**Exhibit 10.4**

 

**LOAN AND SECURITY AGREEMENT**

**THIS LOAN AND SECURITY AGREEMENT**(this “**Agreement**”) dated as of the EffectiveDate between **SILICON VALLEY BANK**, a Californiacorporation (“**Bank**”), and **ITERIS, INC.**,a Delaware corporation (“**Borrower**”),provides the terms on which Bank shall lend to Borrower and Borrower shallrepay Bank.  The parties agree asfollows:

# **1**              **ACCOUNTING AND OTHER TERMS**

Accounting terms not defined in this Agreement shallbe construed following GAAP. Calculations and determinations must be made following GAAP.  Capitalized terms not otherwise defined inthis Agreement shall have the meanings set forth in Section 13.  All other terms contained in this Agreement,unless otherwise indicated, shall have the meaning provided by the Code to the extentsuch terms are defined therein.

# **2**              **LOAN AND TERMS OF PAYMENT**

## **2.1          Promiseto Pay**. Borrower hereby unconditionally promises to pay Bank the outstandingprincipal amount of all Credit Extensions and accrued and unpaid interestthereon as and when due in accordance with this Agreement.

### **2.1.1       Revolving Advances**.

#### (a)           Availability.  Subject to the terms and conditions of thisAgreement and to deduction of Reserves, Bank will make Advances to Borrower upto an amount (“**Net Borrowing Availability**”)not to exceed the lesser of:  (a) the Revolving Line; or (b)the amounts available under the Borrowing Base.

#### (b)           Streamline Period.  [omitted]

#### (c)           Termination; Repayment.  The Revolving Line terminates on theRevolving Line Maturity Date, when the principal amount of all Advances, theunpaid interest thereon, and all other Obligations relating to the RevolvingLine shall be immediately due and payable.

### **2.1.2       Letters of Credit Sublimit**.

(a)   As part of the Revolving Line, Bank shallissue or have issued Letters of Credit for Borrower’s account.  The face amount of outstanding Letters ofCredit (including drawn but unreimbursed Letters of Credit and any Letter ofCredit Reserve) may not exceed the Availability Amount.  Such aggregate amounts utilized hereundershall at all times reduce the amount otherwise available for Advances under theRevolving Line.  If, on the RevolvingLine Maturity Date, there are any outstanding Letters of Credit, then on suchdate Borrower shall provide to Bank cash collateral in an amount equal to 105%of the face amount of all such Letters of Credit plus all interest, fees, andcosts due or to become due in connection therewith (as estimated by Bank in itsgood faith business judgment), to secure all of the Obligations relating tosaid Letters of Credit.  All Letters ofCredit shall be in form and substance acceptable to Bank in its sole discretionand shall be subject to the terms and conditions of Bank’s standard Applicationand Letter of Credit Agreement (the “**Letter of CreditApplication**”).  Borroweragrees to execute any further documentation in connection with the Letters ofCredit as Bank may reasonably request. Borrower further agrees to be bound by the regulations andinterpretations of the issuer of any Letters of Credit guarantied by Bank andopened for Borrower’s account or by Bank’s interpretations of any Letter ofCredit issued by Bank for Borrower’s account, and Borrower understands andagrees that Bank shall not be liable for any error, negligence, or mistake,whether of omission or commission, in following Borrower’s instructions orthose contained in the Letters of Credit or any modifications, amendments, orsupplements thereto; but nothing herein shall relieve Bank from liability forits own gross negligence or willful misconduct.

#### (b)           The obligation of Borrower toimmediately reimburse Bank for drawings made under Letters of Credit shall beabsolute, unconditional, and irrevocable, and shall be performed strictly inaccordance with the terms of this Agreement, such Letters of Credit, and theLetter of Credit Application.

#### (c)           Borrower may request that Bank issuea Letter of Credit payable in a Foreign Currency.  If a demand for payment is made under anysuch Letter of Credit, Bank shall treat such demand as an Advance to Borrower ofthe equivalent of the amount thereof (plus fees and charges in connectiontherewith such as wire, cable,

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#### SWIFT or similar charges) in Dollars at thethen-prevailing rate of exchange in San Francisco, California, for sales of theForeign Currency for transfer to the country issuing such Foreign Currency.

#### (d)           To guard against fluctuations incurrency exchange rates, upon the issuance of any Letter of Credit payable in aForeign Currency, Bank shall create a reserve (the “**Letter of Credit Reserve**”) under the Revolving Line in anamount equal to ten percent (10%) of the face amount of such Letter ofCredit.  The amount of the Letter ofCredit Reserve may be adjusted by Bank from time to time to account forfluctuations in the exchange rate.  Theavailability of funds under the Revolving Line shall be reduced by the amountof such Letter of Credit Reserve for as long as such Letter of Credit remainsoutstanding.

### **2.1.3       ForeignExchange Sublimit**. As part of the Revolving Line, Borrower may enter into foreign exchangecontracts with Bank under which Borrower commits to purchase from or sell toBank a specific amount of Foreign Currency (each, a “**FX Forward Contract**”) on a specified date (the “**Settlement Date**”).  FX Forward Contracts shall have a SettlementDate of at least one (1) FX Business Day after the contract date and shall besubject to a reserve of ten percent (10%) of each outstanding FX ForwardContract in a maximum aggregate amount equal to **$1,000,000** (the “**FX Reserve**”).  The aggregate amount of FX Forward Contractsat any one time may not exceed ten (10) times the amount of the FX Reserve.

### **2.1.4       CashManagement Services Sublimit**.  Borrower may use up to **$1,000,000**(the “**Cash Management Services Sublimit**”) of the Revolving Line forBank’s cash management services which may include merchant services, directdeposit of payroll, business credit card, and check cashing services identifiedin Bank’s various cash management services agreements (collectively, the “**Cash Management Services**”).  Any amounts Bank pays on behalf of Borroweror any amounts that are not paid by Borrower for any Cash Management Serviceswill be treated as Advances under the Revolving Line and will accrue interestat the interest rate applicable to Advances.

### **2.1.5       OverallAggregate Sublimit.** In no event shall the total amount of (i) outstanding Letters of Credit(including drawn but unreimbursed Letters of Credit and any Letter of CreditReserve), and (ii) the FX Reserve, and (iii) the amount of the Revolving Lineutilized for Cash Management Services, at any time exceed **$1,000,000** in the aggregate.

### **2.1.6       TermLoan**.

#### (a)           Availability.  Bank shall make one (1) term loan availableto Borrower in an amount up to the Term Loan Amount on the Effective Datesubject to the satisfaction of the terms and conditions of this Agreement.

#### (b)           Repayment.  Borrower shall repay the Term Loan in (i)twenty (20) equal installments of principal in the amount of not less than$104,600 each (the actual amount of the installments shall be determined basedupon the actual amount of the Term Loan Amount), plus (ii) monthly payments ofaccrued interest****(the “**Term Loan Payment**”).  Beginning on the last day of the month inwhich the Funding Date occurs, each Term Loan Payment shall be payable on thelast day of each month.  Borrower’s finalTerm Loan Payment, due on the earlier of (a) the date the Loan Agreement isterminated or (b) the Term Loan Maturity Date, shall include all outstandingprincipal and accrued and unpaid interest under the Term Loan.

## (c)           TermLoan Reserve. Notwithstanding the foregoing, an amount equal to thecurrently outstanding principal amount of the Term Loan shall be reservedagainst the Revolving Line which would otherwise be available to Borrower asset forth above.

## **2.2          Overadvances**.  If at any time or for any reason the total ofall outstanding Advances and all other monetary Obligations exceeds NetBorrowing Availability (an “**Overadvance**”),Borrower shall immediately pay the amount of the excess to Bank, without noticeor demand.  Without limiting Borrower’sobligation to repay to Bank the amount of any Overadvance, Borrower agrees topay Bank interest on the outstanding amount of any Overadvance, on demand, atthe Default Rate.

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## **2.3          Paymentof Interest on the Credit Extensions**.

#### (a)           Interest Rate.

#### (i)            Advances.  Subject to Section 2.3(b), the principalamount outstanding under the Revolving Line shall accrue interest at a floatingper annum rate equal to 1.25% percentage points above the Prime Rate, providedthat the interest rate in effect on any given day shall not be less than 8.50%per annum, which interest shall be payable monthly.

(ii)           Term Loan.  Subject to Section 2.3(b), the principalamount outstanding under the Term Loan shall accrue interest at a floating perannum rate equal to 1.25% percentage points above the Prime Rate, provided thatthe interest rate in effect on any given day shall not be less than 8.50% perannum, which interest shall be payable monthly.

#### (b)           Default Rate. Immediately uponthe occurrence and during the continuance of an Event of Default, Obligationsshall bear interest at a rate per annum which is five percentage points abovethe rate effective immediately before the Event of Default (the “**Default Rate**”).  Payment or acceptance of the increasedinterest rate provided in this Section 2.3(b) is not a permittedalternative to timely payment and shall not constitute a waiver of any Event ofDefault or otherwise prejudice or limit any rights or remedies of Bank.

#### (c)           Adjustment to Interest Rate.Changes to the interest rate of any Credit Extension based on changes to thePrime Rate shall be effective on the effective date of any change to the PrimeRate and to the extent of any such change.

#### (d)           360-Day Year.  Interest shall be computed on the basis of a360-day year for the actual number of days elapsed.

#### (e)           Debit of Accounts.  Bank may debit any of Borrower’s depositaccounts, including the Designated Deposit Account, for principal and interestpayments or any other amounts Borrower owes Bank when due.  These debits shall not constitute a set-off.

#### (f)            Minimum Monthly Interest.  [omitted].

#### (g)           Payment; Interest Computation;Float Charge.  Interest is payablemonthly on the last calendar day of each month. In computing interest on the Obligations, all payments received after 12:00p.m. Pacific time on any day shall be deemed received on the next BusinessDay.  In addition, so long as anyprincipal or interest with respect to any Credit Extension remains outstanding,Bank shall be entitled to charge Borrower a “float” charge in an amount equalto three (3) Business Days interest, at the interest rate applicable to theAdvances, on all payments received by Bank. Said float charge is not included in interest for purposes of computingMinimum Monthly Interest (if any) under this Agreement.  The float charge for each month shall bepayable on the last day of the month. Bank shall not, however, be required to credit Borrower’s account forthe amount of any item of payment which is unsatisfactory to Bank in its goodfaith business judgment, and Bank may charge Borrower’s Designated DepositAccount for the amount of any item of payment which is returned to Bank unpaid.

## **2.4          Fees**.  Borrower shall pay to Bank:

#### (a)           CommitmentFee.  A fully earned, non-refundablecommitment fee of $40,000, on the Effective Date (less the amount of $13,608which Bank acknowledges it has already been received from Borrower); and

#### (b)           Letter of Credit Fee.  Bank’s customary fees and expenses for theissuance or renewal of Letters of Credit upon the issuance or renewal of suchLetter of Credit by Bank;****and

#### (c)           Termination Fee.  Subject to the terms of Section 4.1, atermination fee as set forth in Section 4.1; and

#### (d)           Unused Revolving Line Facility Fee.  A fee (the “**UnusedRevolving Line Facility Fee**”), which fee shall be paid monthly, inarrears, on a calendar year basis, in an amount equal to 0.25% per annum of theaverage unused portion of the Revolving Line, as determined by Bank.  Borrower shall not be entitled to any credit,rebate or repayment of any Unused Revolving Line Facility Fee previously earnedby Bank pursuant to this Section notwithstanding any termination of theAgreement, or suspension or termination of Bank’s obligation to make loans andadvances hereunder, including during any Streamline Period; and

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(e)           Collateral Monitoring Fee.  A monthly collateral monitoring fee of$2,000, payable in arrears on the last day of each month (prorated for anypartial month at the beginning and upon termination of this Agreement); and

#### (f)            Bank Expenses.  All Bank Expenses (including reasonableattorneys’ fees and expenses, and expenses for documentation and negotiation ofthis Agreement) incurred through and after the Effective Date, when due; and

#### (g)           Anniversary Fee.  A fully earned, non-refundable anniversary feeof $40,000, on the first anniversary of the Effective Date.

# **3**              **CONDITIONS OF LOANS**

## **3.1          ConditionsPrecedent to Initial Credit Extension**.  Bank’s obligation to make the initial CreditExtension is subject to the condition precedent that Bank shall have received,in form and substance satisfactory to Bank, such documents, and completion ofsuch other matters, as Bank may reasonably deem necessary or appropriate,including, without limitation:

#### (a)           Borrower shall have delivered dulyexecuted original signatures to the Loan Documents to which it is a party;

#### (b)           Borrower shall have delivered dulyexecuted original signatures to the Control Agreements;

#### (c)           Borrower shall have delivered itsOperating Documents and a good standing certificate of Borrower certified bythe Secretary of State of the State of Delaware as of a date no earlier thanthirty (30) days prior to the Effective Date;

#### (d)           Borrower shall have delivered dulyexecuted original signatures to the completed Borrowing Resolutions forBorrower;

#### (e)           Borrower shall have delivered aPayment Agreement from Wells Fargo Bank;

#### (f)            Borrower shall have deliveredevidence that (i) the Liens securing Indebtedness owed by Borrower to WellsFargo Bank will be terminated and (ii) the documents and/or filings evidencing theperfection of such Liens, including without limitation any financing statementsand/or control agreements, have or will, concurrently with the initial CreditExtension, be terminated.

#### (g)           Bank shall have received certifiedcopies, dated as of a recent date, of financing statement searches, as Bankshall request, accompanied by written evidence (including any UCC terminationstatements) that the Liens indicated in any such financing statements eitherconstitute Permitted Liens or have been or, in connection with the initialCredit Extension, will be terminated or released;

#### (h)           Borrower shall have delivered thePerfection Certificate(s) executed by Borrower;

#### (i)            [omitted];

#### (j)            Borrower shall have delivered theinsurance policies and/or endorsements required pursuant to Section 6.5 hereof;and

#### (k)           Borrower shall have paid the fees andBank Expenses then due as specified in Section 2.4 hereof.

## **3.2          ConditionsPrecedent to all Credit Extensions**.  Bank’s obligations to make each CreditExtension, including the initial Credit Extension, is subject to the following:

#### (a)           except as otherwise provided inSection 3.4(a), timely receipt of an executed Payment/Advance Form orTransaction Report, as applicable;

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#### (b)           the representations and warranties inSection 5 shall be true in all material respects on the date of thePayment/Advance Form or Transaction Report, as applicable, and on the FundingDate of each Credit Extension; provided, however, that such materialityqualifier shall not be applicable to any representations and warranties thatalready are qualified or modified by materiality in the text thereof; andprovided, further that those representations and warranties expressly referringto a specific date shall be true, accurate and complete in all material respectsas of such date, and no Default or Event of Default shall have occurred and becontinuing or result from the Credit Extension. Each Credit Extension is Borrower’s representation and warranty on thatdate that the representations and warranties in Section 5 remain true in allmaterial respects; provided, however, that such materiality qualifier shall notbe applicable to any representations and warranties that already are qualifiedor modified by materiality in the text thereof; and provided, further that thoserepresentations and warranties expressly referring to a specific date shall betrue, accurate and complete in all material respects as of such date; and

#### (c)           in Bank’s sole discretion, there hasnot been a Material Adverse Change.

## **3.3          Covenantto Deliver**.

Borrower agrees to deliver to Bank each item requiredto be delivered to Bank under this Agreement as a condition to any CreditExtension.  Borrower expressly agreesthat the extension of a Credit Extension prior to the receipt by Bank of anysuch item shall not constitute a waiver by Bank of Borrower’s obligation todeliver such item, and any such extension in the absence of a required itemshall be in Bank’s sole discretion.

## **3.4****                               Proceduresfor Borrowing**.

## (a)           Advances.  Subject to the prior satisfaction of allother applicable conditions to the making of an Advance set forth in thisAgreement, to obtain an Advance, Borrower shall notify Bank (which notice shallbe irrevocable) by electronic mail, facsimile, or telephone by 12:00 p.m.Pacific time on the Funding Date of the Advance.  Together with such notification, Borrowermust promptly deliver to Bank by electronic mail or facsimile a completedTransaction Report executed by a Responsible Officer or his or her designee.  Bank shall credit Advances to the DesignatedDeposit Account.  Bank may make Advancesunder this Agreement based on instructions from a Responsible Officer or his orher designee or without instructions if the Advances are necessary to meetObligations that have become due.  Bankmay rely on any telephone notice given by a person whom Bank believes is aResponsible Officer or designee.

# (b)           Termloan.  Subject to the priorsatisfaction of all other applicable conditions to the making of the Term Loanset forth in this Agreement, if any portion of the proceeds of the Term Loanshall be used to purchase or finance Equipment, Borrower shall deliver to Bankby electronic mail or facsimile a copy of the invoice for the Equipment to bepurchased and/or refinanced and the request for the Term Loan.

# **4              CREATION OF SECURITY INTEREST**

## **4.1          Grantof Security Interest**. Borrower hereby grants Bank, to secure the payment and performance infull of all of the Obligations, a continuing security interest in, and pledgesto Bank, the Collateral, wherever located, whether now owned or hereafteracquired or arising, and all proceeds and products thereof.  Borrower represents, warrants, and covenantsthat the security interest granted herein is and shall at all times continue tobe a first priority perfected security interest in the Collateral (subject onlyto Permitted Liens that may have superior priority to Bank’s Lien under thisAgreement).  If Borrower shall acquire acommercial tort claim, Borrower shall promptly notify Bank in a writing signedby Borrower of the general details thereof and grant to Bank in such writing asecurity interest therein and in the proceeds thereof, all upon the terms ofthis Agreement, with such writing to be in form and substance reasonablysatisfactory to Bank.

This Agreement maybe terminated prior to the Revolving Line Maturity Date by Borrower, effectivethree (3) Business Days after written notice of termination is given to Bank orif Bank’s obligation to fund Credit Extensions terminates pursuant to the termsof Section 2.1.1(c).  Notwithstanding anysuch termination, Bank’s lien and security interest in the Collateral shallcontinue until Borrower fully satisfies its Obligations.  If such termination is at Borrower’s electionor at Bank’s election due to the occurrence and continuance of an Event ofDefault, Borrower shall pay to Bank, in addition to the payment of any otherexpenses or fees then-owing, a termination fee in an amount equal to 2.0% ofthe Maximum Dollar Amount if termination occurs on or before the first anniversaryof the Effective Date, and 1.0% of the Maximum Dollar Amount if terminationoccurs after the first anniversary of the Effective Date; provided that notermination fee shall be charged if the credit facility hereunder is

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replaced with a newfacility from a division of Silicon Valley Bank.  Upon payment in full of the Obligations and at such time as Bank’s obligation to make Credit Extensionshas terminated, Bank shall release its liens and security interests in theCollateral and all rights therein shall revert to Borrower.

## **4.2          Authorizationto File Financing Statements**.  Borrower hereby authorizes Bank to filefinancing statements, without notice to Borrower, with all appropriatejurisdictions to perfect or protect Bank’s interest or rights hereunder, includinga notice that any disposition of the Collateral, by either Borrower or anyother Person, shall be deemed to violate the rights of Bank under the Code.

# **5              REPRESENTATIONS AND WARRANTIES**

Borrowerrepresents and warrants as follows:

## **5.1          DueOrganization and Authorization**.  Borrower and each of its Subsidiaries areduly existing and in good standing in their respective jurisdictions offormation and are qualified and licensed to do business and are in goodstanding in any jurisdiction in which the conduct of their business or theirownership of property requires that they be qualified except where the failureto do so could not reasonably be expected to have a Material AdverseChange.  In connection with this Agreement,Borrower has delivered to Bank a completed certificate signed by Borrowerentitled “Perfection Certificate”. Borrower represents and warrants to Bank that (a) Borrower’s exact legalname is that indicated on the Perfection Certificate and on the signature pagehereof; (b) Borrower is an organization of the type and is organized inthe jurisdiction set forth in the Perfection Certificate; (c) the PerfectionCertificate accurately sets forth Borrower’s organizational identificationnumber or accurately states that Borrower has none; (d) the PerfectionCertificate accurately sets forth Borrower’s place of business, or, if morethan one, its chief executive office as well as Borrower’s mailing address (ifdifferent than its chief executive office); (e) Borrower (and each of itspredecessors) has not, in the past five (5) years, changed its jurisdiction offormation, organizational structure or type, or any organizational numberassigned by its jurisdiction; and (f) all other information set forth on thePerfection Certificate pertaining to Borrower and each of its Subsidiaries isaccurate and complete.  If Borrower isnot now a Registered Organization but later becomes one, Borrower shallpromptly notify Bank of such occurrence and provide Bank with Borrower’sorganizational identification number.

The execution, deliveryand performance of the Loan Documents have been duly authorized, and do notconflict with Borrower’s organizational documents, nor constitute an event ofdefault under any material agreement by which Borrower is bound.  Borrower is not in default under anyagreement to which it is a party or by which it is bound in which the defaultcould reasonably be expected to cause a Material Adverse Change.

## **5.2          Collateral**.  Borrower has good title to the Collateral,free of Liens except Permitted Liens. Borrower has no deposit account other than the deposit accounts withBank and deposit accounts described in the Perfection Certificate delivered toBank in connection herewith.

## The Collateral is not in the possession ofany third party bailee (such as a warehouse). Except as hereafter disclosed to Bank in writing by Borrower, none ofthe components of the Collateral shall be maintained at locations other than asprovided in the Perfection Certificate. In the event that Borrower, after the date hereof, intends to store orotherwise deliver any portion of the Collateral to a bailee, then Borrower willfirst receive the written consent of Bank and such bailee must acknowledge inwriting that the bailee is holding such Collateral for the benefit of Bank.

## All Inventory is in all material respects ofgood and marketable quality, free from material defects.

## Borrower is the sole owner of itsIntellectual Property, except for non-exclusive licenses granted to itscustomers in the ordinary course of business. Each Patent is valid and enforceable and no part of the IntellectualProperty has been judged invalid or unenforceable, in whole or in part, and tothe best of Borrower’s knowledge, no claim has been made that any part of theIntellectual Property violates the rights of any third party except to theextent such claim could not reasonably be expected to cause a Material AdverseChange.

## Except as noted on the PerfectionCertificate, Borrower is not a party to, nor is bound by, any material****license or other agreement with respect towhich Borrower is the licensee that prohibits or otherwise restricts Borrowerfrom granting a security interest in Borrower’s interest in such license oragreement or any other property. Borrower shall provide written notice to Bank within thirty days ofentering or becoming bound by any such license or agreement which is reasonablylikely to have a material impact on Borrower’s business or financial condition

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## (other than over-the-counter software that is commercially available tothe public).  Borrower shall take suchsteps as Bank requests to obtain the consent of, or waiver by, any person whoseconsent or waiver is necessary for all such licenses or contract rights to bedeemed “Collateral” and for Bank to have a security interest in it that mightotherwise be restricted or prohibited by law or by the terms of any suchlicense or agreement (such consent or authorization may include a licensor’sagreement to a contingent assignment of the license to Bank if Bank determines thatis necessary in its good faith judgment), whether now existing or entered intoin the future.

## **5.3          AccountsReceivable**.

(a)           For each Account with respect towhich Advances are requested, on the date each Advance is requested and made,such Account shall be an Eligible Account, set forth in Section 13 below.

(b)**          **Allstatements made and all unpaid balances appearing in all invoices, instrumentsand other documents evidencing the Accounts are and shall be true and correctand all such invoices, instruments and other documents, and all of Borrower’sBooks are genuine and in all respects what they purport to be.  All sales and other transactions underlyingor giving rise to each Account shall comply in all material respects with allapplicable laws and governmental rules and regulations.  Borrower has and will have no knowledge ofany actual or imminent Insolvency Proceeding of any Account Debtor whoseaccounts are shown as Eligible Accounts in any Transaction Report.  To the best of Borrower’s knowledge, all signaturesand endorsements on all documents, instruments, and agreements relating to allAccounts are and will be genuine, and all such documents, instruments andagreements are and will be legally enforceable in accordance with their terms.

## **5.4          Litigation**.  There are no actions or proceedings pendingor, to the knowledge of the Responsible Officers, threatened in writing by oragainst Borrower or any of its Subsidiaries involving more than $50,000.

## **5.5          NoMaterial Deviation in Financial Statements**.  All consolidated financial statements forBorrower and any of its Subsidiaries delivered to Bank fairly present in allmaterial respects Borrower’s consolidated financial condition and Borrower’sconsolidated results of operations. There has not been any material deterioration in Borrower’s consolidatedfinancial condition since the date of the most recent financial statementssubmitted to Bank.

## **5.6          Solvency**.Borrower is able to pay its debts (including trade debts) as they mature.

## **5.7          RegulatoryCompliance**.  Borroweris not an “investment company” or a company “controlled” by an “investmentcompany” under the Investment Company Act. Borrower is not engaged as one of its important activities in extendingcredit for margin stock (under Regulations T and U of the Federal Reserve Boardof Governors).  Borrower has complied inall material respects with the Federal Fair Labor Standards Act.  Borrower has not violated any laws,ordinances or rules, the violation of which could reasonably be expected tocause a Material Adverse Change.  None ofBorrower’s or any of its Subsidiaries’ properties or assets has been used byBorrower or any Subsidiary or, to the best of Borrower’s knowledge, by previousPersons, in disposing, producing, storing, treating, or transporting anyhazardous substance other than legally. Borrower and each of its Subsidiaries have obtained all consents,approvals and authorizations of, made all declarations or filings with, andgiven all notices to, all government authorities that are necessary to continueits business as currently conducted.

## **5.8          Subsidiaries;Investments**. Borrower does not have any Subsidiaries, other than Iteris Europe GmbHand other Subsidiaries organized with the prior written consent of Bank, anddoes not own any stock, partnership interest or other equity securities in anyother Person, except for Permitted Investments.

## **5.9          TaxReturns and Payments; Pension Contributions**.  Borrower has timely filed all required taxreturns and reports, and Borrower has timely paid all foreign, federal, stateand local taxes, assessments, deposits and contributions owed by Borrower.  Borrower may defer payment of any contestedtaxes, provided that Borrower (a) in good faith contests its obligation to paythe taxes by appropriate proceedings promptly and diligently instituted andconducted, (b) notifies Bank in writing of the commencement of, and anymaterial development in, the proceedings, (c) posts bonds or takes any othersteps required to prevent the governmental authority levying such contestedtaxes from obtaining a Lien upon any of the Collateral that is other than a “PermittedLien”.  Borrower is unaware of any claimsor adjustments proposed for any of Borrower’s prior tax years which couldresult in additional taxes becoming due and payable by Borrower.  Borrower has paid all amounts necessary tofund all present pension, profit sharing and deferred compensation plans inaccordance with their terms, and Borrower has not withdrawn from participationin, and has not permitted partial or complete termination of, or permitted theoccurrence of any other event with respect to, any such plan which couldreasonably be expected to result in any

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## liability of Borrower, including any liability to the Pension BenefitGuaranty Corporation or its successors or any other governmental agency.

## **5.10        Useof Proceeds**. Borrower shall use the proceeds of the Credit Extensions solely asworking capital, and to fund its general business requirements and not forpersonal, family, household or agricultural purposes.

## **5.11        FullDisclosure**.  Nowritten representation, warranty or other statement of Borrower in anycertificate or written statement given to Bank, as of the date suchrepresentations, warranties, or other statements were made, taken together withall such written certificates and written statements given to Bank, containsany untrue statement of a material fact or omits to state a material factnecessary to make the statements contained in the certificates or statementsnot misleading (it being recognized by Bank that the projections and forecastsprovided by Borrower in good faith and based upon reasonable assumptions arenot viewed as facts and that actual results during the period or periodscovered by such projections and forecasts may differ from the projected orforecasted results).

# **6              AFFIRMATIVECOVENANTS**

Borrower shall do all ofthe following:

## **6.1          GovernmentCompliance**. Maintain its and all its Subsidiaries’ legal existence and good standingin their respective jurisdictions of formation and maintain qualification ineach jurisdiction in which the failure to so qualify would reasonably beexpected to cause a Material Adverse Change. Borrower shall comply, and have each Subsidiary comply, with all laws,ordinances and regulations to which it is subject, noncompliance with whichcould reasonably be expected to cause a Material Adverse Change.

## **6.2          FinancialStatements, Reports, Certificates**.

(a)           Borrower shall provide Bank with thefollowing:

(i)            a Transaction Report weekly and at thetime of each request for an Advance;

(ii)           withinfifteen (15) days after the end of each month,

(A)                              monthly accounts receivable agings,aged by invoice date,

(B)                                monthly accounts payable agings,aged by invoice date, and outstanding or held check registers, if any,

(C)                                monthly reconciliations of accountsreceivable agings (aged by invoice date), transaction reports, and generalledger,

(D)                               monthly perpetual inventory reportsfor Inventory valued on a first-in, first-out basis at the lower of cost ormarket (in accordance with GAAP) or such other inventory reports as arerequested by Bank in its good faith business judgment;

(iii)                               assoon as available, and in any event within thirty (30) days after the end ofeach month, monthly unaudited financial statements;

(iv)                              withinthirty (30) days after the end of each month a monthly Compliance Certificatesigned by a Responsible Officer, certifying that as of the end of such month,Borrower was in full compliance with all of the terms and conditions of thisAgreement, and setting forth calculations showing compliance with the financialcovenants set forth in this Agreement and such other information as Bank shallreasonably request, including, without limitation, a statement that at the endof such month there were no held checks;

(v)                                 [omitted];

(vi)                              withinthirty (30) days prior to the end of each fiscal year of Borrower, (A) annualoperating budgets (including income statements, balance sheets and cash flowstatements, by month) for the upcoming fiscal year of Borrower, and (B)

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annual financial projections for the following fiscalyear (on a quarterly basis) as approved by Borrower’s board of directors,together with any related business forecasts used in the preparation of suchannual financial projections; and

(vii)                           [omitted].

(b)           At all times that Borrower is subjectto the reporting requirements under the Securities Exchange Act of 1934, asamended, within five (5) days after filing, all reports on Form 10-K, 10-Q and8-K filed with the Securities and Exchange Commission or a link theretoon Borrower’s or another website on the Internet.

(c)           Prompt written notice of (i) anymaterial change in the composition of the Intellectual Property, (ii) theregistration of any Copyright, including any subsequent ownership right ofBorrower in or to any Copyright, Patent or Trademark not shown in the IPSecurity Agreement, or (iii) Borrower’s knowledge of an event thatmaterially adversely affects the value of the Intellectual Property.

## **6.3          AccountsReceivable.**

(a)**          **Schedulesand Documents Relating to Accounts*.* Borrower shall deliver to Bank transactionreports and schedules of collections, as provided in Section 6.2, on Bank’sstandard forms; provided, however, that Borrower’s failure to execute anddeliver the same shall not affect or limit Bank’s Lien and other rights in allof Borrower’s Accounts, nor shall Bank’s failure to advance or lend against aspecific Account affect or limit Bank’s Lien and other rights therein.  If requested by Bank, Borrower shall furnishBank with copies (or, at Bank’s request, originals) of all contracts, orders,invoices, and other similar documents, and all shipping instructions, deliveryreceipts, bills of lading, and other evidence of delivery, for any goods thesale or disposition of which gave rise to such Accounts.  In addition, Borrower shall deliver to Bank,on its request, the originals of all instruments, chattel paper, securityagreements, guarantees and other documents and property evidencing or securingany Accounts, in the same form as received, with all necessary endorsements,and copies of all credit memos.

(b)           Disputes.  Borrower shall promptly notify Bank of alldisputes or claims in excess of $15,000 relating to Accounts.  Borrower may forgive (completely orpartially), compromise, or settle any Account for less than payment in full, oragree to do any of the foregoing so long as (i) Borrower does so in goodfaith, in a commercially reasonable manner, in the ordinary course of business,in arm’s-length transactions, and reports the same to Bank in the regularreports provided to Bank; and (ii) no Default or Event of Default hasoccurred and is continuing; and (iii) after taking into account all suchdiscounts, settlements and forgiveness, the total outstanding Advances will notexceed the lesser of the Revolving Line or the Borrowing Base.

(c)           Collection of Accounts.  Borrower shall have the right to collect allAccounts, unless and until a Default or an Event of Default has occurred and iscontinuing.  Whether or not an Event ofDefault has occurred and is continuing, Borrower shall hold all payments on,and proceeds of, Accounts in trust for Bank, and Borrower shall immediatelydeliver all such payments and proceeds to Bank in their original form, dulyendorsed, to be applied to the Obligations pursuant to the terms of Section 9.4hereof.  Bank may, in its good faithbusiness judgment, require that all proceeds of Accounts be deposited byBorrower into a lockbox account, or such other “blocked account” as Bank mayspecify, pursuant to a blocked account agreement in such form as Bank mayspecify in its good faith business judgment.

(d)           Returns*.*  Provided no Event of Default has occurred andis continuing, if any Account Debtor returns any Inventory to Borrower,Borrower shall promptly (i) determine the reason for such return,(ii) issue a credit memorandum to the Account Debtor in the appropriateamount, and (iii) provide a copy of such credit memorandum to Bank, uponrequest from Bank.  In the event anyattempted return occurs after the occurrence and during the continuance of anyEvent of Default, Borrower shall hold the returned Inventory in trust for Bank,and immediately notify Bank of the return of the Inventory.

(e)           Verification*.*  Bank may, from timeto time, upon prior notice to Borrower (via an invoice copy request orotherwise) verify directly with the respective Account Debtors the validity,amount and other matters relating to the Accounts, either in the name ofBorrower or Bank or such other name as Bank may choose; provided, however,the Bank shall not incur any liability for inadvertently or negligently failingto provide such notice.

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## (f)            NoLiability*.*  Bank shall not be responsible or liable forany shortage or discrepancy in, damage to, or loss or destruction of, anygoods, the sale or other disposition of which gives rise to an Account, or forany error, act, omission, or delay of any kind occurring in the settlement,failure to settle, collection or failure to collect any Account, or forsettling any Account in good faith for less than the full amount thereof, norshall Bank be deemed to be responsible for any of Borrower’s obligations underany contract or agreement giving rise to an Account.  Nothing herein shall, however, relieve Bankfrom liability for its own gross negligence or willful misconduct.

## **6.4          Remittanceof Proceeds**. Except as otherwise provided in Section 6.3(c), deliver, in kind, allproceeds arising from the disposition of any Collateral to Bank in the originalform in which received by Borrower not later than the following Business Dayafter receipt by Borrower, to be applied to the Obligations pursuant to theterms of Section 9.4 hereof; provided that, if no Default or Event of Defaulthas occurred and is continuing, Borrower shall not be obligated to remit toBank the proceeds of the sale of worn out or obsolete Equipment disposed of byBorrower in good faith in an arm’s length transaction for an aggregate purchaseprice of $25,000 or less (for all such transactions in any fiscal year).  Borrower agrees that it will not commingleproceeds of Collateral with any of Borrower’s other funds or property, but willhold such proceeds separate and apart from such other funds and property and inan express trust for Bank.  Nothing inthis Section limits the restrictions on disposition of Collateral set forthelsewhere in this Agreement.

**6.5          Taxes;Pensions**.  Timely file allrequired tax returns and reports and timely pay all foreign, federal, state andlocal taxes, assessments, deposits and contributions owed by Borrower except fordeferred payment of any taxes contested pursuant to the terms of Section 5.9hereof, and pay all amounts necessary to fund all present pension, profitsharing and deferred compensation plans in accordance with their terms.

## **6.6          Access to Collateral; Books andRecords**.  Atreasonable times, on one (1) Business Day’s notice (provided no notice isrequired if an Event of Default has occurred and is continuing), Bank, or itsagents, shall have the right to inspect the Collateral and the right to auditand copy Borrower’s Books.  The partiescontemplate that such audits will be performed no more frequently than threetimes per calendar year, but nothing herein restricts Bank’s right to conductsuch audits more frequently if (i) Bank believes that it is advisable to do soin Bank’s good faith business judgment, or (ii) Bank believes in good faiththat a Default or Event of Default has occurred and is continuing; provided,however, that Borrower will not be responsible for the expense of any more thanthree (3) audits in any calendar year (other than audits performed when aDefault or Event of Default has occurred and is continuing).  The foregoing inspections and audits shall beat Borrower’s expense, and the charge therefor shall be $750 per person per day(or such higher amount as shall represent Bank’s then-current standard chargefor the same), plus reasonable out-of-pocket expenses.  In the event Borrower and Bank schedule anaudit more than ten (10) days in advance, and Borrower cancels or seeks toreschedules the audit with less than ten (10) days written notice to Bank, then(without limiting any of Bank’s rights or remedies), Borrower shall pay Bank afee of $1,000 plus any out-of-pocket expenses incurred by Bank to compensateBank for the anticipated costs and expenses of the cancellation orrescheduling.

## **6.7          Insurance**.  Keep its business and the Collateral insuredfor risks and in amounts standard for companies in Borrower’s industry andlocation and as Bank may reasonably request. Insurance policies shall be in a form, with companies, and in amountsthat are satisfactory to Bank.  Allproperty policies shall have a lender’s loss payable endorsement showing Bankas an additional lender loss payee and waive subrogation against Bank, and allliability policies shall show, or have endorsements showing, Bank as anadditional insured.  All policies (or theloss payable and additional insured endorsements) shall provide that theinsurer must give Bank at least twenty (20) days notice before canceling,amending, or declining to renew its policy. At Bank’s request, Borrower shall deliver certified copies of policiesand evidence of all premium payments. Proceeds payable under any policy shall, at Bank’s option, be payable toBank on account of the Obligations.  Notwithstandingthe foregoing, (a) so long as no Event of Default has occurred and iscontinuing, Borrower shall have the option of applying the proceeds of anycasualty policy up to $50,000, in the aggregate, toward the replacement orrepair of destroyed or damaged property; provided that any such replaced orrepaired property (i) shall be of equal or like value as the replaced orrepaired Collateral and (ii) shall be deemed Collateral in which Bank hasbeen granted a first priority security interest, and (b) after the occurrenceand during the continuance of an Event of Default, all proceeds payable undersuch casualty policy shall, at the option of Bank, be payable to Bank onaccount of the Obligations.  If Borrowerfails to obtain insurance as required under this Section 6.7 or to pay anyamount or furnish any required proof of payment to third persons and Bank, Bankmay make all or part of such payment or obtain such insurance policies requiredin this Section 6.7, and take any action under the policies Bank deems prudent.

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## **6.8          OperatingAccounts**.

#### (a)           Maintain its and its Subsidiaries’primary depository and operating accounts and securities accounts****maintained in the United States****with Bank and Bank’s affiliates****which accounts shall represent at least85% of the dollar value of Borrower’s and such Subsidiaries accounts at allfinancial institutions.

#### (b)           Disclose in writing to Bank allCollateral Accounts maintained with any bank or financial institution otherthan Bank or its Affiliates.  Inaddition, for each Collateral Account that Borrower maintains with any bank orfinancial institution other than Bank or its Affiliates, Borrower shall causethe deposits and/or securities maintained therein to be transferred to Bank orits Affiliates within 90 days of the Effective Date and for any deposits and/orsecurities not so transferred to Bank and its Affiliates within such timeperiod, Borrower shall cause such applicable bank or financial institution(other than Bank) at or with which any Collateral Account is maintained to executeand deliver a Control Agreement or other appropriate instrument with respect tosuch Collateral Account to perfect Bank’s Lien in such Collateral Account inaccordance with the terms hereunder.  Theprovisions of the previous sentence shall not apply to deposit accountsexclusively used for payroll, payroll taxes and other employee wage and benefitpayments to or for the benefit of Borrower’s employees and identified to Bankby Borrower as such.

## **6.9          FinancialCovenants**.

Borrower shallmaintain at all times, to be tested as of the last day of each month, unlessotherwise noted, on a consolidated basis:

(a)           TangibleNet Worth.  A Tangible Net Worth ofat least $**4,000,000 (“Minimum Tangible Net Worth”)**plus (i) 25% of all consideration received after the date hereof for equitysecurities and subordinated debt of the Borrower, plus (ii) 25% of the Borrower’snet income in each fiscal quarter ending after the date hereof.  Increases in the Minimum Tangible Net Worthbased on consideration received for equity securities and subordinated debt ofthe Borrower shall be effective as of the end of the month in which suchconsideration is received, and shall continue effective thereafter. Increasesin the Minimum Tangible Net Worth based on net income shall be effective on thelast day of the fiscal quarter in which said net income is realized, and shallcontinue effective thereafter. In no event shall the Minimum Tangible Net Worthbe decreased.

## **6.10        IntellectualProperty Rights**. Borrower shall:  (a) protect,defend and maintain the validity and enforceability of its intellectualproperty; (b) promptly advise Bank in writing of material infringements of itsintellectual property; and (c) not allow any intellectual property material toBorrower’s business to be abandoned, forfeited or dedicated to the publicwithout Bank’s written consent.  IfBorrower decides to register any copyrights or mask works in the United StatesCopyright Office, Borrower shall: (x) provide Bank with at least fifteen (15)days prior written notice of its intent to register such copyrights or maskworks together with a copy of the application it intends to file with theUnited States Copyright Office (excluding exhibits thereto); (y) execute anintellectual property security agreement or such other documents as Bank mayreasonably request to maintain the perfection and priority of Bank’s securityinterest in the copyrights or mask works intended to be registered with theUnited States Copyright Office; and (z) record such intellectual property securityagreement with the United States Copyright Office contemporaneously with filingthe copyright or mask work application(s) with the United States CopyrightOffice.  Borrower shall promptly provideto Bank a copy of the application(s) filed with the United States CopyrightOffice together with evidence of the recording of the intellectual propertysecurity agreement necessary for Bank to maintain the perfection and priorityof its security interest in such copyrights or mask works.  Borrower shall provide written notice to Bankof any application filed by Borrower in the United States Patent and TrademarkOffice for a patent or to register a trademark or service mark within 30 daysafter any such filing.

## **6.11        LitigationCooperation**. From the date hereof and continuing through the termination of thisAgreement, make available to Bank, without expense to Bank, Borrower and itsofficers, employees and agents and Borrower’s books and records, to the extentthat Bank may deem them reasonably necessary to prosecute or defend anythird-party suit or proceeding instituted by or against Bank with respect toany Collateral or relating to Borrower.

## **6.12        [omitted]**

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## **6.13        FurtherAssurances**. Borrower shall execute any further instruments and take further actionas Bank reasonably requests to perfect or continue Bank’s Lien in theCollateral or to effect the purposes of this Agreement.

# **7              NEGATIVE COVENANTS**

Borrower shall not do anyof the following without Bank’s prior written consent:

## **7.1          Dispositions**.  Convey, sell, lease, transfer or otherwisedispose of (collectively, “**Transfer**”),or permit any of its Subsidiaries to Transfer, all or any part of its businessor property, except for (a) Transfers of Inventory in the ordinary courseof business; (b) Transfers of worn-out or obsolete Equipment; and (c)Transfers consisting of Permitted Liens and Permitted Investments.

## **7.2          Changesin Business, Management, Ownership, or Business Locations**.

## (a)           Engage in or permit any of its Subsidiaries to engage inany business other than the businesses currently engaged in by Borrower andsuch Subsidiary, as applicable, or reasonably related thereto;

## (b)           liquidate or dissolve; or

## (c)           permit any person ortwo or more persons acting in concert from acquiring beneficial ownership(within the meaning of Rule 13(d)(3) of the Securities and Exchange Commissionunder the Securities Exchange Act of 1934), directly or indirectly, of sharesof stock of the Borrower representing more than 50% of the combined votingpower of all shares of stock of the Borrower entitled to vote in the electionof directors (other than by the sale of Borrower’s equity securities in apublic offering or to venture capital investors so long as Borrower identifiesto Bank the venture capital investors prior to the closing of the transaction);or

## (d)           without at least thirty (30) days prior written notice toBank: (1) add any new offices or business locations, including warehouses(unless such new offices or business locations contain assets and property ofBorrower with an aggregate value of less than $10,000), (2) change itsjurisdiction of organization, (3) change its organizational structure ortype, (4) change its legal name, or (5) change its organizational number(if any) assigned by its jurisdiction of organization.

## **7.3          Mergersor Acquisitions**. Merge or consolidate, or permit any of its Subsidiaries to merge orconsolidate, with any other Person, or acquire, or permit any of itsSubsidiaries to acquire, all or substantially all of the capital stock or propertyof another Person, except that a Subsidiary of Borrower may merge orconsolidate into another Subsidiary of Borrower or into Borrower.

## **7.4          Indebtedness**.  Create, incur, assume, or be liable for anyIndebtedness, or permit any Subsidiary to do so, other than PermittedIndebtedness.

## **7.5          Encumbrance**.  Create, incur, or allow any Lien on any ofits property****or assets, or assignor convey any right to receive income, including the sale of any Accounts, orpermit any of its Subsidiaries to do so, except for Permitted Liens, or permitany Collateral not to be subject to the first priority security interestgranted herein (except as otherwise specifically allowed in the definition ofPermitted Liens), or enter into any agreement, document, instrument or otherarrangement (except with or in favor of Bank) with any Person which directly orindirectly prohibits or has the effect of prohibiting Borrower or anySubsidiary from assigning, mortgaging, pledging, granting a security interestin or upon, or encumbering any of Borrower’s or any Subsidiary’s intellectualproperty, except as is otherwise permitted in Section 7.1 hereof and thedefinition of “Permitted Lien” herein.

## **7.6          Maintenanceof Collateral Accounts**.  Maintain any Collateral Account exceptpursuant to the terms of Section 6.8.(b) hereof.

## **7.7          Investments;Distributions**. (a) Directly or indirectly make any Investment other than PermittedInvestments, or permit any of its Subsidiaries to do so; or (b) pay anydividends or make any distribution or payment or redeem, retire or purchase anycapital stock, provided that (i) Borrower may convert any of itsconvertible securities into other securities pursuant to the terms of suchconvertible securities or otherwise in exchange thereof, (ii) Borrower maypay dividends solely in common stock; and (iii) Borrower may repurchase thestock of former

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## employees or consultants pursuant to stock repurchase agreements solong as no Default or Event of Default has occurred at the time of suchrepurchase and would not exist after giving effect to such repurchase, providedsuch repurchase does not exceed in the aggregate of $50,000 per fiscal year.

## **7.8          Transactionswith Affiliates**. Directly or indirectly enter into or permit to exist any materialtransaction with any Affiliate of Borrower, except for transactions that are inthe ordinary course of Borrower’s business, upon fair and reasonable terms thatare no less favorable to Borrower than would be obtained in an arm’s lengthtransaction with a non-affiliated Person.

## **7.9          SubordinatedDebt**.  (a) Makeor permit any payment on any Subordinated Debt, except under the terms of thesubordination, intercreditor, or other similar agreement to which suchSubordinated Debt is subject, or (b) amend any provision in any documentrelating to the Subordinated Debt which would increase the amount thereof orthe amount of any permitted payments thereunder or adversely affect thesubordination thereof to Obligations owed to Bank.

## **7.10        Compliance**.  Become an “investment company” or a companycontrolled by an “investment company”, under the Investment Company Act of 1940or undertake as one of its important activities extending credit to purchase orcarry margin stock (as defined in Regulation U of the Board of Governors of theFederal Reserve System), or use the proceeds of any Credit Extension for thatpurpose; fail to meet the minimum funding requirements of ERISA, permit aReportable Event or Prohibited Transaction, as defined in ERISA, to occur; failto comply with the Federal Fair Labor Standards Act or violate any other law orregulation, if the violation could reasonably be expected to cause a MaterialAdverse Change, or permit any of its Subsidiaries to do so; withdraw or permitany Subsidiary to withdraw from participation in, permit partial or complete terminationof, or permit the occurrence of any other event with respect to, any presentpension, profit sharing and deferred compensation plan which could reasonablybe expected to result in any liability of Borrower, including any liability tothe Pension Benefit Guaranty Corporation or its successors or any othergovernmental agency.

# **8              EVENTS OF DEFAULT**

Any one of the followingshall constitute an event of default (an “**Event of Default**”)under this Agreement:

## **8.1          PaymentDefault**. Borrower fails to (a) make any payment of principal or interest onany Credit Extension on its due date, or (b) pay any other Obligationswithin three (3) Business Days after such Obligations are due and payable.  During the cure period, the failure to curethe payment default is not an Event of Default (but no Credit Extension will bemade during the cure period);

## **8.2          CovenantDefault**.

(a)           Borrower fails or neglects to performany obligation in Sections 6.2, 6.3, 6.4, 6.6, 6.8, or 6.9, or violates anycovenant in Section 7; or

## (b)           Borrower fails or neglects to perform, keep, or observeany other term, provision, condition, covenant or agreement contained in thisAgreement, any Loan Documents, and as to any default (other than thosespecified in this Section 8) under such other term, provision, condition,covenant or agreement that can be cured, has failed to cure the default withinten (10) days after the occurrence thereof; provided, however, that if thedefault cannot by its nature be cured within the ten (10) day period or cannotafter diligent attempts by Borrower be cured within such ten (10) day period,and such default is likely to be cured within a reasonable time, then Borrowershall have an additional period (which shall not in any case exceed thirty (30)days) to attempt to cure such default, and within such reasonable time periodthe failure to cure the default shall not be deemed an Event of Default (but noCredit Extensions shall be made during such cure period).  Grace periods provided under this sectionshall not apply, among other things, to financial covenants or any othercovenants set forth in subsection (a) above;

## **8.3          MaterialAdverse Change**. A Material Adverse Change occurs;

## **8.4          Attachment**.  (a) Any material portion of Borrower’s assetsis attached, seized, levied on, or comes into possession of a trustee orreceiver and the attachment, seizure or levy is not removed in ten (10) days;(b) the service of process upon Bank seeking to attach, by trustee orsimilar process, any funds of Borrower, or any

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## entity under control of Borrower (including a subsidiary) on depositwith Bank; (c) Borrower is enjoined, restrained, or prevented by court orderfrom conducting a material part of its business; (d) a judgment or other claimin excess of $10,000 becomes a Lien on any of Borrower’s assets; or (e) anotice of lien, levy, or assessment is filed against any of Borrower’s assetsby any government agency and not paid within ten (10) days after Borrowerreceives notice.  These are not Events ofDefault if stayed or if a bond is posted pending contest by Borrower within tendays after the date such events occur (but no Credit Extensions shall be madeduring the cure period);

## **8.5          Insolvency**.  Borrower is unable to pay its debts(including trade debts) as they become due or otherwise becomes insolvent; (b)Borrower begins an Insolvency Proceeding; or (c) an Insolvency Proceeding isbegun against Borrower and not dismissed or stayed within thirty (30) days (butno Credit Extensions shall be made while of any of the conditions described inclause (a) exist and/or until any Insolvency Proceeding is dismissed);

## **8.6          OtherAgreements**. There is a default in any agreement to which Borrower or any Guarantoris a party with a third party or parties resulting in a right by such thirdparty or parties, whether or not exercised, to accelerate the maturity of anyIndebtedness in an amount in excess of $50,000 or that could result in aMaterial Adverse Change with respect to Borrower’s or any Guarantor; provided,however, that the Event of Default under this Section 8.6 caused by theoccurrence of a default under such other agreement shall be cured or waived forpurposes of this Agreement upon Bank receiving written notice from the partyasserting such default of such cure or waiver of the default under such otheragreement, if at the time of such cure or waiver under such other agreement (a)Bank has not declared an Event of Default under this Agreement and/or exercisedany rights with respect thereto; (b) any such cure or waiver does not result inan Event of Default under any other provision of this Agreement or any LoanDocument; and (c) in connection with any such cure or waiver under suchother agreement, the terms of any agreement with such third party are notmodified or amended in any manner which could in the good faith judgment ofBank be materially less advantageous to Borrower or any Guarantor;

## **8.7          Judgments**.  A judgment or judgments for the payment ofmoney in an amount, individually or in the aggregate, of $50,000 or more (notcovered by independent third-party insurance) shall be rendered againstBorrower and shall remain unsatisfied and unstayed for a period of ten (10)days after the entry thereof (provided that no Credit Extensions will be madeprior to the satisfaction or stay of such judgment);

## **8.8          Misrepresentations**.  Borrower or any Person acting for Borrowermakes any representation, warranty, or other statement now or later in thisAgreement, any Loan Document or in any writing delivered to Bank or to induceBank to enter this Agreement or any Loan Document, and such representation,warranty, or other statement is incorrect in any material respect when made;

## **8.9          SubordinatedDebt**.  A defaultor breach occurs under any agreement between Borrower and any creditor ofBorrower that signed a subordination, intercreditor, or other similar agreementwith Bank, or any creditor that has signed such an agreement with Bank breachesany terms of such agreement; or

## **8.10        Guaranty**.  (a) Any guaranty of any Obligationsterminates or ceases for any reason to be in full force and effect; (b) anyGuarantor does not perform any obligation or covenant under any guaranty of theObligations; (c) any circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or8.8. occurs with respect to any Guarantor, or (d) the death, liquidation,winding up, or termination of existence of any Guarantor; or(e) (i) a material impairment in the perfection or priority of Bank’sLien in the collateral provided by Guarantor or in the value of such collateralor (ii) a material adverse change in the general affairs, management,results of operation, condition (financial or otherwise) or the prospect ofrepayment of the Obligations occurs with respect to any Guarantor.

# **9              BANK’S RIGHTS AND REMEDIES**

## **9.1          Rightsand Remedies**. If an Event of Default has occurred and is continuing, Bank may, withoutnotice or demand, do any or all of the following:

#### (a)           declare all Obligations immediatelydue and payable (but if an Event of Default described in Section 8.5 occurs allObligations are immediately due and payable without any action by Bank);

#### (b)           stop advancing money or extendingcredit for Borrower’s benefit under this Agreement or under any other agreementbetween Borrower and Bank;

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#### (c)           demand that Borrower (i) deposit cashwith Bank in an amount equal to the aggregate amount of any Letters of Creditremaining undrawn, as collateral security for the repayment of any futuredrawings under such Letters of Credit, and Borrower shall forthwith deposit andpay such amounts, and (ii) pay in advance all Letter of Credit fees scheduledto be paid or payable over the remaining term of any Letters of Credit;

#### (d)           terminate any FX Contracts;

#### (e)           demand payment of, and collect anyAccounts and General Intangibles comprising Collateral, settle or adjust disputesand claims directly with Account Debtors for amounts, on terms, and in anyorder that Bank considers advisable, notify any Account Debtor or other Personowing Borrower money of Bank’s security interest in such funds, verify theamount of the same and collect the same;

#### (f)            make any payments and do any acts itconsiders necessary or reasonable to protect the Collateral and/or its securityinterest in the Collateral.  Borrowershall assemble the Collateral if Bank requests and make it available as Bankdesignates.  Bank may enter premiseswhere the Collateral is located, take and maintain possession of any part ofthe Collateral, and pay, purchase, contest, or compromise any Lien whichappears to be prior or superior to its security interest and pay all expensesincurred. Borrower grants Bank a license to enter and occupy any of itspremises, without charge, to exercise any of Bank’s rights or remedies;

#### (g)           apply to the Obligations any (i)balances and deposits of Borrower it holds, or (ii) any amount held by Bankowing to or for the credit or the account of Borrower;

#### (h)           ship, reclaim, recover, store,finish, maintain, repair, prepare for sale, advertise for sale, and sell theCollateral.  Bank is hereby granted anon-exclusive, royalty-free license or other right to use, without charge,Borrower’s labels, patents, copyrights, mask works, rights of use of any name,trade secrets, trade names, trademarks, service marks, and advertising matter,or any similar property as it pertains to the Collateral, in completingproduction of, advertising for sale, and selling any Collateral and, inconnection with Bank’s exercise of its rights under this Section, Borrower’srights under all licenses and all franchise agreements inure to Bank’s benefit;

#### (i)            place a “hold” on any accountmaintained with Bank and/or deliver a notice of exclusive control, anyentitlement order, or other directions or instructions pursuant to any ControlAgreement or similar agreements providing control of any Collateral;

#### (j)            demand and receive possession ofBorrower’s Books; and

#### (k)           exercise all rights and remediesavailable to Bank under the Loan Documents or at law or equity, including allremedies provided under the Code (including disposal of the Collateral pursuantto the terms thereof).

## **9.2          Powerof Attorney**. Borrower hereby irrevocably appoints Bank as its lawfulattorney-in-fact, exercisable upon the occurrence and during the continuance ofan Event of Default, to:  (a) endorse Borrower’sname on any checks or other forms of payment or security; (b) sign Borrower’sname on any invoice or bill of lading for any Account or drafts against AccountDebtors; (c) settle and adjust disputes and claims about the Accounts directlywith Account Debtors, for amounts and on terms Bank determines reasonable; (d)make, settle, and adjust all claims under Borrower’s insurance policies; (e)pay, contest or settle any Lien, charge, encumbrance, security interest, andadverse claim in or to the Collateral, or any judgment based thereon, orotherwise take any action to terminate or discharge the same; and (f) transferthe Collateral into the name of Bank or a third party as the Code permits.  Borrower hereby appoints Bank as its lawfulattorney-in-fact to sign Borrower’s name on any documents necessary to perfector continue the perfection of any security interest regardless of whether anEvent of Default has occurred until all Obligations have been satisfied in fulland Bank is under no further obligation to make Credit Extensions hereunder.  Bank’s foregoing appointment as Borrower’sattorney in fact, and all of Bank’s rights and powers, coupled with aninterest, are irrevocable until all Obligations have been fully repaid andperformed and Bank’s obligation to provide Credit Extensions terminates.

## **9.3          ProtectivePayments**.  IfBorrower fails to obtain the insurance called for by Section 6.7 or fails topay any premium thereon or fails to pay any other amount which Borrower isobligated to pay under this Agreement or any other Loan Document, Bank mayobtain such insurance or make such payment, and all amounts

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## so paid by Bank are Bank Expenses and immediately due and payable,bearing interest at the then highest applicable rate, and secured by theCollateral.  Bank will make reasonableefforts to provide Borrower with notice of Bank obtaining such insurance at thetime it is obtained or within a reasonable time thereafter.  No payments by Bank are deemed an agreementto make similar payments in the future or Bank’s waiver of any Event ofDefault.

## **9.4          Applicationof Payments and Proceeds.** Unless an Event of Default has occurred and iscontinuing, Bank shall apply any funds in its possession, whether from Borroweraccount balances, payments, or proceeds realized as the result of anycollection of Accounts or other disposition of the Collateral, first, to BankExpenses, including without limitation, the reasonable costs, expenses,liabilities, obligations and attorneys’ fees incurred by Bank in the exerciseof its rights under this Agreement; second, to the interest due upon any of theObligations; and third, to the principal of the Obligations and any applicablefees and other charges, in such order as Bank shall determine in its solediscretion.  Any surplus shall be paid toBorrower or other Persons legally entitled thereto; Borrower shall remainliable to Bank for any deficiency.  If anEvent of Default has occurred and is continuing, Bank may apply any funds inits possession, whether from Borrower account balances, payments, proceedsrealized as the result of any collection of Accounts or other disposition ofthe Collateral, or otherwise, to the Obligations in such order as Bank shalldetermine in its sole discretion.  Anysurplus shall be paid to Borrower or other Persons legally entitled thereto;Borrower shall remain liable to Bank for any deficiency.  If Bank, in its good faith business judgment,directly or indirectly enters into a deferred payment or other credittransaction with any purchaser at any sale of Collateral, Bank shall have theoption, exercisable at any time, of either reducing the Obligations by theprincipal amount of the purchase price or deferring the reduction of theObligations until the actual receipt by Bank of cash therefor.

## **9.5          Bank’sLiability for Collateral**.  So long as Bank complies with reasonablebanking practices regarding the safekeeping of the Collateral in the possessionor under the control of Bank, Bank shall not be liable or responsible for: (a)the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c)any diminution in the value of the Collateral; or (d) any act or default of anycarrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss, damage or destruction of theCollateral.

## **9.6          NoWaiver; Remedies Cumulative**.  Bank’s failure, at any time or times, torequire strict performance by Borrower of any provision of this Agreement orany other Loan Document shall not waive, affect, or diminish any right of Bankthereafter to demand strict performance and compliance herewith or therewith.  No waiver hereunder shall be effective unlesssigned by Bank and then is only effective for the specific instance and purposefor which it is given.  Bank’s rights andremedies under this Agreement and the other Loan Documents are cumulative.  Bank has all rights and remedies providedunder the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election, and Bank’swaiver of any Event of Default is not a continuing waiver.  Bank’s delay in exercising any remedy is nota waiver, election, or acquiescence.

## **9.7          DemandWaiver**. Borrower waives demand, notice of default or dishonor, notice of paymentand nonpayment, notice of any default, nonpayment at maturity, release,compromise, settlement, extension, or renewal of accounts, documents,instruments, chattel paper, and guarantees held by Bank on which Borrower isliable.

# **10           NOTICES**

All notices, consents,requests, approvals, demands, or other communication (collectively, “**Communication**”), other than Advance requests made pursuant toSection 3.4, by any party to this Agreement or any other Loan Document must bein writing and be delivered or sent by facsimile at the addresses or facsimilenumbers listed below.  Bank or Borrowermay change its notice address by giving the other party written noticethereof.  Each such Communication shallbe deemed to have been validly served, given, or delivered: (a) upon theearlier of actual receipt and three (3) Business Days after deposit in the U.S.mail, registered or certified mail, return receipt requested, with properpostage prepaid; (b) upon transmission, when sent by facsimile transmission(with such facsimile promptly confirmed by delivery of a copy by personaldelivery or United States mail as otherwise provided in this Section 10); (c) one(1) Business Day after deposit with a reputable overnight courier with allcharges prepaid; or (d) when delivered, if hand-delivered by messenger, all ofwhich shall be addressed to the party to be notified and sent to the address orfacsimile number indicated below. Advance requests made pursuant to Section 3.4 must be in writing and maybe in the form of electronic mail, delivered to Bank by Borrower at the e-mailaddress of Bank provided below and shall be deemed to have been validly served,given, or delivered when sent (with such electronic mail promptly confirmed bydelivery of a copy by personal delivery or United States mail as otherwiseprovided in this Section 10).  Bank orBorrower may change its address, facsimile number, or

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electronic mail addressby giving the other party written notice thereof in accordance with the termsof this Section 10.

If to Borrower:                                                        Iteris,Inc.1515 South Manchester AvenueAnaheim, CA  92802Attn:          James S. MieleFax:             714-780-7246Email:         jsm@iteris.com

If to Bank:                                                                              SiliconValley Bank 38 Technology West, Suite 150Irvine, CA  92618Attn:          DerekBrunelleFax:             949-789-1930Email:         dbrunelle@svb.com

# **11           CHOICE OF LAW, VENUE, JURY TRIALWAIVER AND JUDICIAL REFERENCE.**

California law governs the Loan Documents without regardto principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the Stateand Federal courts in Santa Clara County, California; provided, however, thatnothing in this Agreement shall be deemed to operate to preclude Bank frombringing suit or taking other legal action in any other jurisdiction to realizeon the Collateral or any other security for the Obligations, or to enforce ajudgment or other court order in favor of Bank. Borrower expressly submits and consents in advance to such jurisdictionin any action or suit commenced in any such court, and Borrower hereby waivesany objection that it may have based upon lack of personal jurisdiction,improper venue, or forum non conveniens and hereby consents to the granting ofsuch legal or equitable relief as is deemed appropriate by such court.  Borrower hereby waives personal service ofthe summons, complaints, and other process issued in such action or suit andagrees that service of such summons, complaints, and other process may be madeby registered or certified mail addressed to Borrower at the address set forthin Section 10 of this Agreement and that service so made shall be deemedcompleted upon the earlier to occur of Borrower’s actual receipt thereof orthree (3) days after deposit in the U.S. mails, proper postage prepaid.

**TO THE EXTENT PERMITTED BY APPLICABLE LAW,BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSEOF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS ORANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALLOTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTERINTO THIS AGREEMENT.  EACH PARTY HASREVIEWED THIS WAIVER WITH ITS COUNSEL**.

**WITHOUTINTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVERIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by juryis not enforceable, the parties hereto agree that any and all disputes orcontroversies of any nature between them arising at any time shall be decidedby a reference to a private judge, mutually selected by the parties (or, ifthey cannot agree, by the Presiding Judge of the Santa Clara County, CaliforniaSuperior Court) appointed in accordance with California Code of Civil ProcedureSection 638 (or pursuant to comparable provisions of federal law if the disputefalls within the exclusive jurisdiction of the federal courts), sitting withouta jury, in Santa Clara County, California; and the parties hereby submit to thejurisdiction of such court.  Thereference proceedings shall be conducted pursuant to and in accordance with theprovisions of California Code of Civil Procedure §§ 638 through 645.1,inclusive.  The private judge shall havethe power, among others, to grant provisional relief, including withoutlimitation, entering temporary restraining orders, issuing preliminary andpermanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential andall records relating thereto shall be permanently sealed.  If during the course of any dispute, a partydesires to seek provisional relief, but a judge has not been appointed at thatpoint pursuant to the judicial reference procedures, then such party may applyto the Santa Clara County, California Superior Court for such relief.  The proceeding before the private judge shallbe conducted in the same manner as it would be before a**

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**courtunder the rules of evidence applicable to judicial proceedings.  The parties shall be entitled to discoverywhich shall be conducted in the same manner as it would be before a court underthe rules of discovery applicable to judicial proceedings.  The private judge shall oversee discovery andmay enforce all discovery rules and order applicable to judicial proceedings inthe same manner as a trial court judge. The parties agree that the selected or appointed private judge shallhave the power to decide all issues in the action or proceeding, whether offact or of law, and shall report a statement of decision thereon pursuant tothe California Code of Civil Procedure § 644(a).  Nothing in this paragraph shall limit theright of any party at any time to exercise self-help remedies, foreclose againstcollateral, or obtain provisional remedies. The private judge shall also determine all issues relating to theapplicability, interpretation, and enforceability of this paragraph.**

# **12           GENERAL PROVISIONS**

## **12.1        Successorsand Assigns**. This Agreement binds and is for the benefit of the successors andpermitted assigns of each party. Borrower may not assign this Agreement or any rights or obligationsunder it without Bank’s prior written consent (which may be granted or withheldin Bank’s discretion).  Bank has theright, without the consent of or notice to Borrower, to sell, transfer,negotiate, or grant participation in all or any part of, or any interest in,Bank’s obligations, rights, and benefits under this Agreement and the otherLoan Documents.

## **12.2        Indemnification**.  Borrower agrees to indemnify, defend and holdBank and its directors, officers, employees, agents, attorneys, or any otherPerson affiliated with or representing Bank harmless against:  (a) all obligations, demands, claims,and liabilities (collectively, “Claims”) asserted by any other party inconnection with the transactions contemplated by the Loan Documents; and (b)all losses or Bank Expenses incurred, or paid by Bank from, following, orarising from transactions between Bank and Borrower (including reasonableattorneys’ fees and expenses), except for Claims and/or losses directly causedby Bank’s gross negligence or willful misconduct.

## **12.3        Limitationof Actions**.**Anyclaim or cause of action by Borrower against Bank, its directors, officers,employees, agents, accountants, attorneys, or any other Person affiliated withor representing Bank based upon, arising from, or relating to this LoanAgreement or any other Loan Document, or any other transaction contemplatedhereby or thereby or relating hereto or thereto, or any other matter, cause orthing whatsoever, occurred, done, omitted or suffered to be done by Bank, itsdirectors, officers, employees, agents, accountants or attorneys, shall bebarred unless asserted by Borrower by the commencement of an action orproceeding in a court of competent jurisdiction by (a) the filing of acomplaint within one year from the earlier of (i) the date any of Borrower’sofficers or directors had knowledge of the first act, the occurrence oromission upon which such claim or cause of action, or any part thereof, isbased, or (ii) the date this Agreement is terminated, and (b) the service of asummons and complaint on an officer of Bank, or on any other person authorizedto accept service on behalf of Bank, within thirty (30) days thereafter.  Borrower agrees that such one-year period isa reasonable and sufficient time for Borrower to investigate and act upon anysuch claim or cause of action.  Theone-year period provided herein shall not be waived, tolled, or extended exceptby the written consent of Bank in its sole discretion.  This provision shall survive any terminationof this Loan Agreement or any other Loan Document.

## **12.4        Timeof Essence**. Time is of the essence for the performance of all Obligations in thisAgreement.

## **12.5        Severabilityof Provisions**. Each provision of this Agreement is severable from every other provisionin determining the enforceability of any provision.

## **12.6        Amendmentsin Writing; Integration**.  All amendments to this Agreement must be inwriting signed by both Bank and Borrower. This Agreement and the Loan Documents represent the entire agreementabout this subject matter and supersede prior negotiations or agreements.  All prior agreements, understandings,representations, warranties, and negotiations between the parties about thesubject matter of this Agreement and the Loan Documents merge into thisAgreement and the Loan Documents.

## **12.7        Counterparts**.  This Agreement may be executed in any numberof counterparts and by different parties on separate counterparts, each ofwhich, when executed and delivered, are an original, and all taken together,constitute one Agreement.

## **12.8        Survival**.  All covenants, representations and warrantiesmade in this Agreement continue in full force until this Agreement hasterminated pursuant to its terms and all Obligations (other than inchoateindemnity

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## obligations and any other obligations which, by their terms, are tosurvive the termination of this Agreement) have been satisfied.  The obligation of Borrower in Section 12.2 toindemnify Bank shall survive until the statute of limitations with respect toall claims and causes of action with respect to which indemnity is given toBank shall have run.

## **12.9        Confidentiality**.  In handling any confidential information,Bank shall exercise the same degree of care that it exercises for its ownproprietary information, but disclosure of information may be made: (a) to Bank’sSubsidiaries or Affiliates; (b) to prospective transferees or purchasers of anyinterest in the Credit Extensions (provided, however, Bank shall usecommercially reasonable efforts to obtain such prospective transferee’s orpurchaser’s agreement to the terms of this provision); (c) as required bylaw, regulation, subpoena, or other order; (d) to Bank’s regulators or asotherwise required in connection with Bank’s examination or audit; and (e) asBank considers appropriate in exercising remedies under this Agreement.  Confidential information does not includeinformation that either: (i) is in the public domain or in Bank’s possessionwhen disclosed to Bank, or becomes part of the public domain after disclosureto Bank; or (ii) is disclosed to Bank by a third party, if Bank does not knowthat the third party is prohibited from disclosing the information.

## **12.10      Attorneys’Fees, Costs and Expenses**.  In any action or proceeding between Borrowerand Bank arising out of or relating to the Loan Documents, the prevailing partyshall be entitled to recover its reasonable attorneys’ fees and other costs andexpenses incurred, in addition to any other relief to which it may be entitled.

# **13           DEFINITIONS**

## **13.1        Definitions**.  As used in this Agreement, the followingterms have the following meanings:

“**Account**” is any“account” as defined in the Code with such additions to such term as mayhereafter be made, and includes, without limitation, all accounts receivableand other sums owing to Borrower.

“**Account Debtor**”is any “account debtor” as defined in the Code with such additions to such termas may hereafter be made.

“**Advance**” or “**Advances**” means an advance (or advances) under the RevolvingLine.

“**Affiliate**” ofany Person is a Person that owns or controls directly or indirectly the Person,any Person that controls or is controlled by or is under common control withthe Person, and each of that Person’s senior executive officers, directors,partners and, for any Person that is a limited liability company, that Person’smanagers and members.

“**Agreement**” isdefined in the preamble hereof.

“**Availability Amount**”is at any time (a) the lesser of (i) the Revolving Line or (ii) the BorrowingBase minus (b) the amount of all outstanding Letters of Credit (includingdrawn but unreimbursed Letters of Credit) minus (c) an amount equal to theLetter of Credit Reserves, minus (d) the FX Reserve, and minus (e) theoutstanding principal balance of any Advances (including any amounts used forCash Management Services) and minus (f) the current principal amountoutstanding of the Term Loan.

“**Bank**” isdefined in the preamble hereof.

“**Bank Expenses**”are all audit fees and expenses, costs, and expenses (including reasonableattorneys’ fees and expenses) for preparing, negotiating, administering,defending and enforcing the Loan Documents (including, without limitation,those incurred in connection with appeals or Insolvency Proceedings) orotherwise incurred with respect to Borrower.

“**Bankruptcy-RelatedDefaults**” is defined in Section 9.1.

 “**Borrower**” is defined in the preamble hereof.

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“**Borrower’s Books**”are all Borrower’s books and records including ledgers, federal and state taxreturns, records regarding Borrower’s assets or liabilities, the Collateral,business operations or financial condition, and all computer programs orstorage or any equipment containing such information.

“**Borrowing Base**”is (a)**85**% of Eligible Accounts, plus (b) thelesser of (i) **30**% of the value of Borrower’sEligible Inventory (valued at the lower of cost or wholesale fair marketvalue), or (ii) **50%** of the Advances made pursuantto subclause (a) above, or (iii) $**1,000,000**, asdetermined by Bank from Borrower’s most recent Transaction Report; provided,however, that Bank may decrease the foregoing percentages in its good faithbusiness judgment based on events, conditions, contingencies, or risks which,as determined by Bank, may adversely affect Collateral.

“**Borrowing Resolutions**”are, with respect to any Person, those resolutions adopted by such Person’sBoard of Directors and delivered by such Person to Bank approving the LoanDocuments to which such Person is a party and the transactions contemplatedthereby, together with a certificate executed by its secretary on behalf ofsuch Person certifying that (a) such Person has the authority to execute,deliver, and perform its obligations under each of the Loan Documents to whichit is a party, (b) sets forth the resolutions then in full force andeffect authorizing and ratifying the execution, delivery, and performance bysuch Person of the Loan Documents to which it is a party, (c) the names of thePersons authorized to execute the Loan Documents on behalf of such Person,together with a sample of the true signatures of such Persons, and(d) that Bank may conclusively rely on such certificate unless and untilsuch Person shall have delivered to Bank a further certificate canceling oramending such prior certificate.

“**Business Day**”is any day that is not a Saturday, Sunday or a day on which Bank is closed.

** “CashEquivalents”** means (a) marketable direct obligationsissued or unconditionally guaranteed by the United States or any agency or anyState thereof having maturities of not more than one (1) year from the date ofacquisition; (b) commercial paper maturing no more than one (1) year afterits creation and having the highest rating from either Standard & Poor’sRatings Group or Moody’s Investors Service, Inc., (c) Bank’s certificates ofdeposit issued maturing no more than one (1) year after issue; and (d) moneymarket funds at least ninety-five percent (95%) of the assets of whichconstitute Cash Equivalents of the kinds described in clauses (a) through (c)of this definition.

**“Cash Management Services”**isdefined in Section 2.1.4.

**“Cash Management Services Sublimit”**isdefined in Section 2.1.4.

 “**Code**” is the Uniform Commercial Code, as the same may, fromtime to time, be enacted and in effect in the State of California; provided,that, to the extent that the Code is used to define any term herein or in anyLoan Document and such term is defined differently in different Articles orDivisions of the Code, the definition of such term contained in Article orDivision 9 shall govern; provided further, that in the event that, by reason ofmandatory provisions of law, any or all of the attachment, perfection, orpriority of, or remedies with respect to, Bank’s Lien on any Collateral isgoverned by the Uniform Commercial Code in effect in a jurisdiction other thanthe State of California, the term “**Code**” shallmean the Uniform Commercial Code as enacted and in effect in such otherjurisdiction solely for purposes on the provisions thereof relating to such attachment,perfection, priority, or remedies and for purposes of definitions relating tosuch provisions.

 “**Collateral**” is any and all properties, rights and assets ofBorrower described on Exhibit A.

“**Collateral Account**”is any Deposit Account, Securities Account, or Commodity Account.

 “**Commodity Account**” is any “commodity account” as defined inthe Code with such additions to such term as may hereafter be made.

“**Communication**”is defined in Section 10.

“**Compliance Certificate**”is that certain certificate in the form attached hereto as Exhibit E.

“**Contingent Obligation**”is, for any Person, any direct or indirect liability, contingent or not, ofthat Person for (a) any indebtedness, lease, dividend, letter of credit orother obligation of another such as an obligation

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directly or indirectly guaranteed, endorsed, co-made,discounted or sold with recourse by that Person, or for which that Person isdirectly or indirectly liable; (b) any obligations for undrawn letters ofcredit for the account of that Person; and (c) all obligations from anyinterest rate, currency or commodity swap agreement, interest rate cap orcollar agreement, or other agreement or arrangement designated to protect aPerson against fluctuation in interest rates, currency exchange rates or commodityprices; but “Contingent Obligation” does not include endorsements in theordinary course of business.  The amountof a Contingent Obligation is the stated or determined amount of the primaryobligation for which the Contingent Obligation is made or, if not determinable,the maximum reasonably anticipated liability for it determined by the Person ingood faith; but the amount may not exceed the maximum of the obligations underany guarantee or other support arrangement.

“**Control Agreement**”is any control agreement entered into among the depository institution at whichBorrower maintains a Deposit Account or the securities intermediary orcommodity intermediary at which Borrower maintains a Securities Account or aCommodity account, Borrower, and Bank pursuant to which Bank obtains control(within the meaning of the Code) over such Deposit Account, Securities Account,or Commodity Account.

“**Credit Extension**”is any Advance, Term Loan, Letter of Credit, FX Forward Contract, amountutilized for Cash Management Services, or any other extension of credit by Bankfor Borrower’s benefit.

 “**Default**” means any event which with notice or passage oftime or both, would constitute an Event of Default.

“**Default Rate**”is defined in Section 2.3(b).

“**Deferred Revenue**”is all amounts received or invoiced in advance of performance under contractsand not yet recognized as revenue.

“**Deposit Account**”is any “deposit account” as defined in the Code with such additions to suchterm as may hereafter be made.

“**Designated Deposit Account**”is Borrower’s deposit account, account number                  ,maintained with Bank.

“**Dollars***,*”**“**dollars**” and “**$**” each meanlawful money of the United States.

 “**Effective Date**” is the date Bank executes this Agreement andas indicated on the signature page hereof.

“**Eligible Accounts**”are Accounts which arise in the ordinary course of Borrower’s business thatmeet all Borrower’s representations and warranties in Section 5.3.  Bank reserves the right at any time and fromtime to time after the Effective Date, to adjust any of the criteria set forthbelow and to establish new criteria in its good faith business judgment.  Unless Bank agrees otherwise in writing,Eligible Accounts shall not include:

(a)           Accounts for which the Account Debtorhas not been invoiced;

(b)           Accounts that the Account Debtor hasnot paid within ninety (90) days of invoice date;

(c)           Accountsowing from an Account Debtor, fifty percent (50%) or more of whose Accountshave not been paid within ninety (90) days of invoice date;

(d)           Credit balances over ninety (90) daysfrom invoice date;

(e)           Accounts owing from an AccountDebtor, including Affiliates, whose total obligations to Borrower exceedtwenty-five (25%) of all Accounts, for the amounts that exceed that percentage,unless Bank approves in writing;

(f)            Accounts owing from an AccountDebtor which does not have its principal place of business in the United States(unless backed by a letter of credit sat­isfactory to Bank, or FCIA insuredsatisfactory to Bank); provided, however, otherwise EligibleAccounts owing from the following foreign Account Debtors will be deemedEligible Accounts up to an aggregate of $1,000,000 for all Accounts from suchAccount Debtors combined:  (i)

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Valeo Schalter, (ii) Scania, (iii) Neoplan, (iv) Man Nutzfahrzeuge, (v)Iveco Magirus, (vi) DAF Trucks, (vii) Mitsubishi FUSO Truck and Bus Corporationand (viii) Iteris Europe, GmbH.

(g)           Accounts owing from an Account Debtorwhich is a federal government entity or any department, agency, orinstrumentality thereof (the “Federal Government”); provided, however,with respect to Accounts owing from the Federal Government, those Accounts willnot be deemed Eligible Accounts only to the extent such Accounts exceed fivepercent (5.0%) of the total Eligible Accounts outstanding; provided, further,that with respect to the portion of such Accounts in excess of five percent(5.0%) of the total Eligible Accounts Outstanding, that portion may still beconsidered Eligible Accounts if Borrower has assigned its payment rights toBank and the assignment has been acknowledged under the Federal Assignment ofClaims Act of 1940, as amended;

(h)           Accounts owing from an Account Debtorto the extent that Borrower is indebted or obligated in any manner to theAccount Debtor (as creditor, lessor, supplier or otherwise - sometimes called “contra”accounts, accounts payable, customer deposits or credit accounts), with theexception of customary credits, adjustments and/or discounts given to anAccount Debtor by Borrower in the ordinary course of its business; provided,however, that if the amount of any such indebtedness or obligation of theBorrower is known, then only to the extent of the asserted amount of suchindebtedness or obligation;

(i)            Accounts for demonstration orpromotional equipment, or in which goods are consigned, or sold on a “saleguaranteed”, “sale or return”, “sale on approval”, “bill and hold”, or otherterms if Account Debtor’s payment may be conditional;

(j)            Accounts for which the AccountDebtor is Borrower’s Affiliate, officer, employee, or agent;

(k)           Accounts in which the Account Debtordisputes liability or makes any claim (but only up to the disputed or claimedamount), or if the Account Debtor is subject to an Insolvency Proceeding, orbecomes insolvent, or goes out of business;

(l)            Accounts owing from an AccountDebtor with respect to which Borrower has received deferred revenue (but onlyto the extent of such deferred revenue);

(m)          Accounts for which Bank in its goodfaith business judgment determines collection to be doubtful; and

(n)           other Accounts Bank deems ineligiblein the exercise of its good faith business judgment.

 “**Eligible Inventory**” means, at any time, the aggregate ofBorrower’s Inventory that (a) consists of raw materials and finished goods, in good,new, and salable condition, which is not perishable, returned, consigned,obsolete, not sellable, damaged, or defective, and is not comprised ofdemonstrative or custom inventory, works in progress, packaging or shippingmaterials, or supplies; (b) meets all applicable governmental standards; (c)has been manufactured in compliance with the Fair Labor Standards Act; (d) isnot subject to any Liens (other than Permitted Liens), except the firstpriority Liens granted or in favor of Bank under this Agreement or any of theother Loan Documents; (e) is located at Borrower’s principal place of business;and (f) is otherwise acceptable to Bank in its good faith businessjudgment.  Notwithstanding subclause (a)above, sub-assembly processors for detection devices are considered EligibleInventory to the extent they satisfy subclauses (b) through (f) above.

“**Equipment**” isall “equipment” as defined in the Code with such additions to such term as mayhereafter be made, and includes without limitation all machinery, fixtures,goods, vehicles (including motor vehicles and trailers), and any interest inany of the foregoing.

“**ERISA**” is theEmployment Retirement Income Security Act of 1974, and its regulations.

“**Event of Default**”is defined in Section 8.

**“Foreign Currency”** means lawfulmoney of a country other than the United States.

 “**Funding Date**” is any date on which a Credit Extension ismade to or on account of Borrower which shall be a Business Day.

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“**FX Business Day**”is any day when (a) Bank’s Foreign Exchange Department is conducting its normalbusiness and (b) the Foreign Currency being purchased or sold by Borrower isavailable to Bank from the entity from which Bank shall buy or sell suchForeign Currency.

“**FX Forward Contract**”****is defined in Section 2.1.3.

“**FX Reserve**”****is defined in Section 2.1.3.

“**GAAP**” isgenerally accepted accounting principles set forth in the opinions andpronouncements of the Accounting Principles Board of the American Institute ofCertified Public Accountants and statements and pronouncements of the FinancialAccounting Standards Board or in such other statements by such other Person asmay be approved by a significant segment of the accounting profession, whichare applicable to the circumstances as of the date of determination.

“**General Intangibles**”is all “general intangibles” as defined in the Code in effect on the datehereof with such additions to such term as may hereafter be made, and includeswithout limitation, all Intellectual Property, payment intangibles, royalties,contract rights, goodwill, franchise agreements, purchase orders, customerlists, route lists, telephone numbers, domain names, claims, income and othertax refunds, security and other deposits, options to purchase or sell real orpersonal property, rights in all litigation presently or hereafter pending(whether in contract, tort or otherwise), insurance policies (including withoutlimitation key man, property damage, and business interruption insurance),payments of insurance and rights to payment of any kind.

“**Guarantor**”****is any present or future guarantor of the Obligations.

“**Indebtedness**”is (a) indebtedness for borrowed money or the deferred price of property orservices, such as reimbursement and other obligations for surety bonds andletters of credit, (b) obligations evidenced by notes, bonds, debentures orsimilar instruments, (c) capital lease obligations, and (d) ContingentObligations.

“**Insolvency Proceeding**”is any proceeding by or against any Person under the United States BankruptcyCode, or any other bankruptcy or insolvency law, including assignments for thebenefit of creditors, compositions, extensions generally with its creditors, orproceedings seeking reorganization, arrangement, or other relief.

**“Intellectual Property”** meansall present and future (a) copyrights, copyright rights, copyrightapplications, copyright registrations and like protections in each work ofauthorship and derivative work thereof, whether published or unpublished, (b)trade secret rights, including all rights to unpatented inventions and know-how,and confidential information; (c) mask work or similar rights available for theprotection of semiconductor chips; (d) patents, patent applications and likeprotections including without limitation improvements, divisions, continuations,renewals, reissues, extensions and continuations-in-part of the same; (e)trademarks, servicemarks, trade styles, and trade names, whether or not any ofthe foregoing are registered, and all applications to register andregistrations of the same and like protections, and the entire goodwill of thebusiness of Borrower connected with and symbolized by any such trademarks; (f)computer software and computer software products; (g) designs and designrights; (h) technology; (i) all claims for damages by way of past, present andfuture infringement of any of the rights included above; (j) all licenses orother rights to use any property or rights of a type described above.

 “**Inventory**” is all “inventory” as defined in the Code ineffect on the date hereof with such additions to such term as may hereafter bemade, and includes without limitation all merchandise, raw materials, parts,supplies, packing and shipping materials, work in process and finishedproducts, including without limitation such inventory as is temporarily out ofBorrower’s custody or possession or in transit and including any returned goodsand any documents of title representing any of the above.

“**Investment**” isany beneficial ownership interest in any Person (including stock, partnership interestor other securities), and any loan, advance or capital contribution to anyPerson.

 “**IP Agreement**” is that certain Intellectual Property SecurityAgreement executed and delivered by Borrower to Bank dated as of approximatelythe Effective Date hereof.

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“**Letter of Credit”**means a standby letter of credit issued by Bank or another institution basedupon an application, guarantee, indemnity or similar agreement on the part ofBank as set forth in Section 2.1.2.

“**Letter of CreditApplication**” is defined in Section 2.1.2(a).

“**Letter of Credit Reserve**”has the meaning set forth in Section 2.1.2(d).

“**Lien**” is amortgage, lien, deed of trust, charge, pledge, security interest or otherencumbrance.

“**Loan Documents**”are, collectively, this Agreement, the Perfection Certificate, the IPAgreement, the Subordination Agreement, any note, or notes or guarantiesexecuted by Borrower or any Guarantor, and any other present or futureagreement between Borrower or any Guarantor and/or for the benefit of Bank inconnection with this Agreement, all as amended, restated, or otherwisemodified.

**“Material Adverse Change”** is (a)a material impairment in the perfection or priority of Bank’s Lien in theCollateral or in the value of such Collateral; (b) a material adverse change inthe business, operations, or condition (financial or otherwise) of Borrower; or(c) a material impairment of the prospect of repayment of any portion of theObligations****or****(d)Bank determines, based upon information available to it and in its good faithjudgment, that there is a reasonable likelihood that Borrower shall fail tocomply with one or more of the financial covenants in Section 6 during the nextsucceeding financial reporting period.

**“Maximum Dollar Amount”**is$8,000,000.

“**Obligations**”are Borrower’s obligation to pay when due any debts, principal, interest, BankExpenses and other amounts Borrower owes Bank now or later, whether under thisAgreement, the Loan Documents, or otherwise, including, without limitation, allobligations relating to letters of credit, cash management services, andforeign exchange contracts, if any, and including interest accruing afterInsolvency Proceedings begin and debts, liabilities, or obligations of Borrowerassigned to Bank, and the performance of Borrower’s duties under the LoanDocuments.

**“Operating Documents”** are, forany Person, such Person’s formation documents, as certified with the Secretaryof State of such Person’s state of formation on a date that is no earlier than30 days prior to the Effective Date, and, (a) if such Person is a corporation,its bylaws in current form, (b) if such Person is a limited liability company,its limited liability company agreement (or similar agreement), and (c) if suchPerson is a partnership, its partnership agreement (or similar agreement), eachof the foregoing with all current amendments or modifications thereto.

“**Payment/Advance Form**”is that certain form attached hereto as Exhibit B.

“**Perfection Certificate**”is defined in Section 5.1.

“**Permitted Indebtedness**”is:

(a)           Borrower’s Indebtedness to Bank underthis Agreement and the other Loan Documents;

(b)           Indebtedness existing on theEffective Date and shown on the Perfection Certificate;

(c)           Subordinated Debt;

(d)           unsecured Indebtedness to trade creditors incurred in the ordinary course ofbusiness;

(e)           Indebtedness incurred as a result ofendorsing negotiable instruments received in the ordinary course of business;

(f)            Indebtedness secured by PermittedLiens;

24

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(g)**          **extensions, refinancings,modifications, amendments and restatements of any items of PermittedIndebtedness (a) through (g) above, provided that the principal amount thereofis not increased or the terms thereof are not modified to impose moreburdensome terms upon Borrower or its Subsidiary, as the case may be.

“**Permitted Investments**”are:

(a)           Investments shown on the PerfectionCertificate and existing on the Effective Date;

(b)           Cash Equivalents;

(c)**          **Investments consisting ofthe endorsement of negotiable instruments for deposit or collection or similartransactions in the ordinary course of Borrower;

(d)           Investmentsconsisting of deposit accounts in which Bank has a perfected security interest;

(e)           Investmentsaccepted in connection with Transfers permitted by Section 7.1;

(f)            Investments of Subsidiaries in or toother Subsidiaries or Borrower and Investments by Borrower in Subsidiaries notto exceed $50,000 in the aggregate in any fiscal year;

(g)           Investments consisting of (i) traveladvances and employee relocation loans and other employee loans and advances inthe ordinary course of business, and (ii) loans to employees, officers ordirectors relating to the purchase of equity securities of Borrower or itsSubsidiaries pursuant to employee stock purchase plans or agreements approvedby Borrower’s Board of Directors;

(h)           Investments (including debtobligations) received in connection with the bankruptcy or reorganization ofcustomers or suppliers and in settlement of delinquent obligations of, andother disputes with, customers or suppliers arising in the ordinary course ofbusiness; and

(i)            Investments consisting of notesreceivable of, or prepaid royalties and other credit extensions, to customersand suppliers who are not Affiliates, in the ordinary course of business;provided that this paragraph shall not apply to Investments of Borrower in anySubsidiary.

“**Permitted Liens**”are:

(a)           Liens existing on the Effective Dateand shown on the Perfection Certificate or arising under this Agreement and theother Loan Documents;

(b)           Liens for taxes, fees, assessments orother government charges or levies, either not delinquent or being contested ingood faith and for which Borrower maintains adequate reserves on its Books, ifthey have no priority over any of Bank’s Liens;

(c)           purchase money Liens (i) on Equipmentacquired or held by Borrower incurred for financing the acquisition of theEquipment, or (ii) existing on Equipment when acquired, if the Lien isconfined to the property and improvements and the proceeds of the Equipment;

(d)           statutory Liens securing claims ordemands of materialmen, mechanics, carriers, warehousemen, landlords and otherPersons imposed without action of such parties, provided, they have no priorityover any of Bank’s Lien and the aggregate amount of such Liens does not at anytime exceed $50,000;

(e)           Liens to secure payment of workers’compensation, employment insurance, old-age pensions, social security and otherlike obligations incurred in the ordinary course of business, provided, theyhave no priority over any of Bank’s Liens and the aggregate amount of theIndebtedness secured by such Liens does not at any time exceed $50,000;

(f)            Liens incurred in the extension,renewal or refinancing of the indebtedness secured by Liens described in (a)through (c), but any extension, renewal or replacement Lien must belimited to the property encumbered by the existing Lien and the principalamount of the indebtedness may not increase;

25

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(g)           leases or subleases of real propertygranted in the ordinary course of business, and leases, subleases, non-exclusivelicenses or sublicenses of property (other than real property or intellectualproperty) granted in the ordinary course of Borrower’s business, if theleases, subleases, licenses and sublicenses do not prohibit granting Bank asecurity interest;

(h)           non-exclusive license of intellectualproperty granted to third parties in the ordinary course of business;

(i)            Liens arising from judgments,decrees or attachments in circumstances not constituting an Event of Defaultunder Section 8.4 or 8.7;

 “**Person**” is any individual, sole proprietorship, partnership,limited liability company, joint venture, company, trust, unincorporatedorganization, association, corporation, institution, public benefitcorporation, firm, joint stock company, estate, entity or government agency.

“**Prime Rate**” isBank’s most recently announced “prime rate,” even if it is not Bank’s lowestrate.

 “**Registered Organization**” is any “registered organization” asdefined in the Code with such additions to such term as may hereafter be made

 “**Responsible Officer**” is any of the Chief Executive Officer,President, Chief Financial Officer and Controller of Borrower.

“**Revolving Line**”is an Advance or Advances in an aggregate amount of up to the **Maximum Dollar Amount** outstanding at any time.

** “RevolvingLine Maturity Date”**is a date two years from the EffectiveDate.

 “**Securities Account**” is any “securities account” as definedin the Code with such additions to such term as may hereafter be made.

“**Settlement Date**”****is defined in Section 2.1.3.

“**Subordinated Debt**”is indebtedness incurred by Borrower subordinated to all of Borrower’s now orhereafter indebtedness to Bank (pursuant to a subordination, intercreditor, orother similar agreement in form and substance satisfactory to Bank entered intobetween Bank and the other creditor), on terms acceptable to Bank.

 “**Subsidiary**” means, with respect to any Person, any Person ofwhich more than 50% of the voting stock or other equity interests is owned orcontrolled, directly or indirectly, by such Person or one or more Affiliates ofsuch Person.

“**Tangible Net Worth**”is, on any date, the consolidated total assets of Borrower and its Subsidiariesminus (a) any amounts attributable to (i) goodwill, (ii) intangibleitems including unamortized debt discount and expense, patents, trade andservice marks and names, copyrights and research and development expensesexcept prepaid expenses, (iii) notes, accounts receivable and other obligationsowing to Borrower from its officers or other Affiliates, and (iv) reserves notalready deducted from assets, minus (b) Total Liabilities, plus(c) Subordinated Debt.

**“Term Loan”** is a loan made byBank pursuant to the terms of Section 2.1.6 hereof.

**“Term Loan Amount”**is anaggregate amount up to $2,200,000 but not to exceed the amount necessary to payBorrower’s loan obligations to Wells Fargo Bank.

“**Term Loan Maturity Date**”is May 27, 2008.

“**Term Loan Payment**”is defined in Section 2.1.6(b).

26

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“**Total Liabilities**”is on any day, obligations that should, under GAAP, be classified as liabilitieson Borrower’s consolidated balance sheet, including all Indebtedness, andcurrent portion of Subordinated Debt permitted by Bank to be paid by Borrower,but excluding all other Subordinated Debt.

**“Transaction Report”** is a reportin such form as Bank shall specify.

 “**Transfer**” is defined in Section 7.1.

 “**Unused Revolving Line Facility Fee”** is defined in Section2.4(d).

**[**Signaturepage follows.**]**

27

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**IN WITNESS WHEREOF**, the partieshereto have caused this Agreement to be executed as of the Effective Date.

BORROWER:

ITERIS, INC.
| By     |   | /S/ JAMES S.  MIELE |   |   |
|--------|--------|---------------------|--------|--------|
| Name:  |   | James S. Miele      |   |   |
| Title: |   | CFO                 |   |
|        |        |                     |        |        |  |  |

 

BANK:

SILICON VALLEY BANK
| By              |             | /S/ DEREK  BRUNELLE |   |
|-----------------|------------------|---------------------|--------|
| Name:           |             | Derek Brunelle      |   |
| Title:          |             | Vice President      |   |
| Effective Date: | October 16, 2006 |                |
|                 |                  |                     |        |  |  |

 

**Exhibits**
| A |   | “Collateral”            |
|---|--------|-----------------------------------|
| B |   | Loan Payment/Advance Request Form |
| C |   | [intentionally omitted]           |
| D |   | [intentionally omitted]           |
| E |   | Compliance Certificate            |
| F |   | Transaction Report                |

 

[Signature page to Loan and Security Agreement]

----

**EXHIBIT A**

The Collateral consists of all of Borrower’s right,title and interest in and to the following personal property:

All goods, Accounts (including health-carereceivables), Equipment, Inventory, contract rights or rights to payment ofmoney, leases, license agreements, franchise agreements, General Intangibles,commercial tort claims, documents, instruments (including any promissorynotes), chattel paper (whether tangible or electronic), cash, deposit accounts,fixtures, letters of credit rights (whether or not the letter of credit isevidenced by a writing), securities, and all other investment property,supporting obligations, and financial assets, whether now owned or hereafteracquired, wherever located; and all Borrower’s Books relating to the foregoing,and any and all claims, rights and interests in any of the above and allsubstitutions for, additions, attachments, accessories, accessions andimprovements to and replacements, products, proceeds and insurance proceeds ofany or all of the foregoing.

1

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**EXHIBIT B**

**LoanPayment/Advance Request Form**

**DEADLINE FOR SAME DAY PROCESSING IS NOON P.S.T.***
| Fax To:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |             | Date:                             |                                             |              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------|-----------------------------------|--------------------------------------------------|-------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |
| **LOAN PAYMENT:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Iteris, Inc.     |                              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| From Account #                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |             |                              | To Account #                                     |              |   |
| (Deposit Account #)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | (Loan Account #) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |
| Principal $                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |             |                              | and/or Interest $                                |              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |
| **Authorized Signature:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |             |                              |                                             |              |
| Print Name/Title:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |             |                              | Phone Number:                                    |              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| **LOAN ADVANCE:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |             |                              |                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| Complete *Outgoing Wire Request*  section below if all or a portion of the funds from this loan advance are for  an outgoing                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| wire.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |             |                              |                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| From Account #                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |             |                              | To Account #                                     |              |   |
| (Loan Account #)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |             | (Deposit Account #)               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| Amount of Advance $                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |             |                              |                                             |              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| All Borrower’s representations and warranties in the  Loan and Security Agreement are true, correct and complete in all material  respects on the date of the request for an advance; provided, however, that  such materiality qualifier shall not be applicable to any representations and  warranties that already are qualified or modified by materiality in the text  thereof; and provided, further that those representations and warranties  expressly referring to a specific date shall be true, accurate and complete  in all material respects as of such date: |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| **Authorized Signature:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |             |                              | Phone Number:                                    |              |   |
| Print Name/Title:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |             |                              |                                             |              |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| **OUTGOING WIRE  REQUEST:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |             |                              |                                             |
| **Complete only if all or a portion of funds from  the loan advance above is to be wired.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| Deadline for same day processing is noon, P.S.T.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |             |                              |                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| Beneficiary Name:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |             |                              |                                             | Amount of Wire: $ |   |   |
| Beneficiary Bank:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |             |                              |                                             | Account Number:   |   |   |
| City and State:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |             |                              |                                             |              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| Beneficiary Bank Transit (ABA) #:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |             |                              | Beneficiary Bank Code (Swift, Sort, Chip, etc.): |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             | **(For International Wire Only)** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| Intermediary Bank:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |             |                              | Transit (ABA) #:                                 |              |   |
| For Further Credit to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |             |                              |                                             |              |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
| Special Instruction:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |             |                              |                                             |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                  |                                   |                                                  |                   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

1

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| *By signing below, I (we) acknowledge and agree that my (our) funds  transfer request shall be processed in accordance with and subject to the  terms and conditions set forth in the agreements(s) covering funds transfer  service(s), which agreements(s) were previously received and executed by me  (us).* |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                             |   |   |   |
| Authorized Signature:                                                                                                                                                                                                                                                                                            |   |   | 2nd Signature (if  required): |   |   |
| Print Name/Title:                                                                                                                                                                                                                                                                                                |   |   | Print Name/Title: |   |   |
| Telephone #:                                                                                                                                                                                                                                                                                                     |   |   | Telephone #: |   |   |
|                                                                                                                                                                                                                                                                                                                  |  |  |  |  |  |  |  |  |  |  |  |

 

2

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**EXHIBIT E**

**COMPLIANCECERTIFICATE**
| TO:   |   | SILICON VALLEY BANK | Date:  |                                     |
|-------|--------|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| FROM: |   | ITERIS, INC.        |   |                                                                                                                                                                                                               |

 

The undersigned authorized officer of Iteris, Inc. (“Borrower”)certifies that under the terms and conditions of the Loan and SecurityAgreement between Borrower and Bank (the “Agreement”), (1) Borrower is incomplete compliance for the period ending                                 with all required covenants except as noted below, (2) there are no Events of Default,(3) all representations and warranties in the Agreement are true andcorrect in all material respects on this date except as noted below; provided,however, that such materiality qualifier shall not be applicable to anyrepresentations and warranties that already are qualified or modified bymateriality in the text thereof; and provided, further that thoserepresentations and warranties expressly referring to a specific date shall betrue, accurate and complete in all material respects as of such date, (4)Borrower, and each of its Subsidiaries, has timely filed all required taxreturns and reports, and Borrower has timely paid all foreign, federal, stateand local taxes, assessments, deposits and contributions owed by Borrowerexcept as otherwise permitted pursuant to the terms of Section 5.9 of theAgreement, and (5) no Liens have been levied or claims made against Borrower orany of its Subsidiaries relating to unpaid employee payroll or benefits ofwhich Borrower has not previously provided written notification to Bank.  Attached are the required documentssupporting the certification.  Theundersigned certifies that these are prepared in accordance with generally GAAPconsistently applied from one period to the next except as explained in an accompanyingletter or footnotes.  The undersignedacknowledges that no borrowings may be requested at any time or date ofdetermination that Borrower is not in compliance with any of the terms of theAgreement, and that compliance is determined not just at the date thiscertificate is delivered.  Capitalizedterms used but not otherwise defined herein shall have the meanings given themin the Agreement.
| **Please  indicate compliance status by circling Yes/No under “Complies” column.** |
|----------------------------------------------------------------------------------------------|

 
| Reporting Covenant                                           | ** ** | **Required**                                       | ** ** | **Complies** |
|--------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------|
| ** **                                                   | ** ** | ** **                                         | ** ** | ** **   |
| Monthly financial statements with Compliance  Certificate    |       | Monthly within 30 days                             |       | Yes  No |
| Transaction Reports                                          |       | Weekly and with each Advance request               |       | Yes  No |
| 10-Q, 10-K and 8-K                                           |       | Within 5 days after filing with SEC                |       | Yes  No |
| A/R & A/P Agings, Reconciliations and Inventory  Reports |       | Monthly within 15 days                             |       | Yes  No |
| Annual Projections, Budgets, etc. for upcoming  fiscal year  |       | Within 30 days prior to end of current fiscal year |       | Yes  No |

 
| The following Intellectual Property was registered  after the Effective Date (if no registrations, state “None”)  ________________________________________________________ |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                 |

 
| Financial Covenant           | ** ** | **Required**                                                                                                                    | ** ** | **Actual**                                                          | ** ** | **Complies**      |
|------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------|
|                         | ** ** | ** **                                                                                                                      | ** ** | ** **                                                          | ** ** | ** **        |
| Maintain on a Monthly Basis: | ** ** | ** **                                                                                                                      | ** ** | ** **                                                          | ** ** | ** **        |
| Minimum Tangible Net Worth   |       | $4,000,000 plus (i) 25% of all consideration for  equity securities and subordinated debt plus (ii) 25% of quarterly net income |       | $            |       | Yes  No |

 

1

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Thefollowing financial covenant analysis and information set forth in Schedule 1attached hereto are true and accurate as of the date of this Certificate.

Thefollowing are the exceptions with respect to the certification above:  (If no exceptions exist, state “No exceptionsto note.”)

____________________________________________________________________________________________________

____________________________________________________________________________________________________

____________________________________________________________________________________________________
| Iteris, Inc. |   | **BANK USE ONLY**                                                                                     |       |
|--------------|--------|-------------------------------------------------------------------------------------------------------|------------|
|         |   | ** **                                                                                            |       |
|         |   | Received by:                                                                                          | ** ** | ** ** |   |
|         |   | authorized signer                                                                                     |       |
| By:          |   |                                                                                                  |       |   |   |
| Name:        |   |                                                                                                  |       | Date: |   |
| Title:       |   |                                                                                                  |       |   |   |
| ** **   |   | Verified:                                                                                             |       |   |   |
|         |   | authorized signer                                                                                     |       |
|         |   |                                                                                                  |       |
|         |   | Date:                                                                                                 |       |
|         |   |                                                                                                  |       |
|         |   | Compliance Status:          Yes   No |       |
|         |   |                                                                                                  |       |
|         |   |                                                                                                  |       |
|              |        |                                                                                                       |            |  |  |  |  |  |  |  |  |

 

2

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**Schedule 1 to Compliance Certificate**

**Financial Covenants of Borrower**

Dated: _____________

**TangibleNet Worth**(Section 6.9(a))

Required:                                             **$4,000,000**plus (i) 25% of all considerationreceived for equity securities and subordinated debt of the Borrower, plus (ii)25% of the Borrower’s net income in each fiscal quarter

Actual:
| A.     |   | Aggregate value of total assets of Borrower and its  Subsidiaries                                                                                                                                                  |   | $_____ |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|   |   |                                                                                                                                                                                                               |   |   |
| B.     |   | Aggregate value of goodwill of Borrower and its  Subsidiaries                                                                                                                                                      |   | $_____ |
|   |   |                                                                                                                                                                                                               |   |   |
| C.     |   | Aggregate value of intangible assets of Borrower and  its Subsidiaries                                                                                                                                             |   | $_____ |
|   |   |                                                                                                                                                                                                               |   |   |
| D.     |   | Aggregate value of investments of Borrower and its  Subsidiaries consisting of minority investments in companies which  investments are not publicly-traded                                                        |   | $_____ |
|   |   |                                                                                                                                                                                                               |   |   |
| E.     |   | Aggregate value of any reserves not already deducted  from assets                                                                                                                                                  |   | $_____ |
|   |   |                                                                                                                                                                                                               |   |   |
| F.     |   | Aggregate value of liabilities of Borrower and its  Subsidiaries (including all Indebtedness) and current portion of Subordinated  Debt permitted by Bank to be paid by Borrower (but no other Subordinated  Debt) |   | $_____ |
|   |   |                                                                                                                                                                                                               |   |   |
| G.     |   | Aggregate value of Indebtedness of Borrower  subordinated to Borrower’s Indebtedness to Bank                                                                                                                  |   | $_____ |
|   |   |                                                                                                                                                                                                               |   |   |
| H.     |   | Tangible Net Worth (line A minus line B minus line C  minus line D minus line E minus line F plus line G)                                                                                                          |   | $_____ |

 

Is line H equal to orgreater than $______?
| ________No, not in compliance |   | ______ Yes,  in compliance |
|-------------------------------|--------|---------------------------------|

 

3

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**Exhibit F**

Transaction Report

1

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