**Exhibit 10.1**

 

WARRANT EXERCISEAGREEMENT

September 27, 2006

 

Special Situations FundIII QP, L.P.

Special Situations FundIII, L.P.

Special Situations CaymanFund, L.P.

Special SituationsPrivate Equity Fund, L.P.

527 Madison Avenue, Suite2600

New York, NY  10022

Attention:  Austin W. Marxe

Dear Austin:

Referenceis hereby made to the Purchase Agreement, dated as of August 7, 2002 (the “PurchaseAgreement”), among Iteris, Inc., as the successor to Odetics, Inc.(collectively, the “Company”), and each of Special Situations Fund III QP,L.P., Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P.and Special Situations Private Equity Fund, L.P., as the successors to thefunds originally party thereto (each a “Fund” and, collectively, the “Funds”).  Pursuant to the terms of the PurchaseAgreement, the Funds hold Warrants (the “Warrants”) to purchase an aggregate of1,250,000 shares of the Common Stock (the “Warrant Shares”), par value $0.10per share, of the Company (“Common Stock”) at an exercise price of $1.61 pershare.  The number of Warrants held byeach Fund is set forth in Exhibit A hereto.

Subjectto the terms and conditions set forth herein, the Funds hereby exercise theirWarrants in full effective on the Closing Date (as defined below).  In consideration of such agreement toexercise, on the Closing Date, the Company shall deliver to the Funds theWarrant Shares, registered in the names and in the respective amounts set forthin Exhibit A, and additional warrants (the “New Warrants”) to purchasean aggregate of 246,250 shares of Common Stock (subject to adjustment) (the “NewWarrant Shares”) at an exercise price of $3.25 per share (subject toadjustment).  The New Warrants shall bein substantially the form attached hereto as Exhibit B hereto. Thenumber of New Warrants to be issued to each Fund is set forth in Exhibit Ahereto.  On the Closing Date, the partieshereto will execute and deliver a Registration Rights Agreement, insubstantially the form attached hereto as Exhibit C (the “RegistrationRights Agreement”), pursuant to which the Company will provide certainregistration rights under the Securities Act of 1933, as amended (the “Act”),and the rules and regulations promulgated thereunder, and applicable statesecurities laws.  In the event that theClosing Date does not occur prior to the close of business on September 29,2006, this Warrant Exercise Agreement (this “Agreement”) shall be null andvoid.

----

Aspromptly as practicable after the date hereof, the Company shall deliver toLowenstein Sandler PC, in trust, certificates representing the Warrant Sharesand the New Warrants, in the amounts and registered in the names set forth in ExhibitA, such Warrant Shares and New Warrants to be held for release to the Fundsonly upon payment in full of the aggregate exercise price of the Warrants of$2,012,500 to the Company by the Funds. Upon such receipt by Lowenstein Sandler PC of the certificates, eachFund shall promptly, but no more than one business day thereafter, cause a wiretransfer in same day funds to be sent to the account of the Company asinstructed in writing by the Company, in an amount representing such Fund’s prorata portion of the aggregate exercise price as set forth in Exhibit Ahereto and shall deliver their Warrants to the Company.  On the date the Company receives theaggregate exercise price and the Warrants (the “Closing Date”), thecertificates evidencing the Warrant Shares and the New Warrants shall bereleased to the Funds (the “Closing”). The Closing of the transactions contemplated hereby shall take place atthe offices of Lowenstein Sandler PC, 1251 Avenue of the Americas, 18th Floor,New York, New York 10020, or at such other location and on such other date asthe Company and the Funds shall mutually agree.

TheCompany hereby represents and warrants to the Funds that:

(a)           The Company is a corporation dulyorganized, validly existing and in good standing under the laws of thejurisdiction of its incorporation and has all requisite corporate power andauthority to carry on its business as now conducted and to own its properties.

(b)           The Company has full corporate powerand authority and has taken all requisite corporate action on the part of theCompany, its officers, directors and stockholders necessary for (i) theauthorization, execution and delivery of this Agreement, the New Warrants andthe Registration Rights Agreement (collectively, the “Transaction Documents”),(ii) the authorization of the performance of all obligations of the Companyhereunder or thereunder, and (iii) the authorization, issuance (or reservationfor issuance) and delivery of the New Warrants and the New Warrant Shares(collectively, the “Securities”).  TheTransaction Documents constitute the legal, valid and binding obligations ofthe Company, enforceable against the Company in accordance with their terms,subject to (x) bankruptcy, insolvency, fraudulent transfer, reorganization,moratorium and similar laws of general applicability, relating to or affectingcreditors’ rights generally, (y) laws relating to the availability of specificperformance, injunctive relief or other equitable remedies, and (z) the extentthe indemnification or contribution provisions contained in the RegistrationRights Agreement may be limited by applicable federal or state securities laws.

(c)           Except as disclosed in Schedule 1hereto, the issuance and sale of the Securities hereunder will not obligate theCompany to issue shares of Common Stock or other securities to any other personor entity (other than the Funds) and will not result in the adjustment of theexercise, conversion, exchange or reset price of any outstanding security.

2

----

(d)           The New Warrants have been duly andvalidly authorized.  Upon the dueexercise of the New Warrants (including the payment of the exercise pricetherefor as specified therein), the New Warrant Shares will be validly issued,fully paid and non-assessable and free and clear of all encumbrances andrestrictions, except for restrictions on transfer set forth in the TransactionDocuments or imposed by applicable securities laws and except for those createdby the Funds.  The Company has reserved asufficient number of shares of Common Stock for issuance upon the exercise ofthe New Warrants, free and clear of all encumbrances and restrictions, exceptfor restrictions on transfer set forth in the Transaction Documents or imposedby applicable securities laws and except for those created by the Funds.

(e)           The execution, delivery andperformance by the Company of the Transaction Documents and the offer, issuanceand sale of the Securities require no consent of, action by or in respect of,or filing with, any person or entity, governmental body, agency, or officialother than filings to be made with the American Stock Exchange, filings thathave been made pursuant to applicable state securities laws and post-salefilings pursuant to applicable state and federal securities laws which theCompany undertakes to file within the applicable time periods.  Subject to the accuracy of the representationsand warranties of each Fund set forth herein, the Company has taken all actionnecessary to exempt (i) the issuance and sale of the Securities, (ii) theissuance of the New Warrant Shares upon due exercise of the New Warrants, and(iii) the other transactions contemplated by the Transaction Documents from theprovisions of (A) any stockholder rights plan or other “poison pill”arrangement, (B) any anti-takeover, business combination or control share lawor statute binding on the Company or to which the Company or any of its assetsand properties may be subject and (C) any provision of the Company’sCertificate of Incorporation or Bylaws, that in case of clauses (A) through (C)above is or could reasonably be expected to become applicable to the Funds as aresult of the transactions contemplated hereby and that would restrict theownership, disposition or voting of the Securities by the Funds or the exerciseof any right granted to the Funds pursuant to this Agreement or the otherTransaction Documents.

(f)            The execution, delivery andperformance of the Transaction Documents by the Company and the issuance andsale of the Securities will not conflict with or result in a breach orviolation of any of the terms and provisions of, or constitute a default under(i) the Company’s Certificate of Incorporation or the Company’s Bylaws, both asin effect on the date hereof (true and complete copies of which have been madeavailable to the Funds through the EDGAR system), or (ii)(A) any statute, rule,regulation or order of any governmental agency or body or any court, domesticor foreign, having jurisdiction over the Company, any subsidiary or any oftheir respective assets or properties, or (B) any agreement or instrument towhich the Company or any subsidiary is a party or by which the Company or asubsidiary is bound or to which any of their respective assets or properties issubject.

(g)           No person or entity will have, as aresult of the transactions contemplated by the Transaction Documents, any validright, interest or claim against or upon the Company, any subsidiary or a Fundfor any commission, fee or other

3

----

compensationpursuant to any agreement, arrangement or understanding entered into by or onbehalf of the Company.

(h)           Neither the Company nor any person orentity acting on its behalf has conducted any general solicitation or generaladvertising (as those terms are used in Regulation D) in connection with theoffer or sale of any of the Securities.

(i)            Neither the Company nor any of itsaffiliates, nor any person or entity acting on its or their behalf has,directly or indirectly, made any offers or sales of any Company security orsolicited any offers to buy any security, under circumstances that wouldadversely affect reliance by the Company on Section 4(2) for the exemption fromregistration for the transactions contemplated hereby or would requireregistration of the Securities under the Act.

(j)            Subject to the accuracy of therepresentations and warranties of each Fund set forth herein, the offer andsale of the Securities to the Funds as contemplated hereby is exempt from theregistration requirements of the Act.

Eachof the Funds hereby severally, and not jointly, represents and warrants to theCompany that:

(a)           Such Fund is a validly existingcorporation, limited partnership or limited liability company and has allrequisite corporate, partnership or limited liability company power andauthority to enter into this Agreement and the other Transaction Documents andto invest in the Securities pursuant to this Agreement.

(b)           The execution, delivery andperformance by such Fund of the Transaction Documents to which such Fund is aparty have been duly authorized and will each constitute the valid and legallybinding obligation of such Fund, enforceable against such Fund in accordancewith their respective terms, subject to (x) bankruptcy, insolvency, fraudulenttransfer, reorganization, moratorium and similar laws of general applicability,relating to or affecting creditors’ rights generally, (y) laws relating to theavailability of specific performance, injunctive relief or other equitableremedies, and (z) the extent the indemnification or contribution provisionscontained in the Registration Rights Agreement may be limited by applicablefederal or state securities laws.

(c)           The Securities to be received by suchFund hereunder will be acquired for such Fund’s own account, not as nominee oragent, and not with a view to the resale or distribution of any part thereof inviolation of the Act, and such Fund has no present intention of selling,granting any participation in, or otherwise distributing the same in violationof the Act without prejudice, however, to such Fund’s right at all times tosell or otherwise dispose of all or any part of such Securities in compliancewith applicable federal and state securities laws.  Nothing contained herein shall be deemed arepresentation or warranty by such Fund to hold the Securities for any periodof time.  Such Fund is not abroker-dealer registered with the Securities and Exchange

4

----

Commission underthe Securities Exchange Act of 1934, as amended, or an entity engaged in abusiness that would require it to be so registered.

(d)           Such Fund acknowledges that it canbear the economic risk and complete loss of its investment in the Securitiesand has such knowledge and experience in financial or business matters that itis capable of evaluating the merits and risks of the investment contemplatedhereby.

(e)           Such Fund has had an opportunity toreceive all information related to the Company requested by it and to askquestions of and receive answers from the Company regarding the Company, itsbusiness and the terms and conditions of the offering of the Securities.  Neither such inquiries nor any other duediligence investigation conducted by such Fund shall modify, limit or otherwiseaffect such Fund’s right to rely on the Company’s representations andwarranties contained in this Agreement.

(f)            Such Fund understands that theSecurities are characterized as “restricted securities” under the U.S. federalsecurities laws inasmuch as they are being acquired from the Company in atransaction not involving a public offering and that under such laws andapplicable regulations such securities may be resold without registration underthe Act only in certain limited circumstances.

(g)           It is understood that, except asprovided below, certificates evidencing the Securities may bear the followingor any similar legend:

“Thesecurities represented hereby may not be transferred unless (i) such securitieshave been registered for sale pursuant to the Securities Act of 1933, asamended, (ii) such securities may be sold pursuant to Rule 144(k), or (iii) theCompany has received an opinion of counsel reasonably satisfactory to it thatsuch transfer may lawfully be made without registration under the SecuritiesAct of 1933 or qualification under applicable state securities laws.”

(h)           Such Fund is an accredited investoras defined in Rule 501(a) of Regulation D, as amended, under the Act.

(i)            Such Fund did not learn of theinvestment in the Securities as a result of any general solicitation or generaladvertising.

(j)            No person or entity will have, as aresult of the transactions contemplated by the Transaction Documents, any validright, interest or claim against or upon the Company, any subsidiary or a Fundfor any commission, fee or other compensation pursuant to any agreement,arrangement or understanding entered into by or on behalf of such Fund.

Promptlyfollowing the date hereof, the Company shall take all necessary action to causethe New Warrant Shares to be listed on the American Stock Exchange

5

----

upon officialnotice of issuance.  Further, if theCompany applies to have its Common Stock or other securities traded on anyother principal stock exchange or market, it shall include in such applicationthe New Warrant Shares and will take such other action as is necessary to causesuch Common Stock to be so listed.  TheCompany will use commercially reasonable efforts to continue the listing andtrading of its Common Stock on the American Stock Exchange and, in accordance,therewith, will use commercially reasonable efforts to comply in all respectswith the Company’s reporting, filing and other obligations under the bylaws orrules of such exchange.

Uponthe earlier of (i) registration for resale pursuant to the Registration RightsAgreement or (ii) Rule 144(k) becoming available the Company shall (A) deliverto the transfer agent for the Common Stock (the “Transfer Agent”) irrevocableinstructions that the Transfer Agent shall reissue a certificate representingthe New Warrant Shares without legends upon receipt by such Transfer Agent ofthe legended certificates for such shares, together with either (1) a customaryrepresentation by the applicable Fund that Rule 144(k) applies to the shares ofCommon Stock represented thereby or (2) a statement by the applicable Fund thatsuch Fund has sold the shares of Common Stock represented thereby in accordancewith the Plan of Distribution contained in the Registration Statement, and (B)cause its counsel to deliver to the Transfer Agent one or more blanket opinionsto the effect that the removal of such legends in such circumstances may beeffected under the Act.  From and afterthe earlier of such dates, upon a Fund’s written request and compliance by theFund with the applicable provisions of clause (A)(1) or (A)(2) above, theCompany shall promptly cause certificates evidencing the Fund’s Securities tobe replaced with certificates which do not bear such restrictive legends, andNew Warrant Shares subsequently issued upon due exercise of the New Warrantsshall not bear such restrictive legends provided the provisions of eitherclause (i) or clause (ii) above, as applicable, are satisfied with respect tosuch New Warrant Shares, and provided further that in the case of clause (i)the Registration Statement has not been suspended (including due to an AllowedDelay, as such term is defined in the Registration Rights Agreement) and nostop order has been issued with respect to such Registration Statement prior tothe sale or transfer by the Fund giving rise to such transfer request.  When the Company is required to causeunlegended certificates to replace previously issued legended certificates, ifunlegended certificates are not delivered to a Fund within three (3) businessdays of delivery by that Fund of legended certificate(s) to the Transfer Agentas provided above (or to the Company, in the case of the New Warrants), theCompany shall be liable to the Fund for liquidated damages in an amount equalto 1.0% of the aggregate exercise price paid or payable in respect of theSecurities evidenced by such certificate(s) for each thirty (30) day period (orportion thereof) beyond such three (3) business days that the unlegendedcertificates have not been so delivered.

Unlessotherwise provided, any notice required or permitted under this Agreement shallbe given in writing and shall be deemed effectively given as hereinafterdescribed (i) if given by personal delivery, then such notice shall be deemedgiven upon such delivery, (ii) if given by telex or facsimile, then such noticeshall be deemed given upon receipt of confirmation of complete transmittal,(iii) if given by mail, then such

6

----

notice shall bedeemed given upon the earlier of (A) receipt of such notice by the recipient or(B) three days after such notice is deposited in first class mail, postageprepaid, and (iv) if given by an internationally recognized overnight aircourier, then such notice shall be deemed given one business day after deliveryto such carrier.  All notices shall beaddressed to the party to be notified at the address as follows, or at suchother address as such party may designate by ten days’ advance written noticeto the other party:

Ifto the Company:

Iteris, Inc.

1515 South ManchesterAvenue

Anaheim, California 92802

Attention:  Jack Johnson

Fax:  (714)780-7857

Ifto the Funds:

Special Situations Funds

527 Madison Avenue, Suite2600

New York, New York 10022

Attention:  Austin W. Marxe

Fax:  (212)319-6677

Theparties hereto shall pay their own costs and expenses in connection herewith,except that the Company shall pay the reasonable fees and expenses ofLowenstein Sandler PC not to exceed $5,000. Such expenses shall be paid not later than the Closing.  The Company shall reimburse the Funds upondemand for all reasonable out-of-pocket expenses incurred by the Funds,including without limitation reimbursement of attorneys’ fees anddisbursements, in connection with any amendment, modification or waiver of thisAgreement or the other Transaction Documents. In the event that legal proceedings are commenced by any party to thisAgreement against another party to this Agreement in connection with thisAgreement or the other Transaction Documents, the party or parties which do notprevail in such proceedings shall severally, but not jointly, pay their prorata share of the reasonable attorneys’ fees and other reasonable out-of-pocketcosts and expenses incurred by the prevailing party in such proceedings.

ThisAgreement shall be governed by, and construed in accordance with, the internallaws of the State of New York without regard to the choice of law principlesthereof.  Each of the parties heretoirrevocably submits to the exclusive jurisdiction of the courts of the State ofNew York located in New York County and the United States District Court forthe Southern District of New York for the purpose of any suit, action,proceeding or judgment relating to or arising out of this Agreement and thetransactions contemplated hereby. Service of process in connection with any such suit, action orproceeding may be served on each party hereto anywhere in the world by the same

7

----

methods as arespecified for the giving of notices under this Agreement.  Each of the parties hereto irrevocablyconsents to the jurisdiction of any such court in any such suit, action orproceeding and to the laying of venue in such court.  Each party hereto irrevocably waives anyobjection to the laying of venue of any such suit, action or proceeding broughtin such courts and irrevocably waives any claim that any such suit, action orproceeding brought in any such court has been brought in an inconvenientforum.  **EACHOF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANYLITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEENCONSULTED SPECIFICALLY AS TO THIS WAIVER.**

*[SignaturePage Follows]*

8

----

Ifthe foregoing accurately reflects our agreement, please execute this letter inthe space provided below and return a copy to the undersigned.  This letter may be executed in counterparts,each of which shall be deemed an original and all of which together shallconstitute one and the same instrument.
|   | ITERIS, INC. |
|--------|--------------|
|   |         |
|   |         |
|   | By:          |  /S/ JAMES  S. MIELE |   |
|   | Name:        | James S. Miele |
|   | Title:       | CFO |
|        |              |  |  |  |

 

 

ACCEPTED ANDAGREED:

Special Situations FundIII QP, L.P.

Special Situations FundIII, L.P.

Special Situations CaymanFund, L.P.

Special SituationsPrivate Equity Fund, L.P.
| By:    |   | /S/ AUSTIN W. MARXE  |   |
|--------|--------|----------------------|--------|
|   |   | Authorized Signatory |

 

9

----

Schedule 1

Exceptions to the Company’s

Representationsand Warranties

The issuance andsale of the Securities will result in a reduction of less than $0.01 of thefollowing:

·              theconversion price of 25% of the outstanding face amount of the convertible debenturesissued in May 2004; and

·              theexercise prices of 25% of the warrants to purchase an aggregate of 673,883shares of Common Stock issued in May 2004.

----

**ExhibitA**
| **Fund**                                      | ** ** | **Number of  Warrants** | ** ** | **Aggregate  Exercise Price** | ** **   | **New  Warrants** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|------------------------------------|--------------|-------------------|------------|
|                                          |       |                         |       |                               |         |              |       |
| Special Situations Fund  III QP, L.P.         |       | 651,263                      |       | $                                  | 1,048,533.43 |              | 128,299    |   |
| Special Situations Fund  III, L.P.            |       | 57,087                       |       | $                                  | 335,363.00   |              | 11,246     |   |
| Special Situations  Cayman Fund, L.P.         |       | 208,300                      |       | $                                  | 335,363.00   |              | 41,035     |   |
| Special Situations  Private Equity Fund, L.P. |       | 333,350                      |       | $                                  | 536,693.50   |              | 65,670     |   |
| Total                                         |       | 1,250,000                    |       | $                                  | 2,012,500.00 |              | 246,250    |   |

----

**ExhibitB**

**Formof New Warrant**

 

 

----

THESECURITIES REPRESENTED HEREBY MAY NOT BE TRANSFERRED UNLESS (I) SUCH SECURITIESHAVE BEEN REGISTERED FOR SALE PURSUANT TO THE SECURITIES ACT OF 1933, ASAMENDED, (II) SUCH SECURITIES MAY BE SOLD PURSUANT TO RULE 144(K), OR (III) THECOMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO IT THATSUCH TRANSFER MAY LAWFULLY BE MADE WITHOUT REGISTRATION UNDER THE SECURITIESACT OF 1933 OR QUALIFICATION UNDER APPLICABLE STATE SECURITIES LAWS.

SUBJECTTO THE PROVISIONS OF SECTION 10 HEREOF, THIS WARRANT SHALL BE VOID AFTER 5:00P.M. EASTERN TIME ON SEPTEMBER 28, 2011 (THE “EXPIRATION DATE”).

**ITERIS, INC.**

**WARRANT TO PURCHASE                 SHARES OFCOMMON STOCK, PAR VALUE $0.10 PER SHARE**

For VALUE RECEIVED,                                                  (“Warrantholder”), is entitled to purchase, subject to the provisions of thisWarrant, from Iteris, Inc., a Delaware corporation (“Company”), at any time notlater than 5:00 P.M., Eastern time, on the Expiration Date (as defined above),at an exercise price per share equal to $3.25 (the exercise price in effectbeing herein called the “Warrant Price”),                       shares (“Warrant Shares”) of the Company’s Common Stock, par value $0.10 pershare (“Common Stock”).  The number ofWarrant Shares purchasable upon exercise of this Warrant and the Warrant Priceshall be subject to adjustment from time to time as described herein.  This Warrant is being issued pursuant to theterms of a Warrant Exercise Agreement among the Company, the initialWarrantholder and the initial holders of the Company Warrants (as definedbelow) (the “Warrant Exercise Agreement”).

Section 1.               Registration.  The Company shall maintain books for thetransfer and registration of the Warrant. Upon the initial issuance of this Warrant, the Company shall issue andregister the Warrant in the name of the Warrantholder.

Section 2.               Transfers.  As provided herein, this Warrant may betransferred only pursuant to a registration statement filed under theSecurities Act of 1933, as amended (the “Securities Act”), or an exemption fromsuch registration.  Subject to suchrestrictions, the Company shall transfer this Warrant from time to time uponthe books to be maintained by the Company for that purpose, upon surrenderhereof for transfer, properly endorsed or accompanied by appropriateinstructions for transfer and such other documents as may be reasonablyrequired by the Company, including, if required by the Company, an opinion ofcounsel to the Warrantholder to the effect that such transfer is exempt fromthe registration requirements of the Securities Act, to establish that suchtransfer is being made in accordance with the terms hereof, and a new Warrantshall be issued to the transferee and the surrendered Warrant shall be canceledby the Company.

----

Section 3.               Exerciseof Warrant.  Subject to theprovisions hereof, the Warrantholder may exercise this Warrant, in whole or inpart, at any time prior to its expiration upon surrender of the Warrant,together with delivery of a duly executed Warrant exercise form, in the formattached hereto as Appendix A (the “Exercise Agreement”), and payment by cash,certified check or wire transfer of funds (or, in certain circumstances, bycashless exercise as provided below) of the aggregate Warrant Price for thatnumber of Warrant Shares then being purchased, to the Company during normalbusiness hours on any business day at the Company’s principal executive offices(or such other office or agency of the Company as it may designate by notice tothe Warrantholder).  The Warrant Sharesso purchased shall be deemed to be issued to the Warrantholder or theWarrantholder’s designee, as the record owner of such shares, as of the closeof business on the date on which this Warrant shall have been surrendered (orthe date evidence of loss, theft or destruction thereof and security orindemnity satisfactory to the Company has been provided to the Company), theWarrant Price shall have been paid and the completed Exercise Agreement shallhave been delivered.  Certificates forthe Warrant Shares so purchased shall be delivered to the Warrantholder withina reasonable time, not exceeding three (3) business days, after this Warrantshall have been so exercised.  Thecertificates so delivered shall be in such denominations as may be requested bythe Warrantholder and shall be registered in the name of the Warrantholder orsuch other name as shall be designated by the Warrantholder, as specified inthe Exercise Agreement.  If this Warrantshall have been exercised only in part, then, unless this Warrant has expired,the Company shall, at its expense, at the time of delivery of suchcertificates, deliver to the Warrantholder a new Warrant representing the rightto purchase the number of shares with respect to which this Warrant shall notthen have been exercised.  As usedherein, “business day” means a day, other than a Saturday or Sunday, on whichbanks in New York City are open for the general transaction of business.  Each exercise hereof shall constitute the re-affirmationby the Warrantholder that the representations and warranties contained in theWarrant Exercise Agreement are true and correct in all material respects withrespect to the Warrantholder as of the time of such exercise.

Section 4.               Compliancewith the Securities Act of 1933. Subject to the terms of the WarrantExercise Agreement, the Company may cause the legend set forth on the firstpage of this Warrant to be set forth on each Warrant, and a similar legend onany security issued or issuable upon exercise of this Warrant, unless counselfor the Company is of the opinion as to any such security that such legend isunnecessary.

Section 5.               Paymentof Taxes.  The Company will pay anydocumentary stamp taxes attributable to the initial issuance of Warrant Sharesissuable upon the exercise of the Warrant; provided, however, that the Companyshall not be required to pay any tax or taxes which may be payable in respectof any transfer involved in the issuance or delivery of any certificates forWarrant Shares in a name other than that of the Warrantholder in respect ofwhich such shares are issued, and in such case, the Company shall not berequired to issue or deliver any certificate for Warrant Shares or any Warrantuntil the person requesting the same has paid to the Company the amount of suchtax or has established to the Company’s reasonable satisfaction that such taxhas been paid.  The Warrantholder shallbe responsible for income taxes due under federal, state or other law, if anysuch tax is due.

2

----

Section 6.               Mutilatedor Missing Warrants.  In case thisWarrant shall be mutilated, lost, stolen, or destroyed, the Company shall issuein exchange and substitution of and upon surrender and cancellation of themutilated Warrant, or in lieu of and substitution for the Warrant lost, stolenor destroyed, a new Warrant of like tenor and for the purchase of a like numberof Warrant Shares, but only upon receipt of evidence reasonably satisfactory tothe Company of such loss, theft or destruction of the Warrant, and with respectto a lost, stolen or destroyed Warrant, reasonable indemnity or bond withrespect thereto, if requested by the Company.

Section 7.               Reservationof Common Stock.  The Company herebyrepresents and warrants that there have been reserved, and the Company shall atall applicable times keep reserved until issued (if necessary) as contemplatedby this Section 7, out of the authorized and unissued shares of Common Stock,sufficient shares to provide for the exercise of the rights of purchase representedby this Warrant.  The Company agrees thatall Warrant Shares issued upon due exercise of the Warrant shall be, at thetime of delivery of the certificates for such Warrant Shares, duly authorized,validly issued, fully paid and non-assessable shares of Common Stock of theCompany.

Section 8.               Adjustments.  Subject and pursuant to the provisions ofthis Section 8, the Warrant Price and number of Warrant Shares subject to thisWarrant shall be subject to adjustment from time to time as set forth hereinafter.

(a)           Ifthe Company shall, at any time or from time to time while this Warrant isoutstanding, pay a dividend or make a distribution on its Common Stock inshares of Common Stock, subdivide its outstanding shares of Common Stock into agreater number of shares or combine its outstanding shares of Common Stock intoa smaller number of shares or issue by reclassification of its outstandingshares of Common Stock any shares of its capital stock (including any suchreclassification in connection with a consolidation or merger in which theCompany is the continuing corporation), then (i) the Warrant Price in effectimmediately prior to the date on which such change shall become effective shallbe adjusted by multiplying such Warrant Price by a fraction, the numerator ofwhich shall be the number of shares of Common Stock outstanding immediatelyprior to such change and the denominator of which shall be the number of sharesof Common Stock outstanding immediately after giving effect to such change and(ii) the number of Warrant Shares purchasable upon exercise of this Warrantshall be adjusted by multiplying the number of Warrant Shares purchasable uponexercise of this Warrant immediately prior to the date on which such changeshall become effective by a fraction, the numerator of which is shall be theWarrant Price in effect immediately prior to the date on which such changeshall become effective and the denominator of which shall be the Warrant Pricein effect immediately after giving effect to such change, calculated inaccordance with clause (i) above.  Suchadjustments shall be made successively whenever any event listed above shalloccur.

(b)           Ifany capital reorganization, reclassification of the capital stock of theCompany, consolidation or merger of the Company with another corporation inwhich the Company is not the survivor, or sale, transfer or other dispositionof all or substantially all of the Company’s assets to another corporationshall be effected, then, as a condition of such reorganization, reclassification,consolidation, merger, sale, transfer or other disposition, lawful 

3

----

andadequate provision shall be made whereby each Warrantholder shall thereafterhave the right to purchase and receive upon the basis and upon the terms andconditions herein specified and in lieu of the Warrant Shares immediatelytheretofore issuable upon exercise of the Warrant, such shares of stock,securities or assets as would have been issuable or payable with respect to orin exchange for a number of Warrant Shares equal to the number of WarrantShares immediately theretofore issuable upon exercise of the Warrant, had suchreorganization, reclassification, consolidation, merger, sale, transfer orother disposition not taken place, and in any such case appropriate provisionshall be made with respect to the rights and interests of each Warrantholder tothe end that the provisions hereof (including, without limitation, provisionfor adjustment of the Warrant Price) shall thereafter be applicable, as nearlyequivalent as may be practicable in relation to any shares of stock, securitiesor assets thereafter deliverable upon the exercise hereof.  The Company shall not effect any suchconsolidation, merger, sale, transfer or other disposition unless prior to orsimultaneously with the consummation thereof the successor corporation (ifother than the Company) resulting from such consolidation or merger, or thecorporation purchasing or otherwise acquiring such assets or other appropriatecorporation or entity shall assume the obligation to deliver to theWarrantholder, at the last address of the Warrantholder appearing on the booksof the Company, such shares of stock, securities or assets as, in accordancewith the foregoing provisions, the Warrantholder may be entitled to purchase,and the other obligations under this Warrant. The provisions of this paragraph (b) shall similarly apply to successivereorganizations, reclassifications, consolidations, mergers, sales, transfersor other dispositions.

(c)           Incase the Company shall fix a payment date for the making of a distribution toall holders of Common Stock (including any such distribution made in connectionwith a consolidation or merger in which the Company is the continuingcorporation) of evidences of indebtedness or assets (other than cash dividendsor cash distributions payable out of consolidated earnings or earned surplus ordividends or distributions referred to in Section 8(a)), or subscription rightsor warrants, the Warrant Price to be in effect after such payment date shall bedetermined by multiplying the Warrant Price in effect immediately prior to suchpayment date by a fraction, the numerator of which shall be the total number ofshares of Common Stock outstanding multiplied by the Market Price (as definedbelow) per share of Common Stock immediately prior to such payment date, lessthe fair market value (as determined by the Company’s Board of Directors ingood faith) of said assets or evidences of indebtedness so distributed, or ofsuch subscription rights or warrants, and the denominator of which shall be thetotal number of shares of Common Stock outstanding multiplied by such MarketPrice per share of Common Stock immediately prior to such payment date.  “Market Price” as of a particular date (the“Valuation Date”) shall mean the following: (i) if the Common Stock is thenlisted on a national stock exchange, the closing sale price of one share ofCommon Stock on such exchange on the last trading day prior to the ValuationDate; (ii) if the Common Stock is then quoted on, the National Association ofSecurities Dealers, Inc. OTC Bulletin Board (the “Bulletin Board”), the PinkSheets, LLC (the “Pink Sheets”) or such similar quotation system orassociation, the closing sale price of one share of Common Stock on theBulletin Board, the Pink Sheets or such other quotation system or associationon the last trading day prior to the Valuation Date or, if no such closing saleprice is available, the average of the high bid and the low asked price quotedthereon on the last trading day prior to the Valuation Date; or (iii) if theCommon Stock is not then listed on a national stock exchange or quoted on suchother quotation system or association,

4

----

thefair market value of one share of Common Stock as of the Valuation Date, asdetermined in good faith by the Board of Directors of the Company and theWarrantholder.  If the Common Stock isnot then listed on a national securities exchange, the Bulletin Board, the PinkSheets or such other quotation system or association, the Board of Directors ofthe Company shall respond promptly, in writing, to an inquiry by theWarrantholder prior to the exercise hereunder as to the fair market value of ashare of Common Stock as determined by the Board of Directors of the Company.  In the event that the Board of Directors ofthe Company and the Warrantholder are unable to agree upon the fair marketvalue in respect of clause (iii) of this paragraph, the Company and theWarrantholder shall jointly select an appraiser, who is experienced in suchmatters.  The decision of such appraisershall be final and conclusive, and the cost of such appraiser shall be borneequally by the Company and the Warrantholder. Such adjustment shall be made successively whenever such a payment dateis fixed.

(d)           An adjustmentto the Warrant Price shall become effective immediately after the payment datein the case of each dividend or distribution and immediately after theeffective date of each other event which requires an adjustment.

(e)           In the event that, as a result of anadjustment made pursuant to this Section 8, the Warrantholder shall becomeentitled to receive any shares of capital stock of the Company other thanshares of Common Stock, the number of such other shares so receivable uponexercise of this Warrant shall be subject thereafter to adjustment from time totime in a manner and on terms as nearly equivalent as practicable to theprovisions with respect to the Warrant Shares contained in this Warrant.

(f)            Exceptas provided in subsection (g) hereof, if and whenever the Company shall issueor sell, or is, in accordance with any of subsections (f)(l) through (f)(7)hereof, deemed to have issued or sold, any Additional Shares of Common Stockfor no consideration or for a consideration per share less than the WarrantPrice in effect immediately prior to the time of such issue or sale, then andin each such case (a “Trigger Issuance”) the then-existing WarrantPrice, shall be reduced, as of the close of business on the effective date ofthe Trigger Issuance, to a price determined as follows:

Adjusted WarrantPrice = (A x B) + D

A+C

where

“A” equals thenumber of shares of Common Stock outstanding, including Additional Shares ofCommon Stock (as defined below) deemed to be issued hereunder, immediatelypreceding such Trigger Issuance;

“B” equals theWarrant Price in effect immediately preceding such Trigger Issuance;

“C” equals thenumber of Additional Shares of Common Stock issued or deemed issued hereunderas a result of the Trigger Issuance; and

5

----

“D” equals theaggregate consideration, if any, received or deemed to be received by theCompany upon such Trigger Issuance;

provided, however,that in no event shall the Warrant Price after giving effect to such TriggerIssuance be greater than the Warrant Price in effect prior to such TriggerIssuance.

For purposes of this subsection (f), “AdditionalShares of Common Stock” shall mean all shares of Common Stock issued by theCompany or deemed to be issued pursuant to this subsection (f), other thanExcluded Issuances (as defined in subsection (g) hereof).

For purposes of this subsection (f), the followingsubsections (f)(l) to (f)(7) shall also be applicable:

(f)(1)  Issuance of Rights or Options.  In case at any time the Company shall in anymanner grant (directly and not by assumption in a merger or otherwise) anywarrants or other rights to subscribe for or to purchase, or any options forthe purchase of, Common Stock or any stock or security convertible into orexchangeable for Common Stock (such warrants, rights or options being called“Options” and such convertible or exchangeable stock or securities being called“Convertible Securities”) whether or not such Options or the right to convertor exchange any such Convertible Securities are immediately exercisable, andthe price per share for which Common Stock is issuable upon the exercise ofsuch Options or upon the conversion or exchange of such Convertible Securities(determined by dividing (i) the sum (which sum shall constitute the applicableconsideration) of (x) the total amount, if any, received or receivable by theCompany as consideration for the granting of such Options, plus (y) theaggregate amount of additional consideration payable to the Company upon theexercise of all such Options, plus (z), in the case of such Options whichrelate to Convertible Securities, the aggregate amount of additionalconsideration, if any, payable upon the issue or sale of such ConvertibleSecurities and upon the conversion or exchange thereof, by (ii) the totalmaximum number of shares of Common Stock issuable upon the exercise of suchOptions or upon the conversion or exchange of all such Convertible Securitiesissuable upon the exercise of such Options) shall be less than the WarrantPrice in effect immediately prior to the time of the granting of such Options,then the total number of shares of Common Stock issuable upon the exercise ofsuch Options or upon conversion or exchange of the total amount of suchConvertible Securities issuable upon the exercise of such Options shall bedeemed to have been issued for such price per share as of the date of grantingof such Options or the issuance of such Convertible Securities and thereaftershall be deemed to be outstanding for purposes of adjusting the Warrant Price.  Except as otherwise provided in subsection8(f)(3), no adjustment of the Warrant Price shall be made upon the actual issueof such Common Stock or of such Convertible Securities upon exercise of suchOptions or upon the actual issue of such Common Stock upon conversion orexchange of such Convertible Securities.

6

----

(f)(2)  Issuance of Convertible Securities.  In case the Company shall in any manner issue(directly and not by assumption in a merger or otherwise) or sell anyConvertible Securities, whether or not the rights to exchange or convert anysuch Convertible Securities are immediately exercisable, and the price pershare for which Common Stock is issuable upon such conversion or exchange(determined by dividing (i) the sum (which sum shall constitute the applicableconsideration) of (x) the total amount received or receivable by the Company asconsideration for the issue or sale of such Convertible Securities, plus (y)the aggregate amount of additional consideration, if any, payable to theCompany upon the conversion or exchange thereof, by (ii) the total number ofshares of Common Stock issuable upon the conversion or exchange of all suchConvertible Securities) shall be less than the Warrant Price in effectimmediately prior to the time of such issue or sale, then the total maximumnumber of shares of Common Stock issuable upon conversion or exchange of allsuch Convertible Securities shall be deemed to have been issued for such priceper share as of the date of the issue or sale of such Convertible Securities andthereafter shall be deemed to be outstanding for purposes of adjusting theWarrant Price, provided that (a) except as otherwise provided in subsection8(f)(3), no adjustment of the Warrant Price shall be made upon the actualissuance of such Common Stock upon conversion or exchange of such ConvertibleSecurities and (b) no further adjustment of the Warrant Price shall be made byreason of the issue or sale of Convertible Securities upon exercise of anyOptions to purchase any such Convertible Securities for which adjustments ofthe Warrant Price have been made pursuant to the other provisions of subsection8(f).

(f)(3) Change inOption Price or Conversion Rate.  Uponthe happening of any of the following events, namely, if the purchase priceprovided for in any Option referred to in subsection 8(f)(l) hereof, theadditional consideration, if any, payable upon the conversion or exchange ofany Convertible Securities referred to in subsections 8(f)(l) or 8(f)(2), orthe rate at which Convertible Securities referred to in subsections 8(f)(l) or8(f)(2) are convertible into or exchangeable for Common Stock shall change atany time (including, but not limited to, changes under or by reason ofprovisions designed to protect against dilution), the Warrant Price in effectat the time of such event shall forthwith be readjusted to the Warrant Pricewhich would have been in effect at such time had such Options or ConvertibleSecurities still outstanding provided for such changed purchase price,additional consideration or conversion rate, as the case may be, at the timeinitially granted, issued or sold.  Onthe termination of any Option for which any adjustment was made pursuant tothis subsection 8(f) or any right to convert or exchange Convertible Securitiesfor which any adjustment was made pursuant to this subsection 8(f) (includingwithout limitation upon the redemption or purchase for consideration of suchConvertible Securities by the Company), the Warrant Price then in effecthereunder shall forthwith be changed to the Warrant Price which would have beenin effect at the time of such termination had such Option or ConvertibleSecurities, to the extent outstanding immediately prior to such termination,never been issued.

7

----

(f)(4) StockDividends.  Subject to the provisions ofthis Section 8(f), in case the Company shall declare or pay a dividend or makeany other distribution upon any stock of the Company (other than the CommonStock) payable in Common Stock, Options or Convertible Securities, then anyCommon Stock, Options or Convertible Securities, as the case may be, issuablein payment of such dividend or distribution shall be deemed to have been issuedor sold without consideration.

(f)(5)Consideration for Stock.  In case anyshares of Common Stock, Options or Convertible Securities shall be issued orsold for cash, the consideration received therefor shall be deemed to be thenet amount received by the Company therefor, after deduction therefrom of anyexpenses incurred or any underwriting commissions or concessions paid orallowed by the Company in connection therewith. In case any shares of Common Stock, Options or Convertible Securitiesshall be issued or sold for a consideration other than cash, the amount of theconsideration other than cash received by the Company shall be deemed to be thefair value of such consideration as determined in good faith by the Board ofDirectors of the Company, after deduction of any expenses incurred or anyunderwriting commissions or concessions paid or allowed by the Company inconnection therewith.  In case anyOptions shall be issued in connection with the issue and sale of othersecurities of the Company, together comprising one integral transaction inwhich no specific consideration is allocated to such Options by the partiesthereto, such Options shall be deemed to have been issued for suchconsideration as determined in good faith by the Board of Directors of theCompany.  If Common Stock, Options orConvertible Securities shall be issued or sold by the Company and, in connectiontherewith, other Options or Convertible Securities (the “Additional Rights”)are issued, then the consideration received or deemed to be received by theCompany shall be reduced by the fair market value of the Additional Rights (asdetermined using the Black-Scholes option pricing model or another methodmutually agreed to by the Company and the Warrantholder).  The Board of Directors of the Company shallrespond promptly, in writing, to an inquiry by the Warrantholder as to the fairmarket value of the Additional Rights. In the event that the Board of Directors of the Company and theWarrantholder are unable to agree upon the fair market value of the AdditionalRights, the Company and the Warrantholder shall jointly select an appraiser,who is experienced in such matters.  Thedecision of such appraiser shall be final and conclusive, and the cost of suchappraiser shall be borne evenly by the Company and the Warrantholder.

(f)(6) RecordDate.  In case the Company shall take arecord of the holders of its Common Stock for the purpose of entitling them (i)to receive a dividend or other distribution payable in Common Stock, Options orConvertible Securities or (ii) to subscribe for or purchase Common Stock,Options or Convertible Securities, then such record date shall be deemed to bethe date of the issue or sale of the shares of Common Stock deemed to have beenissued or sold upon the 

8

----

declaration ofsuch dividend or the making of such other distribution or the date of thegranting of such right of subscription or purchase, as the case may be.

(f)(7) TreasuryShares.  The number of shares of CommonStock outstanding at any given time shall not include shares owned or held byor for the account of the Company or any of its wholly-owned subsidiaries, andthe disposition of any such shares (other than the cancellation or retirementthereof) shall be considered an issue or sale of Common Stock for the purposeof this subsection (f).

(g)           Anything herein to the contrarynotwithstanding, the Company shall not be required to make any adjustment ofthe Warrant Price in the case of the issuance of (A) capital stock, Options orConvertible Securities issued to directors, officers, employees or consultantsof the Company in connection with their service as directors of the Company,their employment by the Company or their retention as consultants by theCompany pursuant to an equity compensation program or other agreement orarrangement approved by the Board of Directors of the Company or thecompensation committee of the Board of Directors of the Company, (B) shares ofCommon Stock issued upon the conversion or exercise of Options or ConvertibleSecurities issued prior to the date hereof, provided such securities are notamended after the date hereof to increase the number of shares of Common Stockissuable thereunder or to lower the exercise or conversion price thereof, and(C) shares of Common Stock issued or issuable by reason of a dividend, stocksplit or other distribution on shares of Common Stock (but only to the extentthat such a dividend, split or distribution results in an adjustment in theWarrant Price pursuant to the other provisions of this Warrant) (collectively,“Excluded Issuances”).

(h)           Upon any adjustment to the WarrantPrice pursuant to Section 8(f) above, the number of Warrant Shares purchasablehereunder shall be adjusted by multiplying such number by a fraction, thenumerator of which shall be the Warrant Price in effect immediately prior tosuch adjustment and the denominator of which shall be the Warrant Price ineffect immediately thereafter.

Section 9.               FractionalInterest.  The Company shall not berequired to issue fractions of Warrant Shares upon the exercise of thisWarrant.  If any fractional share ofCommon Stock would, except for the provisions of the first sentence of thisSection 9, be deliverable upon such exercise, the Company, in lieu ofdelivering such fractional share, shall pay to the exercising Warrantholder anamount in cash equal to the Market Price of such fractional share of CommonStock on the date of exercise.

Section 10.             Extensionof Expiration Date.  If the Companyfails to cause any Registration Statement covering Registrable Securities(unless otherwise defined herein, capitalized terms are as defined in theRegistration Rights Agreement relating to the Warrant Shares (the “RegistrationRights Agreement”)) to be declared effective prior to the applicable dates setforth therein, or if any of the events specified in Section 2(c)(ii) of theRegistration Rights Agreement occurs, and the Blackout Period (whether alone,or in combination with any other Blackout Period) continues for more than 60days in any 12 month period, or for more than 

9

----

atotal of 90 days, then the Expiration Date of this Warrant shall be extendedone day for each day beyond the 60-day or 90-day limits, as the case may be,that the Blackout Period continues.

Section 11.             Benefits.  Nothing in this Warrant shall be construed togive any person, firm or corporation (other than the Company and the Warrantholder)any legal or equitable right, remedy or claim, it being agreed that thisWarrant shall be for the sole and exclusive benefit of the Company and theWarrantholder.

Section 12.             Noticesto Warrantholder.  Upon the happeningof any event requiring an adjustment of the Warrant Price, the Company shallpromptly give written notice thereof to the Warrantholder at the addressappearing in the records of the Company, stating the adjusted Warrant Price andthe adjusted number of Warrant Shares resulting from such event and settingforth in reasonable detail the method of calculation and the facts upon whichsuch calculation is based.  Failure togive such notice to the Warrantholder or any defect therein shall not affect thelegality or validity of the subject adjustment.

Section 13.             Identityof Transfer Agent.  The TransferAgent for the Common Stock is U.S. Stock Transfer Corporation.  Upon the appointment of any subsequenttransfer agent for the Common Stock or other shares of the Company’s capitalstock issuable upon the exercise of the rights of purchase represented by theWarrant, the Company will mail to the Warrantholder a statement setting forththe name and address of such transfer agent.

Section 14.             Notices.  Unless otherwise provided, any notice requiredor permitted under this Warrant shall be given in writing and shall be deemedeffectively given as hereinafter described (i) if given by personal delivery,then such notice shall be deemed given upon such delivery, (ii) if given bytelex or facsimile, then such notice shall be deemed given upon receipt ofconfirmation of complete transmittal, (iii) if given by mail, then such noticeshall be deemed given upon the earlier of (A) receipt of such notice by therecipient or (B) three days after such notice is deposited in first class mail,postage prepaid, and (iv) if given by an internationally recognized overnightair courier, then such notice shall be deemed given one business day afterdelivery to such carrier.  All noticesshall be addressed as follows: if to the Warrantholder, at its address as setforth in the Company’s books and records and, if to the Company, at the addressas follows, or at such other address as the Warrantholder or the Company maydesignate by ten days’ advance written notice to the other:

If to the Company:

Iteris, Inc.

1515 South ManchesterAvenue

Anaheim, California 92802

Attention:  Jack Johnson

Fax:  (714)780-7857

Section 15.             RegistrationRights.  The initial Warrantholder isentitled to the benefit of certain registration rights with respect to theshares of Common Stock issuable upon the exercise 

10

----

ofthis Warrant as provided in the Registration Rights Agreement, and anysubsequent Warrantholder may be entitled to such rights.

Section 16.             Successors.  All the covenants and provisions hereof by orfor the benefit of the Warrantholder shall bind and inure to the benefit of itsrespective successors and assigns hereunder.

Section 17.             GoverningLaw; Consent to Jurisdiction; Waiver of Jury Trial.  This Warrant shall be governed by, andconstrued in accordance with, the internal laws of the State of New York,without reference to the choice of law provisions thereof.  The Company and, by accepting this Warrant,the Warrantholder, each irrevocably submits to the exclusive jurisdiction ofthe courts of the State of New York located in New York County and the UnitedStates District Court for the Southern District of New York for the purpose ofany suit, action, proceeding or judgment relating to or arising out of thisWarrant and the transactions contemplated hereby.  Service of process in connection with anysuch suit, action or proceeding may be served on each party hereto anywhere inthe world by the same methods as are specified for the giving of notices underthis Warrant.  The Company and, byaccepting this Warrant, the Warrantholder, each irrevocably consents to thejurisdiction of any such court in any such suit, action or proceeding and tothe laying of venue in such court.  TheCompany and, by accepting this Warrant, the Warrantholder, each irrevocablywaives any objection to the laying of venue of any such suit, action orproceeding brought in such courts and irrevocably waives any claim that anysuch suit, action or proceeding brought in any such court has been brought inan inconvenient forum. ** EACH OF THE COMPANY AND, BY ITS ACCEPTANCEHEREOF, THE WARRANTHOLDER HEREBY WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY INANY LITIGATION WITH RESPECT TO THIS WARRANT AND REPRESENTS THAT COUNSEL HASBEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.**

Section 18.             Call Provision.  Notwithstanding any other provision containedin this Warrant to the contrary, in the event that the closing bid price pershare of Common Stock as traded on the American Stock Exchange (or such otherexchange or stock market on which the Common Stock may then be listed orquoted) equals or exceeds $6.50 (appropriately adjusted for any stock split,reverse stock split, stock dividend or other reclassification or combination ofthe Common Stock occurring after the date hereof) for any twenty (20)consecutive trading days commencing after the Registration Statement (asdefined in the Registration Rights Agreement) has been declared effective, theCompany, upon thirty (30) days prior written notice (the “Notice Period”)given to the Warrantholder within one (1) business day immediately followingthe end of such twenty (20) trading day period, may call this Warrant, in wholebut not in part, at a redemption price equal to $0.01 per share of Common Stockthen purchasable pursuant to this Warrant; provided that (i) the Companysimultaneously calls all Company Warrants (as defined below) on the same terms,(ii) all of the shares of Common Stock issuable hereunder either (A) areregistered pursuant to an effective Registration Statement (as defined in theRegistration Rights Agreement) which is not suspended and for which no stoporder is in effect, and pursuant to which the Warrantholder is able to sellsuch shares of Common Stock at all times during the Notice Period or (B) no longerconstitute Registrable Securities (as defined in the Registration RightsAgreement) and (iii) this Warrant is fully exercisable for the full amount ofWarrant 

11

----

Shares coveredhereby.  Notwithstanding any such noticeby the Company, the Warrantholder shall have the right to exercise this Warrantprior to the end of the Notice Period.

Section 19.             CashlessExercise.  Notwithstanding any otherprovision contained herein to the contrary, from and after the firstanniversary of the Closing Date (as defined in the Warrant Exercise Agreement)and so long as the Company is required under the Registration Rights Agreementto have effected and keep effective the registration of the Warrant Shares forresale to the public pursuant to a Registration Statement (as such term isdefined in the Registration Rights Agreement), if the Warrant Shares may not befreely sold to the public because such shares are not covered by an effectiveRegistration Statement which is not suspended and for which no stop order is ineffect, then during such period in which the Warrant Shares may not be freelysold to the public (but excluding the period of any Allowed Delay (as definedin the Registration Rights Agreement)), the Warrantholder may elect to receive,without the payment by the Warrantholder of the aggregate Warrant Price inrespect of the shares of Common Stock to be acquired, shares of Common Stock ofequal value to the value of this Warrant, or any specified portion hereof, bythe surrender of this Warrant (or such portion of this Warrant being soexercised) together with a Net Issue Election Notice, in the form annexedhereto as Appendix B, duly executed, to the Company.  Thereupon, the Company shall issue to theWarrantholder such number of fully paid, validly issued and nonassessableshares of Common Stock as is computed using the following formula:

X = Y (A - B)

       A

where

X =          the number of shares of Common Stockto which the Warrantholder is entitled upon such cashless exercise;

Y =          the total number of shares of CommonStock covered by this Warrant for which the Warrantholder has surrenderedpurchase rights at such time for cashless exercise (including both shares to beissued to the Warrantholder and shares as to which the purchase rights are tobe canceled as payment therefor);

A =         the “Market Price” of one share ofCommon Stock as of the date the net issue election is made; and

B =          theWarrant Price in effect under this Warrant at the time the net issue electionis made.

Section 20.             No Rights as Stockholder.  Prior to the exercise of this Warrant, theWarrantholder shall not have or exercise any rights as a stockholder of theCompany by virtue of its ownership of this Warrant.

Section 21.             Amendment; Waiver.  This Warrant is one of a series of Warrantsof like tenor issued by the Company pursuant to the Warrant Exercise Agreementand initially covering 

12

----

an aggregate of 246,250shares of Common Stock (collectively, the “Company Warrants”).  Any term of this Warrant may be amended orwaived (including the adjustment provisions included in Section 8 of thisWarrant) upon the written consent of the Company and the holders of CompanyWarrants representing at least 50% of the number of shares of Common Stock thensubject to all outstanding Company Warrants (the “Majority Holders”); provided,that (x) any such amendment or waiver must apply to all Company Warrants; and(y) the number of Warrant Shares subject to this Warrant, the Warrant Price andthe Expiration Date may not be amended, and the right to exercise this Warrantmay not be altered or waived, without the written consent of the Warrantholder.

Section 22.             Section Headings.  The section headings in this Warrant are forthe convenience of the Company and the Warrantholder and in no way alter,modify, amend, limit or restrict the provisions hereof.

*[SignaturePage Follows]*

13

----

IN WITNESS WHEREOF, the Company has caused thisWarrant to be duly executed, as of the 28th day of September, 2006.
|        | ITERIS, INC. |
|--------|--------------|
|   |         |   |
|   |         |   |   |
|   | By:          |   |   |
|   | Name:        | James S. Miele |
|   | Title:       | Chief Financial Officer |
|        |              |  |  |  |  |

 

 

14

----

APPENDIX A

ITERIS, INC.

WARRANT EXERCISE FORM

To Iteris, Inc.:

Theundersigned hereby irrevocably elects to exercise the right of purchaserepresented by the within Warrant (“Warrant”) for, and to purchase thereunderby the payment of the Warrant Price and surrender of the Warrant,                                 shares of Common Stock (“Warrant Shares”) provided for therein, and requeststhat certificates for the Warrant Shares be issued as follows:
|        |                                   |   |
|--------|----------------------------------------|--------|
|   | Name                                   |   |
|   |                                   |   |
|   | Address                                |   |
|   |                                   |   |
|   |                                   |   |
|   | Federal Tax ID  or Social Security No. |   |

 
|        |              |
|--------|-------------------|
|   | and delivered by: | o |  certified  mail to the above address, or |
|   | (check one)       | o |  electronically (provide DWAC Instructions:                           ),  or |
|   | o                 |  other  (specify):                                                                                 . |
|   |              |

and, if the numberof Warrant Shares shall not be all the Warrant Shares purchasable upon exerciseof the Warrant, that a new Warrant for the balance of the Warrant Sharespurchasable upon exercise of this Warrant be registered in the name of theundersigned Warrantholder or the undersigned’s Assignee as below indicated anddelivered to the address stated below.
| Dated:                                         |                       | ,      |   |   |   |
|------------------------------------------------|----------------------------|--------|--------|--------|--------|
|                                           |                       |
| Note: The  signature must correspond with      | Signature:                 |   |   |
| the name of the  Warrantholder as written      |                       |
| on the first  page of the Warrant in every     |                       |   |
| particular,  without alteration or enlargement | Name (please print)        |
| or any change  whatever, unless the Warrant    |                       |
| has been  assigned.                            |                       |   |
|                                           |                       |   |
|                                           | Address                    |   |
|                                           |                       |   |
|                                           | Federal  Identification or |   |
|                                           | Social Security  No.       |   |
|                                           |                       |   |
|                                           | Assignee:                  |   |
|                                           |                       |   |
|                                           |                       |   |
|                                           |                       |   |
|                                                |                            |        |        |        |        |  |  |  |

 

----

APPENDIX B

ITERIS, INC.

NET ISSUE ELECTION NOTICE

 

To: Iteris, Inc.

Date:[                                              ]

The undersignedhereby elects under Section 19 of this Warrant to surrender the right topurchase [                       ]shares of Common Stock pursuant to this Warrant and hereby requests theissuance of [                         ]shares of Common Stock.  Thecertificate(s) for the shares issuable upon such net issue election shall beissued in the name of the undersigned or as otherwise indicated below.
|                        |   |
|------------------------|--------|
| Signature              |   |
|                   |   |
|                   |   |
| Name for  Registration |   |
|                   |   |
|                   |   |
| Mailing Address        |   |

 

 

----

 

**ExhibitC**

**RegistrationRights Agreement**

 

----