Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-Q**

 

**(Mark****One)**

 

| **x**                                                      | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                                       |                                                                                                     |
| **For the quarterly period ended December 31,  2009** |
|                                                       |                                                                                                     |
| **OR**                                                     |
|                                                       |                                                                                                     |
| **o**                                                      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from           to           **

** **

**Commission file number:  001-08762**

 

****

** **

**ITERIS, INC.**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                             | ** ** | **95-2588496**      |
|------------------------------------------|------------|---------------------|
| (State or other jurisdiction of          |       | (I.R.S. Employer    |
| incorporation or organization)           |       | Identification No.) |
|                                     |       |                |
| **1700 Carnegie Avenue, Suite 100** | ** ** | ** **          |
| **Santa Ana, California**                | ** ** | **92705**           |
| (Address of principal executive office)  |       | (Zip Code)          |

 

**(949)** 270-9400

**(Registrant’stelephone number, including area code)**

** **

**Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934, as amended (the “Exchange Act”), during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90days.  Yes **x  No o

** **

Indicate by check mark whether the registranthas 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 (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes  o  No  o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (Do  not check if a smaller reporting company) |   |                              |

 

**Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes **o No x

** **

**A**sof January 29, 2010, there were 34,286,756 shares of common stockoutstanding.

 

 

 

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Table of Contents

 

**ITERIS, INC.**

**Quarterly Report on Form 10-QFor the Three and Nine Months Ended December 31, 2009**

** **

**Table of Contents**

 
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                                            |   | 3      |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|              |       |                                                                                                                                 |   |   |
| ITEM 1.           |       | FINANCIAL STATEMENTS                                                                                                                 |   | 3      |
|              |       |                                                                                                                                 |   |   |
|              |       | UNAUDITED CONDENSED CONSOLIDATED BALANCE  SHEETS AT DECEMBER 31, 2009 AND MARCH 31, 2009                                   |   | 3      |
|              |       |                                                                                                                                 |   |   |
|              |       | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS  OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2009  AND 2008 |   | 4      |
|              |       |                                                                                                                                 |   |   |
|              |       | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS  OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 2009 AND 2008                      |   | 5      |
|              |       |                                                                                                                                 |   |   |
|              |       | NOTES TO  UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                                      |   | 6      |
|              |       |                                                                                                                                 |   |   |
| ITEM  2.          |       | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                     |   | 16     |
|              |       |                                                                                                                                 |   |   |
| ITEM 3.           |       | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                                          |   | 26     |
|              |       |                                                                                                                                 |   |   |
| ITEM 4T.          |       | CONTROLS AND PROCEDURES                                                                                                              |   | 26     |
|              |       |                                                                                                                                 |   |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                                |   | 27     |
|              |       |                                                                                                                                 |   |   |
| ITEM 1.           |       | LEGAL PROCEEDINGS                                                                                                                    |   | 27     |
|              |       |                                                                                                                                 |   |   |
| ITEM 1A.          |       | RISK FACTORS                                                                                                                         |   | 27     |
|              |       |                                                                                                                                 |   |   |
| ITEM 2.           |       | UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS                                                                         |   | 35     |
|              |       |                                                                                                                                 |   |   |
| ITEM 3.           |       | DEFAULTS UPON SENIOR SECURITIES                                                                                                      |   | 35     |
|              |       |                                                                                                                                 |   |   |
| ITEM 4.           |       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                                                 |   | 35     |
|              |       |                                                                                                                                 |   |   |
| ITEM 5.           |       | OTHER INFORMATION                                                                                                                    |   | 35     |
|              |       |                                                                                                                                 |   |   |
| ITEM 6.           |       | EXHIBITS                                                                                                                             |   | 36     |

 

Unless otherwise indicated in this report,the “Company,” “we,” “us” and “our” refer to Iteris, Inc. and ourwholly-owned subsidiary, Iteris Europe GmbH.

 

AutoVue®, Iteris®,Vantage®, VersiCamTM, EdgeConnectTM, RZ4 AdvancedTM, PicoTMand Safety DirectTM are among the trademarks of Iteris, Inc. Any othertrademarks or trade names mentioned herein are the property of their respectiveowners.

 

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**PART I. FINANCIALINFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

** **

**Iteris, Inc.**

**UnauditedCondensed Consolidated Balance Sheets**

**(In thousands, except parvalue)**

 
| ** **                                                                                                                                                       | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------|------------|
| ** **                                                                                                                                                       | ** ** | **2009**         | ** ** | **2009**      | ** ** |
| **Assets**                                                                                                                                                       | ** ** | ** **       | ** ** | ** **    | ** ** |
| Current assets:                                                                                                                                                  |       |             |       |          |       |
| Cash and cash equivalents                                                                                                                                        |       | $                | 9,404      |          | $          | 6,372 |   |
| Trade accounts receivable                                                                                                                                        |       | 10,010           |       | 12,448        |       |
| Costs in excess of billings on uncompleted contracts                                                                                                             |       | 4,780            |       | 4,217         |       |
| Inventories                                                                                                                                                      |       | 3,203            |       | 5,681         |       |
| Deferred income taxes                                                                                                                                            |       | 3,667            |       | 4,241         |       |
| Prepaid expenses and other current assets                                                                                                                        |       | 473              |       | 272           |       |
| Total current assets                                                                                                                                             |       | 31,537           |       | 33,231        |       |
| Property and equipment, net                                                                                                                                      |       | 2,685            |       | 3,244         |       |
| Deferred income taxes                                                                                                                                            |       | 11,505           |       | 11,505        |       |
| Intangible assets, net                                                                                                                                           |       | 489              |       | 110           |       |
| Goodwill                                                                                                                                                         |       | 27,791           |       | 27,774        |       |
| Other assets                                                                                                                                                     |       | 198              |       | 202           |       |
| Total assets                                                                                                                                                     |       | $                | 74,205     |          | $          | 76,066 |   |
|                                                                                                                                                             |       |             |       |          |       |
| **Liabilities and stockholders' equity**                                                                                                                         |       |             |       |          |       |
| Current liabilities:                                                                                                                                             |       |             |       |          |       |
| Trade accounts payable                                                                                                                                           |       | $                | 3,119      |          | $          | 4,228 |   |
| Accrued payroll and related expenses                                                                                                                             |       | 2,243            |       | 3,188         |       |
| Accrued liabilities                                                                                                                                              |       | 1,853            |       | 1,662         |       |
| Billings in excess of costs and estimated earnings on uncompleted  contracts                                                                                     |       | 1,729            |       | 1,534         |       |
| Current portion of long-term debt                                                                                                                                |       | 2,324            |       | 2,019         |       |
| Total current liabilities                                                                                                                                        |       | 11,268           |       | 12,631        |       |
| Deferred rent                                                                                                                                                    |       | 1,464            |       | 1,686         |       |
| Unrecognized tax benefits                                                                                                                                        |       | 794              |       | 1,117         |       |
| Other non-current liabilities                                                                                                                                    |       | 112              |       | —        |       |
| Long-term debt                                                                                                                                                   |       | 3,426            |       | 5,274         |       |
| Total liabilities                                                                                                                                                |       | 17,064           |       | 20,708        |       |
| Commitments and contingencies                                                                                                                                    |       |             |       |          |       |
| Stockholders' equity:                                                                                                                                            |       |             |       |          |       |
| Common stock. $0.10 par value, 70,000 shares authorized, 34,281 and  34,205 shares issued and outstanding at December 31, 2009 and March 31, 2009,  respectively |       | 3,428            |       | 3,420         |       |
| Additional paid-in capital                                                                                                                                       |       | 137,361          |       | 136,997       |       |
| Common stock held in trust                                                                                                                                       |       | —           |       | (31           | )          |
| Accumulated deficit                                                                                                                                              |       | (83,676          | )          | (85,025       | )          |
| Accumulated other comprehensive income (loss)                                                                                                                    |       | 28               |       | (3            | )          |
| Total stockholders' equity                                                                                                                                       |       | 57,141           |       | 55,358        |       |
| Total liabilities and stockholders' equity                                                                                                                       |       | $                | 74,205     |          | $          | 76,066 |   |

 

Seeaccompanying notes.

 

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**Iteris, Inc.**

**Unaudited Condensed ConsolidatedStatements of Operations**

**(In thousands, except per share amounts)**

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **December 31,**       | ** ** | **December 31,**      | ** ** |
| ** **                                | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales and contract revenues:          |       |                   |       |                  |       |   |   |   |   |
| Net sales                                 |       | $                      | 7,401      |                  | $          | 9,083 |   | $ | 22,796 |   | $ | 30,687 |   |
| Contract revenues                         |       | 6,176                  |       | 7,379                 |       | 20,280 |   | 22,283 |   |
| Total net sales and contract revenues     |       | 13,577                 |       | 16,462                |       | 43,076 |   | 52,970 |   |
| Costs of net sales and contract revenues: |       |                   |       |                  |       |   |   |   |   |
| Cost of net sales(a)                      |       | 3,844                  |       | 4,890                 |       | 12,099 |   | 16,043 |   |
| Cost of contract revenues(a)              |       | 4,198                  |       | 5,068                 |       | 13,290 |   | 14,796 |   |
| Gross profit                              |       | 5,535                  |       | 6,504                 |       | 17,687 |   | 22,131 |   |
| Operating expenses:                       |       |                   |       |                  |       |   |   |   |   |
| Selling, general and administrative(a)    |       | 3,915                  |       | 4,385                 |       | 12,695 |   | 14,193 |   |
| Research and development(a)               |       | 890                    |       | 848                   |       | 2,738 |   | 3,180 |   |
| Amortization of intangible assets         |       | 36                     |       | 37                    |       | 122 |   | 110 |   |
| Total operating expenses                  |       | 4,841                  |       | 5,270                 |       | 15,555 |   | 17,483 |   |
| Operating income                          |       | 694                    |       | 1,234                 |       | 2,132 |   | 4,648 |   |
| Non-operating income (expense):           |       |                   |       |                  |       |   |   |   |   |
| Other income, net                         |       | 25                     |       | 63                    |       | 42 |   | 90 |   |
| Interest expense, net                     |       | (58                    | )          | (141                  | )          | (215 | ) | (537 | ) |
| Income before income taxes                |       | 661                    |       | 1,156                 |       | 1,959 |   | 4,201 |   |
| Benefit (provision) for income taxes      |       | 48                     |       | (415                  | )          | (563 | ) | (1,727 | ) |
| Net income                                |       | $                      | 709        |                  | $          | 741 |   | $ | 1,396 |   | $ | 2,474 |   |
|                                      |       |                   |       |                  |       |   |   |   |   |
| Earnings per share:                       |       |                   |       |                  |       |   |   |   |   |
| Basic                                     |       | $                      | 0.02       |                  | $          | 0.02 |   | $ | 0.04 |   | $ | 0.07 |   |
| Diluted                                   |       | $                      | 0.02       |                  | $          | 0.02 |   | $ | 0.04 |   | $ | 0.07 |   |
| Weighted average shares outstanding:      |       |                   |       |                  |       |   |   |   |   |
| Basic                                     |       | 34,260                 |       | 34,120                |       | 34,235 |   | 33,895 |   |
| Diluted                                   |       | 34,469                 |       | 34,358                |       | 34,430 |   | 34,752 |   |

 

----

(a)             Includes stock-based compensation expense asfollows:

 
| Cost of net sales                           |   | $  | 3      |   | $      | 2   |   | $   | 7      |   | $ | 7   |   |
|---------------------------------------------|--------|----|--------|--------|--------|-----|--------|-----|--------|--------|---|-----|--------|
| Cost of contract revenues                   |   | 10 |   | 10     |   | 30  |   | 30  |   |
| Selling, general and administrative expense |   | 75 |   | 75     |   | 225 |   | 228 |   |
| Research and development expense            |   | 7  |   | 5      |   | 20  |   | 15  |   |
| Total stock-based compensation expense      |   | $  | 95     |   | $      | 92  |   | $   | 282    |   | $ | 280 |   |

 

Seeaccompanying notes.

 

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**Iteris, Inc.**

**Unaudited CondensedConsolidated Statements of Cash Flows**

**(In thousands)**

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **December 31,**      | ** ** |
| ** **                                                                         | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Cash flows from operating activities**                                           | ** ** | ** **            | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                     | 1,396      |   | $ | 2,474 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                  |       |   |   |
| Depreciation of property and equipment                                             |       | 742                   |       | 755 |   |
| Stock-based compensation                                                           |       | 282                   |       | 280 |   |
| Amortization of intangible assets                                                  |       | 122                   |       | 110 |   |
| Amortization of debt discounts                                                     |       | —                |       | 166 |   |
| Amortization of deferred financing costs                                           |       | —                |       | 110 |   |
| Change in deferred tax assets                                                      |       | 574                   |       | 1,700 |   |
| Changes in operating assets and liabilities:                                       |       |                  |       |   |   |
| Accounts receivable                                                                |       | 2,451                 |       | 258 |   |
| Net costs and estimated earnings in excess of billings                             |       | (368                  | )          | 2,646 |   |
| Inventories                                                                        |       | 2,478                 |       | (771 | ) |
| Prepaid expenses and other assets                                                  |       | (196                  | )          | 80 |   |
| Accounts payable and accrued expenses                                              |       | (2,569                | )          | (1,778 | ) |
| Net cash provided by operating activities                                          |       | 4,912                 |       | 6,030 |   |
|                                                                               |       |                  |       |   |   |
| **Cash flows from investing activities**                                           |       |                  |       |   |   |
| Purchases of property and equipment                                                |       | (180                  | )          | (716 | ) |
| Cash paid for business combination                                                 |       | (300                  | )          | — |   |
| Net cash used in investing activities                                              |       | (480                  | )          | (716 | ) |
|                                                                               |       |                  |       |   |   |
| **Cash flows from financing activities**                                           |       |                  |       |   |   |
| Borrowings on long-term debt                                                       |       | 750                   |       | 5,073 |   |
| Payments on long-term debt                                                         |       | (2,293                | )          | (5,744 | ) |
| Proceeds from stock option exercises                                               |       | 90                    |       | 911 |   |
| Net cash provided by (used in) financing activities                                |       | (1,453                | )          | 240 |   |
| Effect of exchange rate changes on cash                                            |       | 53                    |       | — |   |
| Increase in cash and cash equivalents                                              |       | 3,032                 |       | 5,554 |   |
| Cash and cash equivalents at beginning of period                                   |       | 6,372                 |       | 421 |   |
| Cash and cash equivalents at end of period                                         |       | $                     | 9,404      |   | $ | 5,975 |   |
|                                                                               |       |                  |       |   |   |
| **Supplemental disclosure of non-cash investing and  financing activities:**       |       |                  |       |   |   |
| Liabilities incurred for business combination                                      |       | $                     | 218        |   | $ | — |   |
| Fair value of common stock issued in settlement of liabilities                     |       | —                |       | 427 |   |

 

Seeaccompanying notes.

 

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**Iteris, Inc.**

**Notes to Unaudited Condensed Consolidated Financial Statements**

**December 31, 2009**

** **

**1.****                                     ****Descriptionof Business and Summary of Significant Accounting Policies**

 

**Description of Business**

 

Iteris, Inc.(including our subsidiary, referred to collectively in these consolidatedfinancial statements as “Iteris,” the “Company,” “we,” “our” and “us”)  is a leader in the traffic management marketfocused on the development and application of advanced technologies that reducetraffic congestion, minimize the environmental impact of traffic congestion andimprove the safety of surface transportation systems infrastructure. Bycombining outdoor image processing, traffic engineering and informationtechnology, we offer a broad range of Intelligent Transportation Systems (“ITS”)and driver safety solutions. Iteris was originally incorporated in Delaware in1987.

 

**Basis of Presentation**

 

Ourunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United States (“U.S.GAAP”) for interim financial information and with the instructions toSecurities and Exchange Commission (“SEC”) Form 10-Q and Article 10of SEC Regulation S-X. In the opinion of management, the accompanying unauditedcondensed consolidated financial statements contain all adjustments, consistingof normal recurring adjustments, necessary to present fairly the consolidatedfinancial position of Iteris as of December 31, 2009, the consolidatedresults of operations for the three and nine months ended December 31,2009 and 2008 and the consolidated cash flows for the nine months ended December 31,2009 and 2008. Certain information and footnote disclosures normally includedin financial statements prepared in accordance with U.S. GAAP have beencondensed or omitted pursuant to the rules and regulations of the SEC. Theresults of operations for the three and nine months ended December 31,2009 are not necessarily indicative of those to be expected for futurequarterly periods or the entire fiscal year. The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withour Annual Report on Form 10-K for the fiscal year ended March 31,2009 (“fiscal 2009”), which was filed with the SEC on June 12, 2009. Wehave evaluated subsequent events through February 2, 2010, whichrepresents the date these financial statements were issued.

 

# **Use ofEstimates**

#  

The preparation of consolidated financial statementsin conformity with U.S. GAAP requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities,disclosures of contingent assets and liabilities at the date of the financialstatements, and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. Significantestimates made in the preparation of the consolidated financial statements includethe allowance for doubtful accounts, projections of taxable income used toassess realizability of deferred tax assets, inventory and warranty reserves,costs to complete long-term contracts, overhead rates used in cost-pluscontracts, contract reserves and estimates of future cash flows used to assessthe recoverability of long-lived assets, the valuation of debt and equityinstruments and the realization of goodwill.

 

# **RevenueRecognition**

#  

Product revenues andrelated costs of sales are recognized upon the transfer of title, whichgenerally occurs upon shipment or, if required, upon acceptance by thecustomer, provided that we believe collectibility of the net sales amount isprobable. Accordingly, at the date revenue is recognized, the significant uncertaintiesconcerning the sale have been resolved.

 

Contract revenues arederived primarily from long-term contracts with governmental agencies. Contractrevenues include costs incurred plus a portion of estimated fees or profitsdetermined on the percentage of completion method of accounting based on therelationship of costs incurred to date to total estimated costs. Anyanticipated losses on contracts are charged to earnings when identified.Changes in job performance and estimated profitability, including those arisingfrom contract penalty provisions and final contract settlements, may result inrevisions to costs and revenues and are recognized in the period in which therevisions are determined. Profit incentives are included in revenue when theirrealization is reasonably assured.

 

We also derive revenuefrom the provision of specific non-recurring contract engineering services androyalties. Non-recurring contract engineering revenues are recognized in theperiod in which the related services are performed. Royalty revenues arerecorded in the period in which the royalty is earned based on unit sales ofcertain of our products. Non-recurring contract engineering and royaltyrevenues are included in net sales in the accompanying unaudited condensed consolidatedstatements of operations and totaled $124,000 and $563,000 for the three andnine months ended December 31, 2009, respectively, and $315,000 and$973,000 for the three and nine months ended December 31, 2008,respectively.

 

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**Concentration of Credit Risk**

 

Financial instrumentsthat potentially subject us to a concentration of credit risk consistprincipally of cash and cash equivalents and trade accounts receivable.

 

Cash and cash equivalentsconsist primarily of demand deposits and money market funds maintained withseveral financial institutions. Deposits held with banks may exceed the amountof insurance provided on such deposits. Generally, these deposits may beredeemed upon demand and are maintained with high credit quality financialinstitutions and therefore have minimal credit risk.

 

Accounts receivable areprimarily derived from revenues earned from customers located throughout NorthAmerica and Europe. We generally do not require collateral or other securityfrom customers. Collectibility of receivable balances is estimated throughreview of invoices outstanding greater than a certain period of time andongoing credit evaluations of our customers’ financial condition. Reserves aremaintained for potential credit losses, and such losses have historically beenwithin management’s expectations.

 

**Fair Values of Financial Instruments**

 

Thefair value of cash and cash equivalents, receivables, accounts payable andaccrued expenses approximate carrying value because of the short period of timeto maturity. The fair value of line of credit agreements, long-term debt andconvertible debentures approximate carrying value because the related effectiverates of interest approximate current market rates available to us for debtwith similar terms and similar remaining maturities. The estimated fair valueof certain of our outstanding warrants is determined using Level 3 inputs (seeNotes 7 and 8).

 

# **Inventories**

#  

Inventories are stated at the lower of cost ormarket. Cost is determined using the first-in, first-out method.

 

**Property and Equipment**

 

Property and equipment are recorded at cost and aredepreciated using the straight-line method over the estimated useful liferanging from three to eight years. Leasehold improvements are depreciated overthe term of the related lease or the estimated useful life of the improvement,whichever is shorter.

 

**Goodwill and Long-Lived Assets**

 

Goodwillis tested for impairment on an annual basis in our fourth fiscal quarter ormore frequently if indicators of impairment exist. The performance of the testinvolves a two-step process. The first step of the impairment test involvescomparing the fair value of our reporting units with each respective reportingunit’s carrying amount, including goodwill. We determine the fair value ofreporting units using the income approach. If the carrying amount of areporting unit exceeds the reporting unit’s fair value, the second step of thegoodwill impairment test is performed to determine the amount of any impairmentloss. The second step of the goodwill impairment test involves comparing theimplied fair value of the reporting unit’s goodwill with the carrying amount ofthat goodwill. We performed annual impairment assessments of the carrying valueof goodwill for each of the fiscal years ended March 31, 2009, 2008 and2007. Based on these assessments, we determined that no impairment as of eachof these dates was indicated as the estimated fair value of each of ourreporting units exceeded its respective carrying value. We monitor theindicators for goodwill impairment testing between annual tests. Certainadverse business conditions impacting one or more of our reporting units wouldcause us to test goodwill for impairment. No such events occurred during thethree and nine months ended December 31, 2009.

 

Weevaluate long-lived assets for impairment when indicators of impairment arepresent. Reviews are performed to determine whether the carrying value ofassets is impaired, based on a comparison to undiscounted expected future cashflows. If this comparison indicates that there is impairment, the impairedasset is written down to fair value, which is typically calculated usingdiscounted expected future cash flows and a discount rate based upon ourweighted average cost of capital adjusted for risks associated with the relatedoperations. Impairment is based on the excess of the carrying amount over thefair value of those assets.

 

**Income Taxes**

 

We utilize the liability method of accounting forincome taxes, whereby deferred taxes are determined based on the temporarydifferences between the financial statement and tax bases of assets andliabilities using enacted tax rates. A valuation allowance is recorded when itis more likely than not that all or a portion of the deferred tax assets willnot be realized.

 

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**Stock-Based Compensation**

 

We record stock-based compensation in the statement ofoperations as an expense, based on the estimated grant date fair values of ourstock-based awards, whereby such fair values are amortized over the requisiteservice period. The fair value of our common stock option awards is estimatedon the grant date using the Black-Scholes-Merton (“BSM”) option-pricingformula, which considers, among other factors, the expected life of the awardand the expected volatility of our stock price.

 

**Research and Development Expenditures**

 

Research and development expenditures are charged toexpense in the period in which they are incurred.

 

**Shipping and Handling Costs**

 

Shipping and handling costs are included in cost ofsales in the period during which products ship.

 

**Sales Taxes**

 

Sales taxes are presented on a net basis (excludedfrom net sales and contract revenues) in the unaudited condensed consolidatedstatements of operations.

 

**Warranty**

 

We generally provide a one to three year warrantyfrom the original invoice date on all products, materials and workmanship.Products sold to various original equipment manufacturer (“OEM”) customerssometimes carry longer warranties. Defective products will be either repairedor replaced, usually at our option, upon meeting certain criteria. We accrue aprovision for the estimated costs that may be incurred for product warrantiesrelating to a product as a component of cost of sales at the time revenue forthat product is recognized. The accrued warranty provision is included withinaccrued liabilities in the accompanying unaudited condensed consolidatedbalance sheets.

 

**Repair and Maintenance Costs**

 

We incur repair andmaintenance costs in the normal course of business. Should the activity resultin a permanent improvement to one of our leased facilities, the cost iscapitalized as a leasehold improvement and amortized over its useful life orthe remainder of the lease period, whichever is shorter. Non-permanent repairand maintenance costs are charged to expense as incurred.

 

**Other Comprehensive Income**

 

The only component of accumulated othercomprehensive income is foreign currency translation adjustments.

 

**Recent Accounting Pronouncements**

 

InAugust 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) No. 2009-05, *MeasuringLiabilities at Fair Value* (“ASU 2009-05”). ASU 2009-05 amends Topic820 of the FASB Accounting Standards Codification (“ASC”) by providing additionalguidance clarifying the measurement of liabilities at fair value. The adoptionof the amendments prescribed by ASU 2009-05 were effective for our fiscalquarter ended December 31, 2009 and did not have a material impact on ourconsolidated financial statements.

 

InOctober 2009, the FASB issued ASU No. 2009-13, *Multiple-DeliverableRevenue Arrangements — a consensus of the FASB Emerging Issues Task Force*(“ASU2009-13”), which amends the existing multiple-element revenue arrangementsguidance currently included in ASC 605-25, *Revenue Recognition —Multiple Element Arrangements*. ASU 2009-13 provides for twosignificant changes to the existing multiple-element revenue arrangementsguidance. The first relates to the determination of when the individual deliverablesincluded in a multiple-element arrangement may be treated as separate units ofaccounting. The second change modifies the manner in which the transactionconsideration is allocated across the separately identified deliverables. Weplan to adopt the amendments prescribed by ASU 2009-13 for our fiscal yearbeginning April 1, 2010. We do not expect that the adoption of this ASUwill have a material impact on our consolidated financial statements.

 

InOctober 2009, the FASB issued ASU No. 2009-14, *CertainRevenue Arrangements That Include Software Elements — a consensus of the FASBEmerging Issues Task Force*(“ASU 2009-14”), which amends andmodifies the scope of ASC 985-605, *Software — RevenueRecognition*, such that many tangible products that rely on softwareand other related transactions will fall outside its scope. We plan to adoptthe amendments prescribed by ASU 2009-14 for our fiscal year beginning April 1,2010. We do not expect that the adoption of this ASU will have a materialimpact on our consolidated financial statements.

 

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InJanuary 2010, the FASB issued ASU No. 2010-06, *ImprovingDisclosures about Fair Value Measurements* (“ASU 2010-06”), whichamends ASC Topic 820,*Fair Value Measurements and Disclosures*(“ASC 820”) to require various additional disclosures regarding fair valuemeasurements and also clarify certain existing disclosure requirements.Additional requirements include disclosing (i) the amounts of significanttransfers between Level 1 and Level 2 of the fair value hierarchy, (ii) thereasons for any transfers in or out of Level 3 and (iii) information inthe reconciliation of recurring Level 3 measurements about purchases, sales,issuances and settlements on a gross basis. ASU 2010-06 does not change anyaccounting requirements, but is expected to have a significant effect on thedisclosures of entities that measure assets and liabilities at fair value. Theamendments prescribed by ASU 2010-06 will be effective for our fiscal quarterending March 31, 2010, except for the requirements described in item (iii) above,which will be effective for our fiscal year beginning April 1, 2011. Wecurrently do not expect the adoption of this ASU will have a material impact onour consolidated financial statements.

 

**2.****                                     ****SupplementalFinancial Information**

 

**Inventories**

 

The following tablepresents details of our inventories:

 
| ** **              | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|-------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **              | ** ** | **2009**              | ** ** | **2009**           | ** ** |
| ** **              | ** ** | **(In thousands)**    | ** ** |
| Materials  and supplies |       | $                     | 2,571      |               | $          | 4,820 |   |
| Work  in process        |       | 93                    |       | 198                |       |
| Finished  goods         |       | 539                   |       | 663                |       |
|                    |       | $                     | 3,203      |               | $          | 5,681 |   |

 

**IntangibleAssets**

 

The following table presentsdetails of our intangible assets:

 
| ** **                                  | ** ** | **December 31, 2009**  | ** ** | **March 31, 2009**       | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                                  | ** ** | **(In thousands)**          | ** ** |
| Intangible  assets subject to amortization: |       |                        |       |                          |       |   |   |   |   |
| Developed  technology                       |       | $                           | 996        |                          | $          | (570 | ) | $ | 495 |   | $ | (482 | ) |
| Patents                                     |       | 317                         |       | (254                          | )          | 317 |   | (220 | ) |
| Total                                       |       | $                           | 1,313      |                          | $          | (824 | ) | $ | 812 |   | $ | (702 | ) |

 

As of December 31,2009, future estimated amortization expense is as follows:

 
| **Fiscal Year Ending March 31:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|------------|
| **(In thousands)**                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Remainder  of 2010                                   |       | $          | 37         |       |       |       |   |
| 2011                                                 |       | 152        |       |       |       |       |
| 2012                                                 |       | 100        |       |       |       |       |
| 2013                                                 |       | 100        |       |       |       |       |
| 2014                                                 |       | 100        |       |       |       |       |
|                                                 |       | $          | 489        |       |       |       |   |

 

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**Goodwill**

 

The following tablepresents the activity related to the carrying value of our goodwill byreportable segment for the nine months ended December 31, 2009:

 
| ** **                                                                 | ** ** | **Roadway  Sensors**    | ** ** | **Vehicle  Sensors** | ** ** | **Transportation  Systems** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------|------------|----------------------|------------|-----------------------------|------------|-----------|------------|
| ** **                                                                 | ** ** | **(In thousands)** | ** ** |
| Beginning  balance                                                         |       | $                       | 8,197      |                 | $          | 4,671                       |       | $         | 14,906     |   | $ | 27,774 |   |
| Goodwill  recorded in connection with Hamilton Signal acquisition (Note 3) |       | 17                      |       | —               |       | —                      |       | 17        |       |
| Ending  balance                                                            |       | $                       | 8,214      |                 | $          | 4,671                       |       | $         | 14,906     |   | $ | 27,791 |   |

 

**Warranty Reserve Activity**

 

The following table presents activity related to thewarranty reserve:

 
| ** **                          | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|
| ** **                          | ** ** | **December 31,**           | ** ** |
| ** **                          | ** ** | **2009**                        | ** ** | **2008** | ** ** |
| ** **                          | ** ** | **(In thousands)**         | ** ** |
| Balance  at beginning of period     |       | $                               | 582        |   | $ | 494 |   |
| Additions  charged to cost of sales |       | 102                             |       | 258 |   |
| Warranty  claims                    |       | (141                            | )          | (196 | ) |
| Balance  at end of period           |       | $                               | 543        |   | $ | 556 |   |

 

**Comprehensive Income**

 

The following tablepresents the components of comprehensive income:

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **December 31,**            | ** ** | **December 31,**           | ** ** |
| ** **                                | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(In thousands)**          | ** ** |
| Net  income                               |       | $                                | 709        |                            | $          | 741 |   | $ | 1,396 |   | $ | 2,474 |   |
| Other  comprehensive income (loss):       |       |                             |       |                            |       |   |   |   |   |
| Foreign  currency translation adjustments |       | (5                               | )          | (3                              | )          | 31 |   | (31 | ) |
| Total  comprehensive income               |       | $                                | 704        |                            | $          | 738 |   | $ | 1,427 |   | $ | 2,443 |   |

 

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**EarningsPer Share**

 

The following table sets forth the computation ofbasic and diluted earnings per share:

 
| ** **                                                  | ** ** | **Three Months Ended**                                      | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **December 31,**                                                 | ** ** | **December 31,**           | ** ** |
| ** **                                                  | ** ** | **2009**                                                              | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                  | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Numerator:                                                  |       |                                                                  |       |                            |       |   |   |   |   |
| Net  Income                                                 |       | $                                                                     | 709        |                            | $          | 741 |   | $ | 1,396 |   | $ | 2,474 |   |
|                                                        |       |                                                                  |       |                            |       |   |   |   |   |
| Denominator:                                                |       |                                                                  |       |                            |       |   |   |   |   |
| Weighted  average common shares used in basic computation   |       | 34,260                                                                |       | 34,120                          |       | 34,235 |   | 33,895 |   |
| Dilutive  stock options                                     |       | 208                                                                   |       | 238                             |       | 194 |   | 853 |   |
| Dilutive  warrants                                          |       | 1                                                                     |       | —                          |       | 1 |   | 4 |   |
| Weighted  average common shares used in diluted computation |       | 34,469                                                                |       | 34,358                          |       | 34,430 |   | 34,752 |   |
|                                                        |       |                                                                  |       |                            |       |   |   |   |   |
| Earnings  per share:                                        |       |                                                                  |       |                            |       |   |   |   |   |
| Basic                                                       |       | $                                                                     | 0.02       |                            | $          | 0.02 |   | $ | 0.04 |   | $ | 0.07 |   |
| Diluted                                                     |       | $                                                                     | 0.02       |                            | $          | 0.02 |   | $ | 0.04 |   | $ | 0.07 |   |

 

The following instrumentswere excluded from the computation of diluted earnings per share as theireffect would have been anti-dilutive:

 
|                    |       |                             |       |                            |       |     |       |     |       |   |   |   |   |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|----------|------------|----------|------------|--------|--------|--------|--------|
| ** **              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **              | ** ** | **December 31,**            | ** ** | **December 31,**           | ** ** |
| ** **              | ** ** | **2009**                         | ** ** | **2008**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **              | ** ** | **(In thousands)**          | ** ** |
|                    |       |                             |       |                            |       |     |       |     |       |
| Stock  options          |       | 1,095                            |       | 2,184                           |       | 2,043    |       | 1,245    |       |
| Warrants                |       | 335                              |       | 1,165                           |       | 387      |       | 1,155    |       |
| Convertible  debentures |       | —                           |       | 623                             |       | —   |       | 1,639    |       |

 

**3.****                                     ****BusinessCombination**

 

OnApril 3, 2009 (the “Closing”), we completed the acquisition of certainassets of Hamilton Signal, Inc., a privately-held developer of videoprocessing algorithms enabling state and local governments to conduct real-timeanalysis on fixed and Pan-Tilt-Zoom camera feeds. The total purchaseconsideration was approximately $518,000, for which we paid $300,000 in cashupon execution of the purchase agreement, and for which, pursuant to thepurchase agreement, we are scheduled to pay an additional (i) $106,000 onthe first anniversary of the Closing and (ii) approximately $112,000 onthe second anniversary of the Closing. Pursuant to the purchase agreement, theseller became an employee of Iteris and is eligible to receive compensationbased on future net sales of certain products during the three-year periodending March 31, 2012, subject to continued employment and otherlimitations.

 

Wehave accounted for this acquisition as a business combination. We calculatedthe fair value of the assets acquired to allocate the purchase price, which issummarized as follows (in thousands):

 
| Developed  technology |   | $  | 501    |   |
|-----------------------|--------|----|--------|--------|
| Goodwill              |   | 17 |   |
|                  |   | $  | 518    |   |

 

Thepurchased developed technology was determined to have an estimated useful lifeof five years. Our primary reasons for the acquisition were to expand ourproduct portfolio in the traffic management market and to incorporate enhancedfunctionality into and complement our Roadway Sensors technologies.

 

Ourunaudited condensed consolidated financial statements for the three and ninemonths ended December 31, 2009 include the results of operations ofHamilton Signal commencing as of the Closing. Disclosures required for materialbusiness combinations have been limited due to the immateriality of theacquisition of Hamilton Signal to our consolidated financial statements. Nosupplemental pro forma information is presented for the acquisition due to theimmaterial effect of the acquisition on our results of operations.

 

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**4.****                                     ****RevolvingLine of Credit and Long-Term Debt**

 

**RevolvingLine of Credit**

 

In October 2008, weentered into a $19.5 million credit facility with California Bank & Trust,which provides for a two-year revolving line of credit with borrowings of up to$12.0 million and a $7.5 million 48-month term note (discussed below). Intereston borrowed amounts under the revolving line of credit are payable monthly at arate equal to the current stated prime rate (3.25% at December 31, 2009)up to the current stated prime rate plus 0.50%, depending on aggregate depositbalances maintained at the bank in relation to the total loan commitment underthe credit facility. We are obligated to pay an unused line fee of 0.25% perannum applied to the average unused portion of the revolving line of creditduring the preceding month. The revolving line of credit does not contain anyearly termination fees and is secured by substantially all of our assets. As ofDecember 31, 2009, no amounts were outstanding under the revolving line ofcredit portion of the facility.

 

**Long-TermDebt**

 

Our long-term debtconsists of the following:

 
| ** **                   | ** ** | **December 31,** | ** ** | **March 31,** | ** ** |
|------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2009**              | ** ** | **2009**           | ** ** |
| ** **                   | ** ** | **(In thousands)**    | ** ** |
| Bank  term note              |       | $                     | 5,750      |               | $          | 6,543 |   |
| Convertible  debentures, net |       | —                |       | 750                |       |
|                         |       | 5,750                 |       | 7,293              |       |
| Less  current portion        |       | (2,324                | )          | (2,019             | )          |
|                         |       | $                     | 3,426      |               | $          | 5,274 |   |

 

*Convertible Debentures, Net.*In May 2009, we retired theremaining $750,000 of convertible debentures that were outstanding as of March 31,2009, which retirement was financed under our bank term note.

 

*Bank Term Note.*Under our current credit facility, whichwe entered into in October 2008, we may borrow up to $7.5 million in theform of a 48-month term note. Principal payments under this term note arerequired to be repaid in 48 monthly installments of $152,000 commencing on June 1,2009. Additionally, beginning on November 1, 2009, and on November 1of each year thereafter, we are required to repay additional principal of up to$500,000, calculated based on certain financial measures, as further defined inthe agreement. These additional principal payments effectively reduce the totalnumber of monthly installments necessary to repay the term note. As of December 31,2009, an additional $500,000 was included in the current portion of the termnote, representing the amount we estimate will be due on November 1, 2010.Interest on the term note is payable monthly at a rate equal to the currentstated prime rate plus 0.50% up to the current stated prime rate plus 1.00%(3.75% to 4.25% at December 31, 2009), depending on aggregate depositbalances maintained at the bank in relation to the total loan commitment underthe credit facility. The term note contains no early termination fees and,along with the revolving line of credit under the same credit agreement, issecured by substantially all of our assets.

 

**5.****                                     ****IncomeTaxes**

 

The following table setsforth our benefit (provision) for income taxes, along with the correspondingeffective tax rates:

 
| ** **                            | ** ** | **Three Months Ended**                 | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **December 31,**                  | ** ** | **December 31,** | ** ** |
| ** **                            | ** ** | **2009**                               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                            | ** ** | **(In thousands, except percentages)** | ** ** |
| Benefit  (provision) for income taxes |       | $                                      | 48         |                  | $          | (415 | ) | $ | (563 | ) | $ | (1,727 | ) |
| Effective  tax rate                   |       | (7.3                                   | )%         | 35.9                  | %          | 28.7 | % | 41.1 | % |
|                                       |            |                                        |            |                       |            |  |  |  |  |  |  |  |  |

 

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Oureffective tax rates for the three and nine months ended December 31, 2009were favorably impacted by the recognition of approximately $320,000 ofunrecognized tax benefits during the three months ended December 31, 2009due to the expiration of certain federal and state statutes in variousjurisdictions. On an interim basis, we estimate what our anticipated annualeffective tax rate will be, while also separately considering applicablediscrete and other non-recurring items, and record a quarterly income taxprovision in accordance with the anticipated annual rate. As the fiscal yearprogresses, we refine our estimates based on actual events and financialresults during the year. This process can result in significant changes to ourexpected effective tax rate. When this occurs, we adjust our income taxprovision during the quarter in which our estimates are refined so that theyear-to-date provision reflects the expected annual effective tax rate. Thesechanges, along with adjustments to our deferred taxes, among others, may createfluctuations in our overall effective tax rate from quarter to quarter.

 

**6.****                                     ****Commitmentsand Contingencies**

 

**Litigation and OtherContingencies**

 

From time to time, we havebeen involved in litigation relating to claims arising out of our operations inthe normal course of business. We currently are not a party to any legalproceedings, the adverse outcome of which, in management’s opinion,individually or in the aggregate, would have a material adverse effect on ourconsolidated results of operations, financial position or cash flows.

 

Furthermore, from time to time, we have experiencedunforeseen developments in contingencies related to our former subsidiaries.For example, we have been the subject of a number of routine tax audits fortime periods and jurisdictions related to the businesses of our formersubsidiaries. Although the development and ultimate outcome of these types of unforeseenmatters cannot be anticipated or predicted with any certainty, our managementdoes not believe that we are presently involved in any matters related to our formersubsidiaries that would have a material adverse effect on our consolidatedresults of operations, financial position or cash flows.

 

**Operating Lease**

 

We previously subleasedoffice space to MAXxess Systems, Inc. (“MAXxess”), one of our formersubsidiaries that we sold in September 2003 and is currently owned by aninvestor group that includes two of our directors, one of whom is the ChiefExecutive Officer of MAXxess. The sublease terminated in September 2007,at which time MAXxess owed us an aggregate of $274,000 related to this subleaseand certain related ancillary services that we provided to MAXxess. We havepreviously fully reserved for amounts owed to us by MAXxess under the terms ofthis sublease. In August 2009, MAXxess executed a promissory note payableto Iteris for $274,000. The promissory note bears interest at a rate of 6% perannum, compounded annually, with accrued interest to be paid annually on thefirst business day of each calendar year. Payments under the note may be madein bona fide services rendered by MAXxess to Iteris to the extent such servicesand amounts are pre-approved in writing by us. All amounts outstanding underthe note will become due and payable on the earliest of (i) August 10,2014, (ii) a change of control in MAXxess, or (iii) a financing byMAXxess resulting in gross proceeds of at least $10 million. All amounts duefrom MAXxess continue to remain fully reserved.

 

**Deferred Compensation Plan**

 

In December 2009, we distributed to theirrespective owners the remaining assets in our Deferred Compensation Plan (the “plan”),which consisted of 23,844 shares of our common stock. This effectivelyterminated the plan, along with the corresponding trust in which the assetswere held. As of December 31, 2009, the original $31,000 cost basis ofthese shares, which was previously recorded as a contra-equity account, alongwith the corresponding liability, were eliminated from our consolidated balancesheet.

 

**7.****                                     ****Warrants**

 

The following tablesummarizes information regarding outstanding warrants to purchase our commonstock as of December 31, 2009:

 
| **Exercise Price** | ** ** | **Warrants  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** |
|--------------------|------------|---------------------------|------------|---------------------------------------------------|------------|
| ** **         | ** ** | **(In thousands)**        | ** ** | **(Years)**                                       | ** ** |
| $                  | 1.42       |                      | 15         |                                              | 3.7        |   |
| 3.25               |       | 246                       |       | 1.2                                               |       |
| 5.00               |       | 75                        |       | 0.6                                               |       |
|               |       | 336                       |       | 1.1                                               |       |
|                    |            |                           |            |                                                   |            |  |

 

In May 2009,outstanding warrants with a weighted average per share exercise price of $3.93to purchase approximately 674,000 shares of our common stock, which wereassociated with our convertible debentures (see Note 4), expired unexercised.In July 2009, outstanding warrants with a per share exercise price of$5.26 to purchase approximately 155,000 shares of our common stock expiredunexercised.

 

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In connection with our adoption of certainprovisions within ASC Topic 815, *Derivatives and Hedging*,which became effective for us on April 1, 2009, we determined that some ofthe outstanding warrants to purchase shares of our common stock containprovisions that provide for a possible future adjustment to either the exerciseprice and/or number of shares to be issued upon exercise. As such, beginning April 1,2009, we began recognizing these warrants as liabilities at their respectiveestimated fair values on each reporting date. The cumulative effect of thechange in accounting for these warrants of $47,000 was recognized as anadjustment to the opening balance of accumulated deficit at April 1, 2009.The amounts recognized in the consolidated balance sheet as a result of ouradoption on April 1, 2009 were determined based on the amounts that wouldhave been recognized if this accounting treatment had been applied from theissuance date of the warrants. At December 31, 2009, the estimated fairvalue of the warrants was $16,000. The change in the estimated fair value ofthe warrants for the three and nine months ended December 31, 2009 isincluded in other income in the accompanying unaudited condensed consolidatedstatements of operations. We estimate the fair value of these warrants usingthe BSM option-pricing formula.

 

**8.****                                     ****FairValue Measurements**

 

ASC 820 defines fair value as the exchange price thatwould be received for an asset or paid to transfer a liability (an exit price)in the principal or most advantageous market for the asset or liability in anorderly transaction between market participants on the measurement date. ASC820 also establishes a fair value hierarchy that requires an entity to maximizethe use of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value. ASC 820 describes three levels of inputs that may be usedto measure fair value:

 

Level 1: Quoted prices in an active market foridentical assets or liabilities.

 

Level 2: Observable inputs other than Level 1prices such as quoted prices for similar assets or liabilities; quoted pricesin markets that are not active; or other inputs that are observable or can becorroborated by observable market data for substantially the full term of theassets or liabilities.

 

Level 3: Unobservable inputs that are supported bylittle or no market activity and that are significant to the fair value of theassets or liabilities.

 

At December 31, 2009, there were outstandingwarrants to purchase shares of our common stock that were classified as aliability with an estimated fair value of $16,000 (see Note 7). These warrantswere valued using Level 3 inputs because there are unobservable inputsassociated with them. The following table reconciles the liability for thesewarrants measured at fair value on a recurring basis using Level 3 inputs forthe nine months ended December 31, 2009 (in thousands):

 
| Balance  at April 1, 2009                       |   | $   | — |   |
|------------------------------------------------------|--------|-----|--------|--------|
| Cumulative  effect of accounting change (Note 7)     |   | 47  |   |
| Gain  on change in fair value included in net income |   | (31 | )      |
| Balance  at December 31, 2009                   |   | $   | 16     |   |

 

Thisliability is included within accrued liabilities in the accompanying unauditedcondensed consolidated balance sheet as of December 31, 2009.

 

The intangible assets acquired in connection withthe Hamilton Signal acquisition (see Note 3) were recorded at fair value as ofthe acquisition date of such assets, and were estimated using the incomeapproach, which included the use of Level 3 inputs. Our non-financial assets, suchas goodwill, intangible assets and property and equipment, are measured at fairvalue on a non-recurring basis; generally when there is a transaction involvingthose assets such as a purchase transaction, a business combination or anadjustment for impairment.

 

**9.****                                     ****Stockholders’Equity**

 

In August 2009, our Board of Directors adopteda stockholder rights plan, which calls for preferred stock purchase rights(each, a “Right”) to be distributed, as a dividend, at the rate of one Rightfor each share of common stock held as of September 3, 2009. Each Rightwill entitle holders of common stock to buy one one-thousandth of one share of Series AJunior Participating Preferred Stock of Iteris. A further description and termsof the Rights are set forth in the Rights Agreement dated August 20, 2009by and between Iteris and Computershare Trust Company, N.A., as rights agent.

 

In connection with the stockholder rights plan, ourBoard of Directors approved the adoption of a Certificate of Designations,which created the Series A Junior Participating Preferred Stock, andlikewise authorized the filing of a Certification of Elimination to eliminatethe two series of junior participating preferred stock, which were originallycreated in April 1998 in connection with our previous stockholder rightsplan which expired in 2008.

 

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**10.****                              ****Stock-BasedCompensation**

 

A summary of activity in our stock option plans forthe nine months ended December 31, 2009 is as follows:

 
| ** **                                     | ** ** | ** **         | ** ** | **Weighted** | ** ** |
|------------------------------------------------|------------|--------------------|------------|--------------|------------|
| ** **                                     | ** ** | ** **         | ** ** | **Average**  | ** ** |
| ** **                                     | ** ** | **Number of**      | ** ** | **Exercise** | ** ** |
| ** **                                     | ** ** | **Shares**         | ** ** | **Price**    | ** ** |
| ** **                                     | ** ** | **(In thousands)** | ** ** | ** **   | ** ** |
| Options  outstanding at March 31, 2009    |       | 3,314              |       | $            | 1.92       |   |
| Granted                                        |       | 393                |       | 1.43         |       |
| Exercised                                      |       | (76                | )          | 1.19         |       |
| Forfeited                                      |       | (30                | )          | 2.49         |       |
| Expired                                        |       | (309               | )          | 3.12         |       |
| Options  outstanding at December 31, 2009 |       | 3,292              |       | $            | 1.76       |   |

 

In September 2009,our stockholders approved an amendment to increase the number of shares of ourcommon stock authorized and reserved for issuance under our 2007 OmnibusIncentive Plan by 800,000 shares to a total of 1,650,000 shares. At December 31,2009, there were 865,000 shares of common stock available for grant under thisplan.

 

The per share fair valuesof stock options granted in the nine months ended December 31, 2009 havebeen estimated with the following weighted average assumptions:

 
| Expected  life - years                            |   | 7      |   |
|---------------------------------------------------|--------|--------|--------|
| Risk-free  interest rate                          |   | 3.2    | %      |
| Expected  volatility of common stock              |   | 74     | %      |
| Dividend  yield                                   |   | — |   |
| Weighted-average  grant date fair value per share |   | $      | 1.01   |   |
|                                                   |        |        |        |  |

 

At December 31,2009, there was approximately $982,000 of total unrecognized compensationexpense related to unvested stock options. This expense is expected to berecognized over a weighted average period of approximately 3.2 years. If thereare any modifications or cancellations of the underlying unvested stockoptions, we may be required to accelerate, increase or cancel any remainingunearned stock-based compensation expense. Future stock-based compensation expenseand unearned stock-based compensation will increase to the extent that we issueadditional stock options or other stock-based awards.

 

**11.****                              ****BusinessSegment Information**

 

We currently operate inthree reportable segments: Roadway Sensors, Vehicle Sensors and TransportationSystems. The Roadway Sensors segment includes our Vantage and VersiCam vehicledetection systems for traffic intersection control, incident detection andcertain highway traffic data collection applications. This segment also includesour Pico compact video detection system, which was designed primarily torespond to international video detection needs. The Vehicle Sensors segmentincludes our lane departure warning products and is comprised of all of ouractivities related to vehicle safety. The Transportation Systems segmentincludes transportation engineering and consulting services and the developmentof transportation management and traveler information systems for the ITSindustry. The accounting policies of the reportable segments are the same asthose described in the summary of significant accounting policies. 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 provideservices with different processes. All segment revenues are derived fromexternal customers.

 

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The following table sets forth selected unauditedfinancial information for our reportable segments for the three and nine monthsended December 31, 2009 and 2008:

 
| ** **                                    | ** ** | **Roadway  Sensors** | ** ** | **Vehicle  Sensors** | ** ** | **Transportation  Systems** | ** ** | **Total**  | ** ** |
|-----------------------------------------------|------------|----------------------|------------|----------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                    | ** ** | **(In thousands)**   | ** ** |
| **Three Months Ended December 31, 2009** | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Product  revenue                              |       | $                    | 5,734      |                 | $          | 1,543                       |       | $          | —     |   | $ | 7,277 |   |
| Service  and other revenue                    |       | —               |       | 124                  |       | 6,176                       |       | 6,300      |       |
| Stock-based  compensation                     |       | 10                   |       | 7                    |       | 16                          |       | 33         |       |
| Depreciation  and amortization                |       | 57                   |       | 24                   |       | 54                          |       | 135        |       |
| Segment  income (loss)                        |       | 582                  |       | (74                  | )          | 283                         |       | 791        |       |
| ** **                                    | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Three Months Ended December 31, 2008** |       |                 |       |                 |       |                        |       |       |       |
| Product  revenue                              |       | $                    | 6,291      |                 | $          | 2,477                       |       | $          | —     |   | $ | 8,768 |   |
| Service  and other revenue                    |       | —               |       | 315                  |       | 7,379                       |       | 7,694      |       |
| Stock-based  compensation                     |       | 8                    |       | 12                   |       | 13                          |       | 33         |       |
| Depreciation  and amortization                |       | 48                   |       | 32                   |       | 65                          |       | 145        |       |
| Segment  income                               |       | 773                  |       | 105                  |       | 425                         |       | 1,303      |       |
|                                          |       |                 |       |                 |       |                        |       |       |       |
| **Nine Months Ended December 31, 2009**  |       |                 |       |                 |       |                        |       |       |       |
| Product  revenue                              |       | $                    | 18,691     |                 | $          | 3,542                       |       | $          | —     |   | $ | 22,233 |   |
| Service  and other revenue                    |       | —               |       | 563                  |       | 20,280                      |       | 20,843     |       |
| Stock-based  compensation                     |       | 28                   |       | 23                   |       | 46                          |       | 97         |       |
| Depreciation  and amortization                |       | 176                  |       | 64                   |       | 168                         |       | 408        |       |
| Segment  income (loss)                        |       | 2,126                |       | (910                 | )          | 1,207                       |       | 2,423      |       |
|                                          |       |                 |       |                 |       |                        |       |       |       |
| **Nine Months Ended December 31, 2008**  |       |                 |       |                 |       |                        |       |       |       |
| Product  revenue                              |       | $                    | 21,334     |                 | $          | 8,380                       |       | $          | —     |   | $ | 29,714 |   |
| Service  and other revenue                    |       | —               |       | 973                  |       | 22,283                      |       | 23,256     |       |
| Stock-based  compensation                     |       | 24                   |       | 36                   |       | 39                          |       | 99         |       |
| Depreciation  and amortization                |       | 144                  |       | 105                  |       | 185                         |       | 434        |       |
| Segment  income                               |       | 2,887                |       | 552                  |       | 1,569                       |       | 5,008      |       |

 

The following table reconciles segment income toconsolidated income before income taxes:

 
| ** **                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                             | ** ** | **(In thousands)**     | ** ** |
| **Segment income:**                    |       |                   |       |                  |       |   |   |   |   |
| Total  income from reportable segments |       | $                      | 791        |                  | $          | 1,303 |   | $ | 2,423 |   | $ | 5,008 |   |
| **Unallocated amounts:**               |       |                   |       |                  |       |   |   |   |   |
| Corporate  and other expenses          |       | (97                    | )          | (69                   | )          | (291 | ) | (360 | ) |
| Other  income, net                     |       | 25                     |       | 63                    |       | 42 |   | 90 |   |
| Interest  expense, net                 |       | (58                    | )          | (141                  | )          | (215 | ) | (537 | ) |
| Income  before income taxes            |       | $                      | 661        |                  | $          | 1,156 |   | $ | 1,959 |   | $ | 4,201 |   |

 
| **ITEM 2.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

*This report, including the following discussion and analysis, containsforward-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 informationavailable to us as of the date of this report. When used in this report and theinformation incorporated herein by reference, the words “expect(s),” “feel(s),”“believe(s),” “should,” “will,” “may,” “anticipate(s),” “estimate(s)” andsimilar expressions or variations of these words are intended to identifyforward-looking statements. These forward-looking statements include, but arenot limited to, statements regarding our anticipated sales, revenue, expenses,profits, capital needs, competition, development plans, backlog andmanufacturing capabilities, the applications for and acceptance of our productsand services, and the status of our facilities and product development. Thesestatements are not guarantees of future performance and are subject to certainrisks and uncertainties that could cause our actual results to differmaterially from those projected. You should not place undue reliance on theseforward-looking statements that speak only as of the date hereof. We encourageyou to carefully review and consider the various disclosures made by us whichdescribe certain factors which could affect our business, including in* “*Risk Factors” set forth in Part II, Item 1A of this report, beforedeciding to invest in our company or to maintain or increase your investment.We undertake no obligation to revise or update publicly any forward-lookingstatement for any reason, including to reflect events or circumstances afterthe date hereof or to reflect the occurrence of unanticipated events.*

 

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**Overview**

 

We are a leader in the traffic management market focused on thedevelopment and application of advanced technologies that reduce trafficcongestion and improve the safety of surface transportation systemsinfrastructure. As an added benefit, our products and services minimize theenvironmental impact of traffic congestion. By combining outdoor imageprocessing, traffic engineering and information technology, we offer a broadrange of Intelligent Transportation Systems (“ITS”) and driver safety solutionsto customers in the U.S. and internationally.

 

Wecurrently operate in three reportable segments: Roadway Sensors, VehicleSensors, and Transportation Systems. The Roadway Sensors segment includes ourVantage and VersiCam vehicle detection systems for trafficintersection control, incident detection and certain highway traffic datacollection applications. The Vehicle Sensors segment includes our lane departurewarning (“LDW”) products and is comprised of all of our activities related tovehicle safety. The Transportation Systems segment includes transportationengineering and consulting services, and the development of transportationmanagement and traveler information systems for the ITS industry.

 

Our Roadway Sensors segment product line uses advanced image processingtechnology to capture and analyze video images through sophisticatedalgorithms, enabling vehicle detection and transmission of both video imagesand data using various communication technologies. Our Vantage video detectionsystems detect vehicle presence, count, speed and other traffic data used intraffic management systems. This gives traffic managers the ability to mitigateroadway congestion by modifying traffic signal timing or detecting incidentsquickly. VersiCam, our integrated camera and processor video detection system,is a cost-efficient video detection system for smaller intersections thatrequires only a few detection points. Vantage video detection systems have beendeployed by hundreds of agencies and are currently sold through a network ofindependent dealers in the United States, Asia, Latin America, Europe and theMiddle East. In December 2009, we introduced Pico, our compact video detectionsystem that was developed primarily to address international video detectionneeds and was designed for easy installation and configuration. We anticipatethat future growth domestically and internationally, particularly in developingcountries, will be dependent in part on the continued adoption of above-groundvideo detection technologies, instead of in-pavement loop technology, to managetraffic.

 

Our Vehicle Sensors segment addresses the leading cause of roadwayfatalities: lane change, roadway departure and rear-end collision accidents. Wedeveloped the world’s first production LDW system and offer a proven systemthat is available as an OEM and aftermarket option on heavy trucks worldwideand as an option in certain passenger cars. Our LDW products utilize videodetection images to detect when a vehicle begins to drift toward an unintendedlane change. When this occurs, the unit automatically emits a distinctiverumble strip or other audible warning sound, alerting the driver to make a correction.To date, we have sold approximately 75,000 LDW systems into the heavy truckmarket in Europe, North America and Asia. Our LDW systems are currentlyqualified as an option on certain heavy trucks, including Mercedes-Benz, MAN,Iveco, DAF, Scania, Freightliner and FUSO, as well as Neoplan and MAN luxurybus and coach lines. In North America, our LDW systems are sold primarily totruck fleets. We believe that as a result of the expected 2013 European mandatefor LDW and other active safety systems, and an overall awareness of thepotential benefits of LDW, that we will experience an even higher degree ofcompetition from a variety of tier-one OEM suppliers and other potential marketentrants, worldwide. While we believe that this increased competition validatesthe long-term market opportunity for LDW systems in commercial vehicles, itcould also adversely effect our future LDW sales and margins. We are currentlyworking with our major European OEM customer base to establish long-term supplyagreements that extend to 2013 and beyond in order to meet the anticipatedincrease in demand; however, we cannot assure you that our efforts will besuccessful or that the increase in demand will occur. We have entered into anexclusive license of our LDW technology to our strategic partner, ValeoSchalter and Sensuren GmbH (“Valeo”), for the passenger car market, resultingin sales to date of approximately 73,500 LDW systems for passenger cars.Additionally, we and our partner have experienced a greater degree ofcompetition in the passenger car market. Several passenger car OEMs haverecently introduced vehicle platforms with competing LDW systems. Valeocontinues to pursue opportunities in the passenger car market.

 

In addition to our LDW systems, our Vehicle Sensors portfolio includestechnologies such as radar-based Forward Collision Warning (“FCW”) and BlindSpot Warning (“BSW”) systems for the North American truck market, which wereboth introduced in August 2008. Our Safety Direct product is a system thatreports driver performance data captured by our LDW system, which data could berelayed directly to fleet operators through integration with the truck’sexisting fleet communications system. We offer the FCW and BSW features throughthe resale of Delphi’s radar-based systems, for which we are the exclusiveNorth American dealer, while Safety Direct was internally developed. Theseproducts, together with our LDW products, combine to create a suite of activesafety driver assistance features focused on reducing the number of motorvehicle crashes and the severity of crash-related injuries.

 

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OurTransportation Systems segment includes transportation engineering andconsulting services focused on the planning, design, development andimplementation of software-based systems that integrate sensors, videosurveillance, computer, and advanced communications equipment to enable publicagencies to monitor, control and direct traffic flow, assist in the quickdispatch of emergency crews and distribute real-time information about trafficconditions. Our services include planning, design and implementation of surfacetransportation infrastructure systems. We perform analysis and study goodsmovement, commercial vehicle operations, travel demand forecasting and systemsengineering, and identify mitigation measures to reduce traffic congestion.These services and systems are primarily sold to local, state and nationaltransportation agencies in the United States; however, in the current fiscalyear, we began work on our first overseas contract award in Abu Dhabi. In thefuture, we plan to continue to pursue additional international opportunitiesfor our Transportation Systems segment.

 

OurTransportation Systems segment is largely dependent upon governmental fundingand budgetary issues. We believe the overall expansion of our TransportationSystems segment in recent years was due in part to the passage of the FederalHighway Bill in 2005, combined with increased transportation fundsavailable at state and local agencies throughout the country. The 2005 FederalHighway Bill expired on October 31, 2009, and Congress is currently in negotiationsregarding future extensions. We anticipate possible delays in theenactment of a new Federal Highway Bill; however, we believe the current levelof funding will continue until such time that the new bill is passed throughCongress. This funding remains uncertain, and we cannot assure the timing orextent of such funding, nor the extent to which we may benefit.

 

Despitethe federal stimulus package, many municipalities and other agencies continueto face budgetary issues. As a result, spending for new roadways, new systemsto address traffic congestion and other transportation infrastructureimprovements has been delayed or eliminated in some cases. We believe that theneed to rebuild and modernize aging transportation infrastructure will continue,and in addition to funds available through the stimulus package and federalhighway bills, there exist a variety of other funding mechanisms that supporttransportation infrastructure and related projects, including bonds, dedicatedsales and gas tax measures and other alternative funding sources. However, wecurrently cannot determine when or if such funding sources will beavailable or the extent to which we may benefit from future sources offunding for transportation-related projects.

 

**Critical Accounting Policies and Estimates**

 

Management’sDiscussion and Analysis of Financial Condition and Results of Operations isbased on our unaudited condensed consolidated financial statements includedherein, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and related disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Onan ongoing basis, we evaluate these estimates and assumptions, including thoserelated to the collectibility of accounts receivable, the valuation ofinventories, the recoverability of long-lived assets and goodwill, therealizability of deferred tax assets, accounting for stock-based compensation,the valuation of equity instruments, warranty reserves and other contingencies.We base these estimates on our historical experience and on various otherfactors that we believe to be reasonable under the circumstances, the resultsof which form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Theseestimates and assumptions by their nature involve risks and uncertainties, andmay prove to be inaccurate. In the event that any of our estimates orassumptions are inaccurate in any material respect, it could have a materialadverse effect on our reported assets and liabilities at the date of thefinancial statements and our reported revenues and expenses during thereporting period.

 

Theaccounting policies that affect our more significant judgments and estimatesused in the preparation of our unaudited condensed consolidated financialstatements are those relating to revenue recognition, accounts receivable,inventory, goodwill, warranty, income taxes, and stock-based compensation.These policies are described in further detail in our Annual Report on Form 10-Kfor the fiscal year ended March 31, 2009 (“fiscal 2009”). There have beenno significant changes in our critical accounting policies and estimates duringthe nine months ended December 31, 2009 as compared to what was previouslydisclosed in our Annual Report on Form 10-K for fiscal 2009.

 

**Recent Accounting Pronouncements**

 

Referto Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements,included in Part I, Item I of this report for a discussion of recentaccounting pronouncements.

 

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**Results of Operations**

 

The followingtable sets forth statement of operations data as a percentage of total netsales and contract revenues for the periods indicated:

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** |
| ** **                                 | ** ** | **2009**               | ** ** | **2008**              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                       |       |                   |       |                  |       |   |   |   |   |
| Net  sales and contract revenues:          |       |                   |       |                  |       |   |   |   |   |
| Net  sales                                 |       | 54.5                   | %          | 55.2                  | %          | 52.9 | % | 57.9 | % |
| Contract  revenues                         |       | 45.5                   |       | 44.8                  |       | 47.1 |   | 42.1 |   |
| Total  net sales and contract revenues     |       | 100.0                  | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
| Costs  of net sales and contract revenues: |       |                   |       |                  |       |   |   |   |   |
| Cost  of net sales                         |       | 28.3                   |       | 29.7                  |       | 28.1 |   | 30.3 |   |
| Cost  of contract revenues                 |       | 30.9                   |       | 30.8                  |       | 30.9 |   | 27.9 |   |
| Gross  profit                              |       | 40.8                   |       | 39.5                  |       | 41.1 |   | 41.8 |   |
| Operating  expenses:                       |       |                   |       |                  |       |   |   |   |   |
| Selling,  general and administrative       |       | 28.8                   |       | 26.6                  |       | 29.5 |   | 26.8 |   |
| Research  and development                  |       | 6.6                    |       | 5.2                   |       | 6.4 |   | 6.0 |   |
| Amortization  of intangible assets         |       | 0.3                    |       | 0.2                   |       | 0.3 |   | 0.2 |   |
| Total  operating expenses                  |       | 35.7                   |       | 32.0                  |       | 36.1 |   | 33.0 |   |
| Operating  income                          |       | 5.1                    |       | 7.5                   |       | 4.9 |   | 8.8 |   |
| Non-operating  income (expense):           |       |                   |       |                  |       |   |   |   |   |
| Other  income, net                         |       | 0.2                    |       | 0.4                   |       | 0.1 |   | 0.2 |   |
| Interest  expense, net                     |       | (0.4                   | )          | (0.9                  | )          | (0.5 | ) | (1.0 | ) |
| Income  before income taxes                |       | 4.9                    |       | 7.0                   |       | 4.5 |   | 7.9 |   |
| Benefit  (provision) for income taxes      |       | 0.4                    |       | (2.5                  | )          | (1.3 | ) | (3.3 | ) |
| Net  income                                |       | 5.2                    | %          | 4.5                   | %          | 3.2 | % | 4.7 | % |

 

**Analysis ofQuarterly Results of Operations**

 

*Net Sales and Contract Revenues*. Net sales are comprised of productsales from our Roadway Sensors and Vehicle Sensors segments, as well ascontract engineering revenue and royalty revenue generated from our VehicleSensors segment. Contract revenues consist entirely of TransportationSystems contract revenues, which are generated from systems integration and ITSconsulting services primarily with federal, state, county and municipalagencies.

 

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The following tables present details of our net sales and contractrevenues for the three and nine months ended December 31, 2009 and 2008:

 
| ** **                             | ** ** | **Three Months Ended**                      | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                             | ** ** | **December 31,**                                 | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                             | ** ** | **2009**                                              | ** ** | **2008**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **(In thousands, except percentages)** | ** ** |
| Roadway  Sensors                       |       | $                                                     | 5,734      |       | $          | 6,291        |       | $ | (557 | ) | (8.9 | )% |
| Vehicle  Sensors                       |       | 1,667                                                 |       | 2,792      |       | (1,125       | )          | (40.3 | ) |
| Net  sales                             |       | 7,401                                                 |       | 9,083      |       | (1,682       | )          | (18.5 | ) |
| Contract  revenues                     |       | 6,176                                                 |       | 7,379      |       | (1,203       | )          | (16.3 | ) |
| Total  net sales and contract revenues |       | $                                                     | 13,577     |       | $          | 16,462       |       | $ | (2,885 | ) | (17.5 | ) |

 
| ** **                             | ** ** | **Nine Months Ended**                       | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                             | ** ** | **December 31,**                                 | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                             | ** ** | **2009**                                              | ** ** | **2008**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **(In thousands, except percentages)** | ** ** |
| Roadway  Sensors                       |       | $                                                     | 18,691     |       | $          | 21,334       |       | $ | (2,643 | ) | (12.4 | )% |
| Vehicle  Sensors                       |       | 4,105                                                 |       | 9,353      |       | (5,248       | )          | (56.1 | ) |
| Net  sales                             |       | 22,796                                                |       | 30,687     |       | (7,891       | )          | (25.7 | ) |
| Contract  revenues                     |       | 20,280                                                |       | 22,283     |       | (2,003       | )          | (9.0 | ) |
| Total  net sales and contract revenues |       | $                                                     | 43,076     |       | $          | 52,970       |       | $ | (9,894 | ) | (18.7 | ) |

 

We havehistorically had a diverse customer base. For the nine month periods ended December 31,2009 and 2008, no individual customer accounted for greater than 10% of ourtotal net sales and contract revenues.

 

*RoadwaySensors*

 

Thedecrease in Roadway Sensors net sales for the three and nine months ended December 31,2009 as compared to the corresponding periods in the prior fiscal year wasmainly due to the ongoing effects of reduced and delayed spending oninfrastructure projects, in part due to the decline in commercial andresidential construction as well as state and local government budgetarypressures and increased competitors in the market. We believe these factors areat least partially attributable to the overall continued weakness in the U.S.and global economy. We expect the above factors, among others, may continue toadversely impact our Roadway Sensors net sales for at least the next few fiscalquarters. Additionally, winter weather conditions have historically had anegative impact on Roadway Sensors net sales in our fiscal third and fourth quartersin the regions where projects can be delayed due to such factors. In December2009, we began selling our products directly to contractors in Texas. We planto continue selling product to our former distributor under the stateprocurement contract.

 

*VehicleSensors*

 

Thelargest element of Vehicle Sensors net sales was sales of our LDW systems tothe heavy truck market, which aggregated approximately $1.5 million and $3.5million for the three and nine months ended December 31, 2009,respectively, compared to approximately $2.5 million and $8.4 million for thethree and nine months ended December 31, 2008, respectively. VehicleSensors net sales decreased for the current fiscal year primarily due to theslowdown in overall LDW unit shipments to each of our key markets during thecurrent year. Although we saw an encouraging increase in net sales in thecurrent fiscal quarter as compared to the immediately preceding quarter, whichresulted primarily from increased sales to certain of our U.S. truck fleet customers,we continue to experience overall softness in our LDW unit sales to the NorthAmerican truck market and to our European and Asian OEM customers, which webelieve is driven largely by lower new heavy truck sales in general, as well asthe general slowdown in the U.S. and worldwide credit markets and continuedweakness in the overall global economy. We anticipate that Vehicle Sensors unitsales for the remainder of the fiscal year ending March 31, 2010 (“fiscal2010”) and beyond could continue to be adversely impacted as a result of theoverall decline in sales of heavy trucks globally and by slower than expectedadoption rates of our LDW system by European and Asian OEMs and North Americanheavy truck fleets. Additionally, future unit sales of LDW systems and unitpricing could be adversely impacted as a result of increased competition inthis market. The increase in competition in the current fiscal year contributedto a division of an international heavy truck customer sourcing future primaryLDW unit sales to a competitor for a specific geographic region.

 

Alsoincluded in Vehicle Sensors net sales are revenues from contract engineeringservices and royalty revenues in the passenger car market that are derived fromour strategic relationship with Valeo, which aggregated approximately $124,000and $563,000 for the three and nine months ended December 31, 2009,respectively, compared to $315,000 and $973,000 for the three and nine monthsended December 31, 2008, respectively. The decline in the current fiscalyear primarily reflects an overall decrease in contract engineering servicesprovided to Valeo as the pertinent engineering development activities havegenerally reached maturity for the related vehicle platforms that currentlyincorporate our LDW system.

 

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*ContractRevenues*

 

Contract revenuesare primarily dependent upon the continued availability of funding at both thestate and federal levels from the various departments of transportation. Forthe three and nine months ended December 31, 2009, our contract revenuesdecreased compared to the corresponding period in the prior fiscal year due tothe timing of sub-consulting content revenues, as well as delays or reductionsin funding for certain of our projects, particularly in the Southeast region ofthe U.S. In the future, we plan to continue to pursue large contracts that maycontain significant sub-consulting content, which will likely contribute tovariability in the timing and amount of our contract revenues from period toperiod. We believe the ability of our Transportation Systems business to growand successfully win and service new contracts will remain highly dependentupon our continued success in recruiting and retaining qualified personnel.Historically, all of our contract revenues have been derived from workperformed in North America under a broad range of fixed price and cost plusfixed fee contracts. Beginning in the second quarter of fiscal 2010, we beganwork on our first overseas contract award to assist the Abu Dhabi Department ofTransport in the development of certain ITS architecture. To date, revenuesfrom this contract have not been significant.

 

*Gross Profit*.  The following tablespresent details of our gross profit for the three and nine months ended December 31,2009 and 2008:

 
| ** **                                                          | ** ** | **Three Months Ended**                 | ** ** | ** ** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                                          | ** ** | **December 31,**                  | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                                                          | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Total  gross profit                                                 |       | $                                      | 5,535      |       | $          | 6,504        |       | $ | (969 | ) | (14.9 | )% |
| Total  gross profit as a % of total net sales and contract revenues | ** ** | 40.8                                   | %          | 39.5       | %          |         |       |   |   |
| Gross  profit as a % of net sales                                   |       | 48.1                                   | %          | 46.2       | %          |         |       |   |   |
| Gross  profit as a % of contract revenues                           |       | 32.0                                   | %          | 31.3       | %          |         |       |   |   |
|                                                                     |            |                                        |            |            |            |              |            |  |  |  |  |  |

 
| ** **                                                          | ** ** | **Nine Months Ended**                  | ** ** | ** ** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                                          | ** ** | **December 31,**                  | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                                                          | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Total  gross profit                                                 |       | $                                      | 17,687     |       | $          | 22,131       |       | $ | (4,444 | ) | (20.1 | )% |
| Total  gross profit as a % of total net sales and contract revenues | ** ** | 41.1                                   | %          | 41.8       | %          |         |       |   |   |
| Gross  profit as a % of net sales                                   |       | 46.9                                   | %          | 47.7       | %          |         |       |   |   |
| Gross  profit as a % of contract revenues                           |       | 34.5                                   | %          | 33.6       | %          |         |       |   |   |
|                                                                     |            |                                        |            |            |            |              |            |  |  |  |  |  |

 

Ourgross margin for the three months ended December 31, 2009 increasedslightly compared to the corresponding period in the prior fiscal yearprimarily as a result of higher overall margins from our net sales during thisperiod and, to a lesser extent, due to a slight improvement in ourTransportation Systems margins, as discussed further below. On a fiscal year-to-datebasis, the slight decline in our gross margin in the current fiscal year, ascompared to the same period in the prior fiscal year, was primarily the resultof a higher mix of contract revenues, which represented approximately 47% ofour total net sales and contract revenues thus far in the current fiscal yearas compared to approximately 42% in the same period in the prior fiscal year.Generally, contract revenues carry lower margins than our net sales.

 

Theincrease in gross profit as a percent of net sales for the three months ended December 31,2009 as compared to the corresponding period in the prior year was primarily aresult of higher margins in Roadway Sensors during the current quarter, drivenlargely by our customer mix. The overall slight decrease in gross profit as apercent of net sales for the nine months ended December 31, 2009 ascompared to the corresponding period in the prior year was primarily a resultof decreased overall gross profit during the current fiscal year in VehicleSensors, which was largely driven by lower overhead absorption due to thedecline in sales in the current fiscal year, as well as an increase in certainestimates for additional excess and obsolete inventory provisions. Gross profitas a percentage of net sales can fluctuate in any specific quarter or yearbased on, among other factors, customer and product mix, competitive pricingrequirements, product warranty costs and provisions for excess and obsoleteinventories, as well as possible shifts of engineering resources fromdevelopment activities to sustaining activities, which we record as cost ofgoods sold.

 

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We recognize contractrevenues and related gross profit using percentage of completion contractaccounting, and the underlying mix of contract activity affects the relatedgross profit recognized in any given period. The slight increase in grossprofit as a percent of contract revenues for both the three and nine monthsended December 31, 2009 compared to the corresponding periods in the prioryear was primarily due to a contract mix weighted more toward higher margincontracts in the current fiscal year. Our higher margin contracts often containa comparatively lower proportion of sub-consulting revenues. For the remainderof fiscal 2010, we expect an overall lower level of sub-consulting content as apercentage of our total contract revenues, as compared to the prior year;however, due to the variability and timing of our contracts, it has becomeincreasingly difficult to accurately predict the sub-consulting content in ourTransportation Systems contracts in future periods.

 

*Selling,General and Administrative Expense*.  The following tablespresent selling, general and administrative expense for the three and ninemonths ended December 31, 2009 and 2008:

 
| ** **                           | ** ** | **Three  Months Ended**                | ** ** | **Three  Months Ended**     | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|-----------------------------|------------|------------|------------|----------------|------------|
| ** **                           | ** ** | **December 31,  2009**            | ** ** | **December 31,  2008** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                           | ** ** | ** **                             | ** ** | **%  of Net**               | ** ** | ** ** | ** ** | **%  of Net**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** ** | **Sales  and**              | ** ** | ** ** | ** ** | **Sales  and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** ** | **Contract**                | ** ** | ** ** | ** ** | **Contract**   | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **Amount**                             | ** ** | **Revenues**                | ** ** | **Amount** | ** ** | **Revenues**   | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(In thousands, except percentages)** | ** ** |
| Salary  and personnel-related        |       | $                                      | 2,611      |                        | 19.2       | %          | $          | 2,828          |       | 17.2 | % | $ | (217 | ) | (7.7 | )% |
| Facilities,  insurance and supplies  |       | 436                                    |       | 3.2                         |       | 616        |       | 3.7            |       | (180 | ) | (29.2 | ) |
| Travel  and conferences              |       | 346                                    |       | 2.5                         |       | 397        |       | 2.4            |       | (51 | ) | (12.8 | ) |
| Professional  and outside services   |       | 205                                    |       | 1.5                         |       | 295        |       | 1.8            |       | (90 | ) | (30.5 | ) |
| Other                                |       | 317                                    |       | 2.3                         |       | 249        |       | 1.5            |       | 68 |   | 27.3 |   |
| Selling,  general and administrative |       | $                                      | 3,915      |                        | 28.8       | %          | $          | 4,385          |       | 26.6 | % | $ | (470 | ) | (10.7 | ) |

 
| ** **                           | ** ** | **Nine  Months Ended**                 | ** ** | **Nine  Months Ended**      | ** ** | ** ** | ** ** | ** **     | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|-----------------------------|------------|------------|------------|----------------|------------|
| ** **                           | ** ** | **December 31,  2009**            | ** ** | **December 31,  2008** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                           | ** ** | ** **                             | ** ** | **%  of Net**               | ** ** | ** ** | ** ** | **%  of Net**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** ** | **Sales  and**              | ** ** | ** ** | ** ** | **Sales  and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** ** | **Contract**                | ** ** | ** ** | ** ** | **Contract**   | ** ** | ** ** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **Amount**                             | ** ** | **Revenues**                | ** ** | **Amount** | ** ** | **Revenues**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(In thousands, except percentages)** | ** ** |
| Salary  and personnel-related        |       | $                                      | 8,518      |                        | 19.8       | %          | $          | 9,245          |       | 17.5 | % | $ | (727 | ) | (7.9 | )% |
| Facilities,  insurance and supplies  |       | 1,708                                  |       | 4.0                         |       | 1,846      |       | 3.5            |       | (138 | ) | (7.5 | ) |
| Travel  and conferences              |       | 1,042                                  |       | 2.4                         |       | 1,210      |       | 2.3            |       | (168 | ) | (13.9 | ) |
| Professional  and outside services   |       | 794                                    |       | 1.8                         |       | 1,130      |       | 2.1            |       | (336 | ) | (29.7 | ) |
| Other                                |       | 633                                    |       | 1.5                         |       | 762        |       | 1.4            |       | (129 | ) | (16.9 | ) |
| Selling,  general and administrative |       | $                                      | 12,695     |                        | 29.5       | %          | $          | 14,193         |       | 26.8 | % | $ | (1,498 | ) | (10.6 | ) |

 

The decreases in selling,general and administrative expense for the three and nine months ended December 31,2009 compared to the corresponding periods in the prior year were primarily dueto (i) our overall reduction in headcount from December 31, 2008levels; (ii) lower accruals for bonuses and other incentive compensationprimarily due to lower sales in the current periods; and (iii) thesuspension of our matching contributions under our 401(k) plan effective July 1,2009. During the current fiscal year, we also reduced our professional andoutside services expenses primarily as a result of our efforts to conservecosts and scale back our usage of these services, along with variousefficiencies gained in our internal control assessment and other financialreporting obligations.

 

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*Researchand Development Expense*.  The following tables present researchand development expense for the three and nine months ended December 31,2009 and 2008:

 
| ** **                            | ** ** | **Three  Months Ended**                | ** ** | **Three  Months Ended**     | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|-----------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **December 31,  2009**            | ** ** | **December 31,  2008** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                            | ** ** | ** **                             | ** ** | **%  of Net**               | ** ** | ** ** | ** ** | **%  of Net**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                             | ** ** | **Sales  and**              | ** ** | ** ** | ** ** | **Sales  and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                             | ** ** | **Contract**                | ** ** | ** ** | ** ** | **Contract**   | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **Amount**                             | ** ** | **Revenues**                | ** ** | **Amount** | ** ** | **Revenues**   | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | **(In thousands, except percentages)** | ** ** |
| Salary  and personnel-related         |       | $                                      | 613        |                        | 4.5        | %          | $          | 577            |       | 3.5 | % | $ | 36 |   | 6.2 | % |
| Facilities,  development and supplies |       | 245                                    |       | 1.8                         |       | 217        |       | 1.3            |       | 28 |   | 12.9 |   |
| Other                                 |       | 32                                     |       | 0.2                         |       | 54         |       | 0.3            |       | (22 | ) | (40.7 | ) |
| Research  and development             |       | $                                      | 890        |                        | 6.6        | %          | $          | 848            |       | 5.2 | % | $ | 42 |   | 5.0 |   |

 
| ** **                            | ** ** | **Nine  Months Ended**                 | ** ** | **Nine  Months Ended**      | ** ** | ** ** | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|-----------------------------|------------|------------|------------|----------------|------------|
| ** **                            | ** ** | **December 31,  2009**            | ** ** | **December 31,  2008** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                            | ** ** | ** **                             | ** ** | **%  of Net**               | ** ** | ** ** | ** ** | **%  of Net**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                             | ** ** | **Sales  and**              | ** ** | ** ** | ** ** | **Sales  and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | ** **                             | ** ** | **Contract**                | ** ** | ** ** | ** ** | **Contract**   | ** ** | ** ** | ** ** | **%** | ** ** |
| ** **                            | ** ** | **Amount**                             | ** ** | **Revenues**                | ** ** | **Amount** | ** ** | **Revenues**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | **(In thousands, except percentages)** | ** ** |
| Salary  and personnel-related         |       | $                                      | 1,957      |                        | 4.5        | %          | $          | 2,207          |       | 4.2 | % | $ | (250 | ) | (11.3 | )% |
| Facilities,  development and supplies |       | 676                                    |       | 1.6                         |       | 782        |       | 1.5            |       | (106 | ) | (13.6 | ) |
| Other                                 |       | 105                                    |       | 0.2                         |       | 191        |       | 0.4            |       | (86 | ) | (45.0 | ) |
| Research  and development             |       | $                                      | 2,738      |                        | 6.4        | %          | $          | 3,180          |       | 6.0 | % | $ | (442 | ) | (13.9 | ) |

 

During the three monthsended December 31, 2009, we saw a slight increase in personnel-relatedresearch and development expenses as compared to the same period in the priorfiscal year as we have dedicated additional resources to certain research anddevelopment activities within Vehicle Sensors. The overall decrease in researchand development expense for the nine months ended December 31, 2009compared to the corresponding period in the prior year is primarily due tolower overall engineering headcount and a shift in engineering resources to anorganization more focused on new product development from one that has beenhistorically focused on new customer qualification and manufacturing support.We believe this structure to be more efficient. We believe that research anddevelopment activities are crucial to our ability to continue to be a leader inour markets. We currently expect our total research and developmentexpenditures for fiscal 2010 will be slightly lower to flat when compared to fiscal2009.

 

For competitive reasons, weclosely guard the confidentiality of specific development projects.

 

*Interest Expense, Net.*   Net interest expense of $58,000 and $215,000for the three and nine months ended December 31, 2009, respectively, waslower than the $141,000 and $537,000 for the three and nine months ended December 31,2008, respectively, primarily due to the overall lower level of borrowings inthe current fiscal year, as well as lower interest rates on our term note.

 

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*Income**Taxes*.  The following tables present our benefit (provision) for incometaxes for the three and nine months ended December 31, 2009 and 2008:

 
| ** **                            | ** ** | **Three  Months Ended**                | ** ** | ** ** | ** ** | ** **   | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                            | ** ** | **December 31,**                  | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                            | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | **(In thousands, except percentages)** | ** ** |
| Benefit  (provision) for income taxes |       | $                                      | 48         |       | $          | (415         | )          | $ | 463 |   | (112 | )% |
| Effective  tax rate                   |       | (7.3                                   | )%         | 35.9       | %          |         |       |   |   |
|                                       |            |                                        |            |            |            |              |            |  |  |  |  |  |

 
| ** **                            | ** ** | **Nine  Months Ended**                 | ** ** | ** ** | ** ** | ** **   | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                            | ** ** | **December 31,**                  | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                            | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | **(In thousands, except percentages)** | ** ** |
| Benefit  (provision) for income taxes |       | $                                      | (563       | )          | $          | (1,727       | )          | $ | 1,164 |   | (67 | )% |
| Effective  tax rate                   |       | 28.7                                   | %          | 41.1       | %          |         |       |   |   |
|                                       |            |                                        |            |            |            |              |            |  |  |  |  |  |

 

Our effective tax rates forthe three and nine months ended December 31, 2009 were favorably impactedby the recognition of approximately $320,000 of unrecognized tax benefitsduring the three months ended December 31, 2009 due to the expiration ofcertain federal and state statutes in various jurisdictions. On an interimbasis, we estimate what our anticipated annual effective tax rate will be,while also separately considering applicable discrete and other non-recurringitems, and record a quarterly income tax provision in accordance with theanticipated annual rate. As the fiscal year progresses, we refine our estimatesbased on actual events and financial results during the year. This process canresult in significant changes to our expected effective tax rate. When thisoccurs, we adjust our income tax provision during the quarter in which ourestimates are refined so that the year-to-date provision reflects the expectedannual effective tax rate. These changes, along with adjustments to ourdeferred taxes, among others, may create fluctuations in our overall effectivetax rate from quarter to quarter.

 

**Liquidity and Capital Resources**

 

*Cash Flows*

 

We have historicallyfinanced our operations with a combination of cash flows from operations,borrowings under credit facilities and the sale of equity securities. Wecurrently rely on cash flows from operations and the availability of borrowingson a line of credit facility to fund our operations, which we believe aresufficient to fund our operations for at least the next twelve months. At December 31,2009, we had $20.3 million in working capital, which included no borrowings onour $12.0 million line of credit and $9.4 million in cash and cash equivalents.Our working capital at March 31, 2009 was $20.6 million and included noborrowings on our line of credit and $6.4 million in cash and cash equivalents.

 

The following tablesummarizes our cash flows for the nine months ended December 31, 2009 and2008:

 
| ** **                          | ** ** | **Nine  Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **December 31,**  | ** ** |
| ** **                          | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                          | ** ** | **(In thousands)**     | ** ** |
| **Net cash provided by (used in):** |       |                   |       |   |   |
| Operating  activities               |       | $                      | 4,912      |   | $ | 6,030 |   |
| Investing  activities               |       | (480                   | )          | (716 | ) |
| Financing  activities               |       | (1,453                 | )          | 240 |   |
|                                     |            |                        |            |  |  |  |  |

 

*Operating Activities. *Cash provided by ouroperations for the nine months ended December 31, 2009 was primarily theresult of (i) our net income of $1.4 million during the current period; (ii) $1.7million in non-cash items within the statement of operations, primarilyadjustments to our deferred tax assets and depreciation expense; and (iii) $1.8million in cash resulting from changes in our operating assets and liabilitiesduring the period. Additionally, our total cash and cash equivalents balance of$9.4 million at December 31, 2009 was negatively affected by approximately$1.0 million in disbursements for payroll and facilities rents that we madenear the end of December 2009 due to holiday timing conflicts. Thesepayments were originally scheduled to be made, and would have otherwise beendisbursed, in January 2010. Cash provided by operating activities during thenine months ended December 31, 2008 was primarily the result of our netincome during that period of $2.5 million and $3.1 million in non-cash itemswithin the statement of operations, primarily adjustments to our deferred taxassets and depreciation expense.

 

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Our net accounts receivabledecreased approximately $2.4 million from March 31, 2009 to December 31,2009 due in part to our lower overall net sales and contract revenues in fiscal2010 as compared to fiscal 2009 levels. During the current fiscal year, we havealso been successful in collecting our outstanding receivables within ourexpected payment terms. In the future, our accounts receivable could increaseif, among other factors, customers delay their payments or if we grant extendedpayment terms to customers, both of which are more likely to occur duringchallenging economic times when our customers may face issues gainingsufficient credit on a timely basis or on acceptable terms.

 

Inventories decreasedapproximately $2.5 million from March 31, 2009 to December 31, 2009as we worked through higher inventory levels on-hand as of March 31, 2009,which were partially due to the introduction of new Roadway Sensors productsand the acquisition of various components that were discontinued by themanufacturer. During the current fiscal year, we have also focused on reducingour inventory purchases to reflect the overall reduction in our net sales andthe ongoing economic slowdown. In the future, our inventory levels are likelyto continue to be determined based upon, among other factors, the level ofpurchase orders we receive from our customers, the stage at which our productsare in their respective product life cycles, and competitive situations in themarketplace. We attempt to balance such considerations against risk ofobsolescence or potentially excess inventory levels.

 

*Investing Activities. *Our investing activities forthe nine months ended December 31, 2009 consisted of purchases of propertyand equipment of $180,000, as well as $300,000 used for the acquisition ofHamilton Signal. Cash used in investing activities for the nine months ended December 31,2008 consisted entirely of purchases of property and equipment of $716,000.

 

*Financing Activities. *Net cash used in financingactivities during the nine months ended December 31, 2009 was the resultof net payments on our long-term debt of $1.5 million, which included anadditional lump-sum principal payment of $500,000 made in November 2009.The net payments on our long-term debt were partially offset during the periodby $90,000 in proceeds received from the exercise of outstanding stock optionsto purchase shares of our common stock. During the nine months ended December 31,2008, cash provided by financing activities was primarily the result of$911,000 in proceeds from the exercise of outstanding stock options to purchaseshares of our common stock, partially offset by net payments on our long-termdebt of $671,000.

 

*Borrowings*

 

In October 2008, we entered into a $19.5 millioncredit facility with California Bank & Trust, which provides for atwo-year revolving line of credit with borrowings of up to $12.0 million and a$7.5 million 48-month term note (discussed below). Interest on borrowed amountsunder the revolving line of credit are payable monthly at a rate equal to thecurrent stated prime rate (3.25% at December 31, 2009) up to the currentstated prime rate plus 0.50%, depending on aggregate deposit balancesmaintained at the bank in relation to the total loan commitment under thecredit facility. We are obligated to pay an unused line fee of 0.25% per annumapplied to the average unused portion of the revolving line of credit duringthe preceding month. The revolving line of credit does not contain any earlytermination fees and is secured by substantially all of our assets. As of December 31,2009, no amounts were outstanding under the revolving line of credit portion ofthe facility.

 

As of December 31, 2009, we had outstandingborrowings of approximately $5.8 million under the term note. Principalpayments under this term note are required to be repaid in 48 monthlyinstallments of $152,000 commencing on June 1, 2009. Additionally,beginning on November 1, 2009, and on November 1 of each yearthereafter, we are required to repay additional principal of up to $500,000,calculated based on certain financial measures, as further defined in the agreement.These additional principal payments effectively reduce the total number ofmonthly installments necessary to repay the term note. Interest on the termnote is payable monthly at a rate equal to the current stated prime rate plus0.50% up to the current stated prime rate plus 1.00% (3.75% to 4.25% at December 31,2009), depending on aggregate deposit balances maintained at the bank inrelation to the total loan commitment under the credit facility. The term notecontains no early termination fees and, along with our revolving line of creditdiscussed above, is secured by substantially all of our assets.

 

In connection with our credit facility and loanagreement with California Bank & Trust, we are also required to complywith certain quarterly financial covenants. These include achieving ratios forworking capital and debt service, as well as maintaining a level ofprofitability, all of which are further defined in the agreement. While webelieve we are currently in compliance with all such financial covenants andexpect to maintain compliance for the foreseeable future, we cannot assure thatwe will not violate one or more covenants in the future. If we were to be inviolation of covenants under this agreement, our lender could choose toaccelerate payment on all outstanding loan balances and pursue its securityinterest in our assets. In this event, we cannot assure you that we would beable to quickly obtain equivalent or suitable replacement financing onacceptable terms, or at all. If we were not able to secure alternative sourcesof financing, such acceleration would have a material adverse impact on ourbusiness and financial condition.

 

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**OffBalance Sheet Arrangements**

 

At December 31, 2009, we had outstanding warrantsto purchase an aggregate of 246,250 shares of our common stock at anexercise price of $3.25 per share that are callable by us if the market priceof our common stock trades for 20 consecutive days at a price equal to orgreater than $6.50 per share. We also had outstanding warrants to purchase anaggregate of 75,000 shares of our common stock at an exercise price of$5.00 per share that are callable by us if the market price of our common stocktrades for 20 consecutive days at a price equal to or greater than $7.50 pershare.

 

In connection with theissuance of warrants to purchase 246,250 shares of our common stock at $3.25per share (discussed above), we are a party to a registration rights agreementthat contains provisions under which we could be subjected to liquidateddamages should we fail to maintain effective registration statements for theshares of common stock issuable upon exercise of certain underlying warrants.Through March 31, 2009, these warrants were accounted for within equity inour consolidated balance sheets and, accordingly, no liabilities were recordedin connection therewith. Beginning April 1, 2009, as further discussed atNote 7 of Notes to Unaudited Condensed Consolidated Financial Statementsincluded in Part I, Item 1 of this report, because these warrants containa provision for possible future adjustments to either the exercise price and/ornumber of shares to be issued upon exercise, we began recognizing thesewarrants as liabilities in our consolidated balance sheet. As of the date ofthis filing, no liquidated damages are payable under the provisions of theregistration rights agreement associated with these warrants.

 

**Seasonality**

 

We have historicallyexperienced, and expect to continue to experience seasonality, particularlywith respect to our Roadway Sensors net sales in the third and fourth fiscalquarters due to a reduction in road construction or repairs during the wintermonths in many markets as a result of inclement weather conditions.

 

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Ourexposure to interest rate risk is limited to our line of credit and our bankterm note. Our line of credit bears interest equal to the prevailing prime rate(3.25% at December 31, 2009) plus 0% to 1.0%. We do not believe that a 10%increase in the interest rate on our line of credit or term note would have amaterial impact on our financial position, operating results or cash flows. Inaddition, we believe that the carrying value of our outstanding debt under ourcredit facility approximates fair value.

 

**ITEM 4T.  CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end of the period covered by this report, wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and our Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and15d-15(e). Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures are effectiveto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission’s rules and forms and are effective in ensuring thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, our managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives. Our management necessarily applied its judgment inevaluating the cost-benefit relationship of such controls and procedures.

 

**Changesin Internal Controls**

 

During the fiscalquarter covered by this report, there has been no change in our internalcontrols over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended) that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrols over financial reporting.

 

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**InherentLimitations on Internal Control**

 

Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Further, the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of management override or improper acts, if any, have beendetected. These inherent limitations include the realities that judgments indecision making can be faulty, and that breakdowns can occur because of simpleerrors. Additionally, controls can be circumvented by the individual acts ofsome 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 uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions. Because of the inherent limitations in acost-effective control system, misstatements due to management override, erroror improper acts may occur and not be detected. Any resulting misstatement orloss may have an adverse and material effect on our business, financialcondition and results of operations.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

The information set forthunder the heading “Litigation and Other Contingencies” in Note 6 of Notes toUnaudited Condensed Consolidated Financial Statements, included in Part I,Item I of this report, is incorporated herein by reference.

 

**ITEM 1A.  RISK FACTORS**

 

*Ourbusiness is subject to a number of risks, some of which are discussed below.Other risks are presented elsewhere in this report and in the informationincorporated by reference into this report. You should consider the followingrisks carefully in addition to the other information contained in this reportand our other filings with the SEC, including our annual report on Form 10-Kand subsequent reports on Forms 10-Q and 8-K, before deciding to buy, sell, orhold our common stock. The risks and uncertainties described below are not theonly ones facing our company. Additional risks and uncertainties not presentlyknown to us or that we currently deem immaterial may also affect our businessoperations. If any of these risks actually occurs, our business, financialcondition, or results of operations could be seriously harmed. In that event,the market price for our common stock could decline and you may lose all orpart of your investment.*

 

**The economic slowdown has adversely impacted real estate development,reduced and delayed government funding for transportation infrastructureprojects and initiatives and decreased availability of financial capital forour customers, all of which is adversely impacting our net sales and couldimpact our contract****revenues.******Decreased consumer spending,the failure of certain financial institutions and businesses, concerns aboutthe availability and cost of credit, and reduced corporate profits and capitalspending have resulted in a downturn in worldwide economic conditions, as wellas budgetary shortfalls increasingly present at all levels of government. Theseunfavorable economic conditions are having a negative impact on customer ordersand government funding of infrastructure projects incorporating our productsand services. Such factors have and may continue to result in cancellations andrescheduling of backlog and customer orders. In addition, the recent decline inthe U.S. real estate market, particularly in new home and commercialconstruction, has adversely impacted new road construction and is resulting inand may continue to result in flat or declining Roadway Sensor and Vehicle Sensornet sales in future periods and have also adversely impacted TransportationSystems contract revenues. Any of the foregoing economic conditions make itextremely difficult for our customers, our suppliers and us to accuratelyforecast and plan future business activities. Additionally, there continues tobe uncertainties regarding the impact of the federal stimulus package and thefact that the accessibility of funds appears to be taking longer thanoriginally anticipated. If such conditions continue or worsen, our business,financial condition and results of operations could be materially and adverselyaffected.

 

**Because we depend on government contracts and subcontracts, we faceadditional risks related to contracting with federal, state and local governments,including budgetary issues and fixed price contracts.**A significantportion of our sales are derived from contracts with governmental agencies,either as a general contractor, subcontractor or supplier. Government contractsrepresented approximately 45%, 38% and 38% of our total net sales and contractrevenues for the fiscal years ended March 31, 2009, 2008 and 2007,respectively. We anticipate that revenue from government contracts willcontinue to remain a significant portion of our net sales and contractrevenues. Government business is, in general, subject to special risks andchallenges, including:

 

·                                          delays in funding, includingdelays in the allocation of funds to state and local agencies from the U.S.federal government as a result of the expiration of the 2005 Federal HighwayBill on October 31, 2009, as well as delays or reductions in stimulusfunds dedicated for transportation projects;

 

·                                          long purchase cycles orapproval processes;

 

·                                          competitive bidding andqualification requirements;

 

·                                          the impact of internationalconflicts;

 

·                                          performance bondrequirements;

 

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·                                          changes in governmentpolicies and political agendas;

 

·                                          other government budgetaryconstraints, cut-backs, delays or reallocation of government funding;

 

·                                          milestone requirements andliquidated damage provisions for failure to meet contract milestones; and

 

·                                          international conflicts orother military operations that could cause the temporary or permanent diversionof government funding from transportation or other infrastructure projects.

 

Governmental budgets and plans are subject to changewithout warning. Certain risks of selling to governmental entities includedependence on appropriations and administrative allocation of funds, changes ingovernmental procurement legislation and regulations and other policies thatmay reflect political developments or agendas, significant changes in contractscheduling, intense competition for government business and termination ofpurchase decisions for the convenience of the governmental entity. Substantialdelays in purchase decisions by governmental entities, and the currentconstraints on government budgets at the federal, state and local level, couldcause our net sales and contract revenues and income to drop substantially orto fluctuate significantly between fiscal periods.

 

Inaddition, a large 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 basedon preliminary projections of the project’s requirements. The financialviability of any given project depends in large part on our ability to estimatethese costs accurately and complete the project on a timely basis. In the eventour costs on these projects exceed the fixed contractual amount, we will berequired to bear the excess costs. Such additional costs would adversely affectour financial condition and results of operations. Moreover, certain of ourgovernment contracts are subject to termination or renegotiation at theconvenience of the government, which could result in a large decline in our netsales and contract revenues in any given quarter. Our inability to address anyof the foregoing concerns or the loss or renegotiation of any materialgovernment contract could seriously harm our business, financial condition andresults of operations.

 

**California state budgetary constraints may have a material adverseimpact on us.**The state of California has experienced, and iscontinuing to experience, a significant budget shortfall and other relatedbudgetary issues and constraints. The state of California has historically beenand is considered to be a key geographic region for our Roadway Sensors andTransportation Systems segments. Ongoing uncertainty as to the timing andaccessibility of federal stimulus monies to the state, changes in state fundingallocations to local agencies and municipalities, or other delays in purchasingfor, or commencement of, transportation projects has and may continue to have anegative impact on our net sales and contract revenues and our income.

 

**Themarkets in which we operate are highly competitive and have many moreestablished competitors, which could adversely affect our sales or the marketacceptance of our products.**We compete with numerous other companies in our targetmarkets including, but not limited to, large, multinational corporations, whichinclude tier-one automotive suppliers, and many smaller regional engineeringfirms. We believe that as a result of the expected 2013 European mandate forLDW and other active safety systems, and an overall awareness of the potentialbenefits of LDW, that we will experience an even higher degree of competitionfrom a variety of tier-one OEM suppliers and other potential market entrants,worldwide. We also expect such competition to increase due to technological advancements,industry consolidations and reduced barriers to entry. Increased competition islikely to result in loss of market share, price reductions and reduced grossmargins, any of which could seriously harm our business, financial conditionand results of operations. For example, a developer of LDW systems was acquiredby a large multinational organization during fiscal 2009. This new competitorhas increased its market share and could be more aggressive in both thepassenger car and heavy truck markets as a result of its greater access toresources and reputation in the market. Furthermore, awareness of LDWtechnology is increasing and other market players have developed competingtechnologies, which may contain improvements or added features beyond thoseoffered by our LDW systems. Additionally, from time to time, we may be requiredto re-compete for LDW business from our main customer base of heavy truck OEMs. TheseOEMs could make a supplier change based on price, product performance oravailable features. Should our competition be successful, this could adverselyaffect our ability to successfully market and sell our LDW systems to new andexisting customers.

 

We compete withexisting, well-established companies in our Roadway Sensors segment, bothdomestically and abroad. Certain technological barriers to entry make itdifficult for new competitors to enter the market with competing video or othertechnologies; however, we are aware of new market entrants from time to time.Increased competition could result in loss of market share, price reductionsand reduced gross margins, any of which could seriously harm our business,financial condition and results of operations.

 

Many of our competitorshave far greater name recognition and greater financial, technological,marketing, and customer service resources than we do. This may allow them torespond more quickly to new or emerging technologies and changes in customerrequirements. It may also allow them to devote greater resources to thedevelopment, promotion, sale and support of their products than we can. Recentconsolidations of end users, distributors and manufacturers in our targetmarkets have exacerbated this problem. 

 

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As a result of theforegoing factors, we may not be able to compete effectively in our targetmarkets and competitive pressures could adversely affect our business,financial condition and results of operations.

 

**We may engage in acquisitions of companies or technologies thatmay require us to undertake significant capital infusions and could resultin disruptions of our business and diversion of resources and managementattention.**We have in the past acquired, and may in the futureacquire, complementary businesses, products, and technologies. Acquisitions mayrequire significant capital infusions and, in general, acquisitions alsoinvolve a number of special risks, including:

 

·                                          potential disruption of ourongoing business and the diversion of our resources and management’s attention;

 

·                                          the failure to retain orintegrate key acquired personnel;

 

·                                          the challenge ofassimilating diverse business cultures, and the difficulties in integrating theoperations, technologies and information system of the acquired companies;

 

·                                          increased costs to improvemanagerial, operational, financial and administrative systems and to eliminateduplicative services;

 

·                                          the incurrence of unforeseenobligations or liabilities;

 

·                                          potential impairment ofrelationships with employees or customers as a result of changes in management;and

 

·                                          increased interest expenseand amortization of acquired intangible assets.

 

Ourcompetitors are also soliciting potential acquisition candidates, which couldboth increase the price of any acquisition targets and decrease the number ofattractive companies available for acquisition. Acquisitions may alsomaterially and adversely affect our operating results due to large write-offs,contingent liabilities, substantial depreciation, deferred compensation chargesor intangible asset amortization, or other adverse tax or accountingconsequences. We cannot assure you that we will be able to identify orconsummate any additional acquisitions, successfully integrate any acquisitionsor realize the benefits anticipated from any acquisition.

 

**We may experience production gaps that could materially andadversely impact our sales and financial results and the ultimate acceptance ofour products.**It is possible that we could experience unforeseenquality control issues or part shortages as we adjust production to meetcurrent demand for our products. We have historically used single suppliers forcertain significant components in our products. Should any such delay ordisruption occur, or should a key supplier discontinue operations because ofthe current economic climate, our future sales will likely be materially andadversely affected. Additionally, we rely heavily on select contractmanufacturers to produce many of our products and do not have any long-termcontracts to guarantee supply of such products. Although we believe ourcontract manufacturers have sufficient capacity to meet our productionschedules for the foreseeable future and we believe we could find alternativecontract manufacturing sources for many of our products, if necessary, we couldexperience a production gap if for any reason our contract manufacturers wereunable to meet our production requirements and our cost of goods sold couldincrease, adversely affecting our margins.

 

**We may be unable to attract and retain key personnel, which couldseriously harm our business.**Due to the specializednature of our business, we are highly dependent on the continued service of ourexecutive officers and other key management, engineering and technicalpersonnel. The loss of Abbas Mohaddes, our Chief Executive Officer, or any ofthe other executive officers or key members of management could adverselyaffect our business, financial condition, or results of operations. Our successwill also depend in large part upon our ability to continue to attract, retainand motivate qualified engineering and other highly skilled technicalpersonnel. In particular, the future success of our Transportation Systemssegment will depend on our ability to hire additional qualified engineers andplanners. Competition for qualified employees, particularly developmentengineers, is intense. We may not be able to continue to attract and retainsufficient numbers of such highly skilled employees. Our inability to attractand retain additional key employees or the loss of one or more of our currentkey employees could adversely affect our business, financial condition andresults of operations.

 

**If we are unable to develop and introduce new products and productenhancements successfully and in a cost-effective and timely manner, or areunable to achieve market acceptance of our new products, our operating resultswould be adversely affected.**We believe our revenuegrowth and future operating results will depend on our ability to completedevelopment of new products and enhancements, introduce these products in atimely, cost-effective manner, achieve broad market acceptance of theseproducts and enhancements, and reduce our production costs. We cannot guaranteethe success of these products, and we may not be able to introduce any newproducts or any enhancements to our existing products on a timely basis, or atall. In addition, the introduction of any new products could adversely affectthe sales of certain of our existing products.

 

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Webelieve that we must continue to make substantial investments to supportongoing research and development in order to remain competitive. We need tocontinue to develop and introduce new products that incorporate the latesttechnological advancements in outdoor image processing hardware, software andcamera technologies in response to evolving customer requirements. We cannotassure you that we will be able to adequately manage product transition issues.Our business and results of operations could be adversely affected if we do notanticipate or respond adequately to technological developments or changingcustomer requirements or if we cannot adequately manage inventory issuestypically related to new product transitions and introductions. We cannotassure you that any such investments in research and development will lead toany corresponding increase in revenue.

 

Marketacceptance of our new products depends upon many factors, including our abilityto accurately predict market requirements and evolving industry standards, ourability to resolve technical challenges in a timely and cost-effective manner,qualify any new products with OEMs and achieve manufacturing efficiencies, theperceived advantages of our new products over traditional products and themarketing capabilities of our independent distributors and strategic partners,including Valeo’s ability to expand sales of LDW systems in the passenger carmarket. The success of our LDW system will also depend in part on the successof the automotive vehicles that incorporate our technology, as well as thesuccess of optional equipment that OEMs bundle with our technologies.

 

Certainof the components used in our products may need to be re-engineered in the next12 to 36 months as the industry is moving towards a standard of using lead-freecomponents. We cannot assure you as to our ability to successfully redesign ourproducts to incorporate compliant components and gain market acceptance of suchredesigned products. In addition, we may experience a shortage of products as aresult of potential scarcity of lead-free components.

 

Ourbusiness and results of operations could also be seriously harmed by anysignificant delays in our new product development. Certain of our new productscould contain undetected design faults and software errors or “bugs” when firstreleased by us, despite our testing. We may not discover these faults or errorsuntil after a product has been installed and used by our customers. Any faultsor errors in our existing products or in any new products may cause delays inproduct introduction and shipments, require design modifications or harmcustomer relationships, any of which could adversely affect our business andcompetitive position.

 

**New environmental regulations may result in adecline in our Vehicle Sensors net sales.**Fromtime to time, environmental regulations are enacted, which can significantlyincrease the cost of manufacturing new vehicles as well as the cost ofmaintaining existing vehicles and truck fleets. As a result, we couldexperience a decline in sales of our Vehicle Sensors products as truck andvehicle manufacturers and fleet operators attempt to control their costs.

 

**We depend upon Valeo to market our LDW technologies for the OEMpassenger car market.**We have granted Valeo the exclusive right tosell and manufacture our LDW system to the worldwide passenger car market inexchange for royalty payments for each LDW unit sold. As such, the futuresuccess and broad market acceptance of our technologies in the passenger carmarket will depend upon Valeo’s ability to manufacture, market and sell ourtechnologies, and to convince more OEM passenger car manufacturers to adopt ourtechnologies. To date, we have not generated significant royalties from Valeo’sefforts and have only been designed into one car OEM product line. If Valeodoes not devote considerable resources and aggressively pursue opportunities,our expansion into the passenger car market, and our related revenues fromcontract engineering services and royalty revenues could be adversely affectedor not materialize as originally anticipated.

 

**If we do not keep pace with rapid technological changes and evolvingindustry standards, we will not be able to remain competitive and there will beno demand for our products.**Our markets are in generalcharacterized by the following factors:

 

·                                          rapid technologicaladvances;

 

·                                          downward price pressure inthe marketplace as technologies mature;

 

·                                          changes in customerrequirements;

 

·                                          additional qualificationrequirements related to new products or components;

 

·                                          frequent new productintroductions and enhancements;

 

·                                          inventory issues related totransition to new or enhanced models; and

 

·                                          evolving industry standardsand changes in the regulatory environment.

 

Ourfuture success will depend upon our ability to anticipate and adapt to changesin technology and industry standards, and to effectively develop, introduce,market and gain broad acceptance of new products and product enhancementsincorporating the latest technological advancements. In particular, our LDWsystems are incorporated into automobiles and trucks that face significanttechnological changes in each model year and among different vehicle models.Accordingly, we must adapt our technology from time to time to function withsuch changes.

 

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**Our international business operations may be threatened by manyfactors that are outside of our control.**We currently market ourproducts internationally and we anticipate that our international operationsmay expand in the near future. International business operations are subject tovarious inherent risks including, among others:

 

·                                          currency fluctuations andrestrictions;

 

·                                          political, social andeconomic instability;

 

·                                          longer accounts receivablepayment cycles;

 

·                                          import and export licenserequirements and restrictions of the United States and each other country inwhich we operate;

 

·                                          unexpected changes inregulatory requirements, tariffs and other trade barriers or restrictions;

 

·                                          the burdens of compliancewith a wide variety of foreign laws and more restrictive labor laws andobligations;

 

·                                          difficulties in managing andstaffing international operations;

 

·                                          potentially adverse taxconsequences; and

 

·                                          reduced protection forintellectual property rights in some countries.

 

Allof our international sales are denominated in U.S. dollars. As a result, anincrease in the relative value of the dollar could make our products moreexpensive and potentially less price competitive in international markets. Wedo not engage in any transactions as a hedge against risks of loss due toforeign currency fluctuations.

 

Anyof the factors mentioned above may adversely affect our future internationalsales and, consequently, affect our business, financial condition and operatingresults. Furthermore, as we increase our international sales, our totalrevenues may also be affected to a greater extent by seasonal fluctuationsresulting from lower sales that typically occur during the summer months inEurope and other parts of the world.

 

**If our internal controls overfinancial reporting do not comply with the requirements of the Sarbanes-OxleyAct, our business and stock price could be adversely affected.**Section 404of the Sarbanes-Oxley Act of 2002 currently requires us to evaluate theeffectiveness of our internal controls over financial reporting at the end ofeach fiscal year and to include a management report assessing the effectivenessof our internal controls over financial reporting in all annual reports.Currently, we expect that beginning in our fiscal year ending March 31,2011, our independent registered public accounting firm will also be requiredto attest to, and report on, the effectiveness of our internal controls overfinancial reporting. We may not be able to complete the work required for suchattestation on a timely basis, and even if we timely complete suchrequirements, our independent registered public accounting firm may stillconclude that our internal controls over financial reporting are not effective.

 

Ourmanagement, including our CEO and CFO, does not expect that our internalcontrols over financial reporting will prevent all errors and all fraud. Acontrol system, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance that the control system’s objectives willbe met. Further, the design of a control system must reflect the fact that thereare resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within Iteris have been or willbe detected. These inherent limitations include the realities that judgments indecision-making can be faulty and that breakdowns can occur because of simpleerrors or mistakes. Controls can also be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe controls. The design of any system of controls is based in part on certainassumptions about the likelihood of future events, and we cannot assure youthat any design will succeed in achieving its stated goals under all potentialfuture conditions. Over time, our controls may become inadequate because ofchanges in conditions or deterioration in the degree of compliance withpolicies or procedures. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

 

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**We may need to raise additional capital in the future, whichmay not be available on terms acceptable to us, or at all. **Until recently, we havehistorically generated significant net losses and operating losses, and haveexperienced volatility in our cash flows from operations from year to year.Although we entered into a $19.5 million credit facility, effective October 2008,should we have an event of default, which includes, among other things, afailure to meet certain financial covenants and a material adverse change inthe business, the bank could choose to limit or take away our ability to borrowthese or any funds. Should this occur, or if the credit markets furthertighten, we may need or choose to raise additional capital to pursueacquisitions or to expand our operations.

 

At December 31, 2009, we had $9.4 million of cashand cash equivalents and the availability of borrowing against our $12.0million line of credit to fund our operations. We may need to raise additionalcapital in the near future to fund our operations or to repay indebtedness.Such additional capital may be raised through bank borrowings, or other debt orequity financings. We cannot assure you that any additional capital will beavailable on a timely basis, on acceptable terms, or at all, and suchadditional financing may result in further dilution to our stockholders.

 

Ourcapital requirements will depend on many factors, including, but not limitedto:

 

·                                          market acceptance of ourproducts and product enhancements, and the overall level of sales of ourproducts;

 

·                                          our ability to controlcosts;

 

·                                          the supply of key componentsfor our products;

 

·                                          our ability to increaserevenue and net income;

 

·                                          increased research anddevelopment expenses and sales and marketing expenses;

 

·                                          our need to respond totechnological advancements and our competitors’ introductions of new productsor technologies;

 

·                                          capital improvements to newand existing facilities and enhancements to our infrastructure and systems;

 

·                                          potential acquisitions ofbusinesses and product lines;

 

·                                          our relationships withcustomers and suppliers;

 

·                                          government budgets,political agendas and other funding issues, including potential delays ingovernment contract awards;

 

·                                          our ability to successfullynegotiate credit arrangements with our bank; and

 

·                                          general economic conditions,including the effects of the current economic slowdown and internationalconflicts.

 

Ifour capital requirements are materially different from those currently planned,we may need additional capital sooner than anticipated. If additional funds areraised through the issuance of equity or convertible debt securities, thepercentage ownership of our stockholders will be reduced and such securitiesmay have rights, preferences and privileges senior to our common stock.Additional financing may not be available on favorable terms, on a timelybasis, or at all. If adequate funds are not available or are not available onacceptable terms, we may be unable to continue our operations as planned,develop or enhance our products, expand our sales and marketing programs, takeadvantage of future opportunities or respond to competitive pressures.

 

**Our quarterly operating results fluctuate as a result of many factors.Therefore, we may fail to meet or exceed the expectations of securitiesanalysts and investors, which could cause our stock price to decline.**Our quarterlyrevenues and operating results have fluctuated and are likely to continue tovary from quarter to quarter due to a number of factors, many of which are notwithin our control. Factors that could affect our revenues include, amongothers, the following:

 

·                                          delays in governmentcontracts and funding from time to time and budgetary constraints at thefederal, state and local levels, including stimulus and other funding;

 

·                                          declines in new home andcommercial real estate construction and related road and other infrastructureconstruction;

 

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·                                          changes in ourpricing policies and the pricing policies of our suppliers and competitors,pricing concessions on volume sales, as well as increased price competition ingeneral;

 

·                                          the long leadtimes associated with government contracts or required by vehiclemanufacturers;

 

·                                          the size,timing, rescheduling or cancellation of significant customer orders;

 

·                                          our ability tocontrol costs;

 

·                                          our ability toraise additional capital;

 

·                                          the mix of ourproducts and services sold in a quarter, which mix has varied and is expectedto continue to vary from time to time;

 

·                                          seasonality dueto winter weather conditions;

 

·                                          our ability todevelop, introduce, patent, market and gain market acceptance of new products,applications and product enhancements in a timely manner, or at all;

 

·                                          marketacceptance of the products incorporating our technologies and products;

 

·                                          theintroduction of new products by competitors;

 

·                                          theavailability and cost of components used in the manufacture of our products;

 

·                                          our success inexpanding and implementing our sales and marketing programs;

 

·                                          the effects oftechnological changes in our target markets;

 

·                                          the amount ofour backlog at any given time;

 

·                                          the nature ofour government contracts;

 

·                                          deferrals ofcustomer orders in anticipation of new products, applications or productenhancements;

 

·                                          risks anduncertainties associated with our international business;

 

·                                          currencyfluctuations and our ability to get currency out of certain foreign countries;and

 

·                                          generaleconomic and political conditions; and

 

·                                          internationalconflicts and acts of terrorism.

 

Dueto all of the factors listed above as well as other unforeseen factors, ourfuture operating results could be below the expectations of securities analystsor investors. If that happens, the trading price of our common stock coulddecline. As a result of these quarterly variations, you should not rely on quarter-to-quartercomparisons of our operating results as an indication of our futureperformance.

 

**We have experienced a decline in ournet sales and contract revenues over the last several quarters. If we fail tomanage this decline effectively, we may be unable to execute our businessplan and may experience future weaknesses in our operating results.**We have expanded our overall business inthe past few years; however, we experienced a reduction in our net sales andcontract revenues over the last several quarters. Based on our businessobjectives, and in order to resume expanding, we will need to continue to addadditional qualified personnel, and invest in additional research anddevelopment and sales and marketing activities. Our past expansion has placed,and future expansion is expected to place, a significant strain on ourmanagerial, administrative, operational, financial and other resources. If weare unable manage these activities successfully, our growth, our business, ourfinancial condition and our results of operations could continue to beadversely affected.

 

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**We may not be able to adequately protect or enforce ourintellectual property rights, which could harm our competitive position.**If we are notable to adequately protect or enforce the proprietary aspects of ourtechnology, competitors could be able to access our proprietary technology andour business, financial condition and results of operations will likely beseriously harmed. We currently attempt to protect our technology through acombination of patent, copyright, trademark and trade secret laws, employee andthird party nondisclosure agreements and similar means. Despite our efforts,other parties may attempt to disclose, obtain or use our technologies orsystems. Our competitors may also be able to independently develop productsthat are substantially equivalent or superior to our products or design aroundour patents. In addition, the laws of some foreign countries do not protect ourproprietary rights as fully as do the laws of the United States. As a result,we may not be able to protect our proprietary rights adequately in the UnitedStates or abroad.

 

Litigation may be necessaryin the future to enforce our intellectual property rights or to determine thevalidity and scope of the proprietary rights of others. Litigation may also benecessary to defend against claims of infringement or invalidity by others. Anadverse outcome in litigation or any similar proceedings could subject us tosignificant liabilities to third parties, require us to license disputed rightsfrom others or require us to cease marketing or using 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 certain customers or strategic partners if it isdetermined that we have infringed upon or misappropriated another party’sintellectual property. Any of these results could adversely affect ourbusiness, financial condition and results of operations. In addition, the costof addressing any intellectual property litigation claim, including legal feesand expenses, and the diversion of management’s attention and resources,regardless of whether the claim is valid, could be significant and couldseriously harm our business, financial condition and results of operations.

 

**We have historically experiencedsubstantial losses and may experience losses in the future.**Although wehave achieved net income in our past four fiscal years, we experienced a netloss of $11.3 million in the year ended March 31, 2005 and significant netlosses in prior years. We cannot assure you that we will be able to sustain orimprove our financial performance, or that we will be able to continue toachieve profitability on a quarterly or annual basis in the future. Most of ourexpenses are fixed in advance. As such, we generally are unable to reduce ourexpenses significantly in the short-term to compensate for any unexpected delayor decrease in anticipated revenues. As a result, we may experience operatinglosses and net losses in the future, which would make it difficult to fund ouroperations and achieve our business plan, and could cause the market price ofour common stock to decline.

 

**The trading price of our common stock is highly volatile.**The tradingprice of our common stock has been subject to wide fluctuations in the past.Since January 2001, our Class A common stock (now known as our commonstock) has traded at prices as low as $0.45 per share and as high as $8.00 pershare. The market price of our common stock could continue to fluctuate in thefuture in response to various factors, including, but not limited to:

 

·                                          quarterlyvariations in operating results;

 

·                                          our ability tocontrol costs, improve cash flow and sustain profitability;

 

·                                          our ability toraise additional capital;

 

·                                          shortagesannounced by suppliers;

 

·                                          announcementsof technological innovations or new products or applications by ourcompetitors, customers or us;

 

·                                          transitions tonew products or product enhancements;

 

·                                          acquisitions ofbusinesses, products or technologies;

 

·                                          the impact ofany litigation;

 

·                                          changes ininvestor perceptions;

 

·                                          governmentfunding, political agendas and other budgetary constraints;

 

·                                          changes inearnings estimates or investment recommendations by securities analysts; and

 

·                                          internationalconflicts, political unrest and acts of terrorism.

 

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Thestock market in general has from time to time experienced volatility, which hasoften affected the market prices of equity securities of many technologycompanies. This volatility has often been unrelated to the operatingperformance of these companies. These broad market fluctuations may adverselyaffect the market price of our common stock. In the past, companies that haveexperienced volatility in the market price of their securities have been thesubject of securities class action litigation. If we were to become the subjectof a class action lawsuit, it could result in substantial losses and divertmanagement’s attention and resources from other matters.

 

**We could experience negative financial impacts arising fromdevelopments in contingencies created under our previous structure or by formersubsidiaries.**Although we divested ourselves of all business unitsprior to October 2004, from time to time we could experience unforeseendevelopments in contingencies related to our former subsidiaries. For example,in July 2006 we entered into a settlement agreement in connection with alawsuit brought against Mariner Networks, Inc., one of our formersubsidiaries, by one of Mariner’s suppliers, pursuant to which we issued 88,912shares of our common stock to this supplier (valued at $213,000 as of the dateof issuance) and paid $475,000 in cash. Although we are not aware of any othermaterial contingencies, it is possible other matters could be brought againstus in connection with activities related to former subsidiaries and that suchmatters could materially and adversely affect our financial results and cashflows.

 

**Certain provisions of the Company’s charterdocuments may discourage a third party from acquiring us andmay adversely affect the price of our common stock.**Certainprovisions of our certificate of incorporation could make it difficult for athird party to acquire us, even though an acquisition might be beneficial toour stockholders. Such provisions could limit the price that investors might bewilling to pay in the future for shares of our common stock. Under the terms ofour certificate of incorporation, our Board of Directors is authorized toissue, without stockholder approval, up to 2,000,000 shares of preferred stockwith voting, conversion and other rights and preferences superior to those ofour common stock. In addition, in August 2009, we adopted a stockholderrights plan and declared a dividend of preferred stock purchase rights to ourstockholders. Generally, the stockholder rights plan provides that if a personor group acquires 15% or more of our common stock, subject to certainexceptions and under certain circumstances, the rights may be exchanged by usfor common stock or the holders of the rights, other than the acquiring personor group, could acquire additional shares of our capital stock at a discountoff of the then current market price. Such exchanges or exercise of rightscould cause substantial dilution to a particular acquirer and discourage theacquirer from pursuing our company. The mere existence of a stockholder rightsplan often delays or makes a merger, tender offer or proxy contest moredifficult.

 

**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.  OTHER INFORMATION**

 

None.

 

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**ITEM 6.  EXHIBITS**

 

The followingexhibits are filed herewith or are incorporated by reference to the locationindicated.

 
| **Exhibit  Number** | ** ** | **Description** | ** **                                                                                                                                    | **Where Located** |
|---------------------|------------|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------------------|
| 3.1                 |       |            | Restated  Certificate of Incorporation of the registrant                                                                                      | * *               | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 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 Junior Participating Preferred Stock                                                            | * *               | *Exhibit 3.2  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2009 as filed with the SEC on October 30, 2009* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 3.3                 |       |            | Bylaws  of registrant, as amended                                                                                                             | * *               | *Exhibit 4.2  to the registrant’s Registration Statement on Form S-1 (Reg.  No. 033-67932) as filed with the SEC on July 6, 1993* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 3.4                 |       |            | Certificates  of Amendment to Bylaws of the registrant dated April 24, 1998 and  August 10, 2001                                    | * *               | *Exhibit 3.4  to the registrant’s Annual Report on Form 10-K/A for the year ended  March 31, 2003 as filed with the SEC on July 29, 2003* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 3.5                 |       |            | Certificate  of Amendment to Bylaws of registrant dated September 9, 2004                                                                | * *               | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 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 registrant dated September 16, 2005                                                               | * *               | *Exhibit 3.5  to the registrant’s Annual Report on Form 10-K for the year ended  March 31, 2007 as filed with the SEC on June 21, 2007* |
|                |       |            | * *                                                                                                                                      | * *               | * * |
| 3.7                 |       |            | Certificate  of Amendment to Bylaws of registrant dated December 7, 2007                                                                 | * *               | *Exhibit 3.1  to the registrant’s Current Report on Form 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 on Form 8-K as filed with the SEC on  August 21, 2009* |
|                |       |            |                                                                                                                                          |                   |   |
| 4.1                 |       |            | Specimen  of Common Stock Certificate                                                                                                         | * *               | *Exhibit 4.1  to the registrant’s Amendment No. 1 to the Registration Statement on  Form 8-A as filed with the SEC on December 8, 2004* |
|                |       |            |                                                                                                                                          |                   |   |
| 4.2                 |       |            | Rights  Agreement dated August 20, 2009 between the registrant and Computershare  Trust Company, N.A., including exhibits thereto        | * *               | *Exhibit 4.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  August 21, 2009* |
|                |       |            |                                                                                                                                          |                   |   |
| 31.1                |       |            | Certification  of the Principal Executive Officer, as required pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                | * *               | *Filed  herewith* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 31.2                |       |            | Certification  of the Principal Financial and Accounting Officer, as required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 | * *               | *Filed  herewith* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 32.1                |       |            | Certification  of the Chief Executive Officer, as required pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                    | * *               | *Filed  herewith* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 32.2                |       |            | Certification  of the Chief Financial Officer, as required pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                    | * *               | *Filed  herewith* |

 

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Table of Contents

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| Dated:  February 2, 2010 | ITERIS,  INC. |
|-------------------------------|---------------|
|                          | (Registrant)  |
|                          |          |
|                          | By            | /S/ ABBAS  MOHADDES |
|                          |          | Abbas  Mohaddes |
|                          |          | Chief  Executive Officer |
|                          |          | (Principal  Executive Officer) |
|                          |          |
|                          |          |
|                          | By            | /S/ JAMES  S. MIELE |
|                          |          | James  S. Miele |
|                          |          | Chief  Financial Officer |
|                          |          | (Principal  Financial and Accounting Officer) |

 

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**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description** | ** **                                                                                                                                    | **Where Located** |
|---------------------|------------|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------------------|
| 3.1                 |       |            | Restated  Certificate of Incorporation of the registrant                                                                                      | * *               | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 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 Junior Participating Preferred Stock                                                            | * *               | *Exhibit 3.2  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2009 as filed with the SEC on October 30, 2009* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 3.3                 |       |            | Bylaws  of registrant, as amended                                                                                                             | * *               | *Exhibit 4.2  to the registrant’s Registration Statement on Form S-1 (Reg.  No. 033-67932) as filed with the SEC on July 6, 1993* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 3.4                 |       |            | Certificates  of Amendment to Bylaws of the registrant dated April 24, 1998 and  August 10, 2001                                    | * *               | *Exhibit 3.4  to the registrant’s Annual Report on Form 10-K/A for the year ended  March 31, 2003 as filed with the SEC on July 29, 2003* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 3.5                 |       |            | Certificate  of Amendment to Bylaws of registrant dated September 9, 2004                                                                | * *               | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 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 registrant dated September 16, 2005                                                               | * *               | *Exhibit 3.5  to the registrant’s Annual Report on Form 10-K for the year ended  March 31, 2007 as filed with the SEC on June 21, 2007* |
|                |       |            |                                                                                                                                          |                   |   |
| 3.7                 |       |            | Certificate  of Amendment to Bylaws of registrant dated December 7, 2007                                                                 | * *               | *Exhibit 3.1  to the registrant’s Current Report on Form 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 on Form 8-K as filed with the SEC on  August 21, 2009* |
|                |       |            |                                                                                                                                          |                   |   |
| 4.1                 |       |            | Specimen  of Common Stock Certificate                                                                                                         | * *               | *Exhibit 4.1  to the registrant’s Amendment No. 1 to the Registration Statement on  Form 8-A as filed with the SEC on December 8, 2004* |
|                |       |            |                                                                                                                                          |                   |   |
| 4.2                 |       |            | Rights  Agreement dated August 20, 2009 between the registrant and Computershare  Trust Company, N.A., including exhibits thereto        | * *               | *Exhibit 4.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  August 21, 2009* |
|                |       |            |                                                                                                                                          |                   |   |
| 31.1                |       |            | Certification  of the Principal Executive Officer, as required pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                | * *               | *Filed  herewith* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 31.2                |       |            | Certification  of the Principal Financial and Accounting Officer, as required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 | * *               | *Filed  herewith* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 32.1                |       |            | Certification  of the Chief Executive Officer, as required pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                    | * *               | *Filed  herewith* |
| * *            | * *   | * *        | * *                                                                                                                                      | * *               | * * |
| 32.2                |       |            | Certification  of the Chief Financial Officer, as required pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                    | * *               | *Filed  herewith* |

 

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