Table of Contents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**Form 10-Q**

 

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

 

**For the transition period from             to             **

 

**Commission file number:  001-08762**

 

 

**ITERIS, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

**(949) 270-9400**

(Registrant’s telephone number, including area code)

 

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

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

Asof July 23, 2010, there were 34,331,756 shares of common stockoutstanding.

 

 

 

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**ITERIS, INC.**

**Quarterly Report on Form 10-QFor the Three Months Ended June 30, 2010**

 

**Table of Contents**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                      | 3      |
|-------------------|----------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                           |   |
| ITEM 1.           | FINANCIAL STATEMENTS                                                                                           | 3      |
|              |                                                                                                           |   |
|              | UNAUDITED  CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2010  AND MARCH 31, 2010                | 3      |
|              |                                                                                                           |   |
|              | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME  FOR THE THREE  MONTHS ENDED JUNE 30, 2010 AND 2009 | 4      |
|              |                                                                                                           |   |
|              | UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH  FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009   | 5      |
|              |                                                                                                           |   |
|              | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL  STATEMENTS                                                | 6      |
|              |                                                                                                           |   |
| ITEM 2.           | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS               | 15     |
|              |                                                                                                           |   |
| ITEM 3.           | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                    | 23     |
|              |                                                                                                           |   |
| ITEM 4T.          | CONTROLS AND PROCEDURES                                                                                        | 23     |
|              |                                                                                                           |   |
| **PART II.** | **OTHER INFORMATION**                                                                                          | 24     |
|              |                                                                                                           |   |
| ITEM 1.           | LEGAL PROCEEDINGS                                                                                              | 24     |
|              |                                                                                                           |   |
| ITEM  1A.         | RISK FACTORS                                                                                                   | 24     |
|              |                                                                                                           |   |
| ITEM 2.           | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                   | 33     |
|              |                                                                                                           |   |
| ITEM 3.           | DEFAULTS UPON  SENIOR SECURITIES                                                                               | 33     |
|              |                                                                                                           |   |
| ITEM 4.           | (REMOVED AND RESERVED)                                                                                         | 33     |
|              |                                                                                                           |   |
| ITEM 5.           | OTHER INFORMATION                                                                                              | 33     |
|              |                                                                                                           |   |
| ITEM  6.          | EXHIBITS                                                                                                       | 34     |

 

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

 

AutoVue®, Iteris®,Vantage®, VantageViewTM, VersiCamTM, SafetyDirectTM and AbacusTM are among thetrademarks of Iteris, Inc. Any other trademarks or trade names mentionedherein are the property of their respective owners.

 

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**PART I. FINANCIAL INFORMATION**

**ITEM 1.  FINANCIAL STATEMENTS**

 

**Iteris, Inc.**

**UnauditedCondensed Consolidated Balance Sheets**

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

 
| ** **                                                                                                                                                            | ** ** | **June 30,** | ** ** | **March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                                                                                            | ** ** | **2010**          | ** ** | **2010**           | ** ** |
| **Assets**                                                                                                                                                            | ** ** | ** **        | ** ** | ** **         | ** ** |
| Current assets:                                                                                                                                                       |       |              |       |               |       |
| Cash and cash equivalents                                                                                                                                             |       | $                 | 11,676     |               | $          | 10,405 |   |
| Trade accounts receivable                                                                                                                                             |       | 11,599            |       | 11,311             |       |
| Costs in excess of billings on uncompleted  contracts                                                                                                                 |       | 4,176             |       | 3,871              |       |
| Inventories                                                                                                                                                           |       | 3,043             |       | 2,727              |       |
| Deferred income taxes                                                                                                                                                 |       | 4,526             |       | 4,993              |       |
| Prepaid expenses and other current assets                                                                                                                             |       | 686               |       | 623                |       |
| Total current assets                                                                                                                                                  |       | 35,706            |       | 33,930             |       |
| Property and equipment, net                                                                                                                                           |       | 2,407             |       | 2,550              |       |
| Deferred income taxes                                                                                                                                                 |       | 9,739             |       | 9,739              |       |
| Intangible assets, net                                                                                                                                                |       | 416               |       | 452                |       |
| Goodwill                                                                                                                                                              |       | 27,791            |       | 27,791             |       |
| Other assets                                                                                                                                                          |       | 215               |       | 200                |       |
| Total assets                                                                                                                                                          |       | $                 | 76,274     |               | $          | 74,662 |   |
|                                                                                                                                                                  |       |              |       |               |       |
| **Liabilities and stockholders’  equity**                                                                                                                        |       |              |       |               |       |
| Current liabilities:                                                                                                                                                  |       |              |       |               |       |
| Trade accounts payable                                                                                                                                                |       | $                 | 3,285      |               | $          | 2,492 |   |
| Accrued payroll and related expenses                                                                                                                                  |       | 3,173             |       | 2,709              |       |
| Accrued liabilities                                                                                                                                                   |       | 1,758             |       | 1,748              |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts                                                                                          |       | 2,190             |       | 2,105              |       |
| Current portion of long-term debt                                                                                                                                     |       | 2,324             |       | 2,324              |       |
| Total current liabilities                                                                                                                                             |       | 12,730            |       | 11,378             |       |
| Deferred rent                                                                                                                                                         |       | 1,308             |       | 1,386              |       |
| Unrecognized tax benefits                                                                                                                                             |       | 751               |       | 751                |       |
| Other non-current liabilities                                                                                                                                         |       | —            |       | 112                |       |
| Long-term debt                                                                                                                                                        |       | 2,512             |       | 2,969              |       |
| Total liabilities                                                                                                                                                     |       | 17,301            |       | 16,596             |       |
| Commitments and contingencies                                                                                                                                         |       |              |       |               |       |
| Stockholders’ equity:                                                                                                                                            |       |              |       |               |       |
| Common stock $0.10 par value, 70,000 shares  authorized, 34,332 and 34,318 shares issued and outstanding at June 30,  2010 and March 31, 2010, respectively |       | 3,433             |       | 3,432              |       |
| Additional paid-in capital                                                                                                                                            |       | 137,612           |       | 137,503            |       |
| Accumulated deficit                                                                                                                                                   |       | (82,072           | )          | (82,869            | )          |
| Total stockholders’ equity                                                                                                                                       |       | 58,973            |       | 58,066             |       |
| Total liabilities and stockholders’ equity                                                                                                                       |       | $                 | 76,274     |               | $          | 74,662 |   |

 

See accompanying notes.

 

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**Iteris, Inc.**

**Unaudited Condensed ConsolidatedStatements of Income**

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

 
| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **June 30,**      | ** ** |
| ** **                                | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Net sales and contract revenues:          |       |                   |       |   |   |
| Net sales                                 |       | $                      | 9,462      |   | $ | 6,933 |   |
| Contract revenues                         |       | 6,212                  |       | 7,701 |   |
| Total net sales and contract revenues     |       | 15,674                 |       | 14,634 |   |
| Costs of net sales and contract revenues: |       |                   |       |   |   |
| Cost of net sales                         |       | 4,520                  |       | 3,843 |   |
| Cost of contract revenues                 |       | 4,137                  |       | 5,209 |   |
| Gross profit                              |       | 7,017                  |       | 5,582 |   |
| Operating expenses:                       |       |                   |       |   |   |
| Selling, general and administrative       |       | 4,641                  |       | 4,253 |   |
| Research and development                  |       | 941                    |       | 964 |   |
| Amortization of intangible assets         |       | 36                     |       | 44 |   |
| Total operating expenses                  |       | 5,618                  |       | 5,261 |   |
| Operating income                          |       | 1,399                  |       | 321 |   |
| Non-operating income (expense):           |       |                   |       |   |   |
| Other income, net                         |       | 1                      |       | 19 |   |
| Interest expense, net                     |       | (40                    | )          | (86 | ) |
| Income before income taxes                |       | 1,360                  |       | 254 |   |
| Provision for income taxes                |       | (563                   | )          | (110 | ) |
| Net income                                |       | $                      | 797        |   | $ | 144 |   |
|                                      |       |                   |       |   |   |
| Earnings per share:                       |       |                   |       |   |   |
| Basic                                     |       | $                      | 0.02       |   | $ | 0.00 |   |
| Diluted                                   |       | $                      | 0.02       |   | $ | 0.00 |   |
| Weighted-average shares outstanding:      |       |                   |       |   |   |
| Basic                                     |       | 34,329                 |       | 34,192 |   |
| Diluted                                   |       | 34,692                 |       | 34,386 |   |

 

See accompanying notes.

 

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**Iteris, Inc.**

**UnauditedCondensed Consolidated Statements of Cash Flows**

**(In thousands)**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **June 30,**      | ** ** |
| ** **                                                                         | ** ** | **2010**               | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                                          | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                      | 797        |   | $ | 144 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                   |       |   |   |
| Change in deferred tax assets                                                      |       | 467                    |       | — |   |
| Depreciation of property and equipment                                             |       | 244                    |       | 256 |   |
| Stock-based compensation                                                           |       | 91                     |       | 89 |   |
| Amortization of intangible assets                                                  |       | 36                     |       | 44 |   |
| Changes in operating assets and liabilities:                                       |       |                   |       |   |   |
| Accounts receivable                                                                |       | (288                   | )          | 644 |   |
| Net costs and estimated earnings in excess of  billings                            |       | (220                   | )          | 159 |   |
| Inventories                                                                        |       | (316                   | )          | 503 |   |
| Prepaid expenses and other assets                                                  |       | (78                    | )          | (128 | ) |
| Accounts payable and accrued expenses                                              |       | 1,183                  |       | (1,690 | ) |
| Net cash provided by operating activities                                          |       | 1,916                  |       | 21 |   |
|                                                                               |       |                   |       |   |   |
| **Cash flows from investing  activities**                                          |       |                   |       |   |   |
| Purchases of property and equipment                                                |       | (101                   | )          | (42 | ) |
| Cash paid for business combination                                                 |       | (106                   | )          | (300 | ) |
| Net cash used in investing activities                                              |       | (207                   | )          | (342 | ) |
|                                                                               |       |                   |       |   |   |
| **Cash flows from financing  activities**                                          |       |                   |       |   |   |
| Borrowings on long-term debt                                                       |       | —                 |       | 750 |   |
| Payments on long-term debt                                                         |       | (457                   | )          | (889 | ) |
| Proceeds from stock option exercises                                               |       | 19                     |       | 72 |   |
| Net cash used in financing activities                                              |       | (438                   | )          | (67 | ) |
| Effect of exchange rate changes on cash                                            |       | —                 |       | 34 |   |
| Increase (decrease) in cash and cash equivalents                                   |       | 1,271                  |       | (354 | ) |
| Cash and cash equivalents at beginning of period                                   |       | 10,405                 |       | 6,372 |   |
| Cash and cash equivalents at end of period                                         |       | $                      | 11,676     |   | $ | 6,018 |   |
|                                                                               |       |                   |       |   |   |
| **Supplemental disclosure of  non-cash investing and financing activities:**       |       |                   |       |   |   |
| Liabilities incurred for business combination                                      |       | $                      | —     |   | $ | 218 |   |

 

See accompanying notes.

 

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**Iteris, Inc.**

**Notes to Unaudited CondensedConsolidated Financial Statements**

**June 30, 2010**

 

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

 

**Descriptionof Business**

 

Iteris, Inc.(including our subsidiary, referred to collectively in these consolidatedfinancial statements as “Iteris,” the “Company,” “we,” “our” and “us”)  is a leader in the traffic management marketfocused on the development and application of advanced technologies that reducetraffic congestion and improve the safety of surface transportation systemsinfrastructure. Additionally, we believe our products and services, inconjunction with sound traffic management, minimize the environmental imact oftraffic congestion. By combining outdoor image processing, traffic engineeringand information technology, we offer a broad range of IntelligentTransportation Systems (“ITS”) and driver safety solutions. Iteris wasoriginally incorporated in Delaware in 1987.

 

**Basisof Presentation**

 

Ourunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United States (“U.S.GAAP”) for interim financial information and with the instructions toSecurities and Exchange Commission (“SEC”) Form 10-Q and Article 10of SEC Regulation S-X. In the opinion of management, the accompanying unauditedcondensed consolidated financial statements contain all adjustments, consistingof normal recurring adjustments, necessary to present fairly the consolidatedfinancial position of Iteris as of June 30, 2010, the consolidated resultsof operations for the three months ended June 30, 2010 and 2009 and theconsolidated cash flows for the three months ended June 30, 2010 and 2009.Certain information and footnote disclosures normally included in financialstatements prepared in accordance with U.S. GAAP have been condensed or omittedpursuant to the rules and regulations of the SEC. The results ofoperations for the three months ended June 30, 2010 are not necessarilyindicative of those to be expected for future quarterly periods or the entirefiscal year. The accompanying unaudited condensed consolidated financialstatements should be read in conjunction with our Annual Report onForm 10-K for the fiscal year ended March 31, 2010, which was filedwith the SEC on May 21, 2010.

 

**Use of Estimates**

 

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

 

**Revenue Recognition**

 

*Net Sales*

 

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

 

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

 

We account for multiple-elementarrangements that consist only of software and software-related services inaccordance with industry-specific accounting guidance for software andsoftware-related transactions. For such transactions, revenue on arrangementsthat include multiple elements is allocated to each element based on therelative fair value of each element, and fair value is generally determined byVSOE. If we cannot objectively determine the fair value of any undeliveredelement included in such multiple-element 

 

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arrangements and the onlyundelivered element is post-contract customer support or maintenance, and VSOEof the fair value of such support or maintenance does not exist, revenue fromthe entire arrangement is recognized ratably over the support period. When thefair value of a delivered element has not been established, but VSOE of fairvalue exists for the undelivered elements, we use the residual method torecognize revenue if the fair value of all undelivered elements isdeterminable. Under the residual method, the fair value of the undeliveredelements is deferred and the remaining portion of the arrangement fee isallocated to the delivered elements and is recognized as revenue.

 

We also derive revenue from the provision of specificnon-recurring contract engineering services and royalties. Non-recurringcontract engineering revenues are recognized in the period in which the relatedservices are performed. Royalty revenues are recorded in the period in whichthe royalty is earned based on unit sales of certain of our products.Non-recurring contract engineering and royalty revenues are included in netsales in the accompanying unaudited condensed consolidated statements of incomeand totaled $141,000 and $248,000 for the three months ended June 30, 2010and 2009, respectively.

 

*Contract Revenues*

 

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

 

**Foreign Currency**

 

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

 

**Concentrationof Credit Risk**

 

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

 

Cash and cash equivalents consist primarily of demand depositsand money market funds maintained with several financial institutions. Depositsheld with banks may exceed the amount of insurance provided on such deposits.Generally, these deposits may be redeemed upon demand and are maintained withhigh credit quality financial institutions and therefore have minimal creditrisk.

 

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

 

**FairValues of Financial Instruments**

 

Thefair value of cash and cash equivalents, receivables, accounts payable andaccrued expenses approximate carrying value because of the short period of timeto maturity. The fair value of line of credit agreements and long-term debtapproximate carrying value because the related effective rates of interest approximatecurrent market rates available to us for debt with similar terms and similarremaining maturities.

 

**Cash and Cash Equivalents**

 

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

 

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**Allowance for Doubtful Accounts**

 

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

 

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

 

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

 

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

 

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

 

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

 

**Inventories**

 

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

 

**Property and Equipment**

 

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

 

**Goodwill and Long-Lived Assets**

 

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

 

Wealso evaluate long-lived assets for impairment which requires impairmentevaluation on long-lived assets used in operations when indicators ofimpairment are present.  Reviews areperformed to determine whether the carrying value of assets is impaired, basedon a comparison of undiscounted expected future cash flows to the carryingvalue of the related net assets.  If thiscomparison indicates that there is impairment, the impaired asset is writtendown to fair value, which is typically calculated using discounted expectedfuture cash flows and a discount rate based upon our weighted average cost ofcapital adjusted for risks associated with the related operations.  Impairment is based on the excess of thecarrying amount over the fair value of those assets.

 

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**Income Taxes**

 

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

 

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

 

**Stock-Based Compensation**

 

We record stock-based compensation in the unauditedconsolidated statements of income as an expense, based on the grant date fairvalues of our stock-based awards, whereby such fair values are amortized overthe requisite service period. The fair value of our common stock option awardsis estimated on the grant date using the Black-Scholes-Merton (“BSM”)option-pricing formula, which considers, among other factors, the expected lifeof the award and the expected volatility of our stock price.

 

**Researchand Development Expenditures**

 

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

 

**Shippingand Handling Costs**

 

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

 

**SalesTaxes**

 

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

 

**Warranty**

 

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

 

**Repairand Maintenance Costs**

 

We incur repair and maintenance costs in the normalcourse of business. Should the activity result in a permanent improvement toone of our leased facilities, the cost is capitalized as a leasehold improvementand amortized over its useful life or the remainder of the lease period,whichever is shorter. Non-permanent repair and maintenance costs are charged toexpense as incurred.

 

**Recent Accounting Pronouncements**

 

InOctober 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”) No. 2009-13, *Multiple-DeliverableRevenue Arrangements*(“ASU 2009-13”), which amends the existingmultiple-element revenue arrangements guidance currently included in AccountingStandards Codification (“ASC”) 605-25, *Revenue Recognition —Multiple Element Arrangements*. ASU 2009-13 provides for twosignificant changes to the existing multiple-element revenue arrangementsguidance. The first relates to the determination of when the individual deliverablesincluded in a multiple-element arrangement may be treated as separate units ofaccounting. The second change modifies the manner in which the transactionconsideration is allocated across the separately identified deliverables. Weadopted the amendments prescribed by ASU 2009-13 for our fiscal year beginningApril 1, 2010 and such adoption did not have a material impact on ourconsolidated financial statements.

 

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

 

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

 

**Inventories**

 

The following table presents details of our inventories:

 
| ** **             | ** ** | **June 30,**  | ** ** | **March 31,** | ** ** |
|------------------------|------------|--------------------|------------|--------------------|------------|
| ** **             | ** ** | **2010**           | ** ** | **2010**           | ** ** |
| ** **             | ** ** | **(In thousands)** | ** ** |
| Materials and supplies |       | $                  | 2,443      |               | $          | 2,292 |   |
| Work in process        |       | 72                 |       | 49                 |       |
| Finished goods         |       | 528                |       | 386                |       |
|                   |       | $                  | 3,043      |               | $          | 2,727 |   |

 

**Intangible Assets**

 

The following table presentsdetails of our intangible assets:

 
| ** **                                 | ** ** | **June 30, 2010**      | ** ** | **March 31, 2010**       | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                                 | ** ** | **(In thousands)**          | ** ** |
| Intangible assets subject to amortization: |       |                        |       |                          |       |   |   |   |   |
| Developed technology                       |       | $                           | 996        |                          | $          | (620 | ) | $ | 996 |   | $ | (595 | ) |
| Patents                                    |       | 317                         |       | (277                          | )          | 317 |   | (266 | ) |
| Total                                      |       | $                           | 1,313      |                          | $          | (897 | ) | $ | 1,313 |   | $ | (861 | ) |

 

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

 
| **Year Ending March 31:** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|
| **(In thousands)**             | ** ** | ** ** | ** ** |
| Remainder of 2011              |       | $          | 110        |   |
| 2012                           |       | 106        |       |
| 2013                           |       | 100        |       |
| 2014                           |       | 100        |       |
|                           |       | $          | 416        |   |

 

**Warranty Reserve Activity**

 

Thefollowing table presents activity related to the warranty reserve:

 
| ** **                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **June 30,**      | ** ** |
| ** **                         | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                         | ** ** | **(In thousands)**     | ** ** |
| Balance at beginning of period     |       | $                      | 468        |   | $ | 582 |   |
| Additions charged to cost of sales |       | 38                     |       | 52 |   |
| Warranty claims                    |       | (30                    | )          | (51 | ) |
| Balance at end of period           |       | $                      | 476        |   | $ | 583 |   |

 

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**Earnings Per Share**

 

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

 
| ** **                                                  | ** ** | **Three Months Ended**                        | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | **June 30,**                             | ** ** |
| ** **                                                  | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| ** **                                                  | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| Numerator:                                                  | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net Income                                                  |       | $                                             | 797        |   | $ | 144 |   |
|                                                        |       |                                          |       |   |   |
| Denominator:                                                |       |                                          |       |   |   |
| Weighted average common shares used in basic  computation   |       | 34,329                                        |       | 34,192 |   |
| Dilutive stock options                                      |       | 360                                           |       | 194 |   |
| Dilutive warrants                                           |       | 3                                             |       | — |   |
| Weighted average common shares used in diluted  computation |       | 34,692                                        |       | 34,386 |   |
|                                                        |       |                                          |       |   |   |
| Earnings per share:                                         |       |                                          |       |   |   |
| Basic                                                       |       | $                                             | 0.02       |   | $ | 0.00 |   |
| Diluted                                                     |       | $                                             | 0.02       |   | $ | 0.00 |   |

 

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

 
| ** **    | ** ** | **Three Months Ended**    | ** ** |
|---------------|------------|---------------------------|------------|
| ** **    | ** ** | **June 30,**         | ** ** |
| ** **    | ** ** | **2010**                  | ** ** | **2009** | ** ** |
| ** **    | ** ** | **(Shares in thousands)** | ** ** |
|          |       |                      |       |   |   |
| Stock options |       | 860                       |       | 2,583 |   |
| Warrants      |       | 321                       |       | 491 |   |

 

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

 

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

 

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

 

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

 

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

 

**Revolving Line of Credit**

 

In October 2008, we entered into a $19.5 millioncredit facility with California Bank & Trust, which provides for atwo-year revolving line of credit with borrowings of up to $12.0 million and a$7.5 million 48-month term note (discussed below). Interest on borrowed amountsunder the revolving line of credit are payable monthly at a rate equal to thecurrent stated prime rate (3.25% at June 30, 2010) up to the currentstated prime rate plus 0.50%, depending on aggregate deposit balancesmaintained at the bank in relation to the total loan commitment under thecredit facility. We are obligated to pay an unused line fee of 0.25% per annumapplied to the average unused portion of the revolving line of credit duringthe preceding month. The revolving line of credit does not contain any earlytermination fees and is secured by substantially all of our assets. As ofJune 30, 2010, no amounts were outstanding under the revolving line ofcredit portion of the facility.

 

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**Long-Term Debt — Bank Term Note**

 

Under our current credit facility, we may borrow up to$7.5 million in the form of a 48-month term note. As of June 30, 2010, we hadoutstanding borrowings of approximately $4.8 million under this term note.Principal payments under this term note are required to be repaid in 48 monthlyinstallments of $152,000 commencing on June 1, 2009. Additionally,beginning on November 1, 2009, and on November 1 of each yearthereafter, we are required to repay additional principal of up to $500,000,calculated based on certain financial measures, as further defined in theagreement. These additional principal payments effectively reduce the totalnumber of monthly installments necessary to repay the term note. As ofJune 30, 2010 and March 31, 2010, an additional $500,000 was includedin the current portion of the term note, representing the amount we estimatewill be due on November 1, 2010. Interest on the term note is payablemonthly at a rate equal to the current stated prime rate plus 0.50% up to thecurrent stated prime rate plus 1.00%, depending on aggregate deposit balancesmaintained at the bank in relation to the total loan commitment under thecredit facility. The term note contains no early termination fees and, alongwith the revolving line of credit under the same credit agreement, is securedby substantially all of our assets.

 

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

 

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

 
| ** **                 | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **June 30,**      | ** ** |
| ** **                 | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                 | ** ** | **(In thousands)**     | ** ** |
| Provision for income taxes |       | $                      | 563        |   | $ | 110 |   |
| Effective tax rate         |       | 41.4                   | %          | 43.3 | % |
|                            |            |                        |            |  |  |  |  |

 

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

 

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

 

**Litigationand Other Contingencies**

 

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

 

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

 

**RelatedParty Transaction**

 

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

 

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**7.****                                     ****Stockholders’Equity**

 

**Stock-BasedCompensation**

 

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

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **June 30,**      | ** ** |
| ** **                                  | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **(In thousands)**     | ** ** |
| Cost of net sales                           |       | $                      | 2          |   | $ | 2 |   |
| Cost of contract revenues                   |       | 8                      |       | 10 |   |
| Selling, general and administrative expense |       | 74                     |       | 71 |   |
| Research and development expense            |       | 7                      |       | 6 |   |
|                                        |       | $                      | 91         |   | $ | 89 |   |

 

At June 30, 2010, there was approximately $727,000of total unrecognized compensation expense related to unvested stock options.This expense is expected to be recognized over a weighted average period ofapproximately 2.6 years. If there are any modifications or cancellations of theunderlying unvested stock options, we may be required to accelerate, increaseor cancel any remaining unearned stock-based compensation expense. Futurestock-based compensation expense and unearned stock-based compensation willincrease to the extent that we issue additional stock options or otherstock-based awards.

 

**StockOptions**

 

A summary of activity in our stock option plans for thethree months ended June 30, 2010 is as follows:

 
| ** **                                 | ** ** | ** **         | ** ** | **Weighted-** | ** ** |
|--------------------------------------------|------------|--------------------|------------|---------------|------------|
| ** **                                 | ** ** | ** **         | ** ** | **Average**   | ** ** |
| ** **                                 | ** ** | **Number of**      | ** ** | **Exercise**  | ** ** |
| ** **                                 | ** ** | **Shares**         | ** ** | **Price**     | ** ** |
|                                       |       | **(In thousands)** |       |          |       |   |
| Options outstanding at March 31, 2010 |       | 3,218              |       | $             | 1.77       |   |
| Exercised                                  |       | (14                | )          | 1.39          |       |
| Expired                                    |       | (14                | )          | 1.80          |       |
| Options outstanding at June 30, 2010  |       | 3,190              |       | $             | 1.77       |   |

 

At June 30, 2010, there were 885,000 shares ofcommon stock available for grant under our 2007 Omnibus Incentive Plan.

 

Includedin the options outstanding at June 30, 2010 are currently exercisable optionsto purchase 769,000 shares of our common stock with an exercise price per shareof $1.19 that, if remaining unexercised, are scheduled to expire in September2011.

 

**CommonStock Warrants**

 

At June 30, 2010, there were outstandingwarrants  to purchase approximately336,000 shares of our common stock with a weighted average exercise price pershare of $3.56. All of the outstanding warrants were exercisable at June 30,2010 and had a weighted average remaining contractual life of approximately 0.6years.

 

In July 2010, warrants to purchase 75,000 shares of our common stock at  an exercise price per share of $5.00 expiredunexercised.

 

**8.****                                     ****BusinessSegment Information**

 

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

 

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The following table sets forth selected unauditedconsolidated financial information for our reportable segments for the threemonths ended June 30, 2010 and 2009:

 
| ** **                                 | ** ** | **Roadway  Sensors** | ** ** | **Vehicle  Sensors** | ** ** | **Transportation  Systems** | ** ** | **Total**  | ** ** |
|--------------------------------------------|------------|----------------------|------------|----------------------|------------|-----------------------------|------------|------------|------------|
| ** **                                 | ** ** | **(In thousands)**   | ** ** |
| **Three Months Ended June 30,  2010** | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Product revenue                            |       | $                    | 7,693      |                 | $          | 1,628                       |       | $          | —     |   | $ | 9,321 |   |
| Service and other revenue                  |       | —               |       | 141                  |       | 6,212                       |       | 6,353      |       |
| Stock-based compensation                   |       | 9                    |       | 7                    |       | 14                          |       | 30         |       |
| Depreciation and amortization              |       | 56                   |       | 21                   |       | 51                          |       | 128        |       |
| Segment income (loss)                      |       | 1,370                |       | (182                 | )          | 313                         |       | 1,501      |       |
| ** **                                 | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Three Months Ended June 30,  2009** |       |                 |       |                 |       |                        |       |       |       |
| Product revenue                            |       | $                    | 5,875      |                 | $          | 810                         |       | $          | —     |   | $ | 6,685 |   |
| Service and other revenue                  |       | —               |       | 248                  |       | 7,701                       |       | 7,949      |       |
| Stock-based compensation                   |       | 8                    |       | 8                    |       | 14                          |       | 30         |       |
| Depreciation and amortization              |       | 62                   |       | 22                   |       | 58                          |       | 142        |       |
| Segment income (loss)                      |       | 362                  |       | (506                 | )          | 534                         |       | 390        |       |

 

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

 
| ** **                            | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **June 30,**      | ** ** |
| ** **                            | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                            | ** ** | **(In thousands)**     | ** ** |
| **Segment Income:**                   |       |                   |       |   |   |
| Total income from reportable segments |       | $                      | 1,501      |   | $ | 390 |   |
| **Unallocated Amounts:**              |       |                   |       |   |   |
| Corporate and other expenses          |       | (66                    | )          | (25 | ) |
| Amortization of intangible assets     |       | (36                    | )          | (44 | ) |
| Other income, net                     |       | 1                      |       | 19 |   |
| Interest expense, net                 |       | (40                    | )          | (86 | ) |
| Income before income taxes            |       | $                      | 1,360      |   | $ | 254 |   |

 

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

 

*This report, including the following discussion and analysis, containsforward-looking statements (within the meaning of the Private SecuritiesLitigation Reform Act of 1995) that are based on our current expectations,estimates and projections about our business and our industry, and reflectmanagement’s beliefs and certain assumptions made by us based upon informationavailable to us as of the date of this report. When used in this report and theinformation incorporated herein by reference, the words “expect(s),” “feel(s),”“believe(s),” “should,” “will,” “may,” “anticipate(s),” “estimate(s)” andsimilar expressions or variations of these words are intended to identifyforward-looking statements. These forward-looking statements include, but arenot limited to, statements regarding our anticipated growth, sales, revenue,expenses, profits, capital needs, competition, development plans, andmanufacturing capabilities, the applications for and acceptance of our productsand services, and the status of our facilities and product development. Thesestatements are not guarantees of future performance and are subject to certainrisks and uncertainties that could cause our actual results to differmaterially from those projected. You should not place undue reliance on theseforward-looking statements that speak only as of the date hereof. We encourageyou to carefully review and consider the various disclosures made by us whichdescribe certain factors which could affect our business, including in* “*Risk Factors” set forth in Part II, Item 1A of this report,before deciding to invest in our company or to maintain or increase yourinvestment. We undertake no obligation to revise or update publicly anyforward-looking statement for any reason, including to reflect events orcircumstances after the date hereof or to reflect the occurrence ofunanticipated events.*

 

**Overview**

 

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

 

*Business Segments.*We currentlyoperate in three reportable segments: Roadway Sensors, Vehicle Sensors andTransportation Systems. The Roadway Sensors segment includes our Vantage,VersiCam and Pico vehicle detection systems for trafficintersection control, incident detection and certain highway traffic datacollection applications, as well as our Abacus family of products. The VehicleSensors segment includes our lane departure warning (“LDW”) products, includingour AutoVue LDW system, and is comprised of all of our activities related toin-vehicle safety. The Transportation Systems segment includes transportationengineering and consulting services, and the development of transportationmanagement and traveler information systems for the ITS industry.

 

Our Roadway Sensors segmentproduct line uses advanced image processing technology to capture and analyzevideo images through sophisticated algorithms, enabling vehicle detection andtransmission of both video images and data using various communicationtechnologies.

 

·                  Our Vantagevideo detection systems detect vehicle presence, count, speed and other trafficdata used in traffic management systems. Our Vantage systems give trafficmanagers the ability to mitigate roadway congestion by modifying traffic signaltiming or detecting incidents quickly.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**Critical Accounting Policies and Estimates**

 

Management’s Discussion andAnalysis of Financial Condition and Results of Operations is based on ourunaudited consolidated financial statements included herein, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and related disclosures of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. On an ongoing basis, weevaluate these estimates and assumptions, including those related to thecollectibility of accounts receivable, the valuation of inventories, therecoverability of long-lived assets and goodwill, the realizability of deferredtax assets, accounting for stock-based compensation, the valuation of equity instruments,warranty reserves and other contingencies. We base these estimates onhistorical experience and on various other factors that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. These estimates and assumptions bytheir nature involve risks and uncertainties, and may prove to be inaccurate.In the event that any of our estimates or assumptions are inaccurate in anymaterial respect, it could have a material adverse effect on our reportedamounts of assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.

 

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The accounting policies thataffect our more significant judgments and estimates used in the preparation ofour unaudited condensed consolidated financial statements are those relating torevenue recognition, accounts receivable, inventory, goodwill, warranty, incometaxes, and stock-based compensation. These policies are described in furtherdetail in our Annual Report on Form 10-K for fiscal 2010. There have been nosignificant changes in our critical accounting policies and estimates duringthe three months ended June 30, 2010 as compared to what was previouslydisclosed in our Annual Report on Form 10-K for fiscal 2010, except for ourrevenue recognition policy, which has been updated as follows:

 

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

 

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

 

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

 

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

 

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

 

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

 

**Recent Accounting Pronouncements**

 

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

 

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**Results ofOperations**

 

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

 
| ** **                                | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| ** **                                | ** ** | **June 30,**           | ** ** |
| ** **                                | ** ** | **2010**               | ** ** | **2009** | ** ** |
|                                      |       |                   |       |   |   |
| Net sales and contract revenues:          |       |                   |       |   |   |
| Net sales                                 |       | 60.4                   | %          | 47.4 | % |
| Contract revenues                         |       | 39.6                   |       | 52.6 |   |
| Total net sales and contract revenues     |       | 100.0                  | %          | 100.0 | % |
| Costs of net sales and contract revenues: |       |                   |       |   |   |
| Cost of net sales                         |       | 28.8                   |       | 26.3 |   |
| Cost of contract revenues                 |       | 26.4                   |       | 35.6 |   |
| Gross profit                              |       | 44.8                   |       | 38.1 |   |
| Operating expenses:                       |       |                   |       |   |   |
| Selling, general and administrative       |       | 29.6                   |       | 29.1 |   |
| Research and development                  |       | 6.0                    |       | 6.6 |   |
| Amortization of intangible assets         |       | 0.2                    |       | 0.3 |   |
| Total operating expenses                  |       | 35.8                   |       | 36.0 |   |
| Operating income                          |       | 8.9                    |       | 2.2 |   |
| Non-operating income (expense):           |       |                   |       |   |   |
| Other income, net                         |       | 0.0                    |       | 0.1 |   |
| Interest expense, net                     |       | (0.3                   | )          | (0.6 | ) |
| Income before income taxes                |       | 8.7                    |       | 1.7 |   |
| Provision for income taxes                |       | (3.6                   | )          | (0.8 | ) |
| Net income                                |       | 5.1                    | %          | 1.0 | % |

 

**Analysis of Quarterly Results ofOperations**

 

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

 

The following table presentsdetails of our net sales and contract revenues for the three months endedJune 30, 2010 and 2009:

 
| ** **                            | ** ** | **Three Months Ended**                 | ** ** | ** **   | ** ** | ** **     | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                            | ** ** | **June 30,**                           | ** ** | **Increase** | ** ** | **%**          | ** ** |
| ** **                            | ** ** | **2010**                               | ** ** | **2009**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                            | ** ** | **(In thousands, except percentages)** | ** ** |
| Roadway sensors                       |       | $                                      | 7,693      |         | $          | 5,875          |       | $ | 1,818 |   | 30.9 | % |
| Vehicle sensors                       |       | 1,769                                  |       | 1,058        |       | 711            |       | 67.2 |   |
| Net sales                             |       | 9,462                                  |       | 6,933        |       | 2,529          |       | 36.5 |   |
| Contract revenues                     |       | 6,212                                  |       | 7,701        |       | (1,489         | )          | (19.3 | ) |
| Total net sales and contract revenues |       | $                                      | 15,674     |         | $          | 14,634         |       | $ | 1,040 |   | 7.1 |   |

 

We have historically had adiverse customer base. For the three months ended June 30, 2010, no individualcustomer represented greater than 10% of our total net sales and contract revenues.In the corresponding period in the prior fiscal year, one individual customeraccounted for approximately 12.1% of our total net sales and contract revenues.

 

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*Roadway Sensors*

 

The increase in RoadwaySensors net sales for the three months ended June 30, 2010 as compared tothe corresponding period in the prior year was driven by strong domestic salesvolumes in both our direct and dealer markets. In the current period, we sawparticular strength in certain of our newer product lines such as VersiCam andAbacus. In the prior year period, we experienced significantly lower salesprimarily as a result of the downturn in the overall economy, which broughtdeclines in commercial and residential construction, reductions and delays inspending on infrastructure projects and government budgetary pressures.

 

*Vehicle Sensors*

 

Vehicle Sensors net saleswere primarily made up of sales of our LDW systems to the heavy truck market,which aggregated approximately $1.6 million and $810,000 for the three monthsended June 30, 2010 and 2009, respectively. In the prior year quarter endedJune 30, 2009, we experienced a significant slowdown in overall LDW unitshipments to each of our key markets, driven largely by the weakness in theU.S. and worldwide economy at that time. Comparatively, in the current quarterwe saw stronger shipments, particularly to our foreign OEM customers in Europeand Japan, as well as our domestic truck fleet customers. We remain cautious inthe outlook for the remainder of our current fiscal year. We anticipate thatVehicle Sensors unit sales in future periods could be adversely impacted by,among other factors, slower than expected adoption rates of our LDW systemacross each of our target markets and the continuing uncertainty in the globaleconomic environment. Additionally, future unit sales of LDW systems and unitpricing could be adversely impacted as a result of increased competition inthis market.

 

Also included in VehicleSensors net sales are revenues from contract engineering services and royaltyrevenues in the passenger car market that are derived from our strategicrelationship with Valeo, which aggregated approximately $141,000 and $248,000for the three months ended June 30, 2010 and 2009, respectively. The decline inthe current fiscal year continues to reflect decreases in contract engineeringservices provided to Valeo as the pertinent engineering development activitieshave generally reached maturity for the related vehicle platforms thatcurrently incorporate our LDW system. Our LDW systems are currently offered asan option on four Infiniti models. While Valeo is promoting our LDW systems toother passenger car OEMs, we cannot assure you that Valeo will be successful inthese efforts.

 

*Contract Revenues*

 

Contract revenues areprimarily dependent upon the continued availability of funding at both thestate and federal levels from the various departments of transportation. Forthe three months ended June 30, 2010, our contract revenues decreasedcompared to the corresponding period in the prior year due primarily to delaysor reductions in funding for certain of our projects. Likewise, in the prioryear period, we experienced higher revenues from several large contracts whichcontained higher than usual amounts of sub-consulting content. In the future,we plan to continue to pursue large contracts that may contain significantsub-consulting content, which will likely contribute to variability in thetiming and amount of our contract revenues from period to period.

 

*GrossProfit*.  The following table presents details of our gross profit forthe three months ended June 30, 2010 and 2009:

 
| ** **                                                          | ** ** | **Three Months Ended**                 | ** ** | ** ** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                                                          | ** ** | **June 30,**                           | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                                                          | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Total gross profit                                                  |       | $                                      | 7,017      |       | $          | 5,582        |       | $ | 1,435 |   | 25.7 | % |
| Total gross profit as a % of total net sales and contract  revenues |       | 44.8                                   | %          | 38.1       | %          |         |       |   |   |
| Gross profit as a % of net sales                                    |       | 52.2                                   | %          | 44.6       | %          | ** **   |       |   |   |
| Gross profit as a % of contract revenues                            |       | 33.4                                   | %          | 32.4       | %          |         |       |   |   |
|                                                                     |            |                                        |            |            |            |              |            |  |  |  |  |  |

 

The increase in our totalgross profit as a percent of total net sales and contract revenues for thethree months ended June 30, 2010 as compared to the corresponding periodin the prior year was primarily the result of our mix, whereby product netsales represents approximately 60% of our total net sales and contract revenuesin the current period as compared to only 47% in the prior year period. Ourproduct net sales generally carry higher margins than our contract revenuesderived from our consulting services.

 

The increase in gross profitas a percent of net sales (“gross margin”) for the three months endedJune 30, 2010 as compared to the corresponding period in the prior yearwas primarily a result of higher margins in Roadway Sensors during the currentquarter, driven by our customer mix and lower costs for certain key materials.We generally enjoy higher gross margins on direct sales as compared to dealerand aftermarket sales. In Vehicle Sensors, we also saw significant improvementin our year over year gross 

 

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margins as a result ofhigher sales levels in the current period which provided for improved overheadabsorption. Additionally, in the prior year period, we recorded certainestimates for excess and obsolete inventory in our Vehicle Sensors segment,which adversely affected our gross margins in that period. Gross profit as apercentage of net sales can fluctuate in any specific quarter or year based on,among other factors, customer and product mix, competitive pricingrequirements, product warranty costs and provisions for excess and obsoleteinventories, as well as possible shifts of engineering resources fromdevelopment activities to sustaining activities, which we record as cost ofgoods sold.

 

We recognize contractrevenues and related gross profit using percentage of completion contractaccounting, and the underlying mix of contract activity affects the relatedgross profit recognized in any given period. The slight increase in grossprofit as a percent of contract revenues for the three months endedJune 30, 2010 compared to the corresponding period in the prior year wasprimarily due to a contract mix weighted more toward higher margin contracts inthe current quarter. As discussed above, a higher portion of our contractrevenues in the three months ended June 30, 2009 were made up of sub-consultantcontent, which generally carry lower margins. We expect the variability andrelated timing of sub-consulting content in our Transportation Systemscontracts in future periods to continue to cause fluctuations in this segment’sgross margins from period to period.

 

*Selling,General and Administrative Expense*.  The following tablepresents selling, general and administrative expense for the three months endedJune 30, 2010 and 2009:

 
| ** **                          | ** ** | **Three Months Ended**                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **    | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|------------------------|------------|------------|------------|---------------|------------|
| ** **                          | ** ** | **June 30, 2010**                      | ** ** | **June 30, 2009**      | ** ** | ** ** | ** ** | ** **    | ** ** |
| ** **                          | ** ** | ** **                             | ** ** | **% of Net**           | ** ** | ** ** | ** ** | **% of Net**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                             | ** ** | **Sales and**          | ** ** | ** ** | ** ** | **Sales and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | ** **                             | ** ** | **Contract**           | ** ** | ** ** | ** ** | **Contract**  | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                          | ** ** | **Amount**                             | ** ** | **Revenues**           | ** ** | **Amount** | ** ** | **Revenues**  | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Salary and personnel-related        |       | $                                      | 3,239      |                   | 20.7       | %          | $          | 2,887         |       | 19.7 | % | $ | 352 |   | 12.2 | % |
| Facilities, insurance and supplies  |       | 643                                    |       | 4.1                    |       | 595        |       | 4.1           |       | 48 |   | 8.1 |   |
| Professional and outside services   |       | 418                                    |       | 2.7                    |       | 295        |       | 2.0           |       | 123 |   | 41.7 |   |
| Travel and conferences              |       | 410                                    |       | 2.6                    |       | 345        |       | 2.4           |       | 65 |   | 18.8 |   |
| Other                               |       | (69                                    | )          | -0.4                   |       | 131        |       | 0.9           |       | (200 | ) | (152.7 | ) |
| Selling, general and administrative |       | $                                      | 4,641      |                   | 29.6       | %          | $          | 4,253         |       | 29.1 | % | $ | 388 |   | 9.1 |   |

 

The increase in selling,general and administrative expense for the three months ended June 30,2010 compared to the corresponding period in the prior year was primarily dueto higher selling and commission-related expenses for our Roadway Sensorsand Vehicle Sensors segments, as total net sales for both segments collectivelyincreased approximately 36% from the prior year quarter. We also saw a shiftfrom cost of sales to sales and marketing of certain of our headcount expensesin our Transportation Systems segment in the current period commensurate withthe overall decline in this segment’s revenues as discussed above and thereallocation of existing personnel. As compared to the prior year quarter, wealso incurred additional consulting and outside services expenses in ourVehicle Sensors segment related to market research and certain other sales andmarketing activities. Additionally, in the current quarter, we realizedapproximately $200,000 in net reversals of previously recorded bad debt expense(included in the “Other” category in the table above) as a result of collectingcertain large accounts receivable balances. In prior periods, we had recordedan estimated allowance for doubtful accounts against these receivables giventhe uncertainty of collection at that time. In the future, our operatingresults in any given period may be favorably or adversely impacted as a resultof our estimates of the realization of our accounts receivable.

 

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*Researchand Development Expense*.  The following table presents researchand development expense for the three months ended June 30, 2010 and 2009:

 
| ** **                           | ** ** | **Three Months Ended**                 | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **    | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|------------------------|------------|------------|------------|---------------|------------|
| ** **                           | ** ** | **June 30, 2010**                      | ** ** | **June 30, 2009**      | ** ** | ** ** | ** ** | ** **    | ** ** |
| ** **                           | ** ** | ** **                             | ** ** | **% of Net**           | ** ** | ** ** | ** ** | **% of Net**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** ** | **Sales and**          | ** ** | ** ** | ** ** | **Sales and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** ** | **Contract**           | ** ** | ** ** | ** ** | **Contract**  | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **Amount**                             | ** ** | **Revenues**           | ** ** | **Amount** | ** ** | **Revenues**  | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(In thousands, except percentages)** | ** ** |
| Salary and personnel-related         |       | $                                      | 620        |                   | 4.0        | %          | $          | 683           |       | 4.7 | % | $ | (63 | ) | (9.2 | )% |
| Facilities, development and supplies |       | 274                                    |       | 1.7                    |       | 236        |       | 1.6           |       | 38 |   | 16.1 |   |
| Other                                |       | 47                                     |       | 0.3                    |       | 45         |       | 0.3           |       | 2 |   | 4.4 |   |
| Research and development             |       | $                                      | 941        |                   | 6.0        | %          | $          | 964           |       | 6.6 | % | $ | (23 | ) | (2.4 | ) |

 

Our total research anddevelopment expenses in the three months ended June 30, 2010 were largelyconsistent with the corresponding period in the prior year. We currently expectour total research and development expenditures for the current fiscal yearwill be flat to slightly higher when compared to the prior fiscal year.

 

*Interest Expense, Net.*   Net interest expense of $40,000 for thethree months ended June 30, 2010 was lower than the $86,000 for the threemonths ended June 30, 2009 primarily due to the overall lower level ofborrowings in the current fiscal year, as we continue to make monthly principalpayments on our term note. As a result, we anticipate our interest expense willcontinue to decline for the remainder of the fiscal year ending March 31, 2011.See Liquidity and Capital Resources below for additional details on ourborrowings.

 

*Income**Taxes*.  The following table presents our provision for income taxes forthe three months ended June 30, 2010 and 2009:

 
| ** **                 | ** ** | **Three Months Ended**                 | ** ** | ** ** | ** ** | ** **   | ** ** |
|----------------------------|------------|----------------------------------------|------------|------------|------------|--------------|------------|
| ** **                 | ** ** | **June 30,**                           | ** ** | ** ** | ** ** | **%**        | ** ** |
| ** **                 | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(In thousands, except percentages)** | ** ** |
| Provision for income taxes |       | $                                      | 563        |       | $          | 110          |       | $ | 453 |   | 412 | % |
| Effective tax rate         |       | 41.4                                   | %          | 43.3       | %          |         |       |   |   |
|                            |            |                                        |            |            |            |              |            |  |  |  |  |  |

 

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

 

**Liquidity and Capital Resources**

 

*Cash Flows*

 

We have historicallyfinanced our operations with a combination of cash flows from operations, borrowingsunder credit facilities and the sale of equity securities. We currently rely oncash flows from operations and the availability of borrowings on a line ofcredit facility to fund our operations, which we believe to be sufficient tofund our operations for at least the next twelve months. However, we may needor choose to raise additional capital to fund potential future acquisitions andour future growth. We may raise such funds by selling equity or debt securitiesto the public or to selected investors, or by borrowing money from financialinstitutions. If we raise additional funds by issuing equity or convertibledebt securities, the ownership percentage of existing stockholders would likelybe reduced.

 

At June 30, 2010, wehad $23.0 million in working capital, which included no borrowings on our $12.0million line of credit and $11.7 million in cash and cash equivalents. Thiscompares to working capital of $22.6 million at March 31, 2010, whichincluded no borrowings on our line of credit and $10.4 million in cash and cashequivalents.

 

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The following tablesummarizes our cash flows for the three months ended June 30, 2010 and 2009:

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **June 30,**           | ** ** |
| ** **                          | ** ** | **2010**               | ** ** | **2009** | ** ** |
| ** **                          | ** ** | **(In thousands)**     | ** ** |
| **Net cash provided by (used in):** |       |                   |       |   |   |
| Operating activities                |       | $                      | 1,916      |   | $ | 21 |   |
| Investing activities                |       | (207                   | )          | (342 | ) |
| Financing activities                |       | (438                   | )          | (67 | ) |
|                                     |            |                        |            |  |  |  |  |

 

*Operating Activities. *Cash provided by ouroperations for the three months ended June 30, 2010 was primarily the result of(i) our net income of $797,000 during the current period;(ii) $838,000 in non-cash items within the statement of income, primarilyadjustments to our deferred tax assets of $467,000 and depreciation expense of$244,000; and (iii) $281,000 in cash resulting from changes in ouroperating assets and liabilities during the period. Cash provided by operatingactivities during the three months ended June 30, 2009 was primarily the resultof our net income during that period of $144,000, along with $389,000 innon-cash items within the statement of income, primarily depreciation andstock-based compensation expense. These cash inflows were substantially offsetby $512,000 in net cash used by changes in operating assets and liabilitiesduring the period.

 

*Investing Activities. *Cash used in our investingactivities for the three months ended June 30, 2010 consisted of (i) $101,000for purchases of property and equipment and (ii) $106,000 representing thefirst anniversary payment for  theacquisition of certain assets of Hamilton Signal. Cash used in investingactivities for the three months ended June 30, 2009 consisted of purchases ofproperty and equipment of $42,000 as well as $300,000 used for the acquisitionof Hamilton Signal. In April 2011, we expect to make the final payment of$112,000 related to the Hamilton Signal acquisition.

 

*Financing Activities. *Net cash used in financingactivities during the three months ended June 30, 2010 was the result ofpayments on our long-term debt of $457,000. These payments were partiallyoffset during the period by $19,000 in proceeds received from the exercise ofoutstanding stock options to purchase shares of our common stock. During thethree months ended June 30, 2009, cash used in financing activities was theresult of net payments on our long-term debt of $139,000, partially offset by$72,000 in proceeds from the exercise of outstanding stock options to purchaseshares of our common stock.

 

*Borrowings*

 

In October 2008, we entered into a $19.5 millioncredit facility with California Bank & Trust, which provides for atwo-year revolving line of credit with borrowings of up to $12.0 million and a$7.5 million 48-month term note (discussed below). Interest on borrowed amountsunder the revolving line of credit are payable monthly at a rate equal to thecurrent stated prime rate (3.25% at June 30, 2010) up to the currentstated prime rate plus 0.50%, depending on aggregate deposit balancesmaintained at the bank in relation to the total loan commitment under thecredit facility. We are obligated to pay an unused line fee of 0.25% per annumapplied to the average unused portion of the revolving line of credit duringthe preceding month. The revolving line of credit does not contain any earlytermination fees and is secured by substantially all of our assets. As ofJune 30, 2010, no amounts were outstanding under the revolving line ofcredit portion of the facility. Availability under this line of credit may bereduced or otherwise limited as a result of our obligations to comply withcertain financial covenants, as described further below.

 

As of June 30, 2010, we had outstanding borrowingsof approximately $4.8 million under the term note included in our creditfacility. Principal payments under this term note are required to be repaid in48 monthly installments of $152,000 commencing on June 1, 2009.Additionally, beginning on November 1, 2009, and on November 1 ofeach year thereafter, we are required to repay additional principal of up to$500,000, calculated based on certain financial measures, as further defined inthe loan agreement. These additional principal payments effectively reduce thetotal number of monthly installments necessary to repay the term note. Intereston the term note is payable monthly at a rate equal to the current stated primerate plus 0.50% up to the current stated prime rate plus 1.00%, depending onaggregate deposit balances maintained at the bank in relation to the total loancommitment under the credit facility. The term note contains no earlytermination fees and, along with our revolving line of credit discussed above,is secured by substantially all of our assets.

 

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

 

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**Off BalanceSheet Arrangements**

 

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

 

**Seasonality**

 

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

 

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

 

**InterestRate Risk**

 

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

 

**ForeignCurrency Risk**

 

Todate, a small portion of our net sales have been denominated in Euros. Gains orlosses from foreign currency remeasurement are included in other income in ourconsolidated financial statements and to date have not been significant. We donot believe we are currently exposed to any material risk of loss from currencyexchange fluctuations. We do not currently purchase derivative financialinstruments to hedge foreign currency exchange risk, but may do so in thefuture.

 

**ITEM 4T.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls andProcedures**

 

As of the end of the period coveredby this report, we carried out an evaluation, under the supervision and withthe participation of our management, including our Chief Executive Officer andour Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures, as such term is defined in ExchangeAct Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, theChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the Securities and Exchange Commission’s rules andforms and are effective in ensuring that information required to be disclosedby us in the reports that we file or submit under the Exchange Act isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating the disclosurecontrols and procedures, our management recognized that any controls and procedures,no matter how well designed and operated, can provide only reasonable assuranceof achieving the desired control objectives. Our management necessarily appliedits judgment in evaluating the cost-benefit relationship of such controls andprocedures.

 

**Changes in Internal Controls**

 

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

 

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**InherentLimitations on Internal Control**

 

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

 

**PART II. OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

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

 

**ITEM 1A.  RISK FACTORS**

 

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

 

**The economic slowdown has reduced and delayed government funding fortransportation infrastructure projects and initiatives, decreased availabilityof financial capital for our customers and has adversely impacted real estatedevelopment, all of which is adversely impacting our net sales and could impactour contract revenues.**Decreased consumer spending, the failure ofcertain financial institutions and businesses, concerns about the availabilityand cost of credit, and reduced corporate profits and capital spending haveresulted in a downturn in worldwide economic conditions, as well as budgetaryshortfalls increasingly present at all levels of government. These unfavorableeconomic conditions are having a negative impact on customer orders andgovernment funding of infrastructure projects incorporating our products andservices. Such factors have and may continue to result in cancellations andrescheduling of backlog and customer orders. In addition, the recent decline inthe U.S. real estate market, particularly in new home and commercialconstruction, has adversely impacted new road construction and in the priorfiscal year resulted in flat or declining Roadway Sensor and Vehicle Sensor netsales and also adversely impacted Transportation Systems contract revenues. Anyof the foregoing economic conditions may adversely affect our net sales andcontract revenues in future periods and make it extremely difficult for ourcustomers, our suppliers and us to accurately forecast and plan future businessactivities. Additionally, there continues to be uncertainties regarding theimpact of the federal stimulus package and the fact that the accessibility offunds is taking longer than originally anticipated, as well as a delay in thepassage of a new Federal Highway Bill. If such conditions continue or worsen,our business, financial condition and results of operations could be materiallyand adversely affected.

 

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

 

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

 

·                                          long purchase cycles orapproval processes;

 

·                                          competitive bidding andqualification requirements;

 

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·                                          the impact of internationalconflicts;

 

·                                          performance bondrequirements;

 

·                                          changes in governmentpolicies and political agendas;

 

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

 

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

 

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

 

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

 

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

 

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

 

**The markets in which we operate are highly competitive and have manymore established competitors, which could adversely affect our sales or themarket acceptance of our products.**We compete with numerousother companies in our target markets including, but not limited to, large,multinational corporations, which include tier-one automotive suppliers, andmany smaller regional engineering firms.

 

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

 

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

 

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

 

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

 

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

 

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

 

·                                          the failure to retain orintegrate key acquired personnel;

 

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

 

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

 

·                                          the incurrence of unforeseenobligations or liabilities;

 

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

 

·                                          increased interest expenseand amortization of acquired intangible assets.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**Our failure to successfully bid on new contracts and renew existingcontracts could reduce our revenues and profits.**Our businessdepends on our ability to successfully bid on new contracts and renew existingcontracts with private and public sector customers. Contract proposals andnegotiations are complex and frequently involve a lengthy bidding and selectionprocess, which are affected by a number of factors, such as market conditions,financing arrangements and required governmental approvals. For example, acustomer may require us to provide a surety bond or letter of credit to protectthe client should we fail to perform under the terms of the contract. Ifnegative market conditions arise, or if we fail to secure adequate financialarrangements or the required governmental approval, we may not be able topursue particular projects, which could adversely reduce or eliminate ourprofitability.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                                          rapid technologicaladvances;

 

·                                          downward price pressures inthe marketplace as technologies mature;

 

·                                          changes in customerrequirements;

 

·                                          additional qualificationrequirements related to new products or components;

 

·                                          frequent new productintroductions and enhancements;

 

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

 

·                                          evolving industry standardsand changes in the regulatory environment.

 

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

 

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

 

·                                          currency fluctuations andrestrictions;

 

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

 

·                                          longer accounts receivablepayment cycles;

 

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

 

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

 

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

 

·                                          difficulties in managing andstaffing international operations;

 

·                                          potentially adverse taxconsequences; and

 

·                                          reduced protection forintellectual property rights in some countries.

 

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

 

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

 

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

 

In July 2010, Congresspassed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which wassubsequently signed into law. Included in the act is a provision thatpermanently exempts small public companies that qualify as either aNon-Accelerated Filer or Smaller Reporting Company from the auditor attestationrequirement of Section 404(b) of the Sarbanes-Oxley Act of 2002. Forour fiscal year ending March 31, 2011, we currently expect to be exemptfrom such requirement; however, to the extent we do not qualify as aNon-Accelerated Filer or Smaller Reporting Company in subsequent fiscal years,we will be subject to such auditor attestation requirement. In such an event,we may not be able to complete the work required for such attestation on atimely basis, and even if we timely complete such requirements, our independentregistered public accounting firm may still conclude that our internal controlsover financial reporting are not effective.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                                          our ability tocontrol costs;

 

·                                          our ability toraise additional capital;

 

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

 

·                                          seasonality dueto winter weather conditions;

 

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

 

·                                          marketacceptance of the products incorporating our technologies and products;

 

·                                          theintroduction of new products by competitors;

 

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

 

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

 

·                                          the effects oftechnological changes in our target markets;

 

·                                          the amount ofour backlog at any given time;

 

·                                          the nature ofour government contracts;

 

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

 

·                                          risks anduncertainties associated with our international business;

 

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

 

·                                          generaleconomic and political conditions; and

 

·                                          internationalconflicts and acts of terrorism.

 

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

 

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

 

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

 

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

 

**We may need to raise additional capital in the future, whichmay not be available on terms acceptable to us, or at all.**  We have historically experienced volatilityin our our earnings and cash flows from operations from year to year. Althoughwe entered into a $19.5 million credit facility, effective October 2008,should we have an event of default, which includes, among other things, afailure to meet certain financial covenants and a material adverse change inthe business, the bank could choose to limit or take away our ability to borrowthese or any funds. Should this occur, or if the credit markets further tightenor our business declines, we may need or choose to raise additional capital torepay indebtedness, or pursue acquisitions or to expand our operations. Such additional capital may be raised throughbank borrowings, or other debt or equity financings. We cannot assure you thatany additional capital will be available on a timely basis, on acceptableterms, or at all, and such additional financing may result in further dilutionto our stockholders.

 

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

 

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

 

·                                          our ability to controlcosts;

 

·                                          the supply of key componentsfor our products;

 

·                                          our ability to increaserevenue and net income;

 

·                                          increased research anddevelopment expenses and sales and marketing expenses;

 

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

 

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

 

·                                          potential acquisitions ofbusinesses and product lines;

 

·                                          our relationships withcustomers and suppliers;

 

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

 

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

 

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

 

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

 

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

 

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

 

·                                          quarterlyvariations in operating results;

 

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

 

·                                          our ability toraise additional capital;

 

·                                          shortagesannounced by suppliers;

 

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

 

·                                          transitions tonew products or product enhancements;

 

·                                          acquisitions ofbusinesses, products or technologies;

 

·                                          the impact ofany litigation;

 

·                                          changes ininvestor perceptions;

 

·                                          governmentfunding, political agendas and other budgetary constraints;

 

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

 

·                                          internationalconflicts, political unrest and acts of terrorism.

 

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

 

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

 

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

 

None.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

 

None.

 

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

 

**ITEM 5.  OTHER INFORMATION**

 

**10b5-1Plans**

 

OnJuly 27, 2010, two of our executive officers, James S. Miele and Greg McKhann,entered into stock selling plans pursuant to Rule 10b5-1 promulgated under theSecurities Exchange Act of 1934, as amended. Mr. Miele’s plan coversthe sale over the next six months of up to an aggregate of 40,000 shares issuable uponexercise of a stock option held by him, which expires on September 26,2011. Mr. Miele’s previous 10b5-1 plan which covered these optionshares expired on July 15, 2010. Mr. McKhann has authorized thesale over the next six months of up to an aggregate of 71,632 sharesof our common stock under his plan. The shares covered by theabove-described 10b5-1 plans will be sold if the price per shareof our common stock reaches the amounts designated in theapplicable plan.

 

**EmploymentAgreements**

 

OnJuly 27, 2010, we entered into a letter agreement as well as a change incontrol agreement with Abbas Mohaddes, our Chief Executive Officer. Theletter agreement provides for salary continuation payments for 12 monthsfollowing termination and payment of 50% of his target bonus for the applicableyear, payable at the end of the 12 month salary continuation period, in theevent that Mr. Mohaddes is terminated without cause (as defined in theletter agreement) within three years after the effective date of theagreement. If his employment is terminated as a result of death ordisability, then no salary continuation or other severance payments will bemade but the vesting of any options, restricted stock or other similar awardsthen held by him will be accelerated by one year. The letter agreementalso provides that Mr. Mohaddes will be granted a restricted stock unitaward covering 50,000 shares of our common stock, which award will vest overfour years. The change in control agreement provides for a lump sumpayment of one year’s base pay and 50% of his target bonus for the year in theevent of an involuntary termination (as defined in the change in controlagreement) of Mr. Mohaddes’ employment in connection with or within 12months after a change in control, except that such payment will be reduced to50% of the annual base pay and no bonus if the involuntary termination is dueto his voluntary resignation which does not occur within the first six monthsafter the change in control. Mr. Mohaddes will also be entitled toreceive reimbursement for the cost of COBRA coverage for a period of up to oneyear following any involuntary termination of his employment.  The changein control agreement terminates on the fifth anniversary of the date of theagreement, unless earlier terminated in accordance therewith.  No amountswill be payable and no acceleration of the vesting of any options or equitybased awards will occur under the letter agreement in the event of atermination of Mr. Mohaddes’ employment after a change in control; after achange in control, the change in control agreement will determine whether ornot Mr. Mohaddes will be entitled to any payments or benefits, and theamount of any payments or benefits, in the event of the termination of hisemployment.

 

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**ITEM 6.  EXHIBITS**

 

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

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                               | ** ** | **Where Located**                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Restated  Certificate of Incorporation of the registrant                                                                                      | * *   | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2009 as filed with the SEC on October 30, 2009*  |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.2                 |       | Bylaws  of registrant, as amended                                                                                                             | * *   | *Exhibit 4.2  to the registrant’s Registration Statement on Form S-1 (Reg.  No. 033-67932) as filed with the SEC on July 6, 1993*                     |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.3                 |       | Certificates  of Amendment to Bylaws of the registrant dated April 24, 1998 and  August 10, 2001                                    | * *   | *Exhibit 3.4  to the registrant’s Annual Report on Form 10-K/A for the year ended  March 31, 2003 as filed with the SEC on July 29, 2003*             |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.4                 |       | Certificate  of Amendment to Bylaws of registrant dated September 9, 2004                                                                | * *   | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2004 as filed with the SEC on November 15, 2004* |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 3.5                 |       | Certificate  of Amendment to Bylaws of registrant dated September 16, 2005                                                               | * *   | *Exhibit 3.5  to the registrant’s Annual Report on Form 10-K for the year ended  March 31, 2007 as filed with the SEC on June 21, 2007*               |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.6                 |       | Certificate  of Amendment to Bylaws of registrant dated December 7, 2007                                                                 | * *   | *Exhibit 3.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  December 13, 2007*                                                  |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 3.7                 |       | Certificate  of Amendment to Bylaws of registrant, effective August 20, 2009                                                             | * *   | *Exhibit 3.3  to the registrant’s Current Report on Form 8-K as filed with the SEC on  August 21, 2009*                                                    |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 4.1                 |       | Rights  Agreement dated August 20, 2009 between the registrant and Computershare  Trust Company, N.A., including exhibits thereto        | * *   | *Exhibit 4.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  August 21, 2009*                                                    |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 10.1                |       | Letter  Agreement dated July 27, 2010 by and between the registrant and Abbas  Mohaddes                                                       |       | *Filed  herewith*                                                                                                                                                              |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 10.2                |       | Change  in Control Agreement dated July 27, 2010 by and between the registrant and  Abbas Mohaddes                                            |       | *Filed  herewith*                                                                                                                                                              |
|                |       |                                                                                                                                          |       | * *                                                                                                                                                                       |
| 10.3                |       | Form  of Restricted Stock Unit Award Agreement under the 2007 Omnibus Incentive  Plan                                                         |       | *Filed  herewith*                                                                                                                                                              |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 31.1                |       | Certification  of the Principal Executive Officer, as required pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                | * *   | *Filed  herewith*                                                                                                                                                              |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 31.2                |       | Certification  of the Principal Financial and Accounting Officer, as required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 | * *   | *Filed  herewith*                                                                                                                                                              |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 32.1                |       | Certification  of the Chief Executive Officer, as required pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                    | * *   | *Filed  herewith*                                                                                                                                                              |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 32.2                |       | Certification  of the Chief Financial Officer, as required pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                    | * *   | *Filed  herewith*                                                                                                                                                              |

 

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**SIGNATURES**

 

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

 
| Dated:  July 27, 2010 | ITERIS, INC. |
|----------------------------|-------------------|
|                       | (Registrant)      |
|                       |              |
|                       | By                | /S/ ABBAS  MOHADDES |
|                       |              | Abbas  Mohaddes |
|                       |              | Chief  Executive Officer |
|                       |              | (Principal  Executive Officer) |
|                       |              |   |
|                       |              |   |
|                       | By                | /S/ JAMES  S. MIELE |
|                       |              | James  S. Miele |
|                       |              | Chief  Financial Officer |
|                       |              | (Principal  Financial and Accounting Officer) |

 

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**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                               | ** ** | **Where Located**                                                                                                                                                         |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Restated  Certificate of Incorporation of the registrant                                                                                      | * *   | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2009 as filed with the SEC on October 30, 2009*  |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.2                 |       | Bylaws  of registrant, as amended                                                                                                             | * *   | *Exhibit 4.2  to the registrant’s Registration Statement on Form S-1 (Reg.  No. 033-67932) as filed with the SEC on July 6, 1993*                     |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.3                 |       | Certificates  of Amendment to Bylaws of the registrant dated April 24, 1998 and  August 10, 2001                                    | * *   | *Exhibit 3.4  to the registrant’s Annual Report on Form 10-K/A for the year ended  March 31, 2003 as filed with the SEC on July 29, 2003*             |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.4                 |       | Certificate  of Amendment to Bylaws of registrant dated September 9, 2004                                                                | * *   | *Exhibit 3.1  to the registrant’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2004 as filed with the SEC on November 15, 2004* |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 3.5                 |       | Certificate  of Amendment to Bylaws of registrant dated September 16, 2005                                                               | * *   | *Exhibit 3.5  to the registrant’s Annual Report on Form 10-K for the year ended  March 31, 2007 as filed with the SEC on June 21, 2007*               |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 3.6                 |       | Certificate  of Amendment to Bylaws of registrant dated December 7, 2007                                                                 | * *   | *Exhibit 3.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  December 13, 2007*                                                  |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 3.7                 |       | Certificate  of Amendment to Bylaws of registrant, effective August 20, 2009                                                             | * *   | *Exhibit 3.3  to the registrant’s Current Report on Form 8-K as filed with the SEC on  August 21, 2009*                                                    |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 4.1                 |       | Rights  Agreement dated August 20, 2009 between the registrant and Computershare  Trust Company, N.A., including exhibits thereto        | * *   | *Exhibit 4.1  to the registrant’s Current Report on Form 8-K as filed with the SEC on  August 21, 2009*                                                    |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 10.1                |       | Letter  Agreement dated July 27, 2010 by and between the registrant and Abbas  Mohaddes                                                       |       | *Filed  herewith*                                                                                                                                                              |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 10.2                |       | Change  in Control Agreement dated July 27, 2010 by and between the registrant and  Abbas Mohaddes                                            |       | *Filed  herewith*                                                                                                                                                              |
|                |       |                                                                                                                                          |       | * *                                                                                                                                                                       |
| 10.3                |       | Form  of Restricted Stock Unit Award Agreement under the 2007 Omnibus Incentive  Plan                                                         |       | *Filed  herewith*                                                                                                                                                              |
|                |       |                                                                                                                                          |       |                                                                                                                                                                           |
| 31.1                |       | Certification  of the Principal Executive Officer, as required pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                | * *   | *Filed  herewith*                                                                                                                                                              |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 31.2                |       | Certification  of the Principal Financial and Accounting Officer, as required pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 | * *   | *Filed  herewith*                                                                                                                                                              |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 32.1                |       | Certification  of the Chief Executive Officer, as required pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                    | * *   | *Filed  herewith*                                                                                                                                                              |
| * *            | * *   | * *                                                                                                                                      | * *   | * *                                                                                                                                                                       |
| 32.2                |       | Certification  of the Chief Financial Officer, as required pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                    | * *   | *Filed  herewith*                                                                                                                                                              |

 

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