<PAGE>

                                                                    EXHIBIT 10.5

                     SEPARATION AND DISTRIBUTION AGREEMENT

     THIS AGREEMENT is made and entered into this 31/st/ day of December, 1999,
by and between ODETICS, INC., a Delaware corporation ("Odetics"), and ITERIS,
INC., a Delaware corporation ("Iteris").

     WHEREAS, Odetics is the owner of approximately 93% of the outstanding
capital stock of Iteris;

     WHEREAS, Iteris is engaged in the business of designing, developing and
marketing software based products and services to improve the safety and
efficiency of vehicle transportation, including video sensor products and
transportation management and traveler information systems for the intelligent
transportation systems industry (the "Business").

     WHEREAS, Odetics' Board of Directors has determined that it is in the best
interests of Odetics and Iteris stockholders to, subject to certain conditions,
distribute to Odetics' stockholders all of the outstanding stock of Iteris owned
by Odetics through a spinoff, which will result in the total and complete
separation of the Business and Iteris from Odetics at the time of the
Distribution; provided, however, that the shares distributed by Odetics shall
not be publicly transferable for 180 days after the date of the prospectus
relating to the IPO and that Odetics may continue to provide services to Iteris
pursuant to services agreements after the Distribution Date;

     WHEREAS, Iteris shall complete the IPO immediately after the Distribution;

     WHEREAS, Odetics has received a private letter ruling from the Internal
Revenue Service to the effect that the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Code;

     WHEREAS, in furtherance of the foregoing, it is appropriate and desirable
to transfer the assets of Iteris held by Odetics to Iteris and for Iteris to
assume the liabilities related to the Business; and

     NOW, THEREFORE, in consideration of the promises and the mutual
representations, warranties, covenants and agreements, and upon the terms and
subject to the conditions hereinafter set forth, the parties do hereby agree as
follows:

                                   ARTICLE I
                                  DEFINITIONS

     1.1  Affiliate of any Person means a Person that controls, is controlled
          ---------
by, or is under common control with such Person. As used herein, "control" means
the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such entity, whether through
ownership of voting securities or other interests, by contract or otherwise.

     1.2  Ancillary Agreements shall mean the Promissory Note, the Services
          --------------------
Agreement and the Tax Allocation Agreement to be entered into between Iteris and
Odetics in connection with the Distribution.

                                       1
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     1.3  Assets means assets, properties and rights (including goodwill),
          ------
wherever located (including in the possession of vendors or other third parties
or elsewhere), whether real, personal or mixed, tangible, intangible or
contingent, in each case whether or not recorded or reflected or required to be
recorded or reflected on the books and records or financial statements of any
Person, including the following:

          (a)  all accounting and other books, records and files whether in
paper, microfilm, microfiche, computer tape or disc, magnetic tape or any other
form;

          (b)  all apparatus, computers and other electronic data processing
equipment, fixtures, machinery, equipment, furniture, office equipment,
automobiles, trucks, rolling stock, vessels, motor vehicles and other
transportation equipment, special and general tools, test devices, prototypes
and models and other tangible personal property;

          (c)  all inventories of materials, parts, raw materials, supplies,
work-in-process and finished goods, prototypes and products;

          (d)  all interests in real property of whatever nature, including
easements, whether as owner, lessor, sublessor, lessee, sublessee or otherwise;

          (e)  all interests in any capital stock or other equity interests of
any Subsidiary or any other Person, all bonds, notes, debentures or other
securities issued by any Subsidiary or any other Person, all loans, advances or
other extensions of credit or capital contributions to any Subsidiary or any
other Person and all other investments in securities of any Person;

          (f)  all license agreements, leases of personal property, open
purchase orders for raw materials, supplies, parts or services, unfilled orders
for the manufacture and sale of products and other contracts, agreements or
commitments;

          (g)  all deposits, letters of credit and performance and surety bonds;

          (h)  all written technical information, data, specifications, research
and development information, engineering drawings, operating and maintenance
manuals, and materials and analyses prepared by consultants and other third
parties;

          (i)  all domestic and foreign patents, copyrights, trade names,
trademarks, service marks and registrations and applications for any of the
foregoing, mask works, trade secrets, inventions, other proprietary information
and licenses from third Persons granting the right to use any of the foregoing,
including, without limitation, rights to damages and payments arising from past
or future infringement or misappropriations of the foregoing, the right to sue
for past, present or future infringements or misappropriations of any of the
foregoing and the right to all goodwill associated with any of the foregoing;

          (j)  all computer applications, programs and other software, including
operating software, network software, firmware, middleware, design software,
design tools, algorithms, systems documentation and instructions;

          (k)  all cost information, sales and pricing data, customer prospect
lists, supplier records, customer and supplier lists, customer and vendor data,
correspondence and lists, product literature, artwork, design, development and
manufacturing files, vendor and customer drawings,

                                       2
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formulations and specifications, quality records and reports and other books,
records, studies, surveys, reports, plans and documents;

          (l)  all prepaid expenses, trade accounts and other accounts and notes
receivables;

          (m)  all rights under contracts or agreements, all claims or rights
against any Person arising from the ownership of any Asset, all rights in
connection with any bids or offers and all related claims, choices in action or
similar rights, whether accrued or contingent;

          (n)  all rights as a named insured under insurance policies and all
rights in the nature of insurance, indemnification or contribution; all
licenses, permits, approvals and authorizations;

          (p)  cash or cash equivalents, bank accounts, lock boxes and other
     deposit agreements; and

          (q)  interest rate, currency, commodity or other swap, collar, cap or
     other hedging or similar agreements or arrangements.

     1.4  Business means the business of Iteris as defined in the recitals.
          --------

     1.5  Code means the Internal Revenue Code of 1986, as amended.
          ----

     1.6  Distribution means the distribution by Odetics on a pro rata basis to
          ------------
holders of Odetics Common Stock of all of the outstanding shares of Iteris
Common Stock owned by Odetics.

     1.7  Distribution Agent means the agent appointed by Odetics to effect the
          ------------------
Distribution of the Iteris shares.

     1.8  Distribution Date means the date on which the Distribution occurs.
          -----------------

     1.9  Exchange Act means the Securities Exchange Act of 1934, as amended,
          ------------
together with the rules and regulations promulgated thereunder.

     1.10 Intentionally omitted.

     1.11 Form 10 Registration Statement means the registration statement on
          ------------------------------
Form 10 filed under the Exchange Act, pursuant to which Iteris Common Stock will
be registered under the Exchange Act following the Distribution, together with
all amendments thereto.

     1.12 Information Statement means the Information Statement forming a
          ---------------------
part of the Form 10 Registration Statement to be mailed to holders of Odetics
Common Stock in connection with the Distribution.

     1.13 Insurance Policies means the insurance policies written by insurance
          ------------------
carriers unaffiliated with Odetics pursuant to which Iteris or one or more of
its Subsidiaries (or their respective officers or directors) will be insured
parties after the Distribution Date.

     1.14 Insurance Proceeds means those monies:
          ------------------

                                       3
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          (a)  received by an insured from an insurance carrier;

          (b)  paid by an insurance carrier on behalf of the insured; or

          (c)  received (including by way of set off) from any third party in
the nature of insurance, contribution or indemnification in respect of any
Liability;

     in any such case net of any applicable premium adjustments (including
reserves and retrospectively rated premium adjustments) and net of any costs or
expenses (including allocated costs of in-house counsel and other personnel)
incurred in the collection thereof.

     1.15 IPO means the initial public offering of Iteris Common Stock in an
          ---
underwritten public offering registered under the Securities Act of 1933, as
amended.

     1.16 IPO Registration Statement means the Registration Statement on Form
          --------------------------
S-1 filed by Iteris with the Securities and Exchange Commission in connection
with the IPO.

     1.17 Iteris Assets means those Iteris Assets described in Section 2.2.
          -------------

     1.18 Iteris Balance Sheet means the audited consolidated balance sheet of
          --------------------
Iteris, including the notes thereto, as of December 31, 1999.

     1.19 Iteris Contracts means contracts and agreements to which Odetics or
          ----------------
any of its Affiliates is a party or by which any of their respective Assets is
bound, whether as of the date hereof or prior to or at the Distribution Date,
and whether or not in writing, relating to the Business and set forth on
Schedule 1.19.
-------------

     1.20 Iteris Group means Iteris, each Subsidiary of Iteris and each other
          ------------
Person that is contemplated to be controlled directly or indirectly by Iteris as
of the Distribution Date.

     1.21 Iteris Liabilities means those Iteris Liabilities described in Section
          ------------------
2.3(a).

     1.22 Liabilities means any and all losses, claims, charges, debts, demands,
          -----------
actions, causes of action, suits, damages, obligations, payments, costs and
expenses, sums of money, accounts, bonds, indemnities and similar obligations,
covenants, contracts, controversies, agreements, promises, guarantees, and
similar obligations, and other liabilities, including all contractual
obligations, whether absolute or contingent, matured or unmatured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising
(including the costs and expenses and reasonable attorneys' fees).

     1.23 License Agreement means that License Agreement to be entered into by
          -----------------
and between Iteris and Odetics substantially in the form of Exhibit A.
                                                            ---------

     1.24 Odetics Group means Odetics and each Person (other than any member of
          -------------
the Iteris Group) that is an Affiliate of Odetics immediately after the
Distribution Date.

     1.25 Person means an individual, a general or limited partnership, a
          ------
corporation, a trust, a joint venture, an unincorporated organization, a limited
liability entity or any other entity.

                                       4
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     1.26 Promissory Note means that Promissory Note made by Iteris payable to
          ---------------
Odetics in substantially the form attached hereto as Exhibit B.
                                                     ---------

     1.27 Record Date means the close of business on the date determined by the
          -----------
Odetics Board of Directors as the record date for determining stockholders of
Odetics entitled to receive shares of Iteris Common Stock in the Distribution.

     1.28 Services Agreement means that certain Services Agreement to be entered
          ------------------
into by and between Odetics and Iteris substantially in the form of Exhibit C.
                                                                    ---------

     1.29 Subsidiary of any Person means any corporation or other organization
          ----------
whether incorporated or unincorporated of which at least a majority of the
securities or interests having by the terms thereof ordinary voting power to
elect at least a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such Person or by any one or more of Iteris
Subsidiaries, or by such Person and one or more of Iteris Subsidiaries;
provided, however that no Person that is not directly or indirectly wholly owned
by any other Person shall be a Subsidiary of such other Person unless such other
Person controls, or has the right, power or ability to control, that Person.

     1.30 Tax Allocation Agreement means that certain Tax Allocation Agreement
          ------------------------
to be entered into by and between Odetics and Iteris substantially in the form
of Exhibit D.
   ---------

     1.31 Underwriting Agreement shall mean the Underwriting Agreement to be
          ----------------------
entered into among Iteris and the underwriters underwriting the sale of Iteris
Common Stock in the IPO.

                                  ARTICLE II
                                 THE TRANSFER

     2.1  Transfer of Assets.
          ------------------
          (a)  Effective as of the date of this Agreement, Odetics hereby
assigns, transfers, conveys and delivers to Iteris, and agrees to cause its
applicable Subsidiaries to assign, transfer, convey and deliver to Iteris, and
Iteris hereby accepts from Odetics and its Subsidiaries, all of Odetics' and its
applicable Subsidiaries' respective right, title and interest in all Iteris
Assets. This assignment, transfer, conveyance and delivery is unconditional,
notwithstanding other provisions in this Agreement.

          (b)  Iteris hereby assumes and agrees faithfully to perform, satisfy,
discharge and fulfill all the Iteris Liabilities in accordance with their
respective terms. Iteris shall be responsible for all Iteris Liabilities,
regardless of when or where such Liabilities arose or arise or whether the facts
on which they are based occurred prior to or subsequent to the date hereof,
regardless of where or against whom such Liabilities are asserted or determined
or whether asserted or determined prior to the date hereof, except those
Liabilities arising from or alleged to arise from recklessness, violation of
law, fraud or misrepresentation (whether based on tort, contract, statute or
otherwise) by any member of the Odetics Group or any of its directors, officers,
employees, agents, Subsidiaries or Affiliates.

          (c)  In the event that at any time or from time to time (whether prior
to or after the Distribution Date) any party hereto (or any member of such
party's respective Group), shall receive

                                       5
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or otherwise possess any Asset that is allocated to any other Person pursuant to
this Agreement or any Ancillary Agreement, such party or member shall promptly
transfer, or cause to be transferred, such Asset to the Person so entitled
thereto. Prior to any such transfer, the Person receiving or possessing such
Asset shall hold such Asset in trust for any such other Person.

     2.2  Iteris Assets.  For purposes of this Agreement, "Iteris Assets" shall
          -------------
mean (without duplication):

          (a)  all Assets reflected in the Iteris Balance Sheet as Assets of
Iteris and its Subsidiaries, subject to any dispositions of any such Assets
subsequent to the date of the Iteris Balance Sheet and all Assets relating to
the Business that are or have been developed, owned, licensed or otherwise held
by Odetics or any member of the Odetics Group;

          (b)  all Assets acquired by or for the exclusive benefit of Iteris
subsequent to the date of the Iteris Balance Sheet and prior to the Distribution
Date that would have been reflected in the Iteris Balance Sheet as Assets of
Iteris had they been owned on the date of the Iteris Balance Sheet;

          (c)  any rights of any member of the Iteris Group under any of the
Insurance Policies, including any rights thereunder arising after the
Distribution Date in respect of any Insurance Policies that are occurrence
policies; (A) any Assets that any Ancillary Agreement contemplates will be
transferred to any member of the Iteris Group, (B) any Iteris Contracts and (C)
all issued and outstanding capital stock of the Subsidiaries of Iteris; and

          (e)  all rights to all intellectual property used in the Iteris
Business, including but not limited to patents, trademarks and service marks
(registered and common law), trade dress, copyrights and trade secrets, all
registrations or applications for registration related to the foregoing and all
rights to claims of infringement or misappropriation, whether arising prior to
or after this Agreement.

     2.3  Iteris Liabilities.  For the purposes of this Agreement, "Iteris
          ------------------
Liabilities" shall mean (without duplication):

          (a)  any and all Liabilities that are expressly contemplated by this
Agreement or any Ancillary Agreement (or the Schedules hereto or thereto) as
Liabilities to be assumed by Iteris or any member of the Iteris Group and all
agreements, obligations and Liabilities of any member of the Iteris Group under
this Agreement or any of the Ancillary Agreements;

          (b)  all Liabilities relating to, arising out of, or resulting from:

               (i)   the operation of the Iteris Business as conducted at any
time prior to, at or after the Distribution Date (including any Liability
relating to, arising out of or resulting from the design, manufacture and sale
of products or services of the Iteris Business); or

               (ii)  any Iteris Assets (including any Iteris Contracts and
leasehold interests) or ownership of any Iteris Assets at any time prior to, at
or after the Distribution Date.

          (c)  all Liabilities relating to, arising out of or resulting from the
Promissory Note.

                                       6
<PAGE>

          (d)  all Liabilities reflected as Liabilities or obligations of Iteris
in the Iteris Balance Sheet, subject to any discharge of such Liabilities
subsequent to the date of the Iteris Balance Sheet, and all Liabilities or
obligations of Iteris incurred subsequent to the date of the Iteris Balance
Sheet that would have been reflected in the Iteris Balance Sheet had they been
incurred as of the date of the Iteris Balance Sheet; and

          (e)  any Liabilities relating to, arising out of or resulting from any
infringement of any intellectual property of any third party, including but not
limited to patent rights, trademark and service mark rights (registered and
common law), trade dress rights, copyrights, misappropriation of trade secret,
based upon or resulting from the operation of the Iteris Business and regardless
of whether said infringement occurred prior to, on or after the Distribution
Date;

     2.4  Documents Further Evidencing Transfers of Assets and Assumption of
          ------------------------------------------------------------------
Liabilities.  In furtherance of the assignment, transfer and conveyance of
-----------
Iteris Assets and the assumption of Iteris Liabilities set forth in Section
2.1(a) and (b), simultaneously with the execution and delivery hereof or as
promptly as practicable thereafter, (i) upon the reasonable request of Iteris,
Odetics shall execute and deliver, and shall cause its Subsidiaries to execute
and deliver, such further bills of sale, stock powers, certificates of title,
assignments of contracts and other instruments of transfer, conveyance and
assignment as and to the extent necessary to fully evidence the transfer,
conveyance and assignment of all of Odetics' and its Subsidiaries' right, title
and interest in and to the Iteris Assets to Iteris and (ii) upon the reasonable
request of Odetics, Iteris shall execute and deliver to Odetics and its
Subsidiaries such further assumptions of contracts and other instruments of
assumption as and to the extent necessary to fully evidence the valid and
effective assumption of the Iteris Liabilities by Iteris.

     2.5  Elimination of Intercompany Account Balances.  Effective as of the
          --------------------------------------------
Distribution Date, Odetics, on behalf of itself and each member of the Odetics
Group, and Iteris, on behalf of itself and each member of the Iteris Group,
shall settle and eliminate all intercompany receivables, payables and other
account balances between Odetics and/or any Odetics Subsidiary and Iteris and/or
any Iteris Subsidiary.  Any account balances owed by Iteris and/or its
Subsidiary to Odetics and any other member of the Odetics Group shall be
evidenced by the Promissory Note to be delivered by Iteris to Odetics on the
Distribution Date pursuant to Section 7.6.  Except for obligations under the
Promissory Note and any other obligations arising under any of the Ancillary
Agreements, Iteris and its Subsidiary shall have no obligations to Odetics or
any member of the Odetics Group.

     2.6  Consideration.  The consideration for the Iteris Assets has been
          -------------
included in the intercompany account balance payable by Iteris to Odetics and
will be included in the principal amount of the Promissory Note, cancelled as a
result of a contribution to the capital of Iteris pursuant to Section 7.7,
and/or paid from the proceeds of the IPO.

                                  ARTICLE III
                   REPRESENTATIONS AND WARRANTIES OF ODETICS

     Odetics represents and warrants to Iteris as follows:

     3.1  Power and Authority; Effect of Agreement.  Odetics is a corporation
          ----------------------------------------
duly organized, validly existing and in good standing under the laws of
Delaware, has requisite corporate power and authority to execute, deliver and
perform this Agreement and to consummate the transactions contemplated hereby.
The execution, delivery and performance by it of this Agreement and the

                                       7
<PAGE>

consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on its part. This Agreement has
been duly and validly executed and delivered by it and constitutes its legal,
valid and binding obligation enforceable against it in accordance with its
terms. Except to the extent that such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to creditors' rights generally. The execution, delivery and performance
by it of this Agreement and the consummation by it of the transactions
contemplated hereby do not, and will not, with or without the giving of notice
or the lapse of time, or both: (i) violate any provision of law, rule or
regulation to which it is subject; (ii) violate any order, judgment or decree
applicable to it; (iii) conflict with, or result in a breach or default under,
its Certificate of Incorporation or its Bylaws; or (iv) conflict with, or result
in a breach or default under, any contract to which it is a party; except, in
each case, for violations, conflicts, breaches or defaults which in the
aggregate would not materially hinder or impair the consummation of the
transactions contemplated hereby or have a material adverse effect on the
Business.

     3.2  Stock of Transferred Subsidiary.  Odetics is the owner, beneficially
          -------------------------------
and of record of 6,000,000 shares of Iteris Common Stock, representing
approximately 93% of all issued and outstanding stock of Iteris, free and clear
of all liens, encumbrances, security agreements, options, claims, charges and
restrictions.

     3.3  Consents.  No consent, approval or authorization of, or exemption
          --------
from, or filing with any governmental or regulatory authority or any other third
party is required in connection with the execution, delivery or performance by
Odetics of the terms of this Agreement or the taking by it of any other action
required to effectuate the transactions contemplated hereby.

                                  ARTICLE IV
                   REPRESENTATIONS AND WARRANTIES OF ITERIS

     Iteris represents and warrants to Odetics as follows:

     4.1  Iteris' Power and Authority.  Iteris is a corporation duly organized
          ---------------------------
validly existing and in good standing under the laws of Delaware, and has all
requisite corporate power and authority to carry on the Business as it is now
being conducted and as proposed to be conducted.

     4.2  Due Authorization, Execution and Delivery; Effect of Agreement.
          --------------------------------------------------------------
Iteris has all requisite corporate power and authority to execute, deliver and
perform this Agreement and to consummate the transactions contemplated hereby.
The execution, delivery and performance by Iteris of this Agreement and the
consummation by Iteris of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Iteris. This
Agreement has been duly and validly executed and delivered by Iteris and
constitutes the legal, valid and binding obligation of Iteris, enforceable
against Iteris in accordance with its terms, except to the extent that such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to creditors' rights generally. The
execution, delivery and performance by Iteris of this Agreement and the
consummation by Iteris of the transactions contemplated hereby do not, and will
not, with or without the giving of notice or the lapse of time, or both: (i)
violate any provision of law, rule or regulation to which Iteris is subject;
(ii) violate any order, judgment or decree applicable to Iteris; (iii) conflict
with, or result in a breach or default under, the Certificate of Incorporation
or Bylaws of Iteris; or (iv) conflict with, or result in a breach or default
under, any contract to which it is a party; except, in each case, for
violations, conflicts, breaches or defaults

                                       8
<PAGE>

which in the aggregate would not materially hinder or impair the consummation of
the transactions contemplated hereby or have a material adverse effect on the
Business.

     4.3  Consents.  No consent, approval or authorization of, or exemption
          --------
from, or filing with, any governmental or regulatory authority or any other
third party is required in connection with the execution, delivery or
performance by Iteris of this Agreement or the taking by of any other action
required to effectuate the transactions contemplated hereby.

                                   ARTICLE V
                             COVENANTS OF ODETICS

     5.1  Cooperation.  Odetics agrees to cooperate with Iteris, both before and
          -----------
after the Distribution, to enable Iteris to implement the IPO and to perform its
obligations hereunder.  Such cooperation will include but not be limited to
preparing and submitting required financial reports after the Distribution Date
which may relate to periods whether before or after the Distribution Date and
executing such documents and doing such other acts and things as may be
necessary to carry out the intent of this Agreement as it relates to the IPO.

     5.2  Books and Records; Personnel.  For a period of six years after the
          ----------------------------
Distribution Date (or such longer period as maybe required by any law or
regulation, any governmental agency, any ongoing litigation or class of
connection with any administrative proceeding):

          (a)  Odetics shall not dispose of or destroy any of the business
records and files of the Business retained by it or any of its Subsidiaries (the
"Retained Records"). If Odetics wishes to dispose of or destroy such records and
files after that time, it shall use reasonable efforts to first give 30 days'
prior written notice to Iteris and Iteris shall have the right, at its option
and expense, upon prior written notice to Odetics within such 30 day period, to
take possession of the Retained Records within 60 days after the date of Iteris'
notice to Odetics.

          (b)  Odetics shall allow Iteris and its representatives reasonable
access to all Retained Records during regular business hours and upon reasonable
notice. Odetics shall maintain the Retained Records in a manner and at locations
that reasonably facilitates retrieval and review by Iteris. Iteris shall have
the right, at its own expense, to make copies of any such records and files and
Odetics shall provide convenient duplication facilities for such purpose,
provided, however, that any such access or copying shall be had or done in such
manner so as not to unreasonably interfere with the normal conduct of Odetics'
business or operations; and

          (c)  Odetics shall make reasonably available to Iteris, upon written
request and at Iteris' expense: (i) personnel to assist in locating and
obtaining records and files maintained by it (including those created after the
date hereof, to the extent necessary and appropriate in connection with pending
and future claims against Iteris relating to the Business) and (ii) any of
Iteris personnel whose assistance or participation (including as a witness
during depositions or at trial) is reasonably required by Iteris in anticipation
of, or preparation for or during, existing or future litigation or other matters
in which Iteris or any of its Affiliates is involved and which is related to the
Business.

                                       9
<PAGE>

                                  ARTICLE VI
                              COVENANTS OF ITERIS

     6.1  Cooperation.  Iteris agrees to cooperate with Odetics, both before and
          -----------
after the Distribution Date, to enable Odetics to implement the Distribution and
to perform its obligations hereunder.  Such cooperation will include but not be
limited to preparing and submitting required financial reports after the
Distribution Date which may relate to periods whether before or after the
Distribution Date and executing such documents and doing such other acts and
things as may be necessary to carry out the intent of this Agreement as it
relates to the Distribution.

     6.2  Books and Records; Personnel.  For a period of six years after the
          ----------------------------
Distribution Date (or such longer period as may be required by any law or
regulation, any governmental agency, any ongoing litigation or class of
litigation, or in connection with any administrative proceeding):

          (a)  Iteris shall not dispose of or destroy of the business records
and files of the Business that are transferred to it or any of its subsidiaries
in carrying out the transactions contemplated hereby (the "Transferred
Records"). If Iteris wishes to dispose of or destroy such records and files
after that time, it shall use reasonable efforts to first give 30 days' prior
written notice to Odetics and Odetics shall have the right at its option and
expense, upon prior written notice to Iteris within such 30 day period, to take
possession of the Transferred Records within 60 days after the date of Odetics'
notice to Iteris;

          (b)  Iteris shall allow Odetics and its representatives reasonable
access to all Transferred Records during regular business hours and upon
reasonable notice. Iteris shall maintain the Transferred Records in a manner and
at locations that reasonably facilitates retrieval and review by Odetics.
Odetics shall have the right at its own expense, to make copies of any such
records and files and Iteris shall provide convenient duplication facilities for
such purposes provided, however, that any such access or copying shall be had or
done in such a manner so as not to unreasonably interfere with the normal
conduct of Iteris' business or operations; and

          (c)  Iteris shall make reasonably available to Odetics upon written
request and at Odetics' expense: (i) personnel to assist in locating and
obtaining records and files maintained by it (including those created after the
date hereof, to the extent necessary and appropriate in connection with pending
and future claims against Odetics relating to the Business), and (ii) any of
Iteris personnel whose assistance or participation (including as a witness
during depositions or at trial) is reasonably required by Odetics in
anticipation of, or preparation for or during, existing or future litigation or
other matters in which Odetics or any of its Affiliates is involved.

                                  ARTICLE VII
                               THE DISTRIBUTION

     7.1  The Distribution.
          ----------------
          (a)  Subject to the conditions specified in Section 7.3 hereof, on or
prior to the Distribution Date, Odetics will deliver to the Distribution Agent
for the benefit of holders of record of Odetics Common Stock on the Record Date,
a single stock certificate, endorsed by Odetics in blank, representing all of
the outstanding shares of Iteris Common Stock then owned by Odetics, and shall
cause the Distribution Agent to distribute on the Distribution Date the
appropriate number of such shares of Iteris Common Stock to each such holder or
designated transferee or transferees of

                                       10
<PAGE>

such holder. Subject to Section 7.4, each holder of Odetics Common Stock on the
Record Date (or such holder's designated transferee or transferees) will be
entitled to receive in the Distribution a number of shares of Iteris Common
Stock equal to the number of shares of Odetics Common Stock held by such holder
on the Record Date multiplied by a fraction the numerator of which is the number
of shares of Iteris Common Stock beneficially owned by Odetics on the Record
Date and the denominator of which is the number of shares of Odetics Common
Stock outstanding on the Record Date.

          (b)  Iteris and Odetics, as the case may be, will provide to the
Distribution Agent all share certificates and any information required in order
to complete the Distribution on the basis specified above.

     7.2  Actions Prior to the Distribution.
          ---------------------------------

          (a)  Odetics and Iteris shall prepare and mail, prior to the
Distribution Date, to the holders of Odetics Common Stock, the Information
Statement, which shall include information concerning Iteris, its business,
operations and management, the Distribution and such other matters as Odetics
shall reasonably determine and as may be required by law. Odetics and Iteris
will prepare, and Iteris will, to the extent required under applicable law, file
with the Commission the Form 10 and any such other documentation which Odetics
and Iteris determine are necessary or desirable to effectuate the Distribution
and Odetics and Iteris shall each use its reasonable best efforts to obtain all
necessary approvals from the Commission with respect thereto as soon as
practicable.

          (b)  Odetics and Iteris shall take all such action as may be necessary
or appropriate under the securities or blue sky laws of each of the states of
the United States (and any comparable laws under any foreign jurisdiction) in
connection with the Distribution.

          (c)  Odetics and Iteris shall take all reasonable steps necessary and
appropriate to cause the conditions set forth in Section 7.3 to be satisfied and
to effect the Distribution on the Distribution Date.

          (d)  Iteris shall prepare and file, and shall use its reasonable best
efforts to have approved, an application for the listing of the Iteris Common
Stock to be distributed in the Distribution on the Nasdaq National Market,
subject to official notice of distribution.

     7.3  Conditions to Distribution.  Odetics shall consummate the
          --------------------------
Distribution as promptly as practicable following the satisfaction or waiver of
the following conditions:

          (a)  declaration by the Securities and Exchange Commission of the
effectiveness of the Form 10 Registration Statement and the IPO Registration
Statement;

          (b)  any material governmental approvals and consents or consents
required under material contracts necessary to consummate the Distribution shall
have been obtained and be in full force and effect;

          (c)  no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Distribution shall be in effect and no other event outside
the control of Odetics shall have occurred or failed to occur that prevents the
consummation of the Distribution; and

                                       11
<PAGE>

          (d)  no other events or developments shall have occurred subsequent to
the date hereof that, in the judgment of the Board of Directors of Odetics,
would result in the Distribution having a material adverse effect on Odetics or
on the stockholders of Odetics.

The foregoing conditions are for the sole benefit of Odetics and shall not give
rise to or create any duty on the part of Odetics or the Odetics Board of
Directors to waive or not waive any such conditions.

     7.4  Fractional Shares.  As soon as practicable after the Distribution
          -----------------
Date, Odetics shall direct the Distribution Agent to determine the number of
whole shares and fractional shares of Iteris Common Stock allocable to each
holder of record or beneficial owner of Odetics Common Stock as of the Record
Date and to aggregate all such fractional shares. In lieu of selling such shares
in open market transactions, Odetics shall cause the transfer agent to cancel
the whole shares obtained thereby, deposit with the Distribution Agent an amount
equal to the aggregate fair market value of such shares based upon the initial
public offering price per share in the IPO, and to cause to be distributed to
each such holder or for the benefit of each such beneficial owner, in lieu of
any fractional share, such holder's or owner's ratable share of the amount
deposited with the Distribution Agent for the cancelled shares, after making
appropriate deductions of any amount required to be withheld for federal income
tax purposes and after deducting an amount equal to all brokerage charges,
commissions and transfer taxes attributed to the cancellation of such shares.
Odetics and the Distribution Agent shall use their reasonable best efforts to
aggregate the shares of Odetics Common Stock that may be held by any beneficial
owner thereof through more than one account in determining the fractional share
allocable to such beneficial owner.

     7.5  Restrictions on Transfer.  Each stock certificate evidencing
          ------------------------
ownership of Iteris Common Stock shall be marked with a legend that restricts
the transfer of such shares, except for privately negotiated transactions,
transfers by gift, transfers that do not effect a change in beneficial ownership
or transfers according to the laws of descent and distribution, for a period of
180 days after the date of the Prospectus, which restrictions shall be set forth
in the Bylaws of Iteris. To enforce this restriction, Iteris shall instruct its
transfer agent to mark its books and records with a stop transfer order during
the 180 day period for all shares of Common Stock distributed in the
Distribution.

     7.6  Ancillary Agreements.  On the Distribution Date, Odetics and Iteris
          --------------------
will execute and deliver each of the Ancillary Agreements to which it is a
party.

     7.7  Contribution to Capital.  On the Distribution Date, Odetics shall
          -----------------------
cancel a portion of the debt owed by Iteris to Odetics as of such date and such
amount shall be treated as a contribution to the capital of Iteris. The amount
of debt to be cancelled shall be determined by the mutual agreement of the
parties hereto on or prior to the Distribution Date.

                                 ARTICLE VIII
                      THE IPO AND ACTIONS PENDING THE IPO

     8.1  The IPO.
          -------
          (a)  Odetics and Iteris shall use their reasonable best efforts to
consummate the IPO immediately following the Distribution. Actions required to
so consummate the IPO shall include, but shall not necessarily be limited to,
those specified in this Section 8.1.

                                       12
<PAGE>

          (b)  Iteris shall file the IPO Registration Statement, and such
amendments or supplements thereto, as may be necessary in order to cause the
same to become and remain effective as required by law or by the underwriters,
including, but not limited to, filing such amendments to the IPO Registration
Statement as may be required by the Underwriting Agreement, the Securities and
Exchange Commission or federal, state or foreign securities laws.

          (c)  Iteris shall enter into the Underwriting Agreement, in form and
substance reasonably satisfactory to Iteris and shall comply with its
obligations thereunder.

          (d)  Odetics and Iteris shall consult with each other and the
Underwriters regarding the timing, pricing and other material matters with
respect to the IPO.

          (e)  Iteris shall use its reasonable best efforts to take all such
action as may be necessary or appropriate under state securities and blue sky
laws of each of the states of the United States (and any comparable laws under
any foreign jurisdictions) in connection with the IPO.

          (f)  Iteris shall prepare, file and use reasonable best efforts to
seek to make effective, an application for listing of the Iteris Common Stock
issued in the IPO on the Nasdaq National Market, subject to official notice of
issuance.

          (g)  Iteris shall participate in the preparation of materials and
presentations as the underwriters shall deem necessary or desirable.

          (h)  Iteris shall pay all third party costs, fees and expenses
relating to the IPO, all of the reimbursable expenses of the Underwriters
pursuant to the Underwriting Agreement, all of the costs of producing, printing,
mailing and otherwise distributing the Prospectus, as well as the underwriters'
discount as provided in the Underwriting Agreement.

     8.2  Conditions Precedent to Consummation of the IPO. As soon as
          -----------------------------------------------
practicable after the date of this Agreement, the parties hereto shall use their
reasonable best efforts to satisfy the following conditions to the consummation
of the IPO. The obligations of the parties to consummate the IPO shall be
conditioned on the satisfaction, or waiver by Odetics, of the following
conditions:

          (a)  The IPO Registration Statement shall have been declared effective
by the Securities and Exchange Commission, and there shall be no stop-order in
effect with respect thereto.

          (b)  The actions and filings with regard to state securities and blue
sky laws of each of the states of the United States (and any comparable laws
under any foreign jurisdictions) described in Section 8.1 shall have been taken
and, where applicable, have become effective or been accepted.

          (c)  The Iteris Common Stock to be issued in the IPO shall have been
accepted for listing on the Nasdaq National Market, on official notice of
issuance.

          (d)  Iteris shall have entered into the Underwriting Agreement and all
conditions to the obligations of Iteris and the underwriters shall have been
satisfied or waived.

          (e)  The Distribution shall have been consummated.

                                       13
<PAGE>

          (f)  No order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the IPO or any of the other transactions contemplated by this
Agreement or any Ancillary Agreement shall be in effect.

          (g)  Such other actions as the parties hereto may, based upon the
advice of counsel, reasonably request to be taken prior to the Distribution and
the IPO in order to assure the successful completion of the Distribution and the
IPO and the other transactions contemplated by this Agreement shall have been
taken.

          (h)  This Agreement shall not have been terminated.

          (i)  A pricing committee of Iteris directors designated by the Board
of Directors of Iteris shall have determined that the terms of the IPO are
acceptable to Iteris.

                                  ARTICLE IX
                       MUTUAL RELEASES; INDEMNIFICATION

     9.1  Release of Pre-Closing Claims.
          -----------------------------
          (a)  Except as provided in Section 9.1(c), effective as of the
Distribution Date, Iteris does hereby, for itself and each of its affiliates,
successors and assigns, and all persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of Iteris (in each case, in their respective capacities as such),
remise, release and forever discharge each of Odetics and its Affiliates,
successors and assigns, and all persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of Odetics (in each case, in their respective capacities as such), and
their respective heirs, executors, administrators, successors and assigns, from
any and all Liabilities whatsoever, whether at law or in equity (including any
right of contribution), whether arising under any contract or agreement, by
operation of law or otherwise, existing or arising from any acts or events
occurring or failing to occur or alleged to have occurred or to have failed to
occur or any conditions existing or alleged to have existed on or before the
Distribution Date, including in connection with the transactions and all other
activities to implement the IPO and the Distribution.

          (b)  Except as provided in Section 9.1(c), effective as of the
Distribution Date, Odetics does hereby, for itself and its Affiliates,
successors and assigns, and all persons who at any time prior to the
Distribution Date have been shareholders, directors, officers, agents or
employees of Odetics (in each case, in their respective capacities as such),
remise, release and forever discharge Iteris, and its Affiliates, successors and
assigns, and all persons who at any time prior to the Distribution Date have
been shareholders, directors, officers, agents or employees of Iteris (in each
case, in their respective capacities as such), and their respective heirs,
executors, administrators, successors and assigns, from any and all Liabilities
whatsoever, whether at law or in equity (including any right of contribution),
whether arising under any contract or agreement, by operation of law or
otherwise, existing or arising from any acts or events occurring or failing to
occur or alleged to have occurred or to have failed to occur or any conditions
existing or alleged to have existed on or before the Distribution Date,
including in connection with the transactions and all other activities to
implement the IPO and the Distribution.

          (c)  Nothing contained in Section 9.1(a) or (b) shall impair any right
of any person to enforce this Agreement, any Ancillary Agreement or any
agreements, arrangements,

                                       14
<PAGE>

commitments or understandings that are specified herein or in the Schedules and
Exhibits hereto not to terminate as of the Distribution Date, in each case in
accordance with its terms. Nothing contained in Section 9.1(a) or (b) shall
release any person from:

               (i)   any liability provided in or resulting from any agreement
between Odetics and Iteris that is specified herein or the Schedules and
Exhibits hereto as not to terminate as of the Distribution Date, or any other
liability specified as not to terminate as of the Distribution Date;

               (ii)  any liability, contingent or otherwise, assumed,
     transferred, assigned or allocated to such person;

               (iii) any liability that the parties may have with respect to
indemnification or contribution pursuant to this Agreement for claims brought
against the parties by third Persons, which liability shall be governed by this
Article IX and, if applicable, the appropriate provisions of the Ancillary
Agreements.

          (d)  Iteris shall not make, any claim or demand, or commence any
action asserting any claim or demand, including any claim of contribution or any
indemnification, against Odetics, or any other person released pursuant to
Section 9.1(a), with respect to any Liabilities released pursuant to Section
9.1(a). Odetics shall not make any claim or demand, or commence any action
asserting any claim or demand, including any claim of contribution or any
indemnification, against Iteris or any other person released pursuant to Section
9.1(b), with respect to any liabilities released pursuant to Section 9.1(b).

          (e)  It is the intent of each of Odetics and Iteris by virtue of the
provisions of this Section 9.1 to provide for a full and complete release and
discharge of all liabilities existing or arising from all acts and events
occurring or failing to occur or alleged to have occurred or to have failed to
occur and all conditions existing or alleged to have existed on or before the
Distribution Date, between or among Iteris and its Affiliates on the one hand,
and Odetics and its Affiliates on the other hand (including any contractual
agreements or arrangements existing or alleged to exist between or among any
such persons on or before the Distribution Date), except as expressly set forth
in Section 9.1(c). At any time, at the request of any other party, each party
shall execute and deliver releases reflecting the provisions hereof.

     9.2  Indemnification by Iteris.  Except as provided in Section 9.4,
          -------------------------
Iteris shall indemnify, defend and hold harmless Odetics, and each of its
directors, officers and employees, and each of the heirs, executors, successors
and assigns of any of the foregoing (collectively, the "Odetics Indemnitees"),
from and against any and all Liabilities of the Odetics Indemnitees relating to,
arising out of or resulting from any of the following items:

          (a)  the failure of Iteris or any other person to pay, perform or
otherwise promptly discharge any Iteris Liabilities or Iteris Contract in
accordance with their respective terms, whether prior to or after the
Distribution Date or the date hereof;

          (b)  the Business, any Iteris Liability or any Iteris Contract;

          (c)  any breach by Iteris or its Affiliates of this Agreement or any
of the Ancillary Agreements; and

                                       15
<PAGE>

          (d)  any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, with
respect to all information contained in any IPO Registration Statement or
Prospectus.

     9.3  Indemnification by Odetics.  Odetics shall indemnify, defend and hold
          --------------------------
harmless Iteris, and each of its directors, officers and employees, and each of
the heirs, executors, successors and assigns of any of the foregoing
(collectively, the "Iteris Indemnitees"), from and against any and all
Liabilities of the Iteris Indemnitees relating to, arising out of or resulting
from any of the following items:

          (a)  the failure of Odetics or any other person to pay, perform or
otherwise promptly discharge any liabilities of Odetics other than the Iteris
Liabilities whether prior to or after the Distribution Date or the date hereof;

          (b)  activities conducted by Odetics, excluding the Business, or any
Liability of Odetics other than the Iteris Liabilities;

          (c)  any breach by Odetics or any of its Affiliates of this Agreement
or any of the Ancillary Agreements; and

          (d)  any untrue statement or alleged untrue statement of a material
fact provided by Odetics to Iteris in writing for inclusion in the IPO
Registration Statement or Prospectus.

     9.4  Indemnification Obligations Net of Insurance Proceeds and Other
          ---------------------------------------------------------------
Amounts.
-------

          (a)  The parties intend that any Liability subject to indemnification
or reimbursement pursuant to this Article IX will be net of Insurance Proceeds
that actually reduce the amount of the Liability. Accordingly, the amount which
any party (an "Indemnifying Party") is required to pay to any person entitled to
indemnification hereunder (an "Indemnitee") will be reduced by any Insurance
Proceeds theretofore actually recovered by or on behalf of the Indemnitee in
reduction of the related Liability. If an Indemnitee receives a payment (an
"Indemnity Payment") required by this Agreement from an Indemnifying Party in
respect of any liability and subsequently receives Insurance Proceeds, then the
Indemnitee will pay to the Indemnifying Party an amount equal to the excess of
the Indemnity Payment received over the amount of the Indemnity Payment that
would have been due if the insurance proceeds recovery had been received,
realized or recovered before the Indemnity Payment was made.

          (b)  An insurer who would otherwise be obligated to pay any claim
shall not be relieved of the responsibility with respect thereto or, solely by
virtue of the indemnification or the assumption of Liability provisions hereof,
have any subrogation rights with respect thereto, it being expressly understood
and agreed that no insurer or any other third party shall be entitled to a
benefit such insurer or other third party would not be entitled to receive in
the absence of the indemnification and assumption of Liability provisions
hereof.

     9.5  Procedures for Indemnification of Third Party Claims.
          ----------------------------------------------------

          (a)  If an Indemnitee shall receive notice or otherwise learn of the
assertion by any person other than the parties hereto (a "Third Party Claim")
with respect to which an

                                       16
<PAGE>

Indemnifying Party may be obligated to provide indemnification to such
Indemnitee pursuant to Section 9.2 or 9.3, or any other Section of this
Agreement or any Ancillary Agreement, such Indemnitee shall give such
Indemnifying Party written notice thereof within 20 days after becoming aware of
such Third Party Claim. Any such notice shall describe the Third Party Claim in
reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee
or other Person to give notice as provided in this Section 9.5(a) shall not
relieve the related Indemnifying Party of its obligations under this Article IX,
except to the extent that such Indemnifying Party is actually prejudiced by such
failure to give notice.

          (b)  An Indemnifying Party may elect to defend (and, unless the
Indemnifying Party has specified any reservations or exceptions, to seek to
settle or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within 30 days after
the receipt of notice from an Indemnitee in accordance with Section 9.5(a), the
Indemnifying Party shall notify the Indemnitee of Iteris election whether the
Indemnifying Party will assume responsibility for defending such Third Party
Claim, which election shall specify any reservations or exceptions. After notice
from an Indemnifying Party to an Indemnitee of Iteris election to assume the
defense of a Third Party Claim, such Indemnitee shall have the right to employ
separate counsel and to participate in (but not control) the defense,
compromise, or settlement thereof, but the fees and expenses of such counsel
shall be the expense of such Indemnitee except as set forth in the next
sentence. In the event that the Indemnifying Party has elected to assume the
defense of the Third Party Claim but has specified, and continues to assert, any
reservations or exceptions in such notice, then, in any such case, the
reasonable fees and expenses of one separate counsel for all Indemnitees shall
be borne by the Indemnifying Party.

          (c)  If an Indemnifying Party elects not to assume responsibility for
defending a Third Party Claim, or fails to notify an Indemnitee of its election
as provided in Section 9.5(b), such Indemnitee may defend such Third Party Claim
at the cost and expense of the Indemnifying Party.

          (d)  Unless the Indemnifying Party has failed to assume the defense of
the Third Party Claim in accordance with the terms of this Agreement, no
Indemnitee may settle or compromise any Third Party Claim without the consent of
the Indemnifying Party.

          (e)  No Indemnifying Party shall consent to entry of any judgment or
enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.

          (f)  The provisions of this Section 9.5 shall not apply to taxes
(which are covered by the Tax Allocation Agreement).

                                   ARTICLE X
                 INTERIM OPERATIONS AND CERTAIN OTHER MATTERS

     10.1 Insurance Matters.
          -----------------
          (a)  Iteris agrees that it will reimburse Odetics for Iteris
proportionate share of premiums paid or accrued, from the date hereof until the
Distribution Date, in respect of Insurance Policies under which Iteris will
continue to have coverage following the date hereof. Odetics and Iteris agree to
cooperate in good faith to provide for an orderly transition of insurance
coverage from

                                       17
<PAGE>

the date hereof through the Distribution Date and for the treatment of any
Insurance Policies that will remain in effect following the Distribution Date on
a mutually agreeable basis. In no event shall Odetics, or any Odetics Indemnitee
have liability or obligation whatsoever to Iteris in the event that any
Insurance Policy or other contract or policy of insurance shall be terminated or
otherwise cease to be in effect for any reason, shall be unavailable or
inadequate to cover any liability of Iteris for any reason whatsoever or shall
not be renewed or extended beyond the current expiration date.

          (b)  (i)  Except as otherwise provided in any Ancillary Agreement, the
parties intend by this Agreement that Iteris and its Affiliates be
successors-in-interest to all rights that any may have as of the Distribution
Date as a subsidiary or Affiliate of Odetics prior to the Distribution Date
under any policy of insurance issued to Odetics by any insurance carrier or
under any agreements related to such policies executed and delivered prior to
the Closing Date, including any rights Iteris and its Affiliates may have, as an
insured or additional named insured, subsidiary or Affiliate to avail itself of
any such policy of insurance or any such agreements related to such policies as
in effect prior to the Closing Date. At the request of Iteris, Odetics shall
take all reasonable steps, including the execution and delivery of any
instruments, to effect the foregoing; provided however that Odetics shall not be
required to pay any amounts, waive any rights or incur any liabilities in
connection therewith.

               (ii)  Except as otherwise contemplated by any Ancillary
Agreement, after the Distribution Date, neither of Odetics or Iteris shall,
without the consent of the other, provide any such insurance carrier with a
release, or amend, modify or waive any rights under any such policy or
agreement, if such release, amendment, modification or waiver would adversely
affect any rights or potential rights of the other hereunder; provided, however,
that the foregoing shall not (A) preclude either from presenting any claim or
from exhausting any policy limit, (B) require either to pay any premium or other
amount or to incur any liability, or (C) require either to renew, extend or
continue any policy in force. Each of Iteris and Odetics will share such
information as is reasonably necessary in order to permit the other to manage
and conduct Iteris insurance matters in an orderly fashion.

          (c)  This Agreement shall not be considered as an attempted assignment
of any policy of insurance or as a contract of insurance and shall not be
construed to waive any right or remedy of either Odetics or Iteris in respect of
any insurance policy or any other contract or policy of insurance.

          (d)  Iteris does hereby, for itself and its Affiliates, agree that
neither Odetics nor any Odetics Indemnitee shall have any liability whatsoever
as a result of the insurance policies and practices of Odetics and its
Affiliates as in effect at any time prior to the Distribution Date, including as
a result of the level or scope of any such insurance, the creditworthiness of
any insurance carrier, the terms and conditions of any policy, the adequacy or
timeliness of any notice to any insurance carrier with respect to any claim or
potential claim or otherwise.

                                  ARTICLE XI
                                 MISCELLANEOUS

     11.1 Counterparts.  This Agreement may be executed in one or more
          ------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party.

                                       18
<PAGE>

     11.2  Entire Agreement. This Agreement, and the Ancillary Agreements and
           ----------------
the Exhibits, and Schedules hereto and thereto contain the entire agreement
between the parties with respect to the subject matter hereof, supersede all
previous agreements, negotiations, discussions, writings, understandings,
commitments and conversations with respect to such subject matter and there are
no agreements or understandings between the parties other than those set forth
or referred to herein or therein.

     11.3  Governing Law.  This Agreement shall be governed by and construed and
           -------------
interpreted in accordance with the laws of the State of California.

     11.4  Assignability. This Agreement and each shall be binding upon and
           -------------

inure to the benefit of the parties hereto and thereto, respectively, and their
respective successors and assigns; provided, however, that no party hereto or
thereto may assign its respective rights or delegate its respective obligations
under this Agreement without the express prior written consent of the other
parties hereto or thereto. Notwithstanding the foregoing, Iteris may assign its
rights and obligations under this Agreement in the event of a merger to effect
the reincorporation of Iteris.

     11.5  Third Party Beneficiaries. Except for the indemnification rights
           -------------------------
under this Agreement of any Odetics Indemnitee or Iteris Indemnitee in their
respective capacities as such, (a) the provisions of this Agreement and each
Ancillary Agreement are solely for the benefit of the parties and are not
intended to confer upon any person except the parties any rights or remedies
hereunder, and (b) there are no third party beneficiaries of this Agreement or
any Ancillary Agreement and neither this Agreement nor any Ancillary Agreement
shall provide any third person with any remedy, claim, liability, reimbursement,
claim of action or other right in excess of those existing without reference to
this Agreement or any Ancillary Agreement.

     11.6  Notices. All notices, requests, claims and other communications
           -------
hereunder shall be in writing and shall be given or made (and shall be deemed to
have been duly given or made upon receipt) by delivery by hand, by reputable
overnight courier service, by facsimile transmission, or by registered or
certified mail (postage prepaid, return receipt requested) to the respective
parties at the addresses (or at such other address for a party as shall be
specified in a notice given in accordance with this Section 11.6) listed below:

           Odetics, Inc.
           1515 Manchester Avenue
           Anaheim, California 92802
           Attn:
           Facsimile: (714) 780-7246

           Iteris, Inc.
           1575 Manchester Avenue
           Anaheim, California 92802
           Attn: Jack Johnson
           Facsimile: (714) 780-7246

or to such other address as any party may, from time to time, designate in a
written notice given in a like manner. Notice given by hand shall be deemed
delivered when received by the recipient. Notice given by mail as set out above
shall be deemed delivered five (5) calendar days after the date the same is
mailed. Notice given by reputable overnight courier shall be deemed delivered on
the next

                                      19
<PAGE>

following business day after the same is sent. Notice given by facsimile
transmission shall be deemed delivered on the day of transmission provided
telephone confirmation of receipt is obtained promptly after completion of
transmission.

     11.7  Severability.  If any provision of this Agreement or the application
           ------------
thereof to any Person or circumstance is determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
hereof or thereof, or the application of such provision to Persons or
circumstances or in jurisdictions other than those as to which it has been held
invalid or unenforceable, shall remain in full force and effect and shall in no
way be affected, impaired or invalidated thereby, so long as the economic or
legal substance of the transactions contemplated hereby or thereby, as the case
may be, is not affected in any manner adverse to any party.  Upon such
determination, the parties shall negotiate in good faith in an effort to agree
upon such a suitable and equitable provision to effect the original intent of
the parties.

     11.8  Force Majeure. No party shall be deemed in default of this Agreement
           -------------
or any Ancillary Agreement to the extent that any delay or failure in the
performance of its obligations under this Agreement or any Ancillary Agreement
results from any cause beyond its reasonable control and without its fault or
negligence, such as acts of God, acts of civil or military authority, embargoes,
epidemics, war, riots, insurrections, fires, explosions, earthquakes, floods,
unusually severe weather conditions, labor problems or unavailability of parts,
or, in the case of computer systems, any failure in electrical or air
conditioning equipment. In the event of any such excused delay, the time for
performance shall be extended for a period equal to the time lost by reason of
the delay.

     11.9  Publicity.  Prior to the Distribution, each of Iteris and Odetics
           ---------
shall consult with the other prior to issuing any press releases or otherwise
making public statements with respect to the IPO, the Distribution or any of the
other transactions contemplated hereby and prior to making any filings with any
governmental authority with respect thereto.

     11.10  Headings. The article, section and paragraph headings contained in
            --------
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.

     11.11  Waivers of Default.  Waiver by any party of any default by the other
            ------------------
party of any provision of this Agreement shall not be deemed a waiver by the
waiving party of any subsequent or other default, nor shall it prejudice the
rights of the other party.

     11.12  Specific Performance.  In the event of any actual or threatened
            --------------------
default in, or breach of, any of the terms, conditions and provisions of this
Agreement or any Ancillary Agreement, the party or parties who are or are to be
thereby aggrieved shall have the right to specific performance and injunctive or
other equitable relief of its rights under this Agreement or such Ancillary
Agreement, in addition to any and all other rights and remedies at law or in
equity, and all such rights and remedies shall be cumulative. The parties agree
that the remedies at law for any breach or threatened breach, including monetary
damages, are inadequate compensation for any loss and that any defense in any
action for specific performance that a remedy at law would be adequate is
waived. Any requirements for the securing or posting of any bond with such
remedy are waived.

                                      20
<PAGE>

     11.13  Amendments.
            ----------

            (a)  No provisions of this Agreement shall be deemed waived,
amended, supplemented or modified by any party, unless such waiver, amendment,
supplement or modification is in writing and signed by the authorized
representative of the party against whom it is sought to enforce such waiver,
amendment, supplement or modification.

     Without limiting the foregoing, the parties anticipate that, prior to the
Distribution Date, some or all of the Schedules to this Agreement may be amended
or supplemented and, in such event, such amended or supplemented Schedules shall
be attached hereto in lieu of the original Schedules.

                                      21
<PAGE>

     IN WITNESS WHEREOF, the parties have caused this Separation and
Distribution Agreement to be executed by their duly authorized representatives.

                              ODETICS, INC.



                              /s/ Gregory A. Miner
                              ----------------------------------
                              Gregory A. Miner
                              Chief Financial Officer



                              ITERIS, INC.



                              /s/ Jack Johnson
                              ----------------------------------
                              Jack Johnson
                              Chief Executive Officer

                                      22
<PAGE>

                                 SCHEDULE 1.19

                           CONTRACTS AND AGREEMENTS
                           RELATING TO THE BUSINESS
                      TO BE ASSIGNED BY ODETICS TO ITERIS


 .    Consultant Services Agreement between the City of Fontana and Odetics, Inc.
     dated November 24, 1997.

 .    Agreement between San Diego Association of Governments and Odetics, Inc.,
     as amended September 8, 1999.

 .    Engineering Services Contract between the State of Utah and Odetics, Inc.,
     as amended May 10, 1999.

                                      23
<PAGE>

                                   EXHIBIT A

                               License Agreement

                                      24

                          [Included as Exhibit 10.9]
<PAGE>

                                   EXHIBIT B

                                Promissory Note

                                      25

                           [Included as Exhibit 10.8]
<PAGE>

                                   EXHIBIT C

                              Services Agreement

                                      26

                          [Included as Exhibit 10.7]
<PAGE>

                                   EXHIBIT D

                           Tax Allocation Agreement


                                      27

                          [Included as Exhibit 10.6]