Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-Q**

 

**(MarkOne)**

 
| **x**                                                       | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                        |                                                                                                    |
| **For the quarterly period  ended September 30, 2010** |
|                                                        |                                                                                                    |
| **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 its charter)

 

| **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’s telephone number, including area code)

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes  o  No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting 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 inRule 12b-2 of the Exchange Act). Yes o No x

 

Asof October 22, 2010, there were 34,331,756 shares of common stockoutstanding.

 

 

 

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**ITERIS, INC.**

**Quarterly Report on Form 10-QFor the Three and Six Months Ended September 30, 2010**

 

**Table ofContents**

 
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                              |   | 3      |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------------|--------|--------|
|              |       |                                                                                                                   |   |   |
| ITEM 1.           |       | FINANCIAL STATEMENTS                                                                                                   |   | 3      |
|              |       |                                                                                                                   |   |   |
|              |       | UNAUDITED  CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2010 AND  MARCH 31, 2010                        |   | 3      |
|              |       |                                                                                                                   |   |   |
|              |       | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS  ENDED SEPTEMBER 30, 2010 AND 2009 |   | 4      |
|              |       |                                                                                                                   |   |   |
|              |       | UNAUDITED  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED  SEPTEMBER 30, 2010 AND 2009       |   | 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                                                            |   | 25     |
|              |       |                                                                                                                   |   |   |
| ITEM 4T.          |       | CONTROLS AND  PROCEDURES                                                                                               |   | 26     |
|              |       |                                                                                                                   |   |   |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                  |   | 26     |
|              |       |                                                                                                                   |   |   |
| ITEM 1.           |       | LEGAL PROCEEDINGS                                                                                                      |   | 26     |
|              |       |                                                                                                                   |   |   |
| ITEM 1A.          |       | RISK FACTORS                                                                                                           |   | 26     |
|              |       |                                                                                                                   |   |   |
| ITEM 2.           |       | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                           |   | 35     |
|              |       |                                                                                                                   |   |   |
| ITEM 3.           |       | DEFAULTS  UPON SENIOR SECURITIES                                                                                       |   | 35     |
|              |       |                                                                                                                   |   |   |
| ITEM 4.           |       | (REMOVED AND  RESERVED)                                                                                                |   | 35     |
|              |       |                                                                                                                   |   |   |
| ITEM 5.           |       | OTHER INFORMATION                                                                                                      |   | 36     |
|              |       |                                                                                                                   |   |   |
| ITEM 6.           |       | EXHIBITS                                                                                                               |   | 36     |

 

Unlessotherwise indicated in this report, the “Company,” “we,” “us” and “our” referto Iteris, Inc. and our wholly-owned subsidiary, Iteris Europe GmbH.

 

AutoVue®, Iteris®,Vantage®, VantageViewTM, VersiCamTM, SafetyDirectTM and AbacusTM 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. FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

 

**Iteris, Inc.**

**UnauditedCondensed Consolidated Balance Sheets**

**(In thousands, except par value)**

** **
| ** **                                                                                                                                                                  | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2010**               | ** ** | **2010**           | ** ** |
| **Assets**                                                                                                                                                                  | ** ** | ** **             | ** ** | ** **         | ** ** |
| Current assets:                                                                                                                                                             |       |                   |       |               |       |
| Cash and cash equivalents                                                                                                                                                   |       | $                      | 12,323     |               | $          | 10,405 |   |
| Trade accounts receivable                                                                                                                                                   |       | 11,083                 |       | 11,311             |       |
| Costs in excess of billings on uncompleted  contracts                                                                                                                       |       | 3,239                  |       | 3,871              |       |
| Inventories                                                                                                                                                                 |       | 3,221                  |       | 2,727              |       |
| Deferred income taxes                                                                                                                                                       |       | 4,193                  |       | 4,993              |       |
| Prepaid expenses and other current assets                                                                                                                                   |       | 395                    |       | 623                |       |
| Total current assets                                                                                                                                                        |       | 34,454                 |       | 33,930             |       |
| Property and equipment, net                                                                                                                                                 |       | 2,315                  |       | 2,550              |       |
| Deferred income taxes                                                                                                                                                       |       | 9,739                  |       | 9,739              |       |
| Intangible assets, net                                                                                                                                                      |       | 379                    |       | 452                |       |
| Goodwill                                                                                                                                                                    |       | 27,791                 |       | 27,791             |       |
| Other assets                                                                                                                                                                |       | 214                    |       | 200                |       |
| Total assets                                                                                                                                                                |       | $                      | 74,892     |               | $          | 74,662 |   |
|                                                                                                                                                                        |       |                   |       |               |       |
| **Liabilities and stockholders’  equity**                                                                                                                              |       |                   |       |               |       |
| Current liabilities:                                                                                                                                                        |       |                   |       |               |       |
| Trade accounts payable                                                                                                                                                      |       | $                      | 2,982      |               | $          | 2,492 |   |
| Accrued payroll and related expenses                                                                                                                                        |       | 2,897                  |       | 2,709              |       |
| Accrued liabilities                                                                                                                                                         |       | 1,721                  |       | 1,748              |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts                                                                                                |       | 1,321                  |       | 2,105              |       |
| Current portion of long-term debt                                                                                                                                           |       | 2,324                  |       | 2,324              |       |
| Total current liabilities                                                                                                                                                   |       | 11,245                 |       | 11,378             |       |
| Deferred rent                                                                                                                                                               |       | 1,230                  |       | 1,386              |       |
| Unrecognized tax benefits                                                                                                                                                   |       | 753                    |       | 751                |       |
| Other non-current liabilities                                                                                                                                               |       | —                 |       | 112                |       |
| Long-term debt                                                                                                                                                              |       | 2,054                  |       | 2,969              |       |
| Total liabilities                                                                                                                                                           |       | 15,282                 |       | 16,596             |       |
| Commitments and contingencies                                                                                                                                               |       |                   |       |               |       |
| Stockholders’ equity:                                                                                                                                                  |       |                   |       |               |       |
| Common stock. $0.10 par value, 70,000 shares  authorized, 34,332 and 34,318 shares issued and outstanding at  September 30, 2010 and March 31, 2010, respectively |       | 3,433                  |       | 3,432              |       |
| Additional paid-in capital                                                                                                                                                  |       | 137,707                |       | 137,503            |       |
| Accumulated deficit                                                                                                                                                         |       | (81,530                | )          | (82,869            | )          |
| Total stockholders’ equity                                                                                                                                             |       | 59,610                 |       | 58,066             |       |
| Total liabilities and stockholders’ equity                                                                                                                             |       | $                      | 74,892     |               | $          | 74,662 |   |

 

See accompanying notes.

 

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**Iteris, Inc.**

**Unaudited Condensed ConsolidatedStatements of Income**

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

** **
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **September 30,**           | ** ** | **September 30,**         | ** ** |
| ** **                                | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales and contract revenues:          |       |                             |       |                           |       |   |   |   |   |
| Net sales                                 |       | $                                | 8,868      |                           | $          | 8,462 |   | $ | 18,330 |   | $ | 15,395 |   |
| Contract revenues                         |       | 5,218                            |       | 6,403                          |       | 11,430 |   | 14,104 |   |
| Total net sales and contract revenues     |       | 14,086                           |       | 14,865                         |       | 29,760 |   | 29,499 |   |
| Costs of net sales and contract revenues: |       |                             |       |                           |       |   |   |   |   |
| Cost of net sales                         |       | 4,543                            |       | 4,412                          |       | 9,063 |   | 8,255 |   |
| Cost of contract revenues                 |       | 3,242                            |       | 3,883                          |       | 7,379 |   | 9,092 |   |
| Gross profit                              |       | 6,301                            |       | 6,570                          |       | 13,318 |   | 12,152 |   |
| Operating expenses:                       |       |                             |       |                           |       |   |   |   |   |
| Selling, general and administrative       |       | 4,271                            |       | 4,527                          |       | 8,912 |   | 8,780 |   |
| Research and development                  |       | 1,040                            |       | 884                            |       | 1,981 |   | 1,848 |   |
| Amortization of intangible assets         |       | 37                               |       | 42                             |       | 73 |   | 86 |   |
| Total operating expenses                  |       | 5,348                            |       | 5,453                          |       | 10,966 |   | 10,714 |   |
| Operating income                          |       | 953                              |       | 1,117                          |       | 2,352 |   | 1,438 |   |
| Non-operating income (expense):           |       |                             |       |                           |       |   |   |   |   |
| Other income (expense), net               |       | 19                               |       | (2                             | )          | 20 |   | 17 |   |
| Interest expense, net                     |       | (42                              | )          | (71                            | )          | (82 | ) | (157 | ) |
| Income before income taxes                |       | 930                              |       | 1,044                          |       | 2,290 |   | 1,298 |   |
| Provision for income taxes                |       | (388                             | )          | (501                           | )          | (951 | ) | (611 | ) |
| Net income                                |       | $                                | 542        |                           | $          | 543 |   | $ | 1,339 |   | $ | 687 |   |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Earnings per share:                       |       |                             |       |                           |       |   |   |   |   |
| Basic                                     |       | $                                | 0.02       |                           | $          | 0.02 |   | $ | 0.04 |   | $ | 0.02 |   |
| Diluted                                   |       | $                                | 0.02       |                           | $          | 0.02 |   | $ | 0.04 |   | $ | 0.02 |   |
| Weighted average shares outstanding:      |       |                             |       |                           |       |   |   |   |   |
| Basic                                     |       | 34,332                           |       | 34,254                         |       | 34,331 |   | 34,223 |   |
| Diluted                                   |       | 34,383                           |       | 34,435                         |       | 34,538 |   | 34,411 |   |

 

See accompanying notes.

 

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**Iteris, Inc.**

**UnauditedCondensed Consolidated Statements of Cash Flows**

**(In thousands)**

** **
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**         | ** ** |
| ** **                                                                         | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| ** **                                                                         | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Cash flows from operating  activities**                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                              | 1,339      |   | $ | 687 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                           |       |   |   |
| Change in deferred tax assets                                                      |       | 800                            |       | 451 |   |
| Depreciation of property and equipment                                             |       | 484                            |       | 499 |   |
| Stock-based compensation                                                           |       | 186                            |       | 187 |   |
| Amortization of intangible assets                                                  |       | 73                             |       | 86 |   |
| Changes in operating assets and liabilities:                                       |       |                           |       |   |   |
| Accounts receivable                                                                |       | 228                            |       | 1,908 |   |
| Net costs and estimated earnings in excess of  billings                            |       | (152                           | )          | 119 |   |
| Inventories                                                                        |       | (494                           | )          | 1,979 |   |
| Prepaid expenses and other assets                                                  |       | 214                            |       | (124 | ) |
| Accounts payable and accrued expenses                                              |       | 491                            |       | (2,126 | ) |
| Net cash provided by operating activities                                          |       | 3,169                          |       | 3,666 |   |
|                                                                               |       |                           |       |   |   |
| **Cash flows from investing  activities**                                          |       |                           |       |   |   |
| Purchases of property and equipment                                                |       | (249                           | )          | (116 | ) |
| Cash paid for business combination                                                 |       | (106                           | )          | (300 | ) |
| Net cash used in investing activities                                              |       | (355                           | )          | (416 | ) |
|                                                                               |       |                           |       |   |   |
| **Cash flows from financing  activities**                                          |       |                           |       |   |   |
| Borrowings on long-term debt                                                       |       | —                         |       | 750 |   |
| Payments on long-term debt                                                         |       | (915                           | )          | (1,335 | ) |
| Proceeds from stock option exercises                                               |       | 19                             |       | 90 |   |
| Net cash used in financing activities                                              |       | (896                           | )          | (495 | ) |
| Effect of exchange rate changes on cash                                            |       | —                         |       | 58 |   |
| Increase in cash and cash equivalents                                              |       | 1,918                          |       | 2,813 |   |
| Cash and cash equivalents at beginning of period                                   |       | 10,405                         |       | 6,372 |   |
| Cash and cash equivalents at end of period                                         |       | $                              | 12,323     |   | $ | 9,185 |   |
|                                                                               |       |                           |       |   |   |
| **Supplemental disclosure of  non-cash investing and financing activities:**       |       |                           |       |   |   |
| Liabilities incurred for business combination                                      |       | $                              | —     |   | $ | 218 |   |

 

See accompanying notes.

 

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**Iteris, Inc.**

**Notes to Unaudited CondensedConsolidated Financial Statements**

**September 30, 2010**

 

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

 

**Descriptionof Business**

 

Iteris, Inc.(including our subsidiary, referred to collectively in these unauditedconsolidated financial 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 and improve the safety of surface transportation systemsinfrastructure. Additionally, we believe our products and services, inconjunction with sound traffic management, minimize the environmental impact oftraffic congestion. By combining outdoor image processing, traffic engineeringand information technology, we offer a broad range of IntelligentTransportation Systems (“ITS”) and driver safety solutions. Iteris wasoriginally incorporated in Delaware in 1987.

 

**Basisof Presentation**

 

Ourunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United States (“U.S.GAAP”) for interim financial information and with the instructions toSecurities and Exchange Commission (“SEC”) Form 10-Q and Article 10of SEC Regulation S-X. In the opinion of management, the accompanying unauditedcondensed consolidated financial statements contain all adjustments, consistingof normal recurring adjustments, necessary to present fairly the consolidatedfinancial position of Iteris as of September 30, 2010, the consolidatedresults of operations for the three and six months ended September 30, 2010and 2009 and the consolidated cash flows for the six months endedSeptember 30, 2010 and 2009. Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with U.S. GAAPhave been condensed or omitted pursuant to the rules and regulations ofthe SEC. The results of operations for the three and six months endedSeptember 30, 2010 are not necessarily indicative of those to be expectedfor future quarterly periods or the entire fiscal year. The accompanyingunaudited condensed consolidated financial statements should be read inconjunction with our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2010, which was filed with the SEC on May 21, 2010.

 

**Use of Estimates**

 

The preparation of consolidated financial statements inconformity with U.S. GAAP requires our management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements, and reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates. Significant estimatesmade in the preparation of the consolidated financial statements include theallowance for doubtful accounts, projections of taxable income used to assessrealizability of deferred tax assets, inventory and warranty reserves, costs tocomplete long-term contracts, indirect cost rates used in cost-plus contracts,contract reserves, the valuation of debt and equity instruments and estimatesof future cash flows used to assess the recoverability of long-lived assets andthe impairment of goodwill.

 

**Revenue Recognition**

 

*Net Sales*

 

Product revenues and related costs of sales arerecognized upon the transfer of title, which generally occurs upon shipment or,if required, upon acceptance by the customer, provided that we believecollectibility of the net sales amount is probable. Accordingly, at the daterevenue is recognized, the significant uncertainties concerning the sale havebeen resolved.

 

We recognize revenue fromthe sale of deliverables that are part of a multiple-element arrangement inaccordance with applicable accounting guidance that establishes a selling pricehierarchy permitting the use of an estimated selling price to determine theallocation of arrangement consideration to a deliverable in a multiple-elementarrangement where neither vendor specific objective evidence (“VSOE”) northird-party evidence (“TPE”) is available for that deliverable. In the absenceof VSOE or TPE of the standalone selling price for one or more delivered orundelivered elements in a multiple-element arrangement, we are required toestimate the selling prices of those elements. Overall arrangementconsideration is allocated to each element (both delivered and undelivereditems) based on their relative selling prices, regardless of whether thoseselling prices are evidenced by VSOE or TPE or are based on our estimatedselling prices.

 

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We account for multiple-elementarrangements that consist only of software and software-related services inaccordance with industry-specific accounting guidance for software andsoftware-related transactions. For such transactions, revenue on arrangementsthat include multiple elements is allocated to each element based on therelative fair value of each element, and fair value is generally determined byVSOE. If we cannot objectively determine the fair value of any undeliveredelement included in such multiple-element arrangements and the only undeliveredelement is post-contract customer support or maintenance, and VSOE of the fairvalue of such support or maintenance does not exist, revenue from the entirearrangement is recognized ratably over the support period. When the fair valueof a delivered element has not been established, but VSOE of fair value existsfor the undelivered elements, we use the residual method to recognize revenueif the fair value of all undelivered elements is determinable. Under theresidual method, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is allocated to the delivered elementsand is recognized as revenue.

 

We also derive revenue from the provision of specificnon-recurring contract engineering services and royalties. Non-recurringcontract engineering revenues are recognized in the period in which the relatedservices are performed. Royalty revenues are recorded in the period in whichthe royalty is earned based on unit sales of certain of our products.Non-recurring contract engineering and royalty revenues are included in netsales in the accompanying unaudited condensed consolidated statements of incomeand totaled $155,000 and $296,000 for the three and six months endedSeptember 30, 2010, respectively, and $191,000 and $439,000 for the threeand six months ended September 30, 2009, respectively.

 

*Contract Revenues*

 

Contract revenues are derived primarily from long-termcontracts with governmental agencies. Contract revenues include costs incurredplus a portion of estimated fees or profits determined on the percentage ofcompletion method of accounting based on the relationship of costs incurred tototal estimated costs. Any anticipated losses on contracts are charged toearnings when identified. Changes in job performance and estimatedprofitability, including those arising from contract penalty provisions and finalcontract settlements, may result in revisions to costs and revenues and arerecognized in the period in which the revisions are determined. Profitincentives are included in revenue when their realization is reasonablyassured.

 

**Foreign Currency**

 

We have determined that the functional currency of oursubsidiary in Europe is the United States (“U.S.”) dollar. Local currencyfinancial statements are remeasured into U.S. dollars at the exchange rate ineffect as of the balance sheet date for monetary assets and liabilities and thehistorical exchange rate for nonmonetary assets and liabilities. Revenues andexpenses are remeasured using the average exchange rate for the period, exceptitems related to nonmonetary assets and liabilities, which are remeasured usinghistorical exchange rates. Remeasurement gains and losses are reported in “otherincome (expense), net” in the unaudited condensed consolidated statements ofincome.

 

**Concentrationof Credit Risk**

 

Financial instruments that potentially subject us to aconcentration of credit risk consist principally of cash and cash equivalentsand trade accounts receivable.

 

Cash and cash equivalents consist primarily of demanddeposits and money market funds maintained with several financial institutions.Deposits held with banks may exceed the amount of insurance provided on suchdeposits. Generally, these deposits may be redeemed upon demand and aremaintained with high credit quality financial institutions, and therefore haveminimal credit risk.

 

Our accounts receivable are primarily derived fromrevenues earned from customers located throughout North America and Europe. Wegenerally do not require collateral or other security from customers. Wemaintain an allowance for doubtful accounts for potential credit losses, whichlosses have generally been within management’s expectations.

 

**FairValues 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 and long-term debtapproximate carrying value because the related effective rates of interestapproximate current market rates available to us for debt with similar termsand similar remaining maturities.

 

**Cash and Cash Equivalents**

 

Cash and cash equivalents consist of cash and short-terminvestments with initial maturities of ninety days or less.

 

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**Allowance for Doubtful Accounts**

 

The collectability of our accounts receivable isevaluated through review of invoices outstanding greater than a certain periodof time and ongoing credit evaluations of our customers’ financial condition.In cases where we are aware of circumstances that may impair a specificcustomer’s ability to meet its financial obligations subsequent to the originalsale, we will record an allowance against amounts due, and thereby reduce thenet recognized receivable to the amount we reasonably believe will becollected. We also maintain an allowance based on our historical collectionsexperience. When we determine that collection is not likely, we write offaccounts receivable against the allowance for doubtful accounts.

 

**Costs in Excess of Billings on Uncompleted Contracts**

 

Costs in excess of billings on uncompleted contracts inthe accompanying unaudited condensed consolidated balance sheets representunbilled amounts earned and reimbursable under services salesarrangements. At any given period-end, a large portion of the balance inthis account represents the accumulation of labor, materials and other coststhat have not been billed due to timing, whereby the accumulation of each month’scosts and earnings are not administratively billed until the subsequent month.Also included in this account are amounts that become billable according tocontract terms, which usually consider the passage of time, achievement ofmilestones or completion of the project. Generally, such unbilled amountswill be billed and collected within the next twelve months.

 

**Billings in Excess of Costs and Estimated Earnings on UncompletedContracts**

 

Billings in excess of costs and estimated earnings onuncompleted contracts in the accompanying unaudited condensed consolidatedbalance sheets is comprised of cash collected from customers and billings tocustomers on contracts in advance of work performed, advance paymentsnegotiated as a contract condition, estimated losses on uncompleted contracts,project-related legal liabilities and other project-related reserves. Themajority of the unearned amounts are expected to be earned within the nexttwelve months.

 

We record provisions for estimated losses on uncompletedcontracts in the period in which such losses become known. The cumulativeeffects of revisions to contract revenues and estimated completion costs arerecorded in the accounting period in which the amounts become evident and canbe reasonably estimated. These revisions can include such items as theeffects of change orders and claims, warranty claims, liquidated damages orother contractual penalties, adjustments for audit findings on U.S. or othergovernment contracts and contract closeout settlements.

 

**Inventories**

 

Inventoriesare stated at the lower of cost or market. Cost is determined using thefirst-in, first-out method.

 

**Property and Equipment**

 

Propertyand equipment are recorded at cost and are depreciated using the straight-linemethod over the estimated useful life ranging from three to eight years.Leasehold improvements are depreciated over the term of the related lease orthe estimated useful life of the improvement, whichever is shorter.

 

**Goodwill and Long-Lived Assets**

 

Goodwill is tested forimpairment on an annual basis in our fourth fiscal quarter or more frequentlyif indicators of impairment exist. The performance of the test involves atwo-step process. The first step of the impairment test involves comparing thefair value of our reporting units with each respective reporting unit’scarrying amount, including goodwill. We determine the fair value of reportingunits using the income approach with a reconciliation of the total reportingunit fair value to our total market capitalization plus an appropriate controlpremium. If the carrying amount of a reporting unit exceeds the reporting unit’sfair value, the second step of the goodwill impairment test is performed todetermine the amount of any impairment loss. The second step of the goodwillimpairment test involves comparing the implied fair value of the reporting unit’sgoodwill with the carrying amount of that goodwill and an impairment charge isrecorded for any excess carrying amount over fair value. We performed annualimpairment assessments of the carrying value of goodwill for each of the fiscalyears ended March 31, 2010, 2009 and 2008. Based on these assessments, wedetermined that no impairment as of each of these dates was indicated as theestimated fair value of each of our reporting units exceeded its respectivecarrying value. We monitor the indicators for goodwill impairment testingbetween annual tests. Various circumstances including, among others, certainadverse business conditions impacting one or more reporting units or a declinein our market capitalization for an extended period of time, would cause us totest goodwill for impairment on an interim basis.

 

Due to the current economic environment, indicatorsemerged that led us to conclude that an impairment assessment of the carryingvalue of goodwill was necessary during the quarter ended September 30, 2010.Accordingly, we performed an interim test of impairment and, based on theresults of this testing, concluded that no impairment existed as ofSeptember 30, 2010. We plan to perform our annual test for impairmentduring the fourth quarter of our current fiscal year ending March 31, 2011.

 

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Wealso evaluate long-lived assets used in operations for impairment whenindicators of impairment are present. Reviews are performed to determine whether the carrying value of assetsis impaired, based on a comparison of undiscounted expected future cash flowsto the carrying value of the related net assets.  If this comparison indicates that there isimpairment, the impaired asset is written down to fair value, which istypically calculated using discounted expected future cash flows and a discountrate based upon our weighted average cost of capital adjusted for risksassociated with the related operations. Impairment is based on the excess of the carrying amount over the fairvalue of those assets.

 

**Income Taxes**

 

Weutilize the liability method of accounting for income taxes, whereby deferredtaxes are determined based on the temporary differences between the financialstatement and tax bases of assets and liabilities using enacted tax rates. Avaluation allowance is recorded when it is more likely than not that all or aportion of the deferred tax assets will not be realized.

 

Wemust review all of our tax positions and make a determination as to whethereach position is more-likely-than-not to be sustained upon examination bytaxing authorities. If a tax position meets the more-likely-than-not standard,then the related tax benefit is measured based on a cumulative probabilityanalysis of the amount that is more-likely-than-not to be realized uponeffective settlement or disposition of the underlying issue.

 

**Stock-Based Compensation**

 

We record stock-based compensation in the unauditedconsolidated statements of income as an expense, based on the grant date fairvalues of our stock-based awards, whereby such fair values are amortized overthe requisite service period. The fair value of our common stock option awardsis estimated 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. The fair valueof our restricted stock units is based on the closing market price of ourcommon stock on the date of grant.

 

**Researchand Development Expenditures**

 

Researchand development expenditures are charged to expense in the period in which theyare incurred.

 

**Shippingand Handling Costs**

 

Shippingand handling costs are included in cost of sales in the period during whichproducts ship.

 

**SalesTaxes**

 

Salestaxes are presented on a net basis (excluded from net sales and contractrevenues) in the unaudited condensed consolidated statements of income.

 

**Warranty**

 

Wegenerally provide a one to three year warranty from the original invoice dateon all products, materials and workmanship. Products sold to various originalequipment manufacturer (“OEM”) customers sometimes carry longer warranties.Defective products will be either repaired or replaced, usually at our option,upon meeting certain criteria. We accrue a provision for the estimated coststhat may be incurred for product warranties relating to a product as acomponent of cost of sales at the time revenue for that product is recognized.The accrued warranty provision is included within accrued liabilities in theaccompanying unaudited condensed consolidated balance sheets.

 

**Repairand Maintenance Costs**

 

We incur repair and maintenance costs in the normalcourse of business. Should the activity result in a permanent improvement toone of our leased facilities, the cost is capitalized as a leaseholdimprovement and amortized over its useful life or the remainder of the leaseperiod, whichever is shorter. Non-permanent repair and maintenance costs arecharged to expense as incurred.

 

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**Recent Accounting Pronouncements**

 

InOctober 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) No. 2009-13, *Multiple-DeliverableRevenue Arrangements*(“ASU 2009-13”), which amends the existingmultiple-element revenue arrangements guidance currently included in AccountingStandards Codification (“ASC”) 605-25, *Revenue Recognition —Multiple Element Arrangements*. ASU 2009-13 provides for twosignificant changes to the existing multiple-element revenue arrangementsguidance. The first relates to the determination of when the individualdeliverables included in a multiple-element arrangement may be treated asseparate units of accounting. The second change modifies the manner in whichthe transaction consideration is allocated across the separately identifieddeliverables. We adopted the amendments prescribed by ASU 2009-13 for ourfiscal year beginning April 1, 2010 and such adoption did not have a materialimpact on our consolidated financial statements.

 

InOctober 2009, the FASB issued ASU No. 2009-14, *CertainRevenue Arrangements That Include Software Elements*(“ASU 2009-14”),which amends and modifies the scope of ASC 985-605, *Software —Revenue Recognition*, such that many sales transactions of tangibleproducts that include software and other related transactions will fall outsideits scope. We adopted the amendments prescribed by ASU 2009-14 for our fiscalyear beginning April 1, 2010 and such adoption did not have a materialimpact on our consolidated financial statements.

 

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

 

**Inventories**

 

The following table presents details of our inventories:

 
| ** **             | ** ** | **September 30,**  | ** ** | **March 31,** | ** ** |
|------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **             | ** ** | **2010**                | ** ** | **2010**           | ** ** |
| ** **             | ** ** | **(In thousands)** | ** ** |
| Materials and supplies |       | $                       | 2,589      |               | $          | 2,292 |   |
| Work in process        |       | 7                       |       | 49                 |       |
| Finished goods         |       | 625                     |       | 386                |       |
|                   |       | $                       | 3,221      |               | $          | 2,727 |   |

 

**Intangible Assets**

 

The following table presentsdetails of our intangible assets:

 
| ** **                                 | ** ** | **September 30, 2010** | ** ** | **March 31, 2010**  | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **Gross  Carrying  Amount**      | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                                 | ** ** | **(In thousands)**          | ** ** |
| Intangible assets subject to amortization: |       |                             |       |                          |       |   |   |   |   |
| Developed technology                       |       | $                                | 996        |                          | $          | (645 | ) | $ | 996 |   | $ | (595 | ) |
| Patents                                    |       | 317                              |       | (289                          | )          | 317 |   | (266 | ) |
| Total                                      |       | $                                | 1,313      |                          | $          | (934 | ) | $ | 1,313 |   | $ | (861 | ) |

 

As of September 30,2010, future estimated amortization expense is as follows:

 
| **Year Ending March 31:** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| **(In thousands)**                  | ** ** | ** ** | ** ** |
| Remainder of 2011                        |       | $          | 73         |   |
| 2012                                     |       | 106        |       |
| 2013                                     |       | 100        |       |
| 2014                                     |       | 100        |       |
|                                     |       | $          | 379        |   |

 

If we acquire additionalintangible assets in future periods, our amortization expense will increase.

 

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**Warranty Reserve Activity**

 

Thefollowing table presents activity related to the warranty reserve:

 
| ** **                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **September 30,**         | ** ** |
| ** **                         | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| ** **                         | ** ** | **(In thousands)**        | ** ** |
| Balance at beginning of period     |       | $                              | 467        |   | $ | 582 |   |
| Additions charged to cost of sales |       | 74                             |       | 102 |   |
| Warranty claims                    |       | (88                            | )          | (94 | ) |
| Balance at end of period           |       | $                              | 453        |   | $ | 590 |   |

 

**Earnings Per Share**

 

The following table sets forth the computation of basicand diluted earnings per share:

 
| ** **                                                  | ** ** | **Three Months Ended**                                      | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **September 30,**                                                | ** ** | **September 30,**         | ** ** |
| ** **                                                  | ** ** | **2010**                                                              | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                  | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Numerator:                                                  | ** ** | ** **                                                            | ** ** | ** **                     |       |   |   |   |   |
| Net income                                                  |       | $                                                                     | 542        |                           | $          | 543 |   | $ | 1,339 |   | $ | 687 |   |
|                                                        |       |                                                                  |       |                           |       |   |   |   |   |
| Denominator:                                                |       |                                                                  |       |                           |       |   |   |   |   |
| Weighted average common shares used in basic  computation   |       | 34,332                                                                |       | 34,254                         |       | 34,331 |   | 34,223 |   |
| Dilutive stock options                                      |       | 46                                                                    |       | 181                            |       | 203 |   | 188 |   |
| Dilutive restricted stock units                             |       | 5                                                                     |       | —                         |       | 3 |   | — |   |
| Dilutive warrants                                           |       | —                                                                |       | —                         |       | 1 |   | — |   |
| Weighted average common shares used in diluted  computation |       | 34,383                                                                |       | 34,435                         |       | 34,538 |   | 34,411 |   |
|                                                        |       |                                                                  |       |                           |       |   |   |   |   |
| Earnings per share:                                         |       |                                                                  |       |                           |       |   |   |   |   |
| Basic                                                       |       | $                                                                     | 0.02       |                           | $          | 0.02 |   | $ | 0.04 |   | $ | 0.02 |   |
| Diluted                                                     |       | $                                                                     | 0.02       |                           | $          | 0.02 |   | $ | 0.04 |   | $ | 0.02 |   |

 

The following instruments were excluded from thecomputation of diluted earnings per share as their effect would have beenanti-dilutive:

 
| ** **    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **    | ** ** | **September 30,**           | ** ** | **September 30,**         | ** ** |
| ** **    | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **    | ** ** | **(In thousands)**          | ** ** |
|          |       |                             |       |                           |       |   |   |   |   |
| Stock options |       | 1,036                            |       | 2,451                          |       | 948 |   | 2,517 |   |
| Warrants      |       | 261                              |       | 336                            |       | 291 |   | 414 |   |

** **

**3.****            ****FairValue Measurements**

 

We measure fair value as theexchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date. Fair value measurements are based on a three-tier hierarchythat prioritizes the inputs used to measure fair value. These tiers include:Level 1, defined as observable inputs such as quoted prices in active marketsfor identical assets and liabilities; Level 2, defined as observable inputsother than Level 1 prices such as quoted prices for similar assets orliabilities or prices quoted in inactive markets; and Level 3, defined asunobservable inputs for which little or no market data exists, thereforerequiring an entity to develop its own assumptions.

 

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AtSeptember 30, 2010, we did not have any material financial assets orliabilities measured at fair value on a recurring basis using Level 3 inputs.

 

Ournon-financial assets, such as goodwill, intangible assets and property andequipment, are measured at fair value on a non-recurring basis; generally whenthere is a transaction involving those assets such as a purchase transaction, abusiness combination or an adjustment for impairment. No non-financial assetswere measured at fair value during the three and six months endedSeptember 30, 2010 and 2009.

 

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

 

**Revolving Line of Credit**

 

In September 2010, we entered into a modificationagreement with California Bank & Trust to extend the expiration dateof our revolving line of credit to October 1, 2012. The terms under thisagreement are substantially similar to those of our prior agreement, whereby wemay borrow up to $12.0 million on our revolving line of credit. Interest onborrowed amounts under the revolving line of credit are payable monthly at arate equal to the current stated prime rate (3.25% at September 30, 2010)up to the current stated prime rate plus 0.50%, depending on aggregate depositbalances maintained at the bank in relation to the total loan commitment underour credit facility (which includes our bank term note discussed below). We areobligated to pay an unused line fee of 0.25% per annum applied to the averageunused portion of the revolving line of credit during the preceding month. Therevolving line of credit does not contain any early termination fees and issecured by substantially all of our assets. As of September 30, 2010, noamounts were outstanding under the revolving line of credit portion of thefacility.

 

**Long-Term Debt — Bank Term Note**

 

As of September 30, 2010, we had outstandingborrowings of approximately $4.4 million under our 48-month term note withCalifornia Bank & Trust. Principal payments under this term note arerequired to be repaid in 48 monthly installments of $152,000 commencing onJune 1, 2009. Additionally, beginning on November 1, 2009, and onNovember 1 of each year thereafter, we are required to repay additionalprincipal of up to $500,000, calculated based on certain financial measures, asfurther defined in the agreement. These additional principal paymentseffectively reduce the total number of monthly installments necessary to repaythe term note. As of September 30, 2010 and March 31, 2010, anadditional $500,000 was included in the current portion of the term note withinthe accompanying unaudited condensed consolidated balance sheets, representingthe amount we estimate will be due on November 1, 2010. Interest on theterm note is payable monthly at a rate equal to the current stated prime rateplus 0.50% up to the current stated prime rate plus 1.00%, depending onaggregate deposit balances maintained at the bank in relation to the total loancommitment under the credit facility. The term note contains no earlytermination fees and, along with the revolving line of credit under the samecredit agreement, is secured by substantially all of our assets.

 

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

 

Thefollowing table sets forth our provision for income taxes, along with thecorresponding effective tax rates:

 
| ** **                 | ** ** | **Three Months Ended**                      | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **September 30,**                                | ** ** | **September 30,**         | ** ** |
| ** **                 | ** ** | **2010**                                              | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                 | ** ** | **(In thousands, except percentages)** | ** ** |
| Provision for income taxes |       | $                                                     | 388        |                           | $          | 501 |   | $ | 951 |   | $ | 611 |   |
| Effective tax rate         |       | 41.7                                                  | %          | 48.0                           | %          | 41.5 | % | 47.1 | % |
|                            |            |                                                       |            |                                |            |  |  |  |  |  |  |  |  |

 

On an interim basis, weestimate what our anticipated annual effective tax rate will be, while alsoseparately considering applicable discrete and other non-recurring items, andrecord a quarterly income tax provision in accordance with the anticipatedannual rate. As the fiscal year progresses, we refine our estimates based onactual events and financial results during the year. This process can result insignificant changes to our expected effective tax rate. When this occurs, weadjust our income tax provision during the quarter in which our estimates arerefined so that the year-to-date provision reflects the expected annualeffective tax rate. These changes, along with adjustments to our deferred taxes,among others, may create fluctuations in our overall effective tax rate fromquarter to quarter.

 

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

 

**Litigationand Other Contingencies**

 

Fromtime to time, we have been involved in litigation relating to claims arisingout of our operations in the normal course of business. We currently are not aparty to any legal proceedings, the adverse outcome of which, in management’sopinion, individually or in the aggregate, is expected to have a materialadverse effect on our consolidated results of operations, financial position orcash flows.

 

Furthermore,from time to time, we have experienced unforeseen developments in contingenciesrelated to our former subsidiaries. For example, we have been the subject of anumber of routine tax audits for time periods and jurisdictions related to thebusinesses of our former subsidiaries. Although the development and ultimateoutcome of these types of unforeseen matters cannot be anticipated or predictedwith any certainty, our management does not believe that we are presentlyinvolved in any matters related to our former subsidiaries that would have amaterial adverse effect on our consolidated results of operations, financialposition or cash flows.

 

**RelatedParty Transaction**

 

InAugust 2009, MAXxess Systems, Inc. (“MAXxess”) executed a promissorynote payable to Iteris for $274,000 for amounts previously owed to us under asublease agreement for which we had previously fully reserved such amount.MAXxess is owned by an investor group that includes two of our directors. As ofSeptember 30, 2010, all accrued interest has been paid and the entire $274,000principal balance was outstanding and payable to Iteris and remains fullyreserved.

 

**7.****            ****EmployeeBenefit Plans**

 

Wecurrently administer three separate stock incentive plans. Of these plans, wemay only grant future awards from the 2007 Omnibus Incentive Plan (the “2007Plan”). The 2007 Plan allows for the issuance of stock options, stockappreciation rights, restricted stock, restricted stock units (“RSUs”) andother stock-based awards. AtSeptember 30, 2010, there were 641,000 shares of common stock availablefor grant under the 2007 Plan.

 

**StockOptions**

 

A summary of activity with respect to our stock optionsfor the six months ended September 30, 2010 is as follows:

 
| ** **                                     | ** ** | ** **              | ** ** | **Weighted**       | ** ** |
|------------------------------------------------|------------|-------------------------|------------|--------------------|------------|
| ** **                                     | ** ** | ** **              | ** ** | **Average**        | ** ** |
| ** **                                     | ** ** | ** **              | ** ** | **Exercise**       | ** ** |
| ** **                                     | ** ** | **Number of**      | ** ** | **Price**          | ** ** |
| ** **                                     | ** ** | **Shares**              | ** ** | **per Share** | ** ** |
| ** **                                     | ** ** | **(In thousands)** | ** ** | ** **         | ** ** |
| Options outstanding at March 31, 2010     |       | 3,218                   |       | $                  | 1.77       |   |
| Granted                                        |       | 30                      |       | 1.45               |       |
| Exercised                                      |       | (14                     | )          | 1.39               |       |
| Expired                                        |       | (61                     | )          | 11.32              |       |
| Options outstanding at September 30, 2010 |       | 3,173                   |       | $                  | 1.58       |   |

 

Includedin the options outstanding at September 30, 2010 are vested options topurchase 769,000 shares of our common stock with an exercise price per share of$1.19, which are scheduled to expire in September 2011 unless exercisedprior to that date.

 

**RestrictedStock Units**

 

InAugust 2010, we granted 214,000 RSUs under the 2007 Plan to certainemployees of Iteris, all of which were unvested and outstanding as of September 30,2010. These RSUs are stock awards that entitle the holder to receive registeredshares of our common stock upon vesting. The RSUs vest at the rate of 25% peryear beginning in August 2011. The fair value per share of these RSUs was$1.48, calculated based on the closing market price of our common stock on thegrant date.

 

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**Stock-BasedCompensation Expense**

 

The following table presents stock-based compensationexpense that is included in each functional line item on our unauditedcondensed consolidated statements of income:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **September 30,**           | ** ** | **September 30,**         | ** ** |
| ** **                                  | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **(In thousands)**          | ** ** |
| Cost of net sales                           |       | $                                | 3          |                           | $          | 2 |   | $ | 5 |   | $ | 4 |   |
| Cost of contract revenues                   |       | 9                                |       | 10                             |       | 17 |   | 20 |   |
| Selling, general and administrative expense |       | 75                               |       | 79                             |       | 149 |   | 150 |   |
| Research and development expense            |       | 8                                |       | 7                              |       | 15 |   | 13 |   |
|                                        |       | $                                | 95         |                           | $          | 98 |   | $ | 186 |   | $ | 187 |   |

 

At September 30, 2010, there was approximately $1.0million of unrecognized compensation expense related to unvested stock options andRSUs. This expense is currently expected to be recognized over a weightedaverage period of approximately 2.7 years. If there are any modifications orcancellations of the underlying unvested awards, we may be required toaccelerate, increase or cancel any remaining unearned stock-based compensationexpense. Future stock-based compensation expense and unearned stock-basedcompensation will increase to the extent that we grant additional stockoptions, or issue any additional RSUs or other stock-based awards.

 

The grant date fair value per share of stock optionsgranted in the six months ended September 30, 2010 has been estimatedusing the following weighted average assumptions:

 
| Expected life - years                            |   | 7      |   |
|--------------------------------------------------|--------|--------|--------|
| Risk-free interest rate                          |   | 2.1    | %      |
| Expected volatility of common stock              |   | 58     | %      |
| Dividend yield                                   |   | — |   |
| Weighted-average grant date fair value per share |   | $      | 0.86   |   |
|                                                  |        |        |        |  |

 

**8.****            ****CommonStock Warrants**

 

The following table summarizes information regardingoutstanding warrants to purchase shares of our common stock as of September 30,2010:

 
| **Exercise Price per Share** | ** ** | **Warrants  Outstanding** | ** ** | **Remaining  Contractual Life** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **(In thousands)**   | ** ** | **(Years)**                          | ** ** |
| $                                           |  1.42 |                      | 15         |                                 | 2.9        |   |
| 3.25                                        |       | 246                       |       | 0.4                                  |       |
|                                        |       | 261                       |       |                                 |       |
|                                             |            |                           |            |                                      |            |  |

 

All of the outstanding warrants were exercisable atSeptember 30, 2010.

 

**9.****            ****BusinessSegment Information**

 

We currently operate in three reportable segments:Roadway Sensors, Vehicle Sensors and Transportation Systems. The RoadwaySensors segment includes our Vantage and VersiCam vehicle detection systems fortraffic intersection control, incident detection and certain highwaytraffic data collection applications. This segment also includes our Picocompact video detection system, which was designed primarily to respond tointernational video detection needs. The Vehicle Sensors segment includes ourlane departure warning products and is comprised of all of our activitiesrelated to vehicle safety. The Transportation Systems segment includestransportation engineering and consulting services and the development oftransportation management and traveler information systems for the ITSindustry. The accounting policies of the reportable segments are the same asthose described in the summary of significant accounting policies. Certaincorporate expenses, including interest and amortization of intangible assets,are not allocated to the segments. The reportable segments are each managedseparately because they manufacture and distribute distinct products or provideservices with different processes. All segment revenues are derived fromexternal customers.

 

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The following table sets forth selected unauditedconsolidated financial information for our reportable segments for the threeand six months ended September 30, 2010 and 2009:

 
| ** **                                      | ** ** | **Roadway  Sensors** | ** ** | **Vehicle  Sensors**    | ** ** | **Transportation  Systems** | ** ** | **Total**  | ** ** |
|-------------------------------------------------|------------|----------------------|------------|-------------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                      | ** ** | ** **           | ** ** | **(In thousands)** | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Three Months Ended  September 30, 2010** | ** ** | ** **           | ** ** | ** **              | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Product revenue                                 |       | $                    | 7,248      |                    | $          | 1,465                       |       | $          | —     |   | $ | 8,713 |   |
| Service and other revenue                       |       | —               |       | 155                     |       | 5,218                       |       | 5,373      |       |
| Stock-based compensation                        |       | 12                   |       | 4                       |       | 17                          |       | 33         |       |
| Depreciation and amortization                   |       | 57                   |       | 21                      |       | 47                          |       | 125        |       |
| Segment income (loss)                           |       | 1,210                |       | (324                    | )          | 165                         |       | 1,051      |       |
| ** **                                      | ** ** | ** **           | ** ** | ** **              | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Three Months Ended  September 30, 2009** |       |                 |       |                    |       |                        |       |       |       |
| Product revenue                                 |       | $                    | 7,082      |                    | $          | 1,189                       |       | $          | —     |   | $ | 8,271 |   |
| Service and other revenue                       |       | —               |       | 191                     |       | 6,403                       |       | 6,594      |       |
| Stock-based compensation                        |       | 10                   |       | 8                       |       | 16                          |       | 34         |       |
| Depreciation and amortization                   |       | 57                   |       | 18                      |       | 56                          |       | 131        |       |
| Segment income (loss)                           |       | 1,182                |       | (330                    | )          | 390                         |       | 1,242      |       |
|                                            |       |                 |       |                    |       |                        |       |       |       |
| **Six Months Ended  September 30, 2010**   |       |                 |       |                    |       |                        |       |       |       |
| Product revenue                                 |       | $                    | 14,941     |                    | $          | 3,093                       |       | $          | —     |   | $ | 18,034 |   |
| Service and other revenue                       |       | —               |       | 296                     |       | 11,430                      |       | 11,726     |       |
| Stock-based compensation                        |       | 21                   |       | 11                      |       | 31                          |       | 63         |       |
| Depreciation and amortization                   |       | 113                  |       | 42                      |       | 98                          |       | 253        |       |
| Segment income (loss)                           |       | 2,580                |       | (506                    | )          | 478                         |       | 2,552      |       |
|                                            |       |                 |       |                    |       |                        |       |       |       |
| **Six Months Ended  September 30, 2009**   |       |                 |       |                    |       |                        |       |       |       |
| Product revenue                                 |       | $                    | 12,957     |                    | $          | 1,999                       |       | $          | —     |   | $ | 14,956 |   |
| Service and other revenue                       |       | —               |       | 439                     |       | 14,104                      |       | 14,543     |       |
| Stock-based compensation                        |       | 18                   |       | 16                      |       | 30                          |       | 64         |       |
| Depreciation and amortization                   |       | 119                  |       | 40                      |       | 114                         |       | 273        |       |
| Segment income (loss)                           |       | 1,544                |       | (836                    | )          | 924                         |       | 1,632      |       |

 

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The following table reconciles segment income tounaudited consolidated income before income taxes:

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | **September 30,**         | ** ** |
| ** **                            | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(In thousands)**          | ** ** |
| **Segment income:**                   |       |                             |       |                           |       |   |   |   |   |
| Total income from reportable segments |       | $                                | 1,051      |                           | $          | 1,242 |   | $ | 2,552 |   | $ | 1,632 |   |
| **Unallocated amounts:**              |       |                             |       |                           |       |   |   |   |   |
| Corporate and other expenses          |       | (61                              | )          | (83                            | )          | (127 | ) | (108 | ) |
| Amortization of intangible assets     |       | (37                              | )          | (42                            | )          | (73 | ) | (86 | ) |
| Other income (expense), net           |       | 19                               |       | (2                             | )          | 20 |   | 17 |   |
| Interest expense, net                 |       | (42                              | )          | (71                            | )          | (82 | ) | (157 | ) |
| Income before income taxes            |       | $                                | 930        |                           | $          | 1,044 |   | $ | 2,290 |   | $ | 1,298 |   |

 
| **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 growth, sales, revenue,expenses, profits, capital needs, competition, development plans, andmanufacturing capabilities, the applications for and acceptance of our productsand services, and the status of our facilities and product development. Thesestatements are not guarantees of future performance and are subject to certainrisks and uncertainties that could cause our actual results to differmaterially from those projected. You should not place undue reliance on theseforward-looking statements that speak only as of the date hereof. We encourageyou to carefully review and consider the various disclosures made by us whichdescribe certain factors which could affect our business, including in* “*Risk Factors” set forth in Part II, Item 1A of this report,before deciding to invest in our company or to maintain or increase yourinvestment. We undertake no obligation to revise or update publicly anyforward-looking statement for any reason, including to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

 

**Overview**

 

*General.*We are a leaderin the traffic management market focused on the development and application ofadvanced technologies that reduce traffic congestion and improve the safety ofsurface transportation systems infrastructure. Additionally, we believe ourproducts and services, in conjunction with sound traffic management, minimizethe environmental impact of traffic congestion. By combining outdoor imageprocessing, traffic engineering and information technology, we offer a broadrange of Intelligent Transportation Systems (“ITS”) and driver safety solutionsto customers in the United States (“U.S.”) and internationally.

 

*Business Segments.*We currentlyoperate in three reportable segments: Roadway Sensors, Vehicle Sensors andTransportation Systems. The Roadway Sensors segment includes our Vantage,VersiCam and Pico vehicle detection systems for trafficintersection control, incident detection and certain highway traffic datacollection applications, as well as our Abacus family of products. The VehicleSensors segment includes our lane departure warning (“LDW”) products, includingour AutoVue LDW system, and is comprised of all of our activities related toin-vehicle 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 segmentproduct line uses advanced image processing technology to capture and analyzevideo images through sophisticated algorithms, enabling vehicle detection andtransmission of both video images and data using various communicationtechnologies.

 

·      Our Vantagevideo detection systems detect vehicle presence at intersections, as well asvehicle count, speed and other traffic data used in traffic management systems.Our Vantage systems give traffic managers the ability to mitigate roadwaycongestion by modifying traffic signal timing or detecting incidents quickly.

 

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·                  VersiCam, ourintegrated camera and processor video detection system, is a cost-efficientvideo detection system for smaller intersections that require only a fewdetection points.

 

·                  Pico, ourcompact video detection system, was developed primarily to addressinternational video detection needs, and was designed for easy installation andconfiguration.

 

·                  Our Abacusproducts take advantage of the large number of existing installedclosed-circuit television video feeds monitoring roadways, signalizedintersections, tunnels and bridges to allow for data collection and incidentdetection without the set-up and calibration generally required with othersystems.

 

We believe that futuregrowth domestically and internationally, particularly in developing countries,will be dependent in part on the continued adoption of above-ground videodetection technologies, instead of traditional in-pavement loop technology, tomanage traffic.

 

Our Vehicle Sensors segmentaddresses the leading cause of roadway fatalities: lane change, roadwaydeparture and rear-end collision accidents. We developed the world’s firstproduction LDW system and offer a proven system that is available as anoriginal equipment manufacturer (“OEM”) and aftermarket option on heavy trucksworldwide and as an option in certain passenger cars. Our LDW products utilizevideo detection images to detect when a vehicle begins to drift toward anunintended lane change. When this occurs, the unit automatically emits adistinctive rumble strip or other audible warning sound, alerting the driver tomake a correction. We believe that as a result of the expected 2013 EuropeanUnion (“EU”) mandate for LDW and other active safety systems, and an overallawareness of the potential benefits of LDW, that we will experience an evenhigher degree of competition from a variety of tier-one OEM suppliers and otherpotential market entrants worldwide. While we believe that this increasedcompetition validates the long-term market opportunity for LDW systems incommercial vehicles, it could also adversely affect our future LDW sales andmargins. We are currently working with our European OEM customer base toestablish long-term supply agreements that extend to 2013 and beyond in orderto meet the anticipated increase in demand; however, we cannot assure you thatour efforts will be successful or that the increase in demand will occur. Wehave entered into an exclusive license of our LDW technology to our strategicpartner, Valeo Schalter and Sensuren GmbH (“Valeo”), for the passenger carmarket. Recently, we and our partner have experienced a greater degree ofcompetition in the passenger car market, as several passenger car OEMs have introducedvehicle platforms with competing LDW systems. However, Valeo continues topursue opportunities in the passenger car market.

 

In addition to our LDWsystems, our Vehicle Sensors portfolio includes radar-based Forward CollisionWarning (“FCW”) and Blind Spot Warning (“BSW”) systems for the North Americantruck market, and our SafetyDirect product, a system that reports driverperformance data captured by our LDW system, and has the ability to relay thisdata directly to fleet operators through integration with the truck’s existingfleet communications system. We offer the FCW and BSW features through theresale of Delphi’s radar-based systems, for which we are the exclusive NorthAmerican dealer, while SafetyDirect was internally developed. These products,together with our LDW products, combine to create a suite of active safetydriver assistance features focused on reducing the number of motor vehiclecrashes and the severity of crash-related injuries.

 

Our Transportation Systemssegment includes transportation engineering and consulting services focused onthe planning, design, development and implementation of software-based systemsthat integrate sensors, video surveillance, computers, and advancedcommunications equipment to enable public agencies to monitor, control anddirect traffic flow, assist in the quick dispatch of emergency crews anddistribute real-time information about traffic conditions. Our services includeplanning, design and implementation of surface transportation infrastructure systems.We perform analysis and study goods movement, commercial vehicle operations,travel demand forecasting and systems engineering, and identify mitigationmeasures to reduce traffic congestion. Historically, these services and systemshave primarily been sold to local, state and national transportation agenciesin the United States under a broad range of fixed price and cost plus fixed feecontracts; however, in the fiscal year ended March 31, 2010 (“fiscal 2010”),we began work on our first two overseas contract awards and plan to pursueadditional international opportunities for our Transportation Systems segment.

 

OurTransportation Systems segment is largely dependent upon governmental fundingand is affected by state and local budgetary issues. We believe the overallexpansion of our Transportation Systems segment in the future will at least inpart be dependent on the passage of a new Federal Highway Bill, which Congressis currently working on. We anticipate continued delays in the enactmentof such a new bill, and until such time as a bill becomes law, the allotment oftransportation funds in federal, state and local budgets may be uncertain. Webelieve that prolonged uncertainty has and may continue to adversely impact ournet sales and contract revenues and our overall financial performance in futureperiods.

 

InApril 2009, we completed the acquisition of certain assets of HamiltonSignal, which included the Abacus system, for an aggregate purchase price ofapproximately $518,000.

 

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**Critical Accounting Policies and Estimates**

 

“Management’s Discussion andAnalysis of Financial Condition and Results of Operations” is based on ourunaudited consolidated financial statements included herein, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and related disclosures of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. On an ongoing basis, we evaluate theseestimates and assumptions, including those related to the collectibility ofaccounts receivable, the valuation of inventories, the recoverability oflong-lived assets and goodwill, the realizability of deferred tax assets,accounting for stock-based compensation, the valuation of equity instruments,warranty reserves and other contingencies. We base these estimates onhistorical experience and on various other factors that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. These estimates and assumptions by theirnature involve risks and uncertainties, and may prove to be inaccurate. In theevent that any of our estimates or assumptions are inaccurate in any materialrespect, it could have a material adverse effect on our reported amounts ofassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.

 

The accounting policies thataffect our more significant judgments and estimates used in the preparation ofour unaudited condensed consolidated financial statements are those relating torevenue recognition, accounts receivable, inventory, goodwill, warranty, incometaxes, and stock-based compensation. These policies are described in furtherdetail in our Annual Report on Form 10-K for our fiscal year ended March 31,2010 (“fiscal 2010”). There have been no significant changes in our criticalaccounting policies and estimates during the six months ended September 30,2010 as compared to what was previously disclosed in our Annual Report on Form 10-Kfor fiscal 2010, except for our revenue recognition policy, which has beenupdated as follows:

 

*Revenue Recognition.* We recordproduct revenues and related costs of sales upon transfer of title, which isgenerally upon shipment or, if required, upon acceptance by the customer,provided that we believe collectibility of the net sales amount is reasonablyassured. Accordingly, at the date revenue is recognized, the significantuncertainties concerning the sale have been resolved.

 

We recognize revenue fromthe sale of deliverables that are part of a multiple-element arrangement inaccordance with applicable accounting guidance that establishes a selling pricehierarchy permitting the use of an estimated selling price to determine theallocation of arrangement consideration to a deliverable in a multiple-elementarrangement where neither vendor specific objective evidence (“VSOE”) northird-party evidence (“TPE”) is available for that deliverable. In the absenceof VSOE or TPE of the standalone selling price for one or more delivered orundelivered elements in a multiple-element arrangement, we are required toestimate the selling prices of those elements. Overall arrangementconsideration is allocated to each element (both delivered and undelivereditems) based on their relative selling prices, regardless of whether thoseselling prices are evidenced by VSOE or TPE or are based on our estimatedselling prices.

 

We account for multiple-elementarrangements that consist only of software and software-related services inaccordance with industry-specific accounting guidance for software andsoftware-related transactions. For such transactions, revenue on arrangementsthat include multiple elements is allocated to each element based on therelative fair value of each element, and fair value is generally determined byVSOE. If we cannot objectively determine the fair value of any undeliveredelement included in such multiple-element arrangements and the only undeliveredelement is post-contract customer support or maintenance, and VSOE of the fairvalue of such support or maintenance does not exist, revenue from the entirearrangement is recognized ratably over the support period. When the fair valueof a delivered element has not been established, but VSOE of fair value existsfor the undelivered elements, we use the residual method to recognize revenueif the fair value of all undelivered elements is determinable. Under theresidual method, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is allocated to the delivered elementsand is recognized as revenue.

 

Contractrevenues are derived primarily from long-term contracts with governmentalagencies. Contract revenues include costs incurred plus a portion of estimatedfees or profits determined using the percentage of completion method ofaccounting based on the relationship of costs incurred to total estimatedcosts. Any anticipated losses on contracts are charged to earnings whenidentified. Changes in job performance and estimated profitability, includingthose arising from contract penalty provisions and final contract settlements,may result in revisions to recognized costs and revenues and are recognized inthe period in which the revisions are determined. Profit incentives are includedin revenue when their realization is reasonably assured. Under the percentageof completion method, recognition of profit is dependent upon the accuracy of avariety of estimates, including engineering progress, materials quantities, andachievement of milestones, incentives, penalty provisions, labor productivity,cost estimates and others. Such estimates are based on variousprofessional judgments we make with respect to those factors and are subject tochange as the project proceeds and new information becomes available.

 

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In addition to product andcontract revenues, we derive revenue from the provision of specificnon-recurring contract engineering services to our strategic partner, Valeo,related to our LDW systems, and royalties earned on unit sales of our LDWsystems by Valeo to the passenger car market. Non-recurring contractengineering revenues are recognized in the period in which the related servicesare performed. Royalty revenues are recorded based on unit sales of ourproducts by Valeo and are recognized in the period in which such sales occur.Non-recurring contract engineering revenues and royalty revenues are includedin our net sales.

 

Revenues from follow-onservice and support, for which we generally charge separately, are recorded inthe period in which the services are performed and are included in our netsales.

 

**Recent Accounting Pronouncements**

 

Refer to Note 1 of Notes toUnaudited Condensed Consolidated Financial Statements, included in Part I, Item1 of this report for a discussion of recent accounting pronouncements.

 

**Results ofOperations**

 

The following table setsforth statement of income data as a percentage of total net sales and contractrevenues for the periods indicated:

 
| ** **                                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **September 30,**           | ** ** | **September 30,**         | ** ** |
| ** **                                | ** ** | **2010**                         | ** ** | **2009**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Net sales and contract revenues:          |       |                             |       |                           |       |   |   |   |   |
| Net sales                                 |       | 63.0                             | %          | 56.9                           | %          | 61.6 | % | 52.2 | % |
| Contract revenues                         |       | 37.0                             |       | 43.1                           |       | 38.4 |   | 47.8 |   |
| Total net sales and contract revenues     |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
|                                      |       |                             |       |                           |       |   |   |   |   |
| Costs of net sales and contract revenues: |       |                             |       |                           |       |   |   |   |   |
| Cost of net sales                         |       | 32.3                             |       | 29.7                           |       | 30.5 |   | 28.0 |   |
| Cost of contract revenues                 |       | 23.0                             |       | 26.1                           |       | 24.8 |   | 30.8 |   |
| Gross profit                              |       | 44.7                             |       | 44.2                           |       | 44.8 |   | 41.2 |   |
| Operating expenses:                       |       |                             |       |                           |       |   |   |   |   |
| Selling, general and administrative       |       | 30.3                             |       | 30.5                           |       | 29.9 |   | 29.8 |   |
| Research and development                  |       | 7.4                              |       | 5.9                            |       | 6.7 |   | 6.3 |   |
| Amortization of intangible assets         |       | 0.3                              |       | 0.3                            |       | 0.2 |   | 0.3 |   |
| Total operating expenses                  |       | 38.0                             |       | 36.7                           |       | 36.8 |   | 36.3 |   |
| Operating income                          |       | 6.8                              |       | 7.5                            |       | 7.9 |   | 4.9 |   |
| Non-operating income (expense):           |       |                             |       |                           |       |   |   |   |   |
| Other income (expense), net               |       | 0.1                              |       | (0.0                           | )          | 0.1 |   | 0.1 |   |
| Interest expense, net                     |       | (0.3                             | )          | (0.5                           | )          | (0.3 | ) | (0.5 | ) |
| Income before income taxes                |       | 6.6                              |       | 7.0                            |       | 7.7 |   | 4.4 |   |
| Provision for income taxes                |       | (2.8                             | )          | (3.4                           | )          | (3.2 | ) | (2.1 | ) |
| Net income                                |       | 3.8                              | %          | 3.7                            | %          | 4.5 | % | 2.3 | % |

 

**Analysis of Quarterly Results ofOperations**

 

*Net Salesand Contract Revenues*. Net sales are comprised of product salesfrom our Roadway Sensors and Vehicle Sensors segments, as well as contractengineering revenue and royalty revenue generated from our Vehicle Sensorssegment. Contract revenues consist entirely of Transportation Systemscontract revenues, which are generated from systems integration and ITSconsulting services primarily with federal, state, county and municipalagencies.

 

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The following tables presentdetails of our net sales and contract revenues for the three and six monthsended September 30, 2010 and 2009:

 
| ** **                            | ** ** | **Three Months Ended**                      | ** ** | ** **   | ** ** | ** **     | ** ** |
|---------------------------------------|------------|-------------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                            | ** ** | **September 30,**                                | ** ** | **Increase** | ** ** | **%**          | ** ** |
| ** **                            | ** ** | **2010**                                              | ** ** | **2009**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | **(In thousands, except percentages)** | ** ** |
| Roadway Sensors                       |       | $                                                     | 7,248      |         | $          | 7,082          |       | $ | 166 |   | 2.3 | % |
| Vehicle Sensors                       |       | 1,620                                                 |       | 1,380        |       | 240            |       | 17.4 |   |
| Net sales                             |       | 8,868                                                 |       | 8,462        |       | 406            |       | 4.8 |   |
| Contract revenues                     |       | 5,218                                                 |       | 6,403        |       | (1,185         | )          | (18.5 | ) |
| Total net sales and contract revenues |       | $                                                     | 14,086     |         | $          | 14,865         |       | $ | (779 | ) | (5.2 | ) |

 
| ** **                            | ** ** | **Six Months Ended**                        | ** ** | ** **   | ** ** | ** **     | ** ** |
|---------------------------------------|------------|-------------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                            | ** ** | **September 30,**                                | ** ** | **Increase** | ** ** | **%**          | ** ** |
| ** **                            | ** ** | **2010**                                              | ** ** | **2009**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | **(In thousands, except percentages)** | ** ** |
| Roadway Sensors                       |       | $                                                     | 14,941     |         | $          | 12,957         |       | $ | 1,984 |   | 15.3 | % |
| Vehicle Sensors                       |       | 3,389                                                 |       | 2,438        |       | 951            |       | 39.0 |   |
| Net sales                             |       | 18,330                                                |       | 15,395       |       | 2,935          |       | 19.1 |   |
| Contract revenues                     |       | 11,430                                                |       | 14,104       |       | (2,674         | )          | (19.0 | ) |
| Total net sales and contract revenues |       | $                                                     | 29,760     |         | $          | 29,499         |       | $ | 261 |   | 0.9 |   |

 

We have historically had adiverse customer base. For the six months ended September 30, 2010, noindividual customer represented greater than 10% of our total net sales andcontract revenues. In the corresponding period in the prior fiscal year, oneindividual customer accounted for approximately 10% of our total net sales andcontract revenues.

 

*Roadway Sensors*

 

The increases in RoadwaySensors net sales for the three and six months ended September 30, 2010 ascompared to the corresponding periods in the prior year were driven by higherdomestic sales volumes from both our direct sales and dealer markets. In thecurrent period, we also saw particular strength, both domestically and internationally,in certain of our newer product lines such as VersiCam and Abacus. In the prioryear periods, particularly in the first quarter, we experienced significantlylower sales primarily as a result of the downturn in the overall economy, whichbrought declines in commercial and residential construction, reductions anddelays in spending on infrastructure projects and government budgetary pressures.

 

*Vehicle Sensors*

 

Vehicle Sensors net saleswere primarily made up of sales of our LDW systems to the heavy truck market,which aggregated approximately $1.5 million and $3.1 million for the three andsix months ended September 30, 2010, respectively, compared to $1.2million and $2.0 million for the three and six months ended September 30,2009, respectively. In the prior year, we experienced a significant slowdown inoverall LDW unit shipments to each of our key markets, driven largely by the weaknessin the U.S. and worldwide economy at that time. Comparatively, in the currentyear periods, we have seen relatively higher unit sales, particularly to ourforeign OEM heavy truck customers in Europe and Japan, as well as to ourdomestic truck fleet customers. We remain cautious in the outlook for theremainder of our current fiscal year. We anticipate that Vehicle Sensors unitsales in future periods could be adversely impacted by, among other factors,slower than expected adoption rates of our LDW system across each of our targetmarkets and the continuing uncertainty in the global economic environment.Additionally, future unit sales of LDW systems and unit pricing could beadversely impacted as a result of increased competition in this market.

 

Also included in VehicleSensors net sales are revenues from contract engineering services and royaltyrevenues in the passenger car market that are derived from our strategicrelationship with Valeo, which aggregated approximately $155,000 and $296,000for the three and six months ended September 30, 2010, respectively,compared to $191,000 and $439,000 for the three and six months ended September 30,2009, respectively. The net overall decline in the current fiscal yearcontinues to be the result of decreases in contract engineering servicesprovided to Valeo as the pertinent engineering development activities havegenerally reached maturity for the related vehicle platforms that currentlyincorporate our LDW system. The decrease in contract engineering services ispartially offset by an increase in our royalty revenues in the current fiscalyear as compared to the prior fiscal year. Our LDW systems are currentlyoffered as an option on four Infiniti models. While Valeo is promoting our LDWsystems to other passenger car OEMs, we cannot assure you that Valeo will besuccessful in these efforts.

 

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*Contract Revenues*

 

Contract revenues areprimarily dependent upon the continued availability of funding at the local,state and federal levels from the various agencies and departments oftransportation. For the three and six months ended September 30, 2010, thedecrease in our contract revenues compared to the corresponding periods in theprior year are primarily the result of the overall slowdown in the market, which has been aggravated by ageneral lengthening of the overall sales cycle, from the bid and proposalprocess, to the signing of a contract and commencement of work on a project, aswell as delays on certain existing contracts. In the prior year periods, weexperienced higher revenues from several large contracts which contained higherthan usual amounts of sub-consulting content. In the future, we plan tocontinue to pursue large contracts that may contain significant sub-consultingcontent, which will likely contribute to variability in the timing and amountof our contract revenues from period to period.

 

*GrossProfit*.  The following tables present details of our gross profit forthe three and six months ended September 30, 2010 and 2009:

 
| ** **                                                          | ** ** | **Three Months Ended**                      | ** ** | ** ** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                                          | ** ** | **September 30,**                                | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                                                          | ** ** | **2010**                                              | ** ** | **2009**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Total gross profit                                                  |       | $                                                     | 6,301      | ** ** | $          | 6,570        |       | $ | (269 | ) | (4.1 | )% |
| Total gross profit as a % of total net sales and  contract revenues |       | 44.7                                                  | %          | 44.2       | %          |         |       |   |   |
| Gross profit as a % of net sales                                    |       | 48.8                                                  | %          | 47.9       | %          | ** **   |       |   |   |
| Gross profit as a % of contract revenues                            |       | 37.9                                                  | %          | 39.4       | %          |         |       |   |   |
|                                                                     |            |                                                       |            |            |            |              |            |  |  |  |  |  |

 
| ** **                                                          | ** ** | **Six Months Ended**                        | ** ** | ** ** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                                          | ** ** | **September 30,**                                | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                                                          | ** ** | **2010**                                              | ** ** | **2009**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Total gross profit                                                  |       | $                                                     | 13,318     |       | $          | 12,152       |       | $ | 1,166 |   | 9.6 | % |
| Total gross profit as a % of total net sales and contract  revenues |       | 44.8                                                  | %          | 41.2       | %          |         |       |   |   |
| Gross profit as a % of net sales                                    |       | 50.6                                                  | %          | 46.4       | %          |         |       |   |   |
| Gross profit as a % of contract revenues                            |       | 35.4                                                  | %          | 35.5       | %          |         |       |   |   |
|                                                                     |            |                                                       |            |            |            |              |            |  |  |  |  |  |

 

Our total gross profit andtotal gross profit as a percent of total net sales and contract revenuesincreased for the six months ended September 30, 2010 as compared to thecorresponding period in the prior year primarily as a result of our product and service mix, whereby productnet sales represented approximately 62% of our total net sales and contractrevenues in the current period as compared to only 52% in the prior yearperiod. Our product net sales generally carry higher margins than our contractrevenues derived from our consulting services.

 

The increase in gross profitas a percent of net sales (“gross margin”) for the three and six months endedSeptember 30, 2010 as compared to the corresponding periods in the prioryear was primarily a result of higher overall net sales and margins in RoadwaySensors during the current year. Such higher margins were largely driven by ourcustomer mix and lower costs for certain key materials. We generally enjoyhigher gross margins on direct sales as compared to dealer and aftermarketsales. In Vehicle Sensors, we also saw significant improvement in our year overyear gross margins as a result of overall higher sales levels in the currentperiod which provided for improved overhead absorption. Additionally, in theprior year periods, we recorded certain estimates for excess and obsoleteinventory in our Vehicle Sensors segment, which adversely affected our grossmargins in that period. Gross profit as a percentage of net sales can fluctuatein any specific quarter or year based on, among other factors, customer andproduct mix, competitive pricing requirements, product warranty costs andprovisions for excess and obsolete inventories, as well as possible shifts ofengineering resources from development activities to sustaining activities,which we record as cost of goods sold.

 

We recognize contractrevenues and related gross profit using percentage of completion contractaccounting, and the underlying mix of contract activity affects the relatedgross profit recognized in any given period. Gross profit as a percent ofcontract revenues for the three months ended September 30, 2010 was downapproximately 150 basis points compared to the corresponding period in theprior year primarily due to both lower overall revenues in the current yearperiod, as well as contract mix. In the current six month period, gross profitas a percent of contract revenues was relatively consistent between the currentand prior year periods. We expect the variability and related timing ofsub-consulting content in our Transportation Systems contracts in futureperiods to continue to cause fluctuations in this segment’s gross margins fromperiod to period.

 

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*Selling,General and Administrative Expense*.  The following tablespresent selling, general and administrative expense for the three and sixmonths ended September 30, 2010 and 2009:

 
| ** **                          | ** ** | **Three Months Ended**                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **             | ** ** |
|-------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------------------|------------|
| ** **                          | ** ** | **September 30, 2010**                      | ** ** | **September 30, 2009** | ** ** | ** ** | ** ** | ** **             | ** ** |
| ** **                          | ** ** | ** **                                            | ** ** | **% of Net**           | ** ** | ** ** | ** ** | **% of Net** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                            | ** ** | **Sales and**               | ** ** | ** ** | ** ** | **Sales and**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                            | ** ** | **Contract**                     | ** ** | ** ** | ** ** | **Contract**           | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                          | ** ** | **Amount**                                            | ** ** | **Revenues**                     | ** ** | **Amount** | ** ** | **Revenues**           | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Salary and personnel-related        |       | $                                                     | 2,995      |                             | 21.3       | %          | $          | 3,020                  |       | 20.3 | % | $ | (25 | ) | (0.8 | )% |
| Facilities, insurance and supplies  |       | 572                                                   |       | 4.1                              |       | 677        |       | 4.6                    |       | (105 | ) | (15.5 | ) |
| Travel and conferences              |       | 335                                                   |       | 2.4                              |       | 351        |       | 2.4                    |       | (16 | ) | (4.6 | ) |
| Professional and outside services   |       | 308                                                   |       | 2.2                              |       | 294        |       | 2.0                    |       | 14 |   | 4.8 |   |
| Other                               |       | 61                                                    |       | 0.4                              |       | 185        |       | 1.2                    |       | (124 | ) | (67.0 | ) |
| Selling, general and administrative |       | $                                                     | 4,271      |                             | 30.3       | %          | $          | 4,527                  |       | 30.5 | % | $ | (256 | ) | (5.7 | ) |

 
| ** **                          | ** ** | **Six Months Ended**                        | ** ** | **Six Months Ended**   | ** ** | ** ** | ** ** | ** **             | ** ** |
|-------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------------------|------------|
| ** **                          | ** ** | **September 30, 2010**                      | ** ** | **September 30, 2009** | ** ** | ** ** | ** ** | ** **             | ** ** |
| ** **                          | ** ** | ** **                                            | ** ** | **% of Net**           | ** ** | ** ** | ** ** | **% of Net** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                            | ** ** | **Sales and**               | ** ** | ** ** | ** ** | **Sales and**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                                            | ** ** | **Contract**                     | ** ** | ** ** | ** ** | **Contract**           | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                          | ** ** | **Amount**                                            | ** ** | **Revenues**                     | ** ** | **Amount** | ** ** | **Revenues**           | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Salary and personnel-related        |       | $                                                     | 6,234      |                             | 20.9       | %          | $          | 5,907                  |       | 20.0 | % | $ | 327 |   | 5.5 | % |
| Facilities, insurance and supplies  |       | 1,215                                                 |       | 4.1                              |       | 1,272      |       | 4.3                    |       | (57 | ) | (4.5 | ) |
| Travel and conferences              |       | 745                                                   |       | 2.5                              |       | 696        |       | 2.4                    |       | 49 |   | 7.0 |   |
| Professional and outside services   |       | 726                                                   |       | 2.4                              |       | 589        |       | 2.0                    |       | 137 |   | 23.3 |   |
| Other                               |       | (8                                                    | )          | (0.0                             | )          | 316        |       | 1.1                    |       | (324 | ) | (102.5 | ) |
| Selling, general and administrative |       | $                                                     | 8,912      |                             | 29.9       | %          | $          | 8,780                  |       | 29.8 | % | $ | 132 |   | 1.5 |   |

 

During the three monthsended September 30, 2010, selling, general and administrative expenseswere slightly lower than the prior year period primarily due to current yearcost savings on certain facility leases and related expenses, along with loweroverall “Other” expenses as described below.

 

The overall increase inselling, general and administrative expense for the six months endedSeptember 30, 2010 compared to the corresponding period in the prior yearwas primarily due to (i) higher selling and commission-relatedexpenses for our Roadway Sensors and Vehicle Sensors segments, as total netsales for both segments collectively increased approximately 19% from the prioryear period and (ii) additional consulting and outside services expenses,primarily in our Vehicle Sensors segment related to market research and certainother sales and marketing activities. We also saw a shift from cost of sales tosales and marketing of certain of our headcount expenses in our TransportationSystems segment in the current period commensurate with the overall decline inthis segment’s revenues and the reallocation of existing personnel.Additionally, in the six months ended September 30, 2010, we realizedapproximately $250,000 in net reversals of previously recorded bad debt expense(included in the “Other” category in the table above) as a result of collectingcertain large accounts receivable balances. In prior periods, we had recordedan estimated allowance for doubtful accounts against these receivables giventhe uncertainty of collection at that time. In the future, our operatingresults in any given period may be favorably or adversely impacted as a resultof our estimates of the realization of our accounts receivable.

 

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*Researchand Development Expense*.  The following tables present researchand development expense for the three and six months ended September 30,2010 and 2009:

 
| ** **                           | ** ** | **Three Months Ended**                      | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **             | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------------------|------------|
| ** **                           | ** ** | **September 30, 2010**                      | ** ** | **September 30, 2009** | ** ** | ** ** | ** ** | ** **             | ** ** |
| ** **                           | ** ** | ** **                                            | ** ** | **% of Net**           | ** ** | ** ** | ** ** | **% of Net** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                                            | ** ** | **Sales and**               | ** ** | ** ** | ** ** | **Sales and**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                                            | ** ** | **Contract**                     | ** ** | ** ** | ** ** | **Contract**           | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **Amount**                                            | ** ** | **Revenues**                     | ** ** | **Amount** | ** ** | **Revenues**           | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(In thousands, except percentages)** | ** ** |
| Salary and personnel-related         |       | $                                                     | 596        |                             | 4.2        | %          | $          | 661                    |       | 4.4 | % | $ | (65 | ) | (9.8 | )% |
| Facilities, development and supplies |       | 407                                                   |       | 2.9                              |       | 195        |       | 1.3                    |       | 212 |   | 108.7 |   |
| Other                                |       | 37                                                    |       | 0.3                              |       | 28         |       | 0.2                    |       | 9 |   | 32.1 |   |
| Research and development             |       | $                                                     | 1,040      |                             | 7.4        | %          | $          | 884                    |       | 5.9 | % | $ | 156 |   | 17.6 |   |

 
| ** **                           | ** ** | **Six Months Ended**                        | ** ** | **Six Months Ended**   | ** ** | ** ** | ** ** | ** **             | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------|------------|------------|------------|------------------------|------------|
| ** **                           | ** ** | **September 30, 2010**                      | ** ** | **September 30, 2009** | ** ** | ** ** | ** ** | ** **             | ** ** |
| ** **                           | ** ** | ** **                                            | ** ** | **% of Net**           | ** ** | ** ** | ** ** | **% of Net** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                                            | ** ** | **Sales and**               | ** ** | ** ** | ** ** | **Sales and**     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                                            | ** ** | **Contract**                     | ** ** | ** ** | ** ** | **Contract**           | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **Amount**                                            | ** ** | **Revenues**                     | ** ** | **Amount** | ** ** | **Revenues**           | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(In thousands, except percentages)** | ** ** |
| Salary and personnel-related         |       | $                                                     | 1,216      |                             | 4.1        | %          | $          | 1,344                  |       | 4.6 | % | $ | (128 | ) | (9.5 | )% |
| Facilities, development and supplies |       | 681                                                   |       | 2.3                              |       | 431        |       | 1.5                    |       | 250 |   | 58.0 |   |
| Other                                |       | 84                                                    |       | 0.3                              |       | 73         |       | 0.2                    |       | 11 |   | 15.1 |   |
| Research and development             |       | $                                                     | 1,981      |                             | 6.7        | %          | $          | 1,848                  |       | 6.3 | % | $ | 133 |   | 7.2 |   |

 

Research and developmentexpenses for the three and six months ended September 30, 2010 were higherthan the corresponding periods in the prior year due primarily to additionaldevelopment and related activities associated with our Vehicle Sensors segment.We currently expect our total research and development expenditures for thecurrent fiscal year will be slightly higher when compared to the prior fiscalyear.

 

*Interest Expense, Net.*   Net interest expense of $42,000 and $82,000for the three and six months ended September 30, 2010, respectively, waslower than the $71,000 and $157,000 for the three and six months ended September 30,2009, respectively, primarily due to the overall lower level of borrowings inthe current fiscal year, as we continue to make monthly principal payments onour term note. As a result, we currently anticipate our interest expense willcontinue to decline for the remainder of the fiscal year ending March 31,2011. See “Liquidity and Capital Resources” below for additional details on ourborrowings.

 

*Income**Taxes*.  The following tables present our provision for income taxes forthe three and six months ended September 30, 2010 and 2009:

 
| ** **                 | ** ** | **Three Months Ended**                      | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                 | ** ** | **September 30,**                                | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                 | ** ** | **2010**                                              | ** ** | **2009**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(In thousands, except percentages)** | ** ** |
| Provision for income taxes |       | $                                                     | 388        |       | $          | 501          |       | $ | (113 | ) | (23 | )% |
| Effective tax rate         |       | 41.7                                                  | %          | 48.0       | %          |         |       |   |   |
|                            |            |                                                       |            |            |            |              |            |  |  |  |  |  |

 
| ** **                 | ** ** | **Six Months Ended**                        | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                 | ** ** | **September 30,**                                | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                 | ** ** | **2010**                                              | ** ** | **2009**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(In thousands, except percentages)** | ** ** |
| Provision for income taxes |       | $                                                     | 951        |       | $          | 611          |       | $ | 340 |   | 56 | % |
| Effective tax rate         |       | 41.5                                                  | %          | 47.1       | %          |         |       |   |   |
|                            |            |                                                       |            |            |            |              |            |  |  |  |  |  |

 

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Our effective tax rates inthe three and six months ended September 30, 2010 were slightly lower thanthose for the corresponding periods in the prior year due primarily to higherestimated projected pre-tax income in the current year compared to the prioryear and the corresponding decreased impact that certain non-deductibleexpenses will have on taxable income. On an interim basis, we estimate what ouranticipated annual effective tax rate will be, while also separatelyconsidering applicable discrete and other non-recurring items, and record aquarterly income tax provision in accordance with the anticipated annual rate.As the fiscal year progresses, we refine our estimates based on actual eventsand financial results during the year. This process can result in significantchanges to our expected effective tax rate. When this occurs, we adjust ourincome tax provision during the quarter in which our estimates are refined sothat the year-to-date provision reflects the expected annual effective taxrate. These changes, along with adjustments to our deferred taxes, amongothers, may create fluctuations in our overall effective tax rate from quarterto quarter. Additionally, we have not recorded any valuation allowance againstour deferred tax assets as of September 30, 2010 and March 31, 2010,respectively.

 

*Goodwill Impairment Testing.* As discussed further in Note 1 of Notes to Unaudited CondensedConsolidated Financial Statements, included in Part I, Item 1 of this report,goodwill is tested for impairment on an annual basis in our fourth fiscalquarter or more frequently if indicators of impairment exist.

 

Due to the current economic environment, we concludedthat events had occurred and circumstances had changed that required us toperform an interim test of impairment of the carrying value of goodwill as ofSeptember 30, 2010. Our interim impairment analysis did not result in anyimpairment charges during the quarter ended September 30, 2010. However, futurechanges in economic conditions or actual financial results that vary from ourexpectations may cause the estimated fair values of one or more of ourreporting units to fall below their respective carrying values, thus resultingin an impairment charge in a future period.

 

At September 30, 2010, the estimated fair values ofour Roadway Sensors and Vehicle Sensors reporting units each significantlyexceeded their respective carrying values. However, the estimated fair value ofour Transportation Systems reporting unit at September 30, 2010 was onlyapproximately 10% in excess of its carrying value. Accordingly, a modestdecline in the estimated fair value of this reporting unit in the future couldresult in an impairment charge. Likewise, further decreases or delays ingovernment spending could cause reduced cash flows in our TransportationSystems reporting unit, which would likely reduce the estimated fair value ofthe unit, resulting in the possibility of goodwill impairment. Furthermore, ifour market capitalization were to decline by a substantial amount and remain ata lower level for a significant duration, the risk of impairment in one of moreof our reporting units will increase.

 

**Liquidity and Capital Resources**

 

*Cash Flows*

 

We have historicallyfinanced our operations with a combination of cash flows from operations,borrowings under credit facilities and the sale of equity securities. Wecurrently rely on cash flows from operations and the availability of borrowingson a line of credit facility to fund our operations, which we believe to besufficient to fund our operations for at least the next twelve months. However,we may need or choose to raise additional capital to fund potential futureacquisitions and our future growth. We may raise such funds by selling equityor debt securities to the public or to selected investors, or by borrowingmoney from financial institutions. If we raise additional funds by issuingequity or convertible debt securities, our existing stockholders may experiencesignificant dilution and any equity securities that may be issued may haverights senior to our existing stockholders.

 

At September 30, 2010,we had $23.2 million in working capital, which included no borrowings on our$12.0 million line of credit and $12.3 million in cash and cash equivalents.This compares to working capital of $22.6 million at March 31, 2010, whichincluded no borrowings on our line of credit and $10.4 million in cash and cashequivalents.

 

The following tablesummarizes our cash flows for the six months ended September 30, 2010 and2009:

 
| ** **                                                   | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **September 30,**         | ** ** |
| **Net cash provided by (used in):** | ** ** | **2010**                       | ** ** | **2009** | ** ** |
| ** **                                                   | ** ** | **(In thousands)**        | ** ** |
| Operating activities                                         |       | $                              | 3,169      |   | $ | 3,666 |   |
| Investing activities                                         |       | (355                           | )          | (416 | ) |
| Financing activities                                         |       | (896                           | )          | (495 | ) |
|                                                              |            |                                |            |  |  |  |  |

 

*Operating Activities. *Cash provided by ouroperations for the six months ended September 30, 2010 was primarily theresult of (i) our net income of $1.3 million during the current period;(ii) $1.5 million in non-cash items within the statement of income,primarily adjustments to our deferred tax assets of $800,000 and depreciationexpense of $484,000; and (iii) $287,000 in cash resulting from changes inour operating assets and liabilities during the period. Cash provided byoperating activities during the six months ended September 30, 2009 wasprimarily the result of (i) our net income during that period of $687,000;(ii) $1.2 million in non-cash items within the statement of income,primarily adjustments to our deferred tax assets and depreciation expense; and (iii) $1.8million in cash resulting from changes in operating assets and liabilitiesduring the period.

 

Our inventories increasedapproximately 18% from March 31, 2010 to September 30, 2010 primarilyas we built up certain inventories on hand to meet anticipated increases in ourproduct net sales, particularly Roadway Sensors. The increase in accountspayable by approximately 20% from March 31, 2010 to September 30,2010 was generally commensurate with our increased inventory levels. In thefuture, our inventory levels are likely to continue to be determined basedupon, among other factors, the level of purchase orders we receive from ourcustomers, the stage at which our products are in their respective product lifecycles, and competitive situations in the marketplace. We attempt to balancesuch considerations against risk of obsolescence and potentially excessinventory levels.

 

*Investing Activities. *Cash used in our investingactivities during the six months ended September 30, 2010 consisted of (i) $249,000for purchases of property and equipment and (ii) $106,000 representing thefirst anniversary payment for the acquisition of certain assets of HamiltonSignal. Cash used in investing activities for the six months ended September 30,2009 consisted of purchases of property and equipment of $116,000, as well as$300,000 used for the Hamilton Signal acquisition in April 2009. In April 2011,we expect to make the final payment of $112,000 related to the Hamilton Signalacquisition.

 

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*Financing Activities. *Net cash used in financingactivities during the six months ended September 30, 2010 was the resultof payments on our long-term debt of $915,000. These payments were partiallyoffset during the period by $19,000 in proceeds received from the exercise ofoutstanding stock options to purchase shares of our common stock. During thesix months ended September 30, 2009, cash used in financing activities wasthe result of net payments on our long-term debt of $585,000, partially offsetby $90,000 in proceeds from the exercise of outstanding stock options topurchase shares of our common stock.

 

*Borrowings*

 

In October 2008, we entered into a $19.5 millioncredit facility with California Bank & Trust (the “Bank”), whichprovides for a two-year revolving line of credit with borrowings of up to $12.0million and a $7.5 million 48-month term note (discussed below). In September 2010,we entered into a modification agreement with the Bank to extend the expirationdate of our revolving line of credit to October 1, 2012. Interest onborrowed amounts under the revolving line of credit are payable monthly at arate equal to the current stated prime rate (3.25% at September 30, 2010)up to the current stated prime rate plus 0.50%, depending on aggregate depositbalances maintained at the bank in relation to the total loan commitment underthe credit facility. We are obligated to pay an unused line fee of 0.25% perannum applied to the average unused portion of the revolving line of creditduring the preceding month. The revolving line of credit does not contain anyearly termination fees and is secured by substantially all of our assets. As ofSeptember 30, 2010, no amounts were outstanding under the revolving lineof credit portion of the facility. Availability under this line of credit maybe reduced or otherwise limited as a result of our obligations to comply with certainfinancial covenants, as described further below.

 

As of September 30, 2010, we had outstandingborrowings of approximately $4.4 million under the term note included in ourcredit facility. Principal payments under this term note are required to be repaidin 48 monthly installments of $152,000 commencing on June 1, 2009.Additionally, beginning on November 1, 2009, and on November 1 ofeach year thereafter, we are required to repay additional principal of up to$500,000, calculated based on certain financial measures, as further defined inthe loan agreement. These additional principal payments effectively reduce thetotal number of monthly installments necessary to repay the term note. Intereston the term note is payable monthly at a rate equal to the current stated primerate plus 0.50% up to the current stated prime rate plus 1.00%, depending onaggregate deposit balances maintained at the bank in relation to the total loancommitment under the credit facility. The term note contains no early terminationfees and, along with our revolving line of credit discussed above, is securedby substantially all of our assets.

 

In connection with our credit facility and loanagreement with the Bank, we are also required to comply with certain quarterlyfinancial covenants. These include achieving ratios for working capital anddebt service, as well as maintaining a level of profitability, all of which arefurther defined in the agreement. While we believe we are currently incompliance with all such financial covenants, we cannot assure you that we willnot violate one or more covenants in the future. If we were to be in violationof covenants under this agreement, our lender could choose to acceleratepayment on all outstanding loan balances and pursue its security interest inour assets. In this event, we cannot assure you that we would be able toquickly obtain equivalent or suitable replacement financing on acceptableterms, on a timely basis, or at all. If we were not able to secure alternativesources of financing, such acceleration would have a material adverse impact onour business and financial condition.

 

**Off BalanceSheet Arrangements**

 

Other than our operatingleases, we do not believe we have any other material off balance sheetarrangements at September 30, 2010.

 

**Seasonality**

 

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

 

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

 

**InterestRate Risk**

 

Ourexposure to interest rate risk is limited to our line of credit and our bankterm note. Our line of credit bears interest equal to the prevailing prime rateplus 0% to 1.0%. We do not believe that a 10% increase in the interest rate onour line of credit or term note would have a material impact on our financialposition, operating results or cash flows. In addition, we believe that thecarrying value of our outstanding debt under our credit facility approximatesfair value.

 

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**ForeignCurrency Risk**

 

Todate, a small portion of our net sales have been denominated in Euros. Gains orlosses from foreign currency remeasurement are included in other income(expense), net in our consolidated financial statements and to date have notbeen significant. We do not believe we are currently exposed to any materialrisk of loss from currency exchange fluctuations. We do not currently purchasederivative financial instruments to hedge foreign currency exchange risk, butmay do so in the future.

 

**ITEM 4T.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

As of the end of the period coveredby this report, we carried out an evaluation, under the supervision and withthe participation of our management, including our Chief Executive Officer andour Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures, as such term is defined in ExchangeAct Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods 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.

 

**Changes in Internal Controls**

 

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

 

**InherentLimitations on Internal Control**

 

A control system, no matterhow well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of managementoverride or improper acts, if any, have been detected. These inherentlimitations include the realities that judgments in decision making can befaulty, and that breakdowns can occur because of simple errors. Additionally,controls can be circumvented by the individual acts of some persons, bycollusion of two or more people, or by management override of the control. Thedesign of any system of controls is also based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to management override, error or improper acts mayoccur and not be detected. Any resulting misstatement or loss may have anadverse and material effect on our business, financial condition and results ofoperations.

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

The information set forthunder the heading “Litigation and Other Contingencies” in Note 6 of Notes toUnaudited Condensed Consolidated Financial Statements, included inPart I, Item 1 of this report, is incorporated herein by reference.

 

**ITEM 1A.  RISK FACTORS**

 

*Ourbusiness is subject to a number of risks, some of which are discussed below.Other risks are presented elsewhere in this report and in the informationincorporated by reference into this report. You should consider the followingrisks carefully in addition to the other information contained in this reportand our other filings with the SEC, including our annual report onForm 10-K and subsequent reports on Forms 10-Q and 8-K, before deciding tobuy, sell, or hold our common stock. The risks and uncertainties describedbelow are not the only ones facing our company. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also affect our business operations. If any of these risks actually occurs,our business, financial condition, or results of operations could be seriouslyharmed. In that event, the market price for our common stock could decline andyou may lose all or part of your investment.*

 

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**The economic slowdown has reduced and delayed government funding fortransportation infrastructure projects and initiatives, decreased availabilityof financial capital for our customers and has adversely impacted real estatedevelopment, all of which has adversely impacted our net sales and could impactour contract revenues.**Decreased consumer spending, the failure ofcertain financial institutions and businesses, concerns about the availabilityand cost of credit, and reduced corporate profits and capital spending haveresulted in a downturn in worldwide economic conditions, as well as budgetaryshortfalls increasingly present at all levels of government. These unfavorableeconomic conditions are having a negative impact on customer orders andgovernment funding of infrastructure projects incorporating our products andservices. 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 commercial construction,has adversely impacted new road construction and in the prior fiscal yearresulted in flat or declining Roadway Sensor and Vehicle Sensor net sales andalso adversely impacted Transportation Systems contract revenues. Any of theforegoing economic conditions may adversely affect our net sales and contractrevenues in future periods and make it extremely difficult for our customers,our suppliers and us to accurately forecast and plan future businessactivities. Additionally, there continues to be uncertainties regarding theimpact of the federal stimulus package and the fact that the accessibility offunds is taking longer than originally anticipated, as well as a delay in thepassage of a new Federal Highway Bill. If such conditions continue or worsen,our business, financial condition and results of operations could be materiallyand adversely affected.

 

**Because we depend on government contracts and subcontracts, we faceadditional risks related to contracting with federal, state and local governments,including budgetary issues and fixed price contracts.**A significantportion of our sales are derived from contracts with governmental agencies,either as a general contractor, subcontractor or supplier. Government contractsrepresented approximately 45%, 45% and 38% of our total net sales and contractrevenues for the fiscal years ended March 31, 2010, 2009 and 2008,respectively. We anticipate that revenue from government contracts willcontinue to remain a significant portion of our net sales and contractrevenues. Government business is, in general, subject to special risks andchallenges, including:

 

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

 

·                                          long purchase cycles orapproval processes;

 

·                                          competitive bidding and qualificationrequirements;

 

·                                          the impact of internationalconflicts;

 

·                                          performance bondrequirements;

 

·                                          changes in governmentpolicies and political agendas;

 

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

 

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

 

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

 

Governmental budgets and plans aresubject to change without warning. Certain risks of selling to governmentalentities include dependence on appropriations and administrative allocation offunds, changes in governmental procurement legislation and regulations andother policies that may reflect political developments or agendas, significantchanges in contract scheduling, intense competition for government business andtermination of purchase decisions for the convenience of the governmentalentity. Substantial delays in purchase decisions by governmental entities, andthe current constraints on government budgets at the federal, state and locallevel, could cause our net sales and contract revenues and income to drop substantiallyor to fluctuate significantly between fiscal periods.

 

Inaddition, a large number of our government contracts are fixed price contracts.As a result, we may not be able to recover any cost overruns we may incur.These fixed price contracts require us to estimate the total project cost basedon preliminary projections of the project’s requirements. The financialviability of any given project depends in large part on our ability to estimatethese costs accurately and complete the project on a timely basis. In the eventour costs on these projects exceed the fixed contractual amount, we will berequired to bear the excess costs. Such additional costs would adversely affectour financial condition and results of operations. Moreover, certain of ourgovernment contracts are subject to termination or renegotiation at theconvenience of the government, which could result in a large decline in our netsales and contract revenues in any given period. Our inability to address anyof the foregoing concerns or the loss or renegotiation of any materialgovernment contract could seriously harm our business, financial condition andresults of operations.

 

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**California state budgetary constraints may have a material adverseimpact on us.**The state of California has experienced, and iscontinuing to experience, a significant budget shortfall and other relatedbudgetary issues and constraints. The state of California has historically beenand is considered to be a key geographic region for our Roadway Sensors andTransportation Systems segments. Ongoing uncertainty as to the timing andaccessibility of budgetary funding, changes in state funding allocations tolocal agencies and municipalities, or other delays in purchasing for, orcommencement of, transportation projects has and may continue to have anegative impact on our 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.

 

InVehicle Sensors, we believe that as a result of the expected 2013 Europeanmandate for LDW and other active safety systems, and an overall awareness ofthe potential benefits of LDW, we will experience an even higher degree ofcompetition from a variety of tier-one OEM suppliers and other potential marketentrants worldwide. We also expect such competition to increase due totechnological advancements, industry consolidations and reduced barriers toentry. Increased competition is likely to result in a loss of market share,price reductions and reduced gross margins, any of which could seriously harmour business, financial condition and results of operations. For example, adeveloper of LDW systems was acquired by a large multinational organizationduring our fiscal year ended March 31, 2009. This new competitor hasrecently increased its market share and could become more aggressive inpursuing market share in both the passenger car and heavy truck markets as aresult of its greater access to resources and reputation in the market.Furthermore, awareness of LDW technology is increasing and other market playershave developed competing technologies, which may contain improvements or addedfeatures beyond those offered by our LDW systems. Additionally, from time totime, we may be required to re-compete for LDW business from our main customerbase of heavy truck OEMs. These OEMs could make a supplier change based onprice, product performance or available features. Should our competition besuccessful, this could adversely affect our ability to successfully market andsell our LDW systems to new and existing customers.

 

We compete with existing,well-established companies in our Roadway Sensors segment, both domesticallyand abroad. Certain technological barriers to entry make it difficult for newcompetitors to enter the market with competing video or other technologies;however, we are aware of new market entrants from time to time. Increasedcompetition could result in loss of market share, price reductions and reducedgross margins, any of which could seriously harm our business, financialcondition and results of operations.

 

TheTransportation Systems market is highly fragmented and is subject to evolvingnational and regional quality and safety standards. Our competitors vary insize, number, scope and breadth of the products and services they offer, andinclude large multi-national engineering firms and smaller local regionalfirms.

 

Inall of our segments, many of our competitors have far greater name recognitionand greater financial, technological, marketing, and customer service resourcesthan we do. This may allow them to respond more quickly to new or emergingtechnologies and changes in customer requirements. It may also allow them todevote greater resources to the development, promotion, sale and support oftheir products than we can. Recent consolidations of end users, distributorsand manufacturers in our target markets have exacerbated this problem. As aresult of the foregoing factors, we may not be able to compete effectively inour target markets and competitive pressures could adversely affect our business,financial condition and results of operations.

 

**We may engage in acquisitions of companies or technologies thatmay require us to undertake significant capital infusions and could resultin disruptions of our business and diversion of resources and managementattention.**We completed the acquisition of certain assets ofHamilton Signal in April 2009. We have in the past acquired, and may inthe future acquire, additional complementary businesses, products, andtechnologies. Acquisitions may require significant capital infusions and, ingeneral, acquisitions also involve a number of special risks, including:

 

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

 

·                                          the failure to retain orintegrate key acquired personnel;

 

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

 

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

 

·                                          the incurrence of unforeseenobligations or liabilities;

 

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

 

·                                          increased interest expenseand amortization of acquired intangible assets.

 

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

 

**We may be unable to attract and retain key personnel, which couldseriously harm our business.**Due to the specializednature of our business, we are highly dependent on the continued service of ourexecutive officers and other key management, engineering and technicalpersonnel. The loss of any of our officers, or any of our other executives orkey members of management could adversely affect our business, financialcondition, or results of operations. Our success will also depend in large partupon our ability to continue to attract, retain and motivate qualifiedengineering and other highly skilled technical personnel. In particular, thefuture success of our Transportation Systems segment will depend on our abilityto hire additional qualified engineers and planners. Competition for qualifiedemployees, particularly development engineers, is intense. We may not be ableto continue to attract and retain sufficient numbers of such highly skilledemployees. Our inability to attract and retain additional key employees or theloss of one or more of our current key employees could adversely affect ourbusiness, financial condition and results of operations.

 

**Our profitability could be adversely affected if we are not able to maintainadequate utilization of our Transportation Systems workforce.**The cost ofproviding our Transportation Systems engineering and consulting services,including the extent to which we utilize our workforce, affects ourprofitability. The rate at which we utilize our workforce is affected by anumber of factors, including:

 

·                                          our ability to transitionemployees from completed projects to new assignments and to hire and assimilatenew employees;

 

·                                          our ability to forecastdemand for our services and thereby maintain an appropriate headcount in ourvarious regions;

 

·                                          our need to devote time andresources to training, business development, professional development and othernon-chargeable activities; and

 

·                                          our ability to match theskill sets of our employees to the needs of the marketplace.

 

**Our use of the percentage of completion method of accounting for ourcontract revenues could result in a reduction or reversal of previouslyrecorded revenues and profits.**A significant portion of ourtotal net sales and contract revenues are measured and recognized using thepercentage of completion method of accounting. Our use of this accountingmethod results in recognition of revenues and profits ratably over the life ofa contract, based generally on the proportion of costs incurred to date tototal costs expected to be incurred for the entire project. The effects ofrevisions to revenues and estimated costs are recorded when the amounts areknown or can be reasonably estimated. Such revisions could occur in any periodand their effects could be material. Although we have historically madereasonably reliable estimates of the progress towards completion of long-termengineering, program management, construction management or constructioncontracts, the uncertainties inherent in the estimating process make itpossible for actual costs to vary materially from estimates, includingreductions or reversals of previously recorded revenues and profits.

 

**Our failure to successfully bid on new contracts and renew existing contractscould reduce our revenues and profits.**Our business depends on ourability to successfully bid on new contracts and renew existing contracts withprivate and public sector customers. Contract proposals and negotiationsare complex and frequently involve a lengthy bidding and selection process,which are affected by a number of factors, such as market conditions, financingarrangements and required governmental approvals. For example, a customermay require us to provide a surety bond or letter of credit to protect theclient should we fail to perform under the terms of the contract. Ifnegative market conditions arise, or if we fail to secure adequate financialarrangements or the required governmental approval, we may not be able topursue particular projects, which could adversely reduce or eliminate ourprofitability.

 

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**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 our contractmanufacturers have sufficient capacity to meet our production schedules for theforeseeable future and we believe we could find alternative contractmanufacturing sources for many of our products, if necessary, we couldexperience a production gap if for any reason our contract manufacturers wereunable to meet our production requirements and our cost of goods sold couldincrease, adversely affecting our margins.

 

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

 

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

 

Marketacceptance of our new products depends upon many factors, including our abilityto accurately predict market requirements and evolving industry standards, ourability to resolve technical challenges in a timely and cost-effective manner,our ability to qualify any new products with OEMs and achieve manufacturingefficiencies, the perceived advantages of our new products over traditionalproducts and the marketing capabilities of our independent distributors andstrategic partners, including Valeo’s ability to expand sales of LDW systems inthe passenger car market. The success of our LDW system will also depend inpart on the success of the automotive vehicles that incorporate our technology,as well as the success of optional equipment that OEMs bundle with ourtechnologies.

 

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

 

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

 

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

 

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

 

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**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 pressures inthe marketplace as technologies mature;

 

·                                          changes in customerrequirements;

 

·                                          additional qualificationrequirements related to new products or components;

 

·                                          frequent new productintroductions and enhancements;

 

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

 

·                                          evolving industry standardsand changes in the regulatory environment.

 

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

 

**Our international business operations may be threatened by manyfactors that are outside of our control.**While we historically havehad limited international sales and operations experience, we began work on ourfirst overseas contracts in Abu Dhabi and Dubai in fiscal 2010. We plan toexpand our international efforts in the future with respect to all three of oursegments, but cannot assure you that we will be successful in those efforts.International operations subject us to various inherent risks including, amongothers:

 

·                                          currency fluctuations andrestrictions;

 

·                                          political, social andeconomic instability, as well as international conflicts and acts of terrorism;

 

·                                          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.

 

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

 

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Anyof the factors mentioned above may adversely affect our future internationalsales and, consequently, affect our business, financial condition and operatingresults. Additionally, as we pursue the expansion of our internationalbusiness, certain fixed and other overhead costs could outpace our revenues, thusadversely affecting our results of operations. We may likewise face localcompetitors in certain international markets who are more established, havegreater economies of scale and stronger customer relationships. Furthermore, aswe increase our international sales, our total revenues may also be affected toa greater extent by seasonal fluctuations resulting from lower sales thattypically occur during the summer months in Europe and other parts of theworld.

 

**If our internal controls overfinancial reporting do not comply with the requirements of the Sarbanes-OxleyAct, our business and stock price could be adversely affected.**Section 404of the Sarbanes-Oxley Act of 2002 currently requires us to evaluate theeffectiveness of our internal controls over financial reporting at the end ofeach fiscal year and to include a management report assessing the effectivenessof our internal controls over financial reporting in all annual reports.

 

In July 2010, theDodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. Section 989Gof the Act added Section 404(c) to the Sarbanes-Oxley Act of 2002,which permanently exempts small public companies that qualify as either aNon-Accelerated Filer or Smaller Reporting Company from the auditor attestationrequirement of Section 404(b) of the Sarbanes-Oxley Act. Likewise, inSeptember 2010, the SEC issued a Final Rule, *InternalControl Over Financial Reporting in Exchange Act Periodic Reports forNon-Accelerated Filers*, to conform its rules and forms with thenew Section 404(c). For our fiscal year ending March 31, 2011, wewill be exempt from the auditor attestation requirement over our internalcontrol over financial reporting; however, to the extent we do not qualify as aNon-Accelerated Filer or Smaller Reporting Company in subsequent fiscal years,we will be subject to such auditor attestation requirement. In such an event,we may not be able to complete the work required for such attestation on atimely basis, and even if we timely complete such requirements, our independentregistered public accounting firm may still conclude that our internal controlsover financial reporting are not effective.

 

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

 

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

 

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

 

·                                          our ability to accessstimulus funding, funding from a new Federal Highway Bill or other funding;

 

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

 

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

 

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

 

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

 

·                                          our ability tocontrol costs;

 

·                                          our ability toraise additional capital;

 

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

 

·                                          seasonality dueto winter weather conditions;

 

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

 

·                                          marketacceptance of the products incorporating our technologies and products;

 

·                                          theintroduction of new products by competitors;

 

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

 

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

 

·                                          the effects oftechnological changes in our target markets;

 

·                                          the amount ofour backlog at any given time;

 

·                                          the nature ofour government contracts;

 

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

 

·                                          risks anduncertainties associated with our international business;

 

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

 

·                                          generaleconomic and political conditions; and

 

·                                          internationalconflicts and acts of terrorism.

 

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

 

**As compared to recent prior fiscalyears, we experienced a decline in our net sales and contract revenues in ourmost recently completed fiscal year ended March 31, 2010. If we fail tomanage this decline effectively, we may be unable to execute our businessplan and may experience future weaknesses in our operating results.**We have expanded our overall business in the past few years; however, weexperienced a reduction in our net sales and contract revenues in the fiscalyear ended March 31, 2010. Based on our business objectives, and in orderto achieve future growth, we will need to continue to add additional qualifiedpersonnel, and invest in additional research and development and sales andmarketing activities, which could lead to increases in our expenses and furtherdeclines in our operating results. In addition, our past expansion has placed,and future expansion is expected to place, a significant strain on ourmanagerial, administrative, operational, financial and other resources. If weare unable to manage these activities or any unexpected revenue declinessuccessfully, our growth, our business, our financial condition and our resultsof operations could continue to be adversely affected.

 

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

 

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Litigation may be necessaryin the future to enforce our intellectual property rights or to determine thevalidity and scope of the proprietary rights of others. Litigation may also benecessary to defend against claims of infringement or invalidity by others. Anadverse outcome in litigation or any similar proceedings could subject us tosignificant liabilities to third parties, require us to license disputed rightsfrom others or require us to cease marketing or using certain products ortechnologies. We may not be able to obtain any licenses on terms acceptable tous, or at all. We also may have to indemnify certain customers or strategicpartners if it is determined that we have infringed upon or misappropriatedanother party’s intellectual property. Any of these results could adverselyaffect our business, financial condition and results of operations. Inaddition, the cost of addressing any intellectual property litigation claim,including legal fees and expenses, and the diversion of management’s attentionand resources, regardless of whether the claim is valid, could be significantand could seriously harm our business, financial condition and results ofoperations.

 

**We may need to raise additional capital in the future, whichmay not be available on terms acceptable to us, or at all.**  We have historically experienced volatilityin our earnings and cash flows from operations from year to year. Although wehave a $12.0 million revolving line of credit, should we have an event ofdefault, which includes, among other things, a failure to meet certainfinancial covenants and a material adverse change in the business, the bankcould choose to limit or take away our ability to borrow these or any funds.Should this occur, or if the credit markets further tighten or our businessdeclines, we may need or choose to raise additional capital to repayindebtedness, or pursue acquisitions or to expand our operations. Such additional capital may be raised throughbank borrowings, or other debt or equity financings. We cannot assure you thatany additional capital will be available on a timely basis, on acceptableterms, or at all, and such additional financing may result in further dilutionto our stockholders.

 

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

 

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

 

·                                          our ability to controlcosts;

 

·                                          the supply of key componentsfor our products;

 

·                                          our ability to increaserevenue and net income;

 

·                                          increased research anddevelopment expenses and sales and marketing expenses;

 

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

 

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

 

·                                          potential acquisitions ofbusinesses and product lines;

 

·                                          our relationships withcustomers and suppliers;

 

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

 

·                                          our ability to successfullynegotiate credit arrangements with our bank and the state of the financialmarkets, in general; and

 

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

 

Ifour capital requirements are materially different from those currently planned,we may need additional capital sooner than anticipated. If additional funds areraised through the issuance of equity or convertible debt securities, thepercentage ownership of our stockholders will be reduced and such securitiesmay have rights, preferences and privileges senior to our common stock.Additional equity or debt financing may not be available on favorable terms, ona timely basis, or at all. If adequate funds are not available or are notavailable on acceptable terms, we may be unable to continue our operations asplanned, develop or enhance our products, expand our sales and marketingprograms, take advantage of future opportunities or respond to competitivepressures.

 

**We may be unable to maintainprofitability on a quarterly or annual basis.**We cannot assure you that wewill be able to sustain or improve our financial performance, or that we willbe able to continue to achieve profitability on a quarterly or annual basis inthe future. Our ability to maintain profitability in future periods could beimpacted by budgetary constraints, government and political agendas, economicinstability and other items that are not in our control. Most of our expensesare fixed in advance. As such, we generally are unable to reduce our expensessignificantly in the short-term to compensate for any unexpected delay ordecrease in anticipated revenues. As a result, we may experience operatinglosses and net losses in the future, which would make it difficult to fund ouroperations and achieve our business plan, and could cause the market price ofour common stock to decline.

 

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

 

·                                          quarterly variationsin operating results;

 

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

 

·                                          our ability toraise additional capital;

 

·                                          shortagesannounced by suppliers;

 

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

 

·                                          transitions tonew products or product enhancements;

 

·                                          acquisitions ofbusinesses, products or technologies;

 

·                                          the impact ofany litigation;

 

·                                          changes ininvestor perceptions;

 

·                                          governmentfunding, political agendas and other budgetary constraints;

 

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

 

·                                          internationalconflicts, political unrest and acts of terrorism.

 

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

 

**Certain provisions of our charter documentsmay discourage a third party from acquiring us and may adverselyaffect the price of our common stock.**Certain provisions of ourcertificate of incorporation could make it difficult for a third party toacquire us, even though an acquisition might be beneficial to our stockholders.Such provisions could limit the price that investors might be willing to pay inthe future for shares of our common stock. Under the terms of our certificateof incorporation, our Board of Directors is authorized to issue, withoutstockholder approval, up to 2,000,000 shares of preferred stock with voting,conversion and other rights and preferences superior to those of our commonstock. In August 2009, we adopted a stockholder rights plan and declared adividend of preferred stock purchase rights to our stockholders. Generally, thestockholder rights plan provides that if a person or group acquires 15% or moreof our common stock, subject to certain exceptions and under certaincircumstances, the rights may be exchanged by us for common stock or theholders of the rights, other than the acquiring person or group, could acquireadditional shares of our capital stock at a discount off of the then currentmarket price. Such exchanges or exercise of rights could cause substantialdilution to a particular acquirer and discourage the acquirer from pursuing ourcompany. The mere existence of a stockholder rights plan often delays or makesa merger, tender offer or proxy contest more difficult.

 

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

 

None.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM 4.  (REMOVED AND RESERVED)**

 

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**ITEM 5.  OTHER INFORMATION**

 

Oneof our directors, Joel Slutzky, has terminated his 10b5-1 trading plan, whichcovered an aggregate of 96,000 shares of common stock to be sold over a twelvemonth period beginning July 1, 2010, at a rate of 8,000 shares permonth.  An aggregate of 32,000 shares of common stock were sold under thetrading plan prior to its termination.

 

**ITEM 6.  EXHIBITS**

 

Thefollowing exhibits are filed herewith or are incorporated by reference to thelocation indicated.

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                               | ** ** | **Where Located**                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Restated  Certificate of Incorporation of the registrant                                                                                      | * *   | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2009 as filed with the SEC on October 30, 2009*  |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.2                 |       | Certificate  of Designations of Series A Junior Participating Preferred Stock                                                            | * *   | *Exhibit 3.2  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2009 as filed with the SEC on October 30, 2009*  |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.3                 |       | Bylaws  of registrant, as amended                                                                                                             | * *   | *Exhibit 4.2  to the registrant’s Registration Statement on Form S-1 (Reg.  No. 033-67932) as filed with the SEC on July 6, 1993*                     |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.4                 |       | Certificates  of Amendment to Bylaws of the registrant dated April 24, 1998 and  August 10, 2001                                    | * *   | *Exhibit 3.4  to the registrant’s Annual Report on Form 10-K/A for the year ended  March 31, 2003 as filed with the SEC on July 29, 2003*             |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.5                 |       | Certificate  of Amendment to Bylaws of registrant dated September 9, 2004                                                                | * *   | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2004 as filed with the SEC on November 15, 2004* |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 3.6                 |       | Certificate  of Amendment to Bylaws of registrant dated September 16, 2005                                                               | * *   | *Exhibit 3.5  to the registrant’s Annual Report on Form 10-K for the year ended  March 31, 2007 as filed with the SEC on June 21, 2007*               |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.7                 |       | Certificate  of Amendment to Bylaws of registrant dated December 7, 2007                                                                 | * *   | *Exhibit 3.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  December 13, 2007*                                                  |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 3.8                 |       | Certificate  of Amendment to Bylaws of registrant, effective August 20, 2009                                                             | * *   | *Exhibit 3.3  to the registrant’s Current Report on Form 8-K as filed with the SEC on  August 21, 2009*                                                    |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 4.1                 |       | Rights  Agreement dated August 20, 2009 between the registrant and Computershare  Trust Company, N.A., including exhibits thereto        | * *   | *Exhibit 4.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  August 21, 2009*                                                    |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 10.1                |       | Modification  Agreement dated September 30, 2010 by and between Iteris, Inc. and  California Bank & Trust                  | * *   | *Exhibit 10.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  October 6, 2010*                                                   |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 31.1                |       | Certification  of the Principal Executive Officer, as required pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                | * *   | *Filed  herewith*                                                                                                                                                              |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 31.2                |       | Certification  of the Principal Financial and Accounting Officer, as required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 | * *   | *Filed  herewith*                                                                                                                                                              |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 32.1                |       | Certification  of the Chief Executive Officer, as required pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                    | * *   | *Filed  herewith*                                                                                                                                                              |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 32.2                |       | Certification  of the Chief Financial Officer, as required pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                    | * *   | *Filed  herewith*                                                                                                                                                              |

 

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Table ofContents

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Dated:  November 1, 2010 | ITERIS, INC. |
|--------------------------|-------------------|
|                     | (Registrant)      |
|                     |              |
|                     | By                | /S/ ABBAS  MOHADDES |
|                     |              | Abbas  Mohaddes |
|                     |              | Chief  Executive Officer |
|                     |              | (Principal  Executive Officer) |
|                     |              |   |
|                     |              |   |
|                     | By                | /S/ JAMES  S. MIELE |
|                     |              | James  S. Miele |
|                     |              | Chief  Financial Officer |
|                     |              | (Principal  Financial and Accounting Officer) |

 

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Table ofContents

 

**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                               | ** ** | **Where Located**                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Restated  Certificate of Incorporation of the registrant                                                                                      | * *   | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2009 as filed with the SEC on October 30, 2009*  |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.2                 |       | Certificate  of Designations of Series A Junior Participating Preferred Stock                                                            | * *   | *Exhibit 3.2  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2009 as filed with the SEC on October 30, 2009*  |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.3                 |       | Bylaws  of registrant, as amended                                                                                                             | * *   | *Exhibit 4.2  to the registrant’s Registration Statement on Form S-1 (Reg.  No. 033-67932) as filed with the SEC on July 6, 1993*                     |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.4                 |       | Certificates  of Amendment to Bylaws of the registrant dated April 24, 1998 and  August 10, 2001                                    | * *   | *Exhibit 3.4  to the registrant’s Annual Report on Form 10-K/A for the year ended  March 31, 2003 as filed with the SEC on July 29, 2003*             |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.5                 |       | Certificate  of Amendment to Bylaws of registrant dated September 9, 2004                                                                | * *   | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2004 as filed with the SEC on November 15, 2004* |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 3.6                 |       | Certificate  of Amendment to Bylaws of registrant dated September 16, 2005                                                               | * *   | *Exhibit 3.5  to the registrant’s Annual Report on Form 10-K for the year ended  March 31, 2007 as filed with the SEC on June 21, 2007*               |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.7                 |       | Certificate  of Amendment to Bylaws of registrant dated December 7, 2007                                                                 | * *   | *Exhibit 3.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  December 13, 2007*                                                  |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 3.8                 |       | Certificate  of Amendment to Bylaws of registrant, effective August 20, 2009                                                             | * *   | *Exhibit 3.3  to the registrant’s Current Report on Form 8-K as filed with the SEC on  August 21, 2009*                                                    |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 4.1                 |       | Rights  Agreement dated August 20, 2009 between the registrant and Computershare  Trust Company, N.A., including exhibits thereto        | * *   | *Exhibit 4.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  August 21, 2009*                                                    |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 10.1                |       | Modification  Agreement dated September 30, 2010 by and between Iteris, Inc. and  California Bank & Trust                  | * *   | *Exhibit 10.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  October 6, 2010*                                                   |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 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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