Iteris Annual Report 2014

Plain-text annual report

Use these links to rapidly review the documentTABLE OF CONTENT1 TABLE OF CONTENT2 TABLE OF CONTENT3Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-KCommission file number 001-08762ITERIS, INC.(Exact Name of Registrant as Specified in Its Charter)Delaware(State or Other Jurisdictionof Incorporation or Organization) 95-2588496(I.R.S. EmployerIdentification No.)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 class Name of each exchange on whichregisteredCommon Stock, $0.10 par value NYSE MKT 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 ý 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 ý 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 the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý 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 submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý 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 of registrant's knowledge, in definitiveproxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý 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 "large accelerated filer," "acceleratedfiler," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):(Mark One) ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended March 31, 2014ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No ý As of the last business day of the registrant's most recently completed second fiscal quarter, based on the closing sale price of the registrant's common stock on such date, the aggregate market value of theregistrant's voting common stock held by nonaffiliates of the registrant was approximately $37,353,000. For the purposes of this calculation, shares owned by officers, directors and 10% stockholders known tothe registrant have been deemed to be owned by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of August 27, 2014, there were 32,682,296 shares of our common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCE None. Large accelerated filer o Accelerated filer o Non-accelerated filer o(Do not check if asmaller reporting company) Smaller reporting company ýTable of ContentsITERIS, INC.ANNUAL REPORT ON FORM 10-KFOR THE FISCAL YEAR ENDED MARCH 31, 2014TABLE OF CONTENTS PART I ITEM 1. BUSINESS 2 ITEM 1A. RISK FACTORS 9 ITEM 1B. UNRESOLVED STAFF COMMENTS 20 ITEM 2. PROPERTIES 20 ITEM 3. LEGAL PROCEEDINGS 20 ITEM 4. MINE SAFETY DISCLOSURES 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES 21 ITEM 6. SELECTED FINANCIAL DATA 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS 22 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 37 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE 37 ITEM 9A. CONTROLS AND PROCEDURES 37 ITEM 9B. OTHER INFORMATION 39 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 40 ITEM 11. EXECUTIVE COMPENSATION 43 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS 49 Unless otherwise indicated in this report, the "Company," "we," "us" and "our" refer to Iteris, Inc. and its wholly-owned subsidiaries. Abacus®,ClearPath™, ClearPath Agriculture™, ClearPath Weather™, Edge®, EdgeConnect™, iPerform®, iPeMS®, Iteris®, IterisPeMS™, Pico™, P10™, P100™,RZ-4™, SmartCycle®, SmartSpan®, Vantage®, VantageNext™, VantageView™, Vantage Vector®, Velocity™, and VersiCam™ are among the trademarksof Iteris, Inc. Any other trademarks or trade names mentioned herein are the property of their respective owners.1ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE 51 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 52 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 53 Table of ContentsCautionary 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 this report andthe information incorporated herein by reference, the words "expect(s)," "feel(s)," "believe(s)," "should," "will," "may," "anticipate(s)," "estimate(s)," "could,""should," and similar expressions or variations of these words are intended to identify forward-looking statements. These forward-looking statementsinclude, but are not limited to, statements regarding our anticipated growth, sales, revenue, expenses, profitability, capital needs, backlog andmanufacturing capabilities, competition, the impact of any current or future litigation, the impact of recent accounting pronouncements, the applicationsfor and acceptance of our products and services, and the status of our facilities and product development. These statements are not guarantees of futureperformance and are subject to certain risks and uncertainties that could cause our actual results to differ materially from those projected. You should notplace undue reliance on these forward-looking statements that speak only as of the date hereof. We encourage you to carefully review and consider thevarious disclosures made by us which describe certain factors which could affect our business, including in "Risk Factors" set forth in Part I, Item 1A of thisreport, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly anyforward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipatedevents.PART I ITEM 1. BUSINESS Overview We are a leading provider of intelligent information solutions for 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 also believe our products, services and solutions, in conjunction withsound traffic management, minimize the environmental impact of traffic congestion. By combining our unique intellectual property, products, decades ofexperience in traffic management, hyper-local weather solutions and information technologies, we offer a broad range of Intelligent Transportation Systems("ITS") solutions to customers throughout the U.S. and internationally. We were originally incorporated in Delaware in 1987. Our principal executive offices are located at 1700 Carnegie Avenue, Santa Ana, California 92705,and our telephone number at that location is (949) 270-9400. Our Internet website address is www.iteris.com. The inclusion of our website address in thisreport does not include or incorporate by reference into this report any information on, or accessible through, our website. 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").Products and Services We currently operate in three reportable segments: Roadway Sensors, Transportation Systems and iPerform. The Roadway Sensors segment includes,among other products, our Vantage, VantageNext, VersiCam, Vantage Vector, SmartCycle, SmartSpan, P10, P100 and Abacus vehicle detection systems fortraffic intersection control, incident detection and certain highway traffic data collection applications.2Table of ContentsThe Transportation Systems segment includes transportation engineering and consulting services, and the development of transportation management andtraveler information systems for the ITS industry. The iPerform segment includes our transportation performance measurement and information managementsolutions. The iPerform performance measurement solutions leverage its real-time data collection, diagnostic, fusion and warehousing platform to aggregateand compute performance measurements. This segment also offers our weather related ClearPath Weather management tools that allow users to createsolutions to meet roadway maintenance decision needs. See Note 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of thisreport, for further details on our reportable segments.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 and VantageNext video detection systems detect vehicle presence at intersections, as well as vehicle count, speed and othertraffic data used in traffic management systems. Vantage video detection systems typically include up to four of our RZ-4 advanced cameras orour RZ-4 advanced wide dynamic range cameras and an EdgeConnect processor. Our Vantage systems give traffic managers the ability tomitigate roadway congestion by modifying traffic signal timing or detecting incidents quickly. Our VantageView software supplements ourVantage video detection systems by providing an integrated platform to manage and "see" video detection assets remotely over a networkconnection. •Our Vantage Vector product is an all-in-one vehicle detection sensor with a wide range of capabilities, including stop bar detection, advanced-zone detection and sensing, which enable 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. •Our SmartSpan product uses proprietary dynamic zone stabilization algorithms and provides accurate and cost effective advance detection andstop-bar detection of vehicles at intersections equipped with span wire mounted signal lights. SmartSpan can be mounted on the same spanwires holding the traffic signal without sacrificing detection accuracy. •Our Vantage systems equipped with SmartCycle can effectively differentiate between bicycles and other vehicles with a single video detectioncamera, enabling more efficient signalized intersections and maximized traffic throughput. Agencies using bicycle timing can now benefitfrom bicycle-specific virtual detection zones that can be placed anywhere within the approaching traffic lanes, eliminating the need forseparate bicycle-only detection systems. •VersiCam, our integrated camera and processor video detection system, is a cost-efficient video detection system for smaller intersections thatrequire only a few detection points. •P10 and P100 (formerly, Pico), our compact video detection system, was developed primarily to address international video detection needs,and was designed for easy 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 bridges3Table of Contentsto allow for data collection and incident detection without the set-up and calibration generally 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 revenues in our third and fourth fiscal quarters due toreductions in road construction and repairs during the winter months related 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. Our Transportation Systems segment is largely dependent upon governmental funding and is affected by state and local budgetary issues. The currentfederal highway bill, which provides federal funding for highway, transit, safety and related transportation programs, will expire at the end of September2014. The President signed a federal highway funding bill to keep the current federal highway bill operational until May of 2015. We expect the extension toencourage government agencies to include ITS technologies in transportation infrastructure projects to a greater degree than in previous legislation. Inaddition, various other funding mechanisms exist to support transportation infrastructure and related projects. These include bonds, dedicated sales and gastax measures and other alternative funding sources. We believe the overall expansion of our Transportation Systems segment in the future will at least in partbe dependent on the federal government's use of funds under the federal highway bill. Delays in the release of funding may prolong uncertainty regarding theallotment of transportation funds in federal, state and local budgets. We believe that prolonged uncertainty has adversely impacted in the past, and mayadversely impact in the future, our Transportation Systems revenues and our overall financial performance in future periods.iPerform Our iPerform segment, formed during the first quarter of our fiscal year ended March 31, 2013 ("Fiscal 2013"), includes our performance measurementand information management solutions, including all of the operations of Berkeley Transportation Systems, Inc. ("BTS"), which we acquired in November2011. BTS specializes in transportation performance measurement. The BTS performance measurement system leverages its real-time data collection,diagnostic, fusion and warehousing platform to aggregate and compute performance measurements. During the fiscal year ended March 31, 2012 ("Fiscal2012"), we began the development of iPeMS (formerly, IterisPeMS). iPeMS is a state-of-the-art information management software suite that utilizes a widerange of data resources and analytical techniques to determine current and future traffic patterns, permitting the effective performance analysis andmanagement of traffic infrastructure resources. This information can then be analyzed by traffic professionals to measure how a transportation network isperforming and to identify potential areas of improvement. iPeMS is also capable of providing users with predictive traffic analytics and easy-to-usevisualization and animation features based on historical traffic conditions.4Table of Contents The iPerform segment also includes the operations of Meridian Environmental Technology, Inc. ("MET"), which we acquired in January 2011. METspecializes in 511/ advanced traveler information systems as well as ClearPath Weather management tools that allow users to create solutions to meetroadway maintenance decision needs. With the addition of MET, we have experienced seasonality particularly related to certain ClearPath Weather servicesin our first and second fiscal quarters, mainly because ClearPath Weather services are generally not required in the summer months when weather conditionsare typically less severe. iPerform is a market leader in performance management solutions for federal and state organizations. We intend to use our strong brand and deepexperience in the traffic management market, as well as our market-specific intellectual property, to expand our leadership in data aggregation and analytics.By increasing investments in both technical and market development, we plan to focus on expanding the scope of our public sector solutions into thecommercial marketplace. Going forward, iPerform's solutions are expected to include incident management applications, arterial solutions, predictive traffic, and weather-baseddata and analytics for both public and commercial markets. We plan to fund these investments through internally generated cash flow from our RoadwaySensors and Transportation Systems operating segments, as well as revenues from our iPerform segment and our available cash if necessary.Sales, Marketing and Principal Customers We sell our Roadway Sensors products through direct and indirect sales channels. In the territories where we sell direct, we use a combination of our ownsales personnel and an outside sales organization to sell, oversee installations and set-up issues and support our products. Our indirect sales channels arecomprised of a network of independent dealers in the U.S. and certain foreign locations, who sell integrated systems and related products to the trafficmanagement market. Our independent dealers are trained in, and primarily responsible for, sales, installation, set-up and support of our products, maintain aninventory of demonstration traffic products from various manufacturers and sell directly to government agencies and installation contractors. These dealersoften have long-term arrangements with local government agencies in their respective territories for the supply of various products for the construction andrenovation of traffic intersections, and are generally well-known suppliers of high-quality ITS products to the traffic management market. We periodicallyhold technical training classes for our dealers and end users and maintain a full-time staff of customer support technicians throughout the U.S. to providetechnical assistance when needed. When appropriate, we have the ability to modify or make changes to our dealer network to accommodate the needs of themarket and our customer base. We market and sell our Transportation Systems services and solutions and iPerform solutions directly to government agencies pursuant to negotiatedcontracts that involve competitive bidding and specific qualification requirements. Most of our contracts are with federal, state and municipal customers andgenerally provide for cancellation or renegotiation at the option of the customer upon reasonable notice and fees paid for modification. We generally useselected 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 lead times and require extensive specification development, evaluation and price negotiations. Additionally, we plan tofocus on expanding the scope of our iPerform public sector solutions to sell into the commercial marketplace. A large portion of our revenues are derived from sales to federal, state and local government agencies. We currently have, and historically have had, adiverse customer base. For our fiscal year ended March 31, 2014 ("Fiscal 2014"), one individual customer represented approximately 11% of our totalrevenues and no other individual customer represented greater than 10% of our total revenues. For Fiscal 2013, one individual customer representedapproximately 13% of our total revenues and no5Table of Contentsother individual customer represented greater than 10% of our total revenues. For Fiscal 2012, no individual customer represented greater than 10% of ourtotal revenues. Also refer to Note 13 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report.Manufacturing and Materials We use contract manufacturers to build subassemblies that are used in our Roadway Sensors products. Additionally, we procure certain components fromqualified suppliers, both locally and globally, and generally use multi-sourcing strategies when technically and economically feasible to mitigate supplyrisk. These subassemblies and components are typically delivered to our Santa Ana, California facility where they go through final assembly and testing priorto shipment to our customers. Our key suppliers include CTS Electronics Manufacturing Solutions, Inc., Sony Electronics, Inc. and LG Electronics, Inc. Ourmanufacturing activities are conducted in approximately 9,000 square feet of space at our Santa Ana facility. Production volume at our subcontractors isbased upon quarterly forecasts that we generally adjust on a monthly basis to control inventory levels. We typically do not manufacture any of the hardwareused in the transportation management and traveler information systems that we design and implement. Our production facility is currently ISO 9001certified.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 service revenuewas not a material portion of our total revenues for each of Fiscal 2014, Fiscal 2013 and Fiscal 2012. We believe customer support is a key competitive factor.Backlog Our total backlog of unfulfilled firm orders was approximately $35.6 million as of March 31, 2014, which included $27.6 million related toTransportation Systems. Substantially the entire backlog for Roadway Sensors is expected to be recognized as revenue in the fiscal year ending March 31,2015 ("Fiscal 2015"). In the past three fiscal years, we have recognized approximately 50% to 70% of our Transportation Systems backlog as of the end of afiscal year in the subsequent fiscal year, and currently expect that trend to continue for the near future for both Transportation Systems and iPerform. At March 31, 2013, we had backlog of approximately $38.6 million, which included $32.2 million related to Transportation Systems. The timing and realization of our backlog is subject to the inherent uncertainties of doing business with federal, state and local governments, particularlyin view of budgetary constraints, cut-backs and other delays or reallocations of funding that these entities typically face. In addition, pursuant to the customary terms of our agreements with government contractors and other customers, our 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 costs andexpenses were approximately $4.0 million for Fiscal 2014, $3.1 million for Fiscal 2013 and $3.2 million for Fiscal 2012. We expect to continue to6Table of Contentspursue various 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. Since 2008, our Roadway Sensors segment has introduced ourVantageNext, Vantage Vector, VersiCam and VersiCam wireless products, P10, P100, RZ-4 advanced camera and our RZ-4 advanced wide dynamic rangecamera, which significantly improve video detection performance in certain harsh lighting conditions, as well as upgrades to our Abacus and VantageViewproducts. Additionally, during Fiscal 2012, we began development of our software based iPeMS performance measurement system, which continued throughFiscal 2014 and will continue during Fiscal 2015. We also plan to focus our development efforts on our ClearPath Weather and ClearPath Agricultureproducts. We believe that developing new offerings across our segments and enhancing, refining and marketing our existing products is a key component ofstrong organic growth and profitability.Competition We generally face significant competition in each of our target markets. Increased competition may result in price reductions, reduced gross margins andloss 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 video cameradetection systems and other non-intrusive detection devices, including microwave, infrared, radar, ultrasonic and magnetic detectors, as well as manufacturersand installers of in-pavement inductive loop products, which have historically, and currently continue to be, the predominant detection system in thismarket. 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 that generally offer expertise in traveler information, integration and transportation management. Ourcompetitors in transportation engineering, planning and design include major regional firms, as well as many smaller local engineering firms. The markets in which our iPeform segment operates vary from public sector customers who focus on performance measurement systems to help measureand manage the effectiveness of their transportation systems to commercial sector customers who ingest and disseminate traffic and weather related data,information and analytics through various consumer outlets. Our competitors vary in number, scope and breadth of the products and services they offer. In thepublic sector, we compete with some of the same transportation engineering, planning and design firms that also compete with our Transportation Systemssegment. In the commercial sector, we compete with a variety of entities that currently provide traffic and/or weather related data to that market. In general, the markets for the products and services we offer are highly competitive and are characterized by rapidly changing technology and evolvingstandards. Many of our current and prospective competitors have longer operating histories, greater name recognition, access to larger customer bases andsignificantly greater financial, technical, manufacturing, distribution and marketing resources than us. As a result, they may be able to adapt more quickly tonew or emerging standards or technologies or to devote greater resources to the promotion and sale of their products. It is also possible that new competitorsor alliances among competitors could emerge and rapidly acquire significant market share. We believe that our ability to compete effectively in our targetmarkets will depend on a number of factors, including the success and timing of our new product development, the7Table of Contentscompatibility of our products with a broad range of computing systems, product quality and performance, reliability, functionality, price and service andtechnical support. Our failure to provide services and develop and market products that compete successfully with those of other suppliers and consultants inour target markets would have a material adverse effect on our business, financial condition and results of operations.Intellectual Property and Proprietary Rights Our ability to compete effectively depends in part on our ability to develop and maintain the proprietary aspects of our technology. Our policy is toobtain appropriate proprietary rights protection for any potentially significant new technology acquired or developed by us. We currently hold three U.S.patents, four foreign patent applications, six patent applications in the United States ("U.S."), and eight provisional patent filings. One U.S. patent, whichexpires in May 2019, is for general technology related to CMOS sensors. Two U.S. patents, which expire between 2014 and 2029, three foreign patentapplications, three U.S. patent applications, and one provisional patent filing relate specifically to our Roadway Sensors technology. One pending foreignpatent, three U.S. patent applications, and seven provisional patent filings relate specifically to our iPerform technology. We cannot be certain that any newpatents will be granted pursuant to these or subsequent patent applications or provisional patent filings. 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 and otherproprietary information through agreements with customers and suppliers, proprietary information agreements with our employees and consultants, and othersimilar 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 ability to successfully achieve 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, 2014, we employed a total of 266 associates (of which 239 are full-time), including56 associates in general management, administration and finance; 26 associates in sales and marketing; 154 associates in engineering and productdevelopment; 14 associates in operations, manufacturing and quality assurance; and 16 associates in customer service. None of our associates are representedby a labor union, and we have never experienced 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 of materialsinto the environment. We are not involved in any pending or, to our knowledge, threatened governmental proceedings, which would require curtailment8Table of Contentsof our operations because of such laws and regulations. We continue to expend funds in connection with our compliance with applicable environmentalregulations. These expenditures have not, however, been significant in the past, and we do not expect any significant expenditure in the near future.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 in theinformation incorporated by reference into this report. You should consider the following risks carefully in addition to the other information contained inthis report and our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K, before deciding to buy, sell or hold our commonstock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to usor that we currently deem immaterial may also affect our business operations. If any of these risks actually occurs, our business, financial condition, orresults of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of yourinvestment. The economic slowdown has reduced and delayed government funding for transportation infrastructure projects and initiatives, decreased availabilityof financial capital for our customers and adversely impacted real estate development, all of which have adversely impacted our revenues. Decreasedconsumer spending, the failure of certain financial institutions and businesses, concerns about the availability and cost of credit, and reduced corporateprofits and capital spending have resulted in a downturn in worldwide economic conditions, as well as budgetary shortfalls at all levels of government. Theseunfavorable economic conditions are having, and are expected to continue to have, a negative impact on customer orders and government funding ofinfrastructure projects incorporating our products and services. Such factors have resulted and may continue to result in delays, cancellations andrescheduling of backlog and customer orders. In addition, the decline in the U.S. real estate market, particularly in new home and commercial construction,has adversely impacted new road construction and has had and may continue to have adverse effects on revenues. Any of the foregoing economic conditionsmay adversely affect our revenues in future periods and make it extremely difficult for our customers, our suppliers and us to accurately forecast and planfuture business activities. Additionally, there was uncertainty in the past few years regarding allotment of government funds due to delays in the passage of afederal highway bill, which adversely impacted our revenues and overall financial performance. The current federal highway bill, which provides federalfunding for highway, transit, safety and related transportation programs, will expire at the end of September 2014. The President signed a federal highwayfunding bill to keep the current federal highway bill operational until May of 2015. While we expect the extension to resolve the current uncertainty infederal funding, our Transportation Systems revenues and overall financial performance in future periods could be negatively affected if funding concernspersist. Furthermore, despite the extension of the federal highway bill, delays in the allocation of funds, the priority of infrastructure projects and theavailability of funds for ITS related projects could continue to adversely impact our revenues and overall financial performance. Because we depend on government contracts and subcontracts, we face additional risks related to contracting with federal, state and localgovernments, including budgetary issues and fixed price contracts. A significant portion of our revenues are derived from contracts with governmentalagencies, either as a general contractor, subcontractor or supplier. We anticipate that revenue from government contracts will continue to remain a significantportion of our 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, delays in theexpenditures from the federal highway bill and9Table of Contentsdelays or reductions in other state and local funding dedicated for transportation and ITS 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 revenues and income to drop substantially or to fluctuate significantly betweenfiscal 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 may incur.These fixed price contracts require us to estimate the total project cost based on preliminary projections of the project's requirements. The financial viabilityof 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 our costson these projects exceed the fixed contractual amount, we will be required to bear the excess costs. Such additional costs would adversely affect our financialcondition 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 revenues in any given period. Our inability to address any of the foregoing concerns or the loss orrenegotiation 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 is continuing toexperience, a significant budget shortfall and other related budgetary issues and constraints. The state of California has historically been and is considered tobe a key geographic region for our Roadway Sensors and Transportation Systems segments. Ongoing uncertainty as to the timing and accessibility ofbudgetary funding, changes in state funding allocations to local agencies and municipalities, or other delays in purchasing for, or commencement of,transportation projects have had and may continue to have a negative impact on our revenues and our income. If we do not keep pace with rapid technological changes and evolving industry standards, we will not be able to remain competitive and there will beno 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;10Table of Contents•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. If we are unable to develop and introduce new products and product enhancements successfully and in a cost-effective and timely manner, or areunable to achieve market acceptance of our new products, our operating results would be adversely affected. We believe our revenue growth and futureoperating results will depend on our ability to complete development of new products and enhancements, introduce these products in a timely, cost-effectivemanner, achieve broad market acceptance of these products and enhancements, and reduce our production costs. We cannot guarantee the success of theseproducts, and we may not be able to introduce any new products, including the iPeMS software, ClearPath Weather or any enhancements to our existingproducts on a timely basis, or at all. In addition, the introduction of any new products could adversely affect the sales of certain of our 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,software and camera technologies in response to evolving customer requirements. We cannot assure you that we will be able to adequately manage producttransition issues. Our business and results of operations could be adversely affected if we do not anticipate or respond adequately to technologicaldevelopments or changing customer requirements or if we cannot adequately manage inventory issues typically related to new product transitions andintroductions. We cannot assure you that any such investments in research and development will lead to any corresponding increase in revenue. We recently entered into the software development market and may be subject to additional challenges and additional costs and delays. We haveonly been in the business of software development for a few years and may experience development and technical challenges. Our business and results ofoperations could also be seriously harmed by any significant delays in our software development and updates. Certain of our new products could containundetected design faults and software errors or "bugs" when first released by us, despite our testing. We may not discover these faults or errors until after aproduct has been installed and used by our customers. Any faults or errors in our existing products or in any new products may cause delays in productintroduction and shipments, require design modifications or harm customer relationships, any of which could adversely affect our business and competitiveposition. We cannot assure you that our customer base will broadly accept any of our new products, product enhancements or software related offerings suchas iPeMS and ClearPath Weather. In addition, the software development industry can frequently experience litigation concerning intellectual propertydisputes, which could be costly and distract our management. The markets in which we operate are highly competitive and have many more established competitors, which could adversely affect our revenues orthe 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 and technologies in our Roadway Sensors segment, both domestically and abroad. Only a smallportion of the intersection traffic market has adopted advanced video detection technologies, and our future success will depend in part upon11Table of Contentsgaining broad market acceptance for video detection in this market. Certain technological barriers to entry make it difficult for new competitors to enter themarket with competing video or other technologies; however, we are aware of new market entrants from time to time. Increased competition could result inloss of market share, price reductions and reduced gross margins, any of which could seriously harm our business, financial condition and results ofoperations. The Transportation Systems market is highly fragmented and is subject to evolving national and regional quality and safety standards. Our competitorsvary in size, number, scope and breadth of the products and services they offer, and include large multi-national engineering firms and smaller local regionalfirms. The markets in which our iPeform segment operates vary from public sector customers who focus on performance measurement systems to help measureand manage the effectiveness of their transportation systems to commercial sector customers who ingest and disseminate traffic and weather related data,information and analytics through various consumer outlets. Our competitors vary in number, scope and breadth of the products and services they offer. In thepublic sector, we compete with some of the same transportation engineering, planning and design firms that also compete with our Transportation Systemssegment. In the commercial sector, we compete with a variety of entities that currently provide traffic and/or weather related data to that market. In all of our segments, many of our competitors have far greater name recognition and greater financial, technological, marketing, and customer serviceresources than we do. This may allow them to respond more quickly to new or emerging technologies and changes in customer requirements. It may alsoallow 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 be unable to attract and retain key personnel, which could seriously harm our business. Due to the specialized nature of our business, we arehighly dependent on the continued service of our executive officers and other key management, engineering and technical personnel. The loss of any of ourofficers, or any of our other executives or key members of management could adversely affect our business, financial condition, or results of operations. Oursuccess will also depend in large part upon our ability to continue to attract, retain and motivate qualified engineering and other highly skilled technicalpersonnel. The future success of our Transportation Systems segment will depend on our ability to hire additional qualified engineers, planners and technicalpersonnel. The future success of our iPerform segment will depend on our ability to hire additional software developers, qualified engineers and technicalpersonnel. Competition for qualified employees, particularly development engineers and software developers, is intense. We may not be able to continue toattract and retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or moreof our current key employees could adversely affect our business, financial condition and results of operations. Our profitability could be adversely affected if we are not able to maintain adequate utilization of our Transportation Systems workforce. The cost ofproviding 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;12Table of Contents•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 failure to successfully bid on new contracts and renew existing contracts could reduce our revenues and profits. Our business depends on ourability to successfully bid on new contracts and renew existing contracts with private and public sector customers. Contract proposals and negotiations arecomplex 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 orthe required governmental approval or fail to meet other required conditions, we may not be able to pursue particular projects, which could reduce oreliminate our profitability. If we experience declining or flat revenues and we fail to manage such declines effectively, we may be unable to execute our business plan and mayexperience future weaknesses in our operating results. Based on our business objectives, and in order to achieve future growth, we will need to continue toadd additional qualified personnel, and invest in additional research and development and sales and marketing activities, which could lead to increases inour expenses and future declines in our operating results. In addition, our past expansion has placed, and future expansion is expected to place, a significantstrain on our managerial, administrative, operational, financial and other resources. If we are unable to manage these activities or any revenue declinessuccessfully, our growth, our business, our financial condition and our results of operations could continue to be adversely affected. 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 improve ourfinancial 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 arenot in our control. Furthermore, we rely on operating profits from the Company's segments to fund investments in sales and marketing and research anddevelopment initiatives. We cannot assure you that at any given time these profits will sustain a sufficient level to completely support those investments.Most of our expenses are fixed in advance. As such, we generally are unable to reduce our expenses significantly in the short-term to compensate for anyunexpected delay or decrease in anticipated revenues or increases in planned investments. As a result, we may experience operating losses and net losses inthe future, which would make it difficult to fund our operations and achieve our business plan, and could cause the market price of our common stock todecline. Our quarterly operating results fluctuate as a result of many factors. Therefore, we may fail to meet or exceed the expectations of securities analystsand investors, which could cause our stock price to decline. Our quarterly revenues and operating results have fluctuated and are likely to continue to varyfrom quarter to quarter due to a number of factors, many of which are not within our control. Factors that could affect our revenues include, among others, thefollowing:•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 the federal highway bill or other funding; •declines in new home and commercial real estate construction and related road and other infrastructure construction;13Table of Contents•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 ClearPath Weather and related weather forecasting services due to the decrease in revenuesgenerated for such services during the spring and summer time periods; •our ability to develop, introduce, patent, market and gain market acceptance of new products, applications and product enhancements in atimely 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; •decrease in revenues derived from key or significant customers; •deferrals of customer orders in anticipation of new products, applications or product enhancements; •risks and uncertainties associated with our international business; •general economic and political conditions; •international conflicts and acts of terrorism; and •other factors beyond our control, including but not limited to, natural disasters. Due to all of the factors listed above as well as other unforeseen factors, our future operating results could be below the expectations of securities analystsor investors. If that happens, the trading price of our common stock could decline. As a result of these quarterly variations, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance. We may be subject to traffic related litigation. The traffic industry in general is subject to litigation claims due to the nature of personal injuries thatresult from traffic accidents. As a provider of traffic engineering services, products and solutions, we are, and could in the future continue to be, from time totime, subject to litigation for traffic related accidents, even if our products or services did not cause the particular accident. While we generally carryinsurance against these types of claims, some claims may not be covered by insurance or the damages resulting from such litigation could exceed ourinsurance coverage limits. In the event that we are required to pay significant damages as a result of14Table of Contentsone or more lawsuits that are not covered by insurance or exceed our coverage limits, it could materially harm our business, financial condition or cash flows.Even defending against unsuccessful claims could cause us to incur significant expenses and result in a diversion of management's attention. We may experience production gaps that could materially and adversely impact our sales and financial results and the ultimate acceptance of ourproducts. It is possible that we could experience unforeseen quality control issues or part shortages as we adjust production to meet current demand for ourproducts. We have historically used single suppliers for certain significant components in our products. Should any such delay or disruption occur, or shoulda key supplier discontinue operations because of the current economic climate, our future sales will likely be materially and adversely affected. Additionally,we rely heavily on select contract manufacturers to produce many of our products and do not have any long-term contracts to guarantee supply of suchproducts. Although we believe our contract manufacturers have sufficient capacity to meet our production schedules for the foreseeable future and we believewe could find alternative contract manufacturing sources for many of our products, if necessary, we could experience a production gap if for any reason ourcontract manufacturers were unable to meet our production requirements and our cost of goods sold could increase, adversely affecting our margins. Our use of the percentage of completion method of accounting for our Transportation Systems revenues could result in a reduction or reversal ofpreviously recorded revenues and profits. A significant portion of Transportation Systems revenues are measured and recognized using the percentage ofcompletion method of accounting. Our use of this accounting method results in recognition of revenues and profits proportionally over the life of a contract,based generally on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to revenues andestimated costs are recorded when the amounts are known or can be reasonably estimated. Such revisions could occur in any period and their effects could bematerial. Although we have historically made reasonably reliable estimates of the progress towards completion of long-term engineering, programmanagement, construction management or construction contracts, the uncertainties inherent in the estimating process make it possible for actual costs to varymaterially from estimates, including reductions or reversals of previously recorded revenues and profits. We may engage in acquisitions of companies or technologies that may require us to undertake significant capital infusions and could result indisruptions of our business and diversion of resources and management attention. We have completed three acquisitions since April 2009 and, in thefuture, we may acquire additional complementary businesses, products, and technologies. Acquisitions may require significant capital infusions and, ingeneral, 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 information systemof the acquired companies; •increased costs to improve managerial, operational, financial and administrative systems and to eliminate duplicative services; •the incurrence of unforeseen obligations or liabilities; •potential impairment of relationships with employees or customers as a result of changes in management; and •increased interest expense and amortization of acquired intangible assets, as well as unanticipated accounting charges.15Table of Contents 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 accountingconsequences. We cannot assure you that we will be able to identify or consummate any additional acquisitions, successfully integrate any acquisitions orrealize the benefits anticipated from any acquisition. Our international business operations may be threatened by many factors that are outside of our control. While we historically have had limitedinternational sales, revenues and operations experience, we began work on our first overseas contracts in the United Arab Emirates in the fiscal year endedMarch 31, 2010. We plan to expand our international efforts in the future with respect to all of our segments, and in particular, plan to expand ourdistribution channels in Latin America and the Middle East. We cannot assure you that we will be successful in our expansion efforts. Internationaloperations subject us to various inherent risks including, among others:•political, social and economic instability, as well as international conflicts and acts of terrorism; •bonding requirements for certain international projects; •longer accounts receivable payment cycles; •import and export license requirements and restrictions of the U.S. and each other country in which we operate; •currency fluctuations and restrictions, and our ability to repatriate currency from certain foreign regions; •unexpected changes in regulatory requirements, tariffs and other trade barriers or restrictions; •required compliance with existing and new foreign regulatory requirements and laws, more restrictive labor laws and obligations, includingbut not limited to the U.S. Foreign Corrupt Practices Act; •difficulties in managing and staffing international operations; •potentially adverse tax consequences; and •reduced protection for intellectual property rights in some countries. Substantially all of our international sales are denominated in U.S. dollars. As a result, an increase in the relative value of the dollar could make ourproducts more expensive and potentially less price competitive in international markets. We do not currently engage in any transactions as a hedge againstrisks of loss due to foreign currency fluctuations. Any of the factors mentioned above may adversely affect our future international revenues and, consequently, affect our business, financial conditionand operating results. Additionally, as we pursue the expansion of our international business, certain fixed and other overhead costs could outpace ourrevenues, thus adversely affecting our results of operations. We may likewise face local competitors in certain international markets who are more established,have greater economies of scale and stronger customer relationships. Furthermore, as we increase our international sales, our total revenues may also beaffected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of theworld. If our internal controls over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business and stock price could beadversely affected. Section 404 of the Sarbanes-Oxley Act of 2002 currently requires us to evaluate the effectiveness of our internal controls over financialreporting at the end of each fiscal year and to include a management report assessing the effectiveness16Table of Contentsof our internal controls over financial reporting in all annual reports. In connection with the preparation of our financial statements for Fiscal 2014, wedetermined that we had several significant deficiencies relating to our accounting for consulting services revenues that constitute a material weakness in ourinternal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our financial statements will not beprevented or detected on a timely basis, and that our internal control over financial reporting was not effective as of the end of Fiscal 2014. In order to improve and to maintain the effectiveness of our internal control over financial reporting and disclosure controls and procedures, we havebegun the process of remediating this material weakness. However, this process will take time and may require significant additional resources, including thehiring of additional personnel and improvements to or upgrades of our enterprise systems. We cannot assure you that such additional resources will remedythe material weakness in a timely fashion or at all. In addition, such remediation efforts may increase our selling, general and administrative expenses andnegatively affect our financial results. As a result of this and similar activities, management's attention may also be diverted from other business concerns,which could have an adverse effect on our business, financial condition and results of operations. If we are unable to remediate this material weakness, or inthe future experience one or more additional material weaknesses, our ability to report our financial condition and results of operations accurately and in atimely manner in the future may be adversely affected and could adversely affect the market price of our common stock. As a smaller reporting company, for Fiscal 2014, we were exempt from the auditor attestation requirement over our internal control over financialreporting; however, to the extent we do not qualify as a non-accelerated filer or smaller reporting company in subsequent fiscal years, we will be subject tothe auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act. In such an event, we may not be able to complete the work required forsuch attestation on a timely basis and, even if we timely complete such requirements, our independent registered public accounting firm may still concludethat 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 all fraud. Acontrol system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will bemet. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative totheir costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues andinstances 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 futureconditions. Over time, our controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies orprocedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position. If we are not able toadequately protect or enforce the proprietary aspects of our technology, competitors could be able to access our proprietary technology and our business,financial condition and results of operations will likely be seriously harmed. We currently attempt to protect our technology through a combination ofpatent, 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 also17Table of Contentsbe able to independently develop products that are substantially equivalent or superior to our products or design around our patents. In addition, the laws ofsome foreign countries do not protect our proprietary rights as fully as do the laws of the U.S. As a result, we may not be able to protect our proprietary rightsadequately 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 orusing certain 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. Our recent expansioninto software development activities may subject us to increased possibility of litigation. Any of the foregoing could adversely affect our business, financialcondition and results of operations. In addition, the cost of addressing any intellectual property litigation claim, including legal fees and expenses, and thediversion of management's attention and resources, regardless of whether the claim is valid, could be significant and could seriously harm our business,financial condition and results of operations. We may need to raise additional capital in the future, which may not be available on terms acceptable to us, or at all. We have historicallyexperienced volatility in our earnings and cash flows from operations from year to year. Although we have a revolving line of credit, should we have an eventof default, which includes, among other things, a failure to meet certain financial covenants and a material adverse change in the business, the bank couldchoose to limit or take away our ability to borrow these or any funds. Should this occur, or if the credit markets further tighten or our business declines, wemay need or choose to raise additional capital to repay indebtedness, pursue acquisitions or expand our operations. Such additional capital may be raisedthrough bank borrowings, or other debt or equity financings. We cannot assure you that any additional capital will be available on a timely basis, onacceptable 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;18Table of Contents•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 suchsecurities may have rights, preferences and privileges senior to our common stock. Additional equity or debt financing may not be available on favorableterms, on a timely 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 asplanned, develop or enhance our products, expand our sales and marketing programs, take advantage of future opportunities or respond to competitivepressures. The trading price of our common stock is highly volatile. The trading price of our common stock has been subject to wide fluctuations in the past.Since April 2012, our common stock has traded at prices as low as $1.25 per share and as high as $2.50 per share. The market price of our common stockcould 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 havebeen the 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 our commonstock. Certain provisions of our certificate of incorporation could make it difficult for a third party to acquire us, even though an acquisition might bebeneficial 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 ofpreferred19Table of Contentsstock with voting, conversion and other rights and preferences superior to those of our common stock. In August 2009, we adopted a new stockholder rightsplan and declared a dividend of preferred stock purchase rights to our stockholders. Generally, the stockholder rights plan provides that if a person or groupacquires 15% or more of our common stock, subject to certain exceptions and under certain circumstances, the rights may be exchanged by us for commonstock or the holders of the rights, other than the acquiring person or group, could acquire additional shares of our capital stock at a discount off of the thencurrent market price. Such exchanges or exercise of rights could cause substantial dilution to a particular acquirer and discourage the acquirer from pursuingour company. The mere existence of a stockholder rights plan often delays or makes a merger, tender offer or other acquisition more difficult.ITEM 1B. UNRESOLVED STAFF COMMENTS None.ITEM 2. PROPERTIES Our headquarters and principal operations are housed in approximately 52,000 square feet of leased office, manufacturing and warehouse space locatedin Santa Ana, California. In February 2014, we entered into an amendment to the lease for the facility to reduce the size of the leased premises toapproximately 41,000 rentable square feet and extend the term of the lease through March 2022. For additional information regarding our obligations underproperty leases, see Note 9 of Notes to Consolidated Financial Statements, included in Part 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, includedin Part IV, Item 15 of this report, is incorporated herein by reference.ITEM 4. MINE SAFETY DISCLOSURES Not applicable.20Table of ContentsPART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES Market Information and Holders Our common stock is traded on the NYSE MKT under the symbol "ITI." The following table sets forth, for the periods indicated, the highest and lowestsales prices for our common stock as reported by NYSE MKT: On August 27, 2014, the last reported sales price of our common stock on the NYSE MKT was $1.72. As of August 27, 2014, we had 383 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 ofour Board 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 In August 2011, our Board of Directors approved a stock repurchase program pursuant to which we were authorized to acquire up to $3 million of ouroutstanding common stock from time to time through August 2012. On August 9, 2012, our Board of Directors approved a new stock repurchase programpursuant to which we may acquire up to $3 million of our outstanding common stock for an unspecified length of time. Under the new program, we mayrepurchase shares from time to time in open-market and privately negotiated transactions and block trades, and may also repurchase shares pursuant to anexisting or future 10b5-1 trading plan to facilitate repurchases during our closed trading windows. There is no guarantee as to the exact number of shares thatwill be repurchased. We may modify or terminate the repurchase program at any time without prior notice. We did not repurchase any of our common stockduring the fourth quarter of Fiscal 2014. As of March 31, 2014, we had approximately $747,000 remaining under the repurchase program and all repurchasedshares have been retired and resumed their status as authorized and unissued shares of our common stock.21 High Low Fiscal 2014 Quarter Ended June 30, 2013 $1.84 $1.55 Quarter Ended September 30, 2013 1.85 1.70 Quarter Ended December 31, 2013 2.29 1.76 Quarter Ended March 31, 2014 2.50 1.92 Fiscal 2013 Quarter Ended June 30, 2012 $1.52 $1.25 Quarter Ended September 30, 2012 1.72 1.34 Quarter Ended December 31, 2012 1.82 1.45 Quarter Ended March 31, 2013 1.91 1.55 Table of ContentsITEM 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 thereto includedin Part IV, Item 15 of this report and the "Risk Factors" section in Item 1A, as well as other cautionary statements and risks described elsewhere in thisreport, before deciding to purchase, hold or sell our common stock.Overview General. We are a leading provider of intelligent information solutions for 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 andpredictive traffic analytics and improve the safety of surface transportation systems infrastructure. We also believe our products, services and solutions, inconjunction with sound traffic management, minimize the environmental impact of traffic congestion. By combining our unique intellectual property,products, decades of experience in traffic management, hyper-local weather solutions and information technologies, we offer a broad range of ITS solutions tocustomers throughout the U.S. and internationally. Acquisitions. In November 2011, we acquired all of the outstanding capital stock of Berkeley Transportation Systems, Inc. ("BTS"), a privately-heldcompany based in Berkeley, California which specializes in transportation performance measurement, for an initial cash payment of approximately $840,000.In the quarter ended December 31, 2012, we entered into an amendment to the BTS stock purchase agreement which modified certain earn-out provisions andas a result, we paid an additional $700,000 in cash to the BTS shareholders for achievement of those modified earn-out provisions in the fourth quarter ofFiscal 2013. The amendment did not have a material impact on previous estimated amounts accrued in connection with the earn-out provisions. Thispayment completed our obligation under the earn-out provisions of the agreement. During the third quarter of Fiscal 2014, we paid $250,000 pursuant tocertain holdback provisions. Additionally, we are scheduled to pay to the BTS shareholders up to approximately $335,000 by November 2014 pursuant tocertain deferred payment provisions. In January 2011, we acquired all of the outstanding 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 ClearPath Weather (formerly, Maintenance DecisionSupport System or 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 first two anniversaries of the closing of the acquisition upon the satisfaction of certain conditions, as well as up to an additional$2 million under a 24-month earn-out provision. In January 2012, we made a cash payment of approximately $668,000 of the first deferred payment to the shareholders of MET and held back $250,000in accordance with certain provisions of the purchase agreement. In June 2012, we determined the contingencies related to the release of the $250,000holdback were not met. As a result, no portion of the $250,000 holdback was released and the entire amount was reversed into operating income during thesecond quarter of Fiscal 2013. Additionally, no amounts were earned by the MET shareholders related to the first and second year earn-out provisions, whichended on December 31, 2011 and 2012, respectively. The second deferred payment of $1 million was due in the fourth quarter of Fiscal 2013. As a result ofcertain holdback22Table of Contentsprovisions and other deductions, the Company paid approximately $409,000 to the MET shareholders in the second quarter of Fiscal 2014. This paymentcompleted the Company's obligation under the deferred payment provisions of the purchase agreement. Refer to Note 4 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report, for additional discussion on these acquisitions. 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 segmentto Bendix Commercial 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 capitalof the Vehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities of the Vehicle Sensors segment. In October 2012,we received approximately $1.7 million in connection with the holdback provision. Furthermore, we are entitled to additional consideration in the form ofcertain performance and royalty-related earn-outs through December 31, 2017. As of March 31, 2014, we have received approximately $1.1 million inconnection with royalty-related earn-out provisions for a total of $14.8 million in cash from the Asset Sale. As a result of the Asset Sale, we no longer operatein the Vehicle Sensors segment, and we determined that the Vehicle Sensors segment, which previously constituted one of our operating segments, qualifiedas a discontinued operation. The applicable financial results of the Vehicle Sensors segment through the closing of the Asset Sale have been reported as adiscontinued operation for all periods presented. Refer to Note 3 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of this report, foradditional discussion on this transaction. Business Segments. Subsequent to the Asset Sale and our acquisition of BTS, we now operate in three reportable segments: Roadway Sensors,Transportation Systems and iPerform.Roadway Sensors The Roadway Sensors segment includes, among other products, our Vantage, VantageNext, VersiCam, Vantage Vector, SmartCycle, SmartSpan, P10,P100 and Abacus vehicle detection systems for traffic intersection control, incident detection and certain highway traffic data collection applications.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. During Fiscal 2012 and Fiscal 2013, this segment included the operations of MET, which specializes in511/ advanced traveler information systems and offers predictive weather and ClearPath Weather management tools that allow users to create solutions tomeet roadway maintenance decision needs. As of April 1, 2013, the predictive weather and ClearPath Weather services were reassigned to the iPerformsegment to better align our predictive weather and traffic capabilities, resources and initiatives.iPerform The iPerform segment includes our performance measurement and information management solutions, including all the operations of BTS, whichspecializes in transportation performance measurement, as well as the predictive weather and ClearPath Weather services reassigned from the TransportationSystems segment on April 1, 2013. During Fiscal 2012, we began the development of iPeMS. iPeMS is a state-of-the-art, information management softwaresuite that utilizes a wide range of data resources and analytical techniques to determine current and future traffic patterns, permitting the effectiveperformance analysis and management of traffic infrastructure resources. This information can23Table of Contentsthen be analyzed by traffic professionals to measure how a transportation network is performing and to identify potential areas of improvement. iPeMS is alsocapable of providing users with predictive traffic analytics and easy-to-use visualization and animation features based on historical traffic conditions. Business Outlook. Given the current ongoing uncertainties regarding global economic conditions, we continue to remain cautious about our overallbusiness. We believe the economic slowdown, reduction and delay in government funding for transportation infrastructure projects and initiatives, decreasedfinancial capital for our customers, and decline in real estate development have negatively affected, and may continue to negatively affect, our financialresults for the foreseeable future, and may impair our ability to accurately forecast our future financial performance and other business trends. In addition,since the end users of a majority of our products and services are governmental entities, we have been, and may continue to be, negatively affected by delaysin the passage of a new federal highway bill (or the extension of the existing bill) and budgetary issues and delays in purchasing decisions that manymunicipalities and other state and local agencies continue to face. Spending for new roadways, new systems to address traffic congestion and othertransportation infrastructure improvements has been delayed or eliminated in some instances. However, we believe the need to rebuild and modernize agingtransportation infrastructure will continue, and in addition to funds available through the federal highway bill, there exist various other funding mechanismsthat support transportation infrastructure and related projects. These include bonds, dedicated sales and gas tax measures and other alternative fundingsources.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 ("GAAP"). The preparation of thesefinancial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosuresof contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Onan ongoing basis, we evaluate these estimates and assumptions, including those related to the collectability of accounts receivable, the valuation ofinventories, the recoverability of long-lived assets and goodwill, the realizability of deferred tax assets, accounting for stock-based compensation, thevaluation of equity instruments, the valuation of contingent acquisition consideration, warranty reserves and other contingencies. We base these estimates onhistorical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions by their natureinvolve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions are inaccurate in any material respect, itcould have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts ofrevenues 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 under the terms of the arrangement has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collectionof the receivable is reasonably assured. These criteria are typically met at the time of product shipment, but in certain circumstances, may not be met untilreceipt or acceptance by the customer. Accordingly, at the date revenue is recognized, the significant obligations or uncertainties concerning the sale havebeen resolved.24Table of Contents Transportation Systems and iPerform revenues are derived primarily from long-term contracts with governmental agencies. When appropriate, revenuesare recognized using the percentage of completion method of accounting, whereby revenue is recognized as contract performance progresses and isdetermined based on the relationship of costs incurred to total estimated costs. Any anticipated losses on contracts are charged to earnings when identified.Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result inrevisions to costs and revenues and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when theirrealization is reasonably assured. Certain of our revenues are recognized as services are performed and amounts are earned, which is measured by timeincurred or other contractual milestones or output measures. Revenues accounted for in this manner generally relate to certain fixed fee professional services,cost-plus fixed fee or time-and-materials contracts. Revenues for ongoing operations and maintenance services contracts are generally accounted for ratablyas the services are performed throughout the term of the contract. Payments received in advance of services performed are deferred and recognized when therelated services are performed. 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. 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,and VSOE of the fair value of such support or maintenance does not exist, revenue from the entire arrangement is recognized ratably over the support period.When the 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 isdeferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue. Accounts Receivable. The collectability of our accounts receivable is evaluated through review of outstanding invoices and ongoing creditevaluations of our customers' financial condition. We record an allowance for doubtful accounts for specific receivables deemed to be at risk for collection aswell as a general allowance based on our historical collections experience. Considerable judgment is required in assessing and estimating the ultimaterealization of trade receivables, including the current credit-worthiness of each customer. If the financial condition of our customers deteriorates, resulting inan impairment of their ability to make 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 down thecarrying value of our inventories to net25Table of Contentsrealizable value for estimated excess and obsolete inventories in an amount equal to the difference between the cost of the inventories and their estimatedrealizable value. These estimates are based on management's judgments and assumptions as to future demand requirements and our evaluation of marketconditions. Demand for our products may fluctuate significantly over time, and actual demand and market conditions may be more or less favorable thanthose 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, once established, are not reversed until the related inventory has been sold or scrapped, so if actual market conditions aremore favorable in the fiscal periods subsequent to those in which we record significant write-downs, we may have higher gross margins when products aresold. Goodwill and Other Long-Lived Assets. Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition andthe 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 oneto seven 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 have determinedthat our reporting units for purposes of testing for goodwill impairment are identical to our reportable segments for financial reporting purposes. In Fiscal2012, we early adopted the provisions issued by the Financial Accounting Standard Board ("FASB") that were intended to simplify goodwill impairmenttesting. This guidance 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 lessthan 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, we conduct a two-step goodwill impairment test. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their carryingvalues. 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 monitorthe indicators for goodwill impairment testing between annual tests. Certain adverse business conditions impacting one or more reporting units would causeus to test goodwill for impairment on an interim basis. As part of our annual assessment, management determines the most appropriate and efficient method toassess goodwill for impairment, which could include either the simplified testing approach or the two-step goodwill test described above. 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 our products, materials and workmanship. Products soldto various 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 that26Table of Contentsmay be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized. The accruedwarranty reserve is included within accrued liabilities in the accompanying consolidated balance sheets. Should our actual experience of warranty returns behigher than anticipated, 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 whichthe 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,which increases our income tax expense in the period such determination is made. On an interim basis, we estimate what our anticipated annual effective tax rate will be, while also separately considering applicable discrete and othernon-recurring items, and record a quarterly income tax provision in accordance with this anticipated rate. As the fiscal year progresses, we refine our estimatesbased upon actual events and financial results during the year. This estimation process can result in significant changes to our expected effective tax rate.When this occurs, we adjust our income tax provision during the quarter in which our estimates are refined so that the year-to-date provision reflects theexpected annual effective tax rate. These changes, along with adjustments to our deferred taxes, among others, may create fluctuations in our overall effectivetax rate from quarter to quarter. 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 reversed in the first subsequent financial reporting period in which that threshold is nolonger met. The application of tax laws and regulations is subject to legal and factual interpretation, judgment and uncertainty. Tax laws and regulations themselvesare subject to change as a result of changes in fiscal policy, changes in legislation, the evolution of regulations and court rulings. Therefore, the actualliability 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 date fairvalue of our stock-based awards, whereby such fair values are amortized over the requisite service period. Our stock-based awards are currently comprised ofcommon stock options and restricted stock units. The fair value of our 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 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.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.27Table of ContentsResults of Operations The following table sets forth certain statement of operations data as a percentage of revenues for the periods indicated.Analysis of Fiscal 2014, Fiscal 2013 and Fiscal 2012 Results of Operations Total Revenues. Total revenues are comprised of sales from our Roadway Sensors, Transportation Systems and iPerform segments. The following tables present details of total revenues for Fiscal 2014 compared to Fiscal 2013, and Fiscal 2013 compared to Fiscal 2012: We currently have, and historically have had, a diverse customer base. For Fiscal 2014, one individual customer represented approximately 11% of ourtotal revenues and no other individual customer represented greater than 10% of our total revenues. For Fiscal 2013, one individual customer representedapproximately 13% of our total revenues and no other individual customer represented28 Year Ended March 31, 2014 2013 2012 Total revenues 100.0% 100.0% 100.0%Cost of revenues 61.9 62.3 60.5 Gross profit 38.1% 37.7% 39.5%Operating expenses: Selling, general and administrative 28.3 29.3 30.8 Research and development 5.9 5.0 5.4 Amortization of intangible assets 0.9 1.0 0.9 Change in fair value of contingent consideration 0.0 (0.3) (1.1)Impairment of goodwill — — — Total operating expenses 35.1 35.0 36.0 Operating income 3.0 2.7 3.5 Non-operating income (expense): Other income (expense), net — 0.0 0.0 Interest income (expense), net — (0.0) (0.1) Income from continuing operations before income taxes 3.0 2.7 3.4 Provision for income taxes (1.0) (1.2) (1.1) Income from continuing operations 2.0 1.5 2.3 Gain on sale of discontinued operation, net of tax 0.1 2.4 2.0 Net income 2.1% 3.9% 4.3% Year EndedMarch 31, %Change 2014 2013 Increase (In thousands, except percentages) Total revenues $68,228 $61,685 $6,543 10.6% Year EndedMarch 31, %Change 2013 2012 Increase (in thousands, except percentages) Total revenues $61,685 $58,406 $3,279 5.6%Table of Contentsgreater than 10% of our total revenues. For Fiscal 2012, no individual customer represented greater than 10% of our total revenues. Total revenues for Fiscal 2014 increased approximately 10.6% to $68.2 million, compared to $61.7 million in Fiscal 2013, due primarily to an increaseof approximately 22.2% in Roadway Sensors revenues, approximately 1.7% in Transportation Systems and approximately 4.6% in iPerform. Total revenues for Fiscal 2013 increased approximately 5.6% to $61.7 million, compared to $58.4 million in Fiscal 2012, due primarily to an increase ofapproximately 8.7% in Transportation Systems revenues and an increase in iPerform revenues of approximately $2.4 million, which was attributable to a fulltwelve months of revenues in Fiscal 2013 from the acquisition of BTS in November 2011. These increases in revenue were partially offset by an approximate6.1% decrease in Roadway Sensors revenues. Roadway Sensors revenues in Fiscal 2014 increased approximately 22.2% compared to Fiscal 2013, primarily due to the success of various growthinitiatives we developed earlier in the year, including increases in the Company's international sales and increases in unit sales of certain original equipmentmanufacturer ("OEM") products. Roadway Sensors revenues in Fiscal 2013 decreased approximately 6.1% compared to Fiscal 2012, due mainly as a result ofa decrease in federal stimulus funded projects and as a result of the discontinuation of redevelopment agencies in California. The federal stimulus fundedprojects and redevelopment agencies in California had a positive impact on Roadway Sensors revenues in the prior year periods. Going forward, we plan tofocus on our core domestic intersection market and refine and deliver products that address the needs of this market, namely our Vantage processor andcamera systems and our Vantage Vector video/radar hybrid sensor, as well as our newly released SmartCycle, SmartSpan and VantageNext products.Additionally, we plan to focus on international distribution channel expansion and expect to continue to refine products that address these markets, namelyour Abacus, P10 and P100 (formerly, Pico) products. Transportation Systems revenues in Fiscal 2014 increased approximately 1.7% compared to Fiscal 2013, primarily as a result of timing of backlogfulfillment on certain projects. Revenues from our Transportation Systems segment are primarily dependent upon the continued availability of funding at thelocal, state and federal levels from the various agencies and departments of transportation. Transportation Systems revenues for Fiscal 2013 increasedapproximately 8.7% compared to Fiscal 2012 due in part to several significant project wins in the first two quarters of Fiscal 2013. Going forward, we plan tocontinue to pursue larger contracts that may contain significant sub-consulting content, which will likely contribute to variability in the timing and amountof our Transportation Systems revenues from period to period. We also intend to continue to expand our foreign operations by pursuing additionalinternational opportunities in the Middle East and other regions. Among other factors, we believe the ability of our Transportation Systems segment to growand successfully win and service new contracts will be highly dependent upon our continued success in recruiting and retaining qualified personnel, as wellas the continued availability of funding at the local, state and federal levels from the various agencies and departments of transportation. iPerform revenues in Fiscal 2014 increased approximately 4.6% compared to Fiscal 2013, primarily attributable to additional contract awards withcertain public agencies. Approximately $3.3 million of the total revenues in Fiscal 2013 and approximately $935,000 of the total revenues in Fiscal 2012were attributable to the iPerform segment and was a direct result of the BTS acquisition in November 2011. Going forward, we plan to continue investing inthis segment, particularly in research, development, sales and marketing of the iPeMS performance measurement and ClearPath Weather solutions, with anear-term focus on delivering iPeMS to public agencies. We also plan for iPerform to pursue commercial opportunities in our ClearPath Weather andClearPath Agriculture solutions.29Table of Contents Gross Profit. The following tables present details of our gross profit for Fiscal 2014 compared to Fiscal 2013, and Fiscal 2013 compared to Fiscal 2012: Our total gross profit as a percentage of total revenues for Fiscal 2014 increased approximately 0.4% compared to Fiscal 2013 primarily as a result of ourproduct and service mix. Revenues derived from our Roadway Sensors segment increased to approximately 46.6% of our total revenues in Fiscal 2014 ascompared to approximately 42.2% in Fiscal 2013. Roadway Sensors revenues carry higher gross margins than Transportation Systems and iPerform revenues.Therefore, the increase in Roadway Sensors revenues had a positive impact on our overall margin. Our total gross profit as a percentage of total revenues for Fiscal 2013 decreased approximately 1.8% compared to Fiscal 2012 primarily as a result of ourproduct and service mix. Revenues derived from our Roadway Sensors segment decreased to approximately 42.2% of our total revenues in Fiscal 2013 ascompared to 47.4% in Fiscal 2012. Gross profits as a percentage of total revenues also declined, to a lesser extent, as a result of an approximate 2.7% decreasein Roadway Sensors profit margins due to the overall decrease in revenues and an increase in sustaining engineering activities. Roadway Sensors gross profit can fluctuate in any specific quarter or year based on, among other factors, customer and product mix, competitive pricingrequirements, product warranty costs and provisions for excess and obsolete inventories, as well as shifts of engineering resources from developmentactivities to sustaining activities, which we record as cost of goods sold. We recognize a portion of our Transportation Systems and iPerform revenues and related gross profit using percentage of completion contract accountingand the underlying mix of contract activity affects the related gross profit recognized in any given period. For the Transportation Systems segment, we expectto experience gross profit variability in future periods due to our contract mix and related sub-consulting content of such contracts, as well as factors such asour ability to efficiently utilize our workforce, which could cause fluctuations in our margins from period to period.30 Year Ended March 31, %Change 2014 2013 Increase (In thousands, except percentages) Gross profit $25,974 $23,258 $2,716 11.7%Gross profit as a % of total revenues 38.1% 37.7% Year Ended March 31, %Change 2013 2012 Increase (in thousands, except percentages) Gross profit $23,258 $23,071 $187 0.8%Gross profit as a % of total revenues 37.7% 39.5% Table of ContentsSelling, General and Administrative Expense The following table presents selling, general and administrative expense for Fiscal 2014 and Fiscal 2013: The overall increase in selling, general and administrative expense for Fiscal 2014, as compared to Fiscal 2013, was primarily due to plannedinvestments in Roadway Sensors and iPerform sales and marketing, including increased headcount which resulted in higher salary and personnel-relatedcosts and travel. The overall increase was also attributable to business travel, facility related costs, supplies and other miscellaneous expenses. We anticipate that our selling, general and administrative expense for the first half of Fiscal 2015 will be significantly higher than the correspondingperiod in Fiscal 2014 as a result of the additional costs incurred in connection with the audit of our Fiscal 2014 financial statements. In addition, we expectthat we will have additional recurring costs in future periods for improvements to our internal control design and the related augmentation of resources. The following table presents selling, general and administrative expense for Fiscal 2013 and 2012: Selling, general and administrative expenses for Fiscal 2013 were generally consistent, in total, with those in Fiscal 2012. The increase in facilities andinsurance costs was due to the increased cost of rent, rent related expenses and insurance coverage for a full twelve month period for our Berkeley, Californiaoffice, related to the operations of BTS, which was acquired in November 2011. This increase was partially offset by a decrease in travel expenses, as well adecrease in general salary and personnel-related expenses.31 Year Ended March 31, 2014 2013 Amount % ofRevenues Amount % ofRevenues Increase(Decrease) %Change (In thousands, except percentages) Salary and personnel-related $12,955 19.0%$12,223 19.8%$732 6.0%Facilities, insurance andsupplies 2,603 3.8 2,255 3.7 348 15.4 Travel and conferences 1,502 2.2 1,281 2.1 221 17.3 Professional and outsideservices 1,593 2.3 1,964 3.2 (371) (18.9)Other 616 0.9 367 0.6 249 67.8 Selling, general andadministrative $19,269 28.2%$18,090 29.3%$1,179 6.5 Year Ended March 31, 2013 2012 Amount % ofRevenues Amount % ofRevenues Increase(Decrease) %Change (In thousands, except percentages) Salary and personnel-related $12,223 19.8%$12,434 21.3%$(211) (1.7)%Facilities, insurance andsupplies 2,255 3.7 1,853 3.2 402 21.7 Travel and conferences 1,281 2.1 1,568 2.7 (287) (18.3)Professional and outsideservices 1,964 3.2 1,778 3.0 186 10.5 Other 367 0.6 353 0.6 14 4.0 Selling, general andadministrative $18,090 29.3%$17,986 30.8%$104 0.6 Table of ContentsResearch and Development Expense The following table presents research and development expense for Fiscal 2014 and Fiscal 2013: Research and development expense for Fiscal 2014 increased approximately 31.2% compared to Fiscal 2013, primarily due to increased salary andpersonnel costs related to certain planned expenditures for software development in the iPerform segment, including increased headcount, as well asinvestments in securing intellectual property rights. The iPerform segment continued to develop an improved version of their flagship traffic analytics product, iPeMS. We anticipate this new offering willallow customers to seamlessly ingest traffic data from leading data providers, providing "plug-and-play" data capabilities and reduce the need for customintegration. As of March 31, 2014, we have capitalized approximately $500,000 of iPeMS software development included in intangible assets in theconsolidated balance sheet. We began amortizing these assets into costs of revenues in the consolidated statement of operations in the third quarter of Fiscal2014. Going forward, iPerform expects to continue developing and upgrading its performance management solution suite, including iPeMS, ClearPath Weatherand ClearPath Agriculture, which will require additional investments. The following table presents research and development expense for Fiscal 2013 and Fiscal 2012: Research and development expense in Fiscal 2013 decreased approximately 3.5% when compared to Fiscal 2012, primarily due to certain expendituresrelated to software development in the iPeform segment that were capitalized to the balance sheet as of March 31, 2013, as well as certain reductions toRoadway Sensors salary and personnel-related expenditures. These reductions were offset by an increase in facility rents, development and supplies expense.The increase in facility costs was attributable to a full twelve month period for our Berkeley, California office, related to the operations of BTS that wereacquired in November 2011.32 Year Ended March 31, 2014 2013 Amount % ofRevenues Amount % ofRevenues Increase(Decrease) %Change (In thousands, except percentages) Salary and personnel-related $2,314 3.4%$1,454 2.4%$860 59.1%Facilities, development and supplies 1,232 1.8 1,378 2.2 (146) (10.6)Other 483 0.7 239 0.4 244 102.1 Research and development $4,029 5.9%$3,071 5.0%$958 31.2 Year Ended March 31, 2013 2012 Amount % ofRevenues Amount % ofRevenues Increase(Decrease) %Change (In thousands, except percentages) Salary and personnel-related $1,454 2.4%$2,153 3.7%$(699) (32.5)%Facilities, development and supplies 1,378 2.2 792 1.4 586 74.0 Other 239 0.4 238 0.4 1 0.4 Research and development $3,071 5.0%$3,183 5.4%$(112) (3.5) Table of ContentsImpairment of Goodwill In Fiscal 2012, we adopted the provisions issued by the FASB that are intended to simplify goodwill impairment testing. The updated guidance permitsus 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 its carrying amount. If weconclude 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-step goodwill impairment test.We performed annual impairment assessments of the carrying value of goodwill for Fiscal 2014 and Fiscal 2013 in their fourth fiscal quarters, respectively.We determined it was more appropriate and cost effective to perform a qualitative assessment in Fiscal 2012 and a quantitative first-step assessment in Fiscal2013 and Fiscal 2014 to estimate the fair value of our reporting units using both the income approach and market approach. Based on our assessments, wedetermined that no impairment was indicated as the estimated fair value of each reporting unit exceeded its respective carrying value. Based on our goodwill impairment testing for Fiscal 2012, Fiscal 2013 and Fiscal 2014, we believe the carrying value of our goodwill is not currentlyimpaired, as the estimated fair values of our reporting units exceeded their carrying values at March 31, 2014. If our actual financial results, or the plans andestimates used in future goodwill impairment analyses, are lower than the original estimates used to assess impairment of our goodwill, we could incur futuregoodwill impairment charges.Interest Expense, Net Net interest expense was approximately $0, $6,000 and $72,000 in Fiscal 2014, Fiscal 2013 and Fiscal 2012, respectively. The sequential decreases wereprimarily due to a continuous decrease in the overall level of borrowings on our term note. During the first quarter of Fiscal 2013, all principal and interestunder the term note were paid in full. See "Liquidity and Capital Resources" below for additional details on our borrowings.Income Taxes The following table presents our provision for income taxes for Fiscal 2014, Fiscal 2013 and Fiscal 2012: Our effective tax rate for Fiscal 2014 was favorably impacted by the recognition of approximately $359,000 of tax credits, partially offset by permanentnon-deductible tax items, including share-based payments and other permanent differences amounting to approximately $103,000, and by the recording avaluation allowance against certain of our state net operating losses in the amount of $185,000, net of federal benefit. Our effective tax rate for Fiscal 2013 was unfavorably impacted by permanent non-deductible tax items, including share-based payments and otherpermanent differences amounting to approximately $82,000, and by the recording of a valuation allowance against certain of our state net operating losses inthe amount of $188,000, net of federal benefit. These unfavorable impacts were partially offset by the recognition of tax credits of approximately $122,000for research and development and hiring activities, and by approximately $62,000 of tax benefit from non-taxable favorable fair value adjustmentsrecognized for financial statement purposes.33 Year Ended March 31, 2014 2013 2012 (In thousands, exceptpercentages) Provision for income taxes $704 $716 $643 Effective tax rate 34.8% 43.9% 33.0% Table of Contents Our effective tax rate for Fiscal 2012 was favorably impacted by the recognition of approximately $276,000 of previously unrecognized tax benefitsduring Fiscal 2012 due to the expiration of statutes limitation in various jurisdictions, by the recognition of tax credits of approximately $246,000 forresearch and development activities, and by approximately $211,000 of tax benefit from non-taxable favorable fair value adjustments recognized forfinancial statement purposes. These favorable impacts were partially offset by the impact of recognizing approximately $466,000 of expense upon theexpiration of a state net operating loss, net of federal benefit. As of March 31, 2014 and 2013, we recorded a valuation allowance against certain of our state net operating loss carryforwards, which we estimated werelikely to not be realized within the applicable carryforward period in the amount of $373,000 and $188,000, respectively, net of federal tax benefit. Inmaking our determination as to the realizability of our deferred tax assets, we reviewed all available positive and negative evidence, including reversal ofdeferred tax liabilities, potential carrybacks, 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 methodof accounting 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 makingsuch determination, we consider all available positive and negative evidence, including, but not limited to, scheduled reversals of deferred tax liabilities,projected future taxable income, tax planning strategies and recent financial performance. At March 31, 2014, we had $18.6 million of federal net operating loss carryforwards and $8.0 million of state net operating loss carryforwards that beginto expire in 2021 and 2015, 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 ResourcesCash Flows We have historically financed our operations with a combination of cash flows from operations, borrowings under credit facilities and the sale of equitysecurities. We currently rely on cash flows from operations and the availability of borrowings on a line of credit facility to fund our operations, which webelieve 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, 2014, we had $30.9 million in working capital, which included $20.4 million in cash and cash equivalents and reflected no borrowings onour $12.0 million line of credit. This compares to working capital of $29.4 million at March 31, 2013, which included no borrowings on our line of credit and$18.7 million in cash and cash equivalents.34Table of Contents The following table summarizes our cash flows for Fiscal 2014, Fiscal 2013 and Fiscal 2012: Operating Activities. Cash provided by our operations in Fiscal 2014 was primarily the result of our net income of approximately $1.4 million andapproximately $2.6 million non-cash items for depreciation, amortization, stock-based compensation expense and adjustments to deferred tax assets. Thiswas offset by approximately $0.7 million used in working capital, consisting of approximately $1.5 million from accounts receivable, inventories, and netcosts and estimated earnings in excess of billings, net of approximately $0.8 million for prepaid expenses and other assets and accounts payable and accruedactivities. Our accounts receivable and costs and estimated earnings in excess of billings increased approximately $0.9 million, or 4.9%, during Fiscal 2014 mainlyas a result of an approximate 11.0% year-over-year increase in revenues. In the near future, our accounts receivable and net costs and estimated earnings inexcess of billings accounts are likely to be determined based upon, among other factors, increases or decreases in revenues, the timing of collections ofexisting receivables and our ability to timely invoice our billings in excess of costs. We try to offset significant increases in accounts receivables throughincreased and focused collection efforts; however, we cannot assure you that our collection efforts will be successful. The increase in accounts payable byapproximately $502,000 at March 31, 2014 compared to March 31, 2013 was largely driven by the general timing of payments to vendors and sub-consultants. Cash provided by our operations in Fiscal 2013 was primarily the result of (i) adding back to net income $901,000 of depreciation expense, $279,000 ofstock-based compensation expense, $644,000 of amortization expense and $1.4 million of deferred tax assets, (ii) deducting from net income $181,000 inchanges in the fair value of contingent consideration related to our prior acquisitions of MET and BTS and $1.5 million of gain on the sale of VehicleSensors and (iii) approximately $300,000 in negative cash flows resulting from changes in our operating assets and liabilities during Fiscal 2013, all of whichwas offset by our net income of $2.4 million for such fiscal year. Our accounts receivable and net costs and estimated earnings in excess of billings increasedapproximately $851,000, or 5.2%, during Fiscal 2013 mainly as a result of an approximate 5.6% year-over-year increase in revenues. Cash provided by our operations in Fiscal 2012 was primarily the result of (i) adding back to net income $907,000 of depreciation expense, $331,000 ofstock-based compensation expense, $504,000 of amortization expense and $286,000 of deferred tax assets, (ii) deducting from net income $619,000 inchanges in the fair value of contingent consideration related to our acquisitions of MET and BTS and $1.2 million for the gain on the sale of Vehicle Sensorsand (iii) $2.1 million in negative cash flows resulting from changes in our operating assets and liabilities during Fiscal 2012, all of which was offset by ournet 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 21.9%, during Fiscal 2012 mainly as a result of a 12.4% year-over-year increase in net sales and contract revenues as well as the timing ofcollection on certain receivables. Investing Activities. Cash used in our investing activities during Fiscal 2014 consisted of approximately $452,000 for purchases of property andequipment and approximately $301,000 used for the development of software and data acquisitions in the iPerform segment. Cash provided by our35 Year Ended March 31, 2014 2013 2012 (In thousands) Net cash provided by (used in): Operating activities $3,274 $3,193 $668 Investing activities (779) 367 10,002 Financing activities (759) (3,583) (3,787)Table of Contentsinvesting activities for Fiscal 2013 primarily consisted of (i) $1.4 million in proceeds from the sale of the Vehicle Sensors segment, (ii) purchases of propertyand equipment of $815,000 and (iii) capitalized software of $190,000 related to iPeMS. Cash provided by our investing activities for Fiscal 2012 largelyconsisted of (i) $11.4 million in proceeds from the sale of the Vehicle Sensors segment, (ii) $1.0 million used for the acquisition of MET and BTS, whichconsisted of $840,000 for the initial purchase of BTS and $129,000 related to purchase price adjustments for the purchase of MET, (iii) purchases of propertyand equipment of $337,000 and (iv) capitalized software of $138,000 related to iPeMS. Financing Activities. Net cash used in financing activities during Fiscal 2014 was primarily the result of approximately $409,000 in cash used for adeferred payment for the prior acquisition of MET, approximately $250,000 in cash used for an earn-out payment for the prior acquisition of BTS, andapproximately $339,000 in cash used to repurchase shares of our common stock under our stock repurchase program. This was partially offset by our receiptof proceeds of $270,000 from stock option and warrant exercises. Net cash used in our financing activities during Fiscal 2013 primarily consisted of$2.5 million used to repurchase our common stock under our stock repurchase program, $634,000 in payments on our long-term debt and $700,000 paid tothe BTS shareholders for achievement of earn-out provisions of the purchase agreement. Net cash used in our financing activities during Fiscal 2012primarily consisted of $2.3 million in payments on our long-term debt, which consists of a bank term note, $676,000 related to the first year deferred paymentto the former stockholders of MET, $112,000 for the second anniversary payment for the prior acquisition of BTS and $754,000 used to repurchase ourcommon stock under our stock repurchase program.Borrowings 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. In September 2010, we entered into a modificationagreement with CB&T to extend the expiration date of our revolving line of credit to October 1, 2012. We repaid in full all principal and interest paymentsunder the term note in September 2012; the term note did not contain any early termination fees or prepayment penalties. In September 2012, we entered into a second modification agreement with CB&T to extend the expiration date of our revolving line of credit toOctober 1, 2014. Interest on borrowed amounts under the revolving line of credit are payable monthly at a rate equal to the current stated prime rate (3.25% atMarch 31, 2014) up to the current stated prime rate plus 0.25%, depending on aggregate deposit balances maintained at the bank in relation to the total loancommitment under the credit facility. We are obligated to pay an unused line fee of 0.25% per annum applied to the average unused portion of the revolvingline of credit during the preceding month. The revolving line of credit does not contain early termination fees and is secured by substantially all of our assets. As of March 31, 2014 and March 31, 2013, no amounts were outstanding under the revolving line of credit. Availability under this line of credit may bereduced or otherwise limited as a result of our obligations to comply with certain financial and other covenants. In connection with our credit facility and loan agreement with CB&T, we are also required to comply with certain quarterly financial covenants. Theseinclude achieving ratios for working capital and debt service, as well as maintaining a level of profitability, all of which are further defined in the agreement.As of March 31, 2014, we were in compliance with all such financial covenants. We cannot assure you that we will not violate one or more covenants in thefuture. If we were to be in violation of certain 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 couldhave a material adverse impact on our business and financial condition.36Table of ContentsOff-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 of thisreport, we do not believe we have any other material off-balance sheet arrangements at March 31, 2014.Seasonality We have historically experienced seasonality, particularly with respect to our Roadway Sensors sales in our third and fourth fiscal quarters due to areduction in intersection construction and repairs during the winter months due to inclement weather conditions, with the third fiscal quarter generallyimpacted the most by inclement weather. We have also experienced seasonality, particularly with respect to our Transportation Systems revenues in our thirdfiscal quarter due to the increased number of holidays, causing a reduction in available billable hours. With the addition of MET in January 2011, we havealso experienced seasonality related to certain ClearPath Weather services in our first and second fiscal quarters mainly because these services are generallynot required during spring and summer when weather conditions are comparatively milder.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, which bears interest equal to the prevailing prime rate (3.25% at March 31, 2014) plus0% to 1.0%. We do not believe that a 10% increase in the interest rate on our line of credit would have a material impact on our financial position, operatingresults or cash flows.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 amended (the"Exchange Act"), as of the end of the period covered by this Annual Report on Form 10-K, management evaluated, with the participation of our President andChief Executive Officer and our Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined inRule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officerand the Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2014 because of a materialweakness in our internal controls over financial reporting ("ICFR") as described below. (b) Material weakness in ICFR. A material weakness is a deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibilitythat a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. Management hasidentified the following significant deficiencies that constitute a material weakness in our ICFR as of March 31, 2014:37Table of Contents•The Company has not designed appropriate internal controls to analyze each consulting contract to determine if it should be accounted for inaccordance with contract accounting (FASB Accounting Standards Codification ("ASC") 605-35, Construction-Type and Production-TypeContracts) or as a multiple element arrangement (ASC 605-25, Revenue Recognition: Multiple-Element Arrangements) and the proper revenuerecognition policy to apply. •The Company has not consistently evaluated how an arrangement or a contract should be bifurcated into separate elements or how separateelements within such arrangements are properly combined in accordance with GAAP. •The Company has not designed sufficient controls to consider the impact of software elements and if such elements result in the arrangementor portions of the arrangement to be software elements to be accounted for in accordance with ASC 985-605, Software: Revenue Recognition. (c) Plan for remediation of material weakness. Management is actively engaged in the planning for, and implementation of, remediation efforts toaddress the material weakness identified above. Management has or intends to take the following actions to address the material weakness:•Management has created a new position (Director, Revenue Recognition) to perform the proper analysis for multiple element contracts,software elements, construction accounting, and other technical accounting issues. •Management began implementing processes and controls during the first quarter of Fiscal 2015 to evaluate multiple deliverable arrangementsto ensure revenue is recognized and accounted for in accordance with GAAP. •Management has performed a detailed review of revenues resulting from contracts as of March 31, 2014 and recorded the necessaryadjustments. (d) Changes in internal control. Except as discussed above, there was no change in our internal control over financial reporting that occurred duringthe fourth quarter of Fiscal 2014 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 beendetected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simpleerrors. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override ofthe control. 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-effective control system, misstatements due to management override, error or improper acts may occur and not be detected. Any resulting misstatement or lossmay have an adverse and material effect on our business, financial condition and results of operations.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 to38Table of Contentsmanagement and our Board of Directors regarding the effectiveness of our internal control processes over the preparation and fair presentation of publishedfinancial statements. We have assessed the effectiveness of our internal controls over financial reporting as of March 31, 2014. In making this assessment, we used the criteriaset forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2006). Based on ourassessment, we believe that, as of March 31, 2014, our internal control over financial reporting was not effective due to a material weakness related to ourcontrols over the accounting for consulting services revenues. A material weakness is a deficiency, or combination of deficiencies, in internal control overfinancial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not beprevented or detected on a timely basis. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financialreporting. Such a report is not required pursuant to the rules of the SEC applicable to smaller reporting companies.ITEM 9B. OTHER INFORMATION Effective February 21, 2014, we entered into a First Amendment to Lease (the "Amendment") with RREF II Freeway Acquisitions, LLC ("Landlord"). TheAmendment modifies the Office Lease dated May 24, 2007 ("Lease") between us and Landlord's predecessor-in-interest, Crown Carnegie Associates, LLC,pursuant to which we lease our headquarters in Santa Ana, California. The Amendment reduces the size of the leased premises to approximately 41,000rentable square feet and amends the term of the Lease to 96 months, beginning April 1, 2014. The monthly lease rate will be approximately $76,000 duringthe first year of the term and increase each year thereafter, up to a maximum of approximately $90,000 during the last year of the term. In addition, theAmendment provides for a second option to extend the term of the Lease by five years, for a total of two consecutive five year extension options under theLease, as well as approximately $328,000 in incentives in the form of tenant improvement allowances.39Table of ContentsPART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors and Executive Officers The table and narrative below set forth certain information, as of August 15, 2014, regarding our directors and executive officers. We believe ourdirectors have the following other key attributes that are important to an effective board of directors: integrity and demonstrated high ethical standards;sound judgment; analytical skills; the ability to engage management and each other in a constructive and collaborative fashion; diversity of experience andthought; and the commitment to devote significant time and energy to service on our Board of Directors and its committees. Richard Char has served as Senior Vice President of Business Development at VeriFone Holdings, Inc., global provider of technology for electronicpayment transactions and value-added services at the point-of-sale, since July 2014. From August 2011 to April 2014, Mr. Char was Managing Director andGlobal Head of Digital Networks and Retail Solutions with Citi Enterprise Payments. Prior to joining Citi, Mr. Char was the Senior Managing Director atRegent Pacific Management Corporation, a turnaround, restructuring, and performance improvement firm, from September 2010 to August 2011. FromOctober 2008 to March 2010, Mr. Char served as CEO of Incentium, LLC (formerly, VIPGift LLC), a provider of corporate and consumer loyalty andincentive programs. Incentium filed for bankruptcy protection in February 2011. From June 2006 to July 2008, Mr. Char was the Senior Vice President ofCorporate Development and General Counsel of Blackhawk Network, Inc., then an affiliate of Safeway which markets pre-paid gift cards through leadingU.S. retailers. Mr. Char's prior business experience includes serving as the President and Chief Executive Officer of IC Media, a developer of CMOS digitalimage sensors, as the Managing Director with the Technology Group of Credit Suisse First Boston, as Co-Head of Technology Investment Banking atCowen & Company, and as a partner in the law firm of Wilson Sonsini Goodrich & Rosati. Mr. Char also served on the board of directors of Netlist, Inc. fromJanuary 2010 until December 2012. He received his A.B. degree from Harvard College and his J.D. degree from Stanford Law School. Mr. Char has served as adirector since October 2005 and brings to the Board of Directors executive leadership experience, as well as significant corporate finance, legal and corporatedevelopment experience and financial acumen through his many years of work as a lawyer and in corporate finance. Kevin C. Daly, Ph.D. has served as the CEO of Maxxess Systems, Inc., a provider of electronic security systems, since November 2005. Between August2007 and August 2009, Dr. Daly also served as40Name Age Current Position(s) with IterisRichard Char(3) 55 DirectorKevin C. Daly,Ph.D.(2)(3) 70 DirectorGregory A. Miner(1) 59 Chairman of the BoardAbbas Mohaddes 57 Chief Executive Officer, President and DirectorGerard M. Mooney 60 DirectorThomas L.Thomas(1)(2)(3) 65 DirectorMikel H.Williams(1)(2) 57 DirectorTodd Kreter 54 Senior Vice President and General Manager of Roadway SensorsThomas N. Blair 50 Senior Vice President, iPerformCraig Christensen 36 Chief Financial Officer (Interim), Vice President and Controller(1)Member of the Audit Committee (2)Member of the Compensation Committee (3)Member of the Nominating and Corporate Governance CommitteeTable of ContentsCEO of iStor Networks, Inc., a manufacturer of IP SAN storage systems. Prior to that, he served as the CEO of several technology companies, includingAvamar Technologies, Inc. and ATL Products, Inc. Dr. Daly served on the board of directors of sTec, Inc., a provider of solid state disk systems, from May2010 until the acquisition of the company in September 2013 by Western Digital Corporation. Dr. Daly received a B.S. degree in electrical engineering fromthe University of Notre Dame and M.S., M.A. and Ph.D degrees in engineering from Princeton University. He has served as a director of Iteris since 1993.Having served as the CEO of several technology companies and as a director of both private and public companies, Dr. Daly offers to the Board a wealth ofmanagement and leadership experience as well as an understanding of issues faced by such companies. Gregory A. Miner has served as a Managing Partner of Merchant Capital Source, LLC, a company that provides working capital financing solutions tomerchants, since 2004. Prior to that, Mr. Miner served in a number of management positions with us and our subsidiaries, most recently as our ChiefExecutive Officer. Mr. Miner is a Certified Public Accountant and his business experience includes work at Deloitte Haskins and Sells (now known asDeloitte LLP). Mr. Miner has served as a director since 1998 and as our Chairman of the Board of Directors since 2004. Through his service in a variety ofexecutive positions with us and our subsidiaries, Mr. Miner has a deep and broad understanding of our business as well as the leadership skills and theoperational understanding to provide sound guidance in continuing to grow our business. Abbas Mohaddes has served as our Chief Executive Officer and President since March 2007 and as a director since September 2005. Prior to hispromotion in March 2007, Mr. Mohaddes served as our Executive Vice President from October 2004. He also served in a number of executive positions withour former Iteris, Inc. subsidiary ("Iteris Subsidiary"), through which the majority of our current operations were conducted until we merged that subsidiaryinto us in October 2004. Mr. Mohaddes was also the President and Chief Executive Officer of Meyer, Mohaddes Associates, Inc. ("MMA"), an ITS andtransportation firm that he co-founded, which was acquired by the Iteris Subsidiary in 1998. Mr. Mohaddes is an International Road Federation boardmember, a founding member and the past chairman of the board of Intelligent Transportation Society of America, a member of Transportation Research BoardExecutive Committee, Institute of Transportation Engineers, Forum for Corporate Directors, and UCI Chief Executive Roundtable. Mr. Mohaddes providesextensive technology, industry and management experience to the Board, as well as a substantial understanding of the Company and its operations resultingfrom his service as an officer of our Iteris Subsidiary and as the founder of MMA. Gerard M. Mooney retired from International Business Machines Corporation ("IBM") in March 2014, after serving in a number of senior positions since2000. Most recently, he served as the Vice President Strategy for IBM's Public Sector from February 2012 until his retirement, as the General Manager, GlobalSmarter Cities for IBM from November 2011 to February 2012, and as the General Manager, Global Government and Education for IBM from April 2008 toNovember 2011. Before joining IBM, Mr. Mooney held various management positions at Hewlett-Packard Company for six years. Mr. Mooney has extensiveoperational and financial experience across a broad range of technology-based companies, from start-ups to large public companies. He is actively involvedin the intelligent transportation market and serves as a member of the board of directors of the Intelligent Transportation Society of America. He also hasconsiderable experience with the major customers in the professional transportation market. He received a B.A. degree from Mount Saint Mary's College, anM.S. degree in Accounting from Georgetown University and an M.B.A. from Yale University. Mr. Mooney has served as a director of Iteris since September2013 and brings to the Board of Directors extensive experience in setting and implementing strategy for both large and small technology organizations, deepcategory knowledge of the intelligent transportation market, and familiarity with many key customers for intelligent transportation solutions.41Table of Contents Thomas L. Thomas has served as the Executive Chairman of International Decision Systems, a provider of software and solutions for the equipmentfinance market, since September of 2009. He also owns a management consulting business, T2 Partners. From 2004 until his retirement in July 2008,Mr. Thomas was as the President and Chief Operating Officer of Global Exchange Services, a provider of business-to-business EDI and supply chainmanagement solutions. Prior to that, Mr. Thomas served as the President and CEO at several technology companies, including HAHT Commerce, AjubaSolutions, and Vantive Corporation, and served in various senior and executive positions at 3Com Corporation, Dell Computer Corporation, Kraft GeneralFoods and Sara Lee Corporation. Mr. Thomas also served on the board of directors of infoGroup, Inc. from January 2009 to July 2010. Mr. Thomas has servedas a director of Iteris since 1999 and offers to the Board of Directors valuable business, leadership and strategic insights obtained through his service in avariety of industries, including a number of technology companies, and his experience in working with companies through several stages of theirdevelopment. Mikel H. Williams has served since May 2013 as the Chief Executive Officer and a director of JPS Industries, Inc., a manufacturer of sheet andmechanically formed glass and aramid substrate materials for the electronics, aerospace ballistics and general industrial applications. Prior to that,Mr. Williams was the President, Chief Executive Officer and a director of DDi Corp., a leading provider of time-critical, technologically advanced electronicsmanufacturing services, from November 2005 to May 2012 and a Senior Vice President and Chief Financial Officer of DDi from November 2004 to October2005. Mr. Williams has also served in various management positions with several technology related companies. DDi was acquired by Viasystems Group, Inc.in May 2012. Mr. Williams began his career as a certified public accountant in the State of Maryland, working as an auditor for Price Waterhouse.Mr. Williams also serves on the boards of directors of USEC Inc. and Lightbridge Communications Corporation and served on the board of directors ofTellabs, Inc. until it was sold in December 2012. Mr. Williams was added to USEC's board of directors in October 2013 on the recommendation of certainholders of USEC's convertible senior notes as USEC was considering a bankruptcy restructuring, which is currently in process. Mr. Williams has served as adirector of Iteris since April 2011 and provides the Board of Directors with operational and public company experience and valuable strategic insightsthrough his many years of leadership positions in technology-related companies with international operations, as well as valuable knowledge and insights infinance and financial reporting matters. Todd Kreter has served as Senior Vice President and General Manager of Roadway Sensors since May 2014. Mr. Kreter served as our Senior VicePresident, Sensors Development and Operations, of the Company from May 2009 to May 2014 and as Vice President of Engineering from November 2007 toMay 2009. Prior to joining us, Mr. Kreter served in a number of executive positions at Quantum Corporation, most recently as the VP Global Services from2004 to January 2007, where he managed the company's worldwide customer service organization. Mr. Kreter holds an executive M.B.A. from Stanford/AEAand a B.S. degree in mechanical engineering from California State University, Fullerton. Thomas N. Blair has served as Senior Vice President, iPerform, of the Company since July 2012. Prior to that, Mr. Blair served as general manager forTrimble Navigation Limited, a provider of integrated positioning, wireless, and software technology solutions, from 2007 to August 2011, and as vicepresident for new business development at @Road, Inc., a leading provider of mobile resource management solutions, from 2006 to 2007. He also worked asdirector of business and corporate development at iAnywhere Solutions, a Sybase company, from 2003 to 2006. Mr. Blair holds a B.S. degree in ManagementInformation Systems from DeVry Institute of Technology and an M.S. degree in Computer Science from Rochester Institute of Technology. Craig Christensen has served as our Chief Financial Officer (Interim) since July 2014, as Vice President since April 2014 and as Controller since April2012. Prior to joining the Company, Mr. Christensen served as the Corporate Controller and Director of Finance and Accounting at42Table of ContentsSM&A, a provider of competition and program management services, from 2007 until April 2012. Prior to joining SM&A, Mr. Christensen served as aManager in the Assurance Advisory & Business Services practice at Ernst & Young LLP. Mr. Christensen is a Certified Public Accountant in the State ofCalifornia and holds a Bachelor of Arts degree in Business Economics with an emphasis in Accounting from the University of California, Santa Barbara.Family Relationships There are no family relationships among any of our directors or executive officers.Code of Ethics and Business Conduct Our Board of Directors has adopted a Code of Ethics and Business Conduct ("Code of Ethics") which applies to all directors, officers (including ourprincipal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions) and employees. Thefull text of our Code of Ethics is available on the Investor Relations section of our website at www.iteris.com. We intend to disclose future amendments tocertain provisions of the Code of Ethics, and any waivers of provisions of the Code of Ethics required to be disclosed under the rules of the SEC, at the samelocation on our website.Audit Committee We currently have several standing committees of the Board, including the Audit Committee, the Compensation Committee, and the Nominating andCorporate Governance Committee. The current members of our Audit Committee are Messrs. Miner, Thomas and Williams. The Board has determined thateach member of the Audit Committee is "independent" under the listing standards of NYSE MKT and the SEC rules regarding audit committee memberships.The Board has identified Mr. Williams as the member of the Audit Committee who qualifies as an "audit committee financial expert" under applicable SECrules and regulations governing the composition of the Audit Committee.Changes in Nominating Procedures There have been no material changes to the procedures by which security holders may recommend nominees to our Board that were implemented sincewe last disclosed such procedures.Section 16(a) Beneficial Ownership Reporting Compliance Under the federal securities laws, our directors and officers and any persons holding more than 10% of our common stock are required to report theirownership of our common stock and any changes in that ownership to the SEC. Specific due dates for these reports have been established, and we are requiredto report any failure to file by such dates. Based solely on our review of copies of the reports on Forms 3, 4 and 5 received by us during or with respect to thefiscal year ended March 31, 2014 and written representations received from the reporting persons that no other reports were required, we believe that alldirectors, executive officers and persons who own more than 10% of our common stock have complied with the reporting requirements of Section 16(a) andhave filed all reports required by such section.ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table shows information regarding the compensation earned during the fiscal years ended March 31, 2013 and 2014 by (i) our ChiefExecutive Officer and (ii) our two most highly compensated executive officers (other than our Chief Executive Officer) who were serving as executive43Table of Contentsofficers as of March 31, 2014. The officers listed below are collectively referred to as the "named executive officers" or "NEOs" in this report.Plan-Based Bonuses For Fiscal 2014, the potential compensation for Messrs. Mohaddes, Kreter and Blair included an annual cash bonus based upon criteria established bythe Compensation Committee at the beginning of the fiscal year. The bonuses were entirely based on our corporate and business unit performance andachievements. For Mr. Mohaddes, 70% of his potential bonus was based on the total revenue and operating income achieved by the Company for the year,10% of his potential bonus was based on revenue achieved by the iPerform segment, and 20% of his potential bonus was based on achieving certainmilestones with respect to the iPerform segment. For Mr. Kreter, 50% of his potential bonus was based on the total revenue and operating income achieved bythe Company, 40% of his potential bonus was based on revenue and operating income achieved by the Roadway Sensors segment, and 10% of his potentialbonus was based on revenue achieved by the iPerform segment. For Mr. Blair, 40% of his potential bonus was based on the total revenue and operatingincome achieved by the Company, 30% of his potential bonus was based on revenue and operating income achieved by the iPerform segment, and 30% ofhis potential bonus was based on achieving certain milestones with respect to the iPerform segment.44Name and Principal Position FiscalYear Salary StockAwards(1) OptionAwards(2) Non-EquityIncentive PlanCompensation(3) All OtherCompensation(4) Total Abbas Mohaddes 2014 $376,910 — $96,800 $51,316 $13,650 $538,676 Chief ExecutiveOfficer 2013 380,016 — — 39,039 13,581 432,636 Todd Kreter 2014 213,013 — 38,720 38,372 6,771 296,876 Senior Vice President 2013 215,266 — — 20,871 7,608 243,745 Thomas N. Blair 2014 230,006 — 32,848 6,569 269,423 Senior Vice President 2013 160,894(5) 75,000 79,100 50,000 1,858 366,852 (1)The dollar amounts shown represent the grant date fair value of restricted stock units ("RSUs") granted during the applicable fiscalyear calculated in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")Topic 718, based on the closing sales price of the underlying shares of our common stock on the respective grant dates and withoutany adjustment for estimated forfeitures. Each RSU represents the right to receive one share of our common stock. The RSU awardsvest in equal annual installments over four years, with the first installment vesting approximately one year after the grant date. Vestedshares are issued as soon as practicable after the applicable vesting date. (2)The dollar amounts shown represent the grant date fair value of stock options granted during the applicable fiscal year determinedpursuant to the Black-Scholes-Merton option pricing formula, in accordance with FASB ASC Topic 718. For a discussion of valuationassumptions used in the calculations, see Note 11 of Notes to Consolidated Financial Statements, included in Part IV, Item 15 of thisreport. See also our discussion of stock-based compensation under "Management's Discussion and Analysis of Financial Conditionand Results of Operations—Critical Accounting Policies and Estimates". The options have an exercise price equal to the closing salesprice of our common stock as of the grant date, vest in equal annual installments over four years, and are not exercisable until vested. (3)The amounts shown in this column constitute the cash bonuses paid to each named executive officer based on the attainment ofcertain pre-established criteria. These awards are discussed in further detail under "Plan-Based Bonuses" below. (4)Represents 401(k) plan employer contributions and automobile allowances paid by us. (5)Mr. Blair was hired on July 10, 2012 at an annual salary of $230,000. The Fiscal 2013 salary represents the amount earned byMr. Blair from his hire date to the end of Fiscal 2013.Table of Contents The milestones to be achieved by Messrs. Mohaddes and Blair with respect to the iPerform segment for bonus purposes were (i) achieving developmentmilestones according to the approved Fiscal 2014 plan, which generally consisted of research and development, business development and marketing goals,and (ii) adding $10 million of backlog during Fiscal 2014, with no bonuses payable with respect to such milestone at or below $8.5 million of backlog. The corporate and business unit performance targets for the annual cash bonuses for Messrs. Mohaddes, Kreter and Blair for Fiscal 2014 were as follows: The potential bonuses at target for Fiscal 2014 were as follows: Mr. Mohaddes—$175,000; Mr. Kreter—$115,000; and Mr. Blair—$115,000. If ourperformance for Fiscal 2014 exceeded the revenue and operating income targets set for bonus purposes, the executives could have earned an additionalbonus of up to 50% of the target bonus award that was not based upon achieving milestones. The full 50% additional bonus would have been earned by theNEOs if the Company had achieved the revenue and operating income goals set forth under the "Maximum" column above. If the Company had achievedrevenue and operating income which were less than the goals set forth under the "Maximum" column but more than the amounts set forth under the "Target"column, the additional bonus payable would have been proportional, or based on the level of the Maximum goal achieved when measured from the Targetamount. For example, if the performance had exceeded the Target goal by 25% of the difference between the Maximum and Target amounts, then 25% of the50% additional bonus relating to such performance goal would have been payable. In Fiscal 2014, our actual revenue and operating results for the Company and for the relevant business units were as follows: Corporate Revenue—$68.2 million; Corporate Operating Income—$2.0 million; Roadway Sensors Revenue—$31.8 million; Roadway Sensors Operating Income—$3.7 million;iPerform Revenue—$5.9 million; and iPerform Operating Loss—$(2.5) million. As a percentage of the targets set for bonus purposes, the results were asfollows: Corporate Revenue—94.6%; Corporate Operating Income—76.4%; Roadway Sensors Revenue—98.7%; Roadway Sensors Operating Income—79.4%; iPerform Revenue—70.7%; and iPerform Operating Income—103.3%. For bonus purposes, segment operating income results include certaincorporate allocations. Accordingly, based upon the above described criteria, bonuses in the following amounts were approved for Fiscal 2014: Mr. Mohaddes—$51,316; Mr. Kreter—$38,372; and Mr. Blair—$32,848.45Performance Component(1) No BonusesAt or Below Target Maximum (in thousands) Corporate Revenue $61,285 $72,100 $79,310 Corporate Operating Income 2,120 2,650 2,915 Roadway Sensors Revenue 28,980 32,200 33,810 Roadway Sensors Operating Income 3,680 4,600 5,290 iPerform Revenue 7,560 8,400 9,240 iPerform Operating Loss (2,040) (2,550) (2,933)(1)The corporate revenue and operating income goals and the iPerform revenue goal were applicable to each NEO, the RoadwaySensors revenue and operating income goals were applicable to Mr. Kreter, and the iPerform Operating Income goal wasapplicable to Mr. Blair.Table of ContentsOutstanding Equity Awards at Fiscal Year-End The following table sets forth the outstanding equity awards held by each named executive officer as of March 31, 2014.Employment Contracts; Termination of Employment and Change of Control Arrangements We do not currently have any employment contracts in effect with any of our named executive officers other than the agreements described below. Weprovide incentives such as salary, benefits and option grants to attract and retain executive officers and other key associates. The plan administrators of the1997 Stock Incentive Plan and the 2007 Omnibus Incentive Plan have the authority to provide for the accelerated vesting of outstanding options held by anindividual in connection with the termination of such individual's employment following an acquisition in which these options are46 Option Awards Stock Awards Name Number ofSecuritiesUnderlyingUnexercisedOptions(#)Exercisable Number ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable OptionExercisePrice ($) OptionGrantDate(1) OptionExpirationDate NumberofShares orUnits ofStockThatHaveNotVested(2) MarketValueof SharesorUnits ofStockThatHave NotVested(3) AbbasMohaddes 30,000 — $2.21 06/15/06 06/14/16 12,500(4)$24,750 ChiefExecutiveOfficer 100,000 — 2.55 03/14/07 03/13/17 200,000 — 2.34 10/02/07 10/01/17 100,000 — 1.41 05/27/09 05/26/19 37,500 37,500 1.10 08/10/11 08/09/21 — 100,000 1.81 07/29/13 07/28/23 Todd Kreter 25,000 — 2.46 02/21/08 02/20/18 6,250(4) 12,375 Senior VicePresident 25,000 — 1.41 05/27/09 05/26/19 10,000(5) 19,800 15,000 15,000 1.10 08/10/11 08/09/21 — 40,000 1.81 07/29/13 07/28/23 Thomas N.Blair 25,000 75,000 1.50 08/09/12 08/08/22 37,500(6) 74,250 Senior VicePresident (1)Each option vests at the rate of 25% on each of the first four anniversaries of the grant date. (2)Indicates the number of shares of common stock subject to restricted stock unit ("RSU") awards. Each RSU represents the right toreceive one share of our common stock. (3)The dollar amounts represent the market value of the shares subject to the RSUs, calculated by multiplying the closing sales price ofour common stock on the last business day of Fiscal 2014 by the applicable number of shares. (4)The original RSU award was granted on August 12, 2010 and vests in equal annual installments over four years. The first installmentvested on August 10, 2011. The shares indicated represent the remaining unvested amount. (5)The original RSU award was granted on August 10, 2011 and vests in equal annual installments over four years. The first installmentvested on August 10, 2012. The shares indicated represent the remaining unvested amount. (6)The original RSU award was granted on August 9, 2012 and vests in equal annual installments over four years. The first installmentvested on August 9, 2013. The shares indicated represent the remaining unvested amount.Table of Contentsassumed or the repurchase rights with respect to the unvested shares are assigned or upon certain changes in control of the Company. Other than suchaccelerated vesting and the agreements described above, there is no agreement or policy which would entitle any executive officer to severance payments orany other compensation as a result of such officer's termination.Agreement with Abbas Mohaddes On July 29, 2013, we entered into an Employment Agreement (the "Employment Agreement") with Abbas Mohaddes, our Chief Executive Officer. TheEmployment Agreement has an initial term of three years and thereafter renews automatically for successive one year periods until ten years after the effectivedate (such initial term together with any renewal periods, the "Employment Period"), unless either party provides written notice of nonrenewal at least30 days prior to the end of the initial term or any renewal period. Under the terms of the Employment Agreement, Mr. Mohaddes is entitled to an initial basesalary of $380,000 per year, which may be increased from time to time at the sole discretion of the Compensation Committee of our Board of Directors. In theevent that he is terminated without Cause (as defined in the Employment Agreement) during the Employment Period, Mr. Mohaddes is entitled to (i) salarycontinuation for 12 months following termination (or a lump sum payment equal to his base salary in the event the termination without Cause occurs within12 months after a Change in Control (as defined in the Employment Agreement)), (ii) a lump sum payment equal to 50% of his average annual target bonusfor the two years immediately preceding the year of termination, payable no later than 30 days following termination, and (iii) reimbursement for the cost tocontinue health benefit coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) for a period of up to one year following termination.If his employment is terminated as a result of death or disability, then Mr. Mohaddes (or his estate) will be entitled to, in the case of death, a lump sumpayment equal to 50% of his then effective base salary and, in the case of disability, salary continuation of up to 90 days until he is eligible for short-termdisability payments. In the event that he resigns for Good Reason (as defined in the Employment Agreement) after a Change in Control, in lieu of any otherbenefits under the Employment Agreement, Mr. Mohaddes will be entitled to (I) a lump sum payment equal to one year's base salary plus an amount equal to50% of his average annual target bonus for the two years immediately preceding the year of termination, payable no later than 30 days following termination,and (II) reimbursement for the cost to continue health benefit coverage under COBRA for a period of up to one year following termination.Director Compensation Directors who are not employees of Iteris or any of its subsidiaries receive an annual retainer of $28,000 per year, paid quarterly, with the Chairman of theBoard receiving an additional $10,000 per year. No additional amounts are paid for attending meetings. In addition, each non-employee director who serveson a Board committee receives the following annual amounts, paid quarterly: Audit Committee—$2,500 ($5,000 for the Chair); Compensation Committee—$1,500 ($3,000 for the Chair); Nominating and Governance Committee—$1,000 ($2,000 for the Chair); ad hoc committees—$500 ($1,000 for the Chair). Alldirectors are reimbursed for their out-of-pocket expenses incurred in attending meetings of our Board of Directors and its committees. Non-employee directors are also eligible to receive periodic option grants pursuant to the Directors' Automatic Option Grant Program under our 2007Omnibus Incentive Plan. Under that plan, each non-employee director receives an option to purchase 20,000 shares of common stock upon his initialappointment to the Board of Directors and an additional option to purchase 10,000 shares of common stock on the date of each annual meeting provided hehas served on the Board for at least six months as of such annual meeting. Each such option is immediately exercisable for any or all of the option shares, butthe shares acquired are subject to repurchase by the Company at the exercise price paid per share if the optionee ceases service with the Company prior tovesting in those shares. Each47Table of Contentsoption vests in full upon the optionee's completion of one year of service measured from the grant date. However, the vesting of each such option willaccelerate in full upon certain changes in control of the Company or upon the optionee's death or disability while a director. Each option granted to non-employee directors under the Directors' Automatic Option Grant Program will have an exercise price equal to the fair market value of the common stock onthe grant date and a maximum term of ten years, subject to earlier termination following the optionee's cessation of service as a Board member. Following theoptionee's cessation of Board service for any reason, each option will remain exercisable for a 12-month period and may be exercised during that time for anyor all shares in which the optionee is vested at the time of such cessation of service as a director. The following table sets forth a summary of the compensation earned in Fiscal 2014 by each person who served as a director during such year, who is nota named executive officer.Indemnification of Directors and Officers Under Section 145 of the Delaware General Corporation Law, we can indemnify our directors and officers against liabilities they may incur in suchcapacities, including liabilities under the Securities Act of 1933, as amended. Our certificate of incorporation and bylaws provide that we will indemnify ourdirectors and officers to the fullest extent permitted by law, and our bylaws require us to advance litigation expenses upon receipt of an undertaking by thedirector or officer to repay such advances if it is ultimately determined that the director or officer is not entitled to indemnification. The bylaws furtherprovide that rights conferred under such bylaws do not exclude any other right such persons may have or acquire under any bylaw, agreement, vote ofstockholders or disinterested directors or otherwise. Our certificate of incorporation provides that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors'fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and48Name Fees Earned orPaid in Cash($)(1) OptionAwards($)(2) Total ($) Richard Char $29,000 $9,382 $38,382 Kevin C. Daly, Ph.D. 33,500 9,382 42,882 Gregory A. Miner 41,500 9,382 50,882 Gerard M. Mooney 14,000 18,763 32,763 Thomas L. Thomas 33,000 9,382 42,382 Mikel H. Williams 34,500 9,382 43,882 (1)Represents amounts earned by the directors based on the compensation arrangement described above. (2)The dollar amounts shown represent the grant date fair value of stock options granted in Fiscal 2014 determined pursuant tothe Black-Scholes-Merton option pricing formula, in accordance with FASB ASC Topic 718. For a discussion of valuationassumptions used in the calculations, see Note 11 of Notes to Consolidated Financial Statements, included in Part IV, Item 15of this report. See also our discussion of stock-based compensation under "Management's Discussion and Analysis of FinancialCondition and Results of Operations—Critical Accounting Policies and Estimates". At the end of Fiscal 2014, the non-employee directors held options for the following number of shares of common stock: Richard Char—75,000; Kevin C. Daly,Ph.D.—65,000; Gregory A. Miner—60,000; Gerard M. Mooney—20,000; Thomas L. Thomas—65,000; and Mikel H.Williams—40,000.Table of Contentsin appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. Inaddition, each director will continue to be subject to liability for breach of the director's duty of loyalty to us or our stockholders, for acts or omissions not ingood faith or involving intentional misconduct or knowing violations of law, for actions leading to improper personal benefit to the director, and forpayment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director'sresponsibilities under any other law, such as the federal securities laws or state or federal environmental laws. We have entered into agreements to indemnify certain of our directors and officers in addition to the indemnification provided for in the certificate ofincorporation and bylaws. These agreements, among other things, indemnify such directors and officers for certain expenses (including attorneys' fees),judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of the Company, onaccount of services as a director or officer of Iteris, or as a director or officer of any other company or enterprise to which the person provides services at ourrequest.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Common Stock Ownership of Certain Beneficial Owners and Management The following table sets forth, as of August 15, 2014, the number and percentage ownership of our common stock by (i) all persons known to us tobeneficially own more than 5% of the outstanding common stock, (ii) each of the named executive officers in the Summary Compensation Table whichappears elsewhere herein, (iii) each of our directors, and (iv) all of our executive officers and directors as a group. To our knowledge, except as otherwiseindicated, each of the persons named in this table has sole voting and investment power with respect to the common stock shown as beneficially owned,subject to community property and similar laws, where applicable.49 Common Stock Name and Address of Beneficial Owner(1) Amount andNature ofBeneficialOwnership(2) Percent ofClass(2) Lloyd I. Miller, III(3) 5,367,630 16.5%Thomson Horstmann & Bryant, Inc.(4) 2,070,852 6.4 Abbas Mohaddes(5) 1,398,691 4.2 Todd Kreter(6) 111,060 * Thomas N. Blair(7) 66,401 * Richard Char(8) 84,000 * Kevin C. Daly, Ph.D(9) 420,132 1.3 Gregory A. Miner(10) 687,485 2.1 Gerard M. Mooney(11) 20,000 * Thomas L. Thomas(12) 104,000 * Mikel H. Williams(13) 50,000 * All executive officers and directors as a group (10 persons)(14) 2,963,019 8.8%*Less than 1%. (1)The address of each of the directors and officers is 1700 Carnegie Avenue, Suite 100, Santa Ana, CA 92705.Table of Contents50(2)Based on 32,608,874 shares of common stock outstanding as of August 15, 2014. Shares of common stock subject to options whichare exercisable within 60 days of August 15, 2014 are deemed to be beneficially owned by the person holding such options orwarrants for the purpose of computing the percentage of ownership of such person but are not treated as outstanding for the purpose ofcomputing the percentage of any other person. Other than as described in the preceding sentence, shares issuable upon exercise ofoutstanding options and warrants are not deemed to be outstanding for purposes of this calculation. In addition to the shares held inthe individual's name, the number of shares indicated also includes shares held for the benefit of the named person under our 401(k)and Stock Ownership Plan. (3)Pursuant to an amendment to a Schedule 13G filed on February 12, 2014 with the SEC, Mr. Miller reported that, as of December 31,2013, he had sole dispositive and voting power with respect to 5,231,993 shares as (i) the manager of a limited liability company thatis the general partner of certain limited partnerships, (ii) the manager of a limited liability company that is the adviser to certain trusts,(iii) the manager of a limited liability company and (iv) an individual. As of such date, Mr. Miller also had shared dispositive andvoting power with respect to 135,637 shares as (i) an advisor to the trustee of a certain trust and (ii) an authorized person with respectto a custody account. The address for Mr. Miller is 222 Lakeview Avenue, Suite 160-365, West Palm Beach, Florida 33401. (4)Pursuant to a Schedule 13G filed on February 6, 2014 with the SEC, Thomson Horstmann & Bryant, Inc. reported that it had soledispositive power over 2,070,852 shares (and shared voting power over 968,391 shares). The address for Thomson Horstmann &Bryant, Inc. is 501 Merritt 7, Norwalk, CT 06851. (5)Includes (i) 492,500 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 daysafter August 15, 2014 and (ii) 11,540 shares held by Mr. Mohaddes' IRA. (6)Includes 82,500 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days afterAugust 15, 2014. (7)Includes 50,000 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days afterAugust 15, 2014. (8)Includes (i) 75,000 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 daysafter August 15, 2014 and (ii) 9,000 shares held by the Char-Yoshida Family Trust, of which Mr. Char is a co-trustee. (9)Includes (i) 100 shares held by Dr. Daly's spouse, (ii) 329,032 shares held by Dr. Daly's IRA, and (iii) 65,000 shares issuable uponexercise of options that are currently exercisable or will become exercisable within 60 days after August 15, 2014. (10)Includes (i) 183,334 shares held by Mr. Miner's IRA, (ii) 19,230 shares held by Mr. Miner's wife's IRA and (iii) 60,000 shares issuableupon exercise of options that are currently exercisable or will become exercisable within 60 days after August 15, 2014. (11)Includes 20,000 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days afterAugust 15, 2014. (12)Includes 65,000 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days afterAugust 15, 2014. (13)Includes 40,000 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 days afterAugust 15, 2014. (14)Includes 963,750 shares issuable upon exercise of options that are currently exercisable or will become exercisable within 60 daysafter August 15, 2014. The number indicated includes shares held by Craig Christensen, who was appointed as our Chief FinancialOfficer (Interim) in July 2014.Table of ContentsEquity Compensation Plans The following table provides information as of March 31, 2014 with respect to shares of our common stock that may be issued under existing equitycompensation plans.ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Certain Transactions Since April 1, 2012, other than the agreements and transactions described in Part III, Item 11 and the transactions described below, there has not been, noris there any proposed transaction, where we (or any of our subsidiaries) were or will be a party in which the amount involved exceeded or will exceed thelesser of $120,000 or the average of our total assets at year end for the last two fiscal years and in which any director, executive officer, holder of more than5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect materialinterest. We previously subleased office space to Maxxess Systems, Inc. ("Maxxess"), one of our former subsidiaries that we sold in September 2003 and iscurrently owned by an investor group that includes Mr. Daly, a current director of Iteris and the Chief Executive Officer of Maxxess, and Joel Slutzky, aformer director of Iteris. The sublease terminated in September 2007, at which time Maxxess owed us an aggregate of $274,000 related to this sublease andcertain ancillary corporate services that we provided to Maxxess. In August 2009, Maxxess executed a promissory note payable to us for $274,000. Thepromissory note accrued interest at a rate of 6% per annum, compounded annually, with such interest to be paid annually on the first business day of eachcalendar year. Payments under the note may be made in bona fide services rendered by Maxxess to us to the extent such services and amounts are pre-approved in writing by us. All amounts outstanding under the note was to become due and payable on the earliest of (i) August 10, 2014, (ii) a change ofcontrol in Maxxess, or (iii) a financing by Maxxess resulting in gross proceeds of at least $10 million. On July 23, 2013, the promissory note with Maxxess was amended and restated. The amended and restated note bears interest at a rate of 6% per annum,compounded annually, with accrued interest to51Plan Category Number of Securities tobe Issued Upon Exerciseof Outstanding Options,Warrants and Rights Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights Number of SecuritiesRemaining Available ForFuture Issuance underEquity Compensation Plans(excluding securitiesreflected in first column) Equity Compensation PlansApproved by SecurityHolders 1997 Stock IncentivePlan 262,000 $2.74 — 2007 Omnibus IncentivePlan 1,952,000(1) 1.75(2) 263,000 Equity Compensation PlansNot Approved by SecurityHolders None — — — Total 2,214,000(1)$1.88(2) 263,000 (1)Includes 195,000 shares of our common stock subject to RSUs that entitle each holder to one share of common stock for each suchunit that vests over the holder's period of continued service. (2)Calculated without taking into account the 195,000 shares of common stock subject to outstanding RSUs that become issuable asthose units vest, without the payment of any additional consideration or exercise price.Table of Contentsbe paid quarterly on the first business day of each calendar quarter. Payments under the amended and restated note may only be made in cash and all amountsoutstanding will become due and payable on the earliest of (i) August 10, 2016, (ii) a change of control in Maxxess or (iii) a financing by Maxxess resultingin gross proceeds of at least $10 million. As of March 31, 2014 and as of August 15, 2014, approximately $259,000 of the original principal balance wasoutstanding and payable to us. During each of Fiscal 2013 and Fiscal 2014, interest payments totaling approximately $16,000 were made by Maxxess. Wehave previously fully reserved for amounts owed to us by Maxxess and all outstanding principal remains fully reserved.Director Independence The Board of Directors has determined that each of Messrs. Char, Daly, Miner, Mooney, Thomas and Williams satisfies the requirements for"independence" under the listing standards of NYSE MKT.ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Principal Accountant Fees The following table presents the aggregate fees billed by McGladrey LLP for the indicated services for the fiscal years ended March 31, 2013 and 2014: Audit Fees. Audit fees consist of fees for professional services rendered in connection with the audit of our annual consolidated financial statementsand review of the consolidated financial statements included in our quarterly reports on Form 10-Q and other regulatory filings. Additionally, audit feesinclude professional services rendered in connection with the Company's annual statutory overhead rate audits. Audit-Related Fees. Audit-related fees consist of fees for professional services that are reasonably related to the performance of the audit or review ofour consolidated financial statements but are not reported under "Audit Fees." Such fees include, among other things, fees for registration statements, fees forinternal control reviews and assistance with meeting the requirements of Section 404 of the Sarbanes-Oxley Act and certain consultations concerningfinancial accounting and reporting standards. Tax Fees. Tax fees consist of fees billed to us by McGladrey LLP during the fiscal years ended March 31, 2013 and 2014 for tax compliance services,which include the preparation of federal, state and international tax returns, and for tax consultations, including tax planning and federal, state andinternational tax advice. All Other Fees. There were no other fees billed to us by McGladrey LLP during the fiscal years ended March 31, 2013 and 2014.Audit Committee Pre-Approval Policies and Procedures All engagements for services by McGladrey LLP or other independent registered public accountants are subject to prior approval by the AuditCommittee; however, de minimis non-audit services may instead be approved in accordance with applicable SEC rules. The prior approval of the AuditCommittee was obtained for all services provided by McGladrey LLP for the fiscal year ended March 31, 2014.52 Fiscal Year EndedMarch 31, 2013 2014 Audit Fees $275,000 $1,082,000 Audit-Related Fees 52,000 50,000 Tax Fees 105,000 27,000 All Other Fees — — Total Fees $432,000 $1,159,000 Table of ContentsPART 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 on Form 10-Kcommencing on the pages referenced below: 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.53Report of Independent Registered Public Accounting Firm 57Consolidated Balance Sheets as of March 31, 2014 and 2013 58Consolidated Statements of Operations for the fiscal years ended March 31, 2014, 2013 and 2012 59Consolidated Statements of Stockholders' Equity for the fiscal years ended March 31, 2014, 2013 and 2012 60Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2014, 2013 and 2012 61Notes to Consolidated Financial Statements 62Table of ContentsSIGNATURES 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 on itsbehalf by the undersigned, thereunto duly authorized.POWER OF ATTORNEY We, the undersigned officers and directors of Iteris, Inc., do hereby constitute and appoint Craig. A Christensen 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, as amended, this report has been signed below by the following persons on behalfof the registrant in the capacities and on the dates indicated:54Dated: September 3, 2014 ITERIS, INC.(Registrant) By /s/ ABBAS MOHADDESAbbas MohaddesChief Executive Officer(Principal Executive Officer)Signature Title Date /s/ ABBAS MOHADDESAbbas Mohaddes Director, President and Chief Executive Officer(principal executive officer) September 3, 2014/s/ CRAIG A. CHRISTENSENCraig A. Christensen Chief Financial Officer (Interim) (principalfinancial and accounting officer) September 3, 2014/s/ GREGORY A. MINERGregory A. Miner Chairman of the Board September 3, 2014/s/ RICHARD CHARRichard Char Director September 3, 2014Table of Contents55Signature Title Date /s/ KEVIN C. DALYKevin C. Daly, Ph.D. Director September 3, 2014/s/ GERARD M. MOONEYGerard M. Mooney Director September 3, 2014/s/ THOMAS L. THOMASThomas L. Thomas Director September 3, 2014/s/ MIKEL WILLIAMSMikel Williams Director September 3, 2014Table of ContentsIteris, Inc. Index to Consolidated Financial Statements 56Report of Independent Registered Public Accounting Firm 57 Consolidated Balance Sheets as of March 31, 2014 and 2013 58 Consolidated Statements of Operations for the fiscal years ended March 31, 2014, 2013 and 2012 59 Consolidated Statements of Stockholders' Equity for the fiscal years ended March 31, 2014, 2013 and 2012 60 Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2014, 2013 and 2012 61 Notes to Consolidated Financial Statements 62 Table of ContentsReport 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, 2014 and 2013, and the relatedconsolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 2014. These financialstatements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company isnot required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonablebasis 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, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended March 31,2014, in conformity with U.S. generally accepted accounting principles./s/ McGladrey LLPIrvine, CaliforniaSeptember 3, 201457Table of ContentsIteris, Inc.Consolidated Balance Sheets(In thousands, except par value) See accompanying notes.58 March 31, 2014 2013 Assets Current assets: Cash and cash equivalents $20,414 $18,678 Trade accounts receivable, net of allowance for doubtful accounts of $532 and $322 atMarch 31, 2014 and March 31, 2013, respectively 12,349 10,946 Costs and estimated earnings in excess of billings on uncompleted contracts 5,813 6,346 Inventories 2,546 2,465 Deferred income taxes 1,429 2,363 Prepaid expenses and other current assets 1,275 1,311 Total current assets 43,826 42,109 Property and equipment, net 1,546 1,862 Deferred income taxes 6,112 5,888 Intangible assets, net 1,584 2,124 Goodwill 17,318 17,318 Other assets 221 210 Total assets $70,607 $69,511 Liabilities and stockholders' equity Current liabilities: Trade accounts payable $5,913 $5,411 Accrued payroll and related expenses 3,971 3,374 Accrued liabilities 1,643 1,979 Billings in excess of costs and estimated earnings on uncompleted contracts 1,391 1,958 Total current liabilities 12,918 12,722 Deferred rent — 312 Unrecognized tax benefits 199 286 Other non-current liabilities — 310 Total liabilities 13,117 13,630 Commitments and contingencies Stockholders' equity: Preferred stock, $1.00 par value: Authorized shares—2,000 Issued and outstanding shares—none — — Common stock, $0.10 par value: Authorized shares—70,000 at March 31, 2014 and March 31, 2013 Issued and outstanding shares—32,788 at March 31, 2014 and 32,626 at March 31, 2013 3,280 3,264 Additional paid-in capital 135,986 135,802 Accumulated deficit (81,776) (83,185) Total stockholders' equity 57,490 55,881 Total liabilities and stockholders' equity $70,607 $69,511 Table of ContentsIteris, Inc.Consolidated Statements of Operations(In thousands, except per share amounts) See accompanying notes.59 Year Ended March 31, 2014 2013 2012 Total revenues $68,228 $61,685 $58,406 Cost of revenues 42,254 38,427 35,335 Gross profit 25,974 23,258 23,071 Operating expenses: Selling, general and administrative 19,269 18,090 17,986 Research and development 4,029 3,071 3,183 Amortization of intangible assets 627 644 504 Change in fair value of contingent consideration 25 (181) (619) Total operating expenses 23,950 21,624 21,054 Operating income 2,024 1,634 2,017 Non-operating income (expense): Other income (expense), net — 2 4 Interest income (expense), net — (6) (72) Income from continuing operations before income taxes 2,024 1,630 1,949 Provision for income taxes (704) (716) (643) Income from continuing operations 1,320 914 1,306 Gain on sale of discontinued operation, net of tax 89 1,465 1,180 Income from discontinued operation, net of tax — — 28 Net income $1,409 $2,379 $2,514 Income per share from continuing operations—basic and diluted $0.04 $0.03 $0.04 Gain per share from sale of discontinued operation—basic and diluted $0.00 $0.04 $0.03 Income per share from discontinued operation—basic and diluted $0.00 $0.00 $0.00 Net income per share—basic and diluted $0.04 $0.07 $0.07 Shares used in basic per share calculations 32,665 33,491 34,259 Shares used in diluted per share calculations 32,847 33,609 34,380 Table of ContentsIteris, Inc.Consolidated Statements of Stockholders' Equity(In thousands) See accompanying notes.60 Common Stock AdditionalPaid-InCapital AccumulatedDeficit TotalStockholders'Equity Shares Amount Balance at March 31, 2011 34,364 $3,436 $137,938 $(88,078)$53,296 Stock option exercises 68 8 77 — 85 Stock-based compensation — — 331 — 331 Issuance of shares pursuant to vesting of restricted stockunits 51 5 (5) — — Repurchases of common stock (574) (58) (696) — (754)Net income — — — 2,514 2,514 Balance at March 31, 2012 33,909 3,391 137,645 (85,564) 55,472 Stock option exercises 190 20 232 — 252 Stock-based compensation — — 279 — 279 Issuance of shares pursuant to vesting of restricted stockunits 51 5 (29) — (24)Repurchases of common stock (1,524) (152) (2,325) — (2,477)Net income — — — 2,379 2,379 Balance at March 31, 2013 32,626 3,264 135,802 (83,185) 55,881 Stock option exercises 284 27 228 — 255 Warrant exercises 15 2 13 — 15 Stock-based compensation — — 300 — 300 Issuance of shares pursuant to vesting of restricted stockunits 59 6 (37) — (31)Repurchases of common stock (196) (19) (320) — (339)Net income — — — 1,409 1,409 Balance at March 31, 2014 32,788 $3,280 $135,986 $(81,776)$57,490 Table of ContentsIteris, Inc.Consolidated Statements of Cash Flows(In thousands) See accompanying notes.61 Year Ended March 31, 2014 2013 2012 Cash flows from operating activities Net income $1,409 $2,379 $2,514 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes 710 1,414 286 Depreciation of property and equipment 768 901 907 Stock-based compensation 300 279 331 Amortization of intangible assets 733 644 504 Change in fair value of contingent consideration 25 (181) (619)Gain on sale of discontinued operation, net of tax (89) (1,465) (1,180)Loss on disposal of equipment — — 1 Loss on impairment of intangible asset 108 — — Changes in operating assets and liabilities, net of effects of discontinued operation: Accounts receivable (1,403) 135 (1,826)Net costs and estimated earnings in excess of billings (34) (570) (902)Inventories (81) (11) 79 Prepaid expenses and other assets 140 (793) 284 Accounts payable and accrued expenses 688 461 289 Net cash provided by operating activities 3,274 3,193 668 Cash flows from investing activities Purchases of property and equipment (452) (815) (337)Capitalized software (301) (190) (138)Cash paid for business combination — — (969)Net proceeds from sale of business segment (26) 1,372 11,446 Net cash (used in) provided by investing activities (779) 367 10,002 Cash flows from financing activities Payments on long-term debt — (634) (2,330)Deferred payment for prior business combination (659) (700) (788)Repurchases of common stock (339) (2,477) (754)Proceeds from stock option exercises 270 252 85 Issuance of common stock pursuant to restricted stock units (31) (24) — Net cash used in financing activities (759) (3,583) (3,787) Increase (decrease) in cash and cash equivalents 1,736 (23) 6,883 Cash and cash equivalents at beginning of period 18,678 18,701 11,818 Cash and cash equivalents at end of period $20,414 $18,678 $18,701 Supplemental cash flow information: Cash paid during the year for: Interest $33 $45 $111 Income taxes 128 339 439 Supplemental schedule of non-cash investing and financing activities: Liabilities incurred for business combinations $— $— $971 Issuance of common stock for vested restricted stock units 6 5 5 Table of ContentsIteris, Inc. Notes to Consolidated Financial Statements March 31, 2014 1. Description of Business and Summary of Significant Accounting PoliciesDescription of Business Iteris, Inc. (referred to collectively with our subsidiaries in these consolidated financial statements as "Iteris," the "Company," "we," "our" and "us") is aleading provider of intelligent information solutions for 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 also believe our products, services and solutions, in conjunction with sound trafficmanagement, minimize the environmental impact of traffic congestion. By combining our unique intellectual property, products, decades of experience intraffic management, hyper-local weather solutions and information technologies, we offer a broad range of Intelligent Transportation Systems ("ITS")solutions to customers throughout the U.S. and internationally. Iteris was incorporated in Delaware in 1987.Basis of Presentation Our consolidated financial statements include the accounts of Iteris, Inc. and its 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 assumptions thataffect 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 collectability of accounts receivable, the valuation of inventories, the recoverability of long-lived assetsand goodwill, the realizability of deferred tax assets, accounting for stock-based compensation, the valuation of equity instruments, the valuation ofcontingent acquisition consideration, warranty reserves and other contingencies.Revenue Recognition 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 under the terms of the arrangement has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection of the receivable isreasonably assured. These criteria are typically met at the time of product shipment, but in certain circumstances, may not be met until receipt or acceptanceby the customer. Accordingly, at the date revenue is recognized, the significant obligations or uncertainties concerning the sale have been resolved.62Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20141. Description of Business and Summary of Significant Accounting Policies (Continued) Transportation Systems and iPerform revenues are derived primarily from long-term contracts with governmental agencies. When appropriate, revenuesare recognized using the percentage of completion method of accounting, whereby revenue is recognized as contract performance progresses and isdetermined based on the relationship of costs incurred to total estimated costs. Any anticipated losses on contracts are charged to earnings when identified.Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result inrevisions to costs and revenues and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when theirrealization is reasonably assured. Certain of our revenues are recognized as services are performed and amounts are earned, which is measured by timeincurred or other contractual milestones or output measures. Revenues accounted for in this manner generally relate to certain fixed fee professional services,cost-plus fixed fee or time-and-materials contracts. Revenues for ongoing operations and maintenance services contracts are generally accounted for ratablyas the services are performed throughout the term of the contract. Payments received in advance of services performed are deferred and recognized when therelated services are performed. 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. 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,and VSOE of the fair value of such support or maintenance does not exist, revenue from the entire arrangement is recognized ratably over the support period.When the 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 isdeferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.63Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20141. Description of Business and Summary of Significant Accounting Policies (Continued)Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts Costs and estimated earnings in excess of billings on uncompleted contracts in the accompanying consolidated balance sheets represent unbilledamounts earned and reimbursable under services sales arrangements. At any given period-end, a large portion of the balance in this account represents theaccumulation 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 notadministratively billed until the subsequent month. Also included in this account are amounts that will become billable according to contract terms, whichusually require the consideration of the passage of time, achievement of milestones or completion of the project. Such unbilled amounts are expected to bebilled and collected within the next twelve months. Costs and estimated earnings in excess of billings on uncompleted contracts at March 31, 2014 and 2013 include approximately $1,064,000 and$937,000, respectively, which were not billable because certain milestone objectives specified in the contracts had not been attained. The costs andestimated earnings in excess of billings at March 31, 2014 are expected to be billed and collected during the fiscal year ending March 31, 2015 ("Fiscal2015").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 beearned within the next twelve months. We record provisions for estimated losses on uncompleted contracts in the period in which such losses become known. The cumulative effects ofrevisions to contract revenues and estimated completion costs are recorded in the accounting period in which the amounts become evident and can bereasonably estimated. These revisions can include such items as the effects of change orders and claims, warranty claims, liquidated damages or othercontractual penalties and 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. Deposits heldwith 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 the Middle East, Europe,South America and Asia. We generally do not64Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20141. Description of Business and Summary of Significant Accounting Policies (Continued)require collateral or other security from customers. We maintain an allowance for doubtful accounts for potential credit losses, which losses have historicallybeen within management's expectations.Fair Values of Financial Instruments The fair value of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate carrying value because of the short periodof 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. Prior year cash and cash equivalentshave been reclassed to conform with current year presentation.Allowance for Doubtful Accounts The collectability of our accounts receivable is evaluated through review of outstanding invoices and ongoing credit evaluations of our customers'financial condition. In cases where we are aware of circumstances that may impair a specific customer's ability to meet its financial obligations subsequent tothe original sale, we will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount we reasonably believewill be collected. We also maintain an allowance based on our historical collections experience. When we determine that collection is not likely, we write offaccounts receivable against the allowance for doubtful accounts.Inventories Inventories consist of finished goods, work-in-process and raw materials and 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 have determinedthat our reporting units for purposes of testing for goodwill impairment are identical to our reportable segments for financial reporting purposes. In the fiscalyear ended March 31, 2012 ("Fiscal 2012"), we adopted the provisions issued by the Financial Accounting Standards Board ("FASB") that were intended tosimplify goodwill impairment testing. This guidance permits us to first assess qualitative factors to determine whether it65Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20141. Description of Business and Summary of Significant Accounting Policies (Continued)is more likely than 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 ofa reporting unit is less than its carrying amount, we conduct a two-step goodwill impairment test. The first step of the impairment test involves comparing thefair values of the applicable reporting units with their carrying values. We determine the fair values of our reporting units using the income valuationapproach, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, weperform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of theaffected reporting unit's goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fairvalue, if any, is recognized as an impairment loss. We performed an annual impairment assessment of the carrying value of goodwill for each of the fiscalyears ended March 31, 2014, 2013 and 2012. Based on these assessments, we determined that no impairment as of each of these dates was indicated as theestimated fair value of each of our reporting units exceeded its respective carrying value. We monitor the indicators for goodwill impairment testing betweenannual tests. Certain adverse business conditions impacting one or more reporting units would cause us to test goodwill for impairment on an interim basis. 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.Income Taxes We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differencesbetween 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 differencesreverse. 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, which increases ourincome 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 isno longer 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 our stock-based awards, whereby such fair values are amortized over the requisite service period. Our stock-based awards are currently comprised of common stockoptions 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. While66Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20141. Description of Business and Summary of Significant Accounting Policies (Continued)utilizing this model meets established requirements, the estimated fair values generated by it may not be indicative of the actual fair values of our commonstock option awards as it does not consider certain factors important to those awards to employees, such as continued employment and periodic vestingrequirements as well as limited transferability. The fair value of our restricted stock units is based on the closing market price of our common stock on thegrant date. If there are any modifications or cancellations of the underlying unvested stock-based awards, we may be required to accelerate, increase or cancelany 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 revenues in the period during which the products ship.Sales Taxes Sales taxes are presented on a net basis (excluded from revenues) in the consolidated statements of operations.Advertising Expenses Advertising costs are expensed in the period incurred and totaled $168,000, $165,000 and $187,000 in the fiscal years ended March 31, 2014, 2013 and2012, respectively.Warranty We generally provide a one to three year warranty from the original invoice date on all products, materials and workmanship. Products sold to variousoriginal equipment manufacturer customers sometimes carry longer warranties. Defective products will be either repaired or replaced, usually at our option,upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a componentof cost of sales at the time revenue for that product is recognized. The accrued warranty reserve is included within accrued liabilities in the accompanyingconsolidated 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 one ofour 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.Comprehensive Income Comprehensive income equals net income for all periods presented.67Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20141. Description of Business and Summary of Significant Accounting Policies (Continued)Recent Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which supersedesthe revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition. ASU 2014-09 is based on the principle that revenueis recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled inexchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cashflows arising from customer contracts, including significant judgments and changes in judgment and assets recognized from costs incurred to obtain or fulfilla contract. The effective date will be the first quarter of our fiscal year ending March 31, 2018, using one of two retrospective application methods. TheCompany has not determined the potential effects on the consolidated financial statements.2. Supplementary Financial InformationInventories The following table presents details regarding our inventories:Property and Equipment The following table presents details of our property and equipment: Depreciation expense was approximately $768,000 and $901,000 in the fiscal year ended March 31, 2014 ("Fiscal 2014") and the fiscal year endedMarch 31, 2013 ("Fiscal 2013"), respectively.68 March 31, 2014 2013 (In thousands) Materials and supplies $1,320 $1,504 Work in process 175 105 Finished goods 1,051 856 $2,546 $2,465 March 31, 2014 2013 (In thousands) Equipment $6,541 $6,126 Leasehold improvements 1,975 1,953 Accumulated depreciation (6,970) (6,217) $1,546 $1,862 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20142. Supplementary Financial Information (Continued)Intangible Assets The following table presents details regarding our intangible assets: Amortization expense for intangible assets subject to amortization was approximately $733,000 for Fiscal 2014, of which approximately $106,000 wasrecorded to cost of revenues and approximately $627,000 recorded to amortization expense in the consolidated statement of operations. Approximately$644,000 and $504,000 was recorded to amortization expense for the fiscal years ended March 31, 2013 and 2012, respectively. We capitalized approximately $172,000 and $190,000 for the fiscal years ended March 31, 2014 and 2013, respectively, of internal costs incurred indeveloping software products to be sold. These costs related to the internal development of our performance measurement software offerings. During thefourth quarter of the fiscal year ended March 31, 2014, we recognized a loss on impairment of intangible assets related to capitalized software ofapproximately $108,000. Capitalized software development costs for the iPeMS platform and acquired data sets began to be amortized in October 2013, resulting inapproximately $106,000 recorded to cost of revenues in the accompanying consolidated statement of operations for the year ended March 31, 2014. We donot have any intangible assets with indefinite useful lives. As of March 31, 2014, the future estimated amortization expense of approximately $1.6 million isentirely associated with our iPerform business segment, as follows:69 March 31, 2014 2013 GrossCarryingAmount AccumulatedAmortization GrossCarryingAmount AccumulatedAmortization (In thousands) Technology $1,856 $(1,422)$1,856 $(1,178)Customer contracts / relationships 750 (371) 750 (247)Trade names and non-compete agreements 1,110 (754) 1,110 (495)Capitalized software development costs 498 (83) 328 — Total $4,214 $(2,630)$4,044 $(1,920) Year Ending March 31, (In thousands) 2015 $597 2016 526 2017 365 2018 88 2019 8 Thereafter — $1,584 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20142. Supplementary Financial Information (Continued) Refer to Note 4 for additional information regarding intangible assets acquired during the last three fiscal years. If we acquire additional intangible assetsin future periods, our future amortization expense will increase.Goodwill The following table presents the activity related to the carrying value of our goodwill by reportable segment for Fiscal 2012, Fiscal 2013 and Fiscal2014: In Fiscal 2013, the Company established the iPerform segment, which included the performance measurement and information management solutions,including all the operations of Berkeley Transportation Systems, Inc. ("BTS"). As a result, the goodwill attributed to the BTS acquisition of approximately$796,000 was transferred to the newly created iPerform segment. In the first quarter of Fiscal 2014, as part of an internal reorganization, the Company's ClearPath Weather operations (formerly, Maintenance DecisionSupport System or MDSS), historically included in the Transportation Systems segment, was reassigned to the iPerform segment to better align theCompany's predictive weather and traffic capabilities, resources, and initiatives. As a result, the goodwill attributed to the ClearPath Weather operations fromthe Meridian Environmental Technology, Inc. ("MET") acquisition of approximately $1,372,000 was transferred to the iPerform segment.70 RoadwaySensors TransportationSystems iPerform Total (In thousands) Balance—March 31, 2012 Goodwill 8,214 17,074 — 25,288 Accumulated impairment losses — (7,970) — (7,970) $8,214 $9,104 $— $17,318 Balance—March 31, 2013 Goodwill 8,214 16,278 796 25,288 Accumulated impairment losses — (7,970) — (7,970) 8,214 8,308 796 17,318 Balance—March 31, 2014 Goodwill 8,214 14,906 2,168 25,288 Accumulated impairment losses — (7,970) — (7,970) $8,214 $6,936 $2,168 $17,318 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20142. Supplementary Financial Information (Continued)Warranty Reserve Activity The following table presents activity with respect to the warranty reserve:Earnings Per Share The following table sets forth the computation of basic and diluted income from continuing operations per share: The following instruments were excluded for purposes of calculating weighted average common share equivalents in the computation of diluted incomefrom continuing operations per share as their effect would have been anti-dilutive:71 Year Ended March 31, 2014 2013 2012 (In thousands) Balance at beginning of fiscal year $169 $231 $279 Additions charged to cost of sales 179 139 86 Warranty claims (164) (201) (134) Balance at end of fiscal year $184 $169 $231 Year Ended March 31, 2014 2013 2012 (In thousands, except per share amounts) Numerator: Income from continuing operations $1,320 $914 $1,306 Denominator: Weighted average common shares used in basic computation 32,665 33,491 34,259 Dilutive stock options 111 60 96 Dilutive restricted stock units 70 56 25 Dilutive warrants 1 2 — Weighted average common shares used in diluted computation 32,847 33,609 34,380 Income from continuing operations per share: Basic $0.04 $0.03 $0.04 Diluted $0.04 $0.03 $0.04 Year Ended March 31, 2014 2013 2012 (In thousands) Stock options 854 1,049 1,840 Warrants — 4 15 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20143. 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 Bendix CommercialVehicle Systems LLC ("Bendix"), a member of Knorr-Bremse Group, pursuant to an Asset Purchase Agreement (the "Agreement") signed on July 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 andadjustments based upon the working capital of the Vehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities ofthe Vehicle Sensors segment. In October 2012, we received approximately $1.7 million in connection with the holdback provision. Furthermore, we areentitled to additional consideration in the form of the following performance and royalty-related earn-outs: Bendix is obligated to pay us an amount in cashequal to (i) 85% of revenue associated with royalties received under our license and distribution agreements with Audiovox Electronics Corporation andValeo Schalter and Sensoren GmbH through December 31, 2017 and (ii) 30% of the amount, if any, by which the amount of revenue generated from the saleof our lane departure warning systems exceeds Bendix's projection for such revenue for the two years following closing, each subject to certain reductionsand limitations set forth in the Agreement. As of March 31, 2014, we received approximately $1.1 million in connection with royalty-related earn-outsprovisions for a total of $14.8 million in cash from the Asset Sale. 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): In comparing the above net assets to the net proceeds received, we recorded a gain on the Asset Sale of $89,000, $1.5 million, and $1.2 million, after tax,in the accompanying consolidated statements of operations for Fiscal 2014, Fiscal 2013, and Fiscal 2012, respectively. The $89,000 gain on the Asset Sale inFiscal 2014 is related to certain performance and royalty-related earn-outs (as described above) that were achieved through March 31, 2014. Included in the$1.5 million gain on the Asset Sale in Fiscal 2013 was an accrual for approximately $90,000, or $58,000 after tax, related to certain performance and royalty-related earn-outs that were achieved through March 31, 2013. The effective72Cash $105 Accounts receivable 1,850 Inventories 1,147 Other current assets 31 Property and equipment, net 133 Goodwill 4,671 Total assets 7,937 Current liabilities (691) Net assets $7,246 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20143. Sale of Vehicle Sensors (Continued)tax rate applicable to the gain was impacted by goodwill of $4.7 million for Fiscal 2012, for which there is no corresponding tax basis. In accordance with applicable accounting guidance, we determined that the Vehicle Sensors segment, which constituted one of our operating segments,qualified as a discontinued operation. The applicable financial results of the Vehicle Sensors segment have been reported as a discontinued operation in theconsolidated statements of operations for all periods presented. For the fiscal years ended March 31, 2014, 2013 and 2012, Vehicle Sensors net salesclassified as part of discontinued operation was $0, $0 and $3.2 million, respectively. We elected not to allocate any interest expense to the discontinuedoperation. 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. AcquisitionsBerkeley Transportation Systems, Inc. In November 2011, we acquired all of the outstanding capital stock of Berkeley Transportation Systems, Inc. ("BTS"). BTS was a privately-held companybased in Berkeley, California, which specializes in transportation performance measurement. BTS' Performance Measurement System leverages its real-timedata collection, diagnostic, fusion and warehousing platform to aggregate and compute performance measures. This information is used to analyze how atransportation system is performing based on pre-determined measures of effectiveness such as stops, delays and travel time. Our primary reasons for theacquisition were to add key technologies to complement our iPerform solutions and strengthen our performance measurement and management initiative as awhole. Our consolidated financial statements for Fiscal 2014, Fiscal 2013 and Fiscal 2012 include the results of operations of BTS commencing as of theacquisition date. On or shortly after the acquisition date, we paid a total of approximately $840,000 in cash to BTS. During the third quarter of Fiscal 2014,the Company paid $250,000 pursuant to certain holdback provisions. Additionally, the Company is scheduled to pay to the BTS shareholders up toapproximately $335,000 by November 2014 pursuant to certain deferred payment provision. On December 17, 2012, the Company entered into anamendment to the BTS stock purchase agreement which modified certain earn-out provisions, and as a result, the Company paid $700,000 in cash to the BTSshareholders for achievement of those modified earn-out provisions in our fourth quarter of Fiscal 2013. The amendment did not have a material impact onprevious estimated amounts accrued in connection with the earn-out provisions. This payment completed the Company's obligation under the earn-outprovisions of the agreement.Acquisition Accounting We accounted for the acquisition of BTS as a business combination in accordance with applicable accounting guidance. We measured the fair value ofthe consideration transferred (including contingent consideration) to determine the purchase price of the acquisition. We allocated the fair value of73Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20144. Acquisitions (Continued)consideration transferred to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values at theacquisition date. The BTS acquisition was recorded as follows (in thousands): 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 deductible for income tax purposes.Purchased Intangible Assets The following table presents details of the intangible assets acquired from BTS: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 in GrandForks, North Dakota. MET specializes in 511 advanced traveler information systems, as well as Maintenance Decision Support System management tools thatallow users to create solutions to meet roadway maintenance decision needs. Our primary reasons for the acquisition were (i) to enhance our ability to providetravelers and traffic management authorities with more accurate and real-time information and network performance management tools and (ii) to provideIteris with key capabilities in the emerging performance measurement and management market.74Fair value of consideration transferred: Cash paid on or shortly after acquisition date $840 Estimated fair value of contingent consideration 971 Total 1,811 Allocation: Accounts receivable (164)Other tangible assets (375)Purchased intangible assets (1,100)Liabilities 624 Goodwill $796 EstimatedUseful Life Amount (In years) (In thousands) Backlog 3 $330 Technology 6 290 Customer contracts / relationships 6 250 Other purchased intangible assets 5 - 7 230 $1,100 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20144. Acquisitions (Continued) On or shortly after the acquisition date, we paid approximately $1.6 million in cash, exclusive of $369,000 of cash acquired. We also agreed to pay up to$1 million on each of the first two anniversaries of the closing of the acquisition upon the satisfaction of certain conditions, as well as up to an additional$2 million under a 24-month earn-out provision. In January 2012, we made a cash payment of approximately $668,000 of the first deferred payment to the shareholders of MET and held back $250,000in accordance with certain provisions of the purchase agreement. In June 2012, we determined the contingencies related to the release of the $250,000holdback were not met. As a result, no portion of the $250,000 holdback was released and the entire amount was reversed into operating income during thesecond quarter of Fiscal 2013. Additionally, no amounts were earned by the MET shareholders related to the first and second year earn-out provisions whichended on December 31, 2011 and 2012, respectively. The second deferred payment of $1 million was due in the fourth quarter of Fiscal 2013. As a result ofcertain holdback provisions and other deductions, the Company paid approximately $409,000 to the MET shareholders in the second quarter of Fiscal 2014.This payment completed the Company's obligation under the deferred payment provisions of the purchase agreement.Purchased Intangible Assets The following table presents details of the intangible assets acquired from MET: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 of impairmentexist. In Fiscal 2012, we early adopted the provisions issued by the FASB that are intended to simplify goodwill impairment testing. The updated guidancepermits 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 its carryingamount. 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-step goodwillimpairment test. We determined it was more appropriate to perform a qualitative assessment in Fiscal 2012 and a quantitative first-step assessment in Fiscal2013 and Fiscal 2014 to estimate the fair value of our reporting units using both the income approach and the market approach. Based on our assessments, wedetermined that no impairment was indicated as the estimated fair value of each reporting unit exceeded its respective carrying value.75 EstimatedUseful Life Amount (In years) (In thousands) Technology 6 $570 Customer contracts / relationships 6 500 Other purchased intangible assets 3 - 7 550 $1,620 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20146. 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 initially determinedusing Level 3 inputs based on a probabilistic calculation whereby we assigned estimated probabilities to achieving the earn-out targets and then discountedthe total contingent consideration to net present value. The MET and BTS earn-out targets were completed during Fiscal 2013 and the remaining liability atMarch 31, 2014 and March 31, 2013 related to deferred acquisition payments discounted to net present value using Level 1 inputs. The following tablereconciles this liability measured at fair value on a recurring basis for Fiscal 2014 (in thousands): The change in the estimated fair value of this liability during the current fiscal year resulted primarily from payments to the shareholders of BTS relatedto the achievement of earn-out targets and reductions to our MET estimates regarding both the probability of achieving certain earn-out targets and theamounts of certain future deferred payments. The current portion of the liability at March 31, 2014 and 2013 of approximately $327,000 and $652,000, respectively, is included within accruedliabilities in the accompanying consolidated balance sheets. The change in the estimated fair value of the liability for the years ended March 31, 2014, 2013,and 2012 is included as part of operating expenses in the accompanying consolidated statements of operations. Other than the above, we did not have any material financial assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as ofMarch 31, 2014. Our non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value on a non-recurring basis, generallywhen there is a transaction involving those assets such as a purchase transaction, a business combination or an adjustment for impairment. See Notes 4 and 5above for further discussion regarding certain of our intangible assets and goodwill balances (including goodwill impairment) that were measured at fairvalue, using certain Level 3 inputs, during the fiscal years ended March 31, 2014, 2013, and 2012.76Balance at March 31, 2013 $961 Deferred payments made to MET shareholders (409)Earn-out payments made to BTS shareholders (250)Change in fair value included in net income 25 Balance at March 31, 2014 $327 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20147. Credit Facility 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. In September 2010, we entered into a modificationagreement with CB&T to extend the expiration date of our revolving line of credit to October 1, 2012. We repaid in full all principal and accrued interestunder the term note in September 2012. The term note did not contain any early termination fees or prepayment penalties. In September 2012, we entered into a second modification agreement with CB&T to extend the expiration date of our revolving line of credit toOctober 1, 2014. Interest on borrowed amounts under the revolving line of credit are payable monthly at a rate equal to the current stated prime rate (3.25% atMarch 31, 2014) up to the current stated prime rate plus 0.25%, depending on aggregate deposit balances maintained at CB&T in relation to the total loancommitment under the credit facility. We are obligated to pay an unused line fee of 0.25% per annum applied to the average unused portion of the revolvingline of credit during the preceding month. The revolving line of credit does not contain early termination fees and is secured by substantially all of our assets. As of March 31, 2014 and 2013, no amounts were outstanding under the credit facility with CB&T. Availability under this line of credit may be reducedor otherwise limited as a result of our obligations to comply with certain financial and other covenants. As of March 31, 2014, we were in compliance with allsuch covenants.8. Income Taxes The reconciliation of our income tax provision to taxes computed at U.S. federal statutory rates is as follows:77 Year Ended March 31, 2014 2013 2012 (In thousands) Income tax provision at statutory rates $688 $554 $663 State income taxes net of federal benefit 48 18 562 Tax credits (290) (39) (246)Change in fair value of contingent acquisition consideration 8 (62) (211)Compensation charges 22 31 59 Unrecognized tax benefits (4) — (276)Change in valuation allowance 185 188 — Other 47 26 92 Provision for income taxes $704 $716 $643 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20148. Income Taxes (Continued) The components of deferred tax assets and liabilities are as follows: The components of current and deferred federal and state income tax provisions and (benefits) are as follows: At March 31, 2014, we had approximately $838,000 in federal alternative minimum tax credit carryforwards that can be carried forward indefinitely. Wehad $18.6 million of federal net operating loss carryforwards at March 31, 2014 that begin to expire in 2021. We also had $8.0 million of state net operatingloss carryforwards at March 31, 2014, of which, $7.8 million are scheduled to expire in 2015 and $160,000 are scheduled to expire in 2031.78 March 31, 2014 2013 (In thousands) Deferred tax assets: Net operating losses $5,835 $7,031 Credit carry forwards 1,350 960 Deferred compensation and payroll 958 913 Bad debt allowance and other reserves 516 462 Deferred rent 165 315 Other, net 198 156 Total deferred tax assets 9,022 9,837 Valuation allowance (373) (188) Total deferred tax assets, net of valuation allowance 8,649 9,649 Deferred tax liabilities: Property and equipment (285) (482)Acquired intangibles (276) (535)Goodwill (547) (381) Total deferred tax liabilities (1,108) (1,398) Net deferred tax assets $7,541 $8,251 Year Ended March 31, 2014 2013 2012 (In thousands) Current income tax provision (benefit): Federal $21 $(20)$(221)State 20 99 208 Deferred income tax provision: Federal 330 425 12 State 333 212 644 Net income tax provision $704 $716 $643 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20148. Income Taxes (Continued) Due to changes in stock ownership, our federal net operating loss carryforwards of approximately $18.6 million as of March 31, 2014 and other federalattributes are subject to an annual limitation under Section 382 of the Internal Revenue Code. As of March 31, 2014, based on the cumulative amount of taxattributes 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, 2014 do not include approximately $958,000 of excess tax benefits from employee stock option exercises that are acomponent of our net operating loss carryforwards. If and when such excess tax benefits are realized, stockholders' equity will be increased. As of March 31, 2014 and 2013, we recorded a valuation allowance against certain of our state net operating loss carryforwards which we estimated werelikely to not be realized within the applicable carryforward period in the amount of $373,000 and $188,000, respectively, net of federal tax benefit. Inmaking our determination as to the realizability of our deferred tax assets, we reviewed all available positive and negative evidence, including reversal ofdeferred tax liabilities, potential carrybacks, projected future taxable income, tax planning strategies and recent financial performance.Unrecognized Tax Benefits As of March 31, 2014 and 2013, our gross unrecognized tax benefits were $281,000 and $218,000, respectively, of which $217,000 and $115,000,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, 2014 and 2013, we had accruedcumulatively $53,000 and $68,000, 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: As of March 31, 2012, our unrecognized tax benefits included $1.4 million related to estimated tax credit carryforwards which, if recognized, would havegiven rise to a deferred tax asset. As of March 31, 2013, we concluded that the information necessary to compute and substantiate the credits was notavailable or reasonably obtainable. As such, we will neither recognize a deferred tax asset for the estimated credit carryforwards, nor continue maintaining anoffsetting amount of unrecognized tax benefits. We do not anticipate a significant change in gross unrecognized tax benefits within the next twelve months.79 Year Ended March 31, 2014 2013 2012 (In thousands) Gross unrecognized tax benefits at beginning of year $218 $1,692 $1,941 Increases for tax positions taken in prior years 106 — 97 Decreases for tax positions taken in prior years (53) (1,431) (10)Increases for tax positions taken in the current year 41 17 20 Lapse in statute of limitations (31) (60) (356) Gross unrecognized tax benefits at March 31 $281 $218 $1,692 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20148. Income Taxes (Continued) 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, 2011 or later,and state and local income tax examination for fiscal tax years ended March 31, 2010 or later.9. Commitments and ContingenciesLitigation and Other Contingencies As a provider of traffic engineering services, products and solutions, we are currently, and may in the future, from time to time, be involved in litigationrelating to claims arising out of our operations in the normal course of business. While we cannot accurately predict the outcome of any such litigation, wecurrently are not a party to any legal proceedings, the adverse outcome of which, in management's opinion, individually or in the aggregate, would have amaterial adverse 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. In September2007, we relocated our headquarters and principal operations into this space. The monthly lease rate was $102,000 during the first year of the lease andincreases 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 estimated useful life of the related leasehold improvements or the term ofthe lease, whichever is shorter. In February 2014, we entered into an amendment to the lease for our principal facility, which reduced our office space by approximately 11,000 squarefeet and changed the lease term to 96 months, commencing on April 1, 2014. The monthly lease rate will be approximately $76,000 during the first year ofthe amended term and increases each year thereafter, up to a maximum of approximately $90,000 during the last year of the term. Additionally, the leaseamendment provides for approximately $328,000 in incentives in the form of tenant improvement allowances, which we recorded as deferred rent and otherreceivables in our consolidated balance sheet. The deferred rent amount will reduce monthly rent expense over the term of the lease amendment, and theother receivables will be capitalized as leasehold improvements during Fiscal 2015 and depreciated over the estimated useful life of the improvements, or theterm of the lease amendment, whichever is shorter.80Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20149. Commitments and Contingencies (Continued) We have lease commitments for facilities in various locations throughout the U.S., as well as for certain equipment. Future minimum rental paymentsunder these non-cancelable operating leases at March 31, 2014 were as follows: Rent expense totaled approximately $1.9 million for each of the fiscal years ended March 31, 2014, 2013 and 2012.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 iscurrently owned by an investor group that includes one current director, who is the Chief Executive Officer of Maxxess, and a former director. The subleaseterminated in September 2007, at which time Maxxess owed us an aggregate of $274,000 related to this sublease and certain ancillary corporate services thatwe provided to Maxxess. In August 2009, Maxxess executed a promissory note payable to Iteris in the original principal amount of $274,000. Thepromissory note accrued interest at a rate of 6% per annum, compounded annually, with accrued interest to be paid annually on the first business day of eachcalendar year; and allowed payments under the note to be made in bona fide services rendered by Maxxess to Iteris, to the extent such services and amountswere pre-approved in writing by us. All amounts outstanding under the note was to become due and payable on the earliest of (i) August 10, 2014, (ii) achange of control in Maxxess, or (iii) a financing by Maxxess resulting in gross proceeds of at least $10 million. On July 23, 2013, the promissory note from Maxxess was amended and restated. The amended and restated note bears interest at a rate of 6% per annum,compounded annually, with accrued interest to be paid quarterly on the first business day of each calendar quarter. Payments under the amended and restatednote may only be paid in cash and all amounts outstanding will become due and payable on the earliest of (i) August 10, 2016, (ii) a change of control inMaxxess, or (iii) a financing by Maxxess resulting in gross proceeds of at least $10 million. As of March 31, 2014, approximately $259,000 of the originalprincipal balance was outstanding and payable to Iteris. We have previously fully reserved for amounts owed to us by Maxxess and all outstanding principalremains fully reserved.81Year Ending March 31, (In thousands) 2015 $1,480 2016 1,644 2017 1,565 2018 1,424 2019 1,297 Thereafter 3,230 $10,640 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 20149. Commitments and Contingencies (Continued)Inventory Purchase Commitments At March 31, 2014, we had firm commitments to purchase approximately $2.9 million of inventory, operating assets and other supplies, which areexpected to occur primarily during the first and second quarters of our fiscal year ending March 31, 2015.10. Stockholders' EquityPreferred 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 issue fromtime 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, 2014 and 2013, 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 2008Common Stock Warrants As of March 31, 2014, we had no outstanding warrants to purchase shares of our common stock. All warrants have been exercised, forfeited or cancelled.Common Stock Reserved for Future Issuance The following summarizes common stock reserved for future issuance at March 31, 2014:82 Number of Shares (In thousands) Stock options outstanding 2,019 Restricted stock units outstanding 195 Authorized for future issuance under stock incentive plans 263 2,477 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 201411. Employee Benefit PlansStock Incentive Plans In September 2007, our stockholders approved the 2007 Omnibus Incentive Plan (the "2007 Plan"), which provides that options to purchase shares of ourunissued common stock may be granted to our employees, officers, consultants and directors at exercise prices which are equal to or greater than the marketvalue 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% on each ofthe first four anniversaries of the grant date. The 2007 Plan also allows for the issuance of stock appreciation rights, restricted stock, restricted stock units("RSUs") and other stock-based awards based on the value of our common stock. New shares are issued to satisfy stock option exercises and share issuancesunder 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. In September 2012, our stockholders approved an amendment toincrease the number of shares of our common stock authorized and reserved for issuance under the 2007 Plan by 800,000 shares to a total of 2,450,000 shares.At March 31, 2014, there were approximately 263,000 shares of common stock available for grant under this plan. As of March 31, 2014, options to purchaseapproximately 1,757,000 shares of common stock, as well as 195,000 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 Plan remainoutstanding pursuant to the terms of such stock options. As of March 31, 2014, options to purchase approximately 262,000 shares of our common stock wereoutstanding under the 1997 Plan. No further options or other stock-based awards may be granted under the 1997 Plan. Certain options granted under the 2007 Plan and the 1997 Plan (collectively, the "Plans") and the RSUs granted under the 2007 Plan provide foraccelerated vesting of unvested options in the event of a change in control under certain circumstances.83Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 201411. Employee Benefit Plans (Continued)Stock Options A summary of activity in the Plans with respect to our stock options for Fiscal 2014 is as follows:Restricted Stock Units In August 2010, we began granting RSUs under the 2007 Plan to certain of our employees. RSU awards are stock-based awards that entitle the holder toreceive 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 grant dateprovided 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.84 Options WeightedAverageExercisePrice PerShare WeightedAverageRemainingContractualLife AggregateIntrinsic Value (In thousands) (Years) (In thousands) Options outstanding at March 31, 2013 1,744 $1.74 Granted 710 1.85 Exercised (284) 0.88 Forfeited (54) 1.50 Expired (98) 2.43 Options outstanding at March 31, 2014 2,018 $1.88 6.6 $548 Options exercisable at March 31, 2014 1,125 $1.98 4.6 $316 Vested and expected to vest at March 31, 2014 1,875 $1.88 6.4 $518 Options exercisable at March 31, 2014 pursuant to a change-in-control 2,018 $1.88 6.6 $548 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 201411. Employee Benefit Plans (Continued) A summary of activity with respect to our RSUs for Fiscal 2014 is as follows:Stock-Based Compensation The following table presents stock-based compensation expense that is included in each functional line item in our consolidated statements ofoperations: At March 31, 2014, there was approximately $840,000 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 2.7 years. If there are any modifications or cancellations ofthe underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Futurestock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock options, RSUs or otherstock-based awards.85 # of Shares WeightedAveragePrice PerShare WeightedAverageRemainingLife AggregateIntrinsic Value (In thousands) (Years) (In thousands) RSUs outstanding at March 31, 2013 210 $1.39 Granted 90 1.81 Vested (76) 1.40 Forfeited (29) 1.09 RSUs outstanding at March 31, 2014 195 $1.58 2.3 $82 Expected to vest at March 31, 2014 169 $1.57 2.2 $73 Common stock issuable (for RSUs) at March 31, 2014 upon achange-in-control 195 $1.58 2.3 $82 Year Ended March 31, 2014 2013 2012 (In thousands) Cost of revenues $30 $42 $45 Selling, general and administrative expense 246 237 280 Research and development expense 24 — 6 Total stock-based compensation $300 $279 $331 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 201411. Employee Benefit Plans (Continued) The grant date fair value of stock options granted was estimated using the following weighted-average assumptions: A summary of certain fair value and intrinsic value information pertaining to our stock options is as follows: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, 2014, 2013 and 2012. We sponsor a defined contribution 401(k) plan (the "401(k) Plan"), adopted in 1990, under which eligible associates voluntarily contribute to the plan,up to IRS maximums, through payroll deductions. We match up to 50% of contributions, up to a stated limit, with all matching contributions being fullyvested after three years of service. Our matching contributions under the 401(k) Plan were approximately $504,000, $498,000 and $475,000 for the fiscalyears ended March 31, 2014, 2013 and 2012, respectively.12. Stock Repurchase Program In August 2011, our Board of Directors approved a stock repurchase program pursuant to which we were authorized to acquire up to $3 million of ouroutstanding common stock from time to time through August 2012. We acquired approximately 964,000 shares under this original program. On August 9,2012, our Board of Directors approved a new stock repurchase program pursuant to which we may acquire up to $3 million of our outstanding common stockfor an unspecified length of time. Under the new program, we may repurchase shares from time to time in open-market and privately negotiated transactionsand block trades, and may also repurchase shares pursuant to a 10b5-1 trading plan during our closed trading windows. There is no guarantee as to the exactnumber of shares that will be repurchased. We may modify or terminate the repurchase program at any time without prior notice.86 Year Ended March 31, 2014 2013 2012 Expected life—years 7.0 7.0 7.0 Risk-free interest rate 2.0% 1.2% 1.6%Expected volatility of common stock 51% 52% 52%Dividend yield —% —% —% Year Ended March 31, 2014 2013 2012 (In thousands, except pershare amounts) Weighted average grant date fair value per share of options granted $0.99 $0.81 $0.61 Intrinsic value of options exercised $281 $42 $7 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 201412. Stock Repurchase Program (Continued) For our fiscal year ended March 31, 2014, 2013, and 2012, we repurchased approximately 196,000, 1,524,000, and 574,000 shares of our common stock,respectively. From inception of the program in August 2011 through March 31, 2014, we repurchased approximately 2,293,000 shares of our common stockfor an aggregate price of approximately $3.6 million, at an average price per share of $1.54. As of March 31, 2014, all repurchased shares have been retiredand resumed their status as authorized and unissued shares of our common stock. As of March 31, 2014, approximately $747,000 remains available for therepurchase of our common stock under our current program.13. Business Segments, Significant Customer and Geographic InformationBusiness Segments We operate in three reportable segments: Roadway Sensors, Transportation Systems and iPerform. The Roadway Sensors segment includes, among other products, our Vantage, VantageNext, VersiCam, Vantage Vector, SmartCycle, SmartSpan, P10,P100 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 and consulting services, and the development of transportation managementand traveler information systems for the ITS industry. During Fiscal 2012 and Fiscal 2013, this segment included the operations of MET, which specializes in511/ advanced traveler information systems and offers predictive weather and ClearPath Weather management tools that allow users to create solutions tomeet roadway maintenance decision needs. As of April 1, 2013, the predictive weather and ClearPath services were reassigned to the iPerform segment tobetter align our predictive weather and traffic capabilities, resources and initiatives. Prior year segment information presented in the table below has been re-classified to reflect this change. The iPerform segment includes our performance measurement and information management solutions, including all the operations of BTS, whichspecializes in transportation performance measurement, as well as the predictive weather and ClearPath Weather services reassigned from the TransportationSystems segment on April 1, 2013. During Fiscal 2012, we began the development of iPeMS. iPeMS is a state-of-the-art, information management softwaresuite that utilizes a wide range of data resources and analytical techniques to determine current and future traffic patterns, permitting the effectiveperformance analysis and management of traffic infrastructure resources. This information can then be analyzed by traffic professionals to measure how atransportation network is performing and to identify potential areas of improvement. iPeMS is also capable of providing users with predictive traffic analyticsand easy-to-use visualization and animation features based on historical traffic conditions. The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies (Note 1). Certaincorporate expenses, including interest and amortization of intangible assets, are not allocated to the segments. The reportable segments are each managedseparately because they manufacture and distribute distinct products or provide services with different processes. All reported segment revenues are derivedfrom external customers.87Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 201413. Business Segments, Significant Customer and Geographic Information (Continued) Selected financial information for our reportable segments for the fiscal years ended March 31, 2014, 2013 and 2012 is as follows: The following table reconciles total segment income to consolidated income from continuing operations before income taxes:Significant Customer and Geographic Information We currently have, and historically have had, a diverse customer base. For Fiscal 2014, one individual customer represented approximately 11% of ourtotal revenues and no other individual customer represented greater than 10% of our total revenues. For Fiscal 2013, one individual customer representedapproximately 13% of our total revenues and no other individual customer represented greater than 10% of our total revenues. For Fiscal 2012, no individualcustomer represented greater than 10% of our total revenues.88 RoadwaySensors TransportationSystems iPerform Total (In thousands) Year Ended March 31, 2014 Revenues $31,769 $30,524 $5,935 $68,228 Depreciation 208 161 118 487 Segment income (loss) 5,791 3,363 (1,575) 7,579 Year Ended March 31, 2013 Revenues $26,002 $30,010 $5,673 $61,685 Depreciation 221 362 20 603 Segment income (loss) 4,119 3,561 (233) 7,447 Year Ended March 31, 2012 Revenues $27,679 $29,792 $935 $58,406 Depreciation 194 393 5 592 Segment income (loss) 4,813 3,151 (367) 7,597 Year Ended March 31, 2014 2013 2012 (in thousands) Segment income: Total income from reportable segments $7,579 $7,447 $7,597 Unallocated amounts: Corporate and other expenses (4,903) (5,350) (5,695)Amortization of intangible assets (627) (644) (504)Change in fair value of contingent acquisition consideration (25) 181 619 Other income, net — 2 4 Interest expense, net — (6) (72) Income from continuing operations before income taxes $2,024 $1,630 $1,949 Table of ContentsIteris, Inc.Notes to Consolidated Financial Statements (Continued)March 31, 201413. Business Segments, Significant Customer and Geographic Information (Continued) No individual customer or government agency had a receivable balance at March 31, 2014 or 2013 greater than 10% of our total trade accountsreceivable balances as of March 31, 2014 and 2013, respectively. The following table sets forth the percentages of our revenues, by geographic region, derived from shipments to, or contract, service and other revenuesfrom, external customers located outside the U.S.: Substantially all of our long-lived assets are held in the U.S.14. Quarterly Financial Data (Unaudited)89 Year Ended March 31, 2014 2013 2012 Middle East 4% 3% —%Asia — — 1 Other 1 1 1 5% 4% 2% Quarter Ended: Revenues GrossProfit Net Income BasicNet Incomeper Share DilutedNet Incomeper Share (In thousands, except per share amounts) June 30, 2013 $17,030 $6,726 $460 $0.01 $0.01 September 30, 2013 17,027 6,912 661 0.02 0.02 December 31, 2013 16,548 6,192 238 0.01 0.01 March 31, 2014 17,623 6,144 50 0.00 0.00 $68,228 $25,974 $1,409 $0.04*$0.04* June 30, 2012 $16,304 $6,264 $676 $0.02 $0.02 September 30, 2012 15,504 6,071 550 0.02 0.02 December 31, 2012 13,994 5,151 1,097 0.03 0.03 March 31, 2013 15,883 5,772 56 0.00 0.00 $61,685 $23,258 $2,379 $0.07*$0.07* *Annual per share amounts may not agree to the sum of the quarterly per share amounts due to differences between averageshares outstanding during the periods.Table of ContentsExhibit Index 90ExhibitNumber Description Reference 2.1+Stock Purchase Agreement dated December 23, 2010by and among Iteris, Inc., Meridian EnvironmentalTechnology, Inc., ("MET") the shareholders of METand Kathy J. Osborne as the ShareholdersRepresentative Exhibit 2.1 to the registrant's Quarterly Report onForm 10-Q for the quarter ended December 31,2010 as filed with the SEC on February 14, 2011 2.2+Asset Purchase Agreement by and betweenIteris, Inc. and Bendix Commercial VehicleSystems LLC, dated as of July 25, 2011 Exhibit 2.1 to the registrant's Current Report onForm 8-K/A as filed with the SEC on November 1,2011 3.1 Restated Certificate of Incorporation of theregistrant Exhibit 3.1 to the registrant's Quarterly Report onForm 10-Q for the quarter ended September 30,2009 as filed with the SEC on October 30, 2009 3.2 Certificate of Designations of Series A JuniorParticipating Preferred Stock Exhibit 3.2 to the registrant's Quarterly Report onForm 10-Q for the quarter ended September 30,2009 as filed with the SEC on October 30, 2009 3.3 Bylaws of the registrant, as amended Exhibit 4.2 to the registrant's RegistrationStatement on Form S-1 (Reg. No. 033-67932) asfiled with the SEC on July 6, 1993 3.4 Certificates of Amendment to Bylaws of theregistrant dated April 24, 1998 and August 10, 2001 Exhibit 3.4 to the registrant's Annual Report onForm 10-K/A for the year ended March 31, 2003 asfiled with the SEC on July 29, 2003 3.5 Certificate of Amendment to Bylaws of registrantdated September 9, 2004 Exhibit 3.1 to the registrant's Quarterly Report onForm 10-Q for the quarter ended September 30,2004 as filed with the SEC on November 15, 2004 3.6 Certificate of Amendment to Bylaws of registranteffective September 16, 2005 Exhibit 3.5 to the registrant's Annual Report onForm 10-K for the year ended March 31, 2007 3.7 Certificate of Amendment to Bylaws of registranteffective December 7, 2007 Exhibit 3.1 to the registrant's Current Report onForm 8-K as filed with the SEC on December 13,2007 3.8 Certificate of Amendment to Bylaws of registrant,effective August 20, 2009 Exhibit 3.3 to the registrant's Current Report onForm 8-K as filed with the SEC on August 21, 2009 4.1 Specimen of common stock certificate Exhibit 4.1 to registrant's Registration Statement onForm 8-A as filed with the SEC on December 8,2004 Table of Contents91ExhibitNumber Description Reference 4.2 Rights Agreement dated August 20, 2009 betweenthe registrant and Computershare Trust Company,N.A., which includes the form of Certificate ofDesignations for the Series A Junior ParticipatingPreferred Stock, the form of Right Certificate, andSummary of Rights to Purchase Preferred Stock asexhibits thereto Exhibit 4.1 to the registrant's Current Report onForm 8-K as filed with the SEC on August 21, 2009 4.3 Amendment No. 1 To Rights Agreement, enteredinto as of August 8, 2012 by and between Iteris, Inc.and Computershare Trust Company, N.A. Exhibit 4.1 to the registrant's Quarterly Report onForm 10-Q for the quarter ended June 30, 2012 asfiled with the SEC on August 10, 2012 10.1 Form of Indemnity Agreement entered into by theregistrant and certain of its officers and directors Exhibit 19.4 to the registrant's Quarterly Report onForm 10-Q for the quarter ended September 30,1988 10.2 Form of Indemnification Agreement entered into bythe registrant and certain of its officers and directors Exhibit 10.5 to the registrant's Annual Report onForm 10-K for the year ended March 31, 2004 asfiled with the SEC on June 29, 2004 10.3*1997 Stock Incentive Plan (the "1997 Plan") asamended on May 3, 2003, as further amended onDecember 15, 2004 Exhibit 10.32 to the registrant's Annual Report onForm 10-K for the year ended March 31, 2005 asfiled with the SEC on July 14, 2005 10.4*Form of Notice of Grant of Stock Option for 1997Plan Exhibit 99.2 to the registrant's RegistrationStatement on Form S-8 (File No. 333-30396) as filedwith the SEC on February 14, 2000 10.5*Form of Stock Option Agreement for the 1997 Plan Exhibit 99.3 to the registrant's RegistrationStatement on Form S-8 (File No. 333-30396) as filedwith the SEC on February 14, 2000 10.6*Form of Addendum to Stock Option Agreement for1997 Plan—Involuntary Termination FollowingCorporate Transaction or Change in Control Exhibit 99.4 to the registrant's RegistrationStatement on Form S-8 (File No. 333-30396) as filedwith the SEC on February 14, 2000 10.7*Form of Addendum to Stock Option Agreement for1997 Plan—Limited Stock Appreciation Rights Exhibit 99.5 to the registrant's RegistrationStatement on Form S-8 (File No. 333-30396) as filedwith the SEC on February 14, 2000 10.8*Form of Stock Issuance Agreement for 1997 Plan Exhibit 99.6 to the registrant's RegistrationStatement on Form S-8 (File No. 333-30396) as filedwith the SEC on February 14, 2000 10.9*Form of Addendum to Stock Issuance Agreement for1997 Plan—Involuntary Termination FollowingCorporate Transaction/Change in Control Exhibit 99.7 to the registrant's RegistrationStatement on Form S-8 (File No. 333-30396) as filedwith the SEC on February 14, 2000 Table of Contents92ExhibitNumber Description Reference 10.10*Form of Notice of Grant of Automatic Stock Optionfor 1997 Plan—Initial Grant Exhibit 99.8 to Exhibit 99.8 to registrant'sRegistration Statement on Form S-8 (File No. 333-30396) as filed with the SEC on February 14, 2000 10.11*Form of Notice of Grant of Automatic Stock Optionfor 1997 Plan—Annual Grant Exhibit 99.9 to the registrant's RegistrationStatement on Form S-8 (File No. 333-30396) as filedwith the SEC on February 14, 2000 10.12*Form of Automatic Stock Option Agreement for1997 Plan Exhibit 99.10 to the registrant's RegistrationStatement on Form S-8 (File No. 333-30396) as filedwith the SEC on February 19, 2000 10.13*Iteris Inc. 1998 Stock Incentive Plan (as amended onFebruary 7, 2000) ("1998 Plan") Exhibit 10.24 to the registrant's Annual Report onForm 10-K for the year ended March 31, 2005 asfiled with the SEC on July 14, 2005 10.14*Form of Notice of Grant for 1998 Plan, includingforms of Option Agreement and Stock PurchaseAgreement for Abbas Mohaddes Exhibit 99.2 to the registrant's RegistrationStatement on Form S-8 (File No. 333-126834) asfiled with the SEC on July 22, 2005 10.15*Form of Addendum to Stock Option Agreement for1998 Plan Exhibit 99.3 to the registrant's RegistrationStatement on Form S-8 (File No. 333-126834) asfiled with the SEC on July 22, 2005 10.16*Form of 1997 Stock Option Agreements Exhibit 99.4 to the registrant's RegistrationStatement on Form S-8 (File No. 333-126834) asfiled with the SEC on July 22, 2005 10.17 Sublease, dated September 30, 2003, by andbetween Odetics, Inc. and Maij, Inc. Exhibit 10.1 to the registrant's Quarterly Report onForm 10-Q for the quarter ended June 30, 2007 asfiled with the SEC on August 14, 2007 10.18 Office Lease, dated May 24, 2007, by and betweenCrown Carnegie Associates, LLC and Iteris, Inc. Exhibit 10.2 to the registrant's Quarterly Report onForm 10-Q for the quarter ended June 30, 2007 asfiled with the SEC on August 14, 2007 10.19*2007 Omnibus Incentive Plan Exhibit 10.19 to the registrant's Annual Report onForm 10-K for the year ended March 31, 2012 asfiled with the SEC on June 11, 2012 10.20*Forms of Stock Option Agreements under the 2007Omnibus Incentive Plan Exhibit 10.20 to the registrant's Annual Report onForm 10-K for the year ended March 31, 2012 asfiled with the SEC on June 11, 2012 Table of Contents93ExhibitNumber Description Reference 10.21 Amended and Restated Loan and SecurityAgreement dated February 4, 2009 by and betweenCalifornia Bank & Trust and the registrant Exhibit 10.1 to the registrant's Quarterly Report onForm 10-Q for the quarter ended December 31,2008 as filed with the SEC on February 13, 2009 10.22*Form of Restricted Stock Unit Award Agreementunder the 2007 Omnibus Incentive Plan Exhibit 10.3 to the registrant's Quarterly Report onForm 10-Q for the quarter ended June 30, 2010 asfiled with the SEC on July 28, 2010 10.23 Modification Agreement dated September 30, 2010by and between Iteris, Inc. and California Bank &Trust Exhibit 10.1 to the registrant's Current Report onForm 8-K as filed with the SEC on October 6, 2010 10.24 Modification Agreement dated September 28, 2012by and between Iteris, Inc. and California Bank &Trust Exhibit 10.1 to the registrant's Current Report onForm 8-K as filed with the SEC on October 3, 2012 10.25 Amended and Restated Promissory Note, effectiveJuly 23, 2013, by and between MaxxessSystems, Inc. in favor of Iteris, Inc. Exhibit 10.1 to the registrant's Quarterly Report onForm 10-Q for the quarter ended June 30, 2013 10.26*Employment Agreement, dated July 29, 2013, byand between Iteris, Inc. and Abbas Mohaddes Exhibit 10.2 to the registrant's Quarterly Report onForm 10-Q for the quarter ended June 30, 2013 10.27*Offer Letter dated November 26, 2013 by andbetween Iteris, Inc. and Walter J. McBride Exhibit 10.1 to the registrant's Current Report onForm 8-K filed with the SEC on December 4, 2013 10.28*Change in Control Agreement dated December 3,2013 by and between Iteris, Inc. and Walter J.McBride Exhibit 10.2 to the registrant's Current Report onForm 8-K filed with the SEC on December 4, 2013 10.29 First Amendment to Lease, dated February 21, 2014,by and between RREF II Freeway Acquisitions, LLCand Iteris, Inc. Filed herewith 21 Subsidiaries of the registrant Filed herewith 23 Consent of Independent Registered PublicAccounting Firm, dated September 3, 2014 Filed herewith 24 Power of Attorney Filed herewith (included on the Signature page) 31.1 Certification of the Chief Executive Officer Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith 31.2 Certification of the Chief Financial Officer Pursuantto Section 302 of the Sarbanes-Oxley Act of 2002 Filed herewith Table of Contents94ExhibitNumber Description Reference 32.1 Certification of the Chief Executive Officer Pursuantto 18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 Filed herewith 32.2 Certification of the Chief Financial Officer Pursuantto 18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002 Filed herewith 101.INS#XBRL Instance Document Filed herewith 101.SCH#XBRL Taxonomy Extension Schema Document Filed herewith 101.CAL#XBRL Taxonomy Extension Calculation LinkbaseDocument Filed herewith 101.LAB#XBRL Taxonomy Extension Label LinkbaseDocument Filed herewith 101.PRE#XBRL Taxonomy Extension Presentation LinkbaseDocument Filed herewith 101.DEF#XBRL Taxonomy Definition Presentation LinkbaseDocument Filed 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 SecuritiesExchange Act of 1934, as amended. In accordance with Rule 24b-2, these confidential portions have been omitted from the exhibitand 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 orprospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are not deemed filed for purposes of Section 18 of theSecurities Exchange Act of 1934, irrespective of any general incorporation language included in any such filings, and otherwise arenot subject to liability under these sections; and ii) are deemed to have complied with Rule 405 of Regulation S-T ("Rule 405") andare not subject to liability under the anti-fraud provisions of the Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of theSecurities Exchange Act of 1934 or under any other liability provision if we have made a good faith attempt to comply with Rule 405and, after we become aware that the interactive data files fail to comply with Rule 405, we promptly amend the interactive data files.Exhibit 10.29 FIRST AMENDMENT TO LEASE This FIRST AMENDMENT TO LEASE (“Amendment”) is made as of February 21, 2014, between RREF II FREEWAY ACQUISITIONS, LLC, aDelaware limited liability company (“Landlord”), and ITERIS, INC., a Delaware corporation (“Tenant”), with reference to the following: RECITALS A. Tenant and Landlord’s predecessor-in-interest, Crown Carnegie Associates, LLC, a Delaware limited liability company (“Crown”) are parties to thatcertain Office Lease, dated as of May 24, 2007 (“Lease”), pursuant to which Tenant leased from Crown certain office space within the office building at 1700E. Carnegie Avenue, Suites 100 & 200, Santa Ana, California, as more particularly described in the Lease (“Premises”) within the complex known as FreewayCorporate Park (“Development”); B. Landlord acquired the Development, including the Premises, from Crown on or about May 30, 2013; C. The current term of the Lease, exclusive of available option periods, expires on January 31, 2015; and D. Landlord and Tenant desire to amend the Lease to reduce the size of the Premises, extend the term of the Lease and make certain other modificationsto the Lease, upon the terms and conditions set forth herein. NOW, THEREFORE, for good, valuable and sufficient consideration received, Landlord and Tenant hereby agree as follows: 1. Terms. All capitalized terms used but not defined herein shall have the meaning given to them in the Lease. 2. Premises. Tenant desires to relinquish to Landlord 11,059 rentable square feet within Suite 100 of the Premises (“Returned Space”). Effective uponthe Commencement Date as amended herein, the Premises shall be reduced to 41,057 rentable square feet and 37,225 usable square feet. Suite 100 shallcontain approximately 28,423 rentable square feet and 25,455 usable square feet. Suite 200 shall remain unchanged. Exhibit A to the Lease depicting thePremises is hereby deleted in its entirety and replaced with Exhibit A attached hereto. 3. Term. The Term is hereby amended to be ninety-six (96) months, commencing on the Commencement Date as amended herein. Provided Tenanthas executed and delivered this Amendment to Landlord on or before February 18, 2014, the Commencement Date is hereby amended to be April 1, 2014. IfTenant does not execute and deliver this Amendment to Landlord on or before February 18, 2014, the Commencement Date shall be delayed to May 1, 2014. The Expiration Date is hereby amended to be the date immediately preceding the date which is ninety-six (96) months following the Commencement Date;provided, however, that if 1 the Commencement Date of this Amendment is a date other than the first day of a month, the Expiration Date shall be the last day of the month which isninety-six (96) months after the month in which the Commencement Date falls. All references to the Term set forth in the Lease shall now mean and refer tothe Term set forth herein. 4. Option to Extend Term. Tenant currently has one (1) Option to extend the Term for a period of five (5) years as set forth in Section 1.2 of theLease. Landlord hereby grants to Tenant an one (1) additional Option to extend the Term for a period of five (5) years, so that Tenant now has a total of two(2) consecutive five (5) year Options to extend the Term. The terms of Section 1.2 of the Lease shall continue to govern with respect to each Option. 5. Base Rent. Upon the Commencement Date as amended herein, the amount of Base Rent shall be adjusted as follows: Months Rent per square foot Monthly Base Rent1-4$0.00$0.005-12$1.85$75,955.4513-24$1.90$78,008.3025-36$1.95$80,061.1537-48$2.00$82,114.0049-60$2.05$84,166.8561-72$2.10$86,219.7073-84$2.15$88,272.5585-96$2.20$90,325.40 6. Tenant’s Share; Base Year; Operating Expenses. Effective as of the Commencement Date as amended herein, Tenant’s Share is hereby amended tobe 52.291% with respect to the Project and 32.009% with respect to the Development. Effective as of the Commencement Date as amended herein, the BaseYear is hereby amended to be Calendar Year 2014. Notwithstanding anything to the contrary in the Lease: (a) Tenant shall not be responsible to pay forTenant’s Share of excess Operating Expenses, if any, for the first twelve (12) months of the Term following the Commencement Date as amended herein;(b) the amount of Operating Expenses that are controllable by Landlord shall be capped on a cumulative and compounded basis at five percent (5%)annually; and (c) all costs related to bringing the Development into compliance with the Americans With Disabilities Act of 1990 (“ADA”) shall be excludedfrom Operating Expenses. 7. Tenant Improvement Allowance. Landlord shall provide to Tenant an allowance for Tenant Improvements (defined below) to be made to thePremises in the amount of up to Eight Dollars ($8.00) per rentable square foot for a total of Three Hundred Twenty-Eight Thousand Four Hundred Fifty-SixDollars ($328,456) (“Tenant Improvement Allowance”). Tenant may use all or any portion of the Tenant Improvement Allowance for all improvements to thePremises and other related work, including but not limited to: (a) space planning and construction drawings; (b) profit, overhead and general conditions ofcontractors; (c) purchase or installation of telephone/computer cabling costs; (d) the cost to purchase or lease any furniture,st 2 fixtures and equipment for the Premises; or (e) such other improvements or repairs to the Premises as Tenant elects (collectively, “Tenant Improvements”). Inaddition, Tenant may apply the Tenant Improvement Allowance toward Base Rent, in which event such credit shall be applied toward the next months’ BaseRent following Landlord’s receipt of written notice thereof from Tenant. The Tenant Improvement Allowance must be utilized by Tenant on or before thedate that is twelve (12) months after the Commencement Date as amended herein. After such date, any unused amount of the Tenant Improvement Allowanceshall no longer be available to Tenant. Landlord shall pay the Tenant Improvement Allowance to Tenant within thirty (30) days after Landlord’s receipt of(as applicable): (a) copies of all invoices for the Tenant Improvements; (b) final as-built plans for Tenant Improvements; (c) copies of all permits for TenantImprovements, if any; and (d) unconditional lien releases from Tenant’s general contractor and all subcontractors. The Tenant Improvements and any otherAlternations made by Tenant remain subject to the requirements of Section 11 of the Lease; provided, however, that Landlord will not be entitled to receivean “administrative/coordination fee” (as described in Section 11.2 of the Lease). All improvements to the Premises made by Tenant covered by the TenantImprovement Allowance shall become the property of Landlord upon the expiration or sooner termination of this Lease. Tenant shall be solely responsiblefor all costs to improve or repair the Premises in excess of the Tenant Improvement Allowance, including any costs to bring the Premises into compliancewith the ADA. Landlord shall be responsible for the cost of demising the Premises to exclude the Returned Space from the Premises and any improvementsand repairs to the Returned Space, including the creation of a corridor to connect the lobby with the restrooms (as shown on attached Exhibit A) and anycosts associated with ADA compliance within the Returned Space. Landlord and Tenant each agree to be responsible to pull their own permits for theirrespective work. 8. Parking Spaces. The number of unreserved parking spaces allotted to Tenant is hereby reduced to one hundred twenty-eight (128) unreservedparking spaces. All other terms related to parking spaces and the Parking Lot remain unchanged. 9. Additional Allowance. Pursuant to Section 2.1.2 of Exhibit D to the Lease, Tenant has been making monthly payments of $1,550.62 to reimburseLandlord for the Additional Allowance. Effective as of the Commencement Date as amended herein, Landlord hereby waives the entire outstanding balanceof the Additional Allowance and Tenant shall have no further obligation to reimburse Landlord for the Additional Allowance. 10. Lease Unchanged and Complete. Except as changed by this Amendment, the Lease remains unchanged and contains the entire agreement ofLandlord and Tenant with respect to the Premises. Landlord and Tenant each represent and warrant it does not believe or claim there are any oral or writtenagreements between Landlord and Tenant relating to the Premises, and that it is not relying on any agreements relating to the Premises, other than thoseagreements contained in the Lease as amended by this Amendment. 11. Authority. Each person signing this Amendment on behalf of Landlord or Tenant represents and warrants that that party has duly authorized him orher to execute and deliver this Amendment and by so doing to bind that party. 3 12. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall constitute one and the same instrument. [Signatures on following page] 4 IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date first set forth above. “LANDLORD” RREF II FREEWAY ACQUISITIONS, LLC,a Delaware limited liability company By:RREF II REI, LP,a Delaware limited partnership,its Sole Member By:Rialto Partners GP II, LLC,a Delaware limited liability company,its General Partner By:Rialto Capital Advisors, LLC,a Delaware limited liability company,its Attorney in fact By:/s/ Mike FarleyName:Mike FarleyTitle:Director “TENANT” ITERIS, INC.,a Delaware corporation By:/s/ Abbas MohaddesName:Abbas MohaddesTitle:CEO By:/s/ Dan GilliamName:Dan GilliamTitle:Assistant Secretary 5 EXHIBIT A PREMISES [See attached] EXHIBIT A 1ST FLOOR TENANT SQUAREFOOTAGE: 126,289 USF 1STFLOOR GIVE-BACK SQUAREFOOTAGE: 410,182 USF COMMONAREAS OWNER TO CONSTRUCT 1HOUR RATED CORRIDOREXTENSION FROM LOBBY TORESTROOMS. CORRIDOR TOINCLUDE ALL WALLS, CEILINGS,LIGHTING, FIRE SPRINKLER, FLOORAND WALL FINISHES. FINISHES TOBE CONSISTENT WITH LOBBYFINISHES. AREA OF CORRIDORINDICATED BY. INCLUDERECESSING 1TERIS ENTRYDOORS. OWNER TO DEMISE THEGIVE BACK SPACE FROM ITERISSPACE. PROVIDE NEW WALLS TOSECURE SPACE. REWORK HVAC,LIGHTING 4 POWER SO EACHSPACE IS SEPARATE. FINISHWALLS ON GIVE BACK SIDE OFWALLS, RELOCATE DOOR TOELECTRICAL ROOM SO ACCESSTO ELECTRICAL ROOM IS INSIDEITERIS’S SPACE. NEW 48’ DOOR FORCOMPUTER ROOM ACCESS. ITERIS1700 CARNEGIE SANTA ANA, CAEXHIBIT A 1ST FLOOR EXHIBIT EXHIBIT “A” PREMISES Suite 200EXHIBIT A” -2- QuickLinks -- Click here to rapidly navigate through this documentExhibit 21 LIST OF SUBSIDIARIES Subsidiary Jurisdiction ofIncorporationMeridian Environmental Technology, Inc. North DakotaBerkeley Transportation Systems, Inc. DelawareQuickLinksExhibit 21LIST OF SUBSIDIARIESQuickLinks -- Click here to rapidly navigate through this documentExhibit 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. 333-190309, 333-162807, 333-146459, 333-126834, 333-75728, 333-44907 and 333-30396) on Form S-8 of Iteris, Inc. of our report dated September 3, 2014,relating to our audit of the consolidated financial statements, which appears in this Annual Report on Form 10-K of Iteris, Inc. for the year ended March 31,2014./s/ McGladrey LLPIrvine, CaliforniaSeptember 3, 2014QuickLinksExhibit 23QuickLinks -- Click here to rapidly navigate through this documentExhibit 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 make thestatements 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 respects thefinancial 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 our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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, to theregistrant'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 arereasonably likely 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 internalcontrol over financial reporting.Date: September 3, 2014 /s/ ABBAS MOHADDESAbbas MohaddesChief Executive Officer(Principal Executive Officer)QuickLinksExhibit 31.1CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002QuickLinks -- Click here to rapidly navigate through this documentExhibit 31.2 CERTIFICATION PURSUANT TOSECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Craig A. Christensen, 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 make thestatements 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 respects thefinancial 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 our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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, to theregistrant'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 arereasonably likely 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 internalcontrol over financial reporting.Date: September 3, 2014 /s/ CRAIG A. CHRISTENSENCraig A. ChristensenChief Financial Officer (Interim)(Principal Financial Officer)QuickLinksExhibit 31.2CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002QuickLinks -- Click here to rapidly navigate through this documentExhibit 32.1 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, 2014, as filed with the Securitiesand Exchange Commission (the "Report"), I, Abbas Mohaddes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adoptedpursuant 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 theCompany.Date: September 3, 2014 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. /s/ ABBAS MOHADDESAbbas MohaddesChief Executive OfficerQuickLinksExhibit 32.1CERTIFICATION PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002QuickLinks -- Click here to rapidly navigate through this documentExhibit 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, 2014 as filed with the Securitiesand Exchange Commission (the "Report"), I, Craig A. Christensen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adoptedpursuant 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 theCompany.Date: September 3, 2014 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. /s/ CRAIG A. CHRISTENSENCraig A. ChristensenChief Financial Officer (Interim)QuickLinksExhibit 32.2CERTIFICATION PURSUANT TO 18 U.S.C. §1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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