevenue was not a material portion of our total net sales and contract revenues for each of Fiscal 2011, 2010 and 2009. We believe customer support is a keycompetitive factor. Backlog Our total backlog of unfulfilled firm orders was approximately $32.8 million as of March 31, 2011, which was comprised of $2.7 million related toRoadway Sensors, $1.0 million related to Vehicle Sensors, $25.5 million related to Transportation Systems and $3.6 million related to EnvironmentalTechnology. Substantially all of the backlog for Roadway Sensors and Vehicle Sensors is expected to be recognized as revenue in the fiscal year endingMarch 31, 2012. We have historically recognized in the subsequent fiscal year between 50% to 70% of our Transportation Systems backlog at the fiscal yearend, and currently expect that trend to continue for the near future. At March 31, 2010, we had backlog of approximately $30.6 million, which was comprised of $1.6 million related to Roadway Sensors, $600,000related to Vehicle Sensors and $28.4 million related to Transportation Systems. The timing and realization of our backlog is subject to the inherent uncertainties of doing business with federal, state and local governments,particularly in view of budgetary constraints, cut-backs and other delays or reallocations of funding that these entities typically face. 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 often depend upon the scheduling and forecasting practices of ourindividual customers, which also can affect the timing of the conversion of our backlog into revenues. For these reasons, among others, our backlog at aparticular date may not be indicative of our future revenues, in particular for our Roadway Sensors and Vehicle Sensors segments. Product Development Most of our product development activities are conducted at our principal facilities in Santa Ana. Our research and development costs and expenseswere approximately $3.8 million for Fiscal 2011, $3.7 million for Fiscal 2010 and $4.0 million for Fiscal 2009. We expect to continue to pursue variousproduct development programs and incur research and development expenditures in future periods. We believe our engineering and product development capabilities are a competitive strength. We strive to continue to develop new products to meet theneeds of the ever-changing ITS market as well as enhance and refine our existing product lines. Within the last 12 to 24 months we have introduced ourVersiCam and VersiCam wireless products, Pico, our new RZ-4 Advanced camera, and our RZ-4 Advanced Wide Dynamic Range camera, whichsignificantly improves video detection performance in certain 5Table of Contents harsh lighting conditions. We have also introduced our Abacus and VantageView software products. We believe that developing new offerings across oursegments and enhancing, refining and marketing our existing products is a key component of strong organic growth and profitability. Competition We generally face significant competition in each of our target markets. Increased competition may result in price reductions, reduced gross marginsand loss of market share, any of which could have a material adverse effect on our business, financial condition and results of operations. In the market for our Roadway Sensors vehicle detection products, we compete with manufacturers and distributors of other above ground videocamera detection systems such as Peek Traffic Corporation, Wavetronix LLC, Econolite Control Products, Inc., Traficon, N.V., Image Sensing Systems, Inc.and other non-intrusive detection devices, including microwave, infrared, ultrasonic and magnetic detectors, as well as manufacturers and installers of in-pavement inductive loop products, which have historically, and currently continue to be, the predominant detection system in this market. In the market for our Vehicle Sensors systems, we believe that, as a result of the expected 2013 European mandate for LDW and other active safetysystems and an increase in overall awareness of the potential benefits of LDW, we anticipate we will experience an even higher degree of competition from avariety of tier-one OEM suppliers and other potential market entrants worldwide. Additionally, we and our strategic partner (Valeo) have recently experienced agreater degree of competition in the passenger car market as several passenger car OEMs have introduced vehicle platforms with competing LDW systems. Weconsider competitors in this market to include Delphi Automotive Systems Corporation, DENSO and Hitachi Ltd. in Japan, Robert Bosch GmbH in Europe,Continental, TRW, MobilEye and Takata, all of which currently have developed or are developing video sensor technologies for the vehicle industry that couldbe used for lane departure warning systems. The markets in which our Transportation Systems and Environmental Technology segments operate are highly fragmented and are subject toevolving national and regional quality, operations and safety standards. Our competitors vary in number, scope and breadth of the products and services theyoffer. Our competitors in advanced Transportation Systems include national corporations such as Transcore, Siemens, Telvent Farradyne, Kimley-Horn andAssociates, Inc., Delcan, Atkins and Open Roads. Our competitors in transportation engineering, planning and design include major firms such as ParsonsBrinkerhoff, Inc., URS, HNTB and Parsons Transportation Group, Inc., as well as many smaller regional engineering firms. Additionally, key competitorspertaining to the road weather portion or our Environmental Technology segment include Telvent DTN, Mixon-Hill and Cambridge Systematics. In general, the markets for the products and services we offer are highly competitive and are characterized by rapidly changing technology andevolving standards. Many of our current and prospective competitors have longer operating histories, greater name recognition, access to larger customer basesand significantly greater financial, technical, manufacturing, distribution and marketing resources than us. As a result, they may be able to adapt morequickly to new or emerging standards or technologies or to devote greater resources to the promotion and sale of their products. It is also possible that newcompetitors or alliances among competitors could emerge and rapidly acquire significant market share. We believe that our ability to compete effectively in ourtarget markets will depend on a number of factors, including the success and timing of our new product development, the compatibility of our products with abroad range of computing 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 markets would have a materialadverse 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. Our policy is toobtain appropriate proprietary rights protection for any potentially significant new technology acquired or developed by us. We currently hold eleven U.S.patents, two foreign patents, one pending U.S. patent and three pending foreign patents. Eight U.S. patents, two foreign patents, one pending U.S. patent, andone pending foreign patent relate specifically to our Vehicle Sensors technology and provide a basis for enhanced functionality and improved performance.Three U.S. patents and two pending foreign patents relate specifically to our Roadway Sensors technology. One of these U.S. patents and the two pendingforeign patents are for an Electronic Traffic Monitor related to our Abacus product in the Roadway Sensors segment. We cannot assure you that any newpatents will be granted pursuant to these or subsequent applications. In addition to patent laws, we rely on copyright and trade secret laws to protect our proprietary rights. We attempt to protect our trade secrets andother proprietary information through agreements with customers and suppliers, proprietary information agreements with our employees and consultants, andother similar measures. We do not have any material licenses or trademarks other 6Table of Contents than those relating to 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 principally upon our employees’technical competence and creative skills for continuing innovation. Litigation may be necessary in the future to enforce our proprietary rights, to determine the validity and scope of the proprietary rights of others, or todefend us against claims of infringement or invalidity by others. An adverse outcome in such litigation or similar proceedings could subject us to significantliabilities to third parties, require disputed rights to be licensed from others or require us to cease marketing or using certain products, any of which couldhave a material adverse effect on our business, financial condition and results of operations. In addition, the cost of addressing any intellectual propertylitigation claim, both in legal fees and expenses, as well as from the diversion of management’s resources, regardless of whether the claim is valid, could besignificant and could have a material adverse effect on our business, financial condition and results of operations. Employees We refer to our employees as associates. As of May 2, 2011, we employed an aggregate of 276 associates, including 55 associates in generalmanagement, administration and finance; 30 associates in sales and marketing; 162 associates in engineering and product development; 18 associates inoperations, manufacturing and quality; and 11 associates in customer service. None of our associates are represented by a labor union, and we have neverexperienced a work stoppage. We believe our relations with our associates are good. Government Regulation Our manufacturing operations are subject to various federal, state and local laws and regulations, including those restricting the discharge ofmaterials into the environment. We are not involved in any pending or, to our knowledge, threatened governmental proceedings, which would requirecurtailment of our operations because of such laws and regulations. We continue to expend funds in connection with our compliance with applicableenvironmental regulations. These expenditures have not, however, been significant in the past, and we do not expect any significant expenditure in the nearfuture. Currently, compliance with foreign laws has not had a material impact on our business and is not expected to have a material impact in the near future. ITEM 1A. RISK FACTORS Our business is subject to a number of risks, some of which are discussed below. Other risks are presented elsewhere in this report and inthe information incorporated by reference into this report. You should consider the following risks carefully in addition to the other informationcontained in this report and our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K, before deciding to buy, sell orhold our common stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties notpresently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occurs, ourbusiness, financial condition, or results of operations could be seriously harmed. In that event, the market price for our common stock could declineand you may lose all or part of your investment. The economic slowdown has reduced and delayed government funding for transportation infrastructure projects and initiatives,decreased availability of financial capital for our customers and adversely impacted real estate development, all of which have adverselyimpacted our net sales and contract revenues. Decreased consumer spending, the failure of certain financial institutions and businesses, concerns aboutthe availability and cost of credit, and reduced corporate profits and capital spending have resulted in a downturn in worldwide economic conditions, as wellas budgetary shortfalls increasingly present at all levels of government. These unfavorable economic conditions are having a negative impact on customerorders and government funding of infrastructure projects incorporating our products and services. Such factors have and may continue to result incancellations and rescheduling of backlog and customer orders. In addition, the recent decline in the U.S. real estate market, particularly in new home andcommercial construction, has adversely impacted new road construction, and in the prior fiscal year, resulted in flat or declining Roadway Sensor and VehicleSensor net sales and adverse effects on Transportation Systems contract revenues. Any of the foregoing economic conditions may adversely affect our net salesand contract revenues in future periods and make it extremely difficult for our customers, our suppliers and us to accurately forecast and plan future businessactivities. Additionally, there continues to be uncertainties regarding the impact of the federal stimulus package and the fact that the accessibility of funds istaking longer than originally anticipated, as well as a delay in the passage of a new Federal Highway Bill. If such conditions continue or worsen, our business,financial condition and results of operations could be materially and adversely affected. Because we depend on government contracts and subcontracts, we face additional risks related to contracting with federal, state andlocal governments, including budgetary issues and fixed price contracts. A significant portion of our sales are derived from contracts with governmentalagencies, either as a general contractor, subcontractor or supplier. We anticipate that 7Table of Contents revenue from government contracts will continue to remain a significant portion of our net sales and contract revenues. Government business is, in general,subject to special risks and challenges, including: · delays in funding, including delays in the allocation of funds to state and local agencies from the U.S. federal government as a result ofthe expiration of the 2005 Federal Highway Bill on October 31, 2009, as well as delays or reductions in stimulus funds and other state andlocal funding dedicated for transportation projects; · other government budgetary constraints, cut-backs, delays or reallocation of government funding; · performance bond requirements; · long purchase cycles or approval processes; · competitive bidding and qualification requirements; · changes in government policies and political agendas; · milestone requirements and liquidated damage provisions for failure to meet contract milestones; and · international conflicts or other military operations that could cause the temporary or permanent diversion of government funding fromtransportation or other infrastructure projects. Governmental budgets and plans are subject to change without warning. Certain risks of selling to governmental entities include dependence onappropriations and administrative allocation of funds, changes in governmental procurement legislation and regulations and other policies that may reflectpolitical developments or agendas, significant changes in contract scheduling, intense competition for government business and termination of purchasedecisions for the convenience of the governmental entity. Substantial delays in purchase decisions by governmental entities, and the current constraints ongovernment budgets at the federal, state and local level, could cause our net sales and contract revenues and income to drop substantially or to fluctuatesignificantly between fiscal periods. In addition, a large number of our government contracts are fixed price contracts. As a result, we may not be able to recover any cost overruns wemay incur. These fixed price contracts require us to estimate the total project cost based on preliminary projections of the project’s requirements. The financialviability of any given project depends in large part on our ability to estimate these costs accurately and complete the project on a timely basis. In the event ourcosts on these projects exceed the fixed contractual amount, we will be required to bear the excess costs. Such additional costs would adversely affect ourfinancial condition and results of operations. Moreover, certain of our government contracts are subject to termination or renegotiation at the convenience of thegovernment, which could result in a large decline in our net sales and contract revenues in any given period. Our inability to address any of the foregoingconcerns or the loss or renegotiation of any material government contract could seriously harm our business, financial condition and results of operations. California state budgetary constraints may have a material adverse impact on us. The state of California has experienced, and iscontinuing to experience, a significant budget shortfall and other related budgetary issues and constraints. The state of California has historically been and isconsidered to be a key geographic region for our Roadway Sensors and Transportation Systems segments. Ongoing uncertainty as to the timing andaccessibility of budgetary funding, changes in state funding allocations to local agencies and municipalities, or other delays in purchasing for, orcommencement of, transportation projects have had and may continue to have a negative impact on our net sales and contract revenues and our income. The markets in which we operate are highly competitive and have many more established competitors, which could adversely affect oursales or the market acceptance of our products. We compete with numerous other companies in our target markets including, but not limited to, large,multinational corporations, which include tier-one automotive suppliers, and many smaller regional engineering firms. In the Vehicle Sensors segment, we believe that as a result of the expected 2013 European mandate for LDW and other active safety systems and anincrease in overall awareness of the potential benefits of LDW, we will experience an even higher degree of competition from a variety of tier-one OEM suppliersand other potential market entrants worldwide. We also expect such competition to increase due to technological advancements, industry consolidations andreduced barriers to entry. Increased competition is likely to result in a loss of market share, price reductions and reduced gross margins, any of which couldseriously harm our business, financial condition and results of operations. Additionally, awareness of LDW technology is increasing and other market playershave 8Table of Contents developed competing technologies, which may contain improvements or added features beyond those offered by our LDW systems. Additionally, from time totime, we may be required to re-compete for LDW business from our main customer base of heavy truck OEMs. These OEMs could make a supplier changebased on price, product performance or available features. Should our competition be successful, this could adversely affect our ability to successfully marketand sell our LDW systems to new and existing customers. We compete with existing, well-established companies in our Roadway Sensors segment, both domestically and abroad. Certain technological barriersto entry make it difficult for new competitors to enter the market with competing video or other technologies; however, we are aware of new market entrantsfrom time to time. Increased competition could result in loss of market share, price reductions and reduced gross margins, any of which could seriously harmour business, financial condition and results of operations. The Transportation Systems and Environmental Technology markets are highly fragmented and are subject to evolving national and regional qualityand safety standards. Our competitors vary in size, number, scope and breadth of the products and services they offer, and include large multi-nationalengineering firms and smaller local regional firms. In all of our segments, many of our competitors have far greater name recognition and greater financial, technological, marketing, and customerservice resources than we do. This may allow them to respond more quickly to new or emerging technologies and changes in customer requirements. It mayalso 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 target markets have exacerbated this problem. As a result of the foregoing factors, we may not be able to competeeffectively in our target markets and competitive pressures could adversely affect our business, financial condition and results of operations. We may engage in acquisitions of companies or technologies that may require us to undertake significant capital infusions and couldresult in disruptions of our business and diversion of resources and management attention. In January 2011, we completed the acquisition ofMeridian Environmental Technology, Inc. We also completed the acquisition of certain assets of Hamilton Signal, Inc. in April 2009. We have in the pastacquired, and may in the future acquire, additional complementary businesses, products, and technologies. Acquisitions may require significant capitalinfusions 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 and informationsystem 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. Our competitors are also soliciting potential acquisition candidates, which could both increase the price of any acquisition targets and decrease thenumber of attractive companies available for acquisition. Acquisitions may also materially and adversely affect our operating results due to large write-offs,contingent liabilities, substantial depreciation, deferred compensation charges or intangible asset amortization, or other adverse tax or accounting consequences.We cannot assure you that we will be able to identify or consummate any additional acquisitions, successfully integrate any acquisitions or realize the benefitsanticipated from any acquisition. We may be unable to attract and retain key personnel, which could seriously harm our business. Due to the specialized nature of ourbusiness, we are highly dependent on the continued service of our executive officers and other key management, engineering and technical personnel. The lossof any of our officers, or any of our other executives or key members of management could adversely affect our business, financial condition, or results ofoperations. Our success will also depend in large part upon our ability to continue to attract, retain and motivate qualified engineering and other highly skilledtechnical personnel. In particular, the future success of our Transportation Systems segment will depend on our ability to hire additional qualified engineersand planners. Competition for qualified employees, particularly development engineers, is intense. We may not be able to continue to attract and 9Table of Contents retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of ourcurrent key employees could adversely affect our business, financial condition and results of operations. Our profitability could be adversely affected if we are not able to maintain adequate utilization of our Transportation Systemsworkforce. The cost of providing our Transportation Systems engineering and consulting services, including the extent to which we utilize our workforce,affects our profitability. The rate at which we utilize our workforce is affected by a number of factors, including: · our ability to transition employees from completed projects to new assignments and to hire and assimilate new employees; · our ability to forecast demand for our services and thereby maintain an appropriate headcount in our various regions; · our need to devote time and resources to training, business development, professional development and other non-chargeable activities; and · our ability to match the skill sets of our employees to the needs of the marketplace. Our use of the percentage of completion method of accounting for our contract revenues could result in a reduction or reversal ofpreviously recorded revenues and profits. A significant portion of our total net sales and contract revenues are measured and recognized using thepercentage of completion method of accounting. Our use of this accounting method results in recognition of revenues and profits ratably over the life of acontract, based generally on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions torevenues and estimated costs are recorded when the amounts are known or can be reasonably estimated. Such revisions could occur in any period and theireffects could be material. Although we have historically made reasonably reliable estimates of the progress towards completion of long-term engineering,program management, construction management or construction contracts, the uncertainties inherent in the estimating process make it possible for actual coststo vary materially from estimates, including reductions or reversals of previously recorded revenues and profits. Our failure to successfully bid on new contracts and renew existing contracts could reduce our revenues and profits. Our business dependson our ability to successfully bid on new contracts and renew existing contracts with private and public sector customers. Contract proposals and negotiationsare complex and frequently involve a lengthy bidding and selection process, which are affected by a number of factors, such as market conditions, financingarrangements and required governmental approvals. For example, a customer may require us to provide a surety bond or letter of credit to protect the clientshould we fail to perform under the terms of the contract. If negative market conditions continue, or if we fail to secure adequate financing arrangements or therequired governmental approval or fail to meet other required conditions, we may not be able to pursue particular projects, which could reduce or eliminate ourprofitability. We may experience production gaps that could materially and adversely impact our sales and financial results and the ultimateacceptance of our products. It is possible that we could experience unforeseen quality control issues or part shortages as we adjust production to meet currentdemand for our products. We have historically used single suppliers for certain significant components in our products. Should any such delay or disruptionoccur, or should a key supplier discontinue operations because of the current economic climate, our future sales will likely be materially and adverselyaffected. Additionally, we rely heavily on select contract manufacturers to produce many of our products and do not have any long-term contracts to guaranteesupply of such products. Although we believe our contract manufacturers have sufficient capacity to meet our production schedules for the foreseeable futureand we believe we could find alternative contract manufacturing sources for many of our products, if necessary, we could experience a production gap if forany reason our contract manufacturers were unable to meet our production requirements and our cost of goods sold could increase, adversely affecting ourmargins. In particular, while we have not to date experienced a material adverse impact due to the earthquake, tsunami and resulting damage to Japan’sinfrastructure, we could experience supply chain interruptions for products sourced from Japan. If we are unable to develop and introduce new products and product enhancements successfully and in a cost-effective and timelymanner, or are unable to achieve market acceptance of our new products, our operating results would be adversely affected. We believe ourrevenue growth and future operating results will depend on our ability to complete development of new products and enhancements, introduce these products ina timely, cost-effective manner, achieve broad market acceptance of these products and enhancements, and reduce our production costs. We cannot guaranteethe success of these products, and we may not be able to introduce any new products or any enhancements to our existing products on a timely basis, or at all.In addition, the introduction of any new products could adversely affect the sales of certain of our existing products. 10Table of Contents We believe that we must continue to make substantial investments to support ongoing research and development in order to remain competitive. Weneed to continue to develop and introduce new products that incorporate the latest technological advancements in outdoor image processing hardware, softwareand camera technologies in response to evolving customer requirements. We cannot assure you that we will be able to adequately manage product transitionissues. Our business and results of operations could be adversely affected if we do not anticipate or respond adequately to technological developments orchanging customer requirements or if we cannot adequately manage inventory issues typically related to new product transitions and introductions. We cannotassure you that any such investments in research and development will lead to any corresponding increase in revenue. Market acceptance of our new products depends upon many factors, including our ability to accurately predict market requirements and evolvingindustry standards, our ability to resolve technical challenges in a timely and cost-effective manner, our ability to qualify any new products with OEMs andachieve manufacturing efficiencies, the perceived advantages of our new products over traditional products and the marketing capabilities of our independentdistributors and strategic partners, including Valeo’s ability to expand sales of LDW systems in the passenger car market. The success of our LDW systemwill also depend in part on the success of the automotive vehicles that incorporate our technology, as well as the success of optional equipment that OEMsbundle with our technologies. Our business and results of operations could also be seriously harmed by any significant delays in our new product development. Certain of our newproducts could contain undetected design faults and software errors or “bugs” when first released by us, despite our testing. We may not discover these faultsor errors until after a product has been installed and used by our customers. Any faults or errors in our existing products or in any new products may causedelays in product introduction and shipments, require design modifications or harm customer relationships, any of which could adversely affect our businessand competitive position. New environmental regulations may result in a decline in our Vehicle Sensors net sales. From time to time, environmental regulations areenacted, which can significantly increase the cost of manufacturing new vehicles as well as the cost of maintaining existing vehicles and truck fleets. As aresult, we could experience a decline in sales of our Vehicle Sensors products as truck and vehicle manufacturers and fleet operators attempt to control theircosts. We depend upon Valeo to market our LDW technologies for the OEM passenger car market. We have granted Valeo the exclusive right tosell and manufacture our LDW system to the worldwide passenger car market in exchange for royalty payments for each LDW unit sold. As such, the futuresuccess and broad market acceptance of our technologies in the passenger car market will depend upon Valeo’s ability to manufacture, market and sell ourtechnologies, and to convince more OEM passenger car manufacturers to adopt our technologies. To date, we have not generated significant royalties fromValeo’s efforts and have only been designed into one passenger car OEM product line. If Valeo does not devote considerable resources and aggressively pursueopportunities, our expansion into the passenger car market, and our related revenues from contract engineering services and royalty revenues, could beadversely affected or not materialize as originally anticipated. If we do not keep pace with rapid technological changes and evolving industry standards, we will not be able to remain competitive andthere will be no demand for our products. Our markets are in general characterized by the following factors: · rapid technological advances; · downward price pressures in the marketplace as technologies mature; · changes in customer requirements; · additional qualification requirements related to new products or components; · frequent new product introductions and enhancements; · inventory issues related to transition to new or enhanced models; 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 to effectively develop,introduce, market and gain broad acceptance of new products and product enhancements incorporating the latest technological advancements. In particular,our LDW systems are incorporated into automobiles and trucks that face significant 11Table of Contents technological changes in each model year and among different vehicle models. Accordingly, we must adapt our technology from time to time to function withsuch changes. Our international business operations may be threatened by many factors that are outside of our control. While we historically have hadlimited international sales and operations experience, we began work on our first overseas contracts in the United Arab Emirates in Fiscal 2010. We plan toexpand our international efforts in the future with respect to all three of our segments, but cannot assure you that we will be successful in those efforts.International operations subject us to various inherent risks including, among others: · currency fluctuations and restrictions; · political, social and economic instability, as well as international conflicts and acts of terrorism; · longer accounts receivable payment cycles; · import and export license requirements and restrictions of the U. S. and each other country in which we operate; · unexpected changes in regulatory requirements, tariffs and other trade barriers or restrictions; · the burdens of compliance with a wide variety of foreign laws and more restrictive labor laws and obligations; · difficulties in managing and staffing international operations; · potentially adverse tax consequences; and · reduced protection for intellectual property rights in some countries. Substantially all of our international sales are denominated in U.S. dollars. As a result, an increase in the relative value of the dollar could make ourproducts more expensive and potentially less price competitive in international markets. We do not currently engage in any transactions as a hedge againstrisks of loss due to foreign currency fluctuations. Any of the factors mentioned above may adversely affect our future international sales and, consequently, affect our business, financial conditionand operating results. Additionally, as we pursue the expansion of our international business, certain fixed and other overhead costs could outpace ourrevenues, thus adversely affecting our results of operations. We may likewise face local competitors in certain international markets who are more established,have greater economies of scale and stronger customer relationships. Furthermore, as we increase our international sales, our total revenues may also beaffected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of theworld. If our internal controls over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business and stockprice could be adversely affected. Section 404 of the Sarbanes-Oxley Act of 2002 currently requires us to evaluate the effectiveness of our internal controlsover financial reporting at the end of each fiscal year and to include a management report assessing the effectiveness of our internal controls over financialreporting in all annual reports. As a smaller reporting company, for our fiscal year ended March 31, 2011, we were exempt from the auditor attestation requirement over our internalcontrol over financial reporting; however, to the extent we do not qualify as a non-accelerated filer or smaller reporting Company in subsequent fiscal years, wewill be subject to the auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act. In such an event, we may not be able to complete the workrequired for such attestation on a timely basis, and even if we timely complete such requirements, our independent registered public accounting firm may stillconclude that our internal controls over financial reporting are not effective. Our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all errors and allfraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectiveswill be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within Iteris have been or will be detected. These inherent limitations include the realities that judgments in decision-making canbe faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, bycollusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptionsabout the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions.Over time, our controls may become inadequate 12Table of Contents because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not be detected. Our quarterly operating results fluctuate as a result of many factors. Therefore, we may fail to meet or exceed the expectations ofsecurities analysts and investors, which could cause our stock price to decline. Our quarterly revenues and operating results have fluctuated and arelikely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. Factors that could affect our revenuesinclude, among others, the following: · delays in government contracts and funding from time to time and budgetary constraints at the federal, state and local levels; · our ability to access stimulus funding, funding from a new Federal Highway Bill or other funding; · declines in new home and commercial real estate construction and related road and other infrastructure construction; · changes in our pricing policies and the pricing policies of our suppliers and competitors, pricing concessions on volume sales, as well asincreased price competition in general; · the long lead times associated with government contracts or required by vehicle manufacturers; · the size, timing, rescheduling or cancellation of significant customer orders; · our ability to control costs; · our ability to raise additional capital; · the mix of our products and services sold in a quarter, which mix has varied and is expected to continue to vary from time to time; · seasonality due to winter weather conditions; · our ability to develop, introduce, patent, market and gain market acceptance of new products, applications and product enhancements ina timely manner, or at all; · market acceptance of the products incorporating our technologies and products; · the introduction of new products by competitors; · the availability and cost of components used in the manufacture of our products; · our success in expanding and implementing our sales and marketing programs; · the effects of technological changes in our target markets; · the amount of our backlog at any given time; · the nature of our government contracts; · 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; · general economic and political conditions; · international conflicts and acts of terrorism; and · other factors beyond our control, including but not limited, to the impact on our future revenues as a result of the recent earthquake,tsunami and related events in Japan. 13Table of Contents Due to all of the factors listed above as well as other unforeseen factors, our future operating results could be below the expectations of securitiesanalysts 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 onquarter-to-quarter comparisons of our operating results as an indication of our future performance. As compared to recent prior fiscal years, we experienced declining or flat net sales and contract revenues in our two most recentlycompleted fiscal years. If we fail to manage this decline effectively, we may be unable to execute our business plan and may experience futureweaknesses in our operating results. Based on our business objectives, and in order to achieve future growth, we will need to continue to add additionalqualified personnel, and invest in additional research and development and sales and marketing activities, which could lead to increases in our expenses andfurther declines in our operating results. In addition, our past expansion has placed, and future expansion is expected to place, a significant strain on ourmanagerial, administrative, operational, financial and other resources. If we are unable to manage these activities or any unexpected revenue declinessuccessfully, our growth, our business, our financial condition and our results of operations could continue to be adversely affected. We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position. If we arenot able to adequately protect or enforce the proprietary aspects of our technology, competitors could be able to access our proprietary technology and ourbusiness, financial condition and results of operations will likely be seriously harmed. We currently attempt to protect our technology through a combinationof patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and similar means. Despite our efforts, other partiesmay attempt to disclose, obtain or use our technologies or systems. Our competitors may also be able to independently develop products that are substantiallyequivalent or superior to our products or design around our patents. In addition, the laws of some foreign countries do not protect our proprietary rights asfully as do the laws of the U. S. As a result, we may not be able to protect our proprietary rights adequately in the U.S. or abroad. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights ofothers. Litigation may also be necessary to defend against claims of infringement or invalidity by others. An adverse outcome in litigation or any similarproceedings could subject us to significant liabilities to third parties, require us to license disputed rights from others or require us to cease marketing or usingcertain products or technologies. We may not be able to obtain any licenses on terms acceptable to us, or at all. We also may have to indemnify certaincustomers or strategic partners if it is determined that we have infringed upon or misappropriated another party’s intellectual property. Any of these resultscould adversely affect our business, financial condition and results of operations. In addition, the cost of addressing any intellectual property litigation claim,including legal fees and expenses, and the diversion of management’s attention and resources, regardless of whether the claim is valid, could be significant andcould seriously harm our business, financial condition and results of operations. We may need to raise additional capital in the future, which may not be available on terms acceptable to us, or at all. We havehistorically experienced volatility in our earnings and cash flows from operations from year to year. Although we have a $12.0 million revolving line of credit,should we have an event of default, which includes, among other things, a failure to meet certain financial covenants and a material adverse change in thebusiness, the bank could choose to limit or take away our ability to borrow these or any funds. Should this occur, or if the credit markets further tighten orour business declines, we may need or choose to raise additional capital to repay indebtedness, pursue acquisitions or expand our operations. Such additionalcapital may be raised through bank borrowings, or other debt or equity financings. We cannot assure you that any additional capital will be available on atimely basis, on acceptable terms, or at all, and such additional financing may result in further dilution to our stockholders. Our capital requirements will depend on many factors, including, but not limited to: · market acceptance of our products and product enhancements, and the overall level of sales of our products; · our ability to control costs; · the supply of key components for our products; · our ability to increase revenue and net income; · increased research and development expenses and sales and marketing expenses; 14Table of Contents · our need to respond to technological advancements and our competitors’ introductions of new products or technologies; · capital improvements to new and existing facilities and enhancements to our infrastructure and systems; · potential acquisitions of businesses and product lines; · our relationships with customers and suppliers; · government budgets, political agendas and other funding issues, including potential delays in government contract awards; · our ability to successfully negotiate credit arrangements with our bank and the state of the financial markets, in general; 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 additionalfunds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and such securitiesmay have rights, preferences and privileges senior to our common stock. Additional equity or debt financing may not be available on favorable terms, on atimely basis, or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to continue our operations as planned,develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitive pressures. We may be unable to maintain profitability on a quarterly or annual basis. We cannot assure you that we will be able to sustain or improveour financial performance, or that we will be able to continue to achieve profitability on a quarterly or annual basis in the future. Our ability to maintainprofitability in future periods could be impacted by budgetary constraints, government and political agendas, economic instability and other items that are notin our control. Most of our expenses are fixed in advance. As such, we generally are unable to reduce our expenses significantly in the short-term to compensatefor any unexpected delay or decrease in anticipated revenues. As a result, we may experience operating losses and net losses in the future, which would make itdifficult to fund our operations and achieve our business plan, and could cause the market price of our common stock to decline. The trading price of our common stock is highly volatile. The trading price of our common stock has been subject to wide fluctuations in thepast. Since April 2008, our Class A common stock (now known as our common stock) has traded at closing prices as low as $0.98 per share and as high as$2.98 per share. 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, improve cash flow and sustain profitability; · our ability to raise additional capital; · shortages announced by suppliers; · announcements of technological innovations or new products or applications by our competitors, customers or us; · transitions to new products or product enhancements; · acquisitions of businesses, products or technologies; · the impact of any litigation; · changes in investor perceptions; · government funding, political agendas and other budgetary constraints; · changes in earnings estimates or investment recommendations by securities analysts; and · international conflicts, political unrest and acts of terrorism. 15Table of Contents The stock market in general has from time to time experienced volatility, which has often affected the market prices of equity securities of manytechnology companies. This volatility has often been unrelated to the operating performance of these companies. These broad market fluctuations mayadversely affect the market price of our common stock. In the past, companies that have experienced volatility in the market price of their securities have beenthe subject of securities class action litigation. If we were to become the subject of a class action lawsuit, it could result in substantial losses and divertmanagement’s attention and resources from other matters. Certain provisions of our charter documents may discourage a third party from acquiring us and may adversely affect the price of ourcommon stock. Certain provisions of our certificate of incorporation could make it difficult for a third party to acquire us, even though an acquisition mightbe beneficial to our stockholders. Such provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.Under the terms of our certificate of incorporation, our Board of Directors is authorized to issue, without stockholder approval, up to 2,000,000 shares ofpreferred stock with voting, conversion and other rights and preferences superior to those of our common stock. In August 2009, we adopted a stockholderrights plan and declared a dividend of preferred stock purchase rights to our stockholders. Generally, the stockholder rights plan provides that if a person orgroup acquires 15% or more of our common stock, subject to certain exceptions and under certain circumstances, the rights may be exchanged by us forcommon stock or the holders of the rights, other than the acquiring person or group, could acquire additional shares of our capital stock at a discount off ofthe then current market price. Such exchanges or exercise of rights could cause substantial dilution to a particular acquirer and discourage the acquirer frompursuing our company. The mere existence of a stockholder rights plan often delays or makes a merger, tender offer or proxy contest more difficult. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our headquarters and principal operations are housed in approximately 52,000 square feet of leased office, manufacturing and warehouse spacelocated in Santa Ana, California. This facility lease expires in 2015 and contains an option to extend the lease for an additional five years at the market rate atthat time. For additional information regarding our obligations under property leases, see Note 8 of Notes to Consolidated Financial Statements, included inPart IV, Item 15 of this report. ITEM 3. LEGAL PROCEEDINGS The information set forth under the heading “Litigation and Other Contingencies” under Note 8 of Notes to Consolidated Financial Statements,included in Part IV, Item 15 of this report, is incorporated herein by reference. ITEM 4. (REMOVED AND RESERVED) 16Table of Contents PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES Market Information and Holders Our common stock is traded on the NYSE Amex under the symbol “ITI.” The following table sets forth, for the periods indicated, the highest andlowest closing prices for our common stock as reported by NYSE Amex: HighLowFiscal 2011Quarter Ended June 30, 2010$2.09$1.35Quarter Ended September 30, 20101.561.28Quarter Ended December 31, 20101.861.35Quarter Ended March 31, 20111.771.41 Fiscal 2010Quarter Ended June 30, 2009$1.45$1.14Quarter Ended September 30, 20091.731.15Quarter Ended December 31, 20091.601.37Quarter Ended March 31, 20102.041.31 On May 20, 2011, the last reported sales price of our common stock on the NYSE Amex was $1.31. As of May 20, 2011, we had 405 holders ofrecord of our common stock according to information furnished by our transfer agent. Dividend Policy We have never paid or declared cash dividends on our common stock, and have no current plans to pay such dividends in the foreseeable future. Wecurrently intend to retain any earnings for working capital and general corporate purposes. The payment of any future dividends will be at the discretion of ourBoard of Directors and will depend upon a number of factors, including, but not limited to, future earnings, the success of our business, our capitalrequirements, our general financial condition and future prospects, general business conditions, the consent of our lender and such other factors as the Boardof Directors may deem relevant. ITEM 6. SELECTED FINANCIAL DATA As a smaller reporting company, we are not required to make any disclosure pursuant to this Item 6. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes theretoincluded in Part IV, Item 15 of this report and the “Risk Factors” section in Item 1A, as well as other cautionary statements and risks describedelsewhere in this report, before deciding to purchase, hold or sell our common stock. Overview General. We are a leader in the traffic management market focused on the development and application of advanced technologies that reduce trafficcongestion and improve the safety of surface transportation systems infrastructure. Additionally, we believe our products and services, in conjunction withsound traffic management, minimize the environmental impact of traffic congestion. By combining outdoor image processing, traffic engineering andinformation technology, we offer a broad range of Intelligent Transportation Systems and driver safety solutions to customers in U.S. and internationally. Acquisitions. In January 2011, we acquired all of the capital stock of Meridian Environmental Technology, Inc. for an initial cash payment ofapproximately $1.6 million. We also agreed to pay up to $1 million on each of the first two anniversaries of the closing of the acquisition, as well as up to anadditional $2 million under a 24-month earn-out provision. In April 2009, we completed the acquisition of certain assets of Hamilton Signal, which included the Abacus system, for an aggregate purchase priceof approximately $518,000. Refer to Note 3 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report for additional discussion regarding theabove acquisitions. Business Segments. We currently operate in four reportable segments: Roadway Sensors, Vehicle Sensors, Transportation Systems andEnvironmental Technology. 17Table of Contents Roadway Sensors Our Roadway Sensors segment product line uses advanced image processing technology to capture and analyze video images through sophisticatedalgorithms, enabling vehicle detection and transmission of both video images and data using various communication technologies. · Our Vantage video detection systems detect vehicle presence at intersections, as well as vehicle count, speed and other traffic data used intraffic management systems. Our Vantage systems give traffic managers the ability to mitigate roadway congestion by modifying trafficsignal timing or detecting incidents quickly. Our VantageView software supplements our Vantage video detection systems by providing anintegrated platform to manage and “see” video detection assets remotely over a network connection. · VersiCam, our integrated camera and processor video detection system, is a cost-efficient video detection system for smaller intersectionsthat require only a few detection points. · Pico, our compact video detection system, was developed primarily to address international video detection needs, and was designed foreasy installation and configuration. · Our Abacus products take advantage of the large number of existing installed closed-circuit television video feeds monitoring roadways,signalized intersections, tunnels and bridges to allow for data collection and incident detection without the set-up and calibration generallyrequired with other systems. We believe that future growth domestically and internationally, particularly in developing countries, will be dependent in part on the continuedadoption of above-ground video detection technologies, instead of traditional in-pavement loop technology, to manage traffic. Vehicle Sensors Our Vehicle Sensors segment addresses the leading cause of roadway fatalities: lane change, roadway departure and rear-end collision accidents. Wedeveloped the world’s first production LDW system and offer a proven system that is available as an OEM and aftermarket option on heavy trucksworldwide and as an option in certain passenger cars. Our LDW products utilize video detection images to detect when a vehicle begins to drift toward anunintended lane change. When this occurs, the unit automatically emits a distinctive rumble strip or other audible warning sound, alerting the driver to make acorrection. We believe that, as a result of the expected 2013 European Union mandate for LDW and other active safety systems and an general increase inawareness of the potential benefits of LDW, we will experience an even higher degree of competition from a variety of tier-one OEM suppliers and otherpotential market entrants worldwide. While we believe that this increased competition validates the long-term market opportunity for LDW systems incommercial vehicles, it could also adversely affect our future LDW sales and margins. We are currently working with our European OEM customer base toestablish long-term supply agreements that extend through 2013 and beyond in order to meet the anticipated increase in demand; however, we cannot assureyou that our efforts will be successful or that the increase in demand will occur. We have entered into an exclusive license of our LDW technology to ourstrategic partner, Valeo, for the passenger car market. Recently, we and our partner have experienced a greater degree of competition in the passenger carmarket, as several passenger car OEMs have introduced vehicle platforms with competing LDW systems. However, Valeo continues to pursue opportunitiesin the passenger car market. In addition to our LDW systems, our Vehicle Sensors portfolio includes radar-based Forward Collision Warning and Blind Spot Warning systemsfor the North American truck market, and our SafetyDirect product, a system that reports driver performance data captured by our LDW system, and has theability to relay this data directly to fleet operators through integration with the truck’s existing fleet communications system. We expect future revenuesgenerated by our SafetyDirect product will be based on a subscription model, whereby we charge our customers a monthly fee based on the number of vehiclesequipped with the product. We offer the FCW and BSW features through the resale of Delphi’s radar-based systems, for which we are the exclusive NorthAmerican dealer, while SafetyDirect was internally developed. These products, together with our LDW products, combine to create a suite of active safetydriver assistance features focused on reducing the number of motor vehicle crashes and the severity of crash-related injuries. Transportation Systems Our Transportation Systems segment includes transportation engineering and consulting services focused on the planning, design, development andimplementation of software-based systems that integrate sensors, video surveillance, computers, and advanced communications equipment to enable publicagencies to monitor, control and direct traffic flow, assist in the quick dispatch of emergency crews and distribute real-time information about trafficconditions. Our services include planning, design and 18Table of Contents implementation of surface transportation infrastructure systems. We perform analysis and study goods movement, commercial vehicle operations, traveldemand forecasting and systems engineering, and identify mitigation measures to reduce traffic congestion. Historically, these services and systems haveprimarily been sold to local, state and national transportation agencies in the U.S. under a broad range of fixed price and cost plus fixed fee contracts;however, in Fiscal 2010, we began work on our first two overseas contract awards and plan to pursue additional international opportunities for ourTransportation Systems segment. Our Transportation Systems segment is largely dependent upon governmental funding and is affected by state and local budgetary issues. We believethe overall expansion of our Transportation Systems segment in the future will at least in part be dependent on the passage of a new Federal Highway Bill,which Congress is currently working on. We anticipate continued delays in the enactment of such a new bill, and until such time as a bill becomes law, theallotment of transportation funds in federal, state and local budgets may be uncertain. We believe that prolonged uncertainty has adversely impacted, and maycontinue to adversely impact, our net sales and contract revenues and our overall financial performance in future periods. Environmental Technology Our Environmental Technology segment is comprised of the activities of MET, which we acquired in January 2011. This segment specializes in 511advanced traveler information systems by offering a unique range of customer-specific environmental and operational forecasting products and services. It alsoutilizes certain internally developed systems and tools as the model for the 511 National Guidelines, and currently delivers a combination of customized route-specific surface weather, travel times and road condition reports statewide across various states in the U.S. We also provide Maintenance Decision SupportSystem (MDSS) management tools that allow users to create solutions to meet roadway maintenance decision needs. MDSS provides detailed and accurateinformation at the route level that enables the efficient maintenance of roads and highways while optimizing resource use and reducing costs. Business. Given the current ongoing uncertainties regarding global economic conditions, we continue to remain cautious about our overall business.Since the end users of a majority of our products and services are governmental entities, we are negatively affected by the budgetary issues and delays inpurchasing decisions that many municipalities and other state and local agencies continue to face. Spending for new roadways, new systems to address trafficcongestion and other transportation infrastructure improvements has been delayed or eliminated in some instances. However, we believe that the need to rebuildand modernize aging transportation infrastructure will continue, and in addition to funds available through recent federal stimulus packages and federalhighway bills, there exist various other funding mechanisms that support transportation infrastructure and related projects. These include bonds, dedicatedsales and gas tax measures and other alternative funding sources. We believe the overall ongoing unfavorable economic environment has negatively affected, and may continue to negatively affect, our financialresults for the foreseeable future. Additionally, our ability to accurately forecast our future financial performance and other business trends may be impaired. Critical Accounting Policies and Estimates Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements includedherein, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financialstatements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures ofcontingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On anongoing basis, we evaluate these estimates and assumptions, including those related to the collectibility of accounts receivable, the valuation of inventories, therecoverability of long-lived assets and goodwill, the realizability of deferred tax assets, accounting for stock-based compensation, the valuation of equityinstruments, warranty reserves and other contingencies. We base these estimates on historical experience and on various other factors that we believe to bereasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are notreadily apparent from other 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 reported amounts of assetsand liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financialstatements. Revenue Recognition. Product revenues and related costs of sales are recognized when all of the following criteria are met: (i) persuasive evidence ofan arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable and (iv) collection of the receivable is reasonablyassured. These criteria are typically met at the time of product shipment, but in certain 19Table of Contents circumstances, may not be met until receipt or acceptance by the customer. Accordingly, at the date revenue is recognized, the significant obligations oruncertainties concerning the sale have been resolved. We recognize revenue from the sale of deliverables that are part of a multiple-element arrangement in accordance with applicable accounting guidancethat establishes a selling price hierarchy permitting the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverablein a multiple-element arrangement where neither vendor specific objective evidence (“VSOE”) nor third-party evidence (“TPE”) of fair value is available forthat deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements that have stand-alone value ina multiple-element arrangement, we are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element(both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or arebased on our estimated selling prices. We account for multiple-element arrangements that consist only of software and software-related services in accordance with industry-specificaccounting guidance for software and software-related transactions. For such transactions, revenue on arrangements that include multiple elements is allocatedto each element based on the relative fair value of each element, and fair value is determined by VSOE. If we cannot objectively determine the fair value of anyundelivered element included in such multiple-element arrangements and the only undelivered element is post-contract customer support or maintenance, andVSOE of the fair value of such support or maintenance does not exist, revenue from the entire arrangement is recognized ratably over the support period. Whenthe fair value of a delivered element has not been established, but VSOE of fair value exists for the undelivered elements, we use the residual method torecognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferredand the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. We also derive revenue from the provision of specific non-recurring contract engineering services to our strategic partner, Valeo, related to our LDWsystems, and royalties earned on unit sales of our LDW systems by Valeo to the passenger car market. Non-recurring contract engineering revenues arerecognized in the period in which the related services are performed. Royalty revenues are recorded based on unit sales of our products by Valeo and arerecognized in the period in which such sales occur. Non-recurring contract engineering revenues and royalty revenues are included in our net sales. Revenues from follow-on service and support, for which we generally charge separately, are recorded in the period in which the services areperformed and are included in our net sales. Contract Revenues Contract revenues are derived primarily from long-term contracts with governmental agencies. The majority of our contract revenues are recognizedusing the percentage of completion method of accounting. Under this method, revenue is recognized as contract performance progresses, and is based on therelationship of costs incurred to total estimated costs. We generally utilize a cost-to-cost approach in applying the percentage of completion method, wherebyrevenue is earned in proportion to total costs incurred, divided by total costs expected to be incurred. Costs are generally determined from actual hours of laboreffort expended. Direct non-labor costs are charged as incurred plus any mark-up permitted under the contract. Certain of our contract revenues are recognizedas services are performed and amounts are earned, which is measured by time incurred or other contractual milestones or output measure. Contract revenuesaccounted for in this manner generally relate to certain cost-plus fixed fee or time-and-materials contracts for which no specific maximum contract values arestipulated. Any anticipated losses on contracts are charged to operations when identified. Changes in job performance and estimated profitability, includingthose arising from contract penalty provisions and final contract settlements, may result in revisions to recognized costs and revenues and are recognized in theperiod in which the revisions are determined. Profit incentives are included in revenue when their realization is reasonably assured. Under the percentage ofcompletion method, recognition of profit is dependent upon the accuracy of a variety of estimates, including engineering progress, materials quantities, andachievement of milestones, incentives, penalty provisions, labor productivity, cost estimates and others. Such estimates are based on various professionaljudgments we make with respect to those factors and are subject to change as the project proceeds and new information becomes available. We have a historyof making reasonably dependable estimates of the extent of progress towards completion and contract completion costs on our long-term contracts. However,due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from our estimates. Substantially all of our contracts are of the following types: Cost-Plus Fixed Fee. Under cost-plus fixed fee contracts, we charge our customers for our costs, including both direct and indirect costs, plus afixed negotiated fee. 20Table of Contents Fixed-Price. Under fixed-price contracts, our customers pay us an agreed fixed amount negotiated in advance for a specified scope of work. Prior tocompletion, our recognized profit margins on any fixed price contract depend on the accuracy of our estimates and will increase to the extent that our currentestimates of aggregate actual costs are below amounts previously estimated. Conversely, if our current estimated costs exceed prior estimates, our profitmargins will decrease and we may realize a loss on a project. Time-and-Materials. Under our time-and-materials contracts, we negotiate hourly billing rates and charge our customers based on the actual timethat we spend on a project. In addition, customers reimburse us for our actual out-of-pocket costs of materials and other direct incidental expenditures that weincur in connection with our performance under the contract. The majority of our time-and-material contracts are subject to maximum contract values and,accordingly, revenues under these contracts are generally recognized under the percentage-of-completion method. Accounts Receivable. We estimate the collectibility of customer receivables on an ongoing basis by reviewing invoices outstanding greater than acertain period of time. We record an allowance for doubtful accounts for specific receivables deemed to be at risk for collection as well as a general allowancebased on our historical collections experience. Considerable judgment is required in assessing and estimating the ultimate realization of trade receivables,including the current credit-worthiness of each customer. If the financial condition of our customers deteriorates, resulting in an impairment of their ability tomake required payments, additional allowances may be required that could adversely affect our operating results. Inventories. Inventories consist of finished goods, work-in-process and raw materials and are stated at the lower of cost or market. We write downthe carrying value of our inventories to net realizable value for estimated excess and obsolete inventories in an amount equal to the difference between the cost ofthe inventories and their estimated realizable value. These estimates are based on management’s judgments and assumptions as to future demand requirementsand our evaluation of market conditions. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may bemore or less favorable than those projected by management. In the event that actual demand is lower than originally projected, additional inventory write-downsmay be required. Estimated inventory write-downs, once established, are not reversed until the related inventory has been sold or scrapped, so if actual marketconditions are more favorable in the fiscal periods subsequent to those in which we record significant write-downs, we may have higher gross margins whenproducts are sold. Acquisitions and Intangible Assets. The accounting for acquisitions requires extensive use of estimates and judgments to measure the fair value ofidentifiable tangible and intangible assets acquired and liabilities assumed. Additionally, we must determine whether an acquired entity is considered to be abusiness or a set of net assets, because the excess of the purchase price over the fair value of net assets can only be recognized as goodwill in a businesscombination in accordance with relevant accounting guidance. Our intangible assets are amortized over the estimated useful life of the asset. We periodically evaluate the recoverability of the intangible assets andconsider any changes in circumstances that would indicate that the carrying amount of an asset may not be recoverable. Any material changes incircumstances, such as significant decreases in revenue or the operating results of one or more of our operating segments, could require future write-downs ofour intangible assets. Goodwill. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the acquirednet tangible and intangible assets. Goodwill is tested for impairment annually in our fourth fiscal quarter at the reporting unit level unless a change incircumstances indicates that an interim impairment analysis is required. We have determined that our reporting units for purposes of testing for goodwillimpairment are identical to our reportable segments for financial reporting purposes. Impairment, if any, is measured based on the estimated fair value of thereporting units with the recorded goodwill. The fair value of our reporting units is determined by using the income approach methodology of valuation whichutilizes discounted cash flows. The estimated fair value of our reporting units also includes a control premium, which is the amount that a buyer is willing topay over the current market price of a company as indicated by the traded price per share (i.e., market capitalization), in order to acquire a controlling interest.Significant management judgment is required in the forecasts of future operating results that are used in the discounted cash flow method of valuation. Inestimating future cash flows, we generally use the financial assumptions in our current budget and our current strategic plan, subject to modification asconsidered necessary, including sales and expense growth rates and the discount rates we estimate to represent our cost of funds. It is possible, however, thatthe plans may change and the estimates used may prove to be inaccurate. In the future, the value of goodwill attributable to each of our reporting units could beadversely impacted by, among other factors, declines in our financial results or market capitalization for an extended period of time or our failure to meetfinancial performance projections included in our forecasts of future operating results. Warranty. We generally provide a one to three year warranty from the original invoice date on all products, materials and workmanship. Defectiveproducts are either repaired or replaced, at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred forproduct warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized. The accrued warranty provision isincluded within accrued expenses in the accompanying 21Table of Contents consolidated balance sheets. Should our actual experience of warranty returns be higher than anticipated, additional warranty reserves may be required, whichwould adversely affect our product gross profit and our operating results. Income Taxes. On a quarterly basis, we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income.Realization of deferred tax assets (such as net operating loss carryforwards) is dependent on future taxable earnings and is therefore uncertain. To the extent webelieve that recovery is not likely, we establish a valuation allowance to reduce our deferred tax assets to amounts that we believe are more likely than not to berealized, which increases our income tax expense in the period such determination is made. On an interim basis, we estimate what our anticipated annual effective tax rate will be, while also separately considering applicable discrete and othernon-recurring items, and record a quarterly income tax provision in accordance with this anticipated rate. As the fiscal year progresses, we refine our estimatesbased upon actual events and financial results during the year. This estimation process can result in significant changes to our expected effective tax rate.When this occurs, we adjust our income tax provision during the quarter in which our estimates are refined so that the year-to-date provision reflects theexpected annual effective tax rate. These changes, along with adjustments to our deferred taxes, among others, may create fluctuations in our overall effectivetax rate from quarter to quarter. Applicable accounting guidance requires that we review all of our tax positions and make a determination as to whether each position is more-likely-than-not to be sustained upon examination by regulatory authorities. If a tax position meets the more-likely-than-not standard, then the related tax benefit ismeasured based on a cumulative probability analysis of the amount that is more-likely-than-not to be realized upon effective settlement or disposition of theunderlying issue. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulationsthemselves are subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, theactual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities orpotentially reverse previously recorded tax liabilities. Stock-Based Compensation. We record stock-based compensation in the statement of operations as an expense, based on the estimated grant datefair value of our stock-based awards, whereby such fair values are amortized over the requisite service period. Our stock-based awards are currentlycomprised of common stock options and restricted stock units. The fair value of our common stock option awards is estimated on the grant date using theBlack-Scholes-Merton (“BSM”) option-pricing formula. While utilizing this model meets established requirements, the estimated fair values generated by itmay not be indicative of the actual fair values of our common stock option awards as it does not consider certain factors important to those awards toemployees, such as continued employment and periodic vesting requirements as well as limited transferability. Our assumptions under the BSM formulainclude the following: (i) expected volatilities are based on the historical volatility of our stock price, (ii) the expected life of options is derived based on thehistorical life of our options, (iii) the risk-free rate for periods within the expected life of the option is based on the U.S. Treasury interest rates in effect at thetime of grant and (iv) the dividend yield assumption is based on our history and expectation of dividend payouts. The fair value of our restricted stock unitsis based on the closing market price of our common stock on the grant date. We include an estimate of forfeitures in the calculation of stock-basedcompensation expense. Future stock-based compensation expense in any particular quarter or year could be affected by changes in our assumptions, changesin market conditions, or to the extent that we grant additional stock-based awards. Additionally, if there are any modifications or cancellations of theunderlying unvested stock-based awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Recent Accounting Pronouncements Refer to Note 1 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report for a discussion of recent accountingpronouncements. 22Table of Contents Results of Operations The following table sets forth certain statement of operations data as a percentage of total net sales and contract revenues for the periods indicated.The following table should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations. Year Ended March 31,201120102009 Net sales and contract revenues:Net sales60.0%54.5%55.4%Contract revenues40.045.544.6Total net sales and contract revenues100.0%100.0%100.0%Costs of net sales and contract revenues:Cost of net sales30.128.429.3Cost of contract revenues26.330.030.4Gross profit43.641.640.3Operating expenses:Selling, general and administrative31.429.326.0Research and development6.36.35.8Impairment of goodwill13.4——Amortization of intangible assets0.40.30.2Change in fair value of contingent acquisition consideration0.1——Total operating expenses51.635.932.0Operating income (loss)(7.9)5.78.2Non-operating income (expense):Other income, net0.00.10.2Interest expense, net(0.3)(0.5)(0.9)Income (loss) before income taxes(8.2)5.37.5Benefit (provision) for income taxes(0.6)(1.5)7.6Net income (loss)(8.8)%3.8%15.1% Analysis of Fiscal 2011, Fiscal 2010 and Fiscal 2009 Results of Operations Net Sales and Contract Revenues. Net sales are comprised of product sales from our Roadway Sensors and Vehicle Sensors segments, as well ascontract engineering revenue and royalty revenue generated from our Vehicle Sensors segment. Contract revenues consist of revenues derived from ourTransportation Systems and Environmental Technology segments. 23Table of Contents The following tables present details of our net sales and contract revenues for Fiscal 2011 compared to Fiscal 2010, and Fiscal 2010 compared toFiscal 2009: FiscalFiscalIncrease%20112010(Decrease)Change(In thousands, except percentages)Roadway Sensors$28,208$25,341$2,86711.3%Vehicle Sensors7,4776,3091,16818.5Net sales35,68531,6504,03512.7Contract revenues23,75826,413(2,655)(10.1)Total net sales and contract revenues$59,443$58,063$1,3802.4 FiscalFiscal%20102009DecreaseChange(In thousands, except percentages)Roadway Sensors$25,341$27,197$(1,856)(6.8)%Vehicle Sensors6,30911,230(4,921)(43.8)Net sales31,65038,427(6,777)(17.6)Contract revenues26,41330,932(4,519)(14.6)Total net sales and contract revenues$58,063$69,359$(11,296)(16.3) We currently have a diverse customer base with no individual customer representing greater than 10% of our total annual net sales and contractrevenues for Fiscal 2011, Fiscal 2010 or Fiscal 2009. Roadway Sensors The increase in Roadway Sensors net sales for Fiscal 2011 as compared to Fiscal 2010 were driven by higher unit sales domestically from both ourdirect sales and dealer markets, which was offset in part by lower prices due to competitive pressures. In the current fiscal year, we also saw particularstrength, both domestically and internationally, in certain of our newer product lines which were introduced within the last 12 to 18 months. Additionally, webelieve we have recently gained market share as a result of these new product introductions. However, we cannot assure you that these new products willcontinue to gain market share or new products we develop in the future will be as successful. Net sales for Fiscal 2010 declined when compared to Fiscal 2009mainly due to the effects of reduced and delayed spending on infrastructure projects, in part due to the decline in commercial and residential construction aswell as state and local government budgetary pressures, and increased competition in the market. Vehicle Sensors Vehicle Sensors net sales were primarily made up of sales of our LDW systems to the heavy truck market, which aggregated approximately $6.9million in Fiscal 2011, $5.6 million in Fiscal 2010 and $9.9 million in Fiscal 2009. As compared to Fiscal 2010, during Fiscal 2011 we saw relativelyhigher unit sales of our LDW products to each of our key markets, particularly to our foreign OEM heavy truck customers in Japan and Europe, as well asour domestic truck fleet customers. In the fourth quarter of Fiscal 2011, we experienced slightly lower total unit shipments to Japan, as compared to recentprior quarters, which we believe was partially attributable to the crisis caused by the earthquake and tsunami that occurred in that region in March 2011. Inthe near term, we remain uncertain as to whether our sales volumes to this region will be adversely impacted as a result of the crisis. Our Fiscal 2010 net saleswere significantly lower when compared to Fiscal 2009 levels, as we saw a substantial slowdown in overall LDW unit shipments to each of our key markets,which began in the fourth quarter of Fiscal 2009. We believe this was driven largely by the weakness in the U.S. and worldwide economy at that time, inwhich there was a significant decline in new heavy truck sales in general. Although we have experienced improvements in our sales in the current year, weremain cautious in our outlook for the upcoming year. We anticipate that Vehicle Sensors unit sales in future periods could be adversely impacted by, amongother factors, slower than expected adoption rates of our LDW system across each of our target markets and the continuing uncertainty in the global economicenvironment. Additionally, future unit sales of LDW systems and unit pricing could be adversely impacted as a result of increased competition in this market. Also included in Vehicle Sensors net sales are revenues from contract engineering services and royalty revenues in the passenger car market that arederived from our strategic relationship with Valeo, which aggregated approximately $568,000, $685,000 and $1.3 million for the fiscal years endedMarch 31, 2011, 2010 and 2009, respectively. We have experienced year-over-year decreases in contract engineering services provided to Valeo as the pertinentengineering development activities have generally reached maturity for the related vehicle platforms that currently incorporate our LDW system. During thecurrent fiscal year, the 24Table of Contents decrease in contract engineering services provided was partially offset by an increase in our royalty revenues. Our LDW systems are currently offered as anoption on four Infiniti models. While Valeo is promoting our LDW systems to other passenger car OEMs, we cannot assure you that Valeo will be successfulin these efforts. Contract Revenues Contract revenues are derived from our Transportation Systems segment, and upon our acquisition of MET in January 2011, also include therevenues from our Environmental Technology segment. Our contract revenues are primarily dependent upon the continued availability of funding at both thestate and federal levels from the various departments of transportation. Our Fiscal 2011 contract revenues include approximately $1.5 million of revenuesattributable to MET. Our Transportation Systems contract revenues have sequentially decreased over the last two fiscal years primarily as a result of theongoing weakness in the markets this segment serves, which has been aggravated by the general lengthening of the overall sales cycle, from the bid andproposal process, to the signing of a contract and commencement of work on a project. Government budgeting constraints and funding delays or reductions onvarious existing contracts, particularly in the Southeast region of the U.S., also contributed to the sequential declines in our revenues. Our private planninggroup, which focuses on private development consulting, has likewise experienced particular weakness over the last two years. The decrease in our Fiscal2010 revenues, as compared to Fiscal 2009, was also partially attributable to the timing differences on certain of our larger contracts, which contained a higheramount of sub-consultant revenue in Fiscal 2009, but such contracts were mostly completed by the end of Fiscal 2009 and were not replaced with similarcontracts in Fiscal 2010. Going forward, we plan to continue to pursue large contracts that may contain significant sub-consulting content, which will likely contribute tovariability in the timing and amount of our contract revenues from period to period. We also intend to continue to expand our foreign operations by pursuingadditional international opportunities in the Middle East and other regions. Among other factors, we believe the ability of both our Transportation Systems andEnvironmental Technology segments to grow and successfully win and service new contracts will be highly dependent upon our continued success inrecruiting and retaining qualified personnel. Gross Profit. The following tables present details of our gross profit for Fiscal 2011 compared to Fiscal 2010, and Fiscal 2010 compared to Fiscal2009: FiscalFiscal%20112010DecreaseChange(In thousands, except percentages)Total gross profit$25,941$24,159$1,7827.4%Total gross profit as a % of total net sales andcontract revenues43.6%41.6%Gross profit as a % of net sales49.9%47.9%Gross profit as a % of contract revenues34.2%34.1% FiscalFiscal%20102009DecreaseChange(In thousands, except percentages)Total gross profit$24,159$27,919$(3,760)(13.5)%Total gross profit as a % of total net sales andcontract revenues41.6%40.3%Gross profit as a % of net sales47.9%47.1%Gross profit as a % of contract revenues34.1%31.8% Our total gross profit as a percent of total net sales and contract revenues increased in Fiscal 2011 compared to Fiscal 2010 primarily as a result ofour product and service mix. In Fiscal 2011, our net sales, which are substantially comprised of product sales, represented approximately 60% of our totalnet sales and contract revenues as compared to 55% in Fiscal 2010. Our net sales generally carry higher margins than our contract revenues derived primarilyfrom our consulting services. Our total gross profit as a percent of total net sales and contract revenues for Fiscal 2010 increased slightly compared to Fiscal2009 primarily due to higher margins from our net sales, particularly Roadway Sensors, as we realized cost savings due to lower costs of materials driven byimprovements in our supply chain management. The increase from Fiscal 2009 to Fiscal 2010 was also attributable, to a lesser extent, to the improvement inour Transportation Systems margins in Fiscal 2010, as discussed further below. The increase in gross profit as a percent of sales (“gross margin”) in Fiscal 2011 as compared to Fiscal 2010 was primarily a result of higher overallnet sales and margins in Roadway Sensors during the current year. Such higher margins were largely driven by 25Table of Contents our customer mix and lower costs for certain key materials. We generally enjoy higher gross margins on direct sales as compared to dealer and aftermarketsales. In Vehicle Sensors, we also experienced a significant improvement in our year over year gross margins as a result of (i) higher product sales levels in thecurrent year which provided for improved overhead absorption and (ii) higher royalty revenues from Valeo. The slight increase in gross margin in Fiscal 2010as compared to Fiscal 2009 was due to certain materials cost savings, as discussed above, and a favorable customer mix weighted more toward direct sales.This increase was partially offset during Fiscal 2010 by decreased gross margins in Vehicle Sensors, which was largely driven by lower overhead absorptiondue to the decline in sales as compared to Fiscal 2009, along with an increase in certain estimates for additional excess and obsolete inventory provisions inFiscal 2010. Gross profit as a percentage of net sales can fluctuate in any specific quarter or year based on, among other factors, customer and product mix,competitive pricing requirements, product warranty costs and provisions for excess and obsolete inventories, as well as possible shifts of engineering resourcesfrom development activities to sustaining activities, which we record as cost of goods sold. We recognize the majority of our contract revenues and related gross profit using percentage of completion contract accounting, and the underlyingmix of contract activity affects the related gross profit recognized in any given period. Gross profit as percent of contract revenues in Fiscal 2011 were highlyconsistent with those of Fiscal 2010. The increase in gross profit as a percent of contract revenues in Fiscal 2010 compared to Fiscal 2009 was primarily dueto a contract mix weighted more toward higher margin contracts in Fiscal 2010. Our higher margin contracts often contain a comparatively lower proportion ofsub-consulting revenues associated with them. We expect the variability and timing of contract mix and related sub-consulting content in our TransportationSystems and Environmental Technology segments in future periods, as well as factors such as paid holidays and our ability to efficiently utilize ourworkforce, will cause fluctuations in our margins from contract revenues from period to period. Selling, General and Administrative Expense The following table presents selling, general and administrative expense for Fiscal 2011 and Fiscal 2010: Fiscal 2011Fiscal 2010% of Net% of NetSales andSales andContractContractIncrease%AmountRevenuesAmountRevenues(Decrease)Change(In thousands, except percentages)Salary and personnel-related$13,04021.9%$11,26219.4%$1,77815.8%Facilities, insurance and supplies2,3293.92,4444.2(115)(4.7)Travel and conferences1,5902.71,4882.61026.9Professional and outside services1,3782.31,0381.834032.8Other3170.57721.3(455)(58.9)Selling, general and administrative$18,65431.4%$17,00429.3%$1,6509.7 The increase in selling, general and administrative expenses in Fiscal 2011 as compared to Fiscal 2010 was primarily due to (i) higher selling andcommission-related expenses for our Roadway Sensors and Vehicle Sensors segments, as total net sales for both segments increased approximately 11% and19%, respectively, from Fiscal 2010 levels, (ii) higher salary and headcount-related expenses as we have added certain key sales and marketing personnel inall of our business segments, including as a result of the acquisition of MET in January 2011, (iii) additional consulting and outside services expenses in theVehicle Sensors segment related to market research and certain other sales and marketing activities and (iv) additional legal and professional services related toour acquisition of MET, along with various other corporate initiatives. We also saw a shift from cost of sales to sales and marketing of certain of ourheadcount expenses in our Transportation Systems segment in the current year commensurate with the overall decline in this segment’s revenues and thereallocation of existing personnel in an effort to expand our contract backlog and increase contract revenues. However, we cannot assure you that our effortswill be successful. Additionally, during Fiscal 2011, we realized approximately $250,000 in reversals of certain previously recorded bad debt expense(included in the “Other” category in the table above) as a result of collecting certain large accounts receivable balances. In prior periods, we had recorded anestimated allowance for doubtful accounts against these receivables given the uncertainty of collection at that time. In the future, our operating results in anygiven period may be favorably or adversely impacted as a result of our estimates of the realization of our accounts receivable. 26Table of Contents The following table presents selling, general and administrative expense for Fiscal 2010 and 2009: Fiscal 2010Fiscal 2009% of Net% of NetSales andSales andContractContractIncrease%AmountRevenuesAmountRevenues(Decrease)Change(In thousands, except percentages)Salary and personnel-related$11,26219.4%$11,94917.2%$(687)(5.7)%Facilities, insurance and supplies2,4444.22,3783.4662.8Travel and conferences1,4882.61,5632.3(75)(4.8)Professional and outside services1,0381.81,3021.9(264)(20.3)Other7721.38431.2(71)(8.4)Selling, general and administrative$17,00429.3%$18,03526.0%$(1,031)(5.7) The decrease in selling, general and administrative expenses in Fiscal 2010 as compared to Fiscal 2009 was primarily due to (i) our overall reductionin headcount during Fiscal 2010; (ii) lower accruals for bonuses and other incentive compensation primarily due to lower sales and operating profit in Fiscal2010; and (iii) the suspension of our matching contributions under our 401(k) plan effective July 1, 2009. We also reduced our professional and outsideservices expenses during Fiscal 2010 primarily through our efforts to conserve costs and scale back our usage of such services, along with various efficienciesgained in our internal control assessment and other financial reporting obligations. Research and Development Expense The following table presents research and development expense for Fiscal 2011 and Fiscal 2010: Fiscal 2011Fiscal 2010% of Net% of NetSales andSales andContractContractIncrease%AmountRevenuesAmountRevenues(Decrease)Change(In thousands, except percentages)Salary and personnel-related$2,3814.0%$2,6554.6%$(274)(10.3)%Facilties, development and supplies1,1732.08831.529032.8Other2080.31400.26848.6Research and development$3,7626.3%$3,6786.3%$842.3 Research and development expenses for Fiscal 2011 were generally consistent, in total, with those of Fiscal 2010. During Fiscal 2011, we incurredcertain additional external costs primarily for development and related activities associated with our Vehicle Sensors segment. As compared to the prior year,the increase in these costs was largely offset by lower personnel-related expenses. We believe research and development activities are crucial to our ability tocontinue to be a leader in our markets. 27Table of Contents The following table presents research and development expense for Fiscal 2010 and 2009: Fiscal 2010Fiscal 2009% of Net% of NetSales andSales andContractContract%AmountRevenuesAmountRevenuesDecreaseChange(In thousands, except percentages)Salary and personnel-related$2,6554.6%$2,7484.0%$(93)(3.4)%Facilties, development andsupplies8831.51,0181.5(135)(13.3)Other1400.22640.4(124)(47.0)Research and development$3,6786.3%$4,0305.8%$(352)(8.7) The decrease in research and development expense in Fiscal 2010 compared to Fiscal 2009 was primarily due to lower overall engineering headcountand a more efficient engineering structure as we shifted our focus to new product development from a historical focus on new customer qualification andmanufacturing support. Impairment of Goodwill. We performed annual impairment assessments of the carrying value of goodwill for the fiscal years ended March 31,2010 and 2009. Based on these assessments, we determined that no impairment as of either of these dates was indicated as the estimated fair value of eachreporting unit exceeded its respective carrying value. As of September 30, 2010, we performed the first step in the impairment analysis of the carrying value of goodwill for all reporting units primarilydue to the decline in our stock price and market capitalization since our fiscal year ended March 31, 2010 and the ongoing weakness in the economicenvironment. This analysis did not result in any impairment charges during the quarter ended September 30, 2010. During the quarter ended December 31, 2010, due primarily to lower than expected operating results in our Transportation Systems reporting unit, aswell as ongoing weakness specifically in the Transportation Systems markets, we determined it was necessary to perform another interim test of impairmentof the carrying value of goodwill in our Transportation Systems reporting unit as of December 31, 2010. In performing the first step in this analysis, weestimated the fair value of our Transportation Systems reporting unit using the income approach. As of December 31, 2010, we determined that the carryingvalue of our Transportation Systems reporting unit exceeded its estimated fair value, and accordingly, we performed the second step of the impairmentanalysis to estimate the implied fair value of the goodwill of this reporting unit. The implied fair value of goodwill was determined in the same manner utilized to estimate the amount of goodwill recognized in a businesscombination. To determine this value, we estimated the fair value of the assets and liabilities, including certain intangible assets, to be allocated to theTransportation Systems reporting unit as of December 31, 2010. The implied fair value of goodwill was measured as the difference between the estimated fairvalue of the reporting unit over the estimated fair value amounts of its assets and liabilities. The impairment loss for the Transportation Systems reporting unitwas measured by the amount the carrying value of its goodwill exceeded the implied fair value of the goodwill. Accordingly, in order to write downTransportation Systems goodwill with a carrying value of $14.9 million to its implied fair value of $6.9 million, we recorded an impairment charge of $8.0million in the three months ended December 31, 2010. We estimated the fair value of the Transportation Systems reporting unit using the income approach, which was based on management’s businessplans and financial projections for the next five years, along with a perpetual growth rate thereafter of approximately 4%. The analysis also used a weightedaverage discount rate of approximately 14%, which we believe reflects our cost of capital, slightly adjusted for increased market risk. Our Transportation Systems segment has recently been adversely impacted by, among other factors, (i) continued delays in government spendingand resolution of budgetary issues, (ii) longer than expected lead times in bidding, successfully winning and commencing work on new contracts, andrenewing existing contracts, and (iii) the ongoing weakness in the macroeconomic environment and the longer than expected economic recovery. 28Table of Contents Subsequent to the interim impairment test as of December 31, 2010 described above, we performed our annual impairment assessment of thecarrying value of goodwill as of March 31, 2011. Based on this assessment, we determined that no impairment as of this date was indicated, as the estimatedfair value of each of our reporting units exceeded its respective carrying value. At March 31, 2011, our Roadway Sensors, Vehicle Sensors, TransportationSystems and Environmental Technology reporting units had goodwill balances of $8.2 million, $4.7 million, $7.2 million and $1.2 million, respectively. Webelieve we have no goodwill at risk, as the estimated fair values of our Roadway Sensors, Vehicle Sensors and Transportations Systems reporting unitssignificantly exceeded their carrying values at March 31, 2011. The fair value of our Environment Technology reporting unit at March 31, 2011 approximatedits carrying value given that the acquisition of MET occurred in January 2011. If our actual financial results, or the plans and estimates used in futuregoodwill impairment analyses, are lower than the original estimates used to assess for impairment of our goodwill, we could incur future goodwill impairmentcharges. Interest Expense, Net Net interest expense was $152,000, $264,000 and $646,000 in Fiscal 2011, 2010 and 2009, respectively. The sequential decreases were primarilydue to our lower overall level of borrowings, as we continue to make monthly principal payments on our term note. See “Liquidity and Capital Resources”below for additional details on our borrowings. Income Taxes The following table presents our benefit (provision) for income taxes for Fiscal 2011, Fiscal 2010 and Fiscal 2009: Year Ended March 31,201120102009(In thousands, except percentages)Benefit (provision) for income taxes$(353)$(895)$5,297Effective tax rate7.3%28.9%(102.3)% Our effective tax rate for Fiscal 2011 was impacted unfavorably by a portion of the charge recorded for the impairment of goodwill, amounting toapproximately $2.2 million, for which there is no corresponding tax basis. This unfavorable impact was partially offset by the impact of the recognition ofapproximately $327,000 of previously unrecognized tax benefits during the year due to expiration of certain federal and state statutes in various jurisdictions.Our effective tax rate for Fiscal 2010 was favorably impacted by the recognition of approximately $414,000 of unrecognized tax benefits during the year due tothe expiration of certain federal and state statutes in various jurisdictions. The income tax benefit recorded in Fiscal 2009 was primarily the result of a decreasein the valuation allowance recorded against our deferred tax assets as a result of changes in estimates of the future realizability of these assets. As of March 31, 2011 and 2010, respectively, we determined that it was more likely than not that our deferred tax assets will be realized.Accordingly, no valuation allowance has been recorded against our deferred tax assets as of either such dates. In making our determination as to therealizability of our deferred tax assets, we reviewed all available positive and negative evidence, including reversal of deferred tax liabilities, potentialcarrybacks, projected future taxable income, tax planning strategies and recent financial performance. As we update our estimates in future periods, adjustments to our deferred tax asset and valuation allowance may be necessary. We anticipate this willcause our future overall effective tax rate in any given period to fluctuate from prior effective tax rates and statutory tax rates. We utilize the liability method ofaccounting for income taxes. We record net deferred tax assets to the extent that we believe these assets will more likely than not be realized. In making suchdetermination, we consider all available positive and negative evidence, including, but not limited to, scheduled reversals of deferred tax liabilities, projectedfuture taxable income, tax planning strategies and recent financial performance. At March 31, 2011, we had $35.7 million of federal net operating loss carryforwards and $18.6 million of state net operating loss carryforwardsthat begin to expire in 2019 and 2017, respectively. Due to changes in stock ownership, our federal net operating loss carryforwards and other federalattributes are subject to a Section 382 annual limitation. Although the impact cannot be precisely determined at this time, we believe that our net operating losscarryforwards will cause us to have future income tax payments that are substantially lower than the income tax liability calculated using statutory tax rates. 29Table of Contents Liquidity and Capital Resources Cash Flows We have historically financed our operations with a combination of cash flows from operations, borrowings under credit facilities and the sale ofequity securities. We currently rely on cash flows from operations and the availability of borrowings on a line of credit facility to fund our operations, whichwe believe to be sufficient to fund our operations for at least the next twelve months. However, we may need or choose to raise additional capital to fundpotential future acquisitions and our future growth. We may raise such funds by selling equity or debt securities to the public or to selected investors, or byborrowing money from financial institutions. If we raise additional funds by issuing equity or convertible debt securities, our existing stockholders mayexperience significant dilution and any equity securities that may be issued may have rights senior to our existing stockholders. At March 31, 2011, we had $19.9 million in working capital, which included no borrowings on our $12.0 million line of credit and $11.8 millionin cash and cash equivalents. This compares to working capital of $22.6 million at March 31, 2010, which included no borrowings on our line of credit and$10.4 million in cash and cash equivalents. The following table summarizes our cash flows for Fiscal 2011, Fiscal 2010 and Fiscal 2009: Year Ended March 31,201120102009(In thousands)Net cash provided by (used in):Operating activities$5,346$6,484$6,390Investing activities(1,530)(594)(795)Financing activities(2,403)(1,857)413 Operating Activities. Cash provided by our operations in Fiscal 2011 was the result of (i) $9.9 million in non-cash items within the statement ofoperations, primarily $8.0 million for the impairment of goodwill, depreciation expense of $1.0 million and stock-based compensation expense of $382,000;and (ii) $614,000 in positive cash flows resulting from changes in our operating assets and liabilities during the year, all of which was partially offset by ournet loss of $5.2 million for the year. Our inventories increased approximately $953,000, or 35%, from March 31, 2010 to March 31, 2011 as we have built up certain inventories onhand to meet anticipated increases in our product net sales in both Roadway Sensors and Vehicle Sensors. In the future, our inventory levels are likely tocontinue to be determined based upon, among other factors, the level of purchase orders we receive from our customers, the stage at which our products are intheir respective product life cycles, and competitive situations in the marketplace. We attempt to balance such considerations against risk of obsolescence andpotentially excess inventory levels. The increase in accounts payable by approximately $920,000 from March 31, 2010 to March 31, 2011 was driven by our increased inventory levelsand the general timing of payments to vendors. Cash provided by our operations in Fiscal 2010 was primarily the result of (i) our Fiscal 2010 net income of $2.2 million; (ii) $2.5 million in non-cash items within the statement of operations, primarily consisting of adjustments to our deferred tax assets of $1.0 million, depreciation expense of $986,000and stock-based compensation expense of $375,000; and (iii) $1.7 million in cash resulting from changes in our operating assets and liabilities during theyear. Cash provided by our operations in Fiscal 2009 was primarily the result of our Fiscal 2009 net income of $10.5 million adjusted for $3.7 million ofnet non-cash items within the statement of operations, which was comprised primarily of adjustments to our deferred tax balances of $5.4 million, offsetslightly by depreciation expense of $1.0 million and stock-based compensation, amortization and other items totaling $642,000. Investing Activities. Cash used in our investing activities for Fiscal 2011 consisted of (i) $1.1 million used for the acquisition of MET andpurchases of property and equipment of $414,000. In April 2011, we made an additional payment of $137,000 related to the MET acquisition. For furtherinformation on our acquisitions, refer to Note 3 of Notes to Consolidated Financial Statements included in Part IV, Item 15 of this report. Our investingactivities for Fiscal 2010 consisted of purchases of property and equipment of 30Table of Contents $294,000, as well as $300,000 representing the initial payment for the acquisition of certain assets of Hamilton Signal, Inc. Cash used in investing activitiesfor Fiscal 2009 consisted of purchases of certain property and equipment of $795,000. Financing Activities. Net cash used in financing activities during Fiscal 2011 primarily consisted of $2.4 million in payments on our long-termdebt and $106,000 for the first anniversary payment for the Hamilton Signal acquisition. In April 2011, we made our final payment of $112,000 for theHamilton Signal acquisition. Net cash used in financing activities during Fiscal 2010 consisted of net payments on our long-term debt of $2.0 million. The netpayments on our long-term debt during Fiscal 2010 were partially offset by $143,000 in proceeds received from the exercise of outstanding stock options topurchase shares of our common stock. Net cash provided by financing activities in Fiscal 2009 was the result of $939,000 in cash inflows from the exerciseof stock options to purchase our common stock, partially offset by net payments on our borrowings of $526,000. Borrowings In October 2008, we entered into a $19.5 million credit facility with California Bank & Trust (the “Bank”), which provided for a two-yearrevolving line of credit with borrowings of up to $12.0 million and a $7.5 million 48-month term note (discussed below). In September 2010, we entered into amodification agreement with the Bank to extend the expiration date of our revolving line of credit to October 1, 2012. Interest on borrowed amounts under therevolving line of credit are payable monthly at a rate equal to the current stated prime rate (3.25% at March 31, 2011) up to the current stated prime rate plus0.50%, depending on aggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. We are obligated topay an unused line fee of 0.25% per annum applied to the average unused portion of the revolving line of credit during the preceding month. The revolving lineof credit does not contain any early termination fees and is secured by substantially all of our assets. As of March 31, 2011, no amounts were outstandingunder the revolving line of credit portion of the facility. Availability under this line of credit may be reduced or otherwise limited as a result of our obligations tocomply with certain financial covenants, as described further below. As of March 31, 2011, we had outstanding borrowings of approximately $3.0 million under the term note included in our credit facility. Principalpayments under this term note are required to be repaid in 48 monthly installments of $152,000 commencing on June 1, 2009. Additionally, beginning onNovember 1, 2009, and on November 1 of each year thereafter, we are required to repay additional principal of up to $500,000, calculated based on certainfinancial measures, as further defined in the loan agreement. These additional principal payments effectively reduce the total number of monthly installmentsnecessary to repay the term note. To date, we have made additional principal payments of $500,000 on each of November 1, 2010 and 2009. Interest on theterm note is payable monthly at a rate equal to the current stated prime rate plus 0.50% up to the current stated prime rate plus 1.00%, depending on aggregatedeposit balances maintained at the bank in relation to the total loan commitment under the credit facility. The term note contains no early termination fees and,along with our revolving line of credit discussed above, is secured by substantially all of our assets. In connection with our credit facility and loan agreement with the Bank, we are also required to comply with certain quarterly financial covenants.These include achieving ratios for working capital and debt service, as well as maintaining a level of profitability, all of which are further defined in theagreement. While we believe we are currently in compliance with all such financial covenants, we cannot assure you that we will not violate one or morecovenants in the future. If we were to be in violation of covenants under this agreement, our lender could choose to accelerate payment on all outstanding loanbalances and pursue its security interest in our assets. In this event, we cannot assure you that we would be able to quickly obtain equivalent or suitablereplacement financing on acceptable terms, on a timely basis, or at all. If we were not able to secure alternative sources of financing, such acceleration wouldhave a material adverse impact on our business and financial condition. Off Balance Sheet Arrangements Other than our operating leases, which are further described at Note 8 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 ofthis report, we do not believe we have any other material off balance sheet arrangements at March 31, 2011. Seasonality We have historically experienced seasonality, particularly with respect to our Roadway Sensors net sales in the third and fourth fiscal quarters due toa reduction in road construction and repairs during the winter months due to inclement weather conditions. 31Table of Contents ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk Our exposure to interest rate risk is limited to our line of credit and our bank term note. Our line of credit bears interest equal to the prevailing primerate (3.25% at March 31, 2011) plus 0% to 1.0%. We do not believe that a 10% increase in the interest rate on our line of credit or term note would have amaterial impact on our financial position, operating results or cash flows. In addition, we believe that the carrying value of our outstanding debt under ourcredit facility approximates fair value. Foreign Currency Risk To date, a small portion of our net sales have been denominated in Euros. Gains or losses from foreign currency remeasurement are included in“other income, net” in our consolidated financial statements and to date have not been significant. We do not believe we are currently exposed to any materialrisk of loss from currency exchange fluctuations. We do not currently purchase derivative financial instruments to hedge foreign currency exchange risk, butmay do so in the future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by Regulation S-X are included in Part IV, Item 15 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934, as of the endof the period covered by this Annual Report on Form 10-K, management evaluated, with the participation of the our President and Chief Executive Officer andthe Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under theExchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief FinancialOfficer have concluded that our disclosure controls and procedures were effective as of the date of such evaluation in ensuring that information required to bedisclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated tomanagement, including the Company’s President and Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. (b) Changes in internal control. There was no change in our internal control over financial reporting that occurred during the period covered bythis Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Inherent Limitations on Internal Control A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controlsystem are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issues and instances of management override or improper acts, if any, have been detected.These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors.Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of thecontrol. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to management override, error or improper acts may occur and not be detected. Any resulting misstatement or loss mayhave an adverse and material effect on our business, financial condition and results of operations. 32Table of Contents Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system wasdesigned to provide reasonable assurance to management and the board of directors regarding the effectiveness of our internal control processes over thepreparation and fair presentation of published financial statements. We have assessed the effectiveness of our internal controls over financial reporting as of March 31, 2011. In making this assessment, we used thecriteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Basedon our assessment, we believe that, as of March 31, 2011, our internal control over financial reporting is effective based on those criteria. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC applicableto smaller reporting companies. ITEM 9B. OTHER INFORMATION In February 2011, three of our executive officers, Abbas Mohaddes, James Miele and Greg McKhann, entered into stock selling plans pursuant toRule 10b5-1 promulgated under the Securities Exchange Act of 1934, as amended. All of such plans only cover shares of the Company’s common stockissuable upon exercise of stock options that expire on September 26, 2011. Mr. Mohaddes’ plan covers the sale of up to an aggregate of 210,000 shares, withinitial sales under the plan commencing on June 8, 2011. Mr. Miele’s plan covers the sale of up to an aggregate of 40,000 shares, with initial sales commencingon June 6, 2011. Mr. McKhann’s plan covers the sale of up to an aggregate of 96,000 shares, with initial sales commencing on June 8, 2011. Shares coveredby the above-described 10b5-1 plans will be sold if the market price per share of our common stock reaches the amounts designated in the applicable plan. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE (a) Identification of Directors. The information under the caption “Election of Directors,” appearing in our proxy statement for the 2011 AnnualMeeting of Stockholders, is incorporated herein by reference. (b) Identification of Executive Officers. The information under the caption “Executive Compensation and Other Information - Executive Officers,”appearing in our proxy statement for the 2011 Annual Meeting of Stockholders, is incorporated herein by reference. (c) Compliance with Section 16(a) of the Exchange Act. The information under the caption “Section 16(a) Beneficial Ownership ReportingCompliance,” appearing in our proxy statement for the 2011 Annual Meeting of Stockholders, is incorporated herein by reference. (d) Corporate Governance. The information under the caption “Corporate Governance,” appearing in our proxy statement for the 2011 AnnualMeeting of Stockholders, is incorporated herein by reference. (e) Audit Committee. The information under the caption “Board Meetings and Committees — Audit Committee,” appearing in our proxy statementfor the 2011 Annual Meeting of Stockholders, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the caption “Executive Compensation and Other Information,” appearing in our proxy statement for the 2011 Annual Meetingof Stockholders, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS The information under the captions “Equity Compensation Plans” and “Principal Stockholders and Common Stock Ownership of CertainBeneficial Owners and Management,” appearing in our proxy statement for the 2011 Annual Meeting of Stockholders, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information under the captions “Corporate Governance — Director Independence” and “Certain Transactions,” appearing in our proxy statementfor the 2011 Annual Meeting of Stockholders, is incorporated herein by reference. 33Table of Contents ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information under the caption “Fees Paid to Independent Registered Public Accounting Firm,” appearing in our proxy statement for the 2011Annual Meeting of Stockholders, is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this report: 1. Financial Statements. The following financial statements of Iteris, Inc. are included in a separate section of this Annual Report onForm 10-K commencing on the pages referenced below: Report of Independent Registered Public Accounting Firm38Consolidated Balance Sheets as of March 31, 2011 and 201039Consolidated Statements of Operations for the years ended March 31, 2011, 2010 and 200940Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended March 31, 2011, 2010 and 200941Consolidated Statements of Cash Flows for the years ended March 31, 2011, 2010 and 200942Notes to Consolidated Financial Statements43 2. Exhibits. The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporatedby reference into, this report. 34Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. Dated: June 1, 2011ITERIS, INC.(Registrant) By/S/ ABBAS MOHADDESAbbas MohaddesChief Executive Officer(Principal Executive Officer) 35Table of Contents POWER OF ATTORNEY We, the undersigned officers and directors of Iteris, Inc., do hereby constitute and appoint James S. Miele and Abbas Mohaddes, and each of 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 andall capacities, to sign any and all amendments to this report, and to file the same, with exhibits thereto, and other documents in connection therewith, with theSecurities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each andevery act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby,ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtuehereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant in the capacities and on the dates indicated: SignatureTitleDate /s/ ABBAS MOHADDESDirector, President and Chief Executive OfficerJune 1, 2011Abbas Mohaddes(principal executive officer) /s/ JAMES S. MIELEChief Financial OfficerJune 1, 2011James S. Miele(principal financial and accounting officer) /s/ GREGORY A. MINERChairman of the BoardJune 1, 2011Gregory A. Miner /s/ RICHARD CHARDirectorJune 1, 2011Richard Char /s/ KEVIN C. DALYDirectorJune 1, 2011Kevin C. Daly, Ph.D. /s/ JOHN SEAZHOLTZDirectorJune 1, 2011John Seazholtz /s/ JOEL SLUTZKYDirectorJune 1, 2011Joel Slutzky /s/ THOMAS L. THOMASDirectorJune 1, 2011Thomas L. Thomas /s/ MIKEL WILLIAMSDirectorJune 1, 2011Mikel Williams 36Table of Contents Iteris, Inc. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm38 Consolidated Balance Sheets as of March 31, 2011 and 201039 Consolidated Statements of Operations for the years ended March 31, 2011, 2010 and 200940 Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended March 31, 2011, 2010 and 200941 Consolidated Statements of Cash Flows for the years ended March 31, 2011, 2010 and 200942 Notes to Consolidated Financial Statements43 37Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and StockholdersIteris, Inc. We have audited the accompanying consolidated balance sheets of Iteris, Inc. and subsidiaries as of March 31, 2011 and 2010, and the related consolidatedstatements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the three years in the period ended March 31,2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal controlover financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion onthe effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement 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 financial position of Iteris, Inc. andsubsidiaries as of March 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended March 31,2011, in conformity with U.S. generally accepted accounting principles. /s/ McGladrey & Pullen, LLPIrvine, CaliforniaJune 1, 2011 38Table of Contents Iteris, Inc.Consolidated Balance Sheets(In thousands, except par value) March 31,20112010 AssetsCurrent assets:Cash and cash equivalents$11,818$10,405Trade accounts receivable, net of allowance for doubtful accounts of $387 and $768 at March 31, 2011and 2010, respectively10,94111,311Costs in excess of billings on uncompleted contracts4,0703,871Inventories3,6802,727Deferred income taxes2,9274,993Prepaid expenses and other current assets432623Total current assets33,86833,930Property and equipment, net2,6072,550Deferred income taxes10,8079,739Intangible assets, net1,850452Goodwill21,27027,791Other assets203200Total assets$70,605$74,662 Liabilities and stockholders’ equityCurrent liabilities:Trade accounts payable$3,412$2,492Accrued payroll and related expenses3,5382,709Accrued liabilities3,3871,748Billings in excess of costs and estimated earnings on uncompleted contracts1,3352,105Current portion of long-term debt2,3242,324Total current liabilities13,99611,378Long-term debt6402,969Deferred rent1,0581,386Unrecognized tax benefits587751Other non-current liabilities1,028112Total liabilities17,30916,596Commitments and contingenciesStockholders’ equity:Preferred stock, $1.00 par value:Authorized shares - 2,000Issued and outstanding shares - none——Common stock. $0.10 par value:Authorized shares - 70,000 at March 31, 2011 and 2010Issued and outstanding shares - 34,364 at March 31, 2011 and 34,318 at March 31, 20103,4363,432Additional paid-in capital137,938137,503Accumulated deficit(88,078)(82,869)Total stockholders’ equity53,29658,066Total liabilities and stockholders’ equity$70,605$74,662 See accompanying notes. 39Table of Contents Iteris, Inc.Consolidated Statements of Operations(In thousands, except per share amounts) Year Ended March 31,201120102009 Net sales and contract revenues:Net sales$35,685$31,650$38,427Contract revenues23,75826,41330,932Total net sales and contract revenues59,44358,06369,359Costs of net sales and contract revenues:Cost of net sales17,86716,50520,346Cost of contract revenues15,63517,39921,094Gross profit25,94124,15927,919Operating expenses:Selling, general and administrative18,65417,00418,035Research and development3,7623,6784,030Impairment of goodwill7,970——Amortization of intangible assets222159147Change in fair value of contingent acquisition consideration55——Total operating expenses30,66320,84122,212Operating income (loss)(4,722)3,3185,707Non-operating income (expense):Other income, net1844116Interest expense, net(152)(264)(646)Income (loss) before income taxes(4,856)3,0985,177Benefit (provision) for income taxes(353)(895)5,297Net income (loss)$(5,209)$2,203$10,474 Net income (loss) per share:Basic$(0.15)$0.06$0.31Diluted$(0.15)$0.06$0.30Weighted-average shares outstanding:Basic34,33534,24933,964Diluted34,33534,43534,638 See accompanying notes. 40Table of Contents Iteris, Inc.Consolidated Statements of Stockholders’ Equity and Comprehensive Income (loss)(In thousands) CommonAccumulatedAdditionalStockOtherTotalCommon StockPaid-InHeld inAccumulatedComprehensiveStockholders’SharesAmountCapitalTrustDeficitIncome (Loss)Equity Balance at March 31, 200833,420$3,342$135,516$(202)$(95,499)$54$43,211Stock option exercises78578861———939Stock-based compensation——364———364Issuance of shares held in trust——256171——427Components of comprehensiveincome:Foreign currency translation—————(57)(57)Net income————10,474—10,474Comprehensive income——————10,417Balance at March 31, 200934,2053,420136,997(31)(85,025)(3)55,358Cumulative effect of adoption ofchange in accounting for warrants————(47)—(47)Stock option exercises11312131———143Stock-based compensation——375———375Issuance of shares held in trust———31——31Components of comprehensiveincome:Foreign currency translation—————33Net income————2,203—2,203Comprehensive income——————2,206Balance at March 31, 201034,3183,432137,503—(82,869)—58,066Stock option exercises46453———57Stock-based compensation——382———382Net loss and comprehensive loss————(5,209)—(5,209)Balance at March 31, 201134,364$3,436$137,938$—$(88,078)$—$53,296 See accompanying notes. 41Table of Contents Iteris, Inc.Consolidated Statements of Cash Flows(In thousands) Year Ended March 31,201120102009 Cash flows from operating activitiesNet income (loss)$(5,209)$2,203$10,474Adjustments to reconcile net income (loss) to net cash provided by operating activities:Deferred income taxes2731,014(5,398)Depreciation of property and equipment1,0309861,018Stock-based compensation382375364Impairment of goodwill7,970——Amortization of intangible assets222159147Change in fair value of contingent acquisition consideration55——Loss on disposal of equipment9——Gain on early extinguishment of debt——(50)Amortization of debt discounts——109Amortization of deferred financing costs——72Changes in operating assets and liabilities, net of effects of business combinations:Accounts receivable1,0521,137660Net costs and estimated earnings in excess of billings(501)9171,542Inventories(953)2,954(1,455)Prepaid expenses and other assets211(350)97Accounts payable and accrued expenses805(2,911)(1,190)Net cash provided by operating activities5,3466,4846,390 Cash flows from investing activitiesPurchases of property and equipment(414)(294)(795)Net cash paid for business combinations(1,116)(300)—Net cash used in investing activities(1,530)(594)(795) Cash flows from financing activitiesPayments on long-term debt(2,354)(2,750)(7,069)Borrowings on long-term debt—7506,543Deferred payment for prior business combination(106)——Proceeds from stock option exercises57143939Net cash provided by (used in) financing activities(2,403)(1,857)413Effect of exchange rate changes on cash——(57)Increase in cash and cash equivalents1,4134,0335,951Cash and cash equivalents at beginning of year10,4056,372421Cash and cash equivalents at end of year$11,818$10,405$6,372 Supplemental cash flow information:Cash paid during the year for:Interest$200$306$545Income taxes455159462 Supplemental schedule of non-cash investing and financing activities:Liabilities incurred for business combinations$2,610$218$—Fair value of common stock issued in settlement of liabilities—31427 See accompanying notes. 42Table of Contents Iteris, Inc.Notes to Consolidated Financial StatementsMarch 31, 2011 1. Description of Business and Summary of Significant Accounting Policies Description of Business Iteris, Inc. (including our subsidiary, referred to collectively in these consolidated financial statements as “Iteris,” “the Company,” “we,” “our” and“us”) is a leader in the traffic management market focused on the development and application of advanced technologies that reduce traffic congestion,minimize the environmental impact of traffic congestion and improve the safety of surface transportation systems infrastructure. By combining outdoor imageprocessing, traffic engineering and information technology, we offer a broad range of Intelligent Transportation Systems (“ITS”) and driver safety solutions tocustomers worldwide. Iteris was originally incorporated in Delaware in 1987. Basis of Presentation Our consolidated financial statements include the accounts of Iteris and our subsidiaries. All significant intercompany accounts and transactionshave been eliminated in consolidation. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires ourmanagement to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets andliabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ fromthose estimates. Significant estimates made in the preparation of the consolidated financial statements include the allowance for doubtful accounts, projectionsof taxable income used to assess realizability of deferred tax assets, inventory and warranty reserves, costs to complete long-term contracts, indirect cost ratesused in cost-plus contracts, contract reserves, the valuation of purchased intangible asset and goodwill, the valuation of debt and equity instruments andestimates of future cash flows used to assess the recoverability of long-lived assets and the impairment of goodwill. Revenue Recognition Net Sales Product revenues and related costs of sales are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists,(ii) delivery has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection of the receivable is reasonably assured. These criteria aretypically met at the time of product shipment, but in certain circumstances, may not be met until receipt or acceptance by the customer. Accordingly, at thedate revenue is recognized, the significant obligations or uncertainties concerning the sale have been resolved. We recognize revenue from the sale of deliverables that are part of a multiple-element arrangement in accordance with applicable accounting guidancethat establishes a selling price hierarchy permitting the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverablein a multiple-element arrangement where neither vendor specific objective evidence (“VSOE”) nor third-party evidence (“TPE”) of fair value is available forthat deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-elementarrangement, we are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (both delivered andundelivered items) that has stand-alone value based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE orare based on our estimated selling prices. We account for multiple-element arrangements that consist only of software and software-related services in accordance with applicable accountingguidance for software and software-related transactions. For such transactions, revenue on arrangements that include multiple elements is allocated to eachelement based on the relative fair value of each element, and fair value is determined by VSOE. If we cannot objectively determine the fair value of anyundelivered element included in such multiple-element arrangements and the only undelivered element is post-contract customer support or maintenance, andVSOE of the fair value of such support or maintenance does not exist, revenue from the entire arrangement is recognized ratably over the support period. Whenthe fair value of a delivered element has not been established, but VSOE of fair value exists for the undelivered elements, we use the residual method torecognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the 43Table of Contents undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. We also derive revenue from the provision of specific non-recurring contract engineering services and royalties. Non-recurring contract engineeringrevenues are recognized in the period in which the related services are performed. Royalty revenues are recorded in the period in which the royalty is earnedbased on unit sales of certain of our products. Non-recurring contract engineering and royalty revenues are included in net sales in the accompanyingconsolidated statements of operations and totaled $568,000, $685,000 and $1.3 million for the fiscal years ending March 31, 2011, 2010 and 2009,respectively. Contract Revenues Contract revenues are derived primarily from long-term contracts with governmental agencies. The majority of our contract revenues are recognizedusing the percentage of completion method of accounting, whereby costs incurred plus a portion of estimated fees or profits are determined based on therelationship of costs incurred 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 provisions and final contract settlements, may result in revisions to costs andrevenues and are recognized in the period in which the revisions are determined. Profit incentives are included in revenue when their realization is reasonablyassured. Certain of our contract revenues are recognized as services are performed and amounts are earned, which is measured by time incurred or othercontractual milestones or output measure. Contract revenues accounted for in this manner generally relate to certain cost-plus fixed fee or time-and-materialscontracts for which no specific maximum contract values are stipulated. Costs in Excess of Billings on Uncompleted Contracts Costs in excess of billings on uncompleted contracts in the accompanying consolidated balance sheets represent unbilled amounts earned andreimbursable under services sales arrangements. At any given period-end, a large portion of the balance in this account represents the accumulation of labor,materials and other costs that have not been billed due to timing, whereby the accumulation of each month’s costs and earnings are not administratively billeduntil the subsequent month. Also included in this account are amounts that become billable according to contract terms, which usually consider the passage oftime, achievement of milestones or completion of the project. Generally, such unbilled amounts will be billed and collected within the next twelve months. Costs in excess of billings on uncompleted contracts at March 31, 2011 and 2010 include $400,000 and $635,000, respectively, which were notbillable as certain milestone objectives specified in the contracts had not been attained. Substantially all costs and estimated earnings in excess of billings atMarch 31, 2011 are expected to be billed and collected during the fiscal year ending March 31, 2012. Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts Billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying consolidated balance sheets is comprised of cashcollected from customers and billings to customers on contracts in advance of work performed, advance payments negotiated as a contract condition,estimated losses on uncompleted contracts, project-related legal liabilities and other project-related reserves. The majority of the unearned amounts are expectedto be earned within the next twelve months. We record provisions for estimated losses on uncompleted contracts in the period in which such losses become known. The cumulative effects ofrevisions to contract revenues and estimated completion costs are recorded in the accounting period in which the amounts become evident and can bereasonably estimated. These revisions can include such items as the effects of change orders and claims, warranty claims, liquidated damages or othercontractual penalties, adjustments for audit findings on United States (“U.S.”) or other government contracts and contract closeout settlements. Foreign Currency We have determined that the functional currency of our subsidiary in Europe is the U.S. dollar. Local currency financial statements are remeasuredinto U.S. dollars at the exchange rate in effect as of the balance sheet date for monetary assets and liabilities and the historical exchange rate for nonmonetaryassets and liabilities. Revenues and expenses are remeasured using the average exchange rate for the period, except items related to nonmonetary assets andliabilities, which are remeasured using historical exchange rates. Remeasurement gains and losses are reported in “other income, net” in the consolidatedstatements of operations. 44Table of Contents Concentration of Credit Risk Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents and trade accountsreceivable. Cash and cash equivalents consist primarily of demand deposits and money market funds maintained with several financial institutions. Depositsheld with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintainedwith high credit quality financial institutions and therefore have minimal credit risk. Our accounts receivable are primarily derived from revenues earned from customers located throughout North America, as well as in Europe, Asia,and South America. We generally do not require collateral or other security from customers. We maintain an allowance for doubtful accounts for potentialcredit losses, which losses have historically been within management’s expectations. Fair Values of Financial Instruments The fair value of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate carrying value because of the shortperiod of time to maturity. The fair value of line of credit agreements and long-term debt approximate carrying value because the related effective rates of interestapproximate current market rates available to us for debt with similar terms and similar remaining maturities. Cash and Cash Equivalents Cash and cash equivalents consist of cash and short-term investments with initial maturities of ninety days or less. Allowance for Doubtful Accounts The collectability of our accounts receivable is evaluated through review of invoices outstanding greater than a certain period of time and ongoingcredit evaluations of our customers’ financial condition. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet itsfinancial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized receivable to theamount we reasonably believe will be collected. We also maintain an allowance based on our historical collections experience. When we determine that collectionis not likely, we write off accounts receivable against the allowance for doubtful accounts. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Property and Equipment Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful life ranging from three to eightyears. Leasehold improvements are depreciated over the term of the related lease or the estimated useful life of the improvement, whichever is shorter. Goodwill and Long-Lived Assets Goodwill is tested for impairment on an annual basis in our fourth fiscal quarter or more frequently if indicators of impairment exist. Theperformance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of our reporting units with eachrespective reporting unit’s carrying amount, including goodwill. We determine the fair value of reporting units using the income approach with a reconciliationof the total reporting unit fair value to our total market capitalization. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, thesecond step of the goodwill impairment test is performed to determine the amount of any impairment loss. The second step of the goodwill impairment testinvolves comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill and an impairment charge is recorded forany excess carrying amount over fair value. We performed annual impairment assessments of the carrying value of goodwill for each of the fiscal years endedMarch 31, 2011, 2010 and 2009. Based on these assessments, we determined that no impairment as of each of these dates was indicated as the estimated fairvalue of each of our reporting units exceeded its respective carrying value. We monitor the indicators for goodwill impairment testing between annual tests.Certain adverse business conditions impacting one or more reporting units would cause us to test goodwill for impairment on an interim basis. Refer to Note 4for additional discussion regarding our interim goodwill impairment analyses during the fiscal year ended March 31, 2011. 45Table of Contents We also evaluate long-lived assets for impairment which requires impairment evaluation on long-lived assets used in operations when indicators ofimpairment are present. Reviews are performed to determine whether the carrying value of assets is impaired, based on a comparison of undiscounted expectedfuture cash flows to the carrying value of the related net assets. If this comparison indicates that there is impairment, the impaired asset is written down to fairvalue, which is typically calculated using discounted expected future cash flows and a discount rate based upon our weighted average cost of capital adjustedfor risks associated with the related operations. Impairment is based on the excess of the carrying amount over the fair value of those assets. Income Taxes We utilize the liability method of accounting for income taxes, whereby deferred taxes are determined based on the temporary differences between thefinancial statement and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that all or aportion of the deferred tax assets will not be realized. We must review all of our tax positions and make a determination as to whether each position is more-likely-than-not to be sustained uponexamination by taxing authorities. If a tax position meets the more-likely-than-not standard, then the related tax benefit is measured based on a cumulativeprobability analysis of the amount that is more-likely-than-not to be realized upon effective settlement or disposition of the underlying issue. Stock-Based Compensation We record stock-based compensation in the consolidated statements of operations as an expense, based on the grant date fair values of our stock-based awards, whereby such fair values are amortized over the requisite service period. The fair value of our common stock option awards is estimated on thegrant date using the Black-Scholes-Merton (“BSM”) option-pricing formula, which considers, among other factors, the expected life of the award and theexpected volatility of our stock price. The fair value of our restricted stock units is based on the closing market price of our common stock on the date ofgrant. Research and Development Expenditures Research and development expenditures are charged to expense in the period incurred. Shipping and Handling Costs Shipping and handling costs are included as cost of sales in the period during which the products ship. Sales Taxes Sales taxes are presented on a net basis (excluded from net sales and contract revenues) in the consolidated statements of operations. Advertising Expenses Advertising costs are expensed in the period incurred and totaled $224,000, $153,000 and $202,000 in the fiscal years ended March 31, 2011, 2010and 2009, respectively. Warranty We generally provide a one to three year warranty from the original invoice date on all products, materials and workmanship. Products sold tovarious original equipment manufacturer (“OEM”) customers sometimes carry longer warranties. Defective products will be either repaired or replaced,usually at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to aproduct as a component of cost of sales at the time revenue for that product is recognized. The accrued warranty reserve is included within accrued liabilitiesin the accompanying consolidated balance sheets. Repair and Maintenance Costs We incur repair and maintenance costs in the normal course of business. Should the activity result in a permanent improvement to one of our leasedfacilities, the cost is capitalized as a leasehold improvement and amortized over its useful life or the remainder of the lease period, whichever is shorter. Non-permanent repair and maintenance costs are charged to expense as incurred. 46Table of Contents Recent Accounting Pronouncements In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”), which amends the existing multiple-element revenue arrangements guidance currently included inAccounting Standards Codification (“ASC”) 605-25, Revenue Recognition — Multiple Element Arrangements. ASU 2009-13 provides for two significantchanges to the existing multiple-element revenue arrangements guidance. The first relates to the determination of when a delivered item included in a multiple-element arrangement may be treated as a separate unit of accounting. The second change modifies the manner in which the transaction consideration isallocated across the separately identified deliverables. We adopted the amendments prescribed by ASU 2009-13 for our fiscal year beginning April 1, 2010 andsuch adoption did not have a material impact on our consolidated financial statements. In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”), whichamends and modifies the scope of ASC 985-605, Software — Revenue Recognition, such that many sales transactions of tangible products that includesoftware and other related transactions will fall outside its scope. We adopted the amendments prescribed by ASU 2009-14 for our fiscal year beginningApril 1, 2010 and such adoption did not have a material impact on our consolidated financial statements. In December 2010, the FASB issued ASU No. 2010-29, Disclosures of Supplementary Pro Forma Information for Business Combinations(“ASU 2010-29”), which amends certain existing, and adds additional, pro forma disclosure requirements for public companies under ASC 805, BusinessCombinations. We expect to adopt the amendments prescribed in ASU 2010-29 for business combinations for which the acquisition date is after our fiscalyear beginning April 1, 2011. We do not expect such adoption to have a material impact on our consolidated financial statements. In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements inU.S. GAAP and IFRSs (“ASU 2011-04”), which amends ASC 820, Fair Value Measurements. ASU 2011-04 aims to eliminate certain differences thatexisted between U.S. and international fair value accounting concepts, and also clarifies existing guidance in U.S. GAAP. Additionally, among otherdisclosures, the ASU requires certain new quantitative and qualitative disclosures regarding unobservable fair value measurements. We will be required toadopt the amendments prescribed by ASU 2011-04 for our fiscal year beginning April 1, 2012. We have not yet evaluated the impact of adoption on ourconsolidated financial statements. 2. Supplementary Financial Information Inventories The following table presents details regarding our inventories: March 31,20112010(In thousands)Materials and supplies$2,668$2,292Work in process12849Finished goods884386$3,680$2,727 Property and Equipment The following table presents details of our property and equipment: March 31,20112010(In thousands)Equipment$9,357$8,334Leasehold improvements1,9851,940Accumulated depreciation(8,735)(7,724)$2,607$2,550 47Table of Contents Intangible Assets The following table presents details regarding our intangible assets: March 31, 2011March 31, 2010GrossCarryingAmountAccumulatedAmortizationGrossCarryingAmountAccumulatedAmortization(In thousands)Developed technology$1,566$(719)$996$(595)Patents317(312)317(266)Customer contracts / relationships500(21)——Other550(31)——Total$2,933$(1,083)$1,313$(861) Amortization expense for intangible assets subject to amortization was $222,000, $159,000, and $147,000 for the fiscal years ended March 31,2011, 2010 and 2009, respectively. We do not have any intangible assets with indefinite useful lives. Future estimated amortization expense is as follows: Year Ending March 31(In thousands)2012$4102013404201438720152372016229Thereafter183$1,850 Refer to Note 3 for additional information regarding intangible assets acquired during the fiscal years ended March 31, 2011 and 2010. If we acquireadditional intangible assets in future periods, our amortization expense will increase. Goodwill The following table presents the activity related to the carrying value of our goodwill by reportable segment for the fiscal year ended March 31, 2011: RoadwaySensorsVehicleSensorsTransportationSystemsEnvironmentalTechnologyTotal(In thousands)Beginning balance - April 1, 2010Goodwill$8,214$4,671$14,906$—$27,791Accumulated impairment losses—————8,2144,67114,906—27,791Acquisition of Meridian EnvironmentalTechnology, Inc. (Note 3)——2191,2301,449Impairment of Transportation Systemsgoodwill (Note 4)——(7,970)—(7,970)Ending balance - March 31, 2011Goodwill8,2144,67115,1251,23029,240Accumulated impairment losses——(7,970)—(7,970)$8,214$4,671$7,155$1,230$21,270 Refer to Note 11 for additional information on our reportable segments. 48Table of Contents Warranty Reserve Activity The following table presents activity with respect to the warranty reserve: Year Ended March 31,201120102009(In thousands)Balance at beginning of year$468$582$494Additions charged to cost of sales130221342Warranty claims(213)(335)(254)Balance at end of year$385$468$582 Net Income (Loss) Per Share The following table sets forth the computation of basic and diluted net income (loss) per share: Year Ended March 31,201120102009(In thousands, except per share amounts)Numerator:Net income (loss)$(5,209)$2,203$10,474 Denominator:Weighted average common shares used in basic computation34,33534,24933,964Dilutive stock options—185671Dilutive warrants—13Weighted average common shares used in diluted computation34,33534,43534,638 Net income (loss) per share:Basic$(0.15)$0.06$0.31Diluted$(0.15)$0.06$0.30 The following instruments were excluded for purposes of calculating weighted average common share equivalents in the computation of diluted netincome (loss) per share as their effect would have been anti-dilutive: Year Ended March 31,201120102009(In thousands) Stock options1,4671,7901,518Warrants2723711,158Restricted stock units54——Convertible debentures——1,281 3. Acquisitions Meridian Environmental Technology, Inc. In January 2011, we acquired all of the capital stock of Meridian Environmental Technology, Inc. (“MET”), a privately-held company based inGrand Forks, North Dakota. MET specializes in 511 advanced traveler information systems, as well as Maintenance Decision Support System managementtools that allow users to create solutions to meet roadway maintenance decision needs. Our primary reasons for the acquisition were (i) to enhance our ability toprovide travelers and traffic management authorities with more accurate and real-time information and network performance management tools and (ii) toprovide Iteris with key capabilities in the emerging performance measurement and management market. Our consolidated financial statements for the fiscal year ended March 31, 2011 include the results of operations of MET commencing as of theacquisition date. On the acquisition date, we paid approximately $1.5 million in cash, exclusive of $369,000 of 49Table of Contents cash acquired. In April 2011, we paid another $137,000 in cash as a result of certain post-closing adjustments. We also agreed to pay up to $1 million on eachof the first two anniversaries of the acquisition date, subject to adjustments related to the retention of various key employees and certain other adjustments asfurther defined in the agreement. Additionally, we may pay up to an additional $1 million per year for two years pursuant to an earn-out provision, based onrevenue and operating income achieved from MET’s operations during the twelve months ending December 31, 2011 and 2012. The potential outcomespertaining to these contingent consideration payments range from zero to approximately $4.0 million. Acquisition-related costs were not significant and areincluded in selling, general and administrative expenses in the accompanying consolidated statement of operations for the year ended March 31, 2011. Acquisition Accounting We have accounted for this acquisition as a business combination in accordance with applicable accounting guidance. We measured the fair value ofthe consideration transferred (including contingent consideration) to determine the purchase price of the acquisition. We allocated the fair value of considerationtransferred to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values at the acquisitiondate. The acquisition is recorded as follows (in thousands): Fair value of consideration transferred:Cash paid on or shortly after acquisition date$1,622Estimated fair value of contingent consideration2,473Total4,095 Allocation:Cash(369)Accounts receivable(682)Other tangible current assets(491)Property and equipment(682)Liabilities1,198Purchased intangible assets(1,620)Goodwill$1,449 The excess of the fair value of the business over the aggregate fair values of identifiable assets acquired and liabilities assumed was recorded asgoodwill. The primary factor that resulted in the recognition of goodwill was the acquisition of MET’s assembled workforce, which is not a separatelyidentifiable intangible asset. Additionally, we allocated approximately $219,000 of the goodwill to our Transportation Systems segment based on estimatedexpected synergies resulting from the acquisition. The goodwill is not expected to be deductible for income tax purposes. Purchased Intangible Assets The following table presents details of the intangible assets acquired: EstimatedUseful LifeAmount(In years)(In thousands)Developed technology6$570Customer contracts / relationships6500Other purchased intangible assets3 - 7550$1,620 Supplemental Pro Forma Data (Unaudited) The unaudited pro forma data below presents selected details of our results of operations as if the acquisition of MET had occurred on April 1, 2009(the beginning of Fiscal 2010). The following data includes the amortization of purchased intangible assets. 50Table of Contents This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or the results thatwould have occurred had the acquisition taken place on April 1, 2009. Year Ended March 31,20112010(In thousands, except per share data) Pro forma net sales and contract revenues$63,643$63,248Pro forma net income (loss)$(5,344)$2,402Pro forma net income (loss) per share - basis$(0.16)$0.07Pro forma net income (loss) per share - diluted$(0.16)$0.07 Hamilton Signal, Inc. In April 2009, we completed the acquisition of certain assets of Hamilton Signal, Inc., a privately-held developer of video processing algorithmsenabling state and local governments to conduct real-time analysis on fixed and pan-tilt-zoom camera feeds. Our primary reasons for the acquisition were toexpand our product portfolio in the traffic management market and to incorporate enhanced functionality into and complement our Roadway Sensorstechnologies. The total purchase consideration was approximately $518,000, for which we paid $300,000 in cash upon execution of the purchase agreement, andfor which, pursuant to the purchase agreement, we paid an additional $106,000 on the first anniversary of the acquisition date and paid $112,000 on thesecond anniversary of the acquisition date. Pursuant to the purchase agreement, the seller became an employee of Iteris and is eligible to receive compensationbased on future net sales of certain products during the three-year period ending March 31, 2012, subject to continued employment and other limitations. We accounted for this acquisition as a business combination in accordance with applicable accounting guidance. We estimated the fair value of theassets acquired to allocate the purchase price, which is summarized as follows (in thousands): Developed technology$501Goodwill17$518 The purchased developed technology was determined to have an estimated useful life of five years. Our consolidated financial statements for the fiscal years ended March 31, 2011 and 2010 include the results of operations of Hamilton Signalcommencing as of the acquisition date. Disclosures required for material business combinations have been limited due to the immateriality of the acquisition ofHamilton Signal to our consolidated financial statements. No supplemental pro forma information is presented for the acquisition due to the immaterial effectof the acquisition on our results of operations. 4. Impairment of Goodwill As discussed in Note 1, goodwill is tested for impairment on an annual basis in our fourth fiscal quarter or more frequently if indicators ofimpairment exist. As of September 30, 2010, we performed the first step in the impairment analysis of the carrying value of goodwill for all reporting units primarilydue to the decline in our stock price and market capitalization since our fiscal year ended March 31, 2010 and the ongoing weakness in the current economicenvironment. This analysis did not result in any impairment charges during the quarter ended September 30, 2010. During the quarter ended December 31, 2010, due primarily to lower than expected operating results in our Transportation Systems reporting unit, aswell as ongoing weakness specifically in the Transportation Systems markets, we determined it was necessary to perform another interim test of impairmentof the carrying value of goodwill in our Transportation Systems reporting unit as of December 31, 2010. In performing the first step in this analysis, weestimated the fair value of our Transportation Systems reporting unit using the income approach. As of December 31, 2010, we determined that the carryingvalue of our Transportation Systems reporting unit exceeded its estimated fair value, and accordingly, we performed the second step of the impairmentanalysis to estimate the implied fair value of the goodwill of this reporting unit. 51Table of Contents The implied fair value of goodwill was determined in the same manner utilized to estimate the amount of goodwill recognized in a businesscombination. To determine this value, we estimated the fair value of the assets and liabilities, including certain intangible assets, to be allocated to theTransportation Systems reporting unit as of December 31, 2010. The implied fair value of goodwill was measured as the difference between the estimated fairvalue of the reporting unit over the estimated fair value amounts of its assets and liabilities. The impairment loss for the Transportation Systems reporting unitwas measured by the amount the carrying value of its goodwill exceeded the implied fair value of the goodwill. Accordingly, in order to write downTransportation Systems goodwill with a carrying value of $14.9 million to its implied fair value of $6.9 million, we recorded an impairment charge of $8.0million in the three months ended December 31, 2010. We estimated the fair value of the Transportation Systems reporting unit using the income approach, which was based on management’s businessplans and financial projections for the next five years, along with a perpetual growth rate thereafter of approximately 4%. The analysis also used a weightedaverage discount rate of approximately 14%, which we believe reflects our cost of capital, slightly adjusted for increased market risk. 5. Fair Value Measurements We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements arebased on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quotedprices in active markets for identical assets and liabilities; Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similarassets or liabilities or prices quoted in inactive markets; and Level 3, defined as unobservable inputs that are significant to the fair value of the asset orliability, and for which little or no market data exists, therefore requiring management to utilize its own assumptions to provide its best estimate of whatmarket participants would use in valuing the asset or liability. The liability for the estimated fair value of the contingent consideration in connection with the MET acquisition (see Note 3) was determined usingLevel 3 inputs based on a probabilistic calculation whereby we assigned estimated probabilities to achieving the earn-out targets and then discounted the totalcontingent consideration to net present value. The following table reconciles this liability measured at fair value on a recurring basis for the fiscal year endedMarch 31, 2011 (in thousands): Balance at April 1, 2010$—Fair value of liability assumed at acquisition date2,473Change in fair value included in net loss55Balance at March 31, 2011$2,528 The current and non-current portions of the liability are included within accrued liabilities and other non-current liabilities, respectively, in theaccompanying consolidated balance sheet as of March 31, 2011. The change in the estimated fair value of the liability for the fiscal year ended March 31,2011 is included as part of operating expenses in the accompanying consolidated statement of operations. Other than the above, we did not have any material financial assets or liabilities measured at fair value on a recurring basis using Level 3 inputs asof March 31, 2011. Our non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value on a non-recurring basis,generally when there is a transaction involving those assets such as a purchase transaction, a business combination or an adjustment for impairment. SeeNotes 3 and 4 above for further discussion regarding certain of our intangible assets and goodwill balances (including goodwill impairment) that weremeasured at fair value, using certain Level 3 inputs, during the fiscal year ended March 31, 2011 and 2010. 6. Revolving Line of Credit and Long-Term Debt Revolving Line of Credit In October 2008, we entered into a new $19.5 million credit facility with California Bank & Trust (“CB&T”). This credit facility provided for a two-year revolving line of credit with borrowings of up to $12.0 million and a $7.5 million 48-month term note (discussed below). Interest on borrowed amountsunder the revolving line of credit are payable monthly at a rate equal to the current stated prime rate (3.25% at March 31, 2011) up to the current stated primerate plus 0.50%, depending on aggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. We areobligated to pay an unused line fee of 52Table of Contents 0.25% per annum applied to the average unused portion of the revolving line of credit during the preceding month. The revolving line of credit does not containany early termination fees and is secured by substantially all of our assets. As of March 31, 2011, no amounts were borrowed under the revolving line ofcredit portion of the facility. Availability under this line of credit may be reduced or otherwise limited as a result of our obligations to comply with certainfinancial covenants. In September 2010, we entered into a modification agreement with CB&T to extend the expiration date of our revolving line of credit toOctober 1, 2012. Long-Term Debt Our long-term debt consists of the following: March 31,20112010(In thousands)Bank term note$2,964$5,293Less current portion(2,324)(2,324)$640$2,969 Scheduled aggregate maturities of long-term debt principal as of March 31, 2011 were as follows: Year Ending March 31(In thousands)2012$2,3242013640$2,964 Bank Term Note. As part of our credit facility described above, we were permitted to borrow up to $7.5 million in the form of a 48-month term note.As of March 31, 2011, we had outstanding borrowings of approximately $3.0 million under the term note. Principal payments under this term note arerequired to be repaid in 48 monthly installments of $152,000 commencing on June 1, 2009. Additionally, beginning on November 1, 2009, and onNovember 1 of each year thereafter, we are required to repay additional principal of up to $500,000, calculated based on certain financial measures, as furtherdefined in the agreement. These additional principal payments effectively reduce the total number of monthly installments necessary to repay the term note. Asof March 31, 2011 and 2010, an additional $500,000 was included as of each date in the current portion of the term note within the accompanyingconsolidated balance sheets, representing the amount we estimate will be due on November 1, 2011 and the amount paid on November 1, 2010. Interest on theterm note is payable monthly at a rate equal to the current stated prime rate plus 0.50% up to the current stated prime rate plus 1.00%, depending on aggregatedeposit balances maintained at the bank in relation to the total loan commitment under the credit facility. The term note contains no early termination fees and,along with the revolving line of credit under the same credit agreement, is secured by substantially all of our assets. Convertible Debentures, Net. In May 2004, we sold and issued subordinated convertible debentures in the aggregate original principal amount of$10.1 million. In connection with the issuance of the debentures, we issued warrants to purchase an aggregate of 639,847 shares of our common stock, thevalue of which was recorded as a debt discount against the face amount of the debentures on the date of issuance and has been amortized to interest expenseover the term of the convertible debentures. The debentures were due in full on May 19, 2009, provided for 6.0% annual interest, payable quarterly, and wereconvertible into our common stock at an initial conversion price of $3.61 per share, subject to certain adjustments, including adjustments for dilutiveissuances. From May 19, 2008 until the maturity date, we were permitted to redeem the debentures at 110% of the principal amount. During the period that thedebentures were outstanding, $250,000 of debentures were converted into 69,252 shares of our common stock. During the fiscal year ended March 31, 2009, at the holders’ request, we early-retired approximately $7.0 million of outstanding convertibledebentures, and realized a net gain of approximately $50,000. For this retirement we used $300,000 of our cash and financed $6.5 million under our bankterm note, which is described above under the caption “Bank Term Note.” The net gain was recorded within “other income, net” within the accompanyingconsolidated statement of operations. During the fiscal year ended March 31, 2010, we retired the remaining $750,000 of convertible debentures. Theretirement was financed under our bank term note. No convertible debentures remained outstanding as of March 31, 2011 and 2010. 53Table of Contents 7. Income Taxes For financial reporting purposes, income (loss) before income taxes includes the following components: Year Ended March 31,201120102009(In thousands)United States$(4,694)$3,177$4,927Foreign(162)(79)250$(4,856)$3,098$5,177 The reconciliation of our income tax provision (benefit) to taxes computed at U.S. federal statutory rates is as follows: Year Ended March 31,201120102009(In thousands)Income tax provision (benefit) at statutory rates$(1,651)$1,053$1,761State income taxes net of federal benefit19218357Change in valuation allowance associated with federal deferred taxassets——(6,915)Goodwill impairment charge2,044——Stock-based compensation charge99(12)(4)Unrecognized tax benefits(288)(362)(290)Other(43)3394Provision (benefit) for income taxes$353$895$(5,297) The components of deferred tax assets and liabilities are as follows: March 31,20112010(In thousands)Deferred tax assets:Net operating losses$12,315$13,273Credit carry forwards319272Deferred compensation and payroll823691Bad debt allowance and other reserves763796Property and equipment—42Other, net252167Total deferred tax assets14,47215,241 Deferred tax liabilities:Property and equipment(66)—Deferred rent(145)Acquired intangibles(527)(509)Total deferred tax liabilities(738)(509)Net deferred tax assets$13,734$14,732 54Table of Contents The components of current and deferred federal and state income tax provisions and (benefits) are as follows: Year Ended March 31,201120102009(In thousands)Current income tax provision (benefit):Federal$(183)$(234)$(200)State264126223Foreign(2)(11)78Deferred income tax provision (benefit):Federal322862(5,261)State(48)152(137)Net income tax provision (benefit)$353$895$(5,297) At March 31, 2011, we had approximately $301,000 in federal alternative minimum tax credit carryforwards that can be carried forward indefinitely.We had $35.7 million of federal net operating loss carryforwards at March 31, 2011 that begin to expire in 2019. We also had $18.6 million of state netoperating loss carryforwards at March 31, 2011, of which, $10.2 million are scheduled to expire in 2017, $7.9 million are scheduled to expire in 2018 and$420,000 are scheduled to expire in 2019. Due to changes in stock ownership, our federal net operating loss carryforwards of approximately $35.7 million and other federal attributes aresubject to a Section 382 annual limitation. Our deferred tax assets at March 31, 2011 do not include $2.4 million of excess tax benefits from employee stock option exercises that are acomponent of our net operating loss carryforwards. If and when such excess tax benefits are realized, stockholders’ equity will be adjusted. As of March 31, 2011 and 2010, we determined that it was more likely than not that our deferred tax assets will be realized. Accordingly, novaluation allowance has been recorded against our deferred tax assets as of either such dates. In making our determination as to the realizability of our deferredtax assets, we reviewed all available positive and negative evidence, including reversal of deferred tax liabilities, potential carrybacks, projected future taxableincome, tax planning strategies and recent financial performance. Unremitted earnings of our foreign subsidiary have been included in the consolidated financial statements without giving effect to the U.S. taxes thatmay be payable on distribution to the U.S. because it is not anticipated that such earnings will be remitted to the U.S. If remitted, the additional U.S. taxeswould not be material. Unrecognized Tax Benefits As of March 31, 2011 and 2010, our gross unrecognized tax benefits were $1.9 million and $2.1 million, respectively, of which $1.5 million and$1.7 million, respectively, if recognized, would affect our effective tax rate. We recognize interest and/or penalties related to income tax matters in income tax expense. As of March 31, 2011 and 2010, we had accruedcumulatively $45,000 and $40,000, respectively, for the payment of potential interest and penalties. 55Table of Contents A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows (in thousands): Gross unrecognized tax benefits at March 31, 2008$2,788Increases in tax positions for prior year155Decreases in tax positions for prior year(36)Increases in tax positions for current year22Lapse in statute of limitations(404)Gross unrecognized tax benefits at March 31, 20092,525Increases in tax positions for prior year93Decreases in tax positions for current year(51)Lapse in statute of limitations(414)Gross unrecognized tax benefits at March 31, 20102,153Increases in tax positions for prior year121Decreases in tax positions for prior year(15)Increases in tax positions for current year17Settlements(8)Lapse in statute of limitations(327)Gross unrecognized tax benefits at March 31, 2011$1,941 We anticipate a decrease in gross unrecognized tax benefits of approximately $343,000 within the next twelve months based on federal and state statuteexpirations in various jurisdictions. We are subject to taxation in the U.S. and various states. We are subject to U.S. federal tax examination for fiscal tax years ended March 31, 2008 orlater, and state and local income tax examination for fiscal tax years ended March 31, 2007 or later. 8. Commitments and Contingencies Litigation and Other Contingencies From time to time, we have been involved in litigation relating to claims arising out of our operations in the normal course of business. We currentlyare not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a materialadverse effect on our consolidated results of operations, financial position or cash flows. Operating Leases In May 2007, we entered into an agreement to lease 52,000 square feet of office space in Santa Ana, California for a term of 88 months. InSeptember 2007, we relocated our headquarters and principal operations into this space. The monthly lease rate was $102,000 during the first year of the leaseand increases each year thereafter, up to a maximum of $120,000 during the last year of the lease. The lease may be extended for a period of five years, at ouroption, at a lease rate to be based on the market lease rate for comparable property determined as of the commencement date of the extension period.Additionally, the lease agreement provided for $1.8 million in incentives in the form of tenant improvement allowances, which we recorded as deferred rentand capitalized leasehold improvements in our consolidated balance sheet. The deferred rent amount reduces monthly rent expense over the term of the lease,and the capitalized leasehold improvements amount are being depreciated over the initial term of the lease (the estimated useful life of the related leaseholdimprovements). 56Table of Contents We have lease commitments for facilities in various locations throughout the U.S. as well as certain other equipment. Future minimum rentalpayments under these noncancelable operating leases at March 31, 2011 were as follows: Year Ending March 31(In thousands)2012$2,02520131,89820141,80320151,3502016235Thereafter514$7,825 Rent expense totaled $1.9 million, $1.9 million and $1.8 million for the fiscal years ended March 31, 2011, 2010 and 2009, respectively. Related Party Transaction We previously subleased office space to MAXxess Systems, Inc. (“MAXxess”), one of our former subsidiaries that we sold in September 2003.MAXxess is currently owned by an investor group that includes two of our directors, one of whom is the Chief Executive Officer of MAXxess. The subleaseterminated in September 2007, at which time MAXxess owed us an aggregate of $274,000 related to this sublease and certain related ancillary services that weprovided to MAXxess. We have previously fully reserved for amounts owed to us by MAXxess under the terms of this sublease. In August 2009, MAXxessexecuted a promissory note payable to Iteris for $274,000. The promissory note bears interest at a rate of 6% per annum, compounded annually, with accruedinterest to be paid annually on the first business day of each calendar year. Payments under the note may be made in bona fide services rendered by MAXxessto Iteris to the extent such services and amounts are pre-approved in writing by us. All amounts outstanding under the note will become due and payable on theearliest of (i) August 10, 2014, (ii) a change of control in MAXxess, or (iii) a financing by MAXxess resulting in gross proceeds of at least $10 million. As ofMarch 31, 2011, approximately $16,000 of accrued interest along with the entire $274,000 principal balance was outstanding and payable to Iteris, all ofwhich remains fully reserved. Inventory Purchase Commitments At March 31, 2011, we had firm commitments to purchase approximately $3.5 million of inventory, primarily during the first and second quartersof our fiscal year ending March 31, 2012. 9. Stockholders’ Equity Preferred Stock Our certificate of incorporation provides for the issuance of up to 2,000,000 shares of preferred stock. As of March 31, 2011 and 2010, there were nooutstanding shares of preferred stock, and we do not currently have plans to issue any shares of preferred stock. In August 2009, our Board of Directors adopted a stockholder rights plan, which calls for preferred stock purchase rights (each, a “Right”) to bedistributed, as a dividend, at the rate of one Right for each share of common stock held as of September 3, 2009. Each Right will entitle holders of commonstock to buy one one-thousandth of one share of Series A Junior Participating Preferred Stock of Iteris. A further description and terms of the Rights are setforth in the Rights Agreement dated August 20, 2009 by and between Iteris and Computershare Trust Company, N.A., as rights agent. In connection with thestockholder rights plan, our Board of Directors approved the adoption of a Certificate of Designations, which created the Series A Junior ParticipatingPreferred Stock, and likewise authorized the filing of a Certification of Elimination to eliminate the two series of junior participating preferred stock, whichwere originally created in April 1998 in connection with our previous stockholder rights plan which expired in 2008. Our Board of Directors is authorized to issue from time to time such authorized but unissued shares of preferred stock in one or more series and tofix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each such series, including the dividend,conversion, voting, redemption and liquidation rights. 57Table of Contents Common Stock Warrants A summary of activity with respect to our common stock warrants for the fiscal year ended March 31, 2011 is as follows: WarrantsWeightedAverageExercisePrice PerShareRemainingContractualLife(In thousands)(Years)Warrants outstanding at March 31, 2010336$3.56Warrants expired(321)3.66Warrants outstanding at March 31, 201115$1.422.4 The warrants outstanding at March 31, 2011 are fully exercisable. In connection with our adoption of certain provisions of accounting for derivatives, which became effective for us on April 1, 2009, we determinedthat certain outstanding warrants to purchase shares of our common stock contained provisions that provide for a possible future adjustment to either theexercise price and/or number of shares to be issued upon exercise. As such, beginning April 1, 2009, we began recognizing these warrants as liabilities at theirrespective estimated fair values on each reporting date. The cumulative effect of the change in accounting for these warrants of $47,000 was recognized as anadjustment to the opening balance of accumulated deficit at April 1, 2009. The amounts recognized in the consolidated balance sheet as a result of our adoptionon April 1, 2009 were determined based on the amounts that would have been recognized if this accounting treatment had been applied from the issuance dateof the warrants. As of March 31, 2011, all such warrants had expired unexercised, and thus there was no remaining liability recorded on our consolidatedbalance sheet at that date. We estimated the fair value of these warrants using the BSM option-pricing formula. The change in the estimated fair value of thewarrants for the fiscal years ended March 31, 2011 and 2010 is included in “other income, net” in the accompanying consolidated statements of operations. Common Stock Reserved for Future Issuance The following summarizes common stock reserved for future issuance at March 31, 2011: Number of Shares(In thousands)Stock options outstanding3,111RSUs outstanding214Authorized for future issuance under stock incentive plans652Warrants oustanding153,992 10. Employee Benefit Plans Stock Incentive Plans In September 2007, our stockholders approved the 2007 Omnibus Incentive Plan (the “2007 Plan”), which provides that options to purchase sharesof our unissued common stock may be granted to our employees, officers, consultants and directors at exercise prices which are equal to or greater than themarket value of our common stock on the date of grant. Options expire no more than ten years after the date of grant and generally vest at the rate of 25% oneach of the first four anniversaries of the grant date. The 2007 Plan also allows for the issuance of stock appreciation rights, restricted stock, restricted stockunits (“RSUs”) and other stock-based awards based on the value of our common stock. New shares are issued to satisfy stock option exercises and shareissuances under the 2007 Plan. In September 2009, our stockholders approved an amendment to increase the number of shares of our common stockauthorized and reserved for issuance under the 2007 Plan by 800,000 shares to a total of 1,650,000 shares. At March 31, 2011, there were approximately652,000 shares of common stock available for grant under this plan. As of March 31, 2011, options to purchase approximately 785,000 shares of commonstock, as well as 214,000 RSUs, were outstanding under the 2007 Plan. Our 1997 Stock Incentive Plan (the “1997 Plan”) terminated in September 2007; however, all stock options outstanding under the 1997 Planremain outstanding pursuant to the terms of such stock options. As of March 31, 2011, options to purchase approximately 1.1 million shares of our commonstock were outstanding under the 1997 Plan. No further options or other stock-based awards may be granted under the 1997 Plan. 58Table of Contents In connection with our merger with the Iteris Subsidiary in 2004, we assumed the 1998 Stock Incentive Plan (the “1998 Plan”) of the IterisSubsidiary and all outstanding options granted thereunder. As of March 31, 2011, options to purchase approximately 1.2 million shares of our common stockwere outstanding under the 1998 Plan. No further options or other stock-based awards may be granted under the 1998 Plan. Certain options granted under the 2007 Plan, the 1997 Plan and the 1998 Plan (collectively, the “Plans”) and the RSUs granted under the 2007 Planprovide for accelerated vesting of unvested options in the event of a change in control under certain circumstances. Stock Options A summary of activity in the Plans with respect to our stock options for the fiscal year ended March 31, 2011 is as follows: OptionsWeightedAverageExercisePrice PerShareWeigthedAverageRemainingContractualLifeAggregateIntrinsicValue(In thousands)(Years)(In thousands)Options outstanding at March 31, 20103,218$1.77Granted301.45Exercised(46)1.25Forfeited(11)1.71Expired(80)8.99Options outstanding at March 31, 20113,111$1.593.1$402Options exercisable at March 31, 20112,701$1.582.4$394Vested and expected to vest at March 31, 20113,065$1.593.1$401Options exercisable at March 31, 2011pursuant to a change-in-control3,111$1.593.1$402 Included in the options outstanding at March 31, 2011 are vested options to purchase 721,000 shares of our common stock with an exercise price pershare of $1.19, which are scheduled to expire in September 2011 unless exercised prior to that date. Restricted Stock Units In August 2010, we granted 214,000 RSUs under the 2007 Plan to certain employees of Iteris, all of which were unvested and outstanding as ofMarch 31, 2011. These RSUs are stock awards that entitle the holder to receive shares of our common stock upon vesting. The RSUs vest at the rate of 25%per year beginning in August 2011. The fair value per share of these RSUs was $1.48, determined based on the closing market price of our common stock onthe grant date. Other than the above, there are no other RSUs outstanding at March 31, 2011. Stock-Based Compensation The following table presents stock-based compensation expense that is included in each functional line item on our consolidated statements ofoperations: Year Ended March 31,201120102009(In thousands)Cost of net sales$11$9$9Cost of contract revenues363938Selling, general and administrative expense300300297Research and development expense352720$382$375$364 At March 31, 2011, there was approximately $611,000 of unrecognized compensation expense related to unvested stock options and RSUs. Thisexpense is currently expected to be recognized over a weighted average period of approximately 2.6 years. If there are any modifications or cancellations of theunderlying unvested awards, we may be required to accelerate, increase or cancel 59Table of Contents any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increaseto the extent that we grant additional stock options, RSUs or other stock-based awards. The grant date fair value of stock options granted was estimated using the following weighted-average assumptions: Year Ended March 31,201120102009 Expected life - years7.07.07.0Risk-free interest rate2.1%3.2%3.3%Expected volatility of common stock58%74%75%Dividend yield—%—%—% A summary of certain fair value and intrinsic value information pertaining to our stock options is as follows: Year Ended March 31,201120102009(In thousands, except per share amounts)Weighted average grant date fair value per share of options granted$0.86$1.01$1.50Intrinsic value of options exercised$23$28$771 Employee Incentive Programs Under the terms of a Profit Sharing Plan, we may contribute to a trust fund such amounts as are determined annually by the Board of Directors. Nocontributions were made during the years ended March 31, 2011, 2010 and 2009. We sponsor a defined contribution 401(k) Plan, adopted in 1990, under which eligible associates voluntarily contribute to the plan, up to IRSmaximums, through payroll deductions. Under the provisions of the 401(k) Plan, associates have various investment choices, one of which is the purchase ofIteris common stock at market price. We match up to 90% of contributions, based on years of service, up to a stated limit. From July 1, 2009 throughMarch 31, 2010, we temporarily suspended our matching contributions to the 401(k) Plan. Beginning in April 2010, we reinstituted certain limited matchingcontributions to the 401(k) Plan. Our matching contributions were approximately $491,000, $220,000 and $753,000 for the fiscal years ended March 31,2011, 2010 and 2009, respectively. 11. Business Segments, Significant Customer and Geographic Information We currently operate in four reportable segments: Roadway Sensors, Vehicle Sensors, Transportation Systems and Environmental Technology. TheRoadway Sensors segment includes our Vantage and VersiCam vehicle detection systems for traffic intersection control, incident detection and certain highwaytraffic data collection applications. This segment also includes our Pico compact video detection system, which was designed primarily to respond tointernational video detection needs. The Vehicle Sensors segment includes our lane departure warning products and is comprised of all of our activities relatedto vehicle safety. The Transportation Systems segment includes transportation engineering and consulting services and the development of transportationmanagement and traveler information systems for the ITS industry. The Environmental Technology segment represents the operations of MET (Note 3) andspecializes in 511 advanced traveler information systems by offering a unique range of customer-specific environmental and operational forecasting productsand services, as well as Maintenance Decision Support System management tools that allow users to create solutions to meet roadway maintenance decisionneeds. The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies (Note 1).Certain corporate expenses, including interest and amortization of intangible assets, are not allocated to the segments. The reportable segments are eachmanaged separately because they manufacture and distribute distinct products or provide services with different processes. All segment revenues are derivedfrom external customers. Segment assets are not disclosed because the discrete financial information provided to and reviewed by our chief executive officer,who is our chief operating decision maker, does not separately identify segment assets. 60Table of Contents Selected financial information for our reportable segments for the fiscal years ended March 31, 2011, 2010 and 2009 is as follows: RoadwaySensorsVehicleSensorsTransportationSystemsEnvironmentalTechnologyTotal(In thousands)Year Ended March 31, 2011Product revenue$28,208$6,909$—$—$35,117Service and other revenue—56822,3011,45724,326Depreciation2178319159550Impairment of goodwill——7,970—7,970Segment income (loss)3,942(691)(7,618)77(4,290) Year Ended March 31, 2010Product revenue$25,341$5,624$—$—$30,965Service and other revenue—68526,413—27,098Depreciation23483221—538Segment income (loss)3,158(894)1,445—3,709 Year Ended March 31, 2009Product revenue$27,197$9,913$—$—$37,110Service and other revenue—1,31730,932—32,249Depreciation198137249—584Segment income3,4155692,216—6,200 The following reconciles segment income (loss) to consolidated income (loss) before income taxes: Year Ended March 31,201120102009(In thousands)Segment income (loss):Total income (loss) from reportable segments$(4,290)$3,709$6,200Unallocated amounts:Corporate and other expenses(155)(232)(346)Amortization of intangible assets(222)(159)(147)Change in fair value of contingent acquisition consideration(55)——Other income, net1844116Interest expense, net(152)(264)(646)Income (loss) before income taxes$(4,856)$3,098$5,177 Significant Customer and Geographic Information No single customer accounted for more than 10% of our total net sales and contract revenues for each of the fiscal years ended March 31, 2011, 2010and 2009. No individual customer or government agency had a receivable balance at March 31, 2011 or 2010 greater than 10% of our total trade accountsreceivable balances as of March 31, 2011 and 2010, respectively. The following table sets forth the percentages of our total net sales and contract revenues, by geographic region, derived from shipments to, orcontract, service and other revenues from external customers located outside the U.S.: Year Ended March 31,201120102009 Europe5%4%9%Asia523Other32313%8%15% Substantially all of our long-lived assets are held in the U.S. 61Table of Contents 12. Quarterly Financial Data (Unaudited) Quarter Ended:Total NetSales andContractRevenuesGrossProfitNetIncome(Loss)Basic NetIncome(Loss) perShareDiluted NetIncome(Loss) perShare(In thousands, except per share amounts)June 30, 2010$15,674$7,017$797$0.02$0.02September 30, 201014,0866,3015420.020.02December 31, 201014,0325,751(7,027)(0.20)(0.20)March 31, 201115,6516,8724790.010.01$59,443$25,941$(5,209)$(0.15)*$(0.15)* June 30, 2009$14,634$5,582$144$0.00$0.00September 30, 200914,8656,5705430.020.02December 31, 200913,5775,5357090.020.02March 31, 201014,9876,4728070.020.02$58,063$24,159$2,203$0.06*$0.06* * Annual per share amounts may not agree to the sum of the quarterly per share amounts due to differences between average shares outstanding during theperiods. 62Table of Contents Exhibit Index ExhibitNumberDescriptionWhere Located 2.1+Stock Purchase Agreement dated December 23, 2010 by and amongIteris, Inc., Meridian Environmental Technology, Inc., theshareholders of MET and Kathy J. Osborne as the ShareholdersRepresentativeExhibit 2.1 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended December 31, 2010 as filed with the SECon February 14, 2011 3.1Restated Certificate of Incorporation of the registrantExhibit 3.1 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 2009 as filed with the SECon October 30, 2009 3.2Certificate of Designations of Series A Junior Participating PreferredStockExhibit 3.2 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 2009 as filed with the SECon October 30, 2009 3.3Bylaws of the registrant, as amendedExhibit 4.2 to the registrant’s Registration Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC on July 6, 1993 3.4Certificates of Amendment to Bylaws of the registrant datedApril 24, 1998 and August 10, 2001Exhibit 3.4 to the registrant’s Annual Report on Form 10-K/A forthe year ended March 31, 2003 as filed with the SEC on July 29,2003 3.5Certificate of Amendment to Bylaws of registrant datedSeptember 9, 2004Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 2004 as filed with the SECon November 15, 2004 3.6Certificate of Amendment to Bylaws of registrant effectiveSeptember 16, 2005Exhibit 3.5 to the registrant’s Annual Report on Form 10-K forthe year ended March 31, 2007 3.7Certificate of Amendment to Bylaws of registrant effectiveDecember 7, 2007Exhibit 3.1 to the registrant’s Current Report on Form 8-K asfiled with the SEC on December 13, 2007 3.8Certificate of Amendment to Bylaws of registrant, effectiveAugust 20, 2009Exhibit 3.3 to the registrant’s Current Report on Form 8-K asfiled with the SEC on August 21, 2009 4.1Specimen of common stock certificateExhibit 4.1 to registrant’s Registration Statement on Form 8-A asfiled with the SEC on December 8, 2004 4.2Rights Agreement dated August 20, 2009 between the registrant andComputershare Trust Company, N.A., which includes the form ofCertificate of Designations for the Series A Junior ParticipatingPreferred Stock, the form of Right Certificate, and Summary ofRights to Purchase Preferred Stock as exhibits theretoExhibit 4.1 to the registrant’s Current Report on Form 8-K asfiled with the SEC on August 21, 2009 10.1Form of Indemnity Agreement entered into by the registrant andcertain of its officers and directorsExhibit 19.4 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 1988 10.2Form of Indemnification Agreement entered into by the registrant andcertain of its officers and directorsExhibit 10.5 to the registrant’s Annual Report on Form 10-K forthe year ended March 31, 2004 as filed with the SEC on June 29,2004 10.3*1997 Stock Incentive Plan (the “1997 Plan”) as amended onMay 3, 2003, as further amended on December 15, 2004Exhibit 10.32 to the registrant’s Annual Report on Form 10-K forthe year ended March 31, 2005 as filed with the SEC on July 14,2005 63Table of Contents 10.4*Form of Notice of Grant of Stock Option for 1997 PlanExhibit 99.2 to the registrant’s Registration Statement onForm S-8 (File No. 333-30396) as filed with the SEC onFebruary 14, 2000 10.5*Form of Stock Option Agreement for the 1997 PlanExhibit 99.3 to the registrant’s Registration Statement onForm S-8 (File No. 333-30396) as filed with the SEC onFebruary 14, 2000 10.6*Form of Addendum to Stock Option Agreement for 1997 Plan—Involuntary Termination Following Corporate Transaction orChange in ControlExhibit 99.4 to the registrant’s Registration Statement onForm S-8 (File No. 333-30396) as filed with the SEC onFebruary 14, 2000 10.7*Form of Addendum to Stock Option Agreement for 1997 Plan—Limited Stock Appreciation RightsExhibit 99.5 to the registrant’s Registration Statement onForm S-8 (File No. 333-30396) as filed with the SEC onFebruary 14, 2000 10.8*Form of Stock Issuance Agreement for 1997 PlanExhibit 99.6 to the registrant’s Registration Statement onForm S-8 (File No. 333-30396) as filed with the SEC onFebruary 14, 2000 10.9*Form of Addendum to Stock Issuance Agreement for 1997 Plan—Involuntary Termination Following CorporateTransaction/Change in ControlExhibit 99.7 to the registrant’s Registration Statement onForm S-8 (File No. 333-30396) as filed with the SEC onFebruary 14, 2000 10.10*Form of Notice of Grant of Automatic Stock Option for 1997 Plan—Initial GrantExhibit 99.8 to Exhibit 99.8 to registrant’s Registration Statementon Form S-8 (File No. 333-30396) as filed with the SEC onFebruary 14, 2000 10.11*Form of Notice of Grant of Automatic Stock Option for 1997 Plan—Annual GrantExhibit 99.9 to the registrant’s Registration Statement onForm S-8 (File No. 333-30396) as filed with the SEC onFebruary 14, 2000 10.12*Form of Automatic Stock Option Agreement for 1997 PlanExhibit 99.10 to the registrant’s Registration Statement onForm S-8 (File No. 333-30396) as filed with the SEC onFebruary 19, 2000 10.13*Iteris Inc. 1998 Stock Incentive Plan (as amended on February 7,2000) (“1998 Plan”)Exhibit 10.24 to the registrant’s Annual Report on Form 10-K forthe year ended March 31, 2005 as filed with the SEC on July 14,2005 10.14*Form of Notice of Grant for 1998 Plan, including forms of OptionAgreement and Stock Purchase Agreement for the following directorsand executive officers: Gregory McKhann, James S. Miele andAbbas MohaddesExhibit 99.2 to the registrant’s Registration Statement onForm S-8 (File No. 333-126834) as filed with the SEC onJuly 22, 2005 10.15*Form of Addendum to Stock Option Agreement for 1998 PlanExhibit 99.3 to the registrant’s Registration Statement onForm S-8 (File No. 333-126834) as filed with the SEC onJuly 22, 2005 10.16*Form of 1997 Stock Option AgreementsExhibit 99.4 to the registrant’s Registration Statement onForm S-8 (File No. 333-126834) as filed with the SEC onJuly 22, 2005 10.17*Iteris, Inc. Deferred Compensation Savings Plan and Grantor TrustExhibit 10.31 to the registrant’s Annual Report on Form 10-K forthe year ended March 31, 2005 as filed with the SEC on July 14,2005 64Table of Contents 10.18+Cooperative Agreement for Development, Manufacture, Marketingand Sale of Products to the Class 1 and Class 2 Vehicle MarketsIncorporating Iteris’ LDWS Technology (Valeo Schalter andSensoren GmbH)Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2004 as filed with the SEC onAugust 16, 2004 10.19Warrant Exercise Agreement dated September 27, 2006 by andamong the registrant and Special Situations Fund III QP, L.P.,Special Situations Fund III, L.P., Special Situations Cayman Fund,L.P. and Special Situations Private Equity Fund, L.P.Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 2006 as filed with the SECon November 14, 2006. 10.20Registration Rights Agreement dated September 28, 2006 by andamong the registrant and Special Situations Fund III QP, L.P.,Special Situations Fund III, L.P., Special Situations Cayman Fund,L.P. and Special Situations Private Equity Fund, L.P.Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 2006 as filed with the SECon November 14, 2006. 10.21+National Intelligent Transportation Systems (ITS) ArchitectureEvolution and Support Award/Contract effective as of October 1,2006 by and between the registrant and the Federal HighwayAdministrationExhibit 10.3 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 2006 as filed with the SECon November 14, 2006. 10.22Sublease Agreement, dated September 30, 2003, by and betweenOdetics, Inc. and Maij, Inc.Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2007 as filed with the SEC onAugust 14, 2007 10.23Office Lease Agreement, dated May 24, 2007, by and betweenCrown Carnegie Associates, LLC and Iteris, Inc.Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2007 as filed with the SEC onAugust 14, 2007 10.24*2007 Omnibus Incentive Plan and forms of agreementsAppendix A to the registrant’s Definitive Proxy Statement onSchedule 14A as filed with the SEC on August 10, 2007 10.25Debenture Redemption Agreement, dated February 11, 2008, by andamong Potomac Capital Partners, LP, Potomac Capital InternationalLtd. and Iteris, Inc.Exhibit 10.1 to the registrant’s Current Report on Form 8-K asfiled with the SEC on February 15, 2008 10.26*Change in Control Agreement dated June 11, 2008 by and betweenJames S. Miele and Iteris, Inc.Exhibit 10.42 to the registrant’s Annual Report on Form 10-K forthe year ended March 31, 2008 as filed with the SEC on June 12,2008 10.27Amended and Restated Loan and Security Agreement datedFebruary 4, 2009 by and between California Bank & Trust and theregistrantExhibit 10.1 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended December 31, 2008 as filed with the SECon February 13, 2009 10.28Unsecured Promissory Note dated August 10, 2009 executed byMAXxess Systems, Inc.Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2009 as filed with the SEC onAugust 11, 2009 10.29*Letter Agreement dated July 27, 2010 by and between the registrantand Abbas MohaddesExhibit 10.1 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2010 as filed with the SEC onJuly 28, 2010 10.30*Change in Control Agreement dated July 27, 2010 by and betweenthe registrant and Abbas MohaddesExhibit 10.2 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2010 as filed with the SEC onJuly 28, 2010 65Table of Contents 10.31Form of Restricted Stock Unit Award Agreement under the 2007Omnibus Incentive PlanExhibit 10.3 to the registrant’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2010 as filed with the SEC onJuly 28, 2010 10.32Modification Agreement dated September 30, 2010 by and betweenIteris, Inc. and California Bank & TrustExhibit 10.1 to the registrant’s Current Report on Form 8-K asfiled with the SEC on October 6, 2010 21Subsidiaries of the registrantFiled Herewith 23Consent of Independent Registered Public Accounting FirmFiled Herewith 24Power of AttorneyFiled Herewith (included on the Signature page) 31.1Certification of the Chief Executive Officer Pursuant to Section 302of the Sarbanes-Oxley Act of 2002Filed Herewith 31.2Certification of the Chief Financial Officer Pursuant to Section 302of the Sarbanes-Oxley Act of 2002Filed Herewith 32.1Certification of the Chief Executive Officer Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Filed Herewith 32.2Certification of the Chief Financial Officer Pursuant to 18 U.S.C.Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Filed Herewith * Indicates a management contract or compensatory plan or arrangement+ Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, asamended. In accordance with Rule 24b-2, these confidential portions have been omitted from the exhibit and filed separately with the SEC. 66Exhibit 21 LIST OF SUBSIDIARIES SubsidiaryJurisdiction ofIncorporation Iteris Europe GmbHGermanyMeridian Environmental Technology, Inc.North Dakota Exhibit 23 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in Registration Statements (Nos. 333-121942, 333-136739, and 333-138735) on Form S-3 and (Nos. 333-162807,333-146459, 333-126834, 333-75728, 333-44907 and 333-30396) on Form S-8 of Iteris, Inc. of our report dated June 1, 2011, relating to our audit of theconsolidated financial statements, which appear in this Annual Report on Form 10-K of Iteris, Inc. for the year ended March 31, 2011. /s/ McGladrey & Pullen, LLPIrvine, CaliforniaJune 1, 2011 Exhibit 31.1 CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Abbas Mohaddes, certify that: 1. I have reviewed this annual report on Form 10-K of Iteris, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: June 1, 2011 /s/ ABBAS MOHADDESAbbas MohaddesChief Executive Officer(Principal Executive Officer) Exhibit 31.2 CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James S. Miele, certify that: 1. I have reviewed this annual report on Form 10-K of Iteris, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respectsthe financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, tothe registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting. Date: June 1, 2011 /s/ JAMES S. MIELEJames S. MieleChief Financial Officer(Principal Financial Officer) Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Iteris, Inc. (the “Company”) on Form 10-K for the fiscal year ended March 31, 2011, as filed with theSecurities and Exchange Commission (the “Report”), I, Abbas Mohaddes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 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 of operations of the Company. Date: June 1, 2011 /s/ ABBAS MOHADDESAbbas MohaddesChief Executive Officer A signed original of this written statement required by Section 906, or any other document authenticating, acknowledging, or otherwise adopting thesignature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company andwill be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. §1350, AS ADOPTEDPURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Iteris, Inc. (the “Company”) on Form 10-K for the fiscal year ended March 31, 2011 as filed with theSecurities and Exchange Commission (the “Report”), I, James S. Miele, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 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 of operations of the Company. Date: June 1, 2011 /s/ JAMES S. MIELEJames S. MieleChief Financial Officer A signed original of this written statement required by Section 906, or any other document authenticating, acknowledging, or otherwise adopting thesignature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company andwill be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 

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