Iteris
Annual Report 2012

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, 2012 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 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 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. x 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 June 1, 2012, there were 33,998,351 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 2012 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, 2012. 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, 2012TABLE OF CONTENTS PART I ITEM 1.BUSINESS2 ITEM 1A.RISK FACTORS6 ITEM 1B.UNRESOLVED STAFF COMMENTS14 ITEM 2.PROPERTIES15 ITEM 3.LEGAL PROCEEDINGS15 ITEM 4.MINE SAFETY DISCLOSURES15 PART II ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES16 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 RISK29 ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA29 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE29 ITEM 9A.CONTROLS AND PROCEDURES29 ITEM 9B.OTHER INFORMATION30 PART III ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE30 ITEM 11.EXECUTIVE COMPENSATION30 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS31 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE31 ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES31 PART IV ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES31 Unless otherwise indicated in this report, the “Company,” “we,” “us” and “our” refer to Iteris, Inc. and our wholly-owned subsidiaries. Iteris®, Vantage®, Abacus®, VantageView™, VersiCam™, Pico™, RZ-4™, Vantage Vector™, iPerform™ and IterisPeMS™ are among the trademarks ofIteris, Inc. Any other trademarks or trade names mentioned herein are the property of their respective owners. 1Table 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 future sales, revenue and operating results, expansionplans, market share, capital needs, competition, backlog and manufacturing capabilities, acceptance of our products and services, and the impact ofrecent accounting pronouncements. These statements are not guarantees of future performance and are subject to certain risks and uncertaintieswhich could cause actual results to differ materially from those projected. You should not place undue reliance on these forward-looking statementsthat speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect events or circumstancesafter the date hereof or to reflect the occurrence of unanticipated events. We encourage you to carefully review and consider the various disclosuresmade by us which describe certain factors which could affect our business, including those in “Risk Factors” in Item 1A of this report, before decidingto invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-lookingstatement for any reason. PART I ITEM 1. BUSINESS Overview We are a leading provider of intelligent information solutions to the traffic management market. We are focused on the development and application ofadvanced technologies and software-based information systems that reduce traffic congestion, provide measurement, management and predictive trafficanalytics and improve the safety of surface transportation systems infrastructure. We believe that our products, services and solutions, in conjunction withsound traffic management, minimize the environmental impact of traffic congestion. By combining our image processing, traffic engineering, informationtechnology, and other products and services, we offer a broad range of Intelligent Transportation Systems (“ITS”) 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. Sale of Vehicle Sensors On July 29, 2011, we completed the sale of substantially all of the assets used in connection with our Vehicle Sensors segment to BendixCommercial Vehicle Systems LLC (“Bendix”), a member of Knorr-Bremse Group, pursuant to an Asset Purchase Agreement signed on July 25, 2011 (the“Asset Sale”). Upon closing, Bendix paid us $14 million in cash, subject to a $2 million holdback and adjustments based upon the working capital of theVehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities of the Vehicle Sensors segment. We are entitled toadditional consideration in the form of certain performance and royalty-related earn-outs. As a result of the Asset Sale, we no longer operate in the VehicleSensors segment and we determined that the Vehicle Sensors segment, which previously constituted one of our operating segments, qualifies as a discontinuedoperation. Refer to Note 3 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report for additional discussion on thistransaction. The applicable financial results of the Vehicle Sensors segment through the closing of the Asset Sale have been reported as a discontinuedoperation for all periods presented. Products and Services As a result of the sale of Vehicle Sensors in July 2011, and a reevaluation and reorganization of our operating segments in the first quarter of thefiscal year ended March 31, 2012, we currently operate in two reportable segments: Roadway Sensors and Transportation Systems. The Roadway Sensorssegment includes, among other products, our Vantage, Versicam, Pico, Vantage Vector and Abacus vehicle detection systems for traffic intersection control,incident detection and certain highway traffic data collection applications. The Transportation Systems segment includes transportation engineering andconsulting services, and the development of transportation management and traveler information systems for the ITS industry. See Note 13 of Notes toConsolidated Financial Statements, included in Part IV, Item 15 of this report, for further details on our reportable segments. 2Table 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. · Our Vantage Vector product is an all-in-one vehicle detection sensor with a wide range of capabilities: stop bar detection, advanced-zonedetection, and sensing that enables advanced safety and adaptive control applications. It includes all the proven benefits of Iteris videodetection, including high accuracy, high availability remote viewing of video images, no trenching or pavement cutting for installation,bicycle detection capability and high precision for dilemma zone detection by integrating the video field-of-view with radar sensing. Enhanced information includes the number of vehicles, speed, and distance in user configurable zones that can be used for specialapplications. · 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 designed to monitorroadways, signalized intersections, tunnels and bridges to allow for data collection and incident detection without the set-up and calibrationgenerally required 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. We have historically experienced seasonality, particularly with respect to our Roadway Sensors net sales in our third and fourth fiscal quarters due toa reduction in road construction and repairs during the winter months due to inclement weather conditions. 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 implementation of surface transportation infrastructure systems. We perform analysis and study goodsmovement, study commercial vehicle operations, provide travel demand forecasting and systems engineering, and identify mitigation measures to reducetraffic congestion. This segment also includes the activities of Meridian Environmental Technology, Inc. (“MET”), which we acquired in January 2011, andwhich specializes in 511 advanced traveler information systems as well as Maintenance Decision Support System (“MDSS”) management tools that allowusers to create solutions to meet roadway maintenance decision needs. The operations of Berkeley Transportation Systems, Inc. (“BTS”), which we acquiredin November 2011, are also included in this segment. BTS specializes in transportation performance measurement and its Performance Measurement Systemleverages its real-time data collection, diagnostic, fusion and warehousing platform to aggregate and compute performance measures. 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.Congress is currently working on such a bill. The previous Federal Highway Bill expired in October 2009 but the funding levels under the expired bill havecontinued through a series of short-term extensions, the most recent of which extends funding through the end of June 2012. Continued delays in the enactmentof such a new Federal Highway Bill, and until such time as a bill becomes law, will prolong the uncertainty regarding the allotment of transportation funds infederal, state and local budgets. We believe that prolonged uncertainty has adversely impacted, and may continue to adversely impact, our net sales andcontract revenues and our overall financial performance in future periods. With the addition of MET in January 2011, we have experienced seasonality particularly related to certain MDSS services in our first and secondfiscal quarters mainly because MDSS services are generally not required in the summer months. 3Table of Contents During the fiscal year ended March 31, 2012 (“Fiscal 2012”), we began the development of IterisPeMS. IterisPeMS is an advanced, real-time datacollection, diagnostic, fusion and warehousing software platform used to aggregate and compute performance measures across multiple transportation modes,including travel time, travel time variability, delay and lost throughput. This information can then be analyzed by traffic professionals to measure how atransportation network is performing and identity potential areas of improvement. IterisPeMS is also capable of providing users with easy-to-use visualizationand animation features for both historical and predictive traffic conditions. Costs incurred during Fiscal 2012, which include research and developmentexpense as well as sales and marketing expenditures were not allocated to either of the Roadway Sensors or Transportation Systems segments as this projectwas deemed to be a corporate level development. Sales, Marketing and Principal Customers We sell our Roadway Sensors products through indirect sales channels comprised of a network of independent dealers in the U.S. and certain foreignlocations, who sell integrated systems and related products to the traffic management market, as well as directly to the traffic management market using acombination of our own sales personnel and an outside sales organization. Our independent dealers are 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 and sell directly togovernment agencies and installation contractors. These dealers often have long-term arrangements with local government agencies in their respective territoriesfor the supply of various products for the construction and renovation of traffic intersections, and are generally well-known suppliers of high-quality ITSproducts to the traffic management market. We periodically hold technical training classes for our dealers and end users and maintain a full-time staff ofcustomer support technicians throughout the U.S. to provide technical assistance when needed. When appropriate, we have the ability to modify or makechanges to our dealer network to accommodate the needs of the market and our customer base. In the states where we sell directly, we use our own staff to sell,oversee installations and set-up issues and support our products. We market and sell our Transportation Systems services directly to government agencies pursuant to negotiated contracts that involve competitivebidding and specific qualification requirements. Most of our contracts are with federal, state and municipal customers and generally provide for cancellationor renegotiation at the option of the customer upon reasonable notice and fees paid for modification. We generally use selected members of our engineering,science and information technology teams on a regional basis to serve in sales and business development functions. Our contracts generally involve long leadtimes and require extensive specification development, evaluation and price negotiations. A large portion of our revenues are derived from sales to federal, state and local government agencies. We currently have a diverse customer base, andno individual customer represented greater than 10% of our total net sales and contract revenues in Fiscal 2012 and in the fiscal years ended March 31, 2011(“Fiscal 2011”) and March 31, 2010 (“Fiscal 2010”). Also refer to Note 13 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 roadway sensors products. Additionally, we procure certain componentsfrom qualified suppliers, both globally and locally, and generally use multi-sourcing strategies when technically and economically feasible to mitigate supplyrisk. These subassemblies and components are delivered to our Santa Ana, California facility where they go through final assembly and testing prior toshipment to our customers. Our key suppliers include CTS Electronics Manufacturing Solutions, Inc., Total Electronics LLC, Sony Electronics, Inc. andLG Electronics, Inc. Our manufacturing activities are conducted in approximately 9,000 square feet of space at our Santa Ana facility. Production volume atour subcontractors is based upon quarterly forecasts that we generally adjust on a monthly basis to control inventory levels. We typically do not manufactureany of the hardware used in the transportation management and traveler information systems that we design and implement. Our production facility iscurrently 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 2012, Fiscal 2011 and Fiscal 2010. We believe customersupport is a key competitive factor. Backlog Our total backlog of unfulfilled firm orders was approximately $35.0 million as of March 31, 2012, which was comprised of $3.2 million related toRoadway Sensors and $31.8 million related to Transportation Systems. Substantially the entire backlog for Roadway Sensors is expected to be recognized asrevenue in the fiscal year ending March 31, 2013. We have historically recognized between 50% to 70% of our Transportation Systems backlog as of the endof a fiscal year in the subsequent fiscal year, and currently expect that trend to continue for the near future. 4Table of Contents At March 31, 2011, we had backlog of approximately $28.2 million, which was comprised of $2.7 million related to Roadway Sensors and $25.5million 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 segment. Product Development Most of our product development activities are conducted at our principal facilities in Santa Ana, California. Our research and development costsand expenses were approximately $3.2 million for Fiscal 2012, $2.4 million for Fiscal 2011 and $2.6 million for Fiscal 2010. We expect to continue to pursuevarious product 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 four fiscal years, our Roadway Sensorssegment has introduced our VersiCam and VersiCam wireless products, Pico, RZ-4 Advanced camera and our RZ-4 Advanced Wide Dynamic Range camera,which significantly improve video detection performance in certain harsh lighting conditions, and within the last fiscal year, Vantage Vector. We have alsoupgraded our Abacus and VantageView software products within the last fiscal year. Additionally, during Fiscal 2012, we began development of ourIterisPeMS Performance Measurement System. We plan to continue this development effort in our fiscal year ending March 31, 2013. We believe thatdeveloping new offerings across our segments and enhancing, refining and marketing our existing products is a key component of strong organic growth andprofitability. 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 and other non-intrusive detection devices, including microwave, infrared, ultrasonic and magnetic detectors, as well asmanufacturers and installers of in-pavement inductive loop products, which have historically, and currently continue to be, the predominant detection systemin this market. The markets in which our Transportation Systems segment operates is highly fragmented and subject to evolving national and regional quality,operations and safety standards. Our competitors vary in number, scope and breadth of the products and services they offer. Our competitors in advancedTransportation Systems include national corporations. Our competitors in transportation engineering, planning and design include major regional firms, aswell as many smaller local engineering firms. 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. 5Table of Contents 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 five U.S.patents, three pending foreign patents and two provisional patents. One U.S. patent, which expires in May 2019, is for general technology related to CMOSsensors. Four U.S. patents, which expire between 2013 and 2029, two pending foreign patents and two provisional patents relate specifically to our RoadwaySensors technology. One of these U.S. patents and the two pending foreign patents are for an Electronic Traffic Monitor related to our Abacus product in theRoadway Sensors segment. We cannot be certain that any new patents will be granted pursuant to these or subsequent applications. As a result of the AssetSale, certain patents were transferred to Bendix. We believe these patents were specific to that segment and the transfer of ownership does not impair ourproprietary rights related to our current product and service offerings. 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 than those relating to product names. We cannot be certain that we will besuccessful in protecting our proprietary rights. While we believe our patents, patent applications, 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 March 31, 2012, we employed an aggregate of 264 full-time associates, including 57 associates ingeneral management, administration and finance; 19 associates in sales and marketing; 160 associates in engineering and product development; 15 associatesin operations, manufacturing and quality; and 13 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 at all levels of government. These unfavorable economic conditions are having a negative impact on customer orders and governmentfunding of infrastructure projects 6Table of Contents incorporating our products and services. Such factors have and may continue to result in delays, cancellations and rescheduling of backlog and customerorders. In addition, the decline in the U.S. real estate market, particularly in new home and commercial construction, has adversely impacted new roadconstruction and has had and may continue to have adverse effects on Transportation Systems contract revenues and Roadway Sensors net sales. Any of theforegoing economic conditions may adversely affect our net sales and contract revenues in future periods and make it extremely difficult for our customers,our suppliers and us to accurately forecast and plan future business activities. Additionally, there continues to be uncertainty regarding allotment ofgovernment funds due to delays in the passage of a new Federal Highway Bill, which has adversely impacted, and may continue to adversely impact, our netsales and contract revenues and overall financial performance in future periods. The previous Federal Highway Bill expired in October 2009 but the fundinglevels under the previous bill have been continued through a series of short-term extensions, the most recent of which extends funding through the end ofJune 2012. If the conditions above continue or worsen, or delays in the passage of a new Federal Highway Bill continue, our business, financial condition andresults 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 net sales and contract revenues are derived fromcontracts with governmental agencies, either as a general contractor, subcontractor or supplier. We anticipate that revenue from government contracts willcontinue 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 and uncertainty regarding the allocation of funds to state and local agencies from the U.S. federal government as a resultof delays in the passage of a new Federal Highway Bill, as well as delays or reductions in other state and local funding dedicated fortransportation 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 number of our government contracts are fixed price contracts. As a result, we may not be able to recover any cost overruns we mayincur. 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. 7Table of Contents 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. The markets in which we operate are highly competitive and have many more established competitors, which could adversely affect ournet sales and contract revenues 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 and many smaller regional engineering firms. 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 market is highly fragmented and is subject to evolving national and regional quality and safety standards. Ourcompetitors vary in size, number, scope and breadth of the products and services they offer, and include large multi-national engineering firms and smallerlocal regional firms. In both 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. Consolidations of end users,distributors and manufacturers in our target markets exacerbate this problem. As a result of the foregoing factors, we may not be able to compete effectively inour 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. We have completed three acquisitions since April 2009and, in the future, we may acquire additional complementary businesses, products, and technologies. Acquisitions may require significant capital infusionsand, 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; 8Table of Contents · 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, as well as unanticipated accounting charges. 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 retainsufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current keyemployees 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 contract revenues are measured and recognized using the percentage of completionmethod of accounting. Our use of this accounting method results in recognition of revenues and profits ratably over the life of a contract, based generally onthe proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to revenues and estimated costs arerecorded when the amounts are known or can be reasonably estimated. Such revisions could occur in any period and their effects could be material. Althoughwe have historically made reasonably reliable estimates of the progress towards completion of long-term engineering, program management, constructionmanagement or construction contracts, the uncertainties inherent in the estimating process make it possible for actual costs to 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, financingare 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 9Table of Contents current economic climate, our future sales will likely be materially and adversely affected. Additionally, we rely heavily on select contract manufacturers toproduce many of our products and do not have any long-term contracts to guarantee supply of such products. Although we believe our contract manufacturershave sufficient capacity to meet our production schedules for the foreseeable future and we believe we could find alternative contract manufacturing sources formany of our products, if necessary, we could experience a production gap if for any reason our contract manufacturers were unable to meet our productionrequirements and our cost of goods sold could increase, adversely affecting our margins. 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. 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. 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. Our international business operations may be threatened by many factors that are outside of our control. While we historically have hadlimited international sales, contract revenues and operations experience, we began work on our first overseas contracts in the United Arab Emirates in the fiscalyear ended March 31, 2010. We plan to expand our international efforts in the future with respect to all of our segments, but cannot assure you that we will besuccessful 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. 10Table of Contents Any of the factors mentioned above may adversely affect our future international sales and contract revenues and, consequently, affect our business,financial condition and operating results. Additionally, as we pursue the expansion of our international business, certain fixed and other overhead costs couldoutpace our revenues, thus adversely affecting our results of operations. We may likewise face local competitors in certain international markets who are moreestablished, have greater economies of scale and stronger customer relationships. Furthermore, as we increase our international sales, our total revenues mayalso be affected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other partsof the world. 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, 2012, we are exempt from the auditor attestationrequirement over our internal control over financial reporting; however, to the extent we do not qualify as a non-accelerated filer or smaller reporting companyin subsequent fiscal years, we will be subject to the auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act. In such an event, we maynot be able to complete the work required for such attestation on a timely basis and, even if we timely complete such requirements, our independent registeredpublic accounting firm may still conclude 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 because of changes in conditions or deterioration in the degree of compliance with policies or procedures.Because of the inherent limitations in a cost-effective control 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; · 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 has varied and is expected to continue to vary from time to time; · seasonality due to winter weather conditions; · seasonality with respect to revenues from our MDSS and related weather forecasting services due to the decrease in revenues generated forsuch services during the spring and summer time periods; 11Table of Contents · 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, natural disasters such as the earthquake, tsunami and related events inJapan. 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. We experienced declining or flat net sales and contract revenues in recent years. If we fail to manage this decline effectively, we may beunable to execute our business plan and may experience future weaknesses in our operating results. Based on our business objectives, and in orderto achieve future growth, we will need to continue to add additional qualified personnel, and invest in additional research and development and sales andmarketing activities, which could lead to increases in our expenses and future declines in our operating results. In addition, our past expansion has placed,and future expansion is expected to place, a significant strain on our managerial, administrative, operational, financial and other resources. If we are unable tomanage these activities or any revenue declines successfully, our growth, our business, our financial condition and our results of operations could continue tobe 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. 12Table of Contents We may be subject to traffic related litigation. The traffic industry in general can be subject to litigation claims due to the nature of personalinjuries that result from traffic accidents. As a provider of traffic engineering services, products and solutions, we have been and could in the future besubject to litigation for traffic related accidents from time to time even if our products or services had nothing to do with the particular accident. While we carryinsurance against such claims, if the damages in any given action were high or we were subject to multiple lawsuits, the damages and costs could exceed thelimits of our insurance coverage. If we were required to pay substantial damages as a result of these lawsuits, it may harm our business and financialcondition. Even defending against unsuccessful claims could cause us to incur significant expenses and result in a diversion of management’s attention. 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; · 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. 13Table of Contents 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 common stock has traded at closing prices as low as $0.90 per share and as high as $2.98 per share. The market price of ourcommon 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. 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 newstockholder rights plan and declared a dividend of preferred stock purchase rights to our stockholders. Generally, the stockholder rights plan provides that ifa person or group acquires 15% or more of our common stock, subject to certain exceptions and under certain circumstances, the rights may be exchanged byus for common stock or the holders of the rights, other than the acquiring person or group, could acquire additional shares of our capital stock at a discountoff of the then current market price. Such exchanges or exercise of rights could cause substantial dilution to a particular acquirer and discourage the acquirerfrom pursuing 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. 14Table of Contents 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 9 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 9 of Notes to Consolidated Financial Statements,included in Part IV, Item 15 of this report, is incorporated herein by reference. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 15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 sales prices for our common stock as reported by NYSE Amex: HighLowFiscal 2012Quarter Ended June 30, 2011$1.58$1.22Quarter Ended September 30, 20111.350.90Quarter Ended December 31, 20111.391.08Quarter Ended March 31, 20121.581.31 Fiscal 2011Quarter Ended June 30, 2010$2.25$1.26Quarter Ended September 30, 20101.781.25Quarter Ended December 31, 20101.931.33Quarter Ended March 31, 20111.921.35 On June 1, 2012, the last reported sales price of our common stock on the NYSE Amex was $1.42. As of June 1, 2012, we had 425 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. Issuer Purchases of Equity Securities On August 22, 2011, our Board of Directors approved a stock repurchase program. Under the program, we may acquire up to $3 million of ouroutstanding common stock from time to time until August 2012. Purchases may be made in the open market (including pursuant to Rule 10b5-1 tradingplans), in privately negotiated transactions or in block purchases, depending on market conditions, share price and other factors. The table below details ourcommon stock repurchases during the fourth quarter of Fiscal 2012. All repurchased shares have been retired and resumed their status as authorized andunissued shares of our common stock. Issuer Purchases of Equity Securities PeriodTotal Numberof SharesPurchasedAveragePrice Paidper ShareTotal Number ofSharesPurchased asPart of PubliclyAnnounced Plansor ProgramsMaximum Number(or ApproximateDollar Value) ofShares that May YetBe Purchased Underthe Plans orProgramsJan 1 to Jan 31, 2012—$——Feb 1 to Feb 29, 2012239,2731.48239,273Mar 1 to Mar 31, 2012———Total239,273$1.48239,273$2,239,470 16Table of Contents 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 leading provider of intelligent information solutions to the traffic management market. We are focused on the development andapplication of advanced technologies and software-based information systems that reduce traffic congestion, provide measurement, management and predictivetraffic analytics and improve the safety of surface transportation systems infrastructure. Additionally, we believe that our products, services and solutions, inconjunction with sound traffic management, minimize the environmental impact of traffic congestion. By combining image processing, traffic engineering,information technology and other products and services, we offer a broad range of ITS solutions to customers worldwide. Acquisitions. In November 2011, we acquired all of the outstanding capital stock of Berkeley Transportation Systems, Inc. (“BTS”), a privately-held company based in Berkeley, California which specializes in transportation performance measurement. On or shortly after the acquisition date, we paid atotal of approximately $840,000 in cash. Additionally, we are scheduled to pay up to a total of $1.5 million within 36 months after the acquisition datepursuant to holdback, deferred payment and earn-out provisions. In January 2011, we acquired all of the capital stock of Meridian Environmental Technology, Inc. (“MET”) for an initial cash payment ofapproximately $1.6 million. MET specializes in 511 advanced traveler information systems and offers Maintenance Decision Support System (“MDSS”)management tools that allow users to create solutions to meet roadway maintenance decision needs. We also agreed to pay up to $1 million on each of the firsttwo anniversaries of the closing of the acquisition, as well as up to an additional $2 million under a 24-month earn-out provision. In January 2012, we made acash payment of approximately $668,000 of the first deferred payment to the shareholders of MET and held back $250,000 in accordance with certainprovisions of the purchase agreement. We expect the contingencies related to the $250,000 holdback to be resolved sometime in the first fiscal quarter of thefiscal year ending March 31, 2013, at which time we may or may not release the holdback. Additionally, no amounts were earned by the MET shareholdersrelated to the first year earn-out provision. In April 2009, we completed the acquisition of certain assets of Hamilton Signal, Inc., which included the Abacus system, for an aggregate purchaseprice of approximately $518,000 in cash. Refer to Note 4 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report, for additional discussion on theseacquisitions. Sale of Vehicle Sensors. On July 29, 2011, we completed the sale of substantially all of our assets used in connection with our Vehicle Sensorssegment to Bendix pursuant to an Asset Purchase Agreement signed on July 25, 2011 (the “Asset Sale”). Upon closing, Bendix paid us $14 million in cash,subject to a $2 million holdback and adjustments based upon the working capital of the Vehicle Sensors segment at closing, and Bendix assumed certainspecified obligations and liabilities of the Vehicle Sensors segment. We are entitled to additional consideration in the form of certain performance and royalty-related earn-outs. As a result of the Asset Sale, we no longer operate in the Vehicle Sensors segment. Refer to Note 3 of Notes to Consolidated FinancialStatements, included in Part IV, Item 15 of this report, for additional discussion on this transaction. Business Segments. Subsequent to the Asset Sale, we now operate in two reportable segments: Roadway Sensors and Transportation Systems. Roadway Sensors The Roadway Sensors segment includes, among other products, our Vantage, Versicam, Pico, Vantage Vector and Abacus vehicle detection systemsfor traffic intersection control, incident detection and certain highway traffic data collection applications. 17Table of Contents Transportation Systems The Transportation Systems segment includes transportation engineering and consulting services and the development of transportation managementand traveler information systems for the ITS industry. This segment includes the operations of MET, which specializes in 511 advanced traveler informationsystems and offers MDSS management tools that allow users to create solutions to meet roadway maintenance decision needs. Also included in this segmentare the operations of BTS, which specializes in transportation performance measurement. Business. Given the current ongoing uncertainties regarding global economic conditions, we continue to remain cautious about our overall business.We believe the overall ongoing unfavorable economic environment has negatively affected, and may continue to negatively affect, our financial results for theforeseeable future, and may impair our ability to accurately forecast our future financial performance and other business trends. In addition, since the endusers of a majority of our products and services are governmental entities, we have been, and may continue to be, negatively affected by the budgetary issuesand delays in purchasing decisions that many municipalities and other state and local agencies continue to face. Spending for new roadways, new systems toaddress traffic congestion and other transportation infrastructure improvements has been delayed or eliminated in some instances. However, we believe theneed to rebuild and modernize aging transportation infrastructure will continue, and in addition to funds available through recent federal stimulus packagesand federal highway bills, there exist various other funding mechanisms that support transportation infrastructure and related projects. These include bonds,dedicated sales and gas tax measures and other alternative funding sources. 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 collectability 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 circumstances, may not be met until receipt or acceptance by thecustomer. Accordingly, at the date 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 relative selling price hierarchy permitting the use of an estimated selling price to determine the allocation of arrangement consideration to adeliverable in a multiple-element arrangement where neither vendor specific objective evidence (“VSOE”) nor third-party evidence (“TPE”) of fair value isavailable for that deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements that have standalone value in a multiple-element arrangement, we are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated toeach element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE orTPE or are based 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 18Table of Contents 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 to recognizerevenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. 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. When appropriate, 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 measures. 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 contract revenues when their realization is reasonably assured. Under thepercentage of completion method, recognition of profit is dependent upon the accuracy of a variety of estimates, including engineering progress, materialsquantities, and achievement of milestones, incentives, penalty provisions, labor productivity, cost estimates and others. Such estimates are based on variousprofessional judgments we make with respect to those factors and are subject to change as the project proceeds and new information becomes available. Wehave a history of making reasonably dependable estimates of the extent of progress towards completion and contract completion costs on our long-termcontracts. However, due to uncertainties inherent in the estimation process, it is possible that actual completion costs may vary from our estimates. To theextent there are material differences between our estimates and our actual results, our future results of operations will be affected. 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. 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 incurredin 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 collectability 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 19Table of Contents products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable than those projected by management.In the event that actual demand is lower than originally projected, additional inventory write-downs may be required. Estimated inventory write-downs, onceestablished, are not reversed until the related inventory has been sold or scrapped, so if actual market conditions are more favorable in the fiscal periodssubsequent to those in which we record significant write-downs, we may have higher gross margins when products are sold. Goodwill and Other Long-Lived Assets. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisitionand the fair value of the acquired net tangible and intangible assets. Other long-lived assets primarily represent purchased intangible assets including developedtechnology, customer relationships, trade names and patents. We currently amortize our intangible assets with definitive lives over periods ranging from one toseven years using a method that reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used or, if that patterncannot be reliably determined, using a straight-line amortization method over the estimated useful life of the asset. We evaluate goodwill on an annual basis in our fourth fiscal quarter or more frequently if we believe indicators of impairment exist. We havedetermined that our reporting units for purposes of testing for goodwill impairment are identical to our reportable segments for financial reporting purposes. InFiscal 2012, we early adopted the new provisions issued by the Financial Accounting Standard Board (“FASB”) that are intended to simplify goodwillimpairment testing. This guidance permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reportingunit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, weconduct a two-step goodwill impairment test. The first step of the impairment test involves comparing the fair values of the applicable reporting units with theircarrying values. We determine the fair values of our reporting units using the income valuation approach, as well as other generally accepted valuationmethodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test.The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value ofthat goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. We test long-lived assets and purchased intangible assets (other than goodwill) for impairment if we believe indicators of impairment exist. Wedetermine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset areexpected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fairvalue. We primarily use the income valuation approach to determine the fair value of our long lived assets and purchased intangible assets. 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 consolidated balance sheets. Should our actual experience of warranty returns be higher thananticipated, additional warranty reserves may be required, which would adversely affect our product gross profit and our operating results. Income Taxes. We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on thetemporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which thebasis differences reverse. A valuation allowance is recorded when it is more-likely-than-not that some or all of the deferred tax assets will not be realized, whichincreases 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. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet themore-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized taxpositions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is nolonger met. 20Table of Contents 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 statements 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 option-pricing formula. While utilizing this model meets established requirements, the estimated fair values generated by it may not beindicative of the actual fair values of our common stock option awards as it does not consider certain factors important to those awards to employees, such ascontinued employment and periodic vesting requirements as well as limited transferability. The fair value of our restricted stock units is based on the closingmarket price of our common stock on the grant date. If there are any modifications or cancellations of the underlying unvested stock-based awards, we may berequired 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. 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. Year Ended March 31,201220112010 Net sales and contract revenues:Net sales47.4%54.3%49.0%Contract revenues52.645.751.0Total net sales and contract revenues100.0%100.0%100.0%Costs of net sales and contract revenues:Cost of net sales22.925.923.8Cost of contract revenues37.630.133.6Gross profit39.544.042.6Operating expenses:Selling, general and administrative30.832.730.4Research and development5.44.75.1Amortization of intangible assets0.90.30.2Change in fair value of contingent acquisition consideration(1.1)0.10.0Impairment of goodwill0.015.30.0Total operating expenses36.053.135.7Operating income (loss)3.5(9.1)6.9Non-operating income (expense):Other income, net0.00.00.1Interest expense, net(0.1)(0.3)(0.5)Income (loss) from continuing operations before income taxes3.4(9.4)6.5Provision for income taxes(1.1)(0.5)(1.9)Income (loss) from continuing operations2.3(9.9)4.6Gain on sale of discontinued operation, net of tax2.00.00.0Income (loss) from discontinued operation, net of tax0.0(0.1)(0.4)Net income (loss)4.3%(10.0)%4.2% 21Table of Contents Analysis of Fiscal 2012, Fiscal 2011 and Fiscal 2010 Results of Operations Net Sales and Contract Revenues. Net sales are comprised of sales from our Roadway Sensors segment. Contract revenues consist of revenuesfrom our Transportation Systems segment. The following tables present details of our net sales and contract revenues for Fiscal 2012 compared to Fiscal 2011, and Fiscal 2011 compared toFiscal 2010: Year Ended March 31,Increase%20122011(Decrease)Change(In thousands, except percentages)Net sales$27,679$28,208$(529)(1.9)%Contract revenues30,72723,7586,96929.3Total net sales and contract revenues$58,406$51,966$6,44012.4 Year Ended March 31,Increase%20112010(Decrease)Change(In thousands, except percentages)Net sales$28,208$25,341$2,86711.3%Contract revenues23,75826,413(2,655)(10.1)Total net sales and contract revenues$51,966$51,754$2120.4 We currently have a diverse customer base, and no individual customer represented greater than 10% of our total a net sales and contract revenues forFiscal 2012, Fiscal 2011 or Fiscal 2010. Net Sales Net sales of Roadway Sensors products in Fiscal 2012 were marginally lower compared to Fiscal 2011 due primarily to certain internationalcustomer orders in Fiscal 2011 which did not recur in the current year. We believe we continued to gain domestic market share in Fiscal 2012, mainly as aresult of new product introductions and other competitive advantages; however, our gains in market share were offset in part by lower prices due tocompetitive pressures. The increase in Roadway Sensors net sales in Fiscal 2011, as compared to Fiscal 2010, were driven by higher unit sales domesticallyfrom both our direct sales and dealer markets, which was offset in part by lower prices due to competitive pressures. We also saw particular strength, bothdomestically and internationally, in certain of our newer product lines which were introduced within the previous two fiscal years. Additionally, we believe wegained market share as a result of these new product introductions. Contract Revenues Our contract revenues are primarily dependent upon the continued availability of funding at the local, state and federal levels from the variousagencies and departments of transportation. Contract revenues in Fiscal 2012 increased compared to Fiscal 2011 in part due to several significant project winsin the last two quarters of Fiscal 2012. Additionally in Fiscal 2012, we recognized $5.1 million and $936,000 of total contract revenues derived from ouracquisitions of MET and BTS, respectively, which contributed to the overall increase. In Fiscal 2012, the Transportation System segment continued toexperience similar general lengthening of overall sales cycles, government budget constraints and funding delays and/or reductions on various existingcontracts that existed in Fiscal 2011. Our Transportation Systems contract revenues decreased in Fiscal 2011 compared to Fiscal 2010 primarily as a result ofthe ongoing 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 decline in our contract revenues. Our private planninggroup, which focuses on private development consulting, has likewise experienced particular weakness. Additionally, our Fiscal 2011 contract revenuesincluded approximately $1.5 million of revenues attributable to MET, which we acquired in January 2011. Going forward, we plan to continue to pursue larger contracts that may contain significant sub-consulting content, which will likely contribute tovariability in the timing and amount of our contract revenues and margins from period to period. We also intend to continue to expand our foreign operationsby pursuing additional international opportunities in the Middle East and other regions. Among other factors, we believe the ability of our TransportationSystems segment to grow and successfully win and service new contracts will be highly dependent upon our continued success in recruiting and retainingqualified personnel, as well as upon the passage of a new Federal Highway Bill and other government funding initiatives in the markets we serve. 22Table of Contents Gross Profit. The following tables present details of our gross profit for Fiscal 2012 compared to Fiscal 2011, and Fiscal 2011 compared to Fiscal2010: Year Ended March 31,%20122011IncreaseChange(In thousands, except percentages)Total gross profit$23,071$22,884$1870.8%Total gross profit as a % of total net sales andcontract revenues39.5%44.0%Gross profit as a % of net sales51.6%52.3%Gross profit as a % of contract revenues28.6%34.2% Year Ended March 31,%20112010IncreaseChange(In thousands, except percentages)Total gross profit$22,884$22,042$8423.8%Total gross profit as a % of total net sales andcontract revenues44.0%42.6%Gross profit as a % of net sales52.3%51.4%Gross profit as a % of contract revenues34.2%34.1% Our total gross profit as a percentage of total net sales and contract revenues decreased in Fiscal 2012 compared to Fiscal 2011 primarily as a resultof our product and service mix, whereby Transportation Systems consulting revenues (discussed below) significantly increased as percentage of the total. Ournet sales (derived from our Roadway Sensors segment) represented approximately 47% of our total net sales and contract revenues in Fiscal 2012 compared to54% in Fiscal 2011. Our net sales generally carry higher margins than our contract revenues, which are derived primarily from our consulting services. Ourtotal gross profit as a percent of total net sales and contract revenues increased in Fiscal 2011 compared to Fiscal 2010 primarily as a result of our product andservice mix. In Fiscal 2011, our net sales represented approximately 54% of our total net sales and contract revenues as compared to 49% in Fiscal 2010. The decrease in gross profit as a percent of net sales in Fiscal 2012 as compared to Fiscal 2011 was primarily a result of sales mix as well as certainmanufacturing overhead costs previously absorbed by sales of Vehicle Sensors products. The Vehicle Sensors segment was divested in July 2011. Our grossmargin on 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 shifts of engineering resources from development activities to sustainingactivities, which we record as cost of goods sold. The increase in gross margin on net sales in Fiscal 2011 as compared to Fiscal 2010 was primarily a result of higher overall net sales and highermargins in Roadway Sensors during Fiscal 2011. Such higher margins were largely driven by our customer mix and lower costs for certain key materials. Wegenerally enjoy higher gross margins on direct product sales as compared to sales throgh our dealer channel. We recognize contract revenues and related gross profit using percentage of completion contract accounting when appropriate, while certain of ourcontract revenues are recognized as services are performed and amounts are earned, which is measured by time incurred or other contractual milestones oroutput measures. Therefore, the underlying mix of contract activity can affect the related gross profit recognized in any given period. Gross profit as a percentof contract revenues in Fiscal 2012 was lower than in Fiscal 2011 primarily due to the overall mix of contract revenues which in the current year contained asignificant proportion of lower-margin sub-consulting content as well as lower margins stemming from seasonality due to the decrease in revenues from certainof our MDSS and weather forecasting services in the spring and summer time periods. Gross profit as percent of contract revenues in Fiscal 2011 were highlyconsistent with those of Fiscal 2010. We expect the variability and timing of contract mix and related sub-consulting content in our Transportation Systemssegment in future periods, as well as factors such as paid holidays and our ability to efficiently utilize our workforce, will cause fluctuations in our marginsfrom contract revenues from period to period. 23Table of Contents Selling, General and Administrative Expense The following table presents selling, general and administrative expense for Fiscal 2012 and Fiscal 2011: Year Ended March 31,20122011% of Net% of NetSales andSales andContractContractIncrease%AmountRevenuesAmountRevenues(Decrease)Change(In thousands, except percentages)Salary and personnel-related$12,43421.3%$11,95223.0%$4824.0%Facilities, insurance and supplies1,8533.21,3792.747434.4Travel and conferences1,5682.71,2052.336330.1Professional and outside services1,7783.02,1504.1(372)(17.3)Other3530.62950.65819.7Selling, general and administrative$17,98630.8%$16,98132.7%$1,0055.9 The increase in selling, general and administrative expenses in Fiscal 2012 as compared to Fiscal 2011 was primarily due to (i) higher salary, traveland headcount-related expenses as we added certain key sales and marketing personnel, (ii) added personnel as well as facilities and other related operatingcosts as a result of the MET and BTS acquisitions, (iii) legal and professional services related to the sale of our Vehicle Sensors segment and (iv) certain othercorporate initiatives related to the development of our performance measurement software. The following table presents selling, general and administrative expense for Fiscal 2011 and 2010: Year Ended March 31,20112010% of Net% of NetSales andSales andContractContractIncrease%AmountRevenuesAmountRevenues(Decrease)Change(In thousands, except percentages)Salary and personnel-related$11,95223.0%$10,49620.3%$1,45613.9%Facilities, insurance and supplies1,3792.71,3202.6594.5Travel and conferences1,2052.39081.829732.7Professional and outside services2,1504.12,2804.4(130)(5.7)Other2950.67061.4(411)(58.2)Selling, general and administrative$16,98132.7%$15,71030.5%$1,2718.1 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 segment, as total net sales increased approximately 11% from Fiscal 2010 levels, (ii) higher salary andheadcount-related expenses as we have added certain key sales and marketing personnel in all of our business segments, including as a result of theacquisition of MET in January 2011, and (iii) additional legal and professional services related to our acquisition of MET, along with various other corporateinitiatives. We also saw a shift from cost of sales to sales and marketing of certain of our headcount expenses in our Transportation Systems segment in Fiscal2011 commensurate with the overall decline in this segment’s revenues and the reallocation of existing personnel in an effort to expand our contract backlogand increase contract revenues. Additionally, during Fiscal 2011, we realized approximately $250,000 in reversals of certain previously recorded bad debtexpense (included in the “Other” category in the table above) as a result of collecting certain large accounts receivable balances. In prior periods, we hadrecorded an estimated allowance for doubtful accounts against these receivables given the uncertainty of collection at that time. In the future, our operatingresults in any given period may be favorably or adversely impacted as a result of our estimates of the realization of our accounts receivable. 24Table of Contents Research and Development Expense The following table presents research and development expense for Fiscal 2012 and Fiscal 2011: Year Ended March 31,20122011% of Net% of NetSales andSales andContractContractIncrease%AmountRevenuesAmountRevenues(Decrease)Change(In thousands, except percentages)Salary and personnel-related$2,1533.7%$1,7363.3%$41724.0%Facilities, development and supplies7921.35571.123542.2Other2380.41510.38757.6Research and development$3,1835.4%$2,4444.7%$73930.2 Research and development expenses for Fiscal 2012 were higher than Fiscal 2011 primarily due to (i) the allocation of additional resources to variousdevelopment projects in our Roadway Sensors segment, including our Vantage Vector vehicle detection sensor, (ii) development costs related to our IterisPeMSinformation management solution, and (iii) additional headcount and other expenses in Fiscal 2012 related to the MET and BTS acquisitions. The following table presents research and development expense for Fiscal 2011 and 2010: Year Ended March 31,20112010% of Net% of NetSales andSales andContractContractIncrease%AmountRevenuesAmountRevenues(Decrease)Change(In thousands, except percentages)Salary and personnel-related$1,7363.3%$1,8573.6%$(121)(6.5)%Facilities, development and supplies5571.16921.3(135)(19.5)Other1510.3960.25557.3Research and development$2,4444.7%$2,6455.1%$(201)(7.6) Research and development expenses for Fiscal 2011 were generally consistent, in total, with those of Fiscal 2010. We believe research anddevelopment activities are crucial to our ability to continue to be a leader in our markets. Impairment of Goodwill In Fiscal 2012, we early adopted the new provisions issued by the FASB that are intended to simplify goodwill impairment testing. The updatedguidance permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than itscarrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a two-stepgoodwill impairment test. We performed the annual impairment assessment of the carrying value of goodwill for Fiscal 2012 in the fourth fiscal quarter. Basedon our assessments, we determined that no impairment was indicated as the estimated fair value of each reporting unit exceeded its respective carrying value. During Fiscal 2011, due primarily to lower than expected operating results in our Transportation Systems reporting unit, as well as ongoingweakness specifically in the Transportation Systems markets, we determined it was necessary to perform an interim test of impairment of the carrying valueof goodwill in our Transportation Systems reporting unit as of December 31, 2010. In performing the first step in this analysis, we estimated the fair value ofour Transportation Systems reporting unit using the income approach. As of December 31, 2010, we determined that the carrying value of our TransportationSystems reporting unit exceeded its estimated fair value and, accordingly, we performed the second step of the impairment analysis to estimate the implied fairvalue of the goodwill of this reporting unit. 25Table 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, the third quarter of Fiscal 2011. As a result of the impairment charge taken in Fiscal 2011, we believe we have no goodwill at risk, as the estimated fair values of our RoadwaySensors and Transportations Systems reporting units significantly exceeded their carrying values at March 31, 2012. If our actual financial results, or theplans and estimates used in future goodwill impairment analyses, are lower than the original estimates used to assess for impairment of our goodwill, we couldincur future goodwill impairment charges. Interest Expense, Net Net interest expense was approximately $72,000, $152,000 and $264,000 in Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively. The sequentialdecreases were primarily due to our lower overall level of borrowings, as we continue to make monthly principal payments on our term note. See “Liquidityand Capital Resources” below for additional details on our borrowings. Income Taxes The following table presents our provision for income taxes for Fiscal 2012, Fiscal 2011 and Fiscal 2010: Year Ended March 31,201220112010(In thousands, except percentages) Provision for income taxes$643$278$960Effective tax rate33.0%-5.7%28.6% Our effective tax rate for Fiscal 2012 was favorably impacted by the recognition of approximately $276,000 of previously unrecognized tax benefitsduring the year due to the expiration of statutes limitation in various jurisdictions, by the recognition of tax credits of approximately $246,000 for research anddevelopment activities, and by approximately $211,000 of tax benefit from non-taxable favorable fair value adjustments recognized for financial statementpurposes. These favorable impacts were partially offset by the impact of recognizing approximately $466,000 of expense upon the expiration of a state netoperating loss, net of federal benefit. Our effective tax rate for Fiscal 2011 was impacted unfavorably by a portion of the charge recorded for the impairment ofgoodwill, amounting to approximately $2.2 million, for which there is no corresponding tax basis. This unfavorable impact was partially offset by the impactof the recognition of approximately $327,000 of previously unrecognized tax benefits during the year due to expiration of certain federal and state statutes invarious jurisdictions. Our effective tax rate for Fiscal 2010 was favorably impacted by the recognition of approximately $414,000 of unrecognized tax benefitsduring the year due to the expiration of certain federal and state statutes in various jurisdictions. As of March 31, 2012 and 2011, 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. 26Table of Contents At March 31, 2012, we had $25.0 million of federal net operating loss carryforwards and $10.9 million of state net operating loss carryforwardsthat begin to expire in 2021 and 2014, respectively. 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.Due to changes in stock ownership, our federal net operating loss carryforwards and other federal attributes are subject to a Section 382 annual limitation. 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, 2012, we had $28.4 million in working capital, which included no borrowings on our $12.0 million line of credit and $18.7 millionin cash and cash equivalents. This compares to working capital of $24.8 million at March 31, 2011, which included no borrowings on our line of credit and$11.8 million in cash and cash equivalents. The following table summarizes our cash flows for Fiscal 2012, Fiscal 2011 and Fiscal 2010: Year Ended March 31,201220112010(In thousands)Net cash provided by (used in):Operating activities$668$5,346$6,484Investing activities10,002(1,530)(594)Financing activities(3,787)(2,403)(1,857) Operating Activities. Cash provided by our operations in Fiscal 2012 was the result of (i) adding back to net income $907,000 of depreciationexpense, $331,000 of stock-based compensation expense, $504,000 of amortization expense and $286,000 of deferred tax assets, (ii) deducting from netincome $619,000 in changes in the fair value of contingent consideration related to our recent acquisition of MET and BTS and $1.2 million for the gain onsale of Vehicle Sensors and (iii) $2.1 million in negative cash flows resulting from changes in our operating assets and liabilities during Fiscal 2012, all ofwhich was partially offset by our net income of $2.5 million for such fiscal year. Our accounts receivable and net costs and estimated earnings in excess of billings increased approximately $3.0 million, or 22%, during Fiscal 2012mainly as a result of a 12% year-over-year increase in net sales and contract revenues as well as the timing of collection on certain receivables. In the future,our accounts receivable and net costs and estimated earnings in excess of billings accounts are likely to be determined based upon, among other factors,increases or decreases in net sales and contract revenues, the timing of collections of existing receivables and our ability to timely bill billings in excess of costsamounts. We try to offset significant increases in accounts receivables through increased and focused collection efforts; however, we cannot assure you thatour efforts will be successful. The increase in accounts payable by approximately $1.1 million during Fiscal 2012 was largely driven by the general timing of payments to vendorsand sub-consultants. Cash provided by our operations in Fiscal 2011 was the result of (i) $9.9 million in non-cash items within the statement of operations, 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 inpositive cash flows resulting from changes in our operating assets and liabilities during Fiscal 2011, all of which was partially offset by our net loss of $5.2million for such fiscal year. Our inventories increased approximately $953,000, or 35%, during Fiscal 2011 as we built up certain inventories on hand in Fiscal 2011 to meetanticipated increases in our product net sales in our the Roadway Sensors segment. In the future, our inventory levels are likely to continue 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 in their respective productlife cycles, and competitive situations in the marketplace. We attempt to balance such considerations against risk of obsolescence and potentially excessinventory levels. 27Table of Contents The increase in accounts payable by approximately $920,000 from March 31, 2010 to March 31, 2011 was primarily driven by our increasedinventory levels and 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. Investing Activities. Cash provided by our investing activities for Fiscal 2012 consisted of (i) $11.4 million in proceeds from the sale of the VehicleSensors segment, (ii) $1.0 million used for the acquisition of MET and BTS, which consisted of $840,000 for the initial purchase of BTS and $129,000related to purchase price adjustments for the purchase of MET, (iii) purchases of property and equipment of $337,000 and (iv) capitalized software of$138,000 related to IterisPeMS. Cash used in our investing activities for Fiscal 2011 consisted of $1.1 million used for the acquisition of MET andpurchases of property and equipment of $414,000. Our investing activities for Fiscal 2010 consisted of purchases of property and equipment of $294,000, aswell as $300,000 representing the initial payment for the acquisition of certain assets of Hamilton Signal, Inc. For further information on our acquisitions, referto Note 4 of Notes to Consolidated Financial Statements included in Part IV, Item 15 of this report. Financing Activities. Net cash used in our financing activities during Fiscal 2012 primarily consisted of $2.3 million in payments on our long-term debt, which consists of a bank term note, $112,000 for the second anniversary payment for the Hamilton Signal acquisition, $676,000 related to thefirst year deferred payment to MET and $754,000 used to repurchase our common stock under our stock repurchase program announced in August 2011.Net cash used in our financing activities during Fiscal 2011 primarily consisted of $2.4 million in payments on our term note and $106,000 for the firstanniversary payment for the Hamilton Signal acquisition. Net cash used in our financing activities during Fiscal 2010 consisted of net payments on our termnote of $2.0 million. The net payments on our term note during Fiscal 2010 were partially offset by $143,000 in proceeds received from the exercise in Fiscal2010 of outstanding stock options to purchase shares of our common stock. 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 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, 2012) 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, 2012, 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, 2012, we had outstanding borrowings of approximately $634,000 under our bank term note, which expires on May 1, 2013.Principal payments under this term note are required to be repaid in monthly installments of $152,000. 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 loan agreement. These additional principal payments effectively reduce the total number of monthly installments necessary to repay the termnote. To date, we have made additional principal payments of $500,000 on each of November 1, 2011, 2010 and 2009. Interest on the term note is payablemonthly 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 aggregate deposit balancesmaintained 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 ourrevolving line of credit discussed above, is secured by substantially all of our assets. We currently expect the remaining outstanding balance of the term notewill be paid off in full by June 30, 2012. 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. 28Table of Contents Off-Balance Sheet Arrangements Other than our operating leases, which are further described at Note 9 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, 2012. Seasonality We have historically experienced seasonality, particularly with respect to our Roadway Sensors net sales in our third and fourth fiscal quarters due toa reduction in road construction and repairs during the winter months due to inclement weather conditions. With the addition of MET in January 2011, wehave also experienced seasonality related to certain MDSS services in our first and second fiscal quarters mainly because these services are generally notrequired in the summer months. 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, 2012) 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. 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 fourth quarter ofFiscal 2012 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. 29Table 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 our 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, 2012. 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. Basedon our assessment, we believe that, as of March 31, 2012, 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 None. 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 2012 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 2012 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 2012 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 2012 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 2012 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 2012 Annual Meetingof Stockholders, is incorporated herein by reference. 30Table of Contents 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 2012 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 2012 Annual Meeting of Stockholders, is incorporated herein by reference. 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 2012Annual 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 Firm34Consolidated Balance Sheets as of March 31, 2012 and 201135Consolidated Statements of Operations for the fiscal years ended March 31, 2012, 2011 and 201036Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the fiscal years ended March 31, 2012,2011 and 201037Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2012, 2011 and 201038Notes to Consolidated Financial Statements39 2. Exhibits. The exhibits listed on the accompanying Exhibit Index immediately following the financial statements are filed as part of, or hereby incorporated byreference into, this report. 31Table 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 11, 2012ITERIS, INC.(Registrant) By/S/ ABBAS MOHADDESAbbas MohaddesChief Executive Officer(Principal Executive Officer) 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 11, 2012Abbas Mohaddes(principal executive officer) /s/ JAMES S. MIELEChief Financial OfficerJune 11, 2012James S. Miele(principal financial and accounting officer) /s/ GREGORY A. MINERChairman of the BoardJune 11, 2012Gregory A. Miner /s/ RICHARD CHARDirectorJune 11, 2012Richard Char /s/ KEVIN C. DALYDirectorJune 11, 2012Kevin C. Daly, Ph.D. /s/ JOEL SLUTZKYDirectorJune 11, 2012Joel Slutzky /s/ THOMAS L. THOMASDirectorJune 11, 2012Thomas L. Thomas /s/ MIKEL WILLIAMSDirectorJune 11, 2012Mikel Williams 3232Table of Contents Iteris, Inc. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm34 Consolidated Balance Sheets as of March 31, 2012 and 201135 Consolidated Statements of Operations for the fiscal years ended March 31, 2012, 2011 and 201036 Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the fiscal years ended March 31, 2012, 2011 and 201037 Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2012, 2011 and 201038 Notes to Consolidated Financial Statements39 33Table 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, 2012 and 2011, 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 31,2012. 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 audits 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, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended March 31,2012, in conformity with U.S. generally accepted accounting principles. /s/ McGladrey LLPIrvine, CaliforniaJune 11, 2012 34Table of Contents Iteris, Inc.Consolidated Balance Sheets(In thousands, except par value) March 31,20122011 AssetsCurrent assets:Cash and cash equivalents$18,701$11,818Trade accounts receivable, net of allowance for doubtful accounts of $379 and $385 at March 31, 2012and 2011, respectively11,0819,419Costs in excess of billings on uncompleted contracts5,3604,070Inventories2,4542,392Deferred income taxes2,9042,967Prepaid expenses and other current assets425392Assets of discontinued operation—7,672Total current assets40,92538,730Property and equipment, net1,9482,461Deferred income taxes6,76110,807Intangible assets, net2,5781,845Goodwill17,31816,522Other assets210203Total assets$69,740$70,568 Liabilities and stockholders’ equityCurrent liabilities:Trade accounts payable$4,044$2,985Accrued payroll and related expenses3,3983,523Accrued liabilities2,9423,181Billings in excess of costs and estimated earnings on uncompleted contracts1,5421,335Current portion of long-term debt6342,324Current liabilities of discontinued operation—611Total current liabilities12,56013,959Long-term debt—640Deferred rent7001,058Unrecognized tax benefits351587Other non-current liabilities6571,028Total liabilities14,26817,272Commitments 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, 2012 and 2011Issued and outstanding shares - 33,909 at March 31, 2012 and 34,364 at March 31, 20113,3913,436Additional paid-in capital137,645137,938Accumulated deficit(85,564)(88,078)Total stockholders’ equity55,47253,296Total liabilities and stockholders’ equity$69,740$70,568 See accompanying notes. 35Table of Contents Iteris, Inc.Consolidated Statements of Operations(In thousands, except per share amounts) Year Ended March 31,201220112010 Net sales and contract revenues:Net sales$27,679$28,208$25,341Contract revenues30,72723,75826,413Total net sales and contract revenues58,40651,96651,754Costs of net sales and contract revenues:Cost of net sales13,39313,44712,313Cost of contract revenues21,94215,63517,399Gross profit23,07122,88422,042Operating expenses:Selling, general and administrative17,98616,98115,709Research and development3,1832,4442,646Amortization of intangible assets504176113Change in fair value of contingent acquisition consideration(619)55—Impairment of goodwill—7,970—Total operating expenses21,05427,62618,468Operating income (loss)2,017(4,742)3,574Non-operating income (expense):Other income, net41844Interest expense, net(72)(152)(264)Income (loss) from continuing operations before income taxes1,949(4,876)3,354Provision for income taxes(643)(278)(960)Income (loss) from continuing operations1,306(5,154)2,394Gain on sale of discontinued operation, net of tax1,180——Income (loss) from discontinued operation, net of tax28(55)(191)Net income (loss)$2,514$(5,209)$2,203 Income (loss) per share from continuing operations - basic and diluted$0.04$(0.15)$0.07Gain per share from sale of discontinued operation - basic and diluted$0.03$0.00$0.00Income (loss) per share from discontinued operation - basic and diluted$0.00$0.00$(0.01)Net income (loss) per share - basic and diluted$0.07$(0.15)$0.06 Shares used in basic per share calculations34,25934,33534,249Shares used in diluted per share calculations34,38034,33534,435 See accompanying notes. 36Table of Contents Iteris, Inc.Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss)(In thousands) CommonAccumulatedAdditionalStockOtherTotalCommon StockPaid-InHeld inAccumulatedComprehensiveStockholders’SharesAmountCapitalTrustDeficitIncome (Loss)EquityBalance at March 31, 200934,205$3,420$136,997$(31)$(85,025)$(3)$55,358Cumulative effect of adoption of changein accounting for warrants————(47)—(47)Stock option exercises11312131———143Stock-based compensation——375———375Issuance of shares held in trust———31——31Components of comprehensive income: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, 201134,3643,436137,938—(88,078)—53,296Stock option exercises68877———85Stock-based compensation——331———331Issuance of shares pursuant to vestingof restricted stock units515(5)————Repurchases of common stock(574)(58)(696)———(754)Net income and comprehensive income————2,514—2,514Balance at March 31, 201233,909$3,391$137,645$—$(85,564)$—$55,472 See accompanying notes. 37Table of Contents Iteris, Inc.Consolidated Statements of Cash Flows(In thousands) Year Ended March 31,201220112010 Cash flows from operating activitiesNet income (loss)$2,514$(5,209)$2,203Adjustments to reconcile net income (loss) to net cash provided by operating activities:Deferred income taxes2862731,014Depreciation of property and equipment9071,030986Stock-based compensation331382375Impairment of goodwill—7,970—Amortization of intangible assets504222159Change in fair value of contingent acquisition consideration(619)55—Loss on disposal of equipment19—Gain on sale of Vehicle Sensors(1,180)——Changes in operating assets and liabilities, net of effects of acquisitions and sale ofVehicle Sensors:Accounts receivable(1,826)1,0521,137Net costs and estimated earnings in excess of billings(902)(501)917Inventories79(953)2,954Prepaid expenses and other assets284211(350)Accounts payable and accrued expenses289805(2,911)Net cash provided by operating activities6685,3466,484 Cash flows from investing activitiesPurchases of property and equipment(337)(414)(294)Capitalized software(138)——Net cash paid for acquisitions(969)(1,116)(300)Net proceeds from sale of Vehicle Sensors11,446——Net cash provided by (used in) investing activities10,002(1,530)(594) Cash flows from financing activitiesPayments on long-term debt(2,330)(2,354)(2,750)Borrowings on long-term debt——750Repurchases of common stock(754)——Deferred payment for prior business combinations(788)(106)—Proceeds from stock option exercises8557143Net cash used in financing activities(3,787)(2,403)(1,857)Increase in cash and cash equivalents6,8831,4134,033Cash and cash equivalents at beginning of year11,81810,4056,372Cash and cash equivalents at end of year$18,701$11,818$10,405 Supplemental cash flow information:Cash paid during the year for:Interest$111$200$306Income taxes439455159 Supplemental schedule of non-cash investing and financing activities:Liabilities incurred for business combinations$971$2,610$218Issuance of common stock for vested restricted stock units5——Fair value of common stock issued in settlement of liabilities——31 See accompanying notes. 38Table of Contents Iteris, Inc.Notes to Consolidated Financial StatementsMarch 31, 2012 1. Description of Business and Summary of Significant Accounting Policies Description of Business Iteris, Inc. (referred to collectively with our subsidiaries in these consolidated financial statements as “Iteris,” the “Company,” “we,” “our” and “us”)is a leading provider of intelligent information solutions to the traffic management market. We are focused on the development and application of advancedtechnologies and software-based information systems that reduce traffic congestion, provide measurement, management and predictive traffic analytics andimprove the safety of surface transportation systems infrastructure. We believe that our products, services and solutions, in conjunction with sound trafficmanagement, minimize the environmental impact of traffic congestion. By combining image processing, traffic engineering, information technology, and otherproducts and services, we offer a broad range of Intelligent Transportation Systems (“ITS”) solutions to customers worldwide. Iteris was originallyincorporated in Delaware in 1987. Basis of Presentation Our consolidated financial statements include the accounts of Iteris and our subsidiaries and have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated inconsolidation. The results of continuing operations for all periods presented in the consolidated financial statements exclude the financial impact of discontinuedoperations. See Note 3, “Sale of Vehicle Sensors”, for further discussion related to discontinued operations presentation. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires our management to make certain estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and reportedamounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in the preparationof the consolidated financial statements include the allowance for doubtful accounts, projections of taxable income used to assess realizability of deferred taxassets, inventory and warranty reserves, costs to complete long-term contracts, indirect cost rates used in cost-plus contracts, contract reserves, the valuationof purchased intangible asset and goodwill, the valuation of debt and equity instruments and estimates of future cash flows used to assess the recoverability oflong-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 relative selling price hierarchy permitting the use of an estimated selling price to determine the allocation of arrangement consideration to adeliverable in a multiple-element arrangement where neither vendor specific objective evidence (“VSOE”) nor third-party evidence (“TPE”) of fair value isavailable for that deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, we are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (bothdelivered and undelivered items) that has stand-alone value based on their relative selling prices, regardless of whether those selling prices are evidenced byVSOE or TPE or are based on our estimated selling prices. 39Table of Contents 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 undelivered elements is deferredand the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. Contract Revenues Contract revenues are derived primarily from long-term contracts with governmental agencies. When appropriate, contract revenues are recognizedusing the percentage of completion method of accounting, whereby revenue is recognized as contract performance progresses and is 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 contract revenues when their realization isreasonably assured. Certain of our contract revenues are recognized as services are performed and amounts are earned, which is measured by time incurred orother contractual milestones or output measures. Contract revenues accounted for in this manner generally relate to certain cost-plus fixed fee or time-and-materials contracts 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 will become billable according to contract terms, which usually require theconsideration of the passage of time, achievement of milestones or completion of the project. Such unbilled amounts are expected to be billed and collectedwithin the next twelve months. Costs in excess of billings on uncompleted contracts at March 31, 2012 and 2011 include approximately $944,000 and $400,000, respectively,which were not billable because certain milestone objectives specified in the contracts had not been attained. The costs and estimated earnings in excess ofbillings at March 31, 2012 are expected to be billed and collected during the fiscal year ending March 31, 2013. 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 unearned amounts are expected to be earnedwithin 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 contract closeout settlements. 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 are believed to have minimal credit risk. Our accounts receivable are primarily derived from billings with customers located throughout North America, as well as in Europe, Asia and SouthAmerica. We generally do not require collateral or other security from customers. We maintain an allowance for doubtful accounts for potential credit losses,which losses have historically been within management’s expectations. 40Table of Contents 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 We evaluate goodwill on an annual basis in our fourth fiscal quarter or more frequently if we believe indicators of impairment exist. We havedetermined that our reporting units for purposes of testing for goodwill impairment are identical to our reportable segments for financial reporting purposes. Inthe fiscal year ended March 31, 2012 (“Fiscal 2012”) we early adopted the new provisions issued by the Financial Accounting Standards Board (“FASB”)that are intended to simplify goodwill impairment testing. This guidance permits us to first assess qualitative factors to determine whether it is more likelythan not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reportingunit is less than its carrying amount, we conduct a two-step goodwill impairment test. The first step of the impairment test involves comparing the fair valuesof the applicable reporting units with their carrying values. We determine the fair values of our reporting units using the income valuation approach, as well asother generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second stepof the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’sgoodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognizedas an impairment loss. We performed an annual impairment assessment of the carrying value of goodwill for each of the fiscal years ended March 31, 2012,2011 and 2010. Based on these assessments, we determined that no impairment as of each of these dates was indicated as the estimated fair value of each ofour reporting units exceeded its respective carrying value. We monitor the indicators for goodwill impairment testing between annual tests. Certain adversebusiness conditions impacting one or more reporting units would cause us to test goodwill for impairment on an interim basis. Refer to Note 5 for additionaldiscussion regarding our interim goodwill impairment analyses during Fiscal 2012 and the fiscal year ended March 31, 2011 (“Fiscal 2011”). We test long-lived assets and purchased intangible assets (other than goodwill) for impairment if we believe indicators of impairment exist. Wedetermine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset areexpected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fairvalue. We primarily use the income valuation approach to determine the fair value of our long lived assets and purchased intangible assets. 41Table of Contents Income Taxes We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporarydifferences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basisdifferences reverse. A valuation allowance is recorded when it is more-likely-than-not that some or all of the deferred tax assets will not be realized, whichincreases our income tax expense in the period such determination is made. Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet themore-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized taxpositions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is nolonger met. Stock-Based Compensation We record stock-based compensation in the consolidated statement of operations as an expense, based on the estimated grant date fair value of ourstock-based awards, whereby such fair values are amortized over the requisite service period. Our stock-based awards are currently comprised of commonstock options and restricted stock units. The fair value of our common stock option awards is estimated on the grant date using the Black-Scholes-Merton(“BSM”) option-pricing formula. While utilizing this model meets established requirements, the estimated fair values generated by it may not be indicative ofthe actual fair values of our common stock option awards as it does not consider certain factors important to those awards to employees, such as continuedemployment and periodic vesting requirements as well as limited transferability. The fair value of our restricted stock units is based on the closing marketprice of our common stock on the grant date. If there are any modifications or cancellations of the underlying unvested stock-based awards, we may berequired to accelerate, increase or cancel any remaining unearned stock-based compensation expense. 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 $187,000, $224,000 and $153,000 in the fiscal years ended March 31, 2012, 2011and 2010, 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 customers sometimes carry longer warranties. Defective products will be either repaired or replaced, usually at ouroption, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as acomponent of cost of sales at the time revenue for that product is recognized. The accrued warranty reserve is included within accrued liabilities in theaccompanying consolidated balance sheets. Repair and Maintenance Costs We incur repair and maintenance costs in the normal course of business. Should the repair or maintenance result in a permanent improvement to oneof our leased facilities, the cost is capitalized as a leasehold improvement and amortized over its useful life or the remainder of the lease period, whichever isshorter. Non-permanent repair and maintenance costs are charged to expense as incurred. 42Table of Contents Recent Accounting Pronouncements In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurementand Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends Accounting Standards Codification 820, Fair ValueMeasurements. ASU 2011-04 aims to eliminate certain differences that existed between U.S. and international fair value accounting concepts, and alsoclarifies existing guidance under GAAP. Additionally, among other disclosures, this ASU requires certain new quantitative and qualitative disclosuresregarding unobservable fair value measurements. We will be required to adopt the amendments prescribed by ASU 2011-04 for our fiscal year endingMarch 31, 2013. We do not expect that the adoption of ASU 2011-04 will have a material impact on our consolidated financial statements. In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires thepresentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuousstatement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items thatare reclassified from other comprehensive income to net income in the statement where the components of net income and the components of othercomprehensive income are presented; however, in December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments tothe Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, whichdeferred this requirement, and the FASB plans to reconsider it during the first half of calendar 2012. The amendments prescribed by ASU 2011-05 arecurrently scheduled to become effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years,beginning after December 15, 2011. Early adoption is permitted. We do not expect that the adoption of ASU 2011-05 will have a material impact on ourconsolidated financial statements. In September 2011, the FASB issued ASU No. 2011-08, Testing for Goodwill Impairment (“ASU 2011-08”). With respect to performing theirrequired annual test for goodwill impairment, ASU 2011-08 gives companies the option to first perform a qualitative assessment to determine whether it ismore likely than not that the fair value of a reporting unit is less than its carrying amount. If a company concludes that this is the case, it must perform thetwo-step test in accordance with previously existing guidance. Otherwise, a company can skip the two-step test. ASU 2011-08 is effective for fiscal yearsbeginning after December 15, 2011. Early adoption is permitted and we chose to adopt ASU 2011-05 in Fiscal 2012, which did not result in a material impacton our consolidated financial statements. 2. Supplementary Financial Information Inventories The following table presents details regarding our inventories: March 31,20122011(In thousands)Materials and supplies$1,513$1,734Work in process9884Finished goods843574$2,454$2,392 Property and Equipment The following table presents details of our property and equipment: March 31,20122011(In thousands)Equipment$5,545$8,101Leasehold improvements1,9461,985Accumulated depreciation(5,543)(7,625)$1,948$2,461 43Table of Contents Intangible Assets The following table presents details regarding our intangible assets: March 31,20122011GrossCarryingAmountAccumulatedAmortizationGrossCarryingAmountAccumulatedAmortization(In thousands)Technology$1,856$(935)$1,566$(719)Customer contracts / relationships750(122)500(21)Other1,110(219)550(31)Capitalized software development costs138———Total$3,854$(1,276)$2,616$(771) Amortization expense for intangible assets subject to amortization was approximately $504,000, $176,000 and $113,000 for the fiscal years endedMarch 31, 2012, 2011 and 2010, respectively. In Fiscal 2012, we capitalized approximately $138,000 of internal costs incurred in developing software products to be sold. These costs related to theinternal development of our performance measurement software offerings. We do not have any intangible assets with indefinite useful lives. Future estimated amortization expense is as follows: Year Ending March 31,(In thousands)2013$6442014627201543120163602017378Thereafter—$2,440 Refer to Note 4 for additional information regarding intangible assets acquired during the last three fiscal years. If we acquire additional intangibleassets 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 Fiscal 2011 and Fiscal 2012: RoadwaySensorsTransportationSystemsTotal(In thousands)Balance - March 31, 2010Goodwill$8,214$14,906$23,120Accumulated impairment losses———8,21414,90623,120Acquisition of Meridian Environmental Technology,Inc. (Note 4)—1,3721,372Impairment loss—(7,970)(7,970) Balance - March 31, 2011Goodwill8,21416,27824,492Accumulated impairment losses—(7,970)(7,970)8,2148,30816,522Acquisition of Berkeley Transportation Systems, Inc.(Note 4)—796796 Balance - March 31, 2012Goodwill8,21417,07425,288Accumulated impairment losses—(7,970)(7,970)$8,214$9,104$17,318 44Table of Contents The measurement period adjustments in the table above are due primarily to certain income tax-related adjustments pertaining to our acquisition ofMeridian Environmental Technology, Inc. in January 2011 (see Note 4). Warranty Reserve Activity The following table presents activity with respect to the warranty reserve: Year Ended March 31,201220112010(In thousands)Balance at beginning of fiscal year$279$297$247Additions charged to cost of sales86137218Warranty claims(134)(155)(168)Balance at end of fiscal year$231$279$297 Earnings Per Share The following table sets forth the computation of basic and diluted income (loss) from continuing operations per share: Year Ended March 31,201220112010(In thousands, except per share amounts)Numerator:Income (loss) from continuing operations$1,306$(5,154)$2,394 Denominator:Weighted average common shares used in basic computation34,25934,33534,249Dilutive stock options96—185Dilutive restricted stock units25——Dilutive warrants——1Weighted average common shares used in diluted computation34,38034,33534,435 Income (loss) from continuing operations per share:Basic$0.04$(0.15)$0.07Diluted$0.04$(0.15)$0.07 The following instruments were excluded for purposes of calculating weighted average common share equivalents in the computation of dilutedincome (loss) from continuing operations per share as their effect would have been anti-dilutive: Year Ended March 31,201220112010(In thousands)Stock options1,8401,4671,790Restricted stock units—54—Warrants15272371 3. Sale of Vehicle Sensors On July 29, 2011, we completed the sale of substantially all of our assets used in connection with our Vehicle Sensors segment to BendixCommercial Vehicle Systems LLC (“Bendix”), a member of Knorr-Bremse Group, pursuant to an Asset Purchase Agreement (the “Agreement”) signed onJuly 25, 2011 (the “Asset Sale”). Under the terms of the Agreement, upon the closing of the Asset Sale, Bendix paid us $14 million in cash, subject to a $2 million holdback andadjustments based upon the working capital of the Vehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities of theVehicle Sensors segment. We are entitled to additional consideration in the form of the following performance and royalty-related earn-outs: Bendix is obligatedto pay us an amount in cash equal to (i) 85% of revenue 45Table of Contents associated with royalties received under our license and distribution agreements with Audiovox Electronics Corporation and Valeo Schalter and SensorenGmbH through December 31, 2017 and (ii) 30% of the amount, if any, by which the amount of revenue generated from the sale of our lane departure warningsystems exceeds Bendix’s projection for such revenue for the two years following closing, each subject to certain reductions and limitations set forth in theAgreement. Upon the closing of the Asset Sale and resolution of working capital adjustments (as described above), we recorded aggregate proceeds received ofapproximately $12.0 million. Legal and other professional fees of approximately $0.6 million that were directly related to the sale transaction were offsetagainst the proceeds to calculate net proceeds from the Asset Sale of approximately $11.4 million. The following table summarizes the assets and liabilities of the Vehicle Sensors segment as of the closing date of the Asset Sale (in thousands): Cash$105Accounts receivable1,850Inventories1,147Other current assets31Property and equipment, net133Goodwill4,671Total assets7,937Current liabilities(691)Net assets$7,246 In comparing the above net assets to the net proceeds received, we recorded a gain on the Asset Sale of $4.3 million, or $1.2 million after tax, in theaccompanying consolidated statements of operations for Fiscal 2012. The effective tax rate applicable to the gain was impacted by goodwill of $4.7 million forwhich there is no corresponding tax basis. We also recorded a gain on the sale of approximately $189,000, or $129,000 after tax, related to certainperformance and royalty-related earn-outs (as described above) that were achieved through December 31, 2011. In accordance with applicable accounting guidance, we determined that the Vehicle Sensors segment, which constituted one of our operatingsegments, qualified as a discontinued operation. The applicable financial results of the Vehicle Sensors segment have been reported as a discontinued operationin the consolidated statements of operations for all periods presented. For the fiscal years ended March 31, 2012, 2011 and 2010, Vehicle Sensors net salesclassified as part of discontinued operation was $3.2 million, $7.5 million and $6.3 million, respectively. We have elected not to allocate any interest expenseto the discontinued operation. Additionally, the applicable net assets of the Vehicle Sensors segment are separately presented as assets and liabilities ofdiscontinued operation in the accompanying consolidated balance sheet as of March 31, 2011. We entered into a short-term transitional services agreement with Bendix that terminated at the end of February 2012, pursuant to which we providedthem certain ongoing logistical and administrative support services. Bendix paid us a fixed monthly amount for such support services, and also paid us anhourly amount for providing certain development-related services during the transition period. 4. Acquisitions Berkeley Transportation Systems, Inc. In November 2011, we acquired all of the outstanding capital stock of Berkeley Transportation Systems, Inc. (“BTS”). BTS was a privately-heldcompany based in Berkeley, California, which specializes in transportation performance measurement. BTS’ Performance Measurement System leverages itsreal-time data collection, diagnostic, fusion and warehousing platform to aggregate and compute performance measures. This information is used to analyzehow a transportation system is performing based on pre-determined measures of effectiveness such as stops, delays and travel time. Our primary reasons forthe acquisition were to add key technologies to complement our iPerform solution and strengthen our performance measurement and management initiative as awhole. Our consolidated financial statements for Fiscal 2012 include the results of operations of BTS commencing as of the acquisition date. BTScontributed approximately $936,000 of Contract Revenues and approximately $38,000 of operating income since the acquisition date included in theconsolidated statement of operations for Fiscal 2012. On or shortly after the acquisition date, we paid a total of approximately $840,000 in cash to BTS.Additionally, we are also scheduled to pay (i) up to $250,000 at the 24-month anniversary of the closing of the acquisition, pursuant to a holdback provision,(ii) up to $500,000 at the 36-month anniversary of the closing of the acquisition, pursuant to a deferred payment provision, and (iii) up to $750,000 pursuantto an earn-out provision based on revenue and operating income achieved from BTS’ operations during the 18 months ending June 30, 2013. Our potentialobligation pertaining to the various contingent consideration payments ranges from zero to $1.5 million. Acquisition-related costs were not significant and areincluded in selling, general and administrative expenses in the accompanying consolidated statement of operations for Fiscal 2012. 46Table of Contents Acquisition Accounting We have accounted for the acquisition of BTS as a business combination in accordance with applicable accounting guidance. We measured the fairvalue of the consideration transferred (including contingent consideration) to determine the purchase price of the acquisition. We allocated the fair value ofconsideration transferred to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values at theacquisition date. The BTS acquisition is recorded as follows (in thousands): Fair value of consideration transferred:Cash paid on or shortly after acquisition date$840Estimated fair value of contingent consideration971Total1,811 Allocation:Accounts receivable(164)Other tangible assets(375)Purchased intangible assets(1,100)Liabilities624Goodwill$796 The excess of the fair value of the BTS 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 BTS’ assembled workforce, which is not a separatelyidentifiable intangible asset. 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 from BTS: EstimatedUseful LifeAmount(In years)(In thousands)Backlog3$330Technology6290Customer contracts / relationships6250Other purchased intangible assets5 - 7230$1,100 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. From the date of acquisition through the end of Fiscal2011, MET contributed approximately $1.5 million of Contract Revenues and approximately $77,000 of operating income included in the consolidatedstatement of operations for Fiscal 2011. Our consolidated financial statements for the fiscal years ended March 31, 2012 and 2011 include the results of operations of MET commencing asof the acquisition date. On or shortly after the acquisition date, we paid approximately $1.6 million in cash, exclusive of $369,000 of cash acquired. We alsoagreed to pay up to $1 million on each of the first two anniversaries of the acquisition date, subject to adjustments related to the retention of various keyemployees and certain other adjustments as further defined in the agreement. Additionally, we agreed to pay up to an additional $1 million per year for twoyears pursuant to an earn-out provision, based on revenue and operating income achieved from MET’s operations during the twelve months endingDecember 31, 2011 and 2012. Acquisition-related costs were not significant and are included in selling, general and administrative expenses in theaccompanying consolidated statement of operations for Fiscal 2011. In January 2012, we made a cash payment of approximately $676,000 related to the firstdeferred payment to the shareholders of MET and held back $250,000 in 47Table of Contents accordance with certain provisions of the purchase agreement. We expect the contingencies related to the hold-back to be resolved sometime in the first fiscalquarter of the fiscal year ending March 31, 2013 at which time we may or may not release the hold-back. No amounts were earned by the shareholders ofMET related to the first year earn-out provision. As a result of the first year deferred payment and that no amounts were earned related to the first year earn-outprovision, the potential outcomes pertaining to the remaining contingent consideration payments at March 31, 2012 range from zero to approximately $1.8million. Acquisition Accounting We have accounted for the acquisition of MET as a business combination in accordance with applicable accounting guidance. We measured the fairvalue of the consideration transferred (including contingent consideration) to determine the purchase price of the acquisition. We allocated the fair value ofconsideration transferred to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values at theacquisition date. 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(531)Property and equipment(682)Purchased intangible assets(1,620)Liabilities1,161Goodwill$1,372 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. 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 from MET: EstimatedUseful LifeAmount(In years)(In thousands)Technology6$570Customer contracts / relationships6500Other purchased intangible assets3 - 7550$1,620 48Table of Contents Supplemental Pro Forma Data (Unaudited) The unaudited pro forma data below presents selected details of our results of operations as if the acquisition of BTS had occurred on April 1, 2010(the beginning of Fiscal 2011). The following data includes the amortization of purchased intangible assets. This pro forma data is presented for informationalpurposes only and does not purport to be indicative of the results of future operations or the results that would have occurred had the acquisition taken placeon April 1, 2010. Year Ended March 31,20122011(In thousands, except per share data)Pro forma net sales and contract revenues$59,553$53,722Pro forma net income (loss)$2,383$(5,433)Pro forma net income (loss) per share - basic and diluted$0.07$(0.16) 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 integrate enhanced functionality into and complement our Roadway Sensorstechnologies. The total purchase consideration was approximately $518,000, of which we paid $300,000 in cash upon execution of the purchase agreement and ofwhich, pursuant to the purchase agreement, we paid $106,000 on the first anniversary of the acquisition date and $112,000 on the second anniversary of theacquisition date. Pursuant to the purchase agreement, the selling stockholder became an employee of Iteris and was eligible to receive compensation based onnet sales of certain products during the three-year period ended 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, 2012, 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. 5. 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. In Fiscal 2012, we early adopted the new provisions issued by the FASB that are intended to simplify goodwill impairment testing. The updatedguidance permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than itscarrying amount. If we conclude that it is more likely than not that the fair value of a reporting units is less than its carrying amount, we conduct a two-stepgoodwill impairment test. Based on our qualitative assessment for Fiscal 2012, we concluded that it is not more likely than not that the fair value of ourreporting units are less than their carrying amount and therefore, we did not perform a two-step goodwill impairment test. In Fiscal 2011, during the quarter ended December 31, 2010, due primarily to lower than expected operating results in our Transportation Systemsreporting unit, as well as ongoing weakness specifically in the Transportation Systems markets, we performed an interim test of impairment of the carryingvalue of goodwill in our Transportation Systems reporting unit as of December 31, 2010. In performing the first step in this analysis, we estimated the fairvalue of our Transportation Systems reporting unit using the income approach. As of December 31, 2010, we determined that the carrying value of ourTransportation Systems reporting unit exceeded its estimated fair value and, accordingly, we performed the second step of the impairment analysis to estimatethe 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. 49Table of Contents 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. 6. 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 our acquisitions of MET and BTS 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 Fiscal 2012 (inthousands): Balance at March 31, 2011$2,528Fair value of BTS contingent consideration assumed at acquisition date971Deferred payments made to MET shareholders(676)Change in fair value included in net income(619)Balance at March 31, 2012$2,204 The change in the estimated fair value of this liability during the current fiscal year resulted primarily from payments to the shareholders of METrelated to the first year deferred payment and revisions to our estimates regarding both the probability of achieving certain earn-out targets and the amounts ofcertain future deferred payments. The current portions of the liability at March 31, 2012 and 2011 were $1.6 million and $1.5 million, respectively, and were included withinaccrued liabilities in the accompanying consolidated balance sheets. The remaining non-current portions of the liability are included within non-currentliabilities in the accompanying consolidated balance sheets. 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, 2012. 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 4 and 5 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 years ended March 31, 2012 and 2011. 7. Revolving Line of Credit and Long-Term Debt Revolving Line of Credit In October 2008, we entered into a $19.5 million credit facility with California Bank & Trust (“CB&T”). This credit facility 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). Interest on borrowed amounts underthe revolving line of credit are payable monthly at a rate equal to the current stated prime rate (3.25% at March 31, 2012) up to the current stated prime rateplus 0.50%, depending on aggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. We are obligatedto pay 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 revolvingline of credit does not contain any early termination fees and is secured by substantially all of our assets. As of March 31, 2012, no amounts were borrowedunder 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. In September 2010, we entered into a modification agreement with CB&T to extend the expiration date of ourrevolving line of credit to October 1, 2012. 50Table of Contents Long-Term Debt — Bank Term Note As of March 31, 2012, we had outstanding borrowings of approximately $634,000 under the term note with our bank referenced above, whichexpires on May 1, 2013. Principal payments under this term note are required to be repaid in monthly installments of $152,000. 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, 2011, 2010 and 2009. Interest onthe term 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 onaggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. The term note contains no early terminationfees and, along with the revolving line of credit under the same credit agreement, is secured by substantially all of our assets. We currently expect theremaining outstanding balance of this term note will be repaid in full by June 2012. 8. Income Taxes: The reconciliation of our income tax provision (benefit) to taxes computed at U.S. federal statutory rates is as follows: Year Ended March 31,201220112010(In thousands)Income tax provision (benefit) at statutory rates$663$(1,658)$1,140State income taxes net of federal benefit562189192Impairment charges—2,044—Research credits(246)——Change in fair value of contingent acquisition consideration(211)——Compensation charges5994(12)Unrecognized tax benefits(276)(288)(362)Other92(103)2$643$278$960Provision for income taxes$643$278$960 The components of deferred tax assets and liabilities are as follows: March 31,20122011(In thousands)Deferred tax assets:Net operating losses$8,246$12,315Credit carry forwards773319Deferred compensation and payroll941823Bad debt allowance and other reserves433763Deferred rent435—Other, net300252Total deferred tax assets11,12814,472 Deferred tax liabilities:Property and equipment(517)(66)Deferred rent—(145)Acquired intangibles(754)(527)Goodwill(193)—Total deferred tax liabilities(1,464)(738)Net deferred tax assets$9,664$13,734 51Table of Contents The components of current and deferred federal and state income tax provisions and (benefits) are as follows: Year Ended March 31,201220112010(In thousands)Current income tax provision (benefit):Federal$(221)$(186)$(234)State208264127Deferred income tax provision (benefit):Federal12251903State644(51)164Net income tax provision (benefit)$643$278$960 At March 31, 2012, we had approximately $525,000 in federal alternative minimum tax credit carryforwards that can be carried forwardindefinitely. We had $25.0 million of federal net operating loss carryforwards at March 31, 2012 that begin to expire in 2021. We also had $10.9 million ofstate net operating loss carryforwards at March 31, 2012, of which $420,000 are scheduled to expire in 2014, $10.2 million are scheduled to expire in 2015and $298,000 are scheduled to expire in 2031. Due to changes in stock ownership, our federal net operating loss carryforwards of approximately $25.0 million as of March 31, 2012 and otherfederal attributes are subject to an annual limitation under Section 382 of the Internal Revenue Code. As of March 31, 2012, based on the cumulative amountof tax attributes that have become available under the limitation imposed by Section 382, all of our net operating losses are now fully available for use. Ourdeferred tax assets at March 31, 2012 do not include approximately $901,000 of excess tax benefits from employee stock option exercises that are a componentof our net operating loss carryforwards. If and when such excess tax benefits are realized, stockholders’ equity will be adjusted. As of March 31, 2012 and 2011, 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. Unrecognized Tax Benefits As of March 31, 2012 and 2011, our gross unrecognized tax benefits were $1.7 million and $1.9 million, respectively, of which $1.3 million and$1.5 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, 2012 and 2011, we had accruedcumulatively $56,000 and $45,000, respectively, for the payment of potential interest and penalties. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows: Year Ended March 31,201220112010(In thousands)Gross unrecognized tax benefits at beginning of year$1,941$2,153$2,525Increases for tax positions taken in prior years9712193Decreases for tax positions taken in prior years(10)(15)—Increases for tax positions taken in the current year2017—Decreases for tax positions taken in the current year——(51)Settlement with taxing authorities—(8)—Lapse in statute of limitations(356)(327)(414)Gross unrecognized tax benefits at March 31$1,692$1,941$2,153 We anticipate a decrease in gross unrecognized tax benefits of approximately $60,000 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, 2009 orlater, and state and local income tax examination for fiscal tax years ended March 31, 2008 or later. 52Table of Contents 9. 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). We have lease commitments for facilities in various locations throughout the U.S., as well as for certain equipment. Future minimum rentalpayments under these non-cancelable operating leases at March 31, 2012 were as follows: Year Ending March 31,(In thousands)2013$2,11120141,90520151,43020162802017175Thereafter339$6,240 Rent expense totaled $1.9 million for each of the fiscal years ended March 31, 2012, 2011 and 2010, 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 former Chief Executive Officer of MAXxess. Thesublease terminated in September 2007, at which time MAXxess owed us an aggregate of $274,000 related to this sublease and certain ancillary corporateservices that we provided to MAXxess. We have previously fully reserved for amounts owed to us by MAXxess under the terms of this sublease. InAugust 2009, MAXxess executed a promissory note payable to Iteris in the original principal amount of $274,000. The promissory note bears interest at a rateof 6% per annum, compounded annually, with accrued interest to be paid annually on the first business day of each calendar year. Payments under the notemay be made in bona fide services rendered by MAXxess to Iteris to the extent such services and amounts are pre-approved in writing by us. All amountsoutstanding under the note will become due and payable on the earliest of (i) August 10, 2014, (ii) a change of control in MAXxess, or (iii) a financing byMAXxess resulting in gross proceeds of at least $10 million. As of March 31, 2012, approximately $259,000 of the original principal balance is outstandingand payable to Iteris, all of which remains fully reserved. Inventory Purchase Commitments At March 31, 2012, we had firm commitments to purchase approximately $2.5 million of inventory, which are expected to occur primarily duringthe first and second quarters of our fiscal year ending March 31, 2013. 53Table of Contents 10. Stockholders’ Equity Preferred Stock Our certificate of incorporation provides for the issuance of up to 2,000,000 shares of preferred stock. Our Board of Directors is authorized to issuefrom time to time such authorized but unissued shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and anyqualifications, limitations or restrictions of the shares of each such series, including the dividend, conversion, voting, redemption and liquidation rights. Asof March 31, 2012 and 2011, there were no outstanding 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. Common Stock Warrants As of March 31, 2012, we had outstanding fully exercisable warrants to purchase 15,000 shares of our common stock. These warrants have anexercise price per share of $1.42 and a remaining contractual life of 1.4 years. There was no activity with respect to these or any other warrants during Fiscal2012. 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. By March 31, 2011, all such warrants had expired unexercised, and thus there was no remaining liability recorded on our consolidatedbalance sheet at that date or thereafter. We estimated the fair value of these warrants using the BSM option-pricing formula. The change in the estimated fairvalue of the warrants for the fiscal years ended March 31, 2011 and 2010 is included in “other income, net” in the accompanying consolidated statements ofoperations. Common Stock Reserved for Future Issuance The following summarizes common stock reserved for future issuance at March 31, 2012: Number of Shares(In thousands)Stock options outstanding2,493Restricted stock units outstanding235Authorized for future issuance under stock incentive plans335Warrants outstanding153,078 11. 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 54Table of Contents under the 2007 Plan. In September 2009, our stockholders approved an amendment to increase the number of shares of our common stock authorized andreserved for issuance under the 2007 Plan by 800,000 shares to a total of 1,650,000 shares. At March 31, 2012, there were approximately 335,000 shares ofcommon stock available for grant under this plan. As of March 31, 2012, options to purchase approximately 1,022,000 shares of common stock, as well as235,000 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, 2012, options to purchase approximately 1,061,000 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. In connection with our merger with our Iteris, Inc. subsidiary (the “Iteris Subsidiary”) in 2004, we assumed the 1998 Stock Incentive Plan (the“1998 Plan”) of the Iteris Subsidiary and all outstanding options granted thereunder. As of March 31, 2012, options to purchase approximately 410,000shares of our common stock were 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 Fiscal 2012 is as follows: OptionsWeightedAverageExercisePrice PerShareWeightedAverageRemainingContractualLifeAggregateIntrinsicValue(In thousands)(Years)(In thousands)Options outstanding at March 31, 20113,111$1.59Granted3151.13Exercised(68)1.24Forfeited(31)1.54Expired(834)1.30Options outstanding at March 31, 20122,493$1.643.8$393Options exercisable at March 31, 20121,986$1.732.5$267Vested and expected to vest at March 31, 20122,431$1.653.6$374Options exercisable at March 31, 2012 pursuant to achange-in-control2,493$1.643.8$393 Restricted Stock Units In August 2010, we began granting RSUs under the 2007 Plan to certain of our employees. RSUs awards are stock-based awards that entitle theholder to receive one share of our common stock for each RSU upon vesting. RSUs vest at the rate of 25% on each of the first four anniversaries of the grantdate provided that the holder remains in service (as defined by the 2007 Plan) as of the vesting date. The fair value per RSU is determined based on the closingmarket price of our common stock on the grant date. 55Table of Contents A summary of activity with respect to our RSUs for Fiscal 2012 is as follows: # of SharesWeightedAveragePrice PerShareWeightedAverageRemainingLifeAggregateIntrinsicValue(In thousands)(Years)(In thousands)RSUs outstanding at March 31, 2011214$1.48Granted1001.10Vested(51)1.48Forfeited(28)1.48RSUs outstanding at March 31, 2012235$1.322.8$40Expected to vest at March 31, 2012198$1.322.8$33Common stock issuable (for RSUs) atMarch 31, 2012 upon a change-in-control235$1.322.8$40 Stock-Based Compensation The following table presents stock-based compensation expense that is included in each functional line item in our consolidated statements ofoperations: Year Ended March 31,201220112010(In thousands)Cost of net sales$16$11$9Cost of contract revenues293639Selling, general and administrative expense249280288Research and development expense312521Income from discontinued operation, net of tax63018Total stock-based compensation$331$382$375 At March 31, 2012, there was approximately $475,000 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 2.5 years. If there are any modifications or cancellations of theunderlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to 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 31,201220112010Expected life - years7.07.07.0Risk-free interest rate1.6%2.1%3.2%Expected volatility of common stock52%58%74%Dividend yield—%—%—% A summary of certain fair value and intrinsic value information pertaining to our stock options is as follows: Year Ended March 31,201220112010(In thousands, except per share amounts)Weighted average grant date fair value per share of options granted$0.61$0.86$1.01Intrinsic value of options exercised$7$23$28 56Table of Contents Employee Incentive Programs Under the terms of a Profit Sharing Plan, we may contribute to a trust fund such amounts as determined annually by the Board of Directors. Nocontributions were made during the fiscal years ended March 31, 2012, 2011 and 2010. 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 under the 401(k) Plan were approximately $475,000, $491,000 and $220,000 for the fiscal yearsended March 31, 2012, 2011 and 2010, respectively. 12. Stock Repurchase Program In August 2011, our Board of Directors approved a stock repurchase program pursuant to which we may acquire up to $3 million of ouroutstanding common stock from time to time until August 2012. Under the program, we may repurchase shares in open-market and privately negotiatedtransactions and block trades and pursuant to a 10b5-1 trading plan during our closed trading windows. There is no guarantee as to the exact number ofshares that will be repurchased. We may modify, terminate or extend the repurchase program at any time without prior notice. From inception of this programthrough March 31, 2012, we repurchased approximately 573,558 shares of our common stock at an average price per share of $1.31. All repurchased shareshave been retired and resumed their status as authorized and unissued shares of our common stock. 13. Business Segments, Significant Customer and Geographic Information Business Segments As a result of the sale of substantially all of the assets used in connection with our Vehicle Sensors segment to Bendix in July 2011 (see Note 3),along with a reevaluation and reorganization of our operating segments in the first quarter of our fiscal year ended March 31, 2012, we now operate in tworeportable segments: Roadway Sensors and Transportation Systems. The Roadway Sensors segment includes, among other products, our Vantage, Versicam, Pico, Vantage Vector and Abacus vehicle detection systemsfor traffic intersection control, incident detection and certain highway traffic data collection applications. The Transportation Systems segment includes transportation engineering and consulting services and the development of transportation managementand traveler information systems for the ITS industry. This segment includes the operations of MET, which specializes in 511 advanced traveler informationsystems and offers Maintenance Decision Support System management tools that allow users to create solutions to meet roadway maintenance decision needs.Also included in this segment are the operations of BTS, which specializes in transportation performance measurement. 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. Unallocated corporate expenses in thecurrent fiscal year also include costs related to the sale of our Vehicle Sensors segment and certain other corporate initiatives, as well as costs related to ourrecently announced iPerform information management solution. The reportable segments are each managed separately because they manufacture and distributedistinct products or provide services with different processes. All reported segment revenues are derived from external customers. 57Table of Contents Selected financial information for our reportable segments for the fiscal years ended March 31, 2012, 2011 and 2010 is as follows: RoadwaySensorsTransportationSystemsTotal(In thousands)Year Ended March 31, 2012Product revenue$27,679$—$27,679Service and other revenue—30,72730,727Depreciation194393587Segment income2,8261,2844,110 Year Ended March 31, 2011Product revenue$28,208$—$28,208Service and other revenue—23,75823,758Depreciation217250467Impairment of goodwill—7,9707,970Segment income (loss)3,942(7,540)(3,598) Year Ended March 31, 2010Product revenue$25,341$—$25,341Service and other revenue—26,41326,413Depreciation234221455Segment income3,1581,4454,603 The following table reconciles total segment income (loss) to consolidated income (loss) from continuing operations before income taxes: Year Ended March 31,201220112010Segment income (loss):Total income (loss) from reportable segments$4,110$(3,598)$4,603Unallocated amounts:Corporate and other expenses(2,208)(913)(916)Amortization of intangible assets(504)(176)(113)Change in fair value of contingent acquisition consideration619(55)—Other income, net41844Interest expense, net(72)(152)(264)Income (loss) from continuing operations before income taxes$1,949$(4,876)$3,354 Fiscal 2012 corporate and other expense includes legal and accounting expenses related to the sale of the Vehicle Sensors segment in July 2011 as wellas certain other costs incurred in connection with the development of IterisPeMS and certain corporate general and administrative expenses allocated to theVehicle Sensors segment in prior fiscal years. 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, 2012, 2011and 2010. No individual customer or government agency had a receivable balance at March 31, 2012 or 2011 greater than 10% of our total trade accountsreceivable balances as of March 31, 2012 and 2011, respectively. 58Table of Contents 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 31,201220112010 Europe—%5%4%Asia152Other1322%13%8% Substantially all of our long-lived assets are held in the U.S. 14. 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, 2011$13,892$5,869$97$0.00$0.00September 30, 201114,3936,0051,3100.040.04December 31, 201114,8815,4647470.020.02March 31, 201215,2405,7333600.010.01$58,406$23,071$2,514$0.07*$0.07* June 30, 2010$13,905$6,257$7970.020.02September 30, 201012,4665,6755420.020.02December 31, 201011,9534,894(7,027)(0.20)(0.20)March 31, 201113,6426,0584790.010.01$51,966$22,884$(5,209)$(0.15)*$(0.15)* * 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. 59Table of Contents Exhibit Index ExhibitNumberDescriptionReference 2.1+Stock Purchase Agreement dated December 23, 2010 by andamong Iteris, Inc., Meridian Environmental Technology, Inc.,(“MET”) the shareholders of MET and Kathy J. Osborne as theShareholders RepresentativeExhibit 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 2.2+Asset Purchase Agreement by and between Iteris, Inc. andBendix Commercial Vehicle Systems LLC, dated as of July 25,2011Exhibit 2.1 to the registrant’s Current Report on Form 8-K/A asfiled with the SEC on November 1, 2011 3.1Restated Certificate of Incorporation of the registrantExhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q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 ParticipatingPreferred StockExhibit 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 registrantand Computershare Trust Company, N.A., which includes theform of Certificate of Designations for the Series A JuniorParticipating Preferred Stock, the form of Right Certificate, andSummary of Rights to Purchase Preferred Stock as exhibitstheretoExhibit 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 registrantand certain 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 60Table of Contents 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-Kfor the year ended March 31, 2005 as filed with the SEC on July14, 2005 10.4*Form of Notice of Grant of Stock Option for 1997 PlanExhibit 99.2 to the registrant’s Registration Statement on FormS-8 (File No. 333-30396) as filed with the SEC on February 14,2000 10.5*Form of Stock Option Agreement for the 1997 PlanExhibit 99.3 to the registrant’s Registration Statement on FormS-8 (File No. 333-30396) as filed with the SEC on February 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 on FormS-8 (File No. 333-30396) as filed with the SEC on February 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 on FormS-8 (File No. 333-30396) as filed with the SEC on February 14,20002000 10.8*Form of Stock Issuance Agreement for 1997 PlanExhibit 99.6 to the registrant’s Registration Statement on FormS-8 (File No. 333-30396) as filed with the SEC on February 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 on FormS-8 (File No. 333-30396) as filed with the SEC on February 14,2000 10.10*Form of Notice of Grant of Automatic Stock Option for 1997Plan—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 1997Plan—Annual GrantExhibit 99.9 to the registrant’s Registration Statement on FormS-8 (File No. 333-30396) as filed with the SEC on February 14,2000 10.12*Form of Automatic Stock Option Agreement for 1997 PlanExhibit 99.10 to the registrant’s Registration Statement on FormS-8 (File No. 333-30396) as filed with the SEC on February 19,2000 10.13*Iteris Inc. 1998 Stock Incentive Plan (as amended on February7, 2000) (“1998 Plan”)Exhibit 10.24 to the registrant’s Annual Report on Form 10-Kfor the year ended March 31, 2005 as filed with the SEC on July14, 2005 10.14*Form of Notice of Grant for 1998 Plan, including forms ofOption Agreement and Stock Purchase Agreement for thefollowing directors and executive officers: Gregory McKhann,James S. Miele and Abbas MohaddesExhibit 99.2 to the registrant’s Registration Statement on FormS-8 (File No. 333-126834) as filed with the SEC on July 22, 2005 10.15*Form of Addendum to Stock Option Agreement for 1998 PlanExhibit 99.3 to the registrant’s Registration Statement on FormS-8 (File No. 333-126834) as filed with the SEC on July 22, 2005 10.16*Form of 1997 Stock Option AgreementsExhibit 99.4 to the registrant’s Registration Statement on FormS-8 (File No. 333-126834) as filed with the SEC on July 22, 2005 61Table of Contents 10.17Sublease 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 10.18Office 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 10.19*2007 Omnibus Incentive PlanFiled herewith 10.20*Forms of Stock Option Agreements under the 2007 OmnibusIncentive PlanFiled herewith 10.21*Change in Control Agreement dated June 11, 2008 by andbetween James S. Miele and Iteris, Inc.Exhibit 10.42 to the registrant’s Annual Report on Form 10-Kfor the year ended March 31, 2008 as filed with the SEC on June12, 2008 10.22Amended and Restated Loan and Security Agreement datedFebruary 4, 2009 by and between California Bank & Trust andthe registrantExhibit 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 10.23Unsecured 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 10.24*Letter Agreement dated July 27, 2010 by and between theregistrant and 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 on Julyregistrant and Abbas Mohaddesfor the quarter ended June 30, 2010 as filed with the SEC on July28, 2010 10.25*Change in Control Agreement dated July 27, 2010 by andbetween the 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 on July28, 2010 62Table of Contents 10.26*Form 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 on July28, 2010 10.27Modification Agreement dated September 30, 2010 by andbetween Iteris, 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 Section302 of the Sarbanes-Oxley Act of 2002Filed herewith 31.2Certification of the Chief Financial Officer Pursuant to Section302 of the Sarbanes-Oxley Act of 2002Filed herewith 32.1Certification of the Chief Executive Officer Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002Filed herewith 32.2Certification of the Chief Financial Officer Pursuant to 18U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002Filed herewith 101.INS#XBRL Instance DocumentFiled herewith 101.SCH#XBRL Taxonomy Extension Schema DocumentFiled herewith 101.CAL#XBRL Taxonomy Extension Calculation Linkbase DocumentFiled herewith 101.LAB#XBRL Taxonomy Extension Label Linkbase DocumentFiled herewith 101.PRE#XBRL Taxonomy Extension Presentation Linkbase DocumentFiled herewith 101.DEF#XBRL Taxonomy Definition Presentation Linkbase DocumentFiled 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 of1934, as amended. In accordance with Rule 24b-2, these confidential portions have been omitted from the exhibit and filed separately with the SEC. # Pursuant to Rule 406T of Regulation S-T, these interactive data files i) are not deemed filed or part of a registration statement or prospectus for purposesof Sections 11 or 12 of the Securities Act of 1933, are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, irrespectiveof any general incorporation language included in any such filings, and otherwise are not subject to liability under these sections; and ii) are deemed tohave complied with Rule 405 of Regulation S-T (“Rule 405”) and are not subject to liability under the anti-fraud provisions of the Section 17(a)(1) of theSecurities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 or under any other liability provision if we have made a good faith attemptto comply with Rule 405 and, after we become aware that the interactive data files fail to comply with Rule 405, we promptly amend the interactive datafiles. 63Exhibit 10.19 ITERIS, INC. 2007 OMNIBUS INCENTIVE PLAN(amended and restated as of October 21, 2010) Table of Contents Section 1.Purpose1 Section 2.Definitions1 Section 3.Administration4(a)Power and Authority of the Committee4(b)Power and Authority of the Board5 Section 4.Shares Available for Awards5(a)Shares Available5(b)Accounting for Awards5(c)Adjustments5(d)Section 162(m) Award Limitations Under the Plan6 Section 5.Eligibility6 Section 6.Awards6(a)Options6(b)Stock Appreciation Rights8(c)Restricted Stock and Restricted Stock Units8(d)Performance Awards9(e)Dividend Equivalents9(f)Other Stock Grants9(g)Other Stock-Based Awards9(h)General10(i)Directors’ Automatic Option Grant Program11 Section 7.Amendment and Termination; Adjustments13(a)Amendments to the Plan13(b)Amendments to Awards14(c)Correction of Defects, Omissions and Inconsistencies14 Section 8.Income Tax Withholding14 Section 9.General Provisions14(a)No Rights to Awards14(b)Award Agreements14(c)Plan Provisions Control14(d)No Rights of Stockholders15(e)No Limit on Other Compensation Arrangements15(f)No Right to Employment15(g)Governing Law15(h)Severability15(i)No Trust or Fund Created16 ii (j)Other Benefits16(k)No Fractional Shares16(l)Headings16(m)Section 16 Compliance; Section 162(m) Administration16(n)Conditions Precedent to Issuance of Shares16 Section 10.Effective Date of the Plan17 Section 11.Term of the Plan17 iii ITERIS, INC.2007 OMNIBUS INCENTIVE PLAN(amended and restated as of October 21, 2010) Section 1. Purpose The purpose of the Plan is to promote the interests of the Company and its stockholders by aiding the Company in attracting and retainingemployees, officers, consultants, independent contractors, advisors and directors capable of assuring the future success of the Company, to offer suchpersons incentives to continue in the Company’s employ or service and to afford such persons an opportunity to acquire a proprietary interest, or otherwiseincrease their proprietary interest, in the Company. Section 2. Definitions As used in the Plan, the following terms shall have the meanings set forth below: (a) “Affiliate” shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and(ii) any entity in which the Company has a significant equity interest, in each case as determined by the Committee. (b) “Award” shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award, DividendEquivalent, Other Stock Grant or Other Stock-Based Award granted under the Plan. (c) “Award Agreement” shall mean any written agreement, contract or other instrument or document evidencing an Award granted under thePlan. Each Award Agreement shall be subject to the applicable terms and conditions of the Plan and any other terms and conditions (not inconsistent with thePlan) determined by the Committee. (d) “Board” shall mean the Board of Directors of the Company. (e) “Change in Control” shall mean a change in ownership or control of the Company effected through any of the following transactions: (i) amerger, consolidation or other reorganization unless securities representing more than 50% of the total combined voting power of the voting securities of thesuccessor corporation are immediately thereafter beneficially owned, directly or indirectly and in substantially the same proportion, by the persons whobeneficially owned the Company’s outstanding voting securities immediately prior to such transaction; (ii) a sale, transfer or other disposition of all orsubstantially all of the Company’s assets; or (iii) the acquisition, directly or indirectly, by any person or related group of persons (other than the Company ora person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning ofRule 13d-3 of the Exchange Act) of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuantto a tender or exchange offer made directly to the Company’s stockholders. (f) “Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder. (g) “Committee” shall mean one or more committees of Directors designated by the Board to administer the Plan, of which the Company’scompensation committee shall initially be the primary committee. The primary Committee shall be comprised of at least two Directors but not less than suchnumber of Directors as shall be required to permit Awards granted under the Plan to qualify under Rule 16b-3 and Section 162(m) of the Code, and eachmember of the primary Committee shall be a “Non-Employee Director” and an “Outside Director.” Any secondary Committee shall be comprised of atleast two Directors. (h) “Company” shall mean Iteris, Inc., a Delaware corporation, and any successor corporation. (i) “Director” shall mean a member of the Board, including any Non-Employee Director. (j) “Dividend Equivalent” shall mean any right granted under Section 6(e) of the Plan. (k) “Eligible Person” shall mean any employee, officer, consultant, independent contractor, advisor or director providing services to theCompany or any Affiliate who the Committee determines to be an Eligible Person. (l) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended. (m) “Fair Market Value” shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fairmarket value of such property determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding theforegoing and unless otherwise determined by the Committee, if the Shares are at the time listed on any stock exchange in the United States, the Fair MarketValue of a Share as of a given date shall be the closing sale price of one Share as reported on the principal United States exchange on which the Shares arelisted on the date as of which Fair Market Value is being determined, or, if there is no closing sales price for the Shares on the date in question, then the FairMarket Value shall be the closing sales price on the last preceding date for which such price exists. (n) “Incentive Stock Option” shall mean an option granted under Section 6(a) of the Plan that is intended to qualify as an “incentive stockoption” in accordance with the terms of Section 422 of the Code or any successor provision. (o) “Non-Employee Director” shall mean any Director who is not also an employee of the Company or an Affiliate within the meaning ofRule 16b-3. (p) “Non-Qualified Stock Option” shall mean an option granted under Section 6(a) of the Plan that is not an Incentive Stock Option. (q) “Option” shall mean an Incentive Stock Option or a Non-Qualified Stock Option. 2 (r) “Other Stock Grant” shall mean any right granted under Section 6(f) of the Plan. (s) “Other Stock-Based Award” shall mean any right granted under Section 6(g) of the Plan. (t) “Outside Director” shall mean any Director who is an “outside director” within the meaning of Section 162(m) of the Code. (u) “Participant” shall mean an Eligible Person designated to be granted an Award under the Plan. (v) “Performance Award” shall mean any right granted under Section 6(d) of the Plan. (w) “Performance Goal” shall mean one or more of the following performance goals, either individually, alternatively or in any combination,applied on a corporate, subsidiary or business unit basis: revenue, cash flow, gross profit, earnings before interest and taxes, earnings before interest, taxes,depreciation and amortization and net earnings, earnings per share, margins (including one or more of gross, operating and net income margins), returns(including one or more of return on assets, equity, investment, capital and revenue and total stockholder return), stock price, economic value added, workingcapital, market share, cost reductions, workforce satisfaction and diversity goals, employee retention, customer satisfaction, completion of key projects andstrategic plan development and implementation. Such goals may reflect absolute entity or business unit performance or a relative comparison to theperformance of a peer group of entities or other external measure of the selected performance criteria. Pursuant to rules and conditions adopted by theCommittee on or before the 90th day of the applicable performance period for which Performance Goals are established, the Committee may appropriatelyadjust any evaluation of performance under such goals to exclude the effect of certain events, including any of the following events: asset write-downs;litigation or claim judgments or settlements; changes in tax law, accounting principles or other such laws or provisions affecting reported results; severance,contract termination and other costs related to exiting certain business activities; and gains or losses from the disposition of businesses or assets or from theearly extinguishment of debt. (x) “Person” shall mean any individual or entity, including a corporation, partnership, limited liability company, association, joint venture ortrust. (y) “Plan” shall mean the Iteris, Inc. 2007 Omnibus Incentive Plan, as amended from time to time, the provisions of which are set forthherein. (z) “Qualified Performance Based Award” shall have the meaning set forth in Section 6(d) of the Plan. (aa) “Restricted Stock” shall mean any Share granted under Section 6(c) of the Plan. (bb) “Restricted Stock Unit” shall mean any unit granted under Section 6(c) of the Plan evidencing the right to receive a Share (or evidencingthe right to receive a cash payment equal to the Fair Market Value of a Share if explicitly so provided in the Award Agreement) at some future date. 3 (cc) “Rule 16b-3” shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act, or any successorrule or regulation. (dd) “Section 162(m)” shall mean Section 162(m) of the Code and the applicable Treasury Regulations promulgated thereunder. (ee) “Securities Act” shall mean the Securities Act of 1933, as amended. (ff) “Service” shall mean the performance of services for the Company (or any Affiliate) by a person in the capacity of an employee, a memberof the board of directors or a consultant, except to the extent otherwise specifically provided in the Award Agreement. (gg) “Share” or “Shares” shall mean a share or shares of common stock, $0.10 par value per share, of the Company or such other securities orproperty as may become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan. (hh) “Stock Appreciation Right” shall mean any right granted under Section 6(b) of the Plan. Section 3. Administration (a) Power and Authority of the Committee. The Plan shall be administered by the Board and the primary Committee. The Board maydesignate a secondary Committee to have concurrent authority to administer the Plan, provided that the secondary Committee shall not have any authority(i) with regard to grants of Options to be made to officers or directors of the Company or any Affiliate who are subject to Section 16 of the Exchange Act, (ii) insuch a manner as would cause the Plan not to comply with the requirements of Section 162(m) of the Code or (iii) in such a manner as would contraveneSection 157 of the Delaware General Corporation Law. Any Awards made to members of the Committee, however, should be authorized by a disinterestedmajority of the Board. Subject to the express provisions of the Plan and to applicable law, the Committee (or the Board, as applicable) shall have full powerand authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine thenumber of Shares to be covered by (or the method by which payments or other rights are to be determined in connection with) each Award; (iv) determine theterms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate theexercisability of any Option or waive any restrictions relating to any Award; (vi) determine whether, to what extent and under what circumstances Awards maybe exercised in cash, Shares, other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) interpret and administer the Plan andany instrument or agreement, including an Award Agreement, relating to the Plan; (viii) establish, amend, suspend or waive such rules and regulations andappoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action thatthe Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations,determinations, interpretations and other decisions under or with respect to the Plan or any Award or Award Agreement shall be within the sole discretion of theCommittee, may be made at any time and shall be final, conclusive and binding upon any Eligible Person and any holder or beneficiary of any Award. 4 (b) Power and Authority of the Board. Notwithstanding anything to the contrary contained herein, the Board may, at any time and from timeto time, without any further action of the Committee, exercise the powers and duties of the Committee under the Plan. Section 4. Shares Available for Awards (a) Shares Available. Subject to adjustment as provided in Section 4(c) of the Plan, the aggregate number of Shares that may be issued underthe Plan shall be One Million Six Hundred Fifty Thousand (1,650,000). Shares to be issued under the Plan may be either authorized but unissued Shares orShares re-acquired and held in treasury. Notwithstanding the foregoing, (x) the number of Shares available for granting Incentive Stock Options under thePlan shall not exceed One Million Six Hundred Fifty Thousand (1,650,000), subject to adjustment as provided in Section 4(c) of the Plan and subject to theprovisions of Section 422 or 424 of the Code or any successor provision and (y) the number of Shares available for granting Restricted Stock and RestrictedStock Units shall not exceed One Million Six Hundred Fifty Thousand (1,650,000), subject to adjustment as provided in Section 4(c) of the Plan. (b) Accounting for Awards. For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number ofShares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the aggregate number of Sharesavailable for granting Awards under the Plan. In addition, if any Shares covered by an Award or to which an Award relates are not purchased or are forfeited,or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available underthe Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan. (c) Adjustments. In the event any dividend or other distribution (whether in the form of cash, Shares, other securities or other property),recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares orother securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporatetransaction or event affects the Shares such that an adjustment is necessary in order to prevent dilution or enlargement of the benefits or potential benefitsintended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and typeof Shares (or other securities or other property) that thereafter may be made the subject of Awards, (ii) the number and type of Shares (or other securities orother property) subject to outstanding Awards, (iii) the purchase price or exercise price with respect to any Award and (iv) the limitations contained inSection 4(d) of the Plan; provided, however, that the number of Shares covered by any Award or to which such Award relates shall always be a wholenumber. 5 (d) Section 162(m) Award Limitations Under the Plan. Notwithstanding any other provision of the Plan other than Section 4(c), if theCommittee provides that this Section 4(d) is applicable to a particular Award, no Participant receiving such an Award shall be granted: (i) Options or SARswith respect to more than 500,000 Shares in the aggregate within any fiscal year of the Company; or (ii) Qualified Performance Based Awards which couldresult in such Participant receiving more than $1,500,000 in cash or the equivalent Fair Market Value of Shares determined at the date of grant for each full orpartial fiscal year of the Company contained in the performance period of a particular Qualified Performance Based Award; provided, however, that, if anyother Qualified Performance Based Awards are outstanding for such Participant for a given fiscal year, such dollar limitation shall be reduced for each suchgiven fiscal year by the amount that could be received by the Participant under all such Qualified Performance Based Awards, divided, for each suchQualified Performance Based Award, by the number of full or partial fiscal years of the Company contained in the performance period of each suchoutstanding Qualified Performance Based Award; provided, however, that the limitations set forth in this Section 4(d) shall be subject to adjustment underSection 4(c) of the Plan only to the extent that such adjustment does not affect the status of any Award intended under Section 6(d) to qualify as “performancebased compensation” under Section 162(m) of the Code. Section 5. Eligibility Any Eligible Person shall be eligible to be designated a Participant. In determining which Eligible Persons shall receive an Award and the terms ofany Award, the Committee may take into account the nature of the services rendered by the respective Eligible Persons, their present and potential contributionsto the success of the Company or such other factors as the Committee, in its discretion, shall deem relevant. Notwithstanding the foregoing, an IncentiveStock Option may only be granted to full-time or part-time employees (which term as used herein includes, without limitation, officers and directors who arealso employees), and an Incentive Stock Option shall not be granted to an employee of an Affiliate unless such Affiliate is also a “subsidiary corporation” ofthe Company within the meaning of Section 424(f) of the Code or any successor provision. Section 6. Awards (a) Options. The Committee is hereby authorized to grant Options to Eligible Persons with the following terms and conditions and with suchadditional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine: (i) Exercise Price. The purchase price per Share purchasable under an Option shall be determined by the Committee; provided,however, that such purchase price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option. (ii) Option Term. The term of each Option shall be fixed by the Committee at the time of grant, but shall not be longer than 10 yearsfrom the date of grant. 6 (iii) Time and Method of Exercise. The Committee shall determine the time or times at which an Option may be exercised in whole orin part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, other securities, other Awards orother property, or any combination thereof, having a Fair Market Value on the exercise date equal to the applicable exercise price) in which, paymentof the exercise price with respect thereto may be made or deemed to have been made. The Committee shall have the discretion to grant Options that areexercisable for unvested Shares. Should the Participant’s Service cease while the Shares issued upon the early exercise of the Participant’s Optionsare still unvested, the Company shall have the right to repurchase any or all of those unvested Shares at a price per share determined by theCommittee. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriatevesting schedule for the purchased shares) shall be established by the Committee and set forth in the Award Agreement. Any repurchases must bemade in compliance with the relevant provisions of Delaware law. (iv) Incentive Stock Options. Notwithstanding anything in the Plan to the contrary, the following additional provisions shall apply tothe grant of stock options which are intended to qualify as Incentive Stock Options: (A) The Committee will not grant Incentive Stock Options in which the aggregate Fair Market Value (determined as of thetime the option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Participantduring any calendar year (under this Plan and all other plans of the Company and its Affiliates) shall exceed $100,000. (B) All Incentive Stock Options must be granted within ten years from the earlier of the date on which this Plan was adoptedby the Board or the date this Plan was approved by the stockholders of the Company. (C) Unless sooner exercised, all Incentive Stock Options shall expire and no longer be exercisable no later than 10 years afterthe date of grant; provided, however, that in the case of a grant of an Incentive Stock Option to a Participant who, at the time such Optionis granted, owns (within the meaning of Section 422 of the Code) stock possessing more than 10% of the total combined voting power of allclasses of stock of the Company or of its Affiliate, such Incentive Stock Option shall expire and no longer be exercisable no later than 5years from the date of grant. (D) The purchase price per Share for an Incentive Stock Option shall be not less than 100% of the Fair Market Value of aShare on the date of grant of the Incentive Stock Option; provided, however, that, in the case of the grant of an Incentive Stock Option to aParticipant who, at the time such Option is granted, owns (within the meaning of Section 422 of the Code) stock possessing more than 10%of the total combined voting power of all classes of stock of the Company or of its Affiliate, the purchase price per Share purchasable underan Incentive Stock Option shall be not less than 110% of the Fair Market Value of a Share on the date of grant of the Inventive StockOption. 7 (E) Any Incentive Stock Option authorized under the Plan shall contain such other provisions as the Committee shall deemadvisable, but shall in all events be consistent with and contain all provisions required in order to qualify the Option as an Incentive StockOption. (b) Stock Appreciation Rights. The Committee is hereby authorized to grant Stock Appreciation Rights to Eligible Persons subject to the termsof the Plan and any applicable Award Agreement. Each Stock Appreciation Right granted under the Plan shall confer on the holder upon exercise the right toreceive a number of Shares equal to the excess of (a) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at anytime during a specified period before or after the date of exercise) over (b) the grant price of the Stock Appreciation Right as determined by the Committee,which grant price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the termsof the Plan, the grant price, term, methods of exercise, dates of exercise and any other terms and conditions (including conditions or restrictions on the exercisethereof) of any Stock Appreciation Right shall be as determined by the Committee. (c) Restricted Stock and Restricted Stock Units. The Committee is hereby authorized to grant Restricted Stock and Restricted Stock Units toEligible Persons with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as theCommittee shall determine: (i) Restrictions. Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee mayimpose (including, without limitation, a restriction on or prohibition against the right to receive any dividend or other right or property with respectthereto), which restrictions may lapse separately or in combination at such time or times, in such installments or otherwise as the Committee maydeem appropriate. (ii) Issuance of Shares. Any Restricted Stock granted under the Plan may be evidenced in such manner as the Board may deemappropriate, including book-entry registration or issuance of a stock certificate or certificates which certificate or certificates shall be held by theCompany. Such certificate or certificates shall be registered in the name of the Participant and shall bear an appropriate legend referring to therestrictions applicable to such Restricted Stock. (iii) Forfeiture. Except as otherwise determined by the Committee, upon a Participant’s termination of Service (as determined undercriteria established by the Committee) during the applicable restriction period, all Shares of Restricted Stock and Restricted Stock Units at such timesubject to restriction shall be forfeited and reacquired by the Company; provided, however, that the Committee may, when it finds that a waiverwould be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock orRestricted Stock Units. 8 (d) Performance Awards. The Committee is hereby authorized to grant Performance Awards to Eligible Persons subject to the terms of thePlan. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock andRestricted Stock Units), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or inpart, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan, theperformance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, theamount of any payment or transfer to be made pursuant to any Performance Award and any other terms and conditions of any Performance Award shall bedetermined by the Committee. From time to time, the Committee may designate an Award granted pursuant to the Plan as an award of “qualified performance-based compensation” within the meaning of Section 162(m) of the Code (a “Qualified Performance Based Award”). Qualified Performance Based Awardsshall, to the extent required by Section 162(m), be conditioned solely on the achievement of one or more objective Performance Goals, and such PerformanceGoals shall be established by the Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m). TheCommittee shall also certify in writing that such Performance Goals have been met prior to payment of the Qualified Performance Based Awards to the extentrequired by Section 162(m). (e) Dividend Equivalents. The Committee is hereby authorized to grant Dividend Equivalents to Eligible Persons under which the Participantshall be entitled to receive payments (in cash, Shares, other securities, other Awards or other property as determined in the discretion of the Committee)equivalent to the amount of cash dividends paid by the Company to holders of Shares with respect to a number of Shares determined by the Committee. Subject to the terms of the Plan, such Dividend Equivalents may have such terms and conditions as the Committee shall determine. (f) Other Stock Grants. The Committee is hereby authorized, subject to the terms of the Plan, to grant to Eligible Persons Shares withoutrestrictions thereon (“Other Stock Grants”) as are deemed by the Committee to be consistent with the purpose of the Plan. Subject to the terms of the Plan andany applicable Award Agreement, such Other Stock Grant may have such terms and conditions as the Committee shall determine. (g) Other Stock-Based Awards. The Committee is hereby authorized to grant to Eligible Persons, subject to the terms of the Plan, such otherAwards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, withoutlimitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan. Shares or other securitiesdelivered pursuant to a purchase right granted under this Section 6(g) shall be purchased for such consideration, which may be paid by such method ormethods and in such form or forms (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof),as the Committee shall determine, the value of which consideration, as established by the Committee, shall not be less than 100% of the Fair Market Value ofsuch Shares or other securities as of the date such purchase right is granted. 9 (h) General. (i) Consideration for Awards. Awards may be granted for no cash consideration or for any cash or other consideration as determinedby the Committee and required by applicable law. (ii) Awards May Be Granted Separately or Together. Awards may, in the discretion of the Committee, be granted either alone or inaddition to, in tandem with or in substitution for any other Award or any award granted under any plan of the Company or any Affiliate. Awardsgranted in addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any such other plan of the Companyor any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards. (iii) Forms of Payment under Awards. Subject to the terms of the Plan and of any applicable Award Agreement, payments ortransfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as theCommittee shall determine (including, without limitation, cash, Shares, other securities, other Awards or other property or any combination thereof),and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and proceduresestablished by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonableinterest on installment or deferred payments or the grant or crediting of Dividend Equivalents with respect to installment or deferred payments. (iv) Limits on Transfer of Awards. No Award (other than Other Stock Grants) and no right under any such Award shall betransferable by a Participant other than by will or by the laws of descent and distribution and the Company shall not be required to recognize anyattempted assignment of such rights by any Participant; provided, however, that, if so determined by the Committee, a Participant may, in themanner established by the Committee, designate a beneficiary or beneficiaries to exercise the rights of the Participant and receive any propertydistributable with respect to any Award upon the death of the Participant; provided, further, that, if so determined by the Committee, a Participantmay, at any time that such Participant holds such Option, transfer a Non-Qualified Stock Option to any “Family Member” (as such term is definedin the General Instructions to Form S-8, or any successor to such Instructions or such Form), or to an inter vivos or testamentary trust in whichFamily Members have a beneficial interest of more than 50% and which provides that such Option is to be transferred to the beneficiaries upon theParticipant’s death, provided that the Participant may not receive any consideration for such transfer, the Family Member may not make anysubsequent transfers other than by will or by the laws of descent and distribution and the Company receives written notice of such transfer,provided, further, that, if so determined by the Committee and except in the case of an Incentive Stock Option, Awards may be transferable asdetermined by the Committee. Except as otherwise determined by the Committee, each Award (other than an Incentive Stock Option) or right underany such Award shall be exercisable during the Participant’s lifetime only by the Participant or, if permissible under applicable law, by theParticipant’s guardian or legal representative. 10 Except as otherwise determined by the Committee, no Award (other than an Incentive Stock Option) or right under any such Award may be pledged,alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or other encumbrance thereof shall be void andunenforceable against the Company or any Affiliate. (v) Term of Awards. The term of each Award shall be fixed by the Committee at the time of grant, but shall not be longer than 10years from the date of grant. (vi) Restrictions; Securities Exchange Listing. All Shares or other securities delivered under the Plan pursuant to any Award or theexercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan, applicablefederal or state securities laws and regulatory requirements, and the Committee may direct appropriate stop transfer orders and cause other legends tobe placed on the certificates for such Shares or other securities to reflect such restrictions. If the Shares or other securities are traded on a securitiesexchange, the Company shall not be required to deliver any Shares or other securities covered by an Award unless and until such Shares or othersecurities have been and continue to be admitted for trading on such securities exchange. No Shares or other assets shall be issued or deliveredpursuant to the Plan unless and until there shall have been compliance with all applicable requirements of applicable securities laws, including thefiling and effectiveness of the Form S-8 registration statement for the Shares issuable pursuant to the Plan, and all applicable listing requirements ofany stock exchange or trading system on which Common Stock is then traded. No Shares shall be issued or delivered pursuant to the Plan if doingso would violate any internal policies of the Company. (vii) Prohibition on Repricing. Except as provided in Section 4(c) of the Plan, no Option or Stock Appreciation Right may be amendedto reduce its initial exercise or grant price and no Option or Stock Appreciation Right shall be canceled and replaced with Options or StockAppreciation Rights having a lower exercise or grant price, without the approval of the stockholders of the Company or unless there would be nomaterial adverse effect on the Company’s financial statements as prepared in accordance with generally accepted accounting principles in the UnitedStates. (i) Directors’ Automatic Option Grant Program. (i) Annual Grant. Beginning with the 2011 Annual Stockholders Meeting, each Non-Employee Director shall receive annually onthe date of each annual stockholders’ meeting a Non-Qualified Stock Option to purchase Ten Thousand (10,000) Shares, provided that such Non-Employee Director has served as a Non-Employee Director for at least six (6) months and is to continue to serve as a Non-Employee Director,whether or not he or she is standing for reelection at that particular Annual Meeting. The exercise price for the Shares shall be 100% of the FairMarket Value of the Shares on the date of grant. Each Option shall be exercisable immediately upon grant, shall be exercisable for ten (10) yearsfollowing the date of grant and shall be generally subject to the terms and conditions set forth in the Plan. Each such Option shall initially 11 be unvested and shall vest in full upon the Non-Employee Director’s completion of one (1) year of Board service measured from the grant date. There shall be no limit on the number of such automatic Option grants any one Non-Employee Director may receive over his or her period of Boardservice, and Non-Employee Directors who have previously been employees of the Company (or any Affiliate) or who have received one or moreOption grants from the Company prior to becoming a Non-Employee Director shall be eligible to receive one or more such automatic Option grantsover their period of continued Board service. (ii) Initial Grant. Upon appointment or initial election to the Board, each Non-Employee Director shall receive a Non-Qualified StockOption to purchase Twenty Thousand (20,000) Shares, provided such individual was not previously in the Company’s employ. The exercise pricefor such Shares shall be 100% of the Fair Market Value of the Shares on the date of grant. Each Option shall be exercisable immediately upon grant,shall be exercisable for 10 years following the date of grant and shall be generally subject to the terms and conditions set forth in the Plan. Each suchOption shall initially be unvested and shall vest in full upon the Non-Employee Director’s completion of one (1) year of Board service measured fromthe grant date. (iii) Termination of Board Service. The following provisions shall govern the exercise of any options granted to Non-EmployeeDirectors pursuant to the Automatic Option Grant Program that are outstanding at the time the Non-Employee Director ceases to serve as a Boardmember: (A) Should the Non-Employee Director’s service as a Board member cease for any reason while one or more Options grantedpursuant to this Automatic Option Grant Program are outstanding, then each such Option shall remain exercisable, for any or all of thevested Shares for which the Option is exercisable at the time of such cessation of Board service, until the earlier of (i) the termination date ofthe Option or (ii) the expiration of the one-year period measured from the date the Non-Employee Director’s Board service ceases. Upon theexpiration of the one-year post-termination exercise period, or (if earlier) upon the termination date of the Option, the Option shall terminatewith respect to any vested Shares for which the Option has not been exercised. (B) Should the Non-Employee Director cease to serve as a Board member by reason of death or Permanent Disability, thenall shares at the time subject to the Option granted pursuant to this Automatic Option Grant Program shall immediately vest so that suchOption may, during the twelve (12) month exercise period following such cessation of Board service, be exercised for all or any portion ofthose shares as fully vested shares of Common Stock. “Permanent Disability” for purposes of this section shall mean the inability of theNon-Employee Director to perform his or her usual duties as a Board member by reason of any medically determinable physical or mentalimpairment expected to result in death or to be of continuous duration of twelve (12) months or more. 12 (C) Each Option granted pursuant to this Automatic Option Grant Program that is outstanding at the time of the Non-Employee Director’s cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and allunvested Shares for which the Option is not otherwise at that time exercisable. (iv) Change in Control. In the event of a Change in Control effected during the Non-Employee Director’s period of Board service, thevesting, if any, of each Option granted pursuant to this Automatic Option Grant Program at the time held by such Non-Employee Director shallautomatically accelerate so that each such Option shall, immediately prior to the specified effective date for the Change in Control, become exercisablefor all of the Shares at the time subject to such Option and may be exercised for all or any portion of such Shares. Upon the consummation of theChange in Control, all Options granted pursuant to this Automatic Option Grant Program shall terminate and cease to be outstanding. (v) Remaining Terms. The remaining terms and conditions of each Option granted pursuant to this Automatic Option GrantProgram shall be substantially the same as the terms in effect for Options made under the Plan and shall be set forth in an Option Agreement. Section 7. Amendment and Termination; Adjustments (a) Amendments to the Plan. The Board may amend, alter, suspend, discontinue or terminate the Plan at any time; provided, however, that,notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the stockholders of the Company, no such amendment,alteration, suspension, discontinuation or termination shall be made that, absent such approval: (i) violates the rules or regulations of the Financial Industry Regulatory Authority, Inc. or any other regulatory organization orsecurities exchange that are applicable to the Company; (ii) causes the Company to be unable, under the Code, to grant Incentive Stock Options under the Plan; (iii) increases the number of shares authorized under the Plan as specified in Section 4(a); (iv) permits the award of Options or Stock Appreciation Rights at a price less than 100% of the Fair Market Value of a Share on thedate of grant of such Option or Stock Appreciation Right, as prohibited by Sections 6(a)(i) and 6(b) of the Plan or the repricing of Options or StockAppreciation Rights, as prohibited by Section 6(h)(vii) of the Plan; or (v) would prevent the grant of Options or Stock Appreciation Rights that would qualify under Section 162(m) of the Code. 13 (b) Amendments to Awards. The Committee may waive any conditions of or rights of the Company under any outstanding Award,prospectively or retroactively. Except as otherwise provided herein or in an Award Agreement, the Committee may not amend, alter, suspend, discontinue orterminate any outstanding Award, prospectively or retroactively, if such action would adversely affect the rights of the holder of such Award, without theconsent of the Participant or holder or beneficiary thereof. Notwithstanding the foregoing, the Committee shall not waive any conditions or rights of theCompany, or otherwise amend or alter any outstanding Qualified Performance Based Awards in such a manner as to cause such Award not to qualify asperformance based compensation within the meaning of Section 162(m) of the Code. (c) Correction of Defects, Omissions and Inconsistencies. The Committee may correct any defect, supply any omission or reconcile anyinconsistency in the Plan or in any Award or Award Agreement in the manner and to the extent it shall deem desirable to implement or maintain the effectivenessof the Plan. Section 8. Income Tax Withholding In order to comply with all applicable federal, state or local income tax laws or regulations, the Company may take such action as it deemsappropriate to ensure that all applicable federal, state or local payroll, withholding, income or other taxes, which are the sole and absolute responsibility of aParticipant, are withheld or collected from such Participant. In order to assist a Participant in paying all or a portion of the federal, state and local taxes to bewithheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additionalterms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of theShares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount ofsuch taxes or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Awardwith a Fair Market Value equal to the amount of such taxes. The election, if any, must be made on or before the date that the amount of tax to be withheld isdetermined. Section 9. General Provisions (a) No Rights to Awards. No Eligible Person or other Person shall have any claim to be granted any Award under the Plan, and there is noobligation for uniformity of treatment of Eligible Persons or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need notbe the same with respect to any Participant or with respect to different Participants. (b) Award Agreements. No Participant will have rights under an Award granted to such Participant unless and until an Award Agreement shallhave been duly executed on behalf of the Company and, if requested by the Company, signed by the Participant. (c) Plan Provisions Control. In the event that any provision of an Award Agreement conflicts with or is inconsistent in any respect with theterms of the Plan as set forth herein or subsequently amended, the terms of the Plan shall control. 14 (d) No Rights of Stockholders. Except with respect to Shares of Restricted Stock as to which the Participant has been granted the right to vote,neither a Participant nor the Participant’s legal representative shall be, or have any of the rights and privileges of, a stockholder of the Company with respect toany Shares issuable to such Participant upon the exercise or payment of any Award, in whole or in part, unless and until such Shares have been issued in thename of such Participant or such Participant’s legal representative without restrictions thereto. (e) No Limit on Other Compensation Arrangements. Nothing contained in the Plan shall prevent the Company or any Affiliate from adoptingor continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specificcases. (f) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ, or asgiving a director of the Company or an Affiliate the right to continue as a director or an Affiliate of the Company or any Affiliate, nor will it affect in any waythe right of the Company or an Affiliate to terminate a Participant’s employment or Service at any time, with or without cause. In addition, the Company or anAffiliate may at any time dismiss a Participant from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability orany claim under the Plan or any Award, unless otherwise expressly provided in the Plan or in any Award Agreement. Nothing in this Plan shall confer on anyperson any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against theCompany or an Affiliate. The Awards granted hereunder shall not form any part of the wages or salary of any Eligible Person for purposes of severance payor termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee ofthe Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Plan which such employee might otherwise haveenjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract orotherwise. By participating in the Plan, each Participant shall be deemed to have accepted all the conditions of the Plan and the terms and conditions of anyrules and regulations adopted by the Committee and shall be fully bound thereby. (g) Governing Law. The validity, construction and effect of the Plan or any Award, and any rules and regulations relating to the Plan or anyAward, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware. (h) Severability. If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in anyjurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemedamended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially alteringthe purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any suchAward shall remain in full force and effect. 15 (i) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or afiduciary relationship between the Company or any Affiliate and an Eligible Person or any other Person. To the extent that any Person acquires a right toreceive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor ofthe Company or any Affiliate. (j) Other Benefits. No compensation or benefit awarded to or realized by any Participant under the Plan shall be included for the purpose ofcomputing such Participant’s compensation under any compensation-based retirement, disability, or similar plan of the Company unless required by law orotherwise provided by such other plan. (k) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shalldetermine whether cash shall be paid in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated orotherwise eliminated. (l) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headingsshall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (m) Section 16 Compliance; Section 162(m) Administration. The Plan is intended to comply in all respects with Rule 16b-3 or any successorprovision, as in effect from time to time, and in all events the Plan shall be construed in accordance with the requirements of Rule 16b-3. If any Planprovision does not comply with Rule 16b-3 as hereafter amended or interpreted, the provision shall be deemed inoperative. The Board of Directors, in itsabsolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan with respect to persons who are officers ordirectors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Eligible Persons. With respectto Options and Stock Appreciation Rights, the Company intends to have the Plan administered in accordance with the requirements for the award of “qualifiedperformance-based compensation” within the meaning of Section 162(m) of the Code. (n) Conditions Precedent to Issuance of Shares. Shares shall not be issued pursuant to the exercise or payment of the purchase price relating toan Award unless such exercise or payment and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law,including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, the requirements of any applicable StockExchange and the Delaware General Corporation Law. As a condition to the exercise or payment of the purchase price relating to such Award, the Companymay require that the person exercising or paying the purchase price represent and warrant that the Shares are being purchased only for investment and withoutany present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation and warranty is required by law. 16 Section 10. Effective Date of the Plan The Plan became effective on September 21, 2007, the date of approval of the Plan by the Company’s stockholders. Section 11. Term of the Plan No Award shall be granted under the Plan after (i) July 19, 2017 or (ii) any earlier date of discontinuation or termination established pursuant toSection 7(a) of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted mayextend beyond such date, and the authority of the Committee provided for hereunder with respect to the Plan and any Awards, and the authority of the Board toamend the Plan, shall extend beyond the termination of the Plan. 17Exhibit 10.20 ITERIS, INC.INCENTIVE STOCK OPTION AGREEMENT This INCENTIVE STOCK OPTION AGREEMENT (the “Agreement”) is made this day of , , by and between Iteris, Inc.,a Delaware corporation (the “Company”), and , an individual resident of , (“Optionee”). Capitalized terms used but not otherwisedefined herein shall have the meaning ascribed to such terms in the Iteris, Inc. 2007 Omnibus Incentive Plan (the “Plan”). 1. Grant of Option. The Company hereby grants Optionee the option (the “Option”) to purchase all or any part of an aggregate of shares (the “Shares”) of common stock, $0.10 par value (“Common Stock”), of the Company at the exercise price of $ per share according to the termsand conditions set forth in this Agreement and in the Plan. The Option will be treated as an incentive stock option within the meaning of Section 422 of theInternal Revenue Code of 1986, as amended (the “Code”). The Option is issued under the Plan and is subject to its terms and conditions. A copy of the Planwill be furnished upon request of Optionee. The Option shall terminate at the close of business ten (10) years from the date hereof; provided, however, that if Optionee owns (within themeaning of Section 422 of the Code) as of the date hereof stock possessing more than 10% of the total combined voting power of all classes of stock of theCompany or of its Affiliates, the Option shall terminate at the close of business five (5) years from the date hereof. 2. Vesting of Option Rights. (a) Except as otherwise provided in this Agreement, the Option may be exercised by Optionee in accordance with the following schedule: On or after each ofthe following datesNumber of Shareswith respect to whichthe Option is exercisable (b) During the lifetime of Optionee, the Option shall be exercisable only by Optionee and shall not be assignable or transferable by Optionee,other than by will or the laws of descent and distribution. (c) Optionee understands that to the extent that the aggregate fair market value (determined at the time the option was granted) of the shares ofCommon Stock of the Company with respect to which all options that are incentive stock options within the meaning of Section 422 of the Code areexercisable for the first time by Optionee during any calendar year exceed $100,000, in accordance with Section 422(d) of the Code, such options shall betreated as options that do not qualify as incentive stock options. 3. Exercise of Option after Death or Termination of Employment or Service. The Option shall terminate and may no longer be exercised ifOptionee ceases to be employed by or provide Service to the Company or its Affiliates, except that: (a) If Optionee’s employment shall be terminated for any reason, voluntary or involuntary, other than for “Cause” (as defined inSection 3(e)) or Optionee’s death or disability (within the meaning of Section 22(e)(3) of the Code), Optionee may at any time within a period of 3months after such termination exercise the Option to the extent the Option was exercisable by Optionee on the date of the termination of Optionee’semployment. (b) If Optionee’s employment is terminated for Cause, the Option shall be terminated as of the date of the act giving rise to suchtermination. (c) If Optionee shall die while the Option is still exercisable according to its terms or if employment is terminated because Optioneehas become disabled (within the meaning of Section 22(e)(3) of the Code) while in the employ of the Company and Optionee shall not have fullyexercised the Option, such Option may be exercised at any time within 12 months after Optionee’s death or date of termination of employment fordisability by Optionee, personal representatives or administrators or guardians of Optionee, as applicable or by any person or persons to whom theOption is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of Shares Optionee was entitled topurchase under the Option on (i) the earlier of the date of death or termination of employment or (ii) the date of termination for such disability, asapplicable. (d) Notwithstanding the above, in no case may the Option be exercised to any extent by anyone after the termination date of theOption. (e) “Cause” shall mean shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee, anyunauthorized use or disclosure by such person of confidential information or trade secrets of the Company (or any Affiliate), or any other intentionalmisconduct by such person adversely affecting the business or affairs of the Company (or any Affiliate) in a material manner. The foregoingdefinition shall not be deemed to be inclusive of all the acts or omissions which the Company (or any Affiliate) may consider as grounds for thedismissal or discharge of any Optionee in the Service of the Company (or any Affiliate). However, if the term or concept has been defined in anemployment agreement between the Company and Optionee, then Cause shall have the definition set forth in such employment agreement. Forpurposes of this paragraph, no action or failure to act on Optionee’s part shall be considered “willful” unless done or omitted to be done, by Optioneein bad faith and without reasonable belief that his or her action or omission was in the best interests of the Company. 2 4. Method of Exercise of Option. Subject to the foregoing, the Option may be exercised in whole or in part from time to time by servingwritten notice of exercise on the Company at its principal office within the Option period. The notice shall state the number of Shares as to which the Option isbeing exercised and shall be accompanied by payment of the exercise price. Payment of the exercise price shall be made (i) in cash (including bank check,personal check or money order payable to the Company), (ii) with the approval of the Company (which may be given in its sole discretion), by delivering tothe Company for cancellation shares of the Company’s Common Stock already owned by Optionee having a Fair Market Value equal to the full exercise priceof the Shares being acquired, (iii) with the approval of the Company (which may be given in its sole discretion) and subject to Section 402 of the Sarbanes-Oxley Act of 2002, by delivering to the Company the full exercise price of the Shares being acquired in a combination of cash and Optionee’s full recourseliability promissory note with a principal amount not to exceed eighty percent (80%) of the exercise price and a term not to exceed five (5) years, whichpromissory note shall provide for interest on the unpaid balance thereof which at all times is not less than the minimum rate required to avoid the imputation ofincome, original issue discount or a below-market rate loan pursuant to Sections 483, 1274 or 7872 of the Code or any successor provisions thereto,(iv) subject to Section 402 of the Sarbanes-Oxley Act of 2002, to the extent this Option is exercised for vested shares, through a special sale and remittanceprocedure pursuant to which Optionee shall concurrently provide irrevocable instructions (1) to Optionee’s brokerage firm to effect the immediate sale of thepurchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise pricepayable for the purchased Shares plus all applicable income and employment taxes required to be withheld by the Company by reason of such exercise and(2) to the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale, or (v) with the approval ofthe Company (which may be given in its sole discretion) and subject to Section 402 of the Sarbanes-Oxley Act of 2002, by delivering to the Company acombination of any of the forms of payment described above. This Option may be exercised only with respect to full shares and no fractional share of stockshall be issued. 5. Change in Control. (a) Immediately prior to the effective date of a “Change in Control” (as defined in Section 5(e)), this Option shall vest and become exercisablefor all of the Shares and may be exercised for any or all of those Shares. However, this Option shall not vest and become exercisable on an accelerated basis ifand to the extent: (i) this Option is to be assumed by the successor corporation (or parent thereof) or is otherwise to be continued in full force and effectpursuant to the terms of the Change in Control transaction or (ii) this Option is to be replaced with a cash incentive program of the successor corporationwhich preserves the spread existing at the time of the Change in Control on the Shares for which this Option is not otherwise at that time exercisable (the excessof the Fair Market Value of those Shares over the aggregate exercise price payable for such Shares) and provides for subsequent payout of that spread no laterthan the time this Option would have vested and become exercisable for those Shares. (b) Immediately following the consummation of the Change in Control, this Option shall terminate, except to the extent assumed by thesuccessor corporation (or parent thereof) or otherwise continued in effect pursuant to the terms of the Change in Control transaction. 3 (c) If this Option is assumed or otherwise continued in effect in connection with a Change in Control, then this Option shall be appropriatelyadjusted, upon such Change in Control, to apply to the number and class of securities which would have been issuable to Optionee in consummation of suchChange in Control had this Option been exercised immediately prior to such Change in Control, and appropriate adjustments shall also be made to the exerciseprice, provided the aggregate exercise price shall remain the same. To the extent that the holders of Common Stock receive cash consideration for theirCommon Stock in consummation of the Change in Control, the successor corporation (or its parent) may, in connection with the assumption of this Option,substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in suchChange in Control. (d) This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise change its capital orbusiness structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. (e) For purposes of this Agreement, “Change in Control” shall mean a change in ownership or control of the Company effected through anyof the following transactions: (i) a merger, consolidation or other reorganization unless securities representing more than 50% of the total combined votingpower of the voting securities of the successor corporation are immediately thereafter beneficially owned, directly or indirectly and in substantially the sameproportion, by the persons who beneficially owned the Company’s outstanding voting securities immediately prior to such transaction; (ii) a sale, transfer orother disposition of all or substantially all of the Company’s assets; or (iii) the acquisition, directly or indirectly, by any person or related group of persons(other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficialownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than 50% of the total combined voting power of theCompany’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders. 6. Capital Adjustments and Reorganization. Should any change be made to the Common Stock by reason of any stock split, reverse stocksplit, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class withoutthe Company’s receipt of consideration, appropriate adjustments shall be made to (a) the number and/or class of securities subject to this Option and (b) theexercise price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 7. Miscellaneous. (a) Entire Agreement; Plan Provisions Control. This Agreement (and any addendum hereto) and the Plan constitute the entire agreementbetween the parties hereto with regard to the subject matter hereof. In the event that any provision of the Agreement conflicts with or is inconsistent in anyrespect with the terms of the Plan, the terms of the Plan shall control. All decisions of the Committee with respect to any question or issue arising under thePlan or this Agreement shall be and binding on all persons having an interest in this Option. All capitalized terms used in this Agreement and not otherwisedefined in this Agreement shall have the meaning assigned to them in the Plan. 4 (b) No Rights of Stockholders. Neither Optionee, Optionee’s legal representative nor a permissible assignee of this Option shall have any ofthe rights and privileges of a stockholder of the Company with respect to the Shares, unless and until such Shares have been issued in the name of Optionee,Optionee’s legal representative or permissible assignee, as applicable, without restrictions thereto. (c) No Right to Employment. The grant of the Option shall not be construed as giving Optionee the right to be retained in the employ of, or ifOptionee is a director of the Company or an Affiliate as giving the Optionee the right to continue as a director of, the Company or an Affiliate, nor will it affectin any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company oran Affiliate may at any time dismiss Optionee from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability orany claim under the Plan or the Agreement. Nothing in the Agreement shall confer on any person any legal or equitable right against the Company or anyAffiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The Option granted hereunder shallnot form any part of the wages or salary of Optionee for purposes of severance pay or termination indemnities, irrespective of the reason for termination ofemployment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for anyloss of any right or benefit under the Agreement or Plan which such employee might otherwise have enjoyed but for termination of employment, whether suchcompensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Optionee shall bedeemed to have accepted all the conditions of the Plan and the Agreement and the terms and conditions of any rules and regulations adopted by the Committeeand shall be fully bound thereby. (d) Governing Law. The validity, construction and effect of the Plan and the Agreement, and any rules and regulations relating to the Plan andthe Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware. (e) Severability. If any provision of the Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction orwould disqualify the Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform toapplicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent ofthe Plan or the Agreement, such provision shall be stricken as to such jurisdiction or the Agreement, and the remainder of the Agreement shall remain in fullforce and effect. (f) No Trust or Fund Created. Neither the Plan nor the Agreement shall create or be construed to create a trust or separate fund of any kind ora fiduciary relationship between the Company or any Affiliate and Optionee or any other person. 5 (g) Headings. Headings are given to the Sections and subsections of the Agreement solely as a convenience to facilitate reference. Suchheadings shall not be deemed in any way material or relevant to the construction or interpretation of the Agreement or any provision thereof. (h) Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be addressed to the Companyat its principal corporate offices. Any notice required to be given or delivered to Optionee shall be addressed to Optionee at the address of record provided to theCompany by Optionee in connection with Optionee’s employment with or Services provided to the Company or such other address as Optionee may designateby ten (10) days’ advance written notice to the Company. Any notice required to be given under this Agreement shall be in writing and shall be deemedeffective upon personal delivery or upon the third (3rd) day following deposit in the U.S. mail, registered or certified, postage prepaid and properly addressedto the party entitled to such notice. (i) Conditions Precedent to Issuance of Shares. Shares shall not be issued pursuant to the exercise of the Option unless such exercise and theissuance and delivery of the applicable Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the SecuritiesAct of 1933, as amended, the Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, state blue sky laws, the requirements ofany applicable Stock Exchange or the Nasdaq Stock Market and the Delaware General Corporation Law. As a condition to the exercise of the purchase pricerelating to the Option, the Company may require that the person exercising or paying the purchase price represent and warrant that the Shares are beingpurchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such arepresentation and warranty is required by law. (j) Withholding. If Optionee shall dispose of any of the shares of Common Stock acquired upon exercise of the Option within two (2) yearsfrom the date the Option was granted or within one (1) year after the date of exercise of the Option, then, in order to provide the Company with the opportunityto claim the benefit of any income tax deduction, Optionee shall promptly notify the Company of the dates of acquisition and disposition of such shares, thenumber of shares so disposed of, and the consideration, if any, received for such shares. In order to comply with all applicable federal or state income taxlaws or regulations, the Company may take such action as it deems appropriate to assure (i) notice to the Company of any disposition of the shares of theCompany within the time periods described above, and (ii) that, if necessary, all applicable federal or state payroll, withholding, income or other taxes arewithheld or collected from Optionee. (k) Consultation With Professional Tax and Investment Advisors. Optionee acknowledges that the grant, exercise and vesting with respect tothis Option, and the sale or other taxable disposition of the Shares, may have tax consequences pursuant to the Code or under local, state or international taxlaws. Optionee further acknowledges that Optionee is relying solely and exclusively on Optionee’s own professional tax and investment advisors with respectto any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives). Optionee understands and agreesthat any and all tax consequences resulting from the Option and its grant, exercise and vesting, and the sale or other taxable disposition of the Shares, is solelyand exclusively the responsibility of Optionee without any expectation or understanding that the Company or any of its employees or representatives will payor reimburse Optionee for such taxes or other items. 6 (l) Acceptance of Option. By accepting this Agreement, Optionee hereby agrees to the terms and conditions set forth in this Agreement and thePlan with respect to the Option and any Shares issued as a result of the exercise of the Option, in whole or in part. IN WITNESS WHEREOF, the Company has executed this Agreement and caused this Option to be issued to Optionee on the date set forth in thefirst paragraph above. ITERIS, INC. By: Name:Title: 7 ITERIS, INC.NON-INCENTIVE STOCK OPTION AGREEMENT This NON-INCENTIVE STOCK OPTION AGREEMENT (the “Agreement”) is made this day of , , by and betweenIteris, Inc., a Delaware corporation (the “Company”), and , an individual resident of , (“Optionee”). Capitalized terms used but nototherwise defined herein shall have the meaning ascribed to such terms in the Iteris, Inc. 2007 Omnibus Incentive Plan (the “Plan”). 1. Grant of Option. The Company hereby grants Optionee the option (the “Option”) to purchase all or any part of an aggregate of shares (the “Shares”) of common stock, $0.10 par value (“Common Stock”), of the Company at the exercise price of $ per share according to the termsand conditions set forth in this Agreement and in the Plan. The Option will not be treated as an incentive stock option within the meaning of Section 422 ofthe Internal Revenue Code of 1986, as amended (the “Code”). The Option is issued under the Plan and is subject to its terms and conditions. A copy of thePlan will be furnished upon request of Optionee. The Option shall terminate at the close of business ten (10) years from the date hereof. 2. Vesting of Option Rights. (a) Except as otherwise provided in this Agreement, the Option may be exercised by Optionee in accordance with the following schedule: On or after each ofthe following datesNumber of Shareswith respect to whichthe Option is exercisable (b) During the lifetime of Optionee, the Option shall be exercisable only by Optionee and shall not be assignable or transferable by Optionee,other than by will or the laws of descent and distribution. Notwithstanding the foregoing, Optionee may transfer the Option to any Family Member (as suchterm is defined in the General Instructions to Form S-8 (or successor to such Instructions or such Form)); provided, however, that (i) Optionee may notreceive any consideration for such transfer, (ii) the Family Member must agree in writing not to make any subsequent transfers of the Option other than bywill or the laws of the descent and distribution and (iii) the Company receives prior written notice of such transfer. 3. Exercise of Option after Death or Termination of Employment or Service. The Option shall terminate and may no longer be exercised ifOptionee ceases to be employed by or provide Service to the Company or its Affiliates, except that: (a) If Optionee’s employment shall be terminated for any reason, voluntary or involuntary, other than for “Cause” (as defined inSection 3(e)) or Optionee’s death or disability (within the meaning of Section 22(e)(3) of the Code), Optionee may at any time within a period of 3months after such termination exercise the Option to the extent the Option was exercisable by Optionee on the date of the termination of Optionee’semployment. (b) If Optionee’s employment is terminated for Cause, the Option shall be terminated as of the date of the act giving rise to suchtermination. (c) If Optionee shall die while the Option is still exercisable according to its terms or if employment is terminated because Optioneehas become disabled (within the meaning of Section 22(e)(3) of the Code) while in the employ of the Company and Optionee shall not have fullyexercised the Option, such Option may be exercised at any time within 12 months after Optionee’s death or date of termination of employment fordisability by Optionee, personal representatives or administrators or guardians of Optionee, as applicable or by any person or persons to whom theOption is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of Shares Optionee was entitled topurchase under the Option on (i) the earlier of the date of death or termination of employment or (ii) the date of termination for such disability, asapplicable. (d) Notwithstanding the above, in no case may the Option be exercised to any extent by anyone after the termination date of theOption. (e) “Cause” shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee, any unauthorized use ordisclosure by such person of confidential information or trade secrets of the Company (or any Affiliate), or any other intentional misconduct by suchperson adversely affecting the business or affairs of the Company (or any Affiliate) in a material manner. The foregoing definition shall not bedeemed to be inclusive of all the acts or omissions which the Company (or any Affiliate) may consider as grounds for the dismissal or discharge ofany Optionee in the Service of the Company (or any Affiliate). However, if the term or concept has been defined in an employment agreement betweenthe Company and Optionee, then Cause shall have the definition set forth in such employment agreement. For purposes of this paragraph, no actionor failure to act on Optionee’s part shall be considered “willful” unless done or omitted to be done, by Optionee in bad faith and without reasonablebelief that his or her action or omission was in the best interests of the Company. 4. Method of Exercise of Option. Subject to the foregoing, the Option may be exercised in whole or in part from time to time by servingwritten notice of exercise on the Company at its principal office within the Option period. The notice shall state the number of Shares as to which the Option isbeing exercised and shall be accompanied by payment of the exercise price. Payment of the exercise price shall be made (i) in cash (including bank check,personal check or money order payable to the Company), (ii) with the approval of the Company (which may be given in its sole discretion), by delivering tothe Company for cancellation shares of the Company’s Common Stock already owned by Optionee having a Fair Market Value equal 2 to the full exercise price of the Shares being acquired, (iii) with the approval of the Company (which may be given in its sole discretion) and subject toSection 402 of the Sarbanes-Oxley Act of 2002, by delivering to the Company the full exercise price of the Shares being acquired in a combination of cash andOptionee’s full recourse liability promissory note with a principal amount not to exceed eighty percent (80%) of the exercise price and a term not to exceed five(5) years, which promissory note shall provide for interest on the unpaid balance thereof which at all times is not less than the minimum rate required to avoidthe imputation of income, original issue discount or a below-market rate loan pursuant to Sections 483, 1274 or 7872 of the Code or any successor provisionsthereto, (iv) subject to Section 402 of the Sarbanes-Oxley Act of 2002, to the extent this Option is exercised for vested shares, through a special sale andremittance procedure pursuant to which Optionee shall concurrently provide irrevocable instructions (1) to Optionee’s brokerage firm to effect the immediatesale of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exerciseprice payable for the purchased Shares plus all applicable income and employment taxes required to be withheld by the Company by reason of such exerciseand (2) to the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale, or (v) with the approvalof the Company (which may be given in its sole discretion) and subject to Section 402 of the Sarbanes-Oxley Act of 2002, by delivering to the Company acombination of any of the forms of payment described above. This Option may be exercised only with respect to full shares and no fractional share of stockshall be issued. 5. Change in Control. (a) Immediately prior to the effective date of a “Change in Control” (as defined in Section 5(e)), this Option shall vest and becomeexercisable for all of the Shares and may be exercised for any or all of those Shares. However, this Option shall not vest and become exercisable onan accelerated basis if and to the extent: (i) this Option is to be assumed by the successor corporation (or parent thereof) or is otherwise to becontinued in full force and effect pursuant to the terms of the Change in Control transaction or (ii) this Option is to be replaced with a cash incentiveprogram of the successor corporation which preserves the spread existing at the time of the Change in Control on the Shares for which this Option isnot otherwise at that time exercisable (the excess of the Fair Market Value of those Shares over the aggregate exercise price payable for such Shares)and provides for subsequent payout of that spread no later than the time this Option would have vested and become exercisable for those Shares. (b) Immediately following the consummation of the Change in Control, this Option shall terminate, except to the extent assumed bythe successor corporation (or parent thereof) or otherwise continued in effect pursuant to the terms of the Change in Control transaction. (c) If this Option is assumed or otherwise continued in effect in connection with a Change in Control, then this Option shall beappropriately adjusted, upon such Change in Control, to apply to the number and class of securities which would have been issuable to Optionee inconsummation of such Change in Control had this Option been exercised immediately prior to such Change in Control, and appropriate adjustmentsshall also be made to the exercise price, provided the aggregate exercise price shall remain the 3 same. To the extent that the holders of Common Stock receive cash consideration for their Common Stock in consummation of the Change inControl, the successor corporation (or its parent) may, in connection with the assumption of this Option, substitute one or more shares of its owncommon stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control. (d) This Agreement shall not in any way affect the right of the Company to adjust, reclassify, reorganize or otherwise change itscapital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. (e) For purposes of this Agreement, “Change in Control” shall mean a change in ownership or control of the Company effectedthrough any of the following transactions: (i) a merger, consolidation or other reorganization unless securities representing more than 50% of the totalcombined voting power of the voting securities of the successor corporation are immediately thereafter beneficially owned, directly or indirectly and insubstantially the same proportion, by the persons who beneficially owned the Company’s outstanding voting securities immediately prior to suchtransaction; (ii) a sale, transfer or other disposition of all or substantially all of the Company’s assets; or (iii) the acquisition, directly or indirectly,by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is undercommon control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing morethan 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to theCompany’s stockholders. 6. Capital Adjustments and Reorganization. Should any change be made to the Common Stock by reason of any stock split, reverse stocksplit, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class withoutthe Company’s receipt of consideration, appropriate adjustments shall be made to (a) the number and/or class of securities subject to this Option and (b) theexercise price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder. 7. Miscellaneous. (a) Entire Agreement; Plan Provisions Control. This Agreement (and any addendum hereto) and the Plan constitute the entire agreementbetween the parties hereto with regard to the subject matter hereof. In the event that any provision of the Agreement conflicts with or is inconsistent in anyrespect with the terms of the Plan, the terms of the Plan shall control. All decisions of the Committee with respect to any question or issue arising under thePlan or this Agreement shall be and binding on all persons having an interest in this Option. All capitalized terms used in this Agreement and not otherwisedefined in this Agreement shall have the meaning assigned to them in the Plan. 4 (b) No Rights of Stockholders. Neither Optionee, Optionee’s legal representative nor a permissible assignee of this Option shall have any ofthe rights and privileges of a stockholder of the Company with respect to the Shares, unless and until such Shares have been issued in the name of Optionee,Optionee’s legal representative or permissible assignee, as applicable, without restrictions thereto. (c) No Right to Employment. The grant of the Option shall not be construed as giving Optionee the right to be retained in the employ of, or ifOptionee is a director of the Company or an Affiliate as giving the Optionee the right to continue as a director of, the Company or an Affiliate, nor will it affectin any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company oran Affiliate may at any time dismiss Optionee from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability orany claim under the Plan or the Agreement. Nothing in the Agreement shall confer on any person any legal or equitable right against the Company or anyAffiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The Option granted hereunder shallnot form any part of the wages or salary of Optionee for purposes of severance pay or termination indemnities, irrespective of the reason for termination ofemployment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for anyloss of any right or benefit under the Agreement or Plan which such employee might otherwise have enjoyed but for termination of employment, whether suchcompensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Optionee shall bedeemed to have accepted all the conditions of the Plan and the Agreement and the terms and conditions of any rules and regulations adopted by the Committeeand shall be fully bound thereby. (d) Governing Law. The validity, construction and effect of the Plan and the Agreement, and any rules and regulations relating to the Plan andthe Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware. (e) Severability. If any provision of the Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction orwould disqualify the Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform toapplicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent ofthe Plan or the Agreement, such provision shall be stricken as to such jurisdiction or the Agreement, and the remainder of the Agreement shall remain in fullforce and effect. (f) No Trust or Fund Created. Neither the Plan nor the Agreement shall create or be construed to create a trust or separate fund of any kind ora fiduciary relationship between the Company or any Affiliate and Optionee or any other person. (g) Headings. Headings are given to the Sections and subsections of the Agreement solely as a convenience to facilitate reference. Suchheadings shall not be deemed in any way material or relevant to the construction or interpretation of the Agreement or any provision thereof. 5 (h) Notices. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be addressed to the Companyat its principal corporate offices. Any notice required to be given or delivered to Optionee shall be addressed to Optionee at the address of record provided to theCompany by Optionee in connection with Optionee’s employment with or Services provided to the Company or such other address as Optionee may designateby ten (10) days’ advance written notice to the Company. Any notice required to be given under this Agreement shall be in writing and shall be deemedeffective upon personal delivery or upon the third (3rd) day following deposit in the U.S. mail, registered or certified, postage prepaid and properly addressedto the party entitled to such notice. (i) Conditions Precedent to Issuance of Shares. Shares shall not be issued pursuant to the exercise of the Option unless such exercise and theissuance and delivery of the applicable Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the SecuritiesAct of 1933, as amended, the Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, state blue sky laws, the requirements ofany applicable Stock Exchange or the Nasdaq Stock Market and the Delaware General Corporation Law. As a condition to the exercise of the purchase pricerelating to the Option, the Company may require that the person exercising or paying the purchase price represent and warrant that the Shares are beingpurchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such arepresentation and warranty is required by law. (j) Withholding. In order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may beavailable to it upon the exercise of the Option and in order to comply with all applicable federal or state income tax laws or regulations, the Company may takesuch action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld orcollected from Optionee. (k) Consultation With Professional Tax and Investment Advisors. Optionee acknowledges that the grant, exercise and vesting with respect tothis Option, and the sale or other taxable disposition of the Shares, may have tax consequences pursuant to the Code or under local, state or international taxlaws. Optionee further acknowledges that Optionee is relying solely and exclusively on Optionee’s own professional tax and investment advisors with respectto any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives). Optionee understands and agreesthat any and all tax consequences resulting from the Option and its grant, exercise and vesting, and the sale or other taxable disposition of the Shares, is solelyand exclusively the responsibility of Optionee without any expectation or understanding that the Company or any of its employees or representatives will payor reimburse Optionee for such taxes or other items. (l) Acceptance of Option. By accepting this Agreement, Optionee hereby agrees to the terms and conditions set forth in this Agreement and thePlan with respect to the Option and any Shares issued as a result of the exercise of the Option, in whole or in part. 6 IN WITNESS WHEREOF, the Company has executed this Agreement and caused this Option to be issued to Optionee on the date set forth in thefirst paragraph above. ITERIS, INC. By: Name:Title: 7Exhibit 21 LIST OF SUBSIDIARIES SubsidiaryJurisdiction ofIncorporation Meridian Environmental Technology, Inc.North DakotaBerkeley Transportation Systems, Inc.Delaware 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 11, 2012, relating to our audit of theconsolidated financial statements, which appears in this Annual Report on Form 10-K of Iteris, Inc. for the year ended March 31, 2012. /s/ McGladrey LLPIrvine, CaliforniaJune 11, 2012 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 11, 2012 /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 11, 2012 /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, 2012, 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 11, 2012 /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, 2012 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 11, 2012 /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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