Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND 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 June 30, 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 90 days.  Yes **x  No o

** **

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive 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 registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange 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

 

Asof July 31, 2009, there were 34,280,756 shares of common stockoutstanding.

 

 

 

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Table of Contents

 

**ITERIS, INC.**

**Quarterly Report on Form 10-QFor the Three Months Ended June 30, 2009**

** **

**Table of Contents**

** **
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                     |   | 3      |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------|--------|--------|
|              |       |                                                                                                          |   |   |
| ITEM 1.           |       | FINANCIAL STATEMENTS                                                                                          |   | 3      |
|              |       |                                                                                                          |   |   |
|              |       | CONDENSED  CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2009 AND MARCH 31, 2009                               |   | 3      |
|              |       |                                                                                                          |   |   |
|              |       | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED  JUNE 30, 2009 AND 2008 |   | 4      |
|              |       |                                                                                                          |   |   |
|              |       | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED  JUNE 30, 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                                                   |   | 23     |
|              |       |                                                                                                          |   |   |
| ITEM 4T.          |       | CONTROLS AND  PROCEDURES                                                                                      |   | 23     |
|              |       |                                                                                                          |   |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                         |   | 23     |
|              |       |                                                                                                          |   |   |
| ITEM 1.           |       | LEGAL PROCEEDINGS                                                                                             |   | 23     |
|              |       |                                                                                                          |   |   |
| ITEM 1A.          |       | RISK FACTORS                                                                                                  |   | 23     |
|              |       |                                                                                                          |   |   |
| ITEM 2.           |       | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                  |   | 32     |
|              |       |                                                                                                          |   |   |
| ITEM 3.           |       | DEFAULTS UPON  SENIOR SECURITIES                                                                              |   | 32     |
|              |       |                                                                                                          |   |   |
| ITEM 4.           |       | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                          |   | 32     |
|              |       |                                                                                                          |   |   |
| ITEM 5.           |       | OTHER INFORMATION                                                                                             |   | 32     |
|              |       |                                                                                                          |   |   |
| ITEM 6.           |       | EXHIBITS                                                                                                      |   | 33     |

 

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

 

AutoVue®,Iteris®, Vantage®, VersiCamTM, EdgeConnectTM, RZ4 AdvancedTM and Safety DirectTM are among thetrademarks of Iteris, Inc. Any other trademarks or trade names mentionedherein are the property of their respective owners.

 

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**PART I. FINANCIALINFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

 

**Iteris, Inc.**

**UnauditedCondensed Consolidated Balance Sheets**

**(In thousands, except parvalue amounts)**

 
| ** **                                                                                                                                                            | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2009**          | ** ** | **2009**           | ** ** |
| **Assets**                                                                                                                                                            | ** ** | ** **        | ** ** | ** **         | ** ** |
| Current assets:                                                                                                                                                       |       |              |       |               |       |
| Cash and cash  equivalents                                                                                                                                            |       | $                 | 6,018      |               | $          | 6,372 |   |
| Trade accounts  receivable                                                                                                                                            |       | 11,812            |       | 12,448             |       |
| Costs in excess of  billings on uncompleted contracts                                                                                                                 |       | 3,876             |       | 4,217              |       |
| Inventories                                                                                                                                                           |       | 5,178             |       | 5,681              |       |
| Deferred income taxes                                                                                                                                                 |       | 4,241             |       | 4,241              |       |
| Prepaid expenses and  other current assets                                                                                                                            |       | 396               |       | 272                |       |
| Total current assets                                                                                                                                                  |       | 31,521            |       | 33,231             |       |
| Property and equipment,  net                                                                                                                                          |       | 3,033             |       | 3,244              |       |
| Deferred income taxes                                                                                                                                                 |       | 11,505            |       | 11,505             |       |
| Intangible assets, net                                                                                                                                                |       | 567               |       | 110                |       |
| Goodwill                                                                                                                                                              |       | 27,791            |       | 27,774             |       |
| Other assets                                                                                                                                                          |       | 205               |       | 202                |       |
| Total assets                                                                                                                                                          |       | $                 | 74,622     |               | $          | 76,066 |   |
|                                                                                                                                                                  |       |              |       |               |       |
| **Liabilities  and stockholders’ equity**                                                                                                                        |       |              |       |               |       |
| Current liabilities:                                                                                                                                                  |       |              |       |               |       |
| Trade accounts payable                                                                                                                                                |       | $                 | 3,338      |               | $          | 4,228 |   |
| Accrued payroll and  related expenses                                                                                                                                 |       | 2,587             |       | 3,188              |       |
| Accrued liabilities                                                                                                                                                   |       | 1,709             |       | 1,662              |       |
| Billings in excess of  costs and estimated earnings on uncompleted contracts                                                                                          |       | 1,352             |       | 1,534              |       |
| Current portion of  long-term debt                                                                                                                                    |       | 2,313             |       | 2,019              |       |
| Total current  liabilities                                                                                                                                            |       | 11,299            |       | 12,631             |       |
| Deferred rent                                                                                                                                                         |       | 1,615             |       | 1,686              |       |
| Unrecognized tax  benefits                                                                                                                                            |       | 1,117             |       | 1,117              |       |
| Other non-current  liabilities                                                                                                                                        |       | 112               |       | —             |       |
| Long-term debt                                                                                                                                                        |       | 4,841             |       | 5,274              |       |
| Total liabilities                                                                                                                                                     |       | 18,984            |       | 20,708             |       |
| Commitments and  contingencies                                                                                                                                        |       |              |       |               |       |
| Stockholders’ equity:                                                                                                                                            |       |              |       |               |       |
| Common stock $0.10 par  value, 70,000 shares authorized, 34,265 and 34,205 shares issued and  outstanding at June 30, 2009 and March 31, 2009, respectively |       | 3,427             |       | 3,420              |       |
| Additional paid-in  capital                                                                                                                                           |       | 137,151           |       | 136,997            |       |
| Common stock held in  trust                                                                                                                                           |       | (31               | )          | (31                | )          |
| Accumulated deficit                                                                                                                                                   |       | (84,928           | )          | (85,025            | )          |
| Accumulated other  comprehensive income (loss)                                                                                                                        |       | 19                |       | (3                 | )          |
| Total stockholders’  equity                                                                                                                                      |       | 55,638            |       | 55,358             |       |
| Total liabilities and  stockholders’ equity                                                                                                                      |       | $                 | 74,622     |               | $          | 76,066 |   |

 

See accompanying notes.

 

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**Iteris, Inc.**

**Unaudited Condensed ConsolidatedStatements of Operations**

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

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **June 30,**      | ** ** |
| ** **                                 | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net sales and contract  revenues:          |       |                   |       |   |   |
| Net sales                                  |       | $                      | 6,933      |   | $ | 10,526 |   |
| Contract revenues                          |       | 7,701                  |       | 6,916 |   |
| Total net sales and  contract revenues     |       | 14,634                 |       | 17,442 |   |
| Costs of net sales and  contract revenues: |       |                   |       |   |   |
| Cost of net sales(a)                       |       | 3,843                  |       | 5,267 |   |
| Cost of contract revenues(a)               |       | 5,209                  |       | 4,423 |   |
| Gross profit                               |       | 5,582                  |       | 7,752 |   |
| Operating expenses:                        |       |                   |       |   |   |
| Selling, general and  administrative(a)    |       | 4,253                  |       | 5,156 |   |
| Research and  development(a)               |       | 964                    |       | 1,210 |   |
| Amortization of  intangible assets         |       | 44                     |       | 36 |   |
| Total operating  expenses                  |       | 5,261                  |       | 6,402 |   |
| Operating income                           |       | 321                    |       | 1,350 |   |
| Non-operating income  (expense):           |       |                   |       |   |   |
| Other income, net                          |       | 19                     |       | 5 |   |
| Interest expense, net                      |       | (86                    | )          | (198 | ) |
| Income before income  taxes                |       | 254                    |       | 1,157 |   |
| Provision for income  taxes                |       | (110                   | )          | (491 | ) |
| Net income                                 |       | $                      | 144        |   | $ | 666 |   |
|                                       |       |                   |       |   |   |
| Earnings per share:                        |       |                   |       |   |   |
| Basic                                      |       | $                      | 0.00       |   | $ | 0.02 |   |
| Diluted                                    |       | $                      | 0.00       |   | $ | 0.02 |   |
| Weighted-average shares  outstanding:      |       |                   |       |   |   |
| Basic                                      |       | 34,192                 |       | 33,618 |   |
| Diluted                                    |       | 34,386                 |       | 34,939 |   |

 

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(a)     Includes stock-based compensation expense as follows:

 
| Cost of net sales                            |   | $  | 2      |   | $      | 2  |   |
|----------------------------------------------|--------|----|--------|--------|--------|----|--------|
| Cost of contract  revenues                   |   | 10 |   | 10     |   |
| Selling, general and  administrative expense |   | 71 |   | 77     |   |
| Research and  development expense            |   | 6  |   | 5      |   |
| Total stock-based  compensation expense      |   | $  | 89     |   | $      | 94 |   |

 

See accompanying notes.

 

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**Iteris, Inc.**

**Unaudited CondensedConsolidated Statements of Cash Flows**

**(In thousands)**

 
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                   | ** ** | **June 30,**      | ** ** |
| ** **                                                                                   | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                                                                   | ** ** | ** **             | ** ** | ** ** | ** ** |
| **Cash  flows from operating activities**                                                    | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income                                                                                   |       | $                      | 144        |   | $ | 666 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                   |       |   |   |
| Depreciation of  property and equipment                                                      |       | 256                    |       | 242 |   |
| Stock-based  compensation                                                                    |       | 89                     |       | 94 |   |
| Amortization of debt  discounts                                                              |       | —                 |       | 41 |   |
| Amortization of  intangible assets                                                           |       | 44                     |       | 36 |   |
| Amortization of  deferred financing costs                                                    |       | —                 |       | 27 |   |
| Changes in operating  assets and liabilities:                                                |       |                   |       |   |   |
| Accounts receivable                                                                          |       | 644                    |       | (2,919 | ) |
| Net costs and estimated  earnings in excess of billings                                      |       | 159                    |       | 1,387 |   |
| Inventories                                                                                  |       | 503                    |       | (154 | ) |
| Prepaid expenses and  other assets                                                           |       | (128                   | )          | (81 | ) |
| Accounts payable and  accrued expenses                                                       |       | (1,690                 | )          | (5 | ) |
| Net cash provided by  (used in) operating activities                                         |       | 21                     |       | (666 | ) |
|                                                                                         |       |                   |       |   |   |
| **Cash  flows from investing activities**                                                    |       |                   |       |   |   |
| Purchases of property  and equipment                                                         |       | (42                    | )          | (257 | ) |
| Cash paid for business  combination                                                          |       | (300                   | )          | — |   |
| Net cash used in  investing activities                                                       |       | (342                   | )          | (257 | ) |
|                                                                                         |       |                   |       |   |   |
| **Cash  flows from financing activities**                                                    |       |                   |       |   |   |
| Borrowings on long-term  debt                                                                |       | 750                    |       | — |   |
| Payments on long-term  debt                                                                  |       | (889                   | )          | (221 | ) |
| Checks drawn in excess  of available bank balances                                           |       | —                 |       | 277 |   |
| Proceeds from stock  option exercises                                                        |       | 72                     |       | 514 |   |
| Net cash provided by  (used in) financing activities                                         |       | (67                    | )          | 570 |   |
| Effect of exchange rate  changes on cash                                                     |       | 34                     |       | — |   |
| Decrease in cash and  cash equivalents                                                       |       | (354                   | )          | (353 | ) |
| Cash and cash  equivalents at beginning of period                                            |       | 6,372                  |       | 421 |   |
| Cash and cash  equivalents at end of period                                                  |       | $                      | 6,018      |   | $ | 68 |   |
|                                                                                         |       |                   |       |   |   |
| **Supplemental  disclosure of non-cash investing and financing acitivies:**                  |       |                   |       |   |   |
| Liabilities incurred  for business combination                                               |       | $                      | 218        |   | $ | — |   |
| Fair value of common  stock issued in settlement of liabilities                              |       | —                 |       | 427 |   |

 

See accompanying notes.

 

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**Iteris, Inc.**

**Notes to Unaudited CondensedConsolidated Financial Statements**

**June 30, 2009**

** **

**1.             Description of Business and Summary of SignificantAccounting 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**

 

Our unaudited condensed consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States (“U.S. GAAP”) for interim financialinformation and with the instructions to Securities and Exchange Commission (“SEC”)Form 10-Q and Article 10 of SEC Regulation S-X. In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements contain all adjustments, consisting of normal recurring adjustments,necessary to present fairly the consolidated financial position of Iteris as ofJune 30, 2009, and the consolidated results of operations and cash flowsfor the three months ended June 30, 2009 and 2008. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with U.S. GAAP have been condensed or omitted pursuant to the rules andregulations of the SEC. The results of operations for the three months ended June 30,2009 are not necessarily indicative of those to be expected for futurequarterly periods or the entire year. The accompanying unaudited condensedconsolidated financial statements should be read in conjunction with our AnnualReport on Form 10-K for the fiscal year ended March 31, 2009 (“fiscal2009”), which was filed with the SEC on June 12, 2009.

 

# **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 statementsinclude the allowance for doubtful accounts, projections of taxable income usedto assess realizability of deferred tax assets, inventory and warrantyreserves, costs to complete long-term contracts, overhead rates used incost-plus contracts, contract reserves and estimates of future cash flows usedto assess the recoverability of long-lived assets, the valuation of debt andequity instruments 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 significantuncertainties concerning 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-recurringcontract engineering revenues and royalty revenues totaled $248,000 and$374,000 for the three months ended June 30, 2009 and 2008, respectively,and are included in net sales in the accompanying condensed consolidatedstatements of operations.

 

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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 6 and 7).

 

# **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 aregenerally depreciated using the straight-line method over the estimated usefullife ranging from three to eight years. Leasehold improvements are depreciatedover the term of the related lease or the estimated useful life of theimprovement, 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 at that timewas indicated as the estimated fair value of each of our reporting unitsexceeded its respective carrying value. We monitor the indicators for goodwillimpairment testing between annual tests. Certain adverse business conditionsimpacting one or more of our reporting units would cause us to test goodwillfor impairment. No such events occurred during the quarter ended June 30,2009.

 

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 for incometaxes, whereby deferred taxes are determined based on the temporary differencesbetween the financial statement and tax bases of assets and liabilities usingenacted tax rates. A valuation allowance is recorded when it is more likelythan not that all or a portion of the deferred tax assets will not be realized.

 

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**Stock-Based Compensation**

 

We record stock-based compensation expense in thestatement of operations as an expense, based on their grant date fair values ofour stock-base awards, whereby such fair values are amortized over therequisite service period. The fair value of our common stock option awards isestimated on the grant date using the Black-Scholes-Merton (“BSM”)option-pricing formula, which considers, among other factors, the expected lifeof the award and 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 certain original equipment manufacturer (“OEM”) customerssometimes carry longer warranties. Defective products will be either repairedor replaced, generally at our option, upon meeting certain criteria. We accruea provision 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 expenses in the accompanying condensed consolidated balance 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 is capitalizedas a leasehold improvement and amortized over its useful life or the remainderof the lease period, whichever is shorter. Non-permanent repair and maintenancecosts are charged to expense as incurred.

 

**Other Comprehensive Income**

 

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

 

**Recent Accounting Pronouncements**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157, *Fair Value Measurements* (“SFAS 157”), which defines fairvalue, establishes a framework for measuring fair value, and expands disclosureabout fair value measurements. SFAS 157 does not require any new fair valuemeasurements; rather it specifies valuation methods to be applied when fairvalue measurements are required under existing or future accountingpronouncements. SFAS 157 is effective for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. In February 2008, theFASB issued FASB Staff Position (“FSP”) 157-2, *EffectiveDate of FASB Statement No. 157* (“FSP 157-2”), which delays theeffective date of SFAS 157 for non-financial assets and liabilities to fiscalyears beginning after November 15, 2008. Generally, SFAS 157 will beapplied prospectively. With respect to financial assets and liabilities, weadopted SFAS 157 in the first quarter of fiscal 2009, for which there was nomaterial impact on our consolidated financial statements. We adopted SFAS 157 andFSP 157-2 with respect to our non-financial assets and liabilities in the firstquarter of our fiscal year ending March 31, 2010 (“fiscal 2010”), forwhich there was no material impact on our consolidated financial statements.

 

InDecember 2007, the FASB issued SFAS No. 141R, *Business Combinations* (“SFAS 141R”). SFAS 141Restablishes principles and requirements for how the acquirer of a businessrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, and any noncontrolling interest in theacquiree. SFAS 141R also provides guidance for recognizing and measuring thegoodwill acquired in the business combination and determines what informationto disclose to enable users of financial statements to evaluate the nature andfinancial effects of the business combination. Additionally, in April 2009,the FASB issued FSP 141R-1, *Accounting for AssetsAcquired and Liabilities Assumed in a Business Combination that Arise fromContingencies*(“FSP 141R-1”), which amends SFAS 141R to require thatassets acquired and liabilities assumed in a business combination that are fromcontingencies be recognized in accordance with SFAS 157 if the fair value canbe determined during the measurement period; and for those that arise fromnon-contractual contingencies for which the fair value cannot be estimated, FSP141R-1 requires an estimated liability to be recorded for such contingenciesthat are probable and reasonably estimable. SFAS 141R and FSP 141R-1 areboth effective for financial statements issued for fiscal years beginning afterDecember 15, 2008. We adopted SFAS 141R and FSP 141R-1 in the firstquarter of fiscal 2010.

 

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InJune 2008, the FASB issued EITF Issue No. 07-5, *DeterminingWhether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock*(“EITF 07-5”). EITF 07-5 clarifies how to determine whether certain instrumentsor features were indexed to an entity’s own stock under EITF Issue No. 01-6,*The Meaning of “Indexed to a Company’s Own Stock”*(“EITF01-6”), and provides guidance to determine what accounting literature may applyto a particular equity linked instrument or feature. EITF 07-5 became effectivefor financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those fiscal years, and must be applied to allinstruments outstanding on the date of adoption. We adopted EITF 07-5 in thefirst quarter of fiscal  2010, as furtherdiscussed at Note 6 herein.

 

In May 2009, the FASB issued SFAS No. 165,*Subsequent Events* (“SFAS 165”). SFAS 165provides authoritative accounting literature related to evaluating subsequentevents that was previously addressed only in the auditing literature, and islargely similar to the current guidance in the auditing literature with someexceptions that are not intended to result in significant changes in practice.SFAS 165 defines subsequent events and also requires the disclosure of the datethrough which an entity has evaluated subsequent events and the basis for thatdate. SFAS 165 is effective on a prospective basis for interim or annualfinancial periods ending after June 15, 2009. We adopted SFAS 165 in thefirst quarter of fiscal 2010, and such adoption did not have any materialimpact on our consolidated financial statements.

 

In June 2009, theFASB issued SFAS No. 168, *The FASB Accounting Standards Codification*TM *and the Hierarchy of Generally Accepted Accounting Principles, areplacement of FASB Statement No. 162* (“SFAS 168”), whichestablishes the FASB Accounting Standards Codification (the “Codification”) asthe source of authoritative accounting principles recognized by the FASB to beapplied in the preparation of financial statements in conformity with U.S.GAAP. SFAS 168 explicitly recognizes rules and interpretive releases ofthe SEC under federal securities laws as authoritative U.S. GAAP for SECregistrants. Following SFAS 168, the FASB will not issue new standards in theform of Statements, FASB Staff Positions or EITF Abstracts, but instead willissue Accounting Standards Updates. The FASB will not consider AccountingStandards Updates as authoritative in their own right. Accounting StandardsUpdates will serve only to update the Codification, provide backgroundinformation about the guidance and provide the bases for conclusions on changesin the Codification. SFAS 168 will become effective in the second quarter of fiscal2010, and as such, we plan to update our disclosures to conform to theCodification beginning in our Form 10-Q filing for the quarter ending September 30,2009.

 

**2.             SupplementalFinancial Information**

 

**Inventories**

 

The following tablepresents details of our inventories:

 
| ** **             | ** ** | **June 30,**   | ** ** | **March 31,** | ** ** |
|------------------------|------------|---------------------|------------|--------------------|------------|
| ** **             | ** ** | **2009**            | ** ** | **2009**           | ** ** |
| ** **             | ** ** | **(In  thousands)** | ** ** |
| Materials and supplies |       | $                   | 4,206      |               | $          | 4,820 |   |
| Work in process        |       | 67                  |       | 198                |       |
| Finished goods         |       | 905                 |       | 663                |       |
|                   |       | $                   | 5,178      |               | $          | 5,681 |   |

 

**IntangibleAssets**

 
| ** **                                  | ** ** | **June 30, 2009**      | ** ** | **March 31, 2009**       | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                                  | ** ** | **(In thousands)**          | ** ** |
| Intangible assets  subject to amortization: |       |                        |       |                          |       |   |   |   |   |
| Developed technology                        |       | $                           | 996        |                          | $          | (515 | ) | $ | 495 |   | $ | (482 | ) |
| Patents                                     |       | 317                         |       | (231                          | )          | 317 |   | (220 | ) |
| Total                                       |       | $                           | 1,313      |                          | $          | (746 | ) | $ | 812 |   | $ | (702 | ) |

 

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Amortization expense forintangible assets subject to amortization was $44,000 and $36,000 for the threemonths ended June 30, 2009 and 2008, respectively. As of June 30,2009, future estimated amortization expense is as follows:

 
| **Year Ending March 31:** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|
| **(In thousands)**             | ** ** | ** ** | ** ** |
| Remainder of 2010              |       | $          | 115        |   |
| 2011                           |       | 152        |       |
| 2012                           |       | 100        |       |
| 2013                           |       | 100        |       |
| 2014                           |       | 100        |       |
|                           |       | $          | 567        |   |

 

**Goodwill**

 

The following table presents the activity related to thecarrying value of our goodwill by reportable segment for the three months endedJune 30, 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 in accrued warrantyobligations:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **June 30,**      | ** ** |
| ** **                          | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                          | ** ** | **(In thousands)**     | ** ** |
| Balance at beginning of  period     |       | $                      | 582        |   | $ | 494 |   |
| Additions charged to  cost of sales |       | 52                     |       | 99 |   |
| Warranty claims                     |       | (51                    | )          | (64 | ) |
| Balance at end of  period           |       | $                      | 583        |   | $ | 529 |   |

 

**Comprehensive Income**

 

The following tablepresents the components of comprehensive income:

 
| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **June 30,**      | ** ** |
| ** **                                | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                                | ** ** | **(In thousands)**     | ** ** |
| Net income                                |       | $                      | 144        |   | $ | 666 |   |
| Other comprehensive  income (loss):       |       |                   |       |   |   |
| Foreign currency  translation adjustments |       | 22                     |       | (1 | ) |
| Total comprehensive  income               |       | $                      | 166        |   | $ | 665 |   |

 

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**Earnings Per Share**

 

The following table setsforth the computation of basic and diluted earnings per share:

 
| ** **                                                  | ** ** | **Three Months Ended**                         | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                  | ** ** | **June 30,**                              | ** ** |
| ** **                                                  | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| ** **                                                  | ** ** | **(In  thousands, except per share  amounts)** | ** ** |
| Numerator:                                                  | ** ** | ** **                                     | ** ** | ** ** | ** ** |
| Net Income                                                  |       | $                                              | 144        |   | $ | 666 |   |
|                                                        |       |                                           |       |   |   |
| Denominator:                                                |       |                                           |       |   |   |
| Weighted average common  shares used in basic computation   |       | 34,192                                         |       | 33,618 |   |
| Dilutive stock options                                      |       | 194                                            |       | 1,314 |   |
| Dilutive warrants                                           |       | —                                         |       | 7 |   |
| Weighted average common  shares used in diluted computation |       | 34,386                                         |       | 34,939 |   |
|                                                        |       |                                           |       |   |   |
| Earnings per share:                                         |       |                                           |       |   |   |
| Basic                                                       |       | $                                              | 0.00       |   | $ | 0.02 |   |
| Diluted                                                     |       | $                                              | 0.00       |   | $ | 0.02 |   |

 

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

 
| ** **             | ** ** | **Three Months Ended**    | ** ** |
|------------------------|------------|---------------------------|------------|
| ** **             | ** ** | **June 30,**         | ** ** |
| ** **             | ** ** | **2009**                  | ** ** | **2008** | ** ** |
| ** **             | ** ** | **(Shares in thousands)** | ** ** |
|                   |       |                      |       |   |   |
| Stock options          |       | 2,583                     |       | 517 |   |
| Warrants               |       | 491                       |       | 1,150 |   |
| Convertible debentures |       | —                    |       | 2,147 |   |

 

**3.             Business Combination**

 

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 is also eligible to receive compensation based on future net sales ofcertain products during the three year period ending March 31, 2012,subject to continued employment and other limitations.

 

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 monthsended June 30, 2009 include the results of operations of Hamilton Signalcommencing as of the Closing. Disclosures required for material businesscombinations have been limited due to the immateriality of the acquisition ofHamilton Signal to our financial statements. No supplemental pro formainformation is presented for the acquisition due to the immaterial effect ofthe acquisition on our results of operations.

 

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**4.             Revolving Line of Credit andLong-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 borrowingsof up to $12.0 million and a $7.5 million 48-month term note (discussed furtherbelow). Interest on borrowed amounts under the revolving line of credit arepayable monthly at a rate equal to the current stated prime rate up to thecurrent stated prime rate plus 0.50%, depending on aggregate deposit balancesmaintained at the bank in relation to the total loan commitment under thecredit facility (3.75% at June 30, 2009). We are obligated to pay anunused line fee of 0.25% per annum applied to the average unused portion of therevolving line of credit during the preceding month. The revolving line ofcredit does not contain any early termination fees and is secured bysubstantially all of our assets. As of June 30, 2009, no amounts wereoutstanding under the revolving line of credit portion of the facility.

 

**Long-TermDebt**

 

Our long-term debtconsists of the following:

 
| ** **                   | ** ** | **June 30,**  | ** ** | **March 31,** | ** ** |
|------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2009**           | ** ** | **2009**           | ** ** |
| ** **                   | ** ** | **(In thousands)** | ** ** |
| Bank term note               |       | $                  | 7,154      |               | $          | 6,543 |   |
| Convertible debentures,  net |       | —             |       | 750                |       |
|                         |       | 7,154              |       | 7,293              |       |
| Less current portion         |       | (2,313             | )          | (2,019             | )          |
|                         |       | $                  | 4,841      |               | $          | 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 Notes.*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 commencing on June 1,2009. Interest on the term note is payable monthly at a rate equal to thecurrent stated prime rate plus 0.50% up to the current stated prime rate plus1.00%, depending on aggregate deposit balances maintained at the bank inrelation to the total loan commitment under the credit facility (4.25% at June 30,2009). The term note contains no early termination fees and, along with therevolving line of credit under the same credit agreement, is secured bysubstantially all of our assets.

 

**5.             Commitments andContingencies**

 

**Litigation and Other Contingencies**

 

From time to time, we have been involved inlitigation relating to claims arising out of our operations in the normalcourse of business. We currently are not a party to any legal proceedings, theadverse outcome of which, in management’s opinion, individually or in theaggregate, would have a material adverse effect on our consolidated results ofoperations, 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, some of which are still in process. Although the development andultimate outcome of these and other unforeseen matters cannot be predicted withany certainty, our management does not believe that we are presently involvedin any matters related to our former subsidiaries that would have a materialadverse effect on our consolidated results of operations, financial position orcash 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. At June 30, 2009, MAXxess owed us anaggregate of $274,000 related to this sublease, which terminated in September 2007,and 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. Subsequently, in August 2009, MAXxess executed a promissorynote in favor of Iteris for $274,000. The promissory note bears interest at arate of 6% per annum, compounded annually, with accrued 

 

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interest to be paidannually on the first business day of each calendar year. Payments under thenote may be made in bona fide services rendered by MAXxess to Iteris to theextent such services and amounts are pre-approved in writing by us. All amountsoutstanding under the note will become due and payable on the earliest of August 10,2014, a change of control in MAXxess or a financing by MAXxess resulting ingross proceeds of at least $10 million. All amounts due from MAXxess continueto remain fully reserved.

 

**6.             Warrants**

 

The following table summarizesinformation regarding outstanding warrants to purchase our common stock as of June 30,2009:

 
| **Range of Exercise Prices** | ** ** | **Warrants  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|------------------------------|------------|---------------------------|------------|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                   | ** ** | **(In thousands)**        | ** ** | **(Years)**                                         | ** ** | ** **                            | ** ** |
| $1.42                        |       | 15                        |       | 4.2                                                 |       | $                                     | 1.42       |   |
| $3.25                        |       | 246                       |       | 1.7                                                 |       | 3.25                                  |       |
| $5.00 to $5.26               |       | 230                       |       | 0.4                                                 |       | 5.18                                  |       |
|                         |       | 491                       |       | 1.2                                                 |       | $                                     | 4.09       |   |

 

In May 2009,outstanding warrants with a weighted average exercise price of $3.93 topurchase approximately 674,000 shares of our common stock, which wereassociated with our convertible debentures (see Note 4), expired unexercised.

 

In connection with the adoption of EITF 07-5, whichwas effective on April 1, 2009, we determined that certain outstandingwarrants to purchase shares of our common stock contain provisions that providefor a possible future adjustment to either the exercise price and/or number ofshares to be issued upon exercise. As such, pursuant to EITF 07-5, wedetermined that these warrants were not indexed to our own stock, as previouslyconcluded pursuant to EITF 00-19, *Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock*. Beginning April 1, 2009, we began recognizing thesewarrants as liabilities at their respective estimated fair values on eachreporting date. The cumulative effect of the change in accounting for thesewarrants of $47,000 was recognized as an adjustment to the opening balance ofaccumulated deficit at April 1, 2009. The amounts recognized in theconsolidated balance sheet as a result of the initial application of EITF 07-5on April 1, 2009 were determined based on the amounts that would have beenrecognized if EITF 07-5 had been applied from the issuance date of thewarrants. At June 30, 2009, the estimated fair value of the warrants,which is included in accrued liabilities in the accompanying unauditedcondensed consolidated balance sheet, was $41,000. The change in the estimatedfair value of the warrants for the three months ended June 30, 2009 isincluded in other income in the accompanying unaudited condensed consolidatedstatement of operations. We estimate the fair value of these warrants using theBSM option-pricing formula.

 

**7.             Fair ValueMeasurements**

 

SFAS 157 defines fair value as the exchange pricethat would be received for an asset or paid to transfer a liability (an exitprice) in the principal or most advantageous market for the asset or liabilityin an orderly transaction between market participants on the measurement date.SFAS 157 also establishes a fair value hierarchy that requires an entityto maximize the use of observable inputs and minimize the use of unobservableinputs when measuring fair value. The standard describes three levels of inputsthat may be used to 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.

 

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At June 30, 2009, there were outstandingwarrants to purchase shares of our common stock that we classified as aliability with an estimated fair value of $41,000 (see Note 6). These warrantswere valued using Level 3 inputs because there are certain 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 three months ended June 30, 2009 (in thousands):

 
| Balance at  April 1, 2009                       |   | $  | — |   |
|------------------------------------------------------|--------|----|--------|--------|
| Cumulative effect of  accounting change (Note 6)     |   | 47 |   |
| Gain on change in fair  value included in net income |   | (6 | )      |
| Balance at  June 30, 2009                       |   | $  | 41     |   |

 

The intangible assets acquired in connection withthe Hamilton Signal acquisition (see Note 3) were recorded at fair value as ofthe acquisition date, and were estimated using the income approach, whichgenerally included the use of certain Level 3 inputs. Our non-financial assets,such as goodwill, intangible assets and property and equipment, are measured atfair value on a non-recurring basis; generally when there is an indicator ofimpairment. Such assets are recorded at fair value only when an impairmentcharge is recognized.

 

**8.             Stock-BasedCompensation**

 

A summary of activity in our stock option plans forthe three months ended June 30, 2009 is as follows:

 
| ** **                                  | ** ** | ** **         | ** ** | **Weighted-** | ** ** |
|---------------------------------------------|------------|--------------------|------------|---------------|------------|
| ** **                                  | ** ** | ** **         | ** ** | **Average**   | ** ** |
| ** **                                  | ** ** | **Number of**      | ** ** | **Exercise**  | ** ** |
| ** **                                  | ** ** | **Shares**         | ** ** | **Price**     | ** ** |
| ** **                                  | ** ** | **(In thousands)** | ** ** | ** **    | ** ** |
| Options outstanding at  March 31, 2009 |       | 3,314              |       | $             | 1.92       |   |
| Granted                                     |       | 363                |       | 1.41          |       |
| Exercised                                   |       | (60                | )          | 1.19          |       |
| Forfeited                                   |       | (21                | )          | 2.50          |       |
| Expired                                     |       | (93                | )          | 1.81          |       |
| Options outstanding at  June 30, 2009  |       | 3,503              |       | $             | 1.88       |   |

 

At June 30, 2009,there were 83,000 shares of common stock available for grant under our 2007Omnibus Incentive Plan.

 

The per share fair valuesof stock options granted in the three months ended June 30, 2009 have beenestimated 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 |   | $      | 1.00   | ** ** |
|                                                   |        |        |        |  |

 

At June 30, 2009,there was approximately $1.1 million of total unrecognized compensation expenserelated to unvested stock options. This expense is expected to be recognizedover a weighted average period of approximately 3.3 years. If there are anymodifications or cancellations of the underlying unvested stock options, we maybe required to accelerate, increase or cancel any remaining unearnedstock-based compensation expense. Future stock-based compensation expense andunearned stock-based compensation will increase to the extent that we issueadditional stock options or other stock-based awards.

 

**9.             Business SegmentInformation**

 

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. The Vehicle Sensorssegment includes our lane departure warning products and is comprised of all ofour activities 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 certain intangibleassets, are not allocated to the segments. The reportable segments are eachmanaged separately because they manufacture and distribute distinct products orprovide services with different processes. All segment revenues are derivedfrom external customers.

 

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The following table sets forth selected unauditedfinancial information for our reportable segments for the three months ended June 30,2009 and 2008:

 
| ** **                                 | ** ** | **Roadway  Sensors** | ** ** | **Vehicle  Sensors** | ** ** | **Transportation  Systems** | ** ** | **Total**  | ** ** |
|--------------------------------------------|------------|----------------------|------------|----------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                 | ** ** | **(In thousands)**   | ** ** |
| **Three  Months Ended June 30, 2009** | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Product revenue                            |       | $                    | 5,875      |                 | $          | 810                         |       | $          | —     |   | $ | 6,685 |   |
| Service and other  revenue                 |       | —               |       | 248                  |       | 7,701                       |       | 7,949      |       |
| Stock-based  compensation                  |       | 8                    |       | 8                    |       | 14                          |       | 30         |       |
| Depreciation and  amortization             |       | 62                   |       | 22                   |       | 58                          |       | 142        |       |
| Segment income (loss)                      |       | 362                  |       | (506                 | )          | 534                         |       | 390        |       |
| ** **                                 | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Three  Months Ended June 30, 2008** |       |                 |       |                 |       |                        |       |       |       |
| Product revenue                            |       | $                    | 7,426      |                 | $          | 2,726                       |       | $          | —     |   | $ | 10,152 |   |
| Service and other  revenue                 |       | —               |       | 374                  |       | 6,916                       |       | 7,290      |       |
| Stock-based compensation                   |       | 8                    |       | 12                   |       | 13                          |       | 33         |       |
| Depreciation and  amortization             |       | 48                   |       | 37                   |       | 56                          |       | 141        |       |
| Segment income                             |       | 1,008                |       | 158                  |       | 406                         |       | 1,572      |       |

 

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

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **June 30,**      | ** ** |
| ** **                             | ** ** | **2009**               | ** ** | **2008** | ** ** |
| ** **                             | ** ** | **(In thousands)**     | ** ** |
| **Segment  Income:**                   |       |                   |       |   |   |
| Total income from  reportable segments |       | $                      | 390        |   | $ | 1,572 |   |
| **Unallocated  Amounts:**              |       |                   |       |   |   |
| Corporate and other  expenses          |       | (69                    | )          | (222 | ) |
| Other income, net                      |       | 19                     |       | 5 |   |
| Interest expense, net                  |       | (86                    | )          | (198 | ) |
| Income before income  taxes            |       | $                      | 254        |   | $ | 1,157 |   |

 

**10.          Subsequent Events**

 

Pursuantto SFAS 165, we have evaluated all subsequent events through August 11,2009, which represents the date these financial statements were available to beissued. Except as disclosed at Note 5, as of August 11, 2009, there wereno other events subsequent to June 30, 2009 which required recognition ordisclosure in our financial statements.

 

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| **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 undertakeno obligation to republish revised forward-looking statements to reflect eventsor circumstances after the date hereof or to reflect the occurrence ofunanticipated events. We encourage you to carefully review and consider the variousdisclosures made by us which describe certain factors which could affect ourbusiness, including in* “*Risk Factors” set forth inPart II, Item 1A of this report, before deciding to invest in our companyor to maintain or increase your investment. We undertake no obligation torevise or update publicly any forward-looking statement for any reason.*

 

**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 worldwide.

 

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 lanedeparture warning 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 a wide range of communication technologies. Our Vantage videodetection systems detect vehicle presence, count, speed and other traffic dataused in traffic management systems. This gives traffic managers the ability tomitigate roadway congestion by modifying traffic signal timing or detectingincidents quickly. VersiCam, our integrated camera and processor videodetection system, is a cost-efficient video detection system for smallerintersections that require only a few detection points. Vantage video detectionsystems have been deployed by hundreds of agencies and are currently soldthrough a network of independent dealers in the United States, Asia, LatinAmerica, Europe and the Middle East.

 

Our Vehicle Sensors segment addresses the leading cause of roadway fatalities:rear-end, lane change, and roadway departure accidents. We developed the world’sfirst production LDW system and offer a proven system that is available as anOEM and aftermarket option on heavy trucks worldwide and as an option inpassenger cars. Our LDW products utilize video detection images to detect whena vehicle begins to drift toward an unintended lane change. When this occurs,the unit automatically emits a distinctive rumble strip or other audiblewarning sound, alerting the driver to make a correction. To date, we have soldapproximately 70,000 LDW systems into the heavy truck market in Europe, NorthAmerica and Asia. Our LDW systems are currently qualified as an option oncertain heavy trucks, including Mercedes-Benz, MAN, Iveco, DAF, Scania,Freightliner and FUSO, as well as Neoplan and MAN luxury bus and coach lines.In North America, our LDW systems are sold primarily to truck fleets. We havealso licensed our LDW technology to our strategic partner, Valeo Schalter andSensuren GmbH (“Valeo”), resulting in sales to date of approximately 70,000 LDWsystems for passenger cars.

 

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. Our SafetyDirect product is a system that reports driver performance data captured by ourLDW system and that has the ability to relay this information directly to fleetoperators through integration with the truck’s existing fleet communicationssystem. We offer the FCW and BSW features through the resale of Delphi’s radarbased systems, for which we are the exclusive North American dealer, whileSafety Direct was internally developed. These products, together with our LDWproducts, combine to create a suite of active safety driver assistance featuresthat help to reduce the number of motor vehicle crashes and the severity ofcrash-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. Our Transportation Systemssegment is largely dependent upon governmental funding and budgetary issues.The Federal Highway Bill that was passed in August 2005 provided for asignificant increase in transportation funding. We believe the recent expansionof our Transportation Systems segment was due in part to the passage of theFederal Highway Bill, combined with increased transportation funds available atstate and local agencies throughout the country. The 2005 Federal Highway Billis set to expire in September 2009. At this point in time, the impact on futurecontract revenues as a result of the recently introduced federal stimuluspackage and any potential delays in the passage of future transportation billscannot be determined.

 

**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, or U.S. GAAP. The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and related disclosuresof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.On an ongoing basis, we evaluate these estimates and assumptions, includingthose related 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 three months ended June 30, 2009 as compared to what was previouslydisclosed in our Annual Report on Form 10-K for fiscal 2009.

 

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**Results of Operations**

 

The followingtable sets forth certain statement of operations data as a percentage of totalnet sales and contract revenues for the periods indicated:

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **June 30,**      | ** ** |
| ** **                                 | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                       |       |                   |       |   |   |
| Net sales and contract  revenues:          |       |                   |       |   |   |
| Net sales                                  |       | 47.4                   | %          | 60.3 | % |
| Contract revenues                          |       | 52.6                   |       | 39.7 |   |
| Total net sales and  contract revenues     |       | 100.0                  | %          | 100.0 | % |
|                                       |       |                   |       |   |   |
| Costs of net sales and  contract revenues: |       |                   |       |   |   |
| Cost of net sales                          |       | 26.3                   |       | 30.2 |   |
| Cost of contract  revenues                 |       | 35.6                   |       | 25.4 |   |
| Gross profit                               |       | 38.1                   |       | 44.4 |   |
| Operating expenses:                        |       |                   |       |   |   |
| Selling, general and  administrative       |       | 29.1                   |       | 29.6 |   |
| Research and  development                  |       | 6.6                    |       | 6.9 |   |
| Amortization of  intangible assets         |       | 0.3                    |       | 0.2 |   |
| Total operating  expenses                  |       | 36.0                   |       | 36.7 |   |
| Operating income                           |       | 2.2                    |       | 7.7 |   |
| Non-operating income  (expense):           |       |                   |       |   |   |
| Other income, net                          |       | 0.1                    |       | 0.0 |   |
| Interest expense, net                      |       | (0.6                   | )          | (1.1 | ) |
| Income before income  taxes                |       | 1.7                    |       | 6.6 |   |
| Provision for income  taxes                |       | (0.7                   | )          | (2.8 | ) |
| Net income                                 |       | 1.0                    | %          | 3.8 | % |

 

**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.

 

The following table presents details of our net sales and contractrevenues for the three months ended June 30, 2009 compared to the threemonths ended June 30, 2008:

 
| ** **                             | ** ** | **Three Months Ended**                 | ** ** | ** **   | ** ** | ** **     | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                             | ** ** | **June 30,**                      | ** ** | **Increase** | ** ** | **%**          | ** ** |
| ** **                             | ** ** | **2009**                               | ** ** | **2008**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **(In thousands, except percentages)** | ** ** |
| Roadway sensors                        |       | $                                      | 5,875      |         | $          | 7,426          |       | $ | (1,551 | ) | (20.9 | )% |
| Vehicle sensors                        |       | 1,058                                  |       | 3,100        |       | (2,042         | )          | (65.9 | ) |
| Net sales                              |       | 6,933                                  |       | 10,526       |       | (3,593         | )          | (34.1 | ) |
| Contract revenues                      |       | 7,701                                  |       | 6,916        |       | 785            |       | 11.4 |   |
| Total net sales and  contract revenues |       | $                                      | 14,634     |         | $          | 17,442         |       | $ | (2,808 | ) | (16.1 | ) |

 

We havehistorically had a diverse customer base. For the three months ended June 30,2009, one individual customer accounted for approximately 12.1% of our totalnet sales and contract revenues. In the corresponding period in the prior year,no individual customer accounted for greater than 10% of our total net salesand contract revenues.

 

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*RoadwaySensors*

 

Thedecrease in Roadway Sensors net sales for the three months ended June 30,2009 as compared to the corresponding period in the prior year was mainly dueto the ongoing effects of reduced and delayed spending on infrastructureprojects, in part due to the decline in commercial and residential constructionas well as state and local government budgetary pressures. We believe thesefactors are at least partially attributable to the continued weakness in theU.S and global economy. We expect the above factors, among others, may continueto adversely impact our Roadway Sensors net sales for at least the next fewfiscal quarters.

 

*VehicleSensors*

 

Thelargest element of Vehicle Sensors net sales was sales of our LDW systems tothe heavy truck market, which aggregated approximately $810,000 and $2.7million for the three months ended June 30, 2009 and 2008, respectively.Vehicle Sensors net sales decreased for the three months ended June 30,2009 as compared to the three months ended June 30, 2008 primarily due tothe ongoing slowdown in overall LDW unit shipments to each of our key markets.We currently continue to experience softness in our LDW unit sales to the NorthAmerican truck market and to our European and Asian OEM customers, which isdriven largely by the general slowdown in the U.S. and worldwide credit marketsand continued weakness in the overall global economy. Vehicle Sensors unitsales for the remainder of fiscal 2010 and beyond could also be adverselyimpacted by slower than expected adoption rates of our LDW system by Europeanand Asian OEMs and North American heavy truck fleets, as well as potentialadditional OEM volume discounts resulting from increased price competition asnew competitors have entered this market.

 

Alsoincluded in Vehicle Sensors net sales are revenues from contract engineeringservices, technology access fees and royalty revenues in the passenger carmarket that are derived from our strategic relationship with Valeo, whichaggregated approximately $248,000 and $374,000 for the three months ended June 30,2009 and 2008, respectively.

 

*Contract Revenues*

 

Contractrevenues are primarily dependent upon the continued availability of funding atboth the state and federal levels from the various departments oftransportation. The increase in contract revenues for the three months ended June 30,2009 compared to the corresponding period in the prior year was largely aresult of our increased sales and marketing activity across the U.S. throughoutthe prior fiscal year, which resulted in certain significant new contractawards from which we continued to realize benefits in the current quarter.Certain of these new contracts contained a higher than usual amount ofsub-consulting content, which was primarily concentrated in our contractrevenues in the fourth quarter of fiscal 2009 as well as the current fiscalquarter. 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. Allof our contract revenues have been derived from work performed in North Americaunder a broad range of fixed price and cost plus fixed fee contracts.

 

*Gross Profit*.  The following tablepresents details of our gross profit for the three months ended June 30,2009 compared to the three months ended June 30, 2008:

 
| ** **                                                          | ** ** | **Three Months Ended**                 | ** ** | ** ** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                                          | ** ** | **June 30,**                      | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                                                          | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Total gross profit                                                  |       | $                                      | 5,582      | ** ** | $          | 7,752        |       | $ | (2,170 | ) | (28.0 | )% |
| Total gross profit as a  % of total net sales and contract revenues |       | 38.1                                   | %          | 44.4       | %          |         |       |   |   |
| Gross profit as a % of  net sales                                   |       | 44.6                                   | %          | 50.0       | %          |         |       |   |   |
| Gross profit as a % of  contract revenues                           |       | 32.4                                   | %          | 36.0       | %          |         |       |   |   |
|                                                                     |            |                                        |            |            |            |              |            |  |  |  |  |  |

 

Thedecline in gross margins in the current quarter was primarily the result of ahigher mix of Transportation Systems contract revenues, which generally carrylower margins than our net sales.

 

Thedecrease in gross profit as a percent of net sales for the three months ended June 30,2009 as compared to the corresponding period in the prior year was primarily aresult of decreased gross profit in Vehicle Sensors, which was driven by loweroverhead absorption due to the decline in sales in the current quarter, as wellas an increase in certain estimates for additional excess and obsolete inventoryprovisions. Gross profit as a percentage of net sales can fluctuate in anyspecific quarter or year based on, among other factors, customer and productmix, competitive pricing requirements, product warranty costs and provisionsfor excess and obsolete inventories, as well as possible shifts of engineeringresources from development activities to sustaining activities, which we recordas cost of goods sold.

 

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Werecognize contract revenues and related gross profit using percentage ofcompletion contract accounting, and the underlying mix of contract activityaffects the related gross profit recognized in any given period. The decreasein gross profit as a percent of contract revenues for the three months ended June 30,2009 compared to the corresponding period in the prior year was primarily dueto a contract mix weighted more toward lower margin contracts in the currentyear. Lower margin contracts generally have a higher proportion ofsub-consulting revenues associated with them. As compared to the prior yearquarter, in the current quarter we experienced a higher level of sub-consultingcontent related to certain new contracts, which helped contribute to both theoverall increase in our contract revenues, as described above, as well as thedecrease in our gross profit. In subsequent quarters of fiscal 2010, we expectlower levels of sub-consulting content; however, due to the variability andtiming of our contracts, we may experience higher than usual sub-consultingcontent in future periods.

 

*Selling, General and Administrative Expense*.  Thefollowing table presents selling, general and administrative expense for thethree months ended June 30, 2009 compared to the three months ended June 30,2008:

 
| ** **                           | ** ** | **Three Months Ended**                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **    | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|------------------------|------------|------------|------------|---------------|------------|
| ** **                           | ** ** | **June 30, 2009**                 | ** ** | **June 30, 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        |       | $                                      | 2,887      |                   | 19.7       | %          | $          | 3,296         |       | 18.9 | % | $ | (409 | ) | (12.4 | )% |
| Facilities, insurance  and supplies  |       | 595                                    |       | 4.1                    |       | 650        |       | 3.7           |       | (55 | ) | (8.5 | ) |
| Professional and  outside services   |       | 295                                    |       | 2.0                    |       | 494        |       | 2.8           |       | (199 | ) | (40.3 | ) |
| Travel and conferences               |       | 345                                    |       | 2.4                    |       | 402        |       | 2.3           |       | (57 | ) | (14.2 | ) |
| Other                                |       | 131                                    |       | 0.9                    |       | 314        |       | 1.8           |       | (183 | ) | (58.3 | ) |
| Selling, general and  administrative |       | $                                      | 4,253      |                   | 29.1       | %          | $          | 5,156         |       | 29.6 | % | $ | (903 | ) | (17.5 | ) |

 

Thedecrease in selling, general and administrative expense for the three monthsended June 30, 2009 compared to the corresponding period in the prior yearwas primarily due to our overall reduction in headcount from June 30, 2008levels. We also reduced our professional and outside services expensesprimarily as a result of our efforts to conserve costs and scale back our usageof certain of these services, as well as various efficiencies gained in ourinternal control assessment and other financial reporting obligations.

 

*Research and Development Expense*.  Thefollowing table presents research and development expense for the three monthsended June 30, 2009 compared to the three months ended June 30, 2008:

 
| ** **                            | ** ** | **Three Months Ended**                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **    | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|------------------------|------------|------------|------------|---------------|------------|
| ** **                            | ** ** | **June 30, 2009**                 | ** ** | **June 30, 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          |       | $                                      | 683        |                   | 4.7        | %          | $          | 876           |       | 5.0 | % | $ | (193 | ) | (22.0 | )% |
| Facilities, development  and supplies |       | 236                                    |       | 1.6                    |       | 264        |       | 1.5           |       | (28 | ) | (10.6 | ) |
| Other                                 |       | 45                                     |       | 0.3                    |       | 70         |       | 0.4           |       | (25 | ) | (35.7 | ) |
| Research and  development             |       | $                                      | 964        |                   | 6.6        | %          | $          | 1,210         |       | 6.9 | % | $ | (246 | ) | (20.3 | ) |

 

Thedecrease in research and development expense for the three months ended June 30,2009 compared to the corresponding period in the prior year was primarily dueto a combination of an approximate 11% reduction in our engineering headcountand a shift in engineering resources to an organization more focused on newproduct development from one that has been historically focused on new customerqualification and manufacturing support. We believe this structure to be moreefficient. Likewise, in the prior year we had ramped up our research anddevelopment activities in Roadway Sensors aimed at accelerating the time tomarket of certain new products. We believe that research and developmentactivities are crucial to our ability to continue to be a leader in our marketsand we currently expect our expenditures in this area to remain relatively flatfor fiscal 2010 as compared to fiscal 2009.

 

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Forcompetitive reasons, we closely guard the confidentiality of specificdevelopment projects.

 

*Interest Expense, Net.*   Net interest expense of $86,000 for thethree months ended June 30, 2009 was lower than the $198,000 for the threemonths ended June 30, 2008 primarily due to the overall lower level ofborrowings in the current period.

 

*Income**Taxes*.  The following table presents our provision for income taxes forthe three months ended June 30, 2009 and 2008:

 
| ** **                  | ** ** | **Three Months Ended**                 | ** ** | ** ** | ** ** | ** **   | ** ** |
|-----------------------------|------------|----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                  | ** ** | **June 30,**                      | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                  | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                  | ** ** | **(In thousands, except percentages)** | ** ** |
| Provision for income  taxes |       | $                                      | 110        |       | $          | 491          |       | $ | (381 | ) | (78 | )% |
| Effective tax rate          |       | 43.3                                   | %          | 42.4       | %          |         |       |   |   |
|                             |            |                                        |            |            |            |              |            |  |  |  |  |  |

 

Onan interim basis, we estimate what our anticipated annual effective tax ratewill be and record a quarterly income tax provision in accordance with thisanticipated 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 rate. These changes, along with adjustments to our deferred taxes, amongothers, may create fluctuations in our overall effective tax rate from quarterto quarter.

 

**Liquidityand Capital Resources**

 

*CashFlows*

 

Wehave historically financed our operations with a combination of cash flows fromoperations, borrowings under credit facilities and the sale of equitysecurities. We currently rely on cash flows from operations and theavailability of borrowings on a line of credit facility to fund our operations,which we believe are sufficient to fund our operations for at least the nexttwelve months. At June 30, 2009, we had $20.2 million in working capital,which included no borrowings on our $12.0 million line of credit and $6.0million in cash and cash equivalents. This compares to working capital of $20.6million at March 31, 2009, which included no borrowings on our line ofcredit and $6.4 million in cash and cash equivalents.

 

Thefollowing table summarizes our cash flows for the three months ended June 30,2009 and 2008:

 
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **June 30,**      | ** ** |
| ** **                           | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                 | ** ** | **(In  thousands)**    | ** ** |
| **Net  cash provided by (used in):** |       |                   |       |   |   |
| Operating activities                 |       | $                      | 21         |   | $ | (666 | ) |
| Investing activities                 |       | (342                   | )          | (257 | ) |
| Financing activities                 |       | (67                    | )          | 570 |   |
|                                      |            |                        |            |  |  |  |  |

 

*OperatingActivities. *Cash providedby our operations for the three months ended June 30, 2009 was primarilythe result of net income during the period of $144,000, along with $389,000 innon-cash items within the statement of operations, primarily depreciation andstock-based compensation expenses. These cash inflows were substantially offsetby $512,000 in net cash used by changes in operating assets and liabilitiesduring the period. Cash used in operating activities during the three monthsended June 30, 2008 was primarily the result of increases in trade accountsreceivable balances during the current quarter, which was largely attributableto the timing of invoicing of our contract revenues in our TransportationSystems segment.

 

*InvestingActivities. *Our investingactivities for the three months ended June 30, 2009 consisted of purchasesof property and equipment of $42,000 as well as $300,000 used for theacquisition of Hamilton Signal. Cash used in investing activities for the threemonths ended June 30, 2008 consisted entirely of purchases of property andequipment of $257,000.

 

*FinancingActivities. *Net cash usedin financing activities during the three months ended June 30, 2009 wasthe result of net payments on our long-term debt of $139,000, partially offsetby $72,000 in proceeds from the exercise of outstanding stock options topurchase shares of our common stock. During the three months ended June 30,2008, cash provided by financing activities was primarily the result of$514,000 in proceeds from the exercise of outstanding stock options to purchaseshares of our common stock.

 

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*Borrowings*

 

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 borrowingsof up to $12.0 million and a $7.5 million 48-month term note (discussed furtherbelow). Interest on borrowed amounts under the revolving line of credit are payablemonthly at a rate equal to the current stated prime rate 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 (3.75% at June 30, 2009). We are obligated to pay anunused line fee of 0.25% per annum applied to the average unused portion of therevolving line of credit during the preceding month. The revolving line ofcredit does not contain any early termination fees and is secured bysubstantially all of our assets. As of June 30, 2009, no amounts wereoutstanding under the revolving line of credit portion of the facility.

 

As of June 30, 2009,we had outstanding borrowings of approximately $7.2 million under the termnote. Principal payments under this term note are required to be repaid in 48monthly installments commencing on June 1, 2009. Interest on the term noteis payable monthly at a rate equal to the current stated prime rate plus 0.50%up to the current stated prime rate plus 1.00% (4.25% at June 30, 2009),depending on aggregate deposit balances maintained at the bank in relation tothe total loan commitment under the credit facility. The term note contains noearly termination fees and, along with our revolving line of credit discussedabove, is secured by substantially all of our assets.

 

In connection with ourcredit facility and loan agreement with California Bank & Trust, weare also required to comply with certain quarterly financial covenants. Theseinclude achieving certain ratios for working capital and debt service, as wellas maintaining a level of profitability, all of which are further defined inthe agreement. While we believe we are currently in compliance with allfinancial covenants and expect to maintain compliance for the foreseeablefuture, we cannot assure that we will not violate one or more covenants in thefuture. If we were to be in violation of covenants under this agreement, ourlender could choose to accelerate payment on all outstanding loan balances andpursue its security interest in our assets. In this event, there can be noassurances that we would be able to quickly obtain equivalent or suitablereplacement financing. If we were not able to secure alternative sources offinancing, such acceleration would have a material adverse impact on ourfinancial condition.

 

**Off Balance Sheet Arrangements**

 

At June 30, 2009, outstanding warrants topurchase an aggregate of 246,250 shares of our common stock at an exerciseprice of $3.25 per share are callable by us if the market price of our commonstock trades for 20 consecutive days at a price equal to or greater than $6.50per share. Outstanding warrants to purchase an aggregate of 75,000 sharesof our common stock at an exercise price of $5.00 per share are callable by usif the market price of our common stock trades for 20 consecutive days at aprice equal to or greater than $7.50 per share.

 

Inconnection with the issuance of warrants to purchase 246,250 shares of ourcommon stock at $3.25 per share, we are a party to a registration rightsagreement that contains provisions under which we could be subjected toliquidated damages should we fail to maintain effective registration statementsfor the shares of common stock issuable upon exercise of certain underlyingwarrants. Through March 31, 2009, these warrants were accounted for withinequity in our consolidated balance sheets in accordance with EITF Issue No. 00-19,*Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock*, and,accordingly, no liabilities were recorded in connection therewith. Beginning April 1,2009, in connection with our adoption of EITF 07-5, *DeterminingWhether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock*,and as further discussed at Note 6 of Notes to Unaudited Condensed ConsolidatedFinancial Statements included in Part I, Item 1 of this report, becausethese warrants contain a provision for possible future adjustments to eitherthe exercise price and/or number of shares to be issued upon exercise, we beganrecognizing these warrants as liabilities in our consolidated balance sheet. Asof the date of this filing, no liquidated damages are payable under theprovisions of the registration rights agreement associated with these warrants.

 

**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.

 

**Seasonality**

 

Wehave historically experienced, and expect to continue to experienceseasonality, particularly with respect to our Roadway Sensors net sales in thethird and fourth fiscal quarters due to a reduction in road construction orrepairs during the winter months in many markets as a result of inclementweather conditions.

 

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

 

Our exposure to interest rate risk is limited to ourline of credit and our new bank term note. Our line of credit bears interestequal to the prevailing prime rate (3.25% at June 30, 2009) plus 0% to1.0%. We do not believe that a 10% increase in the interest rate on our line ofcredit or term note (from 3.25% to 4.68%) would have a material impact on ourfinancial position, operating results or cash flows. In addition, we believethat the carrying value of our outstanding debt under our credit facilityapproximates fair value.

 

**ITEM 4T.  CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end of theperiod covered by this report, we carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, of the effectiveness of thedesign and operation of our disclosure controls and procedures, as such term isdefined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based uponthat evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures are effective to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the Securities and Exchange Commission’s rules andforms and are effective in ensuring that information required to be disclosedby us in the reports that we file or submit under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating the disclosurecontrols and procedures, our management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives. Ourmanagement necessarily applied its judgment in evaluating the cost-benefitrelationship of such controls and procedures.

 

**Changesin Internal Controls**

 

During the fiscal quarter covered by this report, there has been nochange in our internal controls over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

 

**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**

 

Theinformation set forth under the heading “Litigation and Other Contingencies” inNote 5 of Notes to Unaudited Condensed Consolidated Financial Statements,included in Part I, Item I of this report, is incorporated herein byreference.

 

**ITEM 1A.  RISK FACTORS**

 

*Our business is subject to a numberof risks, some of which are discussed below. Other risks are presentedelsewhere in this report and in the information incorporated by reference intothis report. You should consider the following risks carefully in addition tothe other information contained in this report and our other filings with theSEC, including our annual report on Form 10-K and subsequent reports onForms 10-Q and 8-K, before deciding to buy, sell, or hold our common stock. Therisks and uncertainties described below are not the only ones facing ourcompany. Additional risks and uncertainties not presently known to us or thatwe currently deem immaterial may also affect our business operations. If any ofthese risks actually occurs, our business, financial condition, or results ofoperations could be seriously harmed. In that event, the market price for ourcommon stock could decline and you may lose all or part of your investment.*

 

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**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, is adversely impacted new road construction and is resulting inand may continue to result in flat or declining Roadway Sensor and VehicleSensor net sales in future periods and could also adversely impactTransportation Systems contract revenues. Any of the foregoing economicconditions make it extremely difficult for our customers, our suppliers and usto accurately forecast and plan future business activities. Additionally, therecontinues to be uncertainty regarding the impact of the federal stimuluspackage, including the fact that the accessibility of funds appears to betaking longer than originally anticipated. If such conditions continue orworsen, our business, financial condition and results of operations could bematerially and adversely affected.

 

**Because we depend on government contracts and subcontracts, we faceadditional risks related to contracting with federal, state and localgovernments, 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 occurring in September 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;

 

·                                          changes in government policiesand 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 andplans are subject to change without warning. Certain risks of selling togovernmental entities include dependence on appropriations and administrativeallocation of funds, changes in governmental procurement legislation andregulations and other policies that may reflect political developments oragendas, significant changes in contract scheduling, intense competition forgovernment business and termination of purchase decisions for the convenienceof the governmental entity. Substantial delays in purchase decisions bygovernmental entities, and the current constraints on government budgets at thefederal, state and local level, could cause our net sales and contract revenuesand income to drop substantially or to fluctuate significantly between fiscalperiods.

 

In addition, a large number of our governmentcontracts are fixed price contracts. As a result, we may not be able to recoverany cost overruns we may incur. These fixed price contracts require us toestimate the total project cost based on preliminary projections of the project’srequirements. The financial viability of any given project depends in largepart on our ability to estimate these costs accurately and complete the projecton a timely basis. In the event our costs on these projects exceed the fixedcontractual 

 

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amount,we will be required to bear the excess costs. Such additional costs wouldadversely affect our financial condition and results of operations. Moreover,certain of our government contracts are subject to termination or renegotiationat the convenience of the government, which could result in a large decline inour net sales and contract revenues in any given quarter. Our inability toaddress any of the foregoing concerns or the loss or renegotiation of anymaterial government contract could seriously harm our business, financialcondition and results of operations.

 

**California state budgetary constraints may have a material adverseimpact on us.**The state of California is currently experiencing asignificant budget shortfall and other related budgetary issues andconstraints. The state of California has historically been and is considered tobe a key geographic region for our Roadway Sensors and Transportation Systemssegments. Ongoing uncertainty as to the timing and accessibility of federalstimulus monies to the state, changes in state funding allocations to localagencies and municipalities, or other delays in purchasing for, or commencementof, transportation projects has and may continue to have a negative impact onour net sales and contract revenues and our income.

 

**The markets in which we operate are highly competitive and have manymore established competitors, which could adversely affect our sales or themarket acceptance of our products.**We compete with numerousother companies in our target markets including, but not limited to, large,multinational corporations, which include tier one automotive suppliers, andmany smaller regional engineering firms. We expect such competition to increasedue to technological advancements, industry consolidations and reduced barriersto entry. Increased competition is likely to result in price reductions,reduced gross margins and loss of market share, any of which could seriouslyharm our business, financial condition and results of operations. In the fiscalyear ended March 31, 2007, we began to experience more competition in ourRoadway Sensors segment as the Department of Transportation in one of our largestsales territories moved to a multi-source contracting environment from one inwhich we were the sole supplier. In addition, one of the other developers ofLDW systems was acquired by a large multinational organization during fiscal2009. This new competitor has increased its market share and could be moreaggressive in both the passenger car and heavy truck markets, as a result ofits greater access to resources and reputation in the market. As a result, wehave experienced and may continue to experience increased price competition,which could erode our margins. Additional new competitors have entered thismarket and more competitors may enter in the future. Furthermore, awareness ofLDW technology 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.

 

Many of our competitors have far greater namerecognition and greater financial, technological, marketing, and customerservice resources than we do. This may allow them to respond more quickly tonew or emerging technologies and changes in customer requirements. It may alsoallow them to devote greater resources to the development, promotion, sale andsupport of their products than we can. Recent consolidations of end users,distributors and manufacturers in our target markets have exacerbated thisproblem. As a result of the foregoing factors, we may not be able to competeeffectively in our target markets and competitive pressures could adverselyaffect our business, financial condition and results of operations.

 

**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 good sold couldincrease, adversely affecting our margins.

 

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**We may be unable toattract and retain key personnel, which could seriously harm our business.**Due to thespecialized nature of our business, we are highly dependent on the continuedservice of our executive officers and other key management, engineering andtechnical personnel. The loss of Abbas Mohaddes, our Chief Executive Officer,or any of the other executive officers or key members of management couldadversely affect our business, financial condition, or results of operations.Our success will also depend in large part upon our ability to continue toattract, retain and motivate qualified engineering and other highly skilledtechnical personnel. In particular, the future success of our TransportationSystems segment will depend on our ability to hire additional qualifiedengineers and planners. Competition for qualified employees, particularlydevelopment engineers, is intense. We may not be able to continue to attractand retain sufficient numbers of such highly skilled employees. Our inabilityto attract and retain additional key employees or the loss of one or more ofour current key employees could adversely affect our business, financialcondition and results 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 product 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.

 

We believe that we must continue to make substantialinvestments to support ongoing research and development in order to remaincompetitive. We need to continue to develop and introduce new products thatincorporate the latest technological advancements in outdoor image processinghardware, software and camera technologies in response to evolving customerrequirements. We cannot assure you that we will be able to adequately manageproduct transition issues. Our business and results of operations could beadversely affected if we do not anticipate or respond adequately totechnological developments or changing customer requirements or if we cannotadequately manage inventory issues typically related to new product transitionsand introductions. We cannot assure you that any such investments in researchand development will lead to any corresponding increase in revenue.

 

Market acceptance of our new products depends uponmany factors, including our ability to accurately predict market requirementsand evolving industry standards, our ability to resolve technical challenges ina timely and cost-effective manner, qualify any new products with OEMs andachieve manufacturing efficiencies, the perceived advantages of our newproducts over traditional products and the marketing capabilities of ourindependent distributors and strategic partners, including Valeo’s ability toexpand sales of LDW systems in the passenger car market. The success of our LDWsystem will also depend in part on the success of the automotive vehicles thatincorporate our technology, as well as the success of optional equipment thatOEMs bundle with our technologies.

 

Certain of the components used in our products mayneed to be re-engineered in the next 12 to 36 months as the industry is movingtowards a standard of using lead-free components. We cannot assure you as tothe timing of the adoption of this new standard or our ability to successfullyredesign our products to incorporate compliant components and gain marketacceptance of such redesigned products. In addition, if the standard is adoptedearlier than anticipated we may experience a shortage of products as a resultof potential scarcity of lead-free components.

 

Our business and results of operations could also beseriously harmed by any significant delays in our new product development.Certain of our new products could contain undetected design faults and softwareerrors or “bugs” when first released by us, despite our testing. We may notdiscover these faults or errors until after a product has been installed andused by our customers. Any faults or errors in our existing products or in anynew products may cause delays in product introduction and shipments, requiredesign modifications or harm customer relationships, any of which couldadversely affect our business and competitive position.

 

**New environmental regulationsmay result in a decline in our Vehicle Sensors net sales.**From time to time, environmental regulations are enacted, which cansignificantly increase the cost of manufacturing new vehicles as well as thecost of maintenance of existing vehicles and truck fleets.  As a result, we could experience a decline insales of our Vehicle Sensors products as truck and vehicle manufacturers andfleet operators attempt to control their costs.

 

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**We may engage inacquisitions of companies or technologies that may require us to undertakesignificant capital infusions and could result in disruptions of our businessand diversion of resources and management attention.**We have in thepast acquired, and may in the future acquire, complementary businesses,products, and technologies. Acquisitions may require significant capitalinfusions and, in general, acquisitions also involve a number of special risks,including:

 

·                                          potentialdisruption of our ongoing business and the diversion of our resources andmanagement’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.

 

Our competitors are also soliciting potentialacquisition candidates, which could both increase the price of any acquisitiontargets and decrease the number of attractive companies available foracquisition. Acquisitions may also materially and adversely affect ouroperating results due to large write-offs, contingent liabilities, substantialdepreciation, deferred compensation charges or intangible asset amortization,or other adverse tax or accounting consequences. We cannot assure you that wewill be able to identify or consummate any additional acquisitions,successfully integrate any acquisitions or realize the benefits anticipatedfrom any acquisition.

 

**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 notgenerated significant royalties from Valeo’s efforts and have only beendesigned into one car OEM product line. If Valeo does not devote considerable resources and aggressively pursueopportunities, our expansion into the passenger car market, and our relatedrevenues from contract engineering services, technology access fees and royaltyrevenues could be adversely affected.

 

**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.

 

Our future success will depend upon our ability toanticipate and adapt to changes in technology and industry standards, and toeffectively develop, introduce, market and gain broad acceptance of newproducts and product enhancements incorporating the latest technologicaladvancements. In particular, our LDW systems are incorporated into automobilesand trucks that face significant technological changes in each model year andamong different vehicle models. Accordingly, we must adapt our technology fromtime to time to function with such changes.

 

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**Our international businessoperations may be threatened by many factors that are outside of ourcontrol.**We currently market our products internationally andwe anticipate that our international operations will expand in the near future.International business operations are subject to various inherent risksincluding, 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.

 

All of our international sales are denominated inU.S. dollars. As a result, an increase in the relative value of the dollarcould make our products more expensive and potentially less price competitivein international markets. We do not engage in any transactions as a hedgeagainst risks of loss due to foreign currency fluctuations.

 

Any of the factors mentioned above may adverselyaffect our future international sales and, consequently, affect our business,financial condition and operating results. Furthermore, as we increase ourinternational sales, our total revenues may also be affected to a greater extentby seasonal fluctuations resulting from lower sales that typically occur duringthe summer months in Europe and other parts of the world.

 

**If ourinternal controls over financial reporting do not comply with the requirementsof the Sarbanes-Oxley Act, our business and stock price could be adverselyaffected.**Section 404 of the Sarbanes-Oxley Act of 2002currently requires us to evaluate the effectiveness of our internal controlsover financial reporting at the end of each fiscal year and to include a managementreport assessing the effectiveness of our internal controls over financialreporting in all annual reports. Beginning in our fiscal year ending March 31,2010, 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.

 

Our management, including our CEO and CFO, does notexpect that our internal controls over financial reporting will prevent allerrors and all fraud. A control system, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance that the controlsystem’s objectives will be met. Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, withinIteris have been or will be detected. These inherent limitations include therealities that judgments in decision-making can be faulty and that breakdownscan occur because of simple errors or mistakes. Controls can also becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the controls. The design of anysystem of controls is based in part on certain assumptions about the likelihoodof future events, and we cannot assure you that any design will succeed inachieving its stated goals under all potential future conditions. Over time,our controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with policies or procedures. Becauseof the inherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected.

 

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**We may need to raiseadditional capital in the future, which may not be available on termsacceptable to us, or at all. **Until recently,we have historically generated significant net losses and operating losses, andhave experienced volatility in our cash flows from operations from year toyear. Although we entered into a new $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 further tighten, we may need or choose to raiseadditional capital to refinance the remaining debentures, pursue acquisitionsor to expand our operations.

 

At June 30, 2009, wehad $6.0 million of cash and cash equivalents and our entire $12.0 million lineof credit to fund our operations. We may need to raise additional capital inthe near future to fund our operations or to repay indebtedness. Suchadditional 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.

 

Our capital requirements will depend on manyfactors, including, but not limited to:

 

·                                          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 repay our subordinatedconvertible debentures; and

 

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

 

If our capital requirements are materially differentfrom those currently planned, we may need additional capital sooner thananticipated. If additional funds are raised through the issuance of equity orconvertible debt securities, the percentage ownership of our stockholders willbe reduced and such securities may have rights, preferences and privilegessenior to our common stock. Additional financing may not be available onfavorable terms, on a timely basis, or at all. If adequate funds are notavailable or are not available on acceptable terms, we may be unable tocontinue our operations as planned, develop or enhance our products, expand oursales and marketing programs, take advantage of future opportunities or respondto 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 quarterly revenuesand operating results have fluctuated and are likely to continue to vary fromquarter to quarter due to a number of factors, many of which are not within ourcontrol. Factors that could affect our revenues include, among others, thefollowing:

 

·                                          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 homeconstruction and related road and other infrastructure construction;

 

·                                          changes in our pricingpolicies and the pricing policies of our suppliers and competitors, pricingconcessions on volume sales, as well as increased price competition in general;

 

·                                          the long lead timesassociated with government contracts or required by vehicle manufacturers;

 

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

 

·                                          our ability to controlcosts;

 

·                                          our ability to raiseadditional capital;

 

·                                          the mix of our products andservices sold in a quarter, which mix has varied and is expected to continue tovary from time to time;

 

·                                          seasonality due to winterweather conditions;

 

·                                          international conflicts andacts of terrorism;

 

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

 

·                                          market acceptance of theproducts incorporating our technologies and products;

 

·                                          the introduction of newproducts by competitors;

 

·                                          the availability and cost ofcomponents used in the manufacture of our products;

 

·                                          our success in expanding andimplementing our sales and marketing programs;

 

·                                          the effects of technologicalchanges in our target markets;

 

·                                          the amount of our backlog atany given time;

 

·                                          the nature of our governmentcontracts;

 

·                                          deferrals of customer ordersin anticipation of new products, applications or product enhancements;

 

·                                          risks and uncertaintiesassociated with our international business;

 

·                                          currency fluctuations andour ability to get currency out of certain foreign countries; and

 

·                                          general economic andpolitical conditions.

 

Due to all of the factors listed above as well asother unforeseen factors, our future operating results could be below theexpectations of securities analysts or investors. If that happens, the tradingprice of our common stock could decline. As a result of these quarterlyvariations, you should not rely on quarter-to-quarter comparisons of ouroperating results as an indication of our future performance.

 

**We haveexperienced growth in recent years. If we fail to manage our growtheffectively, we may be unable to execute our business plan andmay experience future weaknesses in our internal controls.**We have expanded our overall business inthe past few years. In order to achieve our business objectives, we will needto continue to expand our business and add additional qualified personnel. Suchexpansion has placed and is expected to continue to place, a significant strainon our managerial, administrative, operational, financial and other resources.If we are unable to successfully manage our growth, our business, financialcondition and results of operations will be adversely affected.

 

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**We may not be able toadequately protect or enforce our intellectual property rights, which couldharm our competitive position.**If we are not able toadequately protect or enforce the proprietary aspects of our technology,competitors could be able to access our proprietary technology and ourbusiness, 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.

 

Litigationmay be necessary in the future to enforce our intellectual property rights orto determine the validity and scope of the proprietary rights of others.Litigation may also be necessary to defend against claims of infringement orinvalidity by others. An adverse outcome in litigation or any similarproceedings could subject us to significant liabilities to third parties,require us to license disputed rights from others or require us to ceasemarketing or using certain products or technologies. We may not be able toobtain any licenses on terms acceptable to us, or at all. We also may have toindemnify certain customers or strategic partners if it is determined that wehave infringed upon or misappropriated another party’s intellectual property.Any of these results could adversely affect our business, financial conditionand results of operations. In addition, the cost of addressing any intellectualproperty litigation claim, including legal fees and expenses, and the diversionof management’s attention and resources, regardless of whether the claim isvalid, could be significant and could seriously harm our business, financialcondition and results of operations.

 

**We havehistorically experienced substantial losses and may experience losses inthe future.**Although we have achieved net income in our pastfour fiscal years, we experienced a net loss of $11.3 million in the year endedMarch 31, 2005 and significant net losses in prior years. We cannot assureyou that we will be able to sustain or improve our financial performance, orthat we will be able to continue to achieve profitability on a quarterly orannual basis in the future. Most of our expenses are fixed in advance. As such,we generally are unable to reduce our expenses significantly in the short-termto compensate for any unexpected delay or decrease in anticipated revenues. Asa result, we may continue to experience operating losses and net losses, whichwould make it difficult to fund our operations and achieve our business plan,and could cause the market price of our common stock to decline.

 

**The trading price of our common stock is highly volatile.**The tradingprice of our common stock has been subject to wide fluctuations in the past.Since February 2001, our Class A common stock (now known as ourcommon stock) has traded at prices as low as $0.45 per share and as high as$6.12 per share. The market price of our common stock could continue tofluctuate in the future in response to various factors, including, but notlimited to:

 

·                                          quarterly variations inoperating results;

 

·                                          our ability to controlcosts, improve cash flow and sustain profitability;

 

·                                          our ability to raiseadditional capital;

 

·                                          shortages announced bysuppliers;

 

·                                          announcements oftechnological innovations or new products or applications by our competitors,customers or us;

 

·                                          transitions to new productsor product enhancements;

 

·                                          acquisitions of businesses,products or technologies;

 

·                                          the impact of anylitigation;

 

·                                          changes in investorperceptions;

 

·                                          government funding, politicalagendas and other budgetary constraints;

 

·                                          changes in earningsestimates or investment recommendations by securities analysts; and

 

·                                          international conflicts,political unrest and acts of terrorism.

 

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The stock market in general has from time to timeexperienced volatility, which has often affected the market prices of equitysecurities of many technology companies. This volatility has often beenunrelated to the operating performance of these companies. These broad marketfluctuations may adversely affect the market price of our common stock. In thepast, companies that have experienced volatility in the market price of theirsecurities have been the subject of securities class action litigation. If wewere to become the subject of a class action lawsuit, it could result insubstantial losses and divert management’s attention and resources from othermatters.

 

**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), paid this supplier $125,000 on October 20, 2006 and arerequired to pay an additional $350,000 in 36 equal monthly installments of$9,700 through October 2009. 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 theCompany’s charter documents may discourage a third party from acquiring usand may adversely affect the price of our common stock.**Certain provisionsof our certificate of incorporation could make it difficult for a third partyto acquire us, even though an acquisition might be beneficial to ourstockholders. 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. Our future issuance of preferred stock also could be used toeffect a stockholder rights plan, which could discourage an unsolicitedacquisition proposal

 

**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**

 

**PromissoryNote with MAXxess**

 

Asdiscussed in Note 5 to Notes to Unaudited Condensed Consolidated FinancialStatements included in Part I, Item 1 of this report, at June 30,2009, MAXxess, one of our former subsidiaries that is currently owned by aninvestor group that includes two of our directors, owed us an aggregate of$274,000 related to a sublease and certain related ancillary services that weprovided to MAXxess. On July 31, 2009, MAXxess executed a promissory notein favor of Iteris for $274,000. The promissory note bears interest at a rateof six percent (6%) per annum, compounded annually, with accrued interest to bepaid annually on the first business day of each calendar year. Payments underthe note may be made in bona fide services rendered to us by MAXxess to theextent we pre-approve such services and amounts. All amounts outstanding underthe note will become due and payable on the earliest of August 10, 2014, achange in control of MAXxess or a financing by MAXxess resulting in grossproceeds of at least $10 million.

 

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**ITEM 6.  EXHIBITS**

 

The following exhibits are filed herewith or areincorporated by reference to the location indicated.

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                               | ** ** | **Where Located**                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Amended and Restated  Certificate of Incorporation of the registrant                                                                          | * *   | *Exhibit 3.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  October 28, 2004*                                                   |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.2                 |       | Certificate of Amendment  to Amended and Restated Certificate of Incorporation filed September 26,  2007                                 | * *   | *Exhibit 3.2  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007 as filed with the SEC on November 13, 2007* |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 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*                                                  |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 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*               |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 10.1                |       | Unsecured  Promissory Note dated August 10, 2009 executed by MAXxess  Systems, Inc.                                                 | * *   | *Filed  herewith*                                                                                                                                                              |
|                |       |                                                                                                                                          | * *   | * *                                                                                                                                                                       |
| 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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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| Dated:  August 11, 2009 | 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                 |       | Amended and Restated  Certificate of Incorporation of the registrant                                                                          | * *   | *Exhibit 3.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  October 28, 2004*                                                   |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.2                 |       | Certificate of Amendment  to Amended and Restated Certificate of Incorporation filed September 26,  2007                                 | * *   | *Exhibit 3.2  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2007 as filed with the SEC on November 13, 2007* |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 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*                                                  |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 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*               |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 10.1                |       | Unsecured  Promissory Note dated August 10, 2009 executed by MAXxess  Systems, Inc.                                                 | * *   | *Filed  herewith*                                                                                                                                                              |
|                |       |                                                                                                                                          | * *   | * *                                                                                                                                                                       |
| 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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