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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K**

** **

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| **(Mark  One)**                                                                                                                                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                               |   |
| **x**                                                                                                                                                                                                              | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                               |   |
| **For the fiscal year ended March 31, 2009**                                                                                                                                                                  |
|                                                                                                                                                                                                               |
| **OR**                                                                                                                                                                                                             |
|                                                                                                                                                                                                               |   |
| **o**                                                                                                                                                                                                              | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                                                                               |   |
| **For the transition period from                  to                ** |
|                                                                                                                                                                                                               |
| **Commission file number 001-08762**                                                                                                                                                                               |

** **

****

**ITERIS, INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Delaware**                                                    | ** ** | **95-2588496**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction  of Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**1700 Carnegie Ave., Santa Ana, California 92705**

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s Telephone Number, Including Area Code: **(949) 270-9400**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

| **Title of each class**       | ** ** | **Name of each exchange on which registered** |
|-------------------------------|------------|-----------------------------------------------|
| Common Stock, $0.10 par value |       | NYSE Amex                                     |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.  Yes o No x

 

Indicate by check mark if the registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act.  Yes oNo x

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by a check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K. o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files). Yes  x  No  o

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Exchange Act Rule 12b-2). Yes o No x

 

Based on the closing sale price of the registrant’s common stock on thelast business day of the registrant’s most recently completed second fiscalquarter, the aggregate market value of the voting common stock held bynonaffiliates of the registrant was approximately $44,730,000. For the purposesof this calculation, shares owned by officers, directors and 10% stockholdersknown to the registrant have been deemed to be owned by affiliates. Thisdetermination of affiliate status is not necessarily a conclusive determinationfor other purposes.

 

As of June 5, 2009, there were 34,212,756 shares of common stockoutstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Part III incorporates by reference certain information from theregistrant’s definitive proxy statement for the 2009 Annual Meeting ofStockholders, which will be filed with the Securities and Exchange Commissionnot later than 120 days after the end of the fiscal year ended March 31,2009. Except with respect to information specifically incorporated by referencein this report, the registrant’s proxy statement is not deemed to be filed as apart hereof.

 

 

 

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**ITERIS,INC.**

**ANNUALREPORT ON FORM 10-K**

**FORTHE FISCAL YEAR ENDED MARCH 31, 2009**

**TABLE OF CONTENTS**

 
| **PART I**   |                                                                                                                |
|-------------------|---------------------------------------------------------------------------------------------------------------------|
|              |                                                                                                                |   |
| ITEM 1.           | BUSINESS                                                                                                            | 2 |
|              |                                                                                                                |   |
| ITEM 1A.          | RISK FACTORS                                                                                                        | 5 |
|              |                                                                                                                |   |
| ITEM 1B.          | UNRESOLVED STAFF  COMMENTS                                                                                          | 13 |
|              |                                                                                                                |   |
| ITEM 2.           | PROPERTIES                                                                                                          | 14 |
|              |                                                                                                                |   |
| ITEM 3.           | LEGAL PROCEEDINGS                                                                                                   | 14 |
|              |                                                                                                                |   |
| ITEM 4.           | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                                | 14 |
|              |                                                                                                                |   |
| **PART II**  | 14                                                                                                                  |
|              |                                                                                                                |   |
| ITEM 5.           | MARKET FOR  REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES  OF EQUITY SECURITIES | 14 |
|              |                                                                                                                |   |
| ITEM 6.           | SELECTED FINANCIAL  DATA                                                                                            | 15 |
|              |                                                                                                                |   |
| ITEM 7.           | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                         | 15 |
|              |                                                                                                                |   |
| ITEM 7A.          | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                         | 27 |
|              |                                                                                                                |   |
| ITEM 8.           | FINANCIAL  STATEMENTS AND SUPPLEMENTARY DATA                                                                        | 27 |
|              |                                                                                                                |   |
| ITEM 9.           | CHANGES IN AND  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                               | 27 |
|              |                                                                                                                |   |
| ITEM 9A(T).       | CONTROLS AND  PROCEDURES                                                                                            | 27 |
|              |                                                                                                                |   |
| ITEM 9B.          | OTHER INFORMATION                                                                                                   | 28 |
|              |                                                                                                                |   |
| **PART III** | 28                                                                                                                  |
|              |                                                                                                                |   |
| ITEM 10.          | DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                             | 28 |
|              |                                                                                                                |   |
| ITEM 11.          | EXECUTIVE  COMPENSATION                                                                                             | 28 |
|              |                                                                                                                |   |
| ITEM 12.          | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS                    | 28 |
|              |                                                                                                                |   |
| ITEM 13.          | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE                                          | 28 |
|              |                                                                                                                |   |
| ITEM 14.          | PRINCIPAL  ACCOUNTING FEES AND SERVICES                                                                             | 29 |
|              |                                                                                                                |   |
| **PART IV**  | 30                                                                                                                  |
|              |                                                                                                                |   |
| ITEM 15.          | EXHIBITS AND  FINANCIAL STATEMENT SCHEDULES                                                                         | 30 |

 

Unless otherwiseindicated in this report, the “Company,” “we,” “us” and “our” refer to Iteris, Inc.and our wholly-owned subsidiary, Iteris Europe, GmbH.

 

AutoVue®, Iteris®, Vantage®, VersiCamTM, EdgeConnectTM,Safety DirectTM and AbacusTM are among the trademarks of Iteris, Inc. Anyother trademarks or trade names mentioned herein are the property of theirrespective owners.

 

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**CautionaryStatement**

 

*Thisreport, 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,” “would,” “could,” “may,” “anticipate(s),” “estimate(s)”and similar expressions or variations of these words are intended to identifyforward-looking statements. These forward-looking statements include but arenot limited to statements regarding our anticipated sales, revenue, expenses,profits, capital needs, competition, backlog and manufacturing capabilities,the practical market applications, future applications and acceptance of ourproducts and services, the status of our facilities and product development.These statements are not guarantees of future performance and are subject tocertain risks and uncertainties which could cause actual results to differmaterially from those projected. You should not place undue reliance on theseforward-looking statements that speak only as of the date hereof. We undertakeno obligation to republish revised forward-looking statements to reflect eventsor circumstances after the date hereof or to reflect the occurrence ofunanticipated events. We encourage you to carefully review and consider thevarious disclosures made by us which describe certain factors which couldaffect our business, including those* in “*Risk Factors” in Item 1Aof this report, before deciding to invest in our company or to maintain orincrease your investment. We undertake no obligation to revise or updatepublicly any forward-looking statement for any reason.*

 

**PART I**

 

**ITEM 1.****                            ****BUSINESS**

 

**Overview**

 

We are a leader in thetraffic management market focused on the development and application ofadvanced technologies that reduce traffic congestion and improve the safety ofsurface transportation systems infrastructure. As an added benefit, ourproducts and services minimize the environmental impact of traffic congestion.By combining outdoor image processing, traffic engineering and informationtechnology, we offer a broad range of Intelligent Transportation Systems (“ITS”)and driver safety solutions to customers worldwide.

 

Wewere originally incorporated in Delaware in 1987.  Our principal executive offices are locatedat 1700 Carnegie Avenue, Santa Ana, California 92705, and our telephone numberat that location is (949) 270-9400.  OurInternet website address is www.iteris.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Qand current reports on Form 8-K, together with amendments to thesereports, are available on the “Investors” section of our website, free ofcharge, as soon as reasonably practicable after such material is electronicallyfiled with, or furnished to, the Securities and Exchange Commission (“SEC”).  The inclusion of our website address in thisreport does not include or incorporate by reference into this report anyinformation on our website.

 

Wecurrently operate in three reportable segments: Roadway Sensors, VehicleSensors and Transportation Systems. The Roadway Sensors segment includes ourVantage and VersiCam vehicle detection systems for trafficintersection control, incident detection and certain highway traffic datacollection applications. The Vehicle Sensors segment includes our AutoVue LaneDeparture Warning (“LDW”) system and is comprised of all activities related tovehicle safety. The Transportation Systems segment includes transportationengineering and consulting services, and the development of transportationmanagement and traveler information systems for the ITS industry. See Note 8 ofthe accompanying consolidated financial statements for further details on ourreportable segments.

 

Our Roadway Sensorssegment product line uses advanced image processing technology to capture andanalyze video images through sophisticated algorithms, enabling vehicledetection and transmission of both video images and data using a wide range ofcommunication technologies.  Our Vantagevideo detection systems detect vehicle presence, count, speed, occupancy andother traffic data used in traffic management systems.  This gives traffic managers the ability tomitigate roadway congestion by modifying traffic signal timing or detectingincidents quickly.  VersiCam, ourintegrated camera and processor video detection system, is a cost-efficientvideo detection system for smaller intersections that require only a fewdetection points.  Vantage videodetection systems have been deployed by hundreds of agencies and are currentlysold through a network of independent dealers in the United States, Asia, LatinAmerica, Europe and the Middle East.

 

Our Vehicle Sensorssegment addresses the leading cause of roadway fatalities:  rear-end, lane change, and roadway departureaccidents.  According to the NationalHighway Traffic Safety Administration, these three crash types result in about27,500 of the U.S.’s 42,000 annual traffic fatalities and contribute to aconsiderable economic loss due to injuries, property damage, and decreasedproductivity.

 

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Our Vehicle Sensorssegment developed the world’s first production LDW system and offers a provensystem that is available as an original equipment manufacturer (“OEM”) andaftermarket option on heavy trucks worldwide and as an OEM option in passengercars.  Our LDW products utilize videodetection images to detect when a vehicle begins to approach an unintended lanechange.  When this occurs, the unitautomatically emits a distinctive rumble strip or other audible warning sound,alerting the driver to make a correction. To date, we have sold approximately 69,000 LDW systems into the heavytruck market in Europe, North America and Asia. Our LDW systems are currently qualified as an option on certain heavytrucks, including Mercedes-Benz, MAN, Iveco, DAF, Scania, Freightliner andFUSO, as well as Neoplan and MAN luxury bus and coach lines. In North America,our LDW systems are sold primarily to truck fleets, and to date, 74 U.S. heavytruck fleets have selected our LDW systems, with a combined fleet sizeestimated at 58,000 vehicles.  Additionally,we have licensed our LDW technology to our strategic partner, Valeo Schalterand Sensuren GmbH (“Valeo”), an independent automotive supplier, resulting insales to date of approximately 69,000 LDW systems for passenger cars.

 

In addition to our LDWsystems, we expanded our Vehicle Sensors portfolio in August 2008 withnewly developed technologies such as radar based Forward Collision Warning (“FCW”)and Blind Spot Warning (“BSW”) systems for the North American truckmarket.  We also introduced Safety Directin March 2008, which is a system that reports real-time driver performancedata captured by our LDW system and that has the ability to relay thisinformation directly to fleet operators through integration with the truck’sexisting fleet communications system.  Weoffer the FCW and BSW features through the resale of Delphi’s radar basedsystems, for which we are the exclusive North American dealer, while SafetyDirect was internally developed. These new products, together with our LDWproducts, combine to create a broad suite of active safety driver assistancefeatures that help to reduce the number of motor vehicle crashes and theseverity of crash-related injuries.

 

Our TransportationSystems segment includes transportation engineering and consulting servicesfocused on the planning, design, development and implementation ofsoftware-based systems that integrate sensors, video surveillance, computersand advanced communications equipment to enable public agencies to monitor,control and direct traffic flow, assist in the quick dispatch of emergencycrews and distribute real-time information about traffic conditions. Ourservices include planning, design and implementation of surface transportationinfrastructure systems.  We performanalysis and study goods movement, commercial vehicle operations, travel demandforecasting and systems engineering, and identify mitigation measures to reducetraffic congestion.  These services andsystems are primarily sold to local, state and national transportation agenciesin the United States.  Our TransportationSystems segment is largely dependent upon governmental funding and budgetaryissues.

 

**Sales,Marketing and Principal Customers**

 

Wesell our Roadway Sensors products through indirect sales channels comprised ofindependent dealers in the United States and Canada who sell integrated systemsand related products to the traffic management market, as well as directly tothe traffic management market using a combination of our own sales personneland an outside sales organization. Our independent dealers are primarilyresponsible for sales, installation and support of these products. Thesedealers maintain an inventory of demonstration traffic products from variousmanufacturers including our vehicle detection systems and sell directly togovernment agencies and installation contractors. These dealers often havelong-term arrangements with the government agencies in their territory for thesupply of various products for the construction and renovation of trafficintersections. We hold technical training classes for dealers and end users andmaintain a full-time staff of customer support technicians to provide technicalassistance when needed.

 

Our marketing strategyfor our Vehicle Sensors segment is to establish our LDW products as the leadingplatform for in-vehicle video sensing for heavy trucks and passenger cars.  We sell LDW systems directly to heavy truckmanufacturers and to U.S. truck fleets, and our LDW system is currently offeredas an option on certain heavy trucks, including Mercedes-Benz, MAN, Iveco, DAF,Scania, Freightliner and FUSO, as well as Neoplan and MAN luxury bus and coachlines. We market the licensing of our LDW technology to manufacturers ofpassenger automobiles through an exclusive strategic relationship with Valeo.In connection with this marketing effort, we provide specific contractengineering services, technical marketing and sales support to Valeo, which todate has enabled the launch of our LDW technology on three Infiniti carplatforms. We plan to continue to provide technical marketing and sales supportto Valeo in our efforts to win new OEM customers for the passenger car marketas well as contract engineering services related to the possible launch of newplatforms that include our LDW system.

 

We market and sell ourTransportation Systems services directly to government agencies pursuant tonegotiated contracts that involve competitive bidding and specificqualification requirements. Most of our Transportation Systems contracts arewith federal, state and municipal customers and generally provide forcancellation or renegotiation at the option of the customer upon reasonablenotice and fees paid for modification. We use selected members of ourengineering team divided on a regional basis to serve in sales and business developmentfunctions. We have historically not engaged in sales of transportationmanagement systems and traveler information services outside of the U.S., butmay do so in the future. Our Transportation Systems contracts generally involvelong lead times and require extensive specification development, evaluation andprice negotiations.

 

A large portion of ourrevenues are derived from sales to federal, state and local governmentagencies.  We currently have a diversecustomer base with no individual customer representing greater than 10% of ourtotal net sales and contract revenues in the fiscal year ended March 31,2009 (“Fiscal 2009”) or the fiscal year ended March 31, 2008 (“Fiscal 2008”).Also refer to Note 8 of Notes to Consolidated Financial Statements, includedin Part IV, Item 15 of this report.

 

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**Manufacturingand Materials**

 

We use contractmanufacturers to build subassemblies that are used in our sensors products.Additionally, we procure certain components from qualified suppliers, bothglobally and locally, and generally use multi-sourcing strategies whentechnically and economically feasible to mitigate supply risk. Thesesubassemblies and components are delivered to our Santa Ana facility where theygo through final assembly and testing prior to shipment to our customers.Certain of our key suppliers include SMS Technologies, Inc., HitachiAmerican Ltd-UB and Total Electronics LLC. Our manufacturing activities areconducted in approximately 9,000 square feet of space at our Santa Ana,California facility. Production volume at our subcontractors is based uponquarterly forecasts that we adjust on a monthly basis to control inventorylevels. For LDW products sales to the passenger car market, all manufacturinghas been and is expected to be performed by Valeo; however, we plan to continueto provide engineering support to Valeo. We currently do not manufacture any ofthe hardware used in the transportation management and traveler informationsystems that we design and implement. Our production facility is currently ISO9001 certified.

 

**CustomerSupport and Services**

 

We provide warrantyservice and support for our products, as well as follow-up service and supportfor which we charge separately. Service revenue accounted for less than 1.0% oftotal net sales and contract revenues for Fiscal 2009. We believe customersupport is a key competitive factor.

 

**Backlog**

 

Our backlog ofunfulfilled firm orders was approximately $36.3 million as of March 31,2009, which was comprised of $1.0 million related to Roadway Sensors, $800,000related to Vehicle Sensors and $34.5 million related to Transportation Systems.Substantially all of the backlog for Roadway Sensors and Vehicle Sensors isexpected to be recognized as revenue in the fiscal year ending March 31,2010 (“Fiscal 2010”), while approximately 75% of Transportation Systems backlogis expected to be recognized as revenue in Fiscal 2010. At March 31, 2008,we had backlog of approximately $26.8 million, which was comprised of $900,000related to Roadway Sensors, $1.3 million related to Vehicle Sensors and $24.6million related to Transportation Systems. All backlog as of March 31,2008 for Roadway Sensors and Vehicle Sensors was recognized as revenue inFiscal 2009 while approximately 65% of our March 31, 2008 backlog forTransportation Systems was recognized as revenue in Fiscal 2009. Pursuant tothe customary terms of our agreements with government contractors and othercustomers, customers can generally cancel or reschedule orders with littleor no penalties. Lead times for the release of purchase orders often dependupon the scheduling and forecasting practices of our individual customers,which also can affect the timing of the conversion of our backlog intorevenues. For these reasons, among others, our backlog at a particular date maynot be indicative of our future revenues, in particular for Roadway Sensors andVehicle Sensors.

 

**ProductDevelopment**

 

Most of our developmentactivities are conducted at our principal facilities in Santa Ana, California.Our company-sponsored research and development costs and expenses wereapproximately $4.0 million for Fiscal 2009, $3.6 million for Fiscal 2008, and$4.0 million for the fiscal year ended March 31, 2007 (“Fiscal 2007”). Weexpect to continue to pursue certain product development programs and incurresearch and development expenditures.

 

**Competition**

 

We generally face significantcompetition in each of our target markets. Increased competition may result inprice reductions, reduced gross margins and loss of market share, any of whichcould have a material adverse effect on our business, financial condition andresults of operations. While our LDW products have historically been the onlyestablished commercially-available LDW system used in the U.S. and in Europe inthe heavy truck market, we have recently experienced increased competition fromnew competitors in this market. We consider competitors in this market toinclude Delphi Automotive Systems Corporation, NEC Corporation and Hitachi Ltd.in Japan and Robert Bosch GmbH in Europe, Continental Tavis, Visteon andTakata, which currently have developed or are developing video sensortechnologies for the vehicle industry that could be used for lane departurewarning systems. In the market for our Roadway Sensors vehicle detectionproducts, we compete with manufacturers of other above ground video cameradetection systems such as Econolite Control Products, Inc., Traficon,N.V., and other non-intrusive detection devices including microwave, infrared,ultrasonic and magnetic detectors, as well as manufacturers and installers ofin-pavement inductive loop products.

 

The TransportationSystems market is highly fragmented and is subject to evolving national andregional quality and safety standards. Our competitors vary in number, scopeand breadth of the products and services they offer. Our competitors inadvanced Transportation Systems include national corporations such asTranscore, Siemens, Telvent Farradyne, Kimley-Horn and Associates, Inc.and Delcan. Our competitors in transportation engineering, planning and designinclude major firms such as Parsons Brinkerhoff, Inc., URS, HNTB andParsons Transportation Group, Inc., as well as many smaller regionalengineering firms.

 

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In general, the marketsfor the products and services we offer are highly competitive and arecharacterized by rapidly changing technology and evolving standards. Many ofour current and prospective competitors have longer operating histories,greater name recognition, access to larger customer bases and significantlygreater financial, technical, manufacturing, distribution and marketingresources than us. As a result, they may be able to adapt more quickly to newor emerging standards or technologies or to devote greater resources to thepromotion and sale of their products. It is also possible that new competitorsor alliances among competitors could emerge and rapidly acquire significantmarket share. We believe that our ability to compete effectively in our targetmarkets will depend on a number of factors, including the success and timing ofour new product development, the compatibility of our products with a broadrange of computing systems, product quality and performance, reliability,functionality, price and service and technical support. Our failure to provideservices and develop and market products that compete successfully with thoseof other suppliers and consultants in our target markets would have a materialadverse effect on our business, financial condition and results of operations.

 

**IntellectualProperty and Proprietary Rights**

 

Our ability to competeeffectively depends in part on our ability to develop and maintain theproprietary aspects of our technology. Our policy is to obtain appropriateproprietary rights protection for any potentially significant new technologyacquired or developed by us. We currently hold ten U.S. patents, which expirecommencing in 2012, relating to our outdoor image processing techniques used inour AutoVue LDW systems. Nine of our patents relate specifically to our LDWtechnology and provide a basis for enhanced functionality for rain sensing andimproved performance. We believe that our other patent, while important for ourtechnology platforms, is less critical to our near term product strategy.  In April 2009, we acquired the rights toU.S., Canadian, and European Community patent applications for an ElectronicTraffic Monitor that is related to new products in our Roadway Sensorsbusinesses (also refer to Note 10 of Notes to Consolidated FinancialStatements, included in Part IV, Item 15 of this report). We cannotassure you that any new patents will be granted pursuant to these or subsequentapplications.

 

In addition to patentlaws, we rely on copyright and trade secret laws to protect our proprietaryrights. We attempt to protect our trade secrets and other proprietaryinformation through agreements with customers and suppliers, proprietaryinformation agreements with our employees and consultants, and other similarmeasures. We do not have any material licenses or trademarks other than thoserelating to product names. We cannot be certain that we will be successful inprotecting our proprietary rights. While we believe our patents, patentapplications, software and other proprietary know-how have value, changingtechnology makes our future success dependent principally upon our employees’technical competence and creative skills for continuing innovation.

 

Litigation may benecessary in the future to enforce our proprietary rights, to determine thevalidity and scope of the proprietary rights of others, or to defend us againstclaims of infringement or invalidity by others. An adverse outcome in suchlitigation or similar proceedings could subject us to significant liabilitiesto third parties, require disputed rights to be licensed from others or requireus to cease marketing or using certain products, any of which could have amaterial adverse effect on our business, financial condition and results ofoperations. In addition, the cost of addressing any intellectual propertylitigation claim, both in legal fees and expenses, as well as from thediversion of management’s resources, regardless of whether the claim is valid,could be significant and could have a material adverse effect on our business,financial condition and results of operations.

 

**Employees**

 

We refer to our employeesas associates. As of June 1, 2009, we employed an aggregate of 242associates, including 55 associates in general management, administration andfinance; 22 associates in sales and marketing; 132 associates in engineeringand product development; 20 associates in operations, manufacturing andquality; and 13 associates in customer service. None of our associates arerepresented by a labor union, and we have never experienced a work stoppage.

 

**GovernmentRegulation**

 

Our manufacturingoperations are subject to various federal, state and local laws andregulations, including those restricting the discharge of materials into theenvironment. We are not involved in any pending or, to our knowledge,threatened governmental proceedings, which would require curtailment of ouroperations because of such laws and regulations. We continue to expend funds inconnection with our compliance with applicable environmental regulations. Theseexpenditures have not, however, been significant in the past, and we do notexpect any significant expenditure in the near future. Currently, compliancewith foreign laws has not had a material impact on our business and is not expectedto have a material impact in the near future.

 

**ITEM 1A.****                   ****RISKFACTORS**

 

*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 on Form 10-Kand subsequent reports on Forms 10-Q and 8-K, before deciding to buy, sell, orhold our common stock. The risks and uncertainties described below are not theonly ones facing our company. Additional risks and uncertainties not presentlyknown to us or that we currently deem immaterial may also affect our businessoperations. If any of these risks actually occurs, our business, financialcondition, or results of operations could be seriously harmed. In that event,the market price for our common stock could decline and you may lose all orpart of your investment.*

 

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**THEECONOMIC SLOWDOWN HAS ADVERSELY IMPACTED REAL ESTATE DEVELOPMENT, REDUCED ORDELAYED GOVERNMENT FUNDING FOR TRANSPORTATION INFRASTRUCTURE PROJECTS ANDINITIATIVES AND DECREASED AVAILABILITY OF FINANCIAL CAPITAL FOR OUR CUSTOMERS,ALL OF WHICH HAVE ADVERSELY IMPACTED OUR NET SALES AND COULD IMPACT OURCONTRACT REVENUES. **Decreased consumer spending, the failureof certain financial institutions and businesses, concerns about theavailability and cost of credit, and reduced corporate profits and capitalspending have resulted in a downturn in worldwide economic conditions, as wellas budgetary shortfalls increasingly present at all levels of government. Theseunfavorable economic conditions have had a negative impact on customer ordersand government funding of infrastructure projects incorporating our productsand services. Such concerns may result in cancellations and rescheduling ofbacklog. In addition, the recent decline in the U.S. real estate market,particularly in new home and commercial construction, has adversely impactednew road construction and has resulted in and may continue to result in flat orslightly declining Roadway Sensor and Vehicle Sensor net sales and couldadversely impact Transportation Systems contract revenues. Any of the foregoingeconomic conditions make it extremely difficult for our customers, oursuppliers and us to accurately forecast and plan future business activities. Ifsuch conditions continue or worsen, our business, financial condition andresults of operations could be materially and adversely affected.

 

**BECAUSEWE DEPEND ON GOVERNMENT CONTRACTS AND SUBCONTRACTS, WE FACE ADDITIONAL RISKSRELATED TO CONTRACTING WITH FEDERAL, STATE AND LOCAL GOVERNMENTS, INCLUDINGBUDGETARY ISSUES AND FIXED PRICE CONTRACTS.**A significant portion of our sales are derived fromcontracts with governmental agencies, either as a general contractor,subcontractor or supplier. Government contracts represented approximately 45%,38% and 38% of our total net sales and contract revenues for the years ended March 31,2009, 2008 and 2007, respectively. We anticipate that revenue from governmentcontracts will continue to remain a significant portion of our net sales andcontract revenues. Government business is, in general, subject to special risksand challenges, including:

 
| · | long purchase  cycles or approval processes;                                                                                                                                                                                    |
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| · | competitive  bidding and qualification requirements;                                                                                                                                                                            |
|   |                                                                                                                                                                                                                            |
| · | the impact of  international conflicts;                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                            |
| · | delays in  funding, including delays 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 Highway Bill occurring in September 2009; |
|   |                                                                                                                                                                                                                            |
| · | performance bond  requirements;                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                            |
| · | changes in  government policies and political agendas;                                                                                                                                                                          |
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| · | other government  budgetary constraints, cut-backs, delays or reallocation of government  funding; and                                                                                                                          |
|   |                                                                                                                                                                                                                            |
| · | milestone  requirements and liquidated damage provisions for failure to meet contract  milestones.                                                                                                                              |

 

Governmental budgets andplans are subject to change without warning. Certain risks of selling togovernmental entities include dependence on appropriations and administrativeallocation of funds, changes in governmental procurement legislation andregulations and other policies that may reflect political developments oragendas, significant changes in contract scheduling, intense competition forgovernment business and termination of purchase decisions for the convenienceof the governmental entity. Substantial delays in purchase decisions bygovernmental entities, or governmental budgetary constraints, could cause ournet sales and contract revenues and income to drop substantially or tofluctuate 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 quarter. Our inability to address anyof the foregoing concerns or the loss or renegotiation of any materialgovernment contract could seriously harm our business, financial condition andresults of operations.

 

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**CURRENT BUDGETARY CONSTRAINTS DUE TO THE SIGNIFICANT MILITARYOPERATIONS IN THE MIDDLE EAST OR ELSEWHERE MAY IMPACT GOVERNMENT FUNDINGOR CONSUMER SPENDING, CAUSING A DECLINE IN OUR REVENUES.**In the near term, the funding of U.S.military operations in the Middle East or elsewhere may cause additionaldisruptions in funding of government contracts. Since military operations ofsuch magnitude are not routinely included in U.S. defense budgets, supplementallegislative funding actions are often required to finance such operations. Evenwhen such legislation is enacted, it may not be adequate for ongoingoperations, causing other government resources to be temporarily or permanentlydiverted. Since a significant portion of our sales are derived from contractswith government agencies, such diversion of funds could produce interruptionsin funding or delays in receipt of our contracts, causing disruptions andadversely effecting our revenue and operations.

 

**THEMARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE AND HAVE MANY MOREESTABLISHED COMPETITORS, WHICH COULD ADVERSELY AFFECT OUR SALES OR THE MARKETACCEPTANCE OF OUR PRODUCTS.**We compete with numerous other companies in our targetmarkets including, but not limited to, large, multinational corporations, whichinclude tier one automotive suppliers, and many smaller regional engineeringfirms. We expect such competition to increase due to technologicaladvancements, industry consolidations and reduced barriers to entry. Increasedcompetition is likely to result in price reductions, reduced gross margins andloss of market share, any of which could seriously harm our business, financialcondition and results of operations. In Fiscal 2007, we began to experiencemore competition in our Roadway Sensors segment as the Department ofTransportation in one of our largest sales territories moved to a multi-sourcecontracting environment from one in which we were the sole supplier. Inaddition, one of the other developers of LDW systems was acquired by a largemultinational organization during Fiscal 2009. This new competitor hasincreased its market share and could be more aggressive in both the passengercar and heavy truck markets, as a result of its greater access to resources andreputation in the market. As a result, we have experienced increased pricecompetition, which could erode our margins. Additional new competitors haveentered this market and more competitors may enter in the future. Furthermore,awareness of LDW technology is increasing and other market players havedeveloped 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.

 

Manyof our competitors have far greater name recognition and greater financial,technological, marketing, and customer service resources than we do. This mayallow them to respond more quickly to new or emerging technologies and changesin customer requirements. It may also allow them to devote greater resources tothe development, promotion, sale and support of their products than we can.Recent consolidations of end users, distributors and manufacturers in ourtarget markets have exacerbated this problem. As a result of the foregoingfactors, we may not be able to compete effectively in our target markets andcompetitive pressures could adversely affect our business, financial conditionand results of operations.

 

**WE MAY EXPERIENCEPRODUCTION GAPS THAT COULD MATERIALLY AND ADVERSELY IMPACT OUR SALES ANDFINANCIAL RESULTS AND THE ULTIMATE ACCEPTANCE OF OUR PRODUCTS.**It is possible that we could experienceunforeseen quality control issues or part shortages as we adjust production tomeet current demand for our products. We have historically used singlesuppliers for certain significant components in our products. Should any suchdelay or disruption occur, or should a key supplier discontinue operations becauseof the current economic climate, our future sales will likely be materially andadversely affected. Additionally, we rely heavily on select contractmanufacturers to produce many of our products and do not have any long-termcontracts to guarantee supply of such products. Although we believe ourcontract manufacturers have sufficient capacity to meet our productionschedules for the foreseeable future and we believe we could find alternativecontract manufacturing sources for many of our products, if necessary, we couldexperience a production gap if for any reason our contract manufacturers wereunable to meet our production requirements and our cost of good sold couldincrease, adversely affecting our margins.

 

**WE MAY BEUNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, WHICH COULD SERIOUSLY HARM OURBUSINESS.**Due tothe specialized nature of our business, we are highly dependent on thecontinued service of our executive officers and other key management,engineering and technical personnel. The loss of Abbas Mohaddes, our ChiefExecutive Officer, or any of the other executive officers or key members ofmanagement could adversely affect our business, financial condition, or resultsof operations. Our success will also depend in large part upon our ability tocontinue to attract, retain and motivate qualified engineering and other highlyskilled technical personnel. In particular, the future success of ourTransportation Systems segment will depend on our ability to hire additionalqualified engineers and planners. Competition for qualified employees,particularly development engineers, is intense. We may not be able to continueto attract and retain sufficient numbers of such highly skilled employees. Ourinability to attract and retain additional key employees or the loss of one ormore of our current key employees could adversely affect our business,financial condition and results of operations.

 

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**IF WE AREUNABLE TO DEVELOP AND INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTSSUCCESSFULLY AND IN A COST-EFFECTIVE AND TIMELY MANNER, OR ARE UNABLE TOACHIEVE MARKET ACCEPTANCE OF OUR NEW PRODUCTS, OUR OPERATING RESULTS WOULD BEADVERSELY AFFECTED.**Webelieve our revenue growth and future operating results will depend on ourability to complete development of new products and enhancements, introducethese products in a timely, cost-effective manner, achieve broad market acceptanceof these products and enhancements, and reduce our product costs. We cannotguarantee the success of these products, and we may not be able to introduceany new products or any enhancements to our existing products on a timelybasis, or at all. In addition, the introduction of any new products couldadversely affect the 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.

 

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,qualify any new products with OEMs and achieve manufacturing efficiencies, theperceived advantages of our new products over traditional products and themarketing capabilities of our independent distributors and strategic partners,including Valeo’s ability to expand sales of LDW systems in the passenger carmarket. The success of our LDW system will also depend in part on the successof the automotive vehicles that incorporate our technology, as well as thesuccess of optional equipment that OEMs bundle with our technologies.

 

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 the timing of the adoption of this newstandard or our ability to successfully redesign our products to incorporatecompliant components and gain market acceptance of such redesigned products. Inaddition, if the standard is adopted earlier than anticipated we may experiencea shortage of products as a result of potential scarcity of lead-freecomponents.

 

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.**From time to time,environmental regulations are enacted, which can significantly increase thecost of manufacturing new vehicles as well as the cost of maintenance ofexisting vehicles and truck fleets.  As aresult, we could experience a decline in sales of our Vehicle Sensors productsas truck and vehicle manufacturers and fleet operators attempt to control theircosts.

 

**WE MAY ENGAGEIN ACQUISITIONS OF COMPANIES OR TECHNOLOGIES THAT MAY REQUIRE US TOUNDERTAKE SIGNIFICANT CAPITAL INFUSIONS AND COULD RESULT IN DISRUPTIONS OF OURBUSINESS AND DIVERSION OF RESOURCES AND MANAGEMENT ATTENTION.**We have in the past acquired, and may inthe future acquire, complementary businesses, products, and technologies.Acquisitions may require significant capital infusions and, in general,acquisitions also involve a number of special risks, including:

 
| · | potential  disruption of our ongoing business and the diversion of our resources and  management’s attention;                                                             |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                           |
| · | the failure to  retain or integrate key acquired personnel;                                                                                                                    |
|   |                                                                                                                                                                           |
| · | the challenge of  assimilating diverse business cultures, and the difficulties in integrating  the operations, technologies and information system of the acquired  companies; |
|   |                                                                                                                                                                           |
| · | increased costs  to improve managerial, operational, financial and administrative systems and  to eliminate duplicative services;                                              |
|   |                                                                                                                                                                           |
| · | the incurrence  of unforeseen obligations or liabilities;                                                                                                                      |
|   |                                                                                                                                                                           |
| · | potential  impairment of relationships with employees or customers as a result of  changes in management; and                                                                  |
|   |                                                                                                                                                                           |
| · | increased  interest expense and 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 or consummateany additional acquisitions, successfully integrate any acquisitions or realizethe benefits anticipated from any acquisition.

 

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**WE DEPENDUPON VALEO TO MARKET OUR LDW TECHNOLOGIES FOR THE OEM PASSENGER CAR MARKET.**We have granted Valeo the exclusive rightto sell and manufacture our LDW system to the worldwide passenger car market inexchange for royalty payments for each LDW unit sold. As such, the futuresuccess and broad market acceptance of our technologies in the passenger carmarket will depend upon Valeo’s ability to manufacture market and sell ourtechnologies, and to convince more OEM passenger car manufacturers to adopt ourtechnologies.  To date, we have notgenerated significant royalties from Valeo’s efforts and have only beendesigned into one car OEM product line. If Valeo does not devote considerable resources and aggressively pursueopportunities, our expansion into the passenger car market could be adverselyaffected.

 

**IF WE DONOT KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES AND EVOLVING INDUSTRY STANDARDS,WE WILL NOT BE ABLE TO REMAIN COMPETITIVE AND THERE WILL BE NO DEMAND FOR OURPRODUCTS.**Ourmarkets are in general characterized by the following factors:

 
| · | rapid  technological advances;                                                |
|--------|-------------------------------------------------------------------------------|
|   |                                                                          |
| · | downward price  pressure in the marketplace as technologies mature;           |
|   |                                                                          |
| · | changes in  customer requirements;                                            |
|   |                                                                          |
| · | additional  qualification requirements related to new products or components; |
|   |                                                                          |
| · | frequent new  product introductions and enhancements;                         |
|   |                                                                          |
| · | inventory issues  related to transition to new or enhanced models; and        |
|   |                                                                          |
| · | evolving  industry standards and 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.

 

**OURINTERNATIONAL BUSINESS OPERATIONS MAY BE THREATENED BY MANY FACTORS THATARE OUTSIDE OF OUR CONTROL.**We currently market our products internationally andwe anticipate that our international operations will expand in the near future.International business operations are subject to various inherent risksincluding, among others:

 
| · | currency  fluctuations and restrictions;                                                                                   |
|--------|----------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                       |
| · | political,  social and economic instability;                                                                               |
|   |                                                                                                                       |
| · | longer accounts  receivable payment cycles;                                                                                |
|   |                                                                                                                       |
| · | import and  export license requirements and restrictions of the United States and each  other country in which we operate; |
|   |                                                                                                                       |
| · | unexpected  changes in regulatory requirements, tariffs and other trade barriers or  restrictions;                         |
|   |                                                                                                                       |
| · | the burdens of  compliance with a wide variety of foreign laws and more restrictive labor  laws and obligations;           |
|   |                                                                                                                       |
| · | difficulties in  managing and staffing international operations;                                                           |
|   |                                                                                                                       |
| · | potentially  adverse tax consequences; and                                                                                 |
|   |                                                                                                                       |
| · | reduced  protection for intellectual property rights in some countries.                                                    |

 

All ofour international sales are denominated in U.S. dollars. As a result, an increasein the relative value of the dollar could make our products more expensive andpotentially less price competitive in international markets. We do not engagein any transactions as a hedge against risks of loss due to foreign currencyfluctuations.

 

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Any ofthe factors mentioned above may adversely affect our future international salesand, consequently, affect our business, financial condition and operatingresults. Furthermore, as we increase our international sales, our totalrevenues may also be affected to a greater extent by seasonal fluctuationsresulting from lower sales that typically occur during the summer months inEurope and other parts of the world.

 

**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 404 of the Sarbanes-Oxley Act of 2002currently requires us to evaluate the effectiveness of our internal controlsover financial reporting at the end of each fiscal year and to include amanagement report assessing the effectiveness of our internal controls overfinancial reporting in all annual reports. Beginning with Fiscal 2010, ourindependent registered public accounting firm will also be required to attestto, and report on, the effectiveness of our internal controls over financialreporting. We may not be able to complete the work required for suchattestation on a timely basis, and even if we timely complete suchrequirements, our independent auditors may still conclude that our internalcontrols over 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.

 

**WE MAY NEEDTO RAISE ADDITIONAL CAPITAL IN THE FUTURE, WHICH MAY NOT BE AVAILABLE ONTERMS ACCEPTABLE TO US, OR AT ALL. **Until recently, we have historicallygenerated significant net losses and operating losses, and have experiencedvolatility in our cash flows from operations from year to year. Although weentered into a new $19.5 million credit facility, effective October 2008,should we have an event of default, which includes, among other things, afailure to meet certain financial covenants and a material adverse change inthe business, the bank could choose to limit or take away our ability to borrowthese or any funds.  Should this occur,or if the credit markets further tighten, we may need or choose to raiseadditional capital to refinance the remaining debentures, pursue acquisitionsor to expand our operations.

 

At March 31, 2009, we had $6.4 million of cash and cashequivalents and our entire $12.0 million line of credit to fund our operations.We may need to raise additional capital in the near future to fund ouroperations or to repay indebtedness. Such additional capital may be raisedthrough bank borrowings, or other debt or equity financings. We cannot assureyou that any additional capital will be available on a timely basis, onacceptable terms, or at all, and such additional financing may result infurther dilution to our stockholders.

 

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

 
| · | market  acceptance of our products and product enhancements, and the overall level of  sales of our products;                |
|--------|------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                         |
| · | our ability to  control costs;                                                                                               |
|   |                                                                                                                         |
| · | the supply of  key components for our products;                                                                              |
|   |                                                                                                                         |
| · | our ability to  increase revenue and net income;                                                                             |
|   |                                                                                                                         |
| · | increased  research and development expenses and sales and marketing expenses;                                               |
|   |                                                                                                                         |
| · | our need to  respond to technological advancements and our competitors’ introductions of  new products or technologies; |
|   |                                                                                                                         |
| · | capital  improvements to new and existing facilities and enhancements to our  infrastructure and systems;                    |
|   |                                                                                                                         |
| · | potential  acquisitions of businesses and product lines;                                                                     |

 

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| · | our  relationships with customers and suppliers;                                                                                 |
|--------|----------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                             |
| · | government  budgets, political agendas and other funding issues, including potential  delays in government contract awards;      |
|   |                                                                                                                             |
| · | our ability to  successfully negotiate credit arrangements with our bank and repay our  subordinated convertible debentures; and |
|   |                                                                                                                             |
| · | general economic  conditions, including the effects of the current economic slowdown and  international conflicts.               |

 

If ourcapital requirements are materially different from those currently planned, wemay need additional capital sooner than anticipated. If additional funds areraised through the issuance of equity or convertible debt securities, the percentageownership of our stockholders will be reduced and such securities may haverights, preferences and privileges senior to our common stock. Additionalfinancing may not be available on favorable terms, on a timely basis, or atall. If adequate funds are not available or are not available on acceptableterms, we may be unable to continue our operations as planned, develop orenhance our products, expand our sales and marketing programs, take advantageof future opportunities or respond to competitive pressures.

 

**OURQUARTERLY OPERATING RESULTS FLUCTUATE AS A RESULT OF MANY FACTORS. THEREFORE,WE MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS ANDINVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.**Our quarterly revenues and operatingresults have fluctuated and are likely to continue to vary from quarter toquarter due to a number of factors, many of which are not within our control.Factors that could affect our revenues include, among others, the following:

 
| · | changes in our  pricing policies and the pricing policies of our suppliers and competitors,  pricing concessions on volume sales, as well as increased price competition  in general; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                  |
| · | the long lead  times associated with government contracts or required by vehicle manufacturers;                                                                                       |
|   |                                                                                                                                                                                  |
| · | the size,  timing, rescheduling or cancellation of significant customer orders;                                                                                                       |
|   |                                                                                                                                                                                  |
| · | delays in  government contracts and funding from time to time and budgetary constraints  at the federal, state and local levels;                                                      |
|   |                                                                                                                                                                                  |
| · | declines in new  home construction and related road and other infrastructure construction;                                                                                            |
|   |                                                                                                                                                                                  |
| · | our ability to  control costs;                                                                                                                                                        |
|   |                                                                                                                                                                                  |
| · | our ability to  raise additional capital;                                                                                                                                             |
|   |                                                                                                                                                                                  |
| · | the mix of our  products and services sold in a quarter, which mix has varied and is expected  to continue to vary from time to time;                                                 |
|   |                                                                                                                                                                                  |
| · | seasonality due  to winter weather conditions;                                                                                                                                        |
|   |                                                                                                                                                                                  |
| · | international  conflicts and acts of terrorism;                                                                                                                                       |
|   |                                                                                                                                                                                  |
| · | our ability to  develop, introduce, patent, market and gain market acceptance of new  products, applications and product enhancements in a timely manner, or at  all;                 |
|   |                                                                                                                                                                                  |
| · | market  acceptance of the products incorporating our technologies and products;                                                                                                       |
|   |                                                                                                                                                                                  |
| · | the introduction  of new products by competitors;                                                                                                                                     |
|   |                                                                                                                                                                                  |
| · | the availability  and cost of components used in the manufacture of our products;                                                                                                     |
|   |                                                                                                                                                                                  |
| · | our success in  expanding and implementing our sales and marketing programs;                                                                                                          |

 

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| · | the effects of  technological changes in our target markets;                                          |
|--------|-------------------------------------------------------------------------------------------------------|
|   |                                                                                                  |
| · | the amount of  our backlog at any given time;                                                         |
|   |                                                                                                  |
| · | the nature of  our government contracts;                                                              |
|   |                                                                                                  |
| · | deferrals of  customer orders in anticipation of new products, applications or product  enhancements; |
|   |                                                                                                  |
| · | risks and  uncertainties associated with our international business;                                  |
|   |                                                                                                  |
| · | currency  fluctuations and our ability to get currency out of certain foreign  countries; and         |
|   |                                                                                                  |
| · | general economic  and political conditions.                                                           |

 

Due toall of the factors listed above as well as other unforeseen factors, our futureoperating results could be below the expectations of securities analysts orinvestors. 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.

 

**WE HAVE EXPERIENCED GROWTH IN RECENT PERIODS. IF WEFAIL TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY BE UNABLE TO EXECUTE OURBUSINESS PLAN AND MAY EXPERIENCE FUTURE WEAKNESSES IN OUR INTERNALCONTROLS.**We haveexpanded our overall business in the past few years. In order to achieve ourbusiness objectives, we will need to continue to expand our business and addadditional qualified personnel. Such expansion has placed and is expected tocontinue to place, a significant strain on our managerial, administrative,operational, financial and other resources. If we are unable to successfullymanage our growth, our business, financial condition and results of operationswill be adversely affected.

 

**WE MAY NOTBE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS,WHICH COULD HARM OUR COMPETITIVE POSITION.**If we are not able to adequately protect or enforcethe proprietary aspects of our technology, competitors could be able to accessour proprietary technology and our business, financial condition and results ofoperations will likely be seriously harmed. We currently attempt to protect ourtechnology through a combination of patent, copyright, trademark and tradesecret laws, employee and third party nondisclosure agreements and similarmeans. Despite our efforts, other parties may attempt to disclose, obtain oruse our technologies or systems. Our competitors may also be able toindependently develop products that are substantially equivalent or superior toour products or design around our patents. In addition, the laws of someforeign countries do not protect our proprietary rights as fully as do the lawsof the United States. As a result, we may not be able to protect ourproprietary rights adequately in the United States or abroad.

 

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

 

**WE HAVE HISTORICALLY EXPERIENCEDSUBSTANTIAL LOSSES AND MAY EXPERIENCE LOSSES IN THE FUTURE.**Although we have achieved net income inour past four fiscal years, we experienced a net loss of $11.3 million in theyear ended March 31, 2005 and significant net losses in prior years. Wecannot assure you that we will be able to sustain or improve our financialperformance, or that we will be able to continue to achieve profitability on aquarterly or annual basis in the future. Most of our expenses are fixed inadvance. As such, we generally are unable to reduce our expenses significantlyin the short-term to compensate for any unexpected delay or decrease inanticipated revenues. As a result, we may continue to experience operating lossesand net losses, which would make it difficult to fund our operations andachieve our business plan, and could cause the market price of our common stockto decline.

 

**THETRADING PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE.**The trading price of our common stock hasbeen subject to wide fluctuations in the past. Since February 2001, our Class Acommon stock (now known as our common stock) has traded at prices as low as$0.45 per share and as high as $6.12 per share. The market price of our commonstock could continue to fluctuate in the future in response to various factors,including, but not limited to:

 

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| · | quarterly  variations in operating results;                                                                       |
|--------|-------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                              |
| · | our ability to  control costs, improve cash flow and sustain profitability;                                       |
|   |                                                                                                              |
| · | our ability to  raise additional capital;                                                                         |
|   |                                                                                                              |
| · | shortages  announced by suppliers;                                                                                |
|   |                                                                                                              |
| · | announcements of  technological innovations or new products or applications by our competitors,  customers or us; |
|   |                                                                                                              |
| · | transitions to  new products or product enhancements;                                                             |
|   |                                                                                                              |
| · | acquisitions of  businesses, products or technologies;                                                            |
|   |                                                                                                              |
| · | the impact of  any litigation;                                                                                    |
|   |                                                                                                              |
| · | changes in  investor perceptions;                                                                                 |
|   |                                                                                                              |
| · | government  funding, political agendas and other budgetary constraints;                                           |
|   |                                                                                                              |
| · | changes in  earnings estimates or investment recommendations by securities analysts; and                          |
|   |                                                                                                              |
| · | international  conflicts, political unrest and acts of terrorism.                                                 |

 

The stockmarket in general has from time to time experienced volatility, which has oftenaffected the market prices of equity securities of many technology companies.This volatility has often been unrelated to the operating performance of thesecompanies. These broad market fluctuations may adversely affect the marketprice of our common stock. In the past, companies that have experiencedvolatility in the market price of their securities have been the subject ofsecurities class action litigation. If we were to become the subject of a classaction lawsuit, it could result in substantial losses and divert management’sattention and resources from other matters.

 

**WE COULDEXPERIENCE NEGATIVE FINANCIAL IMPACTS ARISING FROM DEVELOPMENTS INCONTINGENCIES CREATED UNDER OUR PREVIOUS STRUCTURE OR BY FORMER SUBSIDIARIES.**Although we divested ourselves of allbusiness units prior to October 2004, from time to time we couldexperience unforeseen developments in contingencies related to our formersubsidiaries. For example, in July 2006 we entered into a settlementagreement in connection with a lawsuit brought against Mariner Networks, Inc.,one of our former subsidiaries, by one of Mariner’s suppliers, pursuant towhich we issued 88,912 shares of our common stock to this supplier (valued at$213,000 as of the date of issuance), paid this supplier $125,000 on October 20,2006 and are required to pay an additional $350,000 in 36 equal monthlyinstallments of $9,700 through October 2009. Although we are not aware ofany other material contingencies, it is possible other matters could be broughtagainst us in connection with activities related to former subsidiaries andthat such matters could materially and adversely affect our financial resultsand cash flows.

 

**CERTAIN PROVISIONS OF THE COMPANY’S CHARTER DOCUMENTS MAY DISCOURAGEA THIRD PARTY FROM ACQUIRING US AND MAY ADVERSELY AFFECT THE PRICE OF OURCOMMON STOCK.**Certainprovisions of our certificate of incorporation could make it difficult for athird party to acquire us, even though an acquisition might be beneficial toour stockholders. Such provisions could limit the price that investors might bewilling to pay in the future for shares of our common stock. Under the terms ofour certificate of incorporation, our Board of Directors is authorized toissue, without stockholder approval, up to 2,000,000 shares of preferred stockwith voting, conversion and other rights and preferences superior to those ofour common stock. Our future issuance of preferred stock also could be used toeffect a stockholder rights plan, which could discourage an unsolicitedacquisition proposal.

 

**ITEM 1B.****              ****UNRESOLVEDSTAFF COMMENTS**

 

None.

 

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**ITEM 2.****                       ****PROPERTIES**

 

Our headquarters andprincipal operations are housed in approximately 52,000 square feet of leasedspace located at 1700 Carnegie Avenue, Santa Ana, California, for which wecurrently pay a monthly base lease rate of approximately $105,000, exclusive ofcertain utility and other costs. The Santa Ana facility lease expires in 2015and contains an option to extend the lease for an additional five years at themarket rate at that time.

 

For additional informationregarding our obligations under property leases, see Note 5 of Notes toConsolidated Financial Statements, included in Part IV, Item 15 of thisreport.

 

**ITEM 3.****                       ****LEGALPROCEEDINGS**

 

The information set forthunder the heading “Litigation” under Note 5 of Notes to Consolidated FinancialStatements, included in Part IV, Item 15 of this report, is incorporatedherein by reference.

 

**ITEM 4.****                       ****SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submittedto a vote of our security holders during the three months ended March 31,2009.

 

**PART II**

** **

**ITEM 5.****                       ****MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

**Market Information and Holders**

 

Our common stock istraded on the NYSE Amex under the symbol “ITI.” The following table sets forth, for the periods indicated, the high andlow sales prices for our common stock as reported by NYSE Amex:

 
| ** **                            | ** ** | **High**   | ** ** | **Low**    | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|
| **Fiscal 2009**                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Quarter Ended June 30, 2008      |       | $          | 2.98       |       | $          | 2.14 |   |
| Quarter Ended September 30, 2008 |       | 2.45       |       | 1.65       |       |
| Quarter Ended December 31, 2008  |       | 1.83       |       | 1.16       |       |
| Quarter Ended March 31, 2009     |       | 1.50       |       | 0.98       |       |
| ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Fiscal 2008**                       |       |       |       |       |       |
| Quarter Ended June 30, 2007      |       | $          | 2.66       |       | $          | 2.11 |   |
| Quarter Ended September 30, 2007 |       | 2.50       |       | 2.00       |       |
| Quarter Ended December 31, 2007  |       | 4.20       |       | 2.18       |       |
| Quarter Ended March 31, 2008     |       | 4.06       |       | 1.94       |       |

 

On June 5, 2009, thelast reported sales price of our common stock on the NYSE Amex was $1.39.  As of June 5, 2009, we had425 holders of record of our common stock according to information furnishedby our transfer agent.

 

**Dividend Policy**

 

We have never paid ordeclared cash dividends on our common stock, and have no current plans to paysuch dividends in the foreseeable future. We currently intend to retain anyearnings for working capital and general corporate purposes. The payment of anyfuture dividends will be at the discretion of our Board of Directors and willdepend upon a number of factors, including, but not limited to, futureearnings, the success of our business, our capital requirements, our generalfinancial condition and future prospects, general business conditions, theconsent of our lender and such other factors as the Board of Directors may deemrelevant.

 

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**ITEM 6.****                       ****SELECTEDFINANCIAL DATA**

 

As a smaller reportingcompany, we are not required to make any disclosure pursuant to this Item 6.

 

**ITEM 7.****                       ****MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*You should read the following discussion and analysis inconjunction with our Consolidated Financial Statements and related Notesthereto included in Part IV, Item 15 of this report and the “Risk Factors”section in Item 1A, as well as other cautionary statements and risksdescribed elsewhere in this report, before deciding to purchase, hold or sellour common stock.*

 

**Overview**

 

We are a leader in thetraffic management market focused on the development and application ofadvanced technologies that reduce traffic congestion and improve the safety ofsurface transportation systems infrastructure. As an added benefit, ourproducts and services minimize the environmental impact of traffic congestion.By combining outdoor image processing, traffic engineering and informationtechnology, we offer a broad range of ITS and driver safety solutions tocustomers worldwide.

 

We currently operate inthree reportable segments: Roadway Sensors, Vehicle Sensors, and TransportationSystems. The Roadway Sensors segment includes our Vantage and VersiCam vehicledetection systems for traffic intersection control, incident detection andcertain highway traffic data collection applications. The Vehicle Sensorssegment includes our AutoVue LDW system and is comprised of all 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.

 

Our Roadway Sensorssegment product line uses advanced image processing technology to capture andanalyze video images through sophisticated algorithms, enabling vehicledetection and transmission of both video images and data using a wide range ofcommunication technologies.  Our Vantagevideo detection systems detect vehicle presence, count, speed, occupancy, andother traffic data used in traffic management systems.  This gives traffic managers the ability tomitigate roadway congestion by modifying traffic signal timing or detectingincidents quickly.  VersiCam, ourintegrated camera and processor video detection system, is a cost-efficientvideo detection system for smaller intersections that require only a fewdetection points.  Vantage videodetection systems have been deployed by hundreds of agencies and are currentlysold through a network of independent dealers in the United States, Asia, LatinAmerica, Europe and the Middle East.

 

Our Vehicle Sensorssegment addresses the leading cause of roadway fatalities:  rear-end, lane change, and roadway departureaccidents.  According to the NationalHighway Traffic Safety Administration, these three crash types result in about27,500 of the U.S.’s 42,000 annual traffic fatalities and contribute to aconsiderable economic loss due to injuries, property damage, and decreasedproductivity.

 

Our Vehicle Sensorssegment developed the world’s first production LDW system and offers a provensystem that is available as an OEM and aftermarket option on heavy trucksworldwide and as an option in passenger cars. Our LDW products utilize video detection images to detect when a vehiclebegins to drift toward an unintended lane change.  When this occurs, the unit automaticallyemits a distinctive rumble strip or other audible warning sound, alerting thedriver to make a correction.  To date, wehave sold approximately 69,000 LDW systems into the heavy truck market inEurope, North America and Asia.  Our LDWsystems are currently qualified as an option on certain heavy trucks, includingMercedes-Benz, MAN, Iveco, DAF, Scania, Freightliner and FUSO, as well asNeoplan and MAN luxury bus and coach lines. In North America, our LDW systemsare sold primarily to truck fleets, and to date, 74 U.S. heavy truck fleetshave selected our LDW systems, with a combined fleet size estimated at 58,000vehicles.  Additionally, we have licensedour LDW technology to our strategic partner, Valeo, resulting in sales to dateof approximately 69,000 LDW systems for passenger cars.

 

In addition to our LDWsystems, we expanded our Vehicle Sensors portfolio in August 2008 withnewly developed technologies such as radar based Forward Collision Warning andBlind Spot Warning systems for the North American truck market.  We also introduced Safety Direct in March 2008,which is a system that reports real-time driver performance data captured byour LDW system and that has the ability to relay this information directly tofleet operators through integration with the truck’s existing fleetcommunications system.  We offer the FCWand BSW features through the resale of Delphi’s radar based systems, for whichwe are the exclusive North American dealer, while Safety Direct was internallydeveloped. These new products, together with our LDW products, combine tocreate a broad suite of active safety driver assistance features that help toreduce the number of motor vehicle crashes and the severity of crash-relatedinjuries.

 

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Our TransportationSystems segment includes transportation engineering and consulting servicesfocused on the planning, design, development and implementation ofsoftware-based systems that integrate sensors, video surveillance, computers,and advanced communications equipment to enable public agencies to monitor,control, and direct traffic flow, assist in the quick dispatch of emergencycrews and distribute real-time information about traffic conditions. Ourservices include planning, design, and implementation of surface transportationinfrastructure systems. We perform analysis and study goods movement,commercial vehicle operations, travel demand forecasting, and systems engineering,and identify mitigation measures to reduce traffic congestion. These servicesand systems are primarily sold to local, state, and national transportationagencies in the United States. Our Transportation Systems segment is largelydependent upon governmental funding and budgetary issues. The Federal HighwayBill that was passed in August 2005 provided for a significant increase intransportation funding. We believe the recent expansion of our TransportationSystems segment was due in part to the passage of the Federal Highway Bill,combined with increased transportation funds available at state and localagencies throughout the country.  The2005 Federal Highway Bill is set to expire in September 2009.  At this point in time, the impact on futurecontract revenues as a result of the recently introduced federal stimuluspackage and any potential delays in the passage of future transportation billscannot be determined.

 

During Fiscal 2009, weintroduced certain products including VersiCam, EdgeConnect and Safety Direct.We also completed the acquisition of certain assets of Hamilton Signalincluding the Abacus system for an aggregate purchase price of approximately$518,000. This acquisition should afford us with the opportunity to provide ourcustomers with traffic and incident detection data from our installed base ofsurveillance cameras.

 

**CriticalAccounting Policies and Estimates**

 

Management’s Discussionand Analysis of Financial Condition and Results of Operations is based on ourconsolidated financial statements included herein, which have been prepared inaccordance with generally accepted accounting principles in the United States (“GAAP”).The preparation of these financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and related disclosures of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. On an ongoing basis, we evaluate theseestimates and assumptions, including those related to the collectibility ofaccounts receivable, the valuation of inventories, the recoverability oflong-lived assets and goodwill, the realizability of deferred tax assets,accounting for stock-based compensation, the valuation of equity instruments,warranty reserves and other contingencies. We base these estimates onhistorical experience and on various other factors that we believe to 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.

 

The following criticalaccounting policies affect our more significant judgments and estimates used inthe preparation of our consolidated financial statements.

 

*Revenue Recognition.* We record product revenues and relatedcosts of sales upon transfer of title, which is generally upon shipment or, ifrequired, upon acceptance by the customer, provided that we believecollectibility of the net sales amount is reasonably assured.  Accordingly, at the date revenue is recognized,the significant uncertainties concerning the sale have been resolved.

 

Contract revenues arederived primarily from long-term contracts with governmental agencies. Contractrevenues include costs incurred plus a portion of estimated fees or profitsdetermined using the percentage of completion method of accounting based on therelationship of costs incurred to total estimated costs. Any anticipated losseson contracts are charged to earnings when identified. Changes in jobperformance and estimated profitability, including those arising from contractpenalty provisions and final contract settlements, may result in revisions torecognized costs and revenues and are recognized in the period in which therevisions are determined. Profit incentives are included in revenue when theirrealization is reasonably assured.

 

In addition toproduct and contract revenues, we derive revenue from technology access fees,the provision of specific non-recurring contract engineering services to ourstrategic partner, Valeo, related to our LDW systems, and royalties earned onunit sales of our LDW systems by Valeo to the passenger car market. Technologyaccess fee revenues are recognized evenly over the period in which they areearned. Non-recurring contract engineering revenues are recognized in theperiod in which the related services are performed. Royalty revenues arerecorded based on unit sales of our products by Valeo and are recognized in theperiod in which such sales occur. Technology access fee revenues, non-recurringcontract engineering revenues and royalty revenues are included in net sales.

 

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

 

*Accounts Receivable.* We estimate the collectibility ofcustomer receivables on an ongoing basis by periodically reviewing invoicesoutstanding greater than a certain period of time. We record reserves forreceivables deemed to be at risk for collection as well as a general reservebased on our historical collections experience. A considerable amount ofjudgment is required in assessing 

 

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the ultimate realization of trade receivables,including the current credit-worthiness of each customer. If the financialcondition of our customers deteriorates, resulting in an impairment of theirability to make required payments, additional allowances may be required thatcould adversely affect our operating results.

 

*Inventory.* Inventories consist of finished goods,work-in-process and raw materials and are stated at the lower of cost ormarket. We provide reserves for potentially excess and obsolete inventory. Inassessing the ultimate realization of inventories, we make judgments as tofuture demand requirements and compare that with the current or committedinventory levels. Reserves are established for inventory levels that exceedanticipated future demand. It is possible that reserves over and above thosealready established may be required in the future if market conditions for ourproducts deteriorate.

 

*Goodwill.* Goodwill is tested for impairmentannually in our fourth fiscal quarter at the reporting unit level unless achange in circumstances indicates that more frequent impairment analysis isrequired. Impairment, if any, is measured based on the estimated fair value ofthe reporting units with the recorded goodwill. Fair value is determined byusing the income approach methodology of valuation which utilizes discountedcash flows taking into consideration the market approach. The estimated fairvalue of our reporting units also includes a control premium, which is theamount that a buyer is willing to pay over the current market price of acompany as indicated by the traded price per share (i.e., marketcapitalization), in order to acquire a controlling interest. Significantmanagement judgment is required in the forecasts of future operating resultsthat are used in the discounted cash flow method of valuation. In estimatingfuture cash flows, we generally use the financial assumptions in our currentbudget and our current strategic plan, subject to modification as considerednecessary, including sales and expense growth rates and the discount rates weestimate to represent our cost of funds. It is possible, however, that theplans and estimates used may be incorrect. If our actual results, or the plansand estimates used in future impairment analyses, are lower than the originalestimates used to assess the recoverability of goodwill, we could incurimpairment charges.

 

*Warranty.* We generally provide a one to three yearwarranty from the original invoice date on all products, materials andworkmanship. Defective products are either repaired or replaced, 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 expenses on theaccompanying consolidated balance sheets. Should our actual experience ofwarranty returns be higher than anticipated, additional warranty reserves maybe required, which may adversely affect our operating results.

 

*Income Taxes.* On a quarterly basis, we assess thelikelihood that our deferred tax asset balance will be recovered from futuretaxable income. Realization of deferred tax assets (such as net operating losscarryforwards) is dependent on future taxable earnings and is thereforeuncertain. To the extent we believe that recovery is not likely, we establish avaluation allowance to reduce our deferred tax assets to amounts that webelieve are more likely than not to be realized, which increases our income taxexpense in the period such determination is made.

 

On an interim basis, weestimate what our anticipated annual effective tax rate will be and record aquarterly income tax provision in accordance with this anticipated rate. As thefiscal year progresses, we refine our estimates based upon actual events andearnings during the year. This estimation process can result in significantchanges to our expected effective tax rate. When this occurs, we adjust theincome tax provision during the quarter in which the change in estimate occursso that the year-to-date provision reflects the expected annual rate. Thechanges described in the preceding sentence and adjustments to our valuationallowance may create fluctuations in our overall effective tax rate fromquarter to quarter.

 

Effective April 1,2007, we adopted the provisions of Financial Accounting Standards Board (“FASB”)Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes – an Interpretation of FASB Statement No. 109* (“FIN48”), which applies to all tax positions accounted for under Statement ofFinancial Accounting Standards (“SFAS”) No. 109, *Accountingfor Income Taxes*(“SFAS 109”). FIN 48 clarifies the accounting for uncertainty in income taxes byestablishing minimum standards for the recognition and measurement of taxpositions taken or expected to be taken in a tax return. Under the requirementsof FIN 48, we must review all of our tax positions and make a determination asto whether our position is more-likely-than-not to be sustained uponexamination by regulatory authorities. If a tax position meets themore-likely-than-not standard, then the related tax benefit is measured basedon a cumulative probability analysis of the amount that is more-likely-than-notto be realized upon ultimate settlement or disposition of the underlying issue.

 

The application of taxlaws and regulations is subject to legal and factual interpretation, judgmentand uncertainty. Tax laws and regulations themselves are subject to change as aresult of changes in fiscal policy, changes in legislation, the evolution ofregulations and court rulings. Therefore, the actual liability for U.S. orforeign taxes may be materially different from our estimates, which couldresult in the need to record additional tax liabilities or potentially reversepreviously recorded tax liabilities.

 

*Stock-BasedCompensation*.  We adopted SFAS No. 123 (revised 2004), *Share-Based Payment* (“SFAS 123R”), effective April 1,2006.  SFAS 123R requires all stock-basedpayments, including grants of employee stock options, to be recognized in thestatement of operations as an expense, based on their grant date fair valueswith such fair values amortized over the requisite service

 

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period.  We elected to utilize the modifiedprospective method for the transition to SFAS 123R. Under the modifiedprospective method, SFAS 123R applies to all awards granted or modified afterthe date of adoption. In addition, under the modified prospective method,compensation expense will be recognized for all stock-based compensation awardsgranted prior to but not yet vested as of April 1, 2006, based ongrant-date fair values estimated in accordance with the original provisions ofSFAS 123.

 

In implementing SFAS123R, we have used the Black-Scholes-Merton (“BSM”) option-pricing formula toestimate the fair value of stock-based awards granted subsequent to April 1,2006.  While this model meets therequirements of SFAS 123R, the estimated fair values generated by it maynot be indicative of the actual fair values of our stock-based awards as itdoes not consider certain factors important to those awards to employees, suchas continued employment and periodic vesting requirements as well as limitedtransferability.  Our assumptions underthe BSM formula include the following:  (i) expectedvolatilities are based on the historical volatility of our stock price, (ii) theexpected life of options is derived based on the historical life of ouroptions, (iii) the risk-free rate for periods within the expected life ofthe option is based on the U.S. Treasury interest rates in effect at the timeof grant and (iv) the dividend yield assumption is based on our historyand expectation of dividend payouts. Additionally, SFAS 123 did not require the estimation of forfeitures inthe calculation of stock compensation expense; however, SFAS 123R does requiresuch estimation and upon adoption of SFAS 123R, we changed our methodology toinclude an estimate of forfeitures. Future stock-based compensation expense in any particular quarter oryear could be affected by changes in our assumptions, changes in marketconditions, or to the extent that we grant additional stock-based awards.Additionally, if there are any modifications or cancellations of the underlyingunvested stock-based awards, we may be required to accelerate, increase orcancel any remaining unearned stock-based compensation expense.

 

**Resultsof Operations**

 

The following table setsforth certain statement of operations data as a percentage of total net salesand contract revenues for the periods indicated. The following table should beread in conjunction with Management’s Discussion and Analysis of FinancialCondition and Results of Operations.

 
| ** **                                | ** ** | **Year Ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                      |       |                           |       |   |   |   |   |
| Net sales and contract revenues:          |       |                           |       |   |   |   |   |
| Net sales                                 |       | 55.4                           | %          | 61.9 | % | 62.2 | % |
| Contract revenues                         |       | 44.6                           |       | 38.1 |   | 37.8 |   |
| Total net sales and contract revenues     |       | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Costs of net sales and contract revenues: |       |                           |       |   |   |   |   |
| Cost of net sales                         |       | 29.3                           |       | 31.5 |   | 34.0 |   |
| Cost of contract revenues                 |       | 30.4                           |       | 25.1 |   | 24.8 |   |
| Gross profit                              |       | 40.3                           |       | 43.4 |   | 41.2 |   |
| Operating expenses:                       |       |                           |       |   |   |   |   |
| Selling, general and administrative       |       | 26.0                           |       | 26.5 |   | 27.5 |   |
| Research and development                  |       | 5.8                            |       | 5.5 |   | 6.9 |   |
| Amortization of intangible assets         |       | 0.2                            |       | 0.2 |   | 0.3 |   |
| Total operating expenses                  |       | 32.0                           |       | 32.2 |   | 34.6 |   |
| Operating income                          |       | 8.2                            |       | 11.2 |   | 6.6 |   |
| Non-operating income (expense):           |       |                           |       |   |   |   |   |
| Other income (expense), net               |       | 0.2                            |       | 0.4 |   | (1.1 | ) |
| Interest expense, net                     |       | (0.9                           | )          | (2.0 | ) | (2.7 | ) |
| Income before income taxes                |       | 7.5                            |       | 9.6 |   | 2.7 |   |
| Income tax benefit                        |       | 7.6                            |       | 9.1 |   | 2.3 |   |
| Net income                                |       | 15.1                           | %          | 18.7 | % | 5.0 | % |

 

**Analysisof Fiscal 2009, Fiscal 2008 and Fiscal 2007 Results of Operations**

 

*NetSales and Contract Revenues*. Net sales are comprised ofproduct sales from our Roadway Sensors and Vehicle Sensors segments, as well astechnology access fees, contract engineering revenue and royalty revenue generatedfrom our Vehicle Sensors segment.  Contract revenues consist entirely ofTransportation Systems contract revenues, which are generated from systemsintegration and ITS consulting services primarily with federal, state, countyand municipal agencies.

 

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The followingtables present details of our net sales and contract revenues for Fiscal 2009compared to Fiscal 2008 and Fiscal 2008 compared to Fiscal 2007, respectively:

 
| ** **                             | ** ** | **Fiscal**                              | ** ** | **Fiscal** | ** ** | **Increase**   | ** ** | **%**      | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                             | ** ** | **2009**                                | ** ** | **2008**   | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
|                                   |       | **(In  thousands, except percentages)** |       |
| Roadway  sensors                       |       | $                                       | 27,197     |       | $          | 28,452         |       | (1,255     | )          | (4.4 | )% |
| Vehicle  sensors                       |       | 11,230                                  |       | 11,874     |       | (644           | )          | (5.4       | )          |
| Net  sales                             |       | 38,427                                  |       | 40,326     |       | (1,899         | )          | (4.7       | )          |
| Contract  revenues                     |       | 30,932                                  |       | 24,837     |       | 6,095          |       | 24.5       |       |
| Total  net sales and contract revenues |       | $                                       | 69,359     |       | $          | 65,163         |       | $          | 4,196      |   | 6.4 |   |
|                                        |            |                                         |            |            |            |                |            |            |            |  |  |  |

 
| ** **                             | ** ** | **Fiscal**                                            | ** ** | **Fiscal** | ** ** | ** **   | ** ** | **%**      | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                             | ** ** | **2008**                                              | ** ** | **2007**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                             | ** ** | **(In thousands, except percentages)** | ** ** |
| Roadway  sensors                       |       | $                                                     | 28,452     |       | $          | 27,261       |       | 1,191      |       | 4.4 | % |
| Vehicle  sensors                       |       | 11,874                                                |       | 8,987      |       | 2,887        |       | 32.1       |       |
| Net  sales                             |       | 40,326                                                |       | 36,248     |       | 4,078        |       | 11.3       |       |
| Contract  revenues                     |       | 24,837                                                |       | 22,049     |       | 2,788        |       | 12.6       |       |
| Total  net sales and contract revenues |       | $                                                     | 65,163     |       | $          | 58,297       |       | $          | 6,866      |   | 11.8 |   |
|                                        |            |                                                       |            |            |            |              |            |            |            |  |  |  |

 

We currently havea diverse customer base with no individual customer representing greater than10% of our total net sales and contract revenues for Fiscal 2009 or 2008, andone customer representing approximately 12.4% of our net sales and contractrevenues in Fiscal 2007.

 

*Roadway Sensors*

 

The majority of RoadwaySensors net sales were derived from sales within North America.  The decrease in Roadway Sensors net sales inFiscal 2009 as compared to Fiscal 2008 was mainly due to reduced and delayedspending on infrastructure projects as a result of the decline in commercialand residential construction, as well as local government budgetary pressures.We expect the above factors, among others, may continue to adversely impact ourRoadway Sensors net sales for at least the next few fiscal quarters. Theincrease in net sales in Fiscal 2008 as compared to Fiscal 2007 primarilyreflects the continued adoption of video vehicle detection technology, such asthe technology offered by our Vantage line of products, both domestically and internationally.

 

*Vehicle Sensors*

 

The largest element ofVehicle Sensors net sales was sales of our LDW systems to the heavy truckmarket, which aggregated approximately $9.9 million in Fiscal 2009, $10.0million in Fiscal 2008 and $6.4 million in Fiscal 2007.  Vehicle Sensors net sales decreased slightlyin Fiscal 2009 as compared to Fiscal 2008 primarily due to a significantslowdown in overall LDW unit shipments to each of our key markets in the fourthquarter of Fiscal 2009. The increase in Fiscal 2008 net sales of VehicleSensors products, as compared to Fiscal 2007, was primarily a result ofincreased unit sales of our LDW systems to European and Asian OEMs.

 

Recently, we haveexperienced softness in our LDW unit sales to the North American truck marketand to our European and Asian OEM customers, which was driven largely by thegeneral slowdown in the U.S. and worldwide credit markets and continuedweakness in the overall global economy. We expect declining LDW unit sales for the first quarter of Fiscal 2010due to these and other macroeconomic conditions.  Additionally, Vehicle Sensors unit sales inFiscal 2010 and beyond could also be adversely impacted by slower than expectedadoption rates of our LDW system by European and Asian OEMs and North Americanheavy truck fleets, as well as potential additional OEM volume discountsresulting from increased price competition as new competitors have entered thismarket.  Additionally, certain recentenvironmental regulations in Europe and North America have substantiallyincreased the cost of new commercial trucks, which could impact future trucksales volumes and, ultimately, unit sales of our LDW systems.

 

Also included in VehicleSensors net sales are revenues from contract engineering services, technology accessfees and royalty revenues in the passenger car market that are derived from ourstrategic relationship with Valeo, which aggregated approximately $1.3 million,$1.9 million and $2.6 million in Fiscal 2009, Fiscal 2008 and Fiscal 2007,respectively.  The total revenues forFiscal 2007 included certain technology access fee revenue of $500,000 that didnot recur in either Fiscal 2008 or 2009. Royalty revenues from Valeo for sales of our LDW systems for the passengercar market were relatively insignificant in Fiscal 2009, Fiscal 2008 and Fiscal2007.  Our LDW systems are now offered asan option on three Infiniti models. While Valeo is promoting our LDW systems to other passenger car OEMs, wecannot assure you that Valeo will be successful in these efforts.

 

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*Contract Revenues*

 

Contract revenues areprimarily dependent upon the continued availability of funding at both thestate and federal levels from the various departments of transportation.  The Fiscal 2009 increase in contract revenueswas largely a result of our increased sales and marketing activity across theU.S., resulting in certain significant new contracts that were awarded to usduring the current fiscal year. Certain of these new contracts contained ahigher than usual amount of sub-consulting content, which was primarilyconcentrated in our contract revenues in the fourth quarter of Fiscal 2009. TheFiscal 2008 increase in contract revenues was largely due to increased fundingat the federal, state and local levels throughout the country, as well as newcontract awards.  At the end of Fiscal2009, our Transportation Systems segment’s staff levels approximated those ofthe prior year-end; however, in response to the growth we have experienced inour Transportation Systems segment over the last several years, we increasedthis segment’s staff by 21% in Fiscal 2008 and 16% in Fiscal 2007.  We believe the ability of our TransportationSystems business to grow and successfully win and service new contracts will behighly dependent upon our continued success in recruiting and retainingqualified personnel.  All of our contractrevenues are derived from work performed in North America under a broad rangeof fixed price and cost plus fixed fee contracts.

 

*GrossProfit*. The following tables present details of our grossprofit for Fiscal 2009 compared to Fiscal 2008 and Fiscal 2008 compared toFiscal 2007, respectively:

 
| ** **                                                          | ** ** | **Fiscal**                             | ** ** | **Fiscal** | ** ** | ** **   | ** ** | **%**      | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                                                          | ** ** | **2009**                               | ** ** | **2008**   | ** ** | **Decrease** | ** ** | **Change** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Total  gross profit                                                 |       | $                                      | 27,919     | ** ** | $          | 28,297       |       | $          | (378       | ) | (1.3 | )% |
| Total  gross profit as a % of total net sales and contract revenues |       | 40.3                                   | %          | 43.4       | %          |         |       |       |       |
| Gross  profit as a % of net sales                                   |       | 47.1                                   | %          | 49.2       | %          | ** **   |       |       |       |
| Gross  profit as a % of contract revenues                           |       | 31.8                                   | %          | 34.1       | %          |         |       |       |       |
|                                                                     |            |                                        |            |            |            |              |            |            |            |  |  |  |

 
| ** **                                                          | ** ** | **Fiscal**                                            | ** ** | **Fiscal** | ** ** | ** **   | ** ** | **%**      | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|--------------|------------|------------|------------|
| ** **                                                          | ** ** | **2008**                                              | ** ** | **2007**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                                                          | ** ** | **(In thousands, except percentages)** | ** ** |
| Total  gross profit                                                 |       | $                                                     | 28,297     | ** ** | $          | 24,008       |       | $          | 4,289      |   | 17.9 | % |
| Total  gross profit as a % of total net sales and contract revenues |       | 43.4                                                  | %          | 41.2       | %          |         |       |       |       |
| Gross  profit as a % of net sales                                   |       | 49.2                                                  | %          | 45.3       | %          |         |       |       |       |
| Gross  profit as a % of contract revenues                           |       | 34.1                                                  | %          | 34.4       | %          |         |       |       |       |
|                                                                     |            |                                                       |            |            |            |              |            |            |            |  |  |  |

 

The decrease in grossprofit as a percent of net sales in Fiscal 2009 as compared to Fiscal 2008 wasprimarily a result of decreased gross profit in Roadway Sensors and wasprimarily driven by our customer mix. Roadway Sensors net sales were weightedmore toward dealer than direct sales in Fiscal 2009. We generally enjoy highergross margins on direct sales as compared to dealer and aftermarket sales.  The increase in gross profit as a percentageof net sales in Fiscal 2008 as compared to Fiscal 2007 was a result of afavorable sales mix in terms of both geography and product mix, as well asimproved production efficiencies.  Grossprofit as a percentage of net sales also improved in Fiscal 2008 through theexpansion of our Vehicle Sensors customer base, which helped mitigate theimpact of lower contractual pricing to our largest European customer.  Gross profit as a percentage of net sales canfluctuate in any specific quarter or year based on, among other factors,customer and product mix, competitive pricing requirements, product warrantycosts and provisions for excess and obsolete inventories, as well as possibleshifts of engineering resources from development activities to sustainingactivities, which we record as cost of goods sold.

 

We recognize contractrevenues and related gross profit using percentage of completion contractaccounting, and the underlying mix of contract activity affects the relatedgross profit recognized in any given period. The decreases in gross profit as apercent of contract revenues in Fiscal 2009 compared to Fiscal 2008 and Fiscal2008 compared to Fiscal 2007 primarily reflect a contract mix weighted moretoward lower margin contracts in those periods. Lower margin contracts generally have a higher proportion ofsub-consulting revenues associated with them. We experienced an abnormally highlevel of sub-consulting content related to certain new contracts during thefourth quarter of Fiscal 2009, which contributed both to the overall increasein contract revenues, as described above, as well as the decrease in our grossprofit. For the first quarter of Fiscal 2010, we do not expect similar levelsof sub-consulting content; however, due to the variability and timing of ourcontracts, we may experience higher than usual sub-consulting content in futureperiods.

 

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*Selling,General and Administrative Expense*

 

The following tablepresents selling, general and administrative expense for Fiscal 2009 and 2008:

 
| ** **                           | ** ** | **Fiscal 2009**                        | ** ** | **Fiscal 2008** | ** ** | ** ** | ** ** | ** **    | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|-----------------|------------|------------|------------|---------------|------------|
| ** **                           | ** ** | ** **                             | ** ** | **% 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        |       | $                                      | 11,949     |            | 17.2       | %          | $          | 10,916        |       | 16.8 | % | $ | 1,033 |   | 9.5 | % |
| Facilities,  insurance and supplies  |       | 2,378                                  |       | 3.4             |       | 2,254      |       | 3.5           |       | 124 |   | 5.5 |   |
| Professional  and outside services   |       | 1,302                                  |       | 1.9             |       | 1,734      |       | 2.7           |       | (432 | ) | (24.9 | ) |
| Travel  and conferences              |       | 1,563                                  |       | 2.3             |       | 1,323      |       | 2.0           |       | 240 |   | 18.1 |   |
| Other                                |       | 843                                    |       | 1.2             |       | 1,062      |       | 1.6           |       | (219 | ) | (20.6 | ) |
| Selling,  general and administrative |       | $                                      | 18,035     |            | 26.0       | %          | $          | 17,289        |       | 26.5 | % | $ | 746 |   | 4.3 |   |

 

The overall increase inselling, general and administrative expenses in Fiscal 2009 was primarilydriven by higher selling expenses in our Transportation Systems segment as aresult of a shift in certain of our labor resources from project-relatedactivities to sales and marketing efforts, aimed at capturing additionalcontract backlog. This resulted in an increase in this segment’s sales andmarketing expenses to $2.8 million for Fiscal 2009 compared to $2.0 million forFiscal 2008. Our professional and outside services expenses decreased in Fiscal2009 primarily due to our efforts to conserve costs and scale back our usage ofcertain outside and professional services, as well as various efficienciesgained in our internal control assessment and other financial reportingobligations in the current year. In Fiscal 2010, we will be subject to the requirementthat our independent registered public accounting firm provide an attestationon the effectiveness of our internal control over financial reporting, forwhich we expect additional increases in our general and administrativeexpenses.

 

The following tablepresents selling, general and administrative expense for Fiscal 2008 and 2007:

 
| ** **                           | ** ** | **Fiscal 2008**                   | ** ** | **Fiscal 2007** | ** ** | ** ** | ** ** | ** **    | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|----------------------|------------|------------|------------|---------------|------------|
| ** **                           | ** ** | ** **                             | ** ** | **% 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        |       | $                                      | 10,916     |                 | 16.8       | %          | $          | 10,024        |       | 17.2 | % | $ | 892 |   | 8.9 | % |
| Facilities, insurance  and supplies  |       | 2,254                                  |       | 3.5                  |       | 2,101      |       | 3.6           |       | 153 |   | 7.3 |   |
| Professional and  outside services   |       | 1,734                                  |       | 2.7                  |       | 1,764      |       | 3.0           |       | (30 | ) | (1.7 | ) |
| Travel and conferences               |       | 1,323                                  |       | 2.0                  |       | 1,250      |       | 2.1           |       | 73 |   | 5.8 |   |
| Other                                |       | 1,062                                  |       | 1.6                  |       | 864        |       | 1.5           |       | 198 |   | 22.9 |   |
| Selling, general and  administrative |       | $                                      | 17,289     |                 | 26.5       | %          | $          | 16,003        |       | 27.5 | % | $ | 1,286 |   | 8.0 |   |
|                                      |            |                                        |            |                      |            |            |            |               |            |  |  |  |  |  |  |  |  |

 

The increase in selling,general and administrative expense in Fiscal 2008 compared to Fiscal 2007 waslargely attributable to higher commissions and selling expenses driven by salesgrowth in our Roadway Sensors segment, as well as general and administrativeexpenses incurred related to our efforts to comply with the internal controlassessment and reporting requirements.

 

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*Researchand Development Expense*

 

The following tablepresents research and development expense for Fiscal 2009 and 2008:

 
| ** **                           | ** ** | **Fiscal 2009**                   | ** **  | **Fiscal 2008** | ** ** | ** ** | ** ** | ** **    | ** ** |
|--------------------------------------|------------|----------------------------------------|-------------|----------------------|------------|------------|------------|---------------|------------|
| ** **                           | ** ** | ** **                             | ** **  | **% of Net**         | ** ** | ** ** | ** ** | **% of Net**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** **  | **Sales and**        | ** ** | ** ** | ** ** | **Sales and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** **  | **Contract**         | ** ** | ** ** | ** ** | **Contract**  | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **Amount**                             | ** **  | **Revenues**         | ** ** | **Amount** | ** ** | **Revenues**  | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(In thousands, except percentages)** | ** **  |
| Salary and  personnel-related        |       | $                                      | 2,748       |                 | 4.0        | %          | $          | 2,294         |       | 3.5 | % | $ | 454 |   | 19.8 | % |
| Facilties, development  and supplies |       | 1,018                                  |        | 1.5                  |       | 1,019      |       | 1.6           |       | (1 | ) | (0.1 | ) |
| Other                                |       | 264                                    |        | 0.4                  |       | 253        |       | 0.4           |       | 11 |   | 4.3 |   |
| Research and  development            |       | $                                      |  4,030 |                 | 5.8        | %          | $          | 3,566         |       | 5.5 | % | $ | 464 |   | 13.0 |   |

 

The increase in researchand development expense in Fiscal 2009 compared to Fiscal 2008 was primarilydue to increased research and development activities in Roadway Sensors aimedat accelerating the time to market of certain new products. We believe researchand development activities are crucial to our ability to continue to be aleader in our markets.

 

The following tablepresents research and development expense for Fiscal 2008 and 2007:

 
| ** **                           | ** ** | **Fiscal 2008**                   | ** **  | **Fiscal 2007** | ** ** | ** ** | ** ** | ** **    | ** ** |
|--------------------------------------|------------|----------------------------------------|-------------|----------------------|------------|------------|------------|---------------|------------|
| ** **                           | ** ** | ** **                             | ** **  | **% of Net**         | ** ** | ** ** | ** ** | **% of Net**  | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** **  | **Sales and**        | ** ** | ** ** | ** ** | **Sales and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | ** **                             | ** **  | **Contract**         | ** ** | ** ** | ** ** | **Contract**  | ** ** | **Increase** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **Amount**                             | ** **  | **Revenues**         | ** ** | **Amount** | ** ** | **Revenues**  | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **(In thousands, except percentages)** | ** **  |
| Salary and  personnel-related        |       | $                                      | 2,294       |                 | 3.5        | %          | $          | 2,265         |       | 3.9 | % | $ | 29 |   | 1.3 | % |
| Facilties, development  and supplies |       | 1,019                                  |        | 1.6                  |       | 1,474      |       | 2.5           |       | (455 | ) | (30.9 | ) |
| Other                                |       | 253                                    |        | 0.4                  |       | 291        |       | 0.5           |       | (38 | ) | (13.1 | ) |
| Research and  development            |       | $                                      |  3,566 |                 | 5.5        | %          | $          | 4,030         |       | 6.9 | % | $ | (464 | ) | (11.5 | ) |

 

The decrease in researchand development expense in Fiscal 2008 compared to Fiscal 2007 was primarilydue to reduced research and development activities in Vehicle Sensors as manyof our significant truck OEM customers now have production LDW units that onlyrequire minimal further development and the majority of our passenger carresearch and development efforts are funded by our strategic partner,Valeo.  This decreased spending waspartially offset by increased research and development spending in RoadwaySensors.

 

For competitive reasons,we closely guard the confidentiality of specific development projects.

 

*OtherIncome (Expense), Net*

 

The following tablepresents other income (expense), net for Fiscal 2009, 2008 and 2007:

 
| ** **                                | ** ** | **Year Ended March 31,** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                | ** ** | **(In thousands)**            | ** ** |
| Net  gain on early extinguishment of debt |       | $                             | 50         |   | $ | 224 |   | $ | — |   |
| Settlement  of lawsuits                   |       | —                        | ** ** | **—** |   | (635 | ) |
| Other                                     |       | 66                            |       | 28 |   | (18 | ) |
| Other  income (expense), net              |       | $                             | 116        |   | $ | 252 |   | $ | (653 | ) |

** **

**Otherincome, net in Fiscal 2009 includes the net gain of $50,000 we recognized inconnection with the early retirement of $7.0 million of convertible debentures,as well as certain net foreign currency gains and other miscellaneous income.Other income, net in Fiscal 2008 primarily reflects the net gain of $224,000 werecognized in connection with the early retirement of $2.1 million ofconvertible debentures. See Note 3 of Notes to Consolidated FinancialStatements for additional discussion regarding the early retirement of ourconvertible debentures.  Other expense,net in Fiscal 2007 primarily reflects $635,000 of expense recorded inconnection with the settlement of litigation in July 2006, which isdiscussed further in Note 5 of Notes to Consolidated Financial Statements.**

 

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*InterestExpense, Net*

 

The following tablepresents interest expense, net for Fiscal 2009, 2008 and 2007:

 
| ** **             | ** ** | **Year Ended March 31,** | ** ** |
|------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **             | ** ** | **(In thousands)**            | ** ** |
| Interest  expense      |       | $                             | (651       | ) | $ | (1,285 | ) | $ | (1,601 | ) |
| Interest  income       |       | 5                             |       | 1 |   | 1 |   |
| Interest  expense, net |       | $                             | (646       | ) | $ | (1,284 | ) | $ | (1,600 | ) |

 

**Interestexpense, net decreased 49.7% in Fiscal 2009 compared to Fiscal 2008 and decreased19.8% in Fiscal 2008 compared to Fiscal 2007 primarily due to our lower overalllevel of borrowings, lower interest rates and also as a result of the earlyretirement of certain of our convertible debentures, as discussed above.**

** **

*IncomeTaxes*

 

The following tablepresents our benefit for income taxes for Fiscal 2009, 2008 and 2007:

 
| ** **          | ** ** | **Year Ended March 31,**               | ** ** |
|---------------------|------------|-------------------------------------------------------|------------|
| ** **          | ** ** | **2009**                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|                |       | **(In thousands, except percentages)** |       |
| Income  tax benefit |       | $                                                     | 5,297      |   | $ | 5,900 |   | $ | 1,343 |   |
| Effective  tax rate |       | (102.3                                                | )%         | (94.2 | )% | (85.3 | )% |
|                     |            |                                                       |            |  |  |  |  |  |  |  |

 

The income tax benefitsrecorded in Fiscal 2009, Fiscal 2008 and Fiscal 2007 were primarily the resultof a decrease in the valuation allowance recorded against our deferred taxassets as a result of changes in estimates of the future realizability of theseassets.  As we update our estimates infuture periods, adjustments to our deferred tax asset and valuation allowancemay be necessary. We anticipate this will cause our future overall effectivetax rate in any given period to fluctuate from prior effective tax rates andstatutory tax rates. We utilize the asset and liability method of accountingfor income taxes as set forth in SFAS No. 109, *Accountingfor Income Taxes*.  We recordnet deferred tax assets to the extent that we believe these assets will morelikely than not be realized. In making such determination, we consider allavailable positive and negative evidence, including, but not limited to,scheduled reversals of deferred tax liabilities, projected future taxableincome, tax planning strategies and recent financial performance.

 

At March 31, 2009,we had $40.8 million of federal net operating loss carryforwards and$18.4 million of state net operating loss carryforwards that begin toexpire in 2019 and 2013, respectively. Due to changes in stock ownership, ourfederal net operating loss carryforwards are subject to a Section 382limitation estimated at approximately $7.8 million annually which can beutilized to offset federal consolidated taxable income.  Although the impact cannot be preciselydetermined, we believe that our net operating loss carryforwards will cause usto have future income tax payments and income tax expense that aresubstantially lower than the income tax liability and income tax expensecalculated using statutory tax rates.

 

**Liquidityand Capital Resources**

 

*Cash Flows*

 

We have historically financed our operations with acombination of cash flows from operations, borrowings under credit facilitiesand the sale of equity securities. We currently rely on cash flows fromoperations and the availability of borrowings on a line of credit facility tofund our operations, which we believe to be sufficient to fund our operationsfor at least the next twelve months.  At March 31,2009, we had $20.6 million in working capital, which included no borrowings onour $12.0 million line of credit and $6.4 million in cash and cash equivalents,as compared to working capital of $14.9 million at March 31, 2008.

 

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The following table summarizes our cash flows forFiscal 2009, 2008 and 2007:

 
| ** **                                            | ** ** | **Year Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                            | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                            | ** ** | **(In thousands)**            | ** ** |
| **Net cash provided by (used in):**                   |       |                          |       |   |   |   |   |
| Operating  activities                                 |       | $                             | 6,390      |   | $ | 7,579 |   | (2,049 | ) |
| Investing  activities                                 |       | (795                          | )          | (739 | ) | (488 | ) |
| Financing  activities                                 |       | 413                           |       | (6,454 | ) | 2,441 |   |
| Net  increase (decrease) in cash and cash equivalents |       | $                             | 6,008      |   | $ | 386 |   | $ | (96 | ) |
|                                                       |            |                               |            |  |  |  |  |  |  |  |

 

*Operating Activities.* Cash provided by our operations in Fiscal 2009 was primarily the resultof our Fiscal 2009 net income of $10.5 million adjusted for certain non-cashitems within the statement of operations, primarily adjustments to our deferredtax balances and depreciation and stock-based compensation expenses.

 

Our net accounts receivable decreased approximately$700,000 from March 31, 2008 to March 31, 2009 due primarily to lowerproduct sales in the fourth quarter of Fiscal 2009 as compared to thecorresponding quarter in the prior year. Additionally, our net costs andestimated earnings in excess of billings decreased approximately $1.5 millionover the same period, primarily as a result of improved timeliness of billingsin our Transportation Systems segment during Fiscal 2009. If, in the longerterm, our net sales and contract revenues increase, it is likely that both ouraccounts receivable and net costs and estimated earnings in excess of billingsbalances will also increase. Our accounts receivable could also increase if customersdelay their payments or if we grant extended payment terms to customers, bothof which are more likely to occur during challenging economic times when ourcustomers may face issues gaining sufficient credit on a timely basis.

 

Inventories increased approximately $1.5 million from March 31,2008 to March 31, 2009 due primarily to a decrease in product sales, theintroduction of new products by our Roadway Sensors segment and the acquisitionof certain components because they have been discontinued by the manufacturer.In the future, our inventory levels are likely to continue to be determinedbased upon, among other factors, the level of purchase orders we receive, thestage at which our products are in their respective product life cycles, andcompetitive situations in the marketplace. We attempt to balance suchconsiderations against risk of obsolescence or potentially excess inventorylevels.

 

Cash provided by our operations in Fiscal 2008 wasprimarily a result of our Fiscal 2008 net income of $12.2 million and $1.6million in net cash provided by changes in operating assets and liabilities,partially offset by approximately $6.2 million in net non-cash items within thestatement of operations.  During Fiscal2007, cash used in operations was primarily a result of investments ininventory due to sales growth and longer lead times in procuring certaincomponents, and an increased level of net costs and estimated earnings inexcess of billings due to sales growth and the timing of invoicing on contractsin our Transportation Systems segment. These were partially offset by our Fiscal 2007 net income of $2.9million.

 

*Investing Activities. *Investing activities for Fiscal 2009, Fiscal 2008 andFiscal 2007 each consisted primarily of purchases of certain property andequipment.

 

*Financing Activities. *Net cash provided by financing activities in Fiscal2009 was the result of $900,000 in cash inflows from the exercise of stockoptions to purchase our common stock, partially offset by net payments on ourborrowings of $500,000. Net cash used in financing activities in Fiscal 2008was the result of net payments on our borrowings of $8.0 million, partiallyoffset by cash inflows of $1.5 million from the exercise of outstanding stockoptions and warrants to purchase our common stock.  During Fiscal 2007, net cash provided byfinancing activities was the result of cash inflows of $3.6 million from theexercise of outstanding stock options and warrants to purchase our common stock,of which approximately $2.0 million was raised through the exercise ofoutstanding warrants to purchase an aggregate of 1,250,000 shares of our commonstock. These cash inflows were partially offset by net payments on ourborrowings of $1.2 million.

 

*Borrowings*

 

The following tablesummarizes our borrowings and long-term debt:

 
| ** **                   | ** ** | **March 31,** | ** ** |
|------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2009**           | ** ** |
| ** **                   | ** ** | **(In thousands)** | ** ** |
| Convertible  debentures, net |       | $                  | 750        |   |
| Bank  term note              |       | 6,543              |       |
|                         |       | $                  | 7,293      |   |

 

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Prior to October 16,2008, we had a credit facility with a bank that provided for line of creditborrowings of up to $10.0 million. Under this credit facility, we could borrowagainst our eligible accounts receivable and eligible inventory, as defined inthe credit agreement. Interest on borrowed amounts under the line of credit waspayable monthly at the current stated prime rate plus 1.00%. Additionally, wewere obligated to pay an unused line fee of 0.25% per annum applied to theamount by which the maximum credit amount exceeded the average daily principalbalance during the preceding month. The credit facility required $2,000 inmonthly collateral management fees and included an early termination fee equalto 2% of the total facility during the first year of the agreement and 1% ofthe total facility in the second year of the agreement. The credit facility wassecured by substantially all of our assets. This credit facility expired on October 15, 2008.

 

Effective October 16,2008, we entered into a new $19.5 million credit facility with a different bank(California Bank & Trust) which replaced our existing creditfacility.  This new credit facilityprovides for a two-year revolving line of credit with borrowings of up to $12.0million and a $7.5 million 48-month term note (discussed below).  Interest on borrowed amounts under therevolving line of credit will be payable monthly at a rate equal to the currentstated prime rate up to the current stated prime rate plus 0.50%, depending onaggregate deposit balances maintained at the bank in relation to the total loancommitment under the credit facility (3.75% at March 31, 2009).  We are obligated to pay an unused line fee of0.25% per annum applied to the average unused portion of the revolving line ofcredit during the preceding month.  Therevolving line of credit does not contain any early termination fees and issecured by substantially all of our assets. As of March 31, 2009, no amounts were borrowed under the revolvingline of credit portion of the facility.

 

Additionally, aspart of this new credit facility and in connection with the early retirement of$7.0 million of our convertible debentures, as of March 31, 2009 we haveborrowed $6.5 million under the $7.5 million 48-month term note to retire suchoutstanding debentures. In May 2009, we borrowed an additional $750,000under the term note to pay off the remaining convertible debentures of the sameamount. Principal payments under this term note are required to be repaid in 48monthly installments commencing on June 1, 2009. Interest on the term notewill be payable monthly at a rate equal to the current stated prime rate plus0.50% up to the current stated prime rate plus 1.00%, depending on aggregatedeposit balances maintained at the bank in relation to the total loancommitment under the credit facility.  InOctober 2008, we paid an upfront loan commitment fee of $28,000 inconnection with the term note portion of the credit facility.  The term note contains no early terminationfees and, along with our revolving line of credit discussed above, is securedby substantially all of our assets.

 

In connection withour credit facility and loan agreement with California Bank & Trust,we are also required to comply with certain quarterly financial covenants.These include achieving certain ratios for working capital and debt service, aswell as maintaining a level of profitability, all of which are further defined inthe agreement. While we are currently in compliance with all financialcovenants and expect to maintain compliance for the foreseeable future, wecannot assure that we will not violate one or more covenants in the future. Ifwe were to be in violation of covenants under this agreement, our lender couldchoose to accelerate payment on all outstanding loan balances. In this event,there can be no assurances that we would be able to quickly obtain equivalentor suitable replacement financing. If we were not able to secure alternativesources of financing, such acceleration would have a material adverse impact onour financial condition.

 

On February 4,2009 we entered into an Amended and Restated Loan and Security Agreement withCalifornia Bank & Trust which supersedes the agreements entered intoon October 16, 2008 in their entirety. The October 16, 2008 documentswere amended and restated to clarify certain ambiguities and removenon-applicable language.  Nomodifications were made to any significant provisions related to the overallamount of the credit facility, interest rate calculations, or any financial ornon-financial covenant.

 

**OffBalance Sheet Arrangements**

 

In May 2004, we issuedsubordinated convertible debentures in an aggregate original principal amountof $10.1 million. These debentures were due in full on May 19, 2009and were convertible into shares of our common stock at a conversion price of$3.61 per share. At March 31, 2009, convertible debentures in an aggregateprincipal amount of $750,000 remained outstanding, and were subsequently paidoff in full on May 19, 2009. Because these debentures were conventionallyconvertible, we have not separately accounted for the conversion feature and,accordingly, no separate amounts are presented in our consolidated financialstatements in connection with this conversion feature.

 

At March 31, 2009,outstanding warrants to purchase an aggregate of 246,250 shares of ourcommon stock at an exercise price of $3.25 per share are callable by us if themarket price of our common stock trades for 20 consecutive days at a priceequal to or greater than two times the exercise price of the warrants.Outstanding warrants to purchase an aggregate of 75,000 shares ofour common stock at an exercise price of $5.00 per share are callable by us ifthe market price of our common stock trades for 20 consecutive days at a priceequal to or greater than one and a half times the exercise price of thewarrants.

 

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In connection with theissuance of warrants to purchase 246,250 shares of our common stock at $3.25per share, we are a party to a registration rights agreement that containsprovisions under which we could be subjected to liquidated damages should wefail to maintain effective registration statements for the shares of commonstock issuable upon exercise of certain underlying warrants. These warrantshave been accounted for within equity in our consolidated balance sheets inaccordance with EITF Issue No. 00-19, *Accounting for DerivativeFinancial Instruments Indexed to, and Potentially Settled in, a Company’s OwnStock*, and, accordingly, no liabilities have been recorded in connectiontherewith. As of the date of this filing, no liquidated damages are payableunder the provisions of the registration rights agreement associated with thesewarrants.

 

**RecentAccounting Pronouncements**

** **

In September 2006, the FASB issued SFAS No. 157,*Fair Value Measurements*, (“SFAS 157”),which defines fair value, establishes a framework for measuring fair value, andexpands disclosure about fair value measurements. SFAS 157 does not require anynew fair value measurements; rather it specifies valuation methods to beapplied when fair value measurements are required under existing or futureaccounting pronouncements. SFAS 157 is effective for fiscal years beginningafter November 15, 2007 and interim periods within those fiscal years. In February 2008,the FASB issued FASB Staff Position (“FSP”) 157-2, *EffectiveDate of FASB Statement No. *157 (“FSP 157-2”), which delays theeffective date of SFAS 157 for non-financial assets and liabilities to fiscalyears beginning after November 15, 2008. Generally, SFAS 157 will beapplied prospectively. With respect to financial assets and liabilities, weadopted SFAS 157 in the first quarter of Fiscal 2009. There was no materialimpact on our consolidated financial statements. We are currently evaluatingthe impact of SFAS 157 and FSP 157-2 with respect to our non-financial assetsand liabilities and expect to adopt SFAS 157 and FSP 157-2 with respect tothese assets and liabilities in the first quarter of Fiscal 2010.

 

In December 2007,the FASB issued SFAS No. 141R, *Business Combinations*(“SFAS 141R”). SFAS 141R establishes principles and requirements forhow the acquirer of a business recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree. The statement also provides guidancefor recognizing and measuring the goodwill acquired in the business combinationand determines what information to disclose to enable users of financialstatements to evaluate the nature and financial effects of the businesscombination. Additionally, in April 2009, the FASB issued FSP 141R-1, *Accounting for Assets Acquired and Liabilities Assumed in a BusinessCombination that Arise from Contingencies*(“FSP 141R-1”), whichamends SFAS 141R to require that assets acquired and liabilities assumed in abusiness combination that are from contingencies be recognized in accordancewith FAS 157 if the fair value can be determined during the measurementperiod.  SFAS 141R and FSP 141R-1are both effective for financial statements issued for fiscal years beginningafter December 15, 2008. The nature and magnitude of the specific effectsof adopting SFAS 141R and FSP 141R-1 will depend upon the nature, terms andsize of any acquisitions we may consummate after the effective date of ouradoption of SFAS 141R in the first quarter of Fiscal 2010.

 

In April 2008, theFASB issued FSP No. 142-3, *Determination of theUseful Life of Intangible Assets* (“FSP 142-3”), which amends theguidance about estimating the useful lives of recognized intangible assets andrequires additional disclosures related to renewing or extending the terms ofrecognized intangible assets under SFAS 142. FSP 142-3 is effective forfinancial statements issued for fiscal years, and interim periods within thosefiscal years, beginning after December 15, 2008. We currently do notexpect the adoption of FSP 142-3 will have a material impact on ourconsolidated financial statements.

 

In May 2008, theFASB issued SFAS No. 162, *TheHierarchy of Generally Accepted Accounting Principles*(“SFAS 162”). SFAS 162identifies the sources of accounting principles to be used in the preparationof financial statements of nongovernmental entities that are presented inconformity with GAAP. SFAS 162 is effective 60 days followingthe Securities and Exchange Commission approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, *The Meaning of Present Fairly in Conformity withGenerally Accepted Accounting Principles.* We currently adhere to thehierarchy of GAAP as presented in SFAS 162, and adoption is not expectedto have a material impact on our consolidated financial statements.

 

In May 2008, theFASB issued FSP APB 14-1, *Accounting for ConvertibleDebt Instruments That May Be Settled in Cash upon Conversion (IncludingPartial Cash Settlement)* (“FSP APB 14-1”). FSP APB 14-1 clarifiesthat convertible debt instruments that may be settled in cash upon eithermandatory or optional conversion (including partial cash settlement) are notaddressed by paragraph 12 of APB Opinion No. 14, *Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants*.Additionally, FSP APB 14-1 specifies that issuers of such instruments shouldseparately account for the liability and equity components in a manner thatwill reflect the entity’s nonconvertible debt borrowing rate when interest costis recognized in subsequent periods. FSP APB 14-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years, and must be applied on aretrospective basis. We plan to adopt FSP APB 14-1 in the first fiscal quarterof Fiscal 2010 and are currently evaluating the impact to our consolidatedfinancial statements.

 

In June 2008, theFASB issued Emerging Issues Task Force (“EITF”) Issue No. 07-5, *Determining Whether an Instrument (or Embedded Feature) Is Indexed toan Entity’s Own Stock* (“EITF 07-5”). EITF 07-5 clarifies how todetermine whether certain instruments or features were indexed to an entity’sown stock under EITF Issue No. 01-6, *The Meaning of “Indexed toa Company’s Own Stock,”*(“EITF 01-6”), and provides guidance todetermine what accounting literature may apply to a particular equity linkedinstrument or feature. EITF 07-5 will become effective for financial statementsissued for fiscal years beginning after December 15, 2008, and interimperiods within those fiscal years, and must be applied to all instrumentsoutstanding on the date of adoption. We plan to adopt EITF 07-5 in the firstquarter of Fiscal 2010 and are currently evaluating the impact to ourconsolidated financial statements.

 

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In May 2009, theFASB issued SFAS No. 165, *Subsequent Events*(“SFAS 165”). SFAS 165 provides authoritative accounting literature related toevaluating subsequent events that was previously addressed only in the auditingliterature, and is largely similar to the current guidance in the auditingliterature with some exceptions that are not intended to result in significantchanges in practice. SFAS 165 defines subsequent events and also requires thedisclosure of the date through which an entity has evaluated subsequent eventsand the basis for that date. SFAS 165 is effective on a prospective basis forinterim or annual financial periods ending after June 15, 2009. We plan toadopt SFAS 165 in the first quarter of Fiscal 2010 and do not expect it to havea material impact on our consolidated financial statements.

 

**Seasonality**

 

We have historicallyexperienced seasonality, particularly with respect to our Roadway Sensors netsales in the third and fourth fiscal quarters due to a reduction in roadconstruction and repairs during the winter months due to inclement weatherconditions.

 

**ITEM 7A.****                                    ****QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our exposure to interestrate risk is limited to our line of credit and our bank term note. Our line ofcredit bears interest based on the prevailing prime rate (3.25% at March 31,2009) plus 0% to 1.0%.  We do not believethat a 10% increase in the interest rate on our line of credit or term note(from 3.25% to 4.68%) would have a material impact on our financial position,operating results or cash flows. In addition, we believe that the carryingvalue of our outstanding debt under our credit facility approximates fairvalue.

 

**ITEM 8.****                                             ****FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

The financial statementsand supplementary data required by Regulation S-X are included in Part IV,Item 15 of this report.

 

**ITEM 9.****                                             ****CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A.****                                    ****CONTROLS AND PROCEDURES**

 

*(a)   Evaluation of disclosure controls andprocedures.*  In accordance with Rule 13a-15(b) ofthe Securities Exchange Act of 1934, as of the end of the period covered bythis Annual Report on Form 10-K, management evaluated, with theparticipation of the our President and Chief Executive Officer and the ChiefFinancial Officer, the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) underthe Exchange Act). Based upon their evaluation of these disclosure controls andprocedures, the President and Chief Executive Officer and the Chief FinancialOfficer have concluded that our disclosure controls and procedures wereeffective as of the date of such evaluation in ensuring that informationrequired to be disclosed in our Exchange Act reports is (1) recorded,processed, summarized and reported in a timely manner, and (2) accumulatedand communicated to management, including the Company’s President and ChiefExecutive Officer and the Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure.

 

*(b)  Changes in internal control.*    There was nochange in our internal control over financial reporting that occurred duringthe period covered by this Annual Report on Form 10-K that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**Inherent Limitations on InternalControl**

 

A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the benefits of controls must be considered relative to their costs. Because ofthe inherent 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.

 

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**Management’s Report on InternalControl Over Financial Reporting**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Our internal control system was designed to providereasonable assurance to management and the board of directors regarding theeffectiveness of our internal control processes over the preparation and fairpresentation of published financial statements.

 

We have assessed theeffectiveness of our internal controls over financial reporting as of March 31,2009. In making this assessment, we used the criteria set forth by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control—Integrated Framework. Based on our assessment, we believethat, as of March 31, 2009, our internal control over financial reportingis effective based on those criteria.

 

This annual report doesnot include an attestation report of our independent registered publicaccounting firm regarding internal control over financial reporting. Management’sreport was not subject to attestation by our independent registered publicaccounting firm pursuant to the rules of the Securities and ExchangeCommission that permit us to provide only management’s report in this annualreport.

 

**ITEM 9B**.                    **OTHER INFORMATION**

 

In May 2009,we entered into a separation agreement with Francis Memole, the former SeniorVice President and General Manager of our Vehicle Sensors segment, related tohis termination of employment with Iteris, Inc.  Pursuant to thisagreement, we have agreed to pay four and one half months of severance to Mr. Memolefor an aggregate severance amount of approximately $72,000, in exchange for Mr. Memole’sbroad release of claims against us and our affiliates.  In addition, wehave agreed to pay 65% of Mr. Memole’s COBRA premiums until December 31,2009 pursuant to the American Recovery and Reinvestment Act, as well asthe balance of his first month’s COBRA premium.

 

**PART III**

 

**ITEM 10.****                     ****DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE**

 

(a)  *Identification of Directors.*Theinformation under the caption “Election of Directors,” appearing in our proxystatement for the 2009 Annual Meeting of Stockholders, is incorporated hereinby reference.

 

(b)  *Identification of Executive Officers.*Theinformation under the caption “Executive Compensation and Other Information -Executive Officers,” appearing in our proxy statement for the 2009 AnnualMeeting of Stockholders, is incorporated herein by reference.

 

(c)  *Compliance with Section 16(a) of theExchange Act.*The information under the caption “Section 16(a) BeneficialOwnership Reporting Compliance” appearing in our proxy statement for the 2009Annual Meeting of Stockholders is incorporated herein by reference.

 

(d)  *Corporate Governance*.The information under the caption “Corporate Governance,” appearing in ourproxy statement for the 2009 Annual Meeting of Stockholders, is incorporatedherein by reference.

 

(e)  *Audit Committee*.The information under the caption “Board Meetings and Committees — AuditCommittee,” appearing in our proxy statement for the 2009 Annual Meeting ofStockholders, is incorporated herein by reference.

 

**ITEM 11.****                     ****EXECUTIVE COMPENSATION**

 

The information under thecaption “Executive Compensation and Other Information,” appearing in our proxystatement for the 2009 Annual Meeting of Stockholders, is incorporated hereinby reference.

 

**ITEM 12.****                  ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

** **

The information under thecaptions “Equity Compensation Plans” and “Principal Stockholders and CommonStock Ownership of Certain Beneficial Owners and Management,” appearing in ourproxy statement for the 2009 Annual Meeting of Stockholders, is incorporatedherein by reference.

 

**ITEM 13.**                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR INDEPENDENCE

** **

The information under thecaptions “Corporate Governance — Director Independence” and “CertainTransactions,” appearing in our proxy statement for the 2009 Annual Meeting ofStockholders, is incorporated herein by reference.

 

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**ITEM 14.**                 PRINCIPAL ACCOUNTING FEES AND SERVICES

** **

The information under thecaption “Fees Paid to Independent Registered Public Accounting Firm,” appearingin our proxy statement for the 2009 Annual Meeting of Stockholders, isincorporated herein by reference.

 

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**PART IV**

 

**ITEM 15.**                 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

** **

(a)               Documentsfiled as part of this report:

 

1.             *Financial Statements.* The following financial statements ofIteris, Inc. are included in a separate section of this Annual Reporton Form 10-K commencing on the pages referenced below:

 
| Report of  Independent Registered Public Accounting Firm                                                                               | 34 |
|----------------------------------------------------------------------------------------------------------------------------------------|----|
| Consolidated Balance  Sheets as of March 31, 2009 and 2008                                                                        | 35 |
| Consolidated  Statements of Operations for the years ended March 31, 2009, 2008 and  2007                                         | 36 |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the years  ended March 31, 2009, 2008 and 2007 | 37 |
| Consolidated  Statements of Cash Flows for the years ended March 31, 2009, 2008 and  2007                                         | 38 |
| Notes to Consolidated Financial Statements                                                                                             | 39 |

 

2.             *Exhibits*.

 

The exhibits listed on the accompanying index toexhibits immediately following the financial statements are filed as part of,or hereby incorporated by reference into, this report.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
| Dated: June 11,  2009 | ITERIS, INC. |
|----------------------------|--------------|
|                       | (Registrant) |
|                       |         |
|                       | By           | /S/ ABBAS MOHADDES |
|                       |         | Abbas Mohaddes |
|                       |         | Chief Executive Officer |
|                       |         | (Principal Executive  Officer) |

 

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##### **POWER OFATTORNEY**

#####  

We, the undersignedofficers and directors of Iteris, Inc., do hereby constitute and appointJames S. Miele and Abbas Mohaddes, and each of them, our true and lawfulattorneys-in-fact and agents, each with full power of substitution andresubstitution, for him and in his name, place and stead, in any and allcapacities, to sign any and all amendments to this report, and to file thesame, with exhibits thereto, and other documents in connection therewith, withthe Securities and Exchange Commission, granting unto said attorneys-in-factand agents, and each of them, full power and authority to do and perform eachand every act and thing requisite or necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do inperson, hereby, ratifying and confirming all that each of saidattorneys-in-fact and agents, or his substitute or substitutes, may lawfully door cause to be done by virtue hereof.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant in thecapacities and on the dates indicated:

 
| Signature             | ** ** | **Title**                                       | ** ** | **Date**           |
|-----------------------|------------|-------------------------------------------------|------------|--------------------|
|                  |       |                                            |       |               |
| /s/ ABBAS  MOHADDES   |       | Director, President and Chief Executive Officer |       | June 11, 2009 |
| Abbas Mohaddes        |       | (principal executive officer)                   |       |               |
|                  |       |                                            |       |               |
| /s/ JAMES S.  MIELE   |       | Chief Financial Officer                         |       | June 11, 2009 |
| James S. Miele        |       | (principal financial and accounting officer)    |       |               |
|                  |       |                                            |       |               |
| /s/ GREGORY A.  MINER |       | Chairman of the Board                           |       | June 11, 2009 |
| Gregory A. Miner      |       |                                            |       |               |
|                  |       |                                            |       |               |
| /s/ RICHARD CHAR      |       | Director                                        |       | June 11, 2009 |
| Richard Char          |       |                                            |       |               |
|                  |       |                                            |       |               |
| /s/ KEVIN C.  DALY    |       | Director                                        |       | June 11, 2009 |
| Kevin C. Daly,  Ph.D. |       |                                            |       |               |
|                  |       |                                            |       |               |
| /s/ JOHN  SEAZHOLTZ   |       | Director                                        |       | June 11, 2009 |
| John Seazholtz        |       |                                            |       |               |
|                  |       |                                            |       |               |
| /s/ JOEL SLUTZKY      |       | Director                                        |       | June 11, 2009 |
| Joel Slutzky          |       |                                            |       |               |
|                  |       |                                            |       |               |
| /s/ THOMAS L.  THOMAS |       | Director                                        |       | June 11, 2009 |
| Thomas L. Thomas      |       |                                            |       |               |

 

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**Iteris, Inc.**

 

**Index to Consolidated Financial Statements**

 
| Report  of Independent Registered Public Accounting Firm                                                                               | 34     |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                   |   |
| Consolidated  Balance Sheets as of March 31, 2009 and 2008                                                                        | 35     |
|                                                                                                                                   |   |
| Consolidated  Statements of Operations for the years ended March 31, 2009, 2008 and  2007                                         | 36     |
|                                                                                                                                   |   |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income for the years  ended March 31, 2009, 2008 and 2007 | 37     |
|                                                                                                                                   |   |
| Consolidated  Statements of Cash Flows for the years ended March 31, 2009, 2008 and  2007                                         | 38     |
|                                                                                                                                   |   |
| Notes to Consolidated Financial Statements                                                                                             | 39     |

 

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**Reportof Independent Registered Public Accounting Firm**

 

To the Board of Directorsand Stockholders

Iteris, Inc.

 

We have audited the accompanying consolidated balancesheets of Iteris, Inc. as of March 31, 2009 and 2008, and the relatedconsolidated statements of operations, stockholders’ equity and comprehensiveincome, and cash flows for each of the three years in the period ended March 31,2009.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Iteris, Inc. as of March 31, 2009 and 2008, and theresults of its operations and its cash flows for each of the three years in theperiod ended March 31, 2009, in conformity with U.S. generally acceptedaccounting principles.

 

As discussed in Note 1 to the consolidated financialstatements, effective April 1, 2007 the Company changed its method ofaccounting for uncertainty in income taxes.

 

We were not engaged to examine management’s assessmentof the effectiveness of Iteris, Inc.’s internal control over financialreporting as of March 31, 2009, included in the accompanying Management’sReport on Internal Control Over Financial Reporting and, accordingly, we do notexpress an opinion thereon.

 
| /s/ McGladrey &  Pullen, LLP |   |
|---------------------------------------|--------|
| Irvine, California                    |   |
| June 10, 2009                    |   |

 

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**Iteris, Inc.**

**Consolidated Balance Sheets**

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

 
| ** **                                                                                                                           | ** ** | **March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                           | ** ** | **2009**           | ** ** | **2008** | ** ** |
| ** **                                                                                                                           | ** ** | ** **         | ** ** | ** ** | ** ** |
| **Assets**                                                                                                                           | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current  assets:                                                                                                                     |       |               |       |   |   |
| Cash  and cash equivalents                                                                                                           |       | $                  | 6,372      |   | $ | 421 |   |
| Trade  accounts receivable, net of allowance for doubtful accounts of $534 and  $1,020 at March 31, 2009 and 2008, respectively |       | 12,448             |       | 13,108 |   |
| Costs  in excess of billings on uncompleted contracts                                                                                |       | 4,217              |       | 5,351 |   |
| Inventories                                                                                                                          |       | 5,681              |       | 4,226 |   |
| Deferred  income taxes                                                                                                               |       | 4,241              |       | 2,541 |   |
| Prepaid  expenses and other current assets                                                                                           |       | 272                |       | 371 |   |
| Total  current assets                                                                                                                |       | 33,231             |       | 26,018 |   |
| Property  and equipment:                                                                                                             |       |               |       |   |   |
| Leasehold  improvements                                                                                                              |       | 1,930              |       | 1,915 |   |
| Equipment                                                                                                                            |       | 8,136              |       | 7,356 |   |
| Accumulated  depreciation                                                                                                            |       | (6,822             | )          | (5,804 | ) |
|                                                                                                                                 |       | 3,244              |       | 3,467 |   |
| Deferred  income taxes                                                                                                               |       | 11,505             |       | 7,807 |   |
| Intangible  assets, net                                                                                                              |       | 110                |       | 257 |   |
| Goodwill                                                                                                                             |       | 27,774             |       | 27,774 |   |
| Other  assets                                                                                                                        |       | 202                |       | 322 |   |
| Total  assets                                                                                                                        |       | $                  | 76,066     |   | $ | 65,645 |   |
|                                                                                                                                 |       |               |       |   |   |
| **Liabilities and stockholders’ equity**                                                                                        |       |               |       |   |   |
| Current  liabilities:                                                                                                                |       |               |       |   |   |
| Trade  accounts payable                                                                                                              |       | $                  | 4,228      |   | $ | 3,902 |   |
| Accrued  payroll and related expenses                                                                                                |       | 3,188              |       | 3,825 |   |
| Accrued  liabilities                                                                                                                 |       | 1,662              |       | 1,973 |   |
| Billings  in excess of costs and estimated earnings on uncompleted contracts                                                         |       | 1,534              |       | 1,126 |   |
| Current  portion of long-term debt                                                                                                   |       | 2,019              |       | 244 |   |
| Total  current liabilities                                                                                                           |       | 12,631             |       | 11,070 |   |
| Deferred  rent                                                                                                                       |       | 1,686              |       | 1,956 |   |
| Unrecognized  tax benefits                                                                                                           |       | 1,117              |       | 1,381 |   |
| Other  non-current liabilities                                                                                                       |       | —             |       | 461 |   |
| Long-term  debt                                                                                                                      |       | 5,274              |       | 7,566 |   |
| Total  liabilities                                                                                                                   |       | 20,708             |       | 22,434 |   |
| Commitments  and contingencies                                                                                                       |       |               |       |   |   |
| Stockholders’  equity:                                                                                                          |       |               |       |   |   |
| Preferred  stock, $1.00 par value:                                                                                                   |       |               |       |   |   |
| Authorized  shares - 2,000                                                                                                           |       |               |       |   |   |
| Issued  and outstanding shares - none                                                                                                |       | —             |       | — |   |
| Common  stock. $0.10 par value:                                                                                                      |       |               |       |   |   |
| Authorized  shares - 70,000 at March 31, 2009 and 2008                                                                          |       |               |       |   |   |
| Issued  and outstanding shares - 34,205 at March 31, 2009 and 33,420 at  March 31, 2008                                    |       | 3,420              |       | 3,342 |   |
| Additional  paid-in capital                                                                                                          |       | 136,997            |       | 135,516 |   |
| Common  stock held in trust                                                                                                          |       | (31                | )          | (202 | ) |
| Accumulated  deficit                                                                                                                 |       | (85,025            | )          | (95,499 | ) |
| Accumulated  other comprehensive income (loss)                                                                                       |       | (3                 | )          | 54 |   |
| Total  stockholders’ equity                                                                                                     |       | 55,358             |       | 43,211 |   |
| Total  liabilities and stockholders’ equity                                                                                     |       | $                  | 76,066     |   | $ | 65,645 |   |

 

See accompanyingnotes.

 

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**Iteris, Inc.**

**Consolidated Statements of Operations**

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

 
| ** **                                 | ** ** | **Year Ended March 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  sales and contract revenues:          |       |                          |       |   |   |   |   |
| Net  sales                                 |       | $                             | 38,427     |   | $ | 40,326 |   | $ | 36,248 |   |
| Contract  revenues                         |       | 30,932                        |       | 24,837 |   | 22,049 |   |
| Total  net sales and contract revenues     |       | 69,359                        |       | 65,163 |   | 58,297 |   |
| Costs  of net sales and contract revenues: |       |                          |       |   |   |   |   |
| Cost  of net sales(a)                      |       | 20,346                        |       | 20,499 |   | 19,829 |   |
| Cost  of contract revenues(a)              |       | 21,094                        |       | 16,367 |   | 14,460 |   |
| Gross  profit                              |       | 27,919                        |       | 28,297 |   | 24,008 |   |
| Operating  expenses:                       |       |                          |       |   |   |   |   |
| Selling,  general and administrative(a)    |       | 18,035                        |       | 17,289 |   | 16,003 |   |
| Research  and development(a)               |       | 4,030                         |       | 3,566 |   | 4,030 |   |
| Amortization  of intangible assets         |       | 147                           |       | 147 |   | 147 |   |
| Total  operating expenses                  |       | 22,212                        |       | 21,002 |   | 20,180 |   |
| Operating  income                          |       | 5,707                         |       | 7,295 |   | 3,828 |   |
| Non-operating  income (expense):           |       |                          |       |   |   |   |   |
| Other  income (expense), net               |       | 116                           |       | 252 |   | (653 | ) |
| Interest  expense, net                     |       | (646                          | )          | (1,284 | ) | (1,600 | ) |
| Income  before income taxes                |       | 5,177                         |       | 6,263 |   | 1,575 |   |
| Income  tax benefit                        |       | 5,297                         |       | 5,900 |   | 1,343 |   |
| Net  income                                |       | $                             | 10,474     |   | $ | 12,163 |   | $ | 2,918 |   |
|                                       |       |                          |       |   |   |   |   |
| Earnings  per share:                       |       |                          |       |   |   |   |   |
| Basic                                      |       | $                             | 0.31       |   | $ | 0.37 |   | $ | 0.10 |   |
| Diluted                                    |       | $                             | 0.30       |   | $ | 0.35 |   | $ | 0.09 |   |
| Weighted-average  shares outstanding:      |       |                          |       |   |   |   |   |
| Basic                                      |       | 33,964                        |       | 32,723 |   | 29,698 |   |
| Diluted                                    |       | 34,638                        |       | 34,713 |   | 33,348 |   |

 
|                                                                               |
|-------------------------------------------------------------------------------|
| (a)     Includes stock-based compensation  expense as follows: |   |   |   |   |   |   |   |
|                                                                          |   |   |   |   |   |   |   |
| Cost  of net sales                                                            |   | $ | 9 |   | $ | 3 |   | $ | 13 |   |
| Cost  of contract revenues                                                    |   | 38 |   | 14 |   | 60 |   |
| Selling,  general and administrative                                          |   | 297 |   | 266 |   | 195 |   |
| Research  and development                                                     |   | 20 |   | 7 |   | 20 |   |
| Total  stock-based compensation expense                                       |   | $ | 364 |   | $ | 290 |   | $ | 288 |   |

 

See accompanyingnotes.

 

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**Iteris, Inc.**

**Consolidated Statements of Stockholders’ Equity andComprehensive Income**

**(In thousands)**

 
| ** **                                                    | ** ** | **Common  Stock Shares** | ** ** | **Amount** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Common  Stock Held  in Trust** | ** ** | **Notes  Receivable  From  Employees** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated Other  Comprehensive  Income (Loss)** | ** ** | **Total Stockholder’s  Equity** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------|------------|------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------|------------|--------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** **                       | ** ** | ** **                                 | ** ** | ** **                             | ** ** | ** **               | ** ** | ** **                                                    | ** ** | ** **                                | ** ** |
| Balance  at March 31, 2006                               |       | 27,432                        |       | $          | 2,743      |                             | $          | 126,664                                    |       | $                                      | (374       | )                        | $          | (49                                                           | )          | $                                         | (110,356   | ) | $ | 7 |   | $ | 18,635 |   |
| Warrant  exercises                                            |       | 1,706                         |       | 170        |       | 2,265                            |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 2,435                                     |       |
| Stock  option exercises                                       |       | 1,374                         |       | 138        |       | 982                              |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 1,120                                     |       |
| Issuance  of warrants                                         |       | —                        |       | —     |       | 22                               |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 22                                        |       |
| Stock-based  compensation                                     |       | —                        |       | —     |       | 288                              |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 288                                       |       |
| Issuance  of common stock in connection with legal settlement |       | 89                            |       | 9          |       | 204                              |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 213                                       |       |
| Repayment  of notes receivable from employees                 |       | —                        |       | —     |       | —                           |       | —                                     |       | 44                                     |       | —                   |       | —                                                        |       | 44                                        |       |
| Components of  comprehensive income:                          |       |                          |       |       |       |                             |       |                                       |       |                                   |       |                     |       |                                                          |       |                                      |       |
| Foreign  currency translation                                 |       | —                        |       | —     |       | —                           |       | —                                     |       | —                                 |       | —                   |       | 12                                                            |       | 12                                        |       |
| Net  income                                                   |       | —                        |       | —     |       | —                           |       | —                                     |       | —                                 |       | 2,918                    |       | —                                                        |       | 2,918                                     |       |
| Comprehensive  income                                         |       | —                        |       | —     |       | —                           |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 2,930                                     |       |
| Balance  at March 31, 2007                               |       | 30,601                        |       | 3,060      |       | 130,425                          |       | (374                                       | )          | (5                                     | )          | (107,438                 | )          | 19                                                            |       | 25,687                                    |       |
| Conversion  of redeemable common stock to common stock        |       | 1,219                         |       | 122        |       | 3,292                            |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 3,414                                     |       |
| Warrant  exercises                                            |       | 85                            |       | 9          |       | 113                              |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 122                                       |       |
| Stock  option exercises                                       |       | 1,515                         |       | 151        |       | 1,223                            |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 1,374                                     |       |
| Stock-based  compensation                                     |       | —                        |       | —     |       | 290                              |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 290                                       |       |
| Issuance  of shares held in trust                             |       | —                        |       | —     |       | 178                              |       | 172                                        |       | —                                 |       | —                   |       | —                                                        |       | 350                                       |       |
| Write-off  of notes receivable from employees                 |       | —                        |       | —     |       | (5                               | )          | —                                     |       | 5                                      |       | —                   |       | —                                                        |       | —                                    |       |
| Cumulative  effect of adoption of FIN 48                      |       | —                        |       | —     |       | —                           |       | —                                     |       | —                                 |       | (224                     | )          | —                                                        |       | (224                                      | )          |
| Components  of comprehensive income:                          |       |                          |       |       |       |                             |       |                                       |       |                                   |       |                     |       |                                                          |       |                                      |       |
| Foreign  currency translation                                 |       | —                        |       | —     |       | —                           |       | —                                     |       | —                                 |       | —                   |       | 35                                                            |       | 35                                        |       |
| Net  income                                                   |       | —                        |       | —     |       | —                           |       | —                                     |       | —                                 |       | 12,163                   |       | —                                                        |       | 12,163                                    |       |
| Comprehensive  income                                         |       | —                        |       | —     |       | —                           |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 12,198                                    |       |
| Balance  at March 31, 2008                               |       | 33,420                        |       | 3,342      |       | 135,516                          |       | (202                                       | )          | —                                 |       | (95,499                  | )          | 54                                                            |       | 43,211                                    |       |
| Stock  option exercises                                       |       | 785                           |       | 78         |       | 861                              |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 939                                       |       |
| Stock-based  compensation                                     |       | —                        |       | —     |       | 364                              |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 364                                       |       |
| Issuance  of shares held in trust                             |       | —                        |       | —     |       | 256                              |       | 171                                        |       | —                                 |       | —                   |       | —                                                        |       | 427                                       |       |
| Components  of comprehensive income:                          |       |                          |       |       |       |                             |       |                                       |       |                                   |       |                     |       |                                                          |       |                                      |       |
| Foreign  currency translation                                 |       | —                        |       | —     |       | —                           |       | —                                     |       | —                                 |       | —                   |       | (57                                                           | )          | (57                                       | )          |
| Net  income                                                   |       | —                        |       | —     |       | —                           |       | —                                     |       | —                                 |       | 10,474                   |       | —                                                        |       | 10,474                                    |       |
| Comprehensive  income                                         |       | —                        |       | —     |       | —                           |       | —                                     |       | —                                 |       | —                   |       | —                                                        |       | 10,417                                    |       |
| Balance  at March 31, 2009                               |       | 34,205                        |       | $          | 3,420      |                             | $          | 136,997                                    |       | $                                      | (31        | )                        | $          | —                                                        |       | $                                         | (85,025    | ) | $ | (3 | ) | $ | 55,358 |   |

 

See accompanyingnotes.

 

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**Iteris, Inc.**

**Consolidated Statements of Cash Flows**

**(In thousands)**

 
| ** **                                                                                    | ** ** | **Year Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                    | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                          |       |                          |       |   |   |   |   |
| **Cash flows from operating activities**                                                      |       |                          |       |   |   |   |   |
| Net  income                                                                                   |       | $                             | 10,474     |   | $ | 12,163 |   | $ | 2,918 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |                          |       |   |   |   |   |
| Change  in deferred tax assets                                                                |       | (5,398                        | )          | (7,321 | ) | (1,419 | ) |
| Depreciation  of property and equipment                                                       |       | 1,018                         |       | 756 |   | 559 |   |
| Stock-based  compensation                                                                     |       | 364                           |       | 290 |   | 288 |   |
| Gain  on early extinguishment of debt                                                         |       | (50                           | )          | (224 | ) | — |   |
| Amortization  of debt discounts                                                               |       | 109                           |       | 201 |   | 207 |   |
| Amortization  of deferred financing costs                                                     |       | 72                            |       | 135 |   | 137 |   |
| Amortization  of deferred gain on sale-leaseback                                              |       | —                        |       | (165 | ) | (284 | ) |
| Amortization  of intangible assets                                                            |       | 147                           |       | 147 |   | 147 |   |
| Issuance  of common stock in connection with legal settlement                                 |       | —                        |       | — |   | 213 |   |
| Fair  value of warrants issued for services                                                   |       | —                        |       | — |   | 22 |   |
| Changes  in operating assets and liabilities:                                                 |       |                          |       |   |   |   |   |
| Accounts  receivable                                                                          |       | 660                           |       | (1,615 | ) | (67 | ) |
| Net  costs and estimated earnings in excess of billings                                       |       | 1,542                         |       | (1,383 | ) | (1,042 | ) |
| Inventories                                                                                   |       | (1,455                        | )          | 2,153 |   | (3,565 | ) |
| Prepaid  expenses and other assets                                                            |       | 97                            |       | (77 | ) | 19 |   |
| Accounts  payable and accrued expenses                                                        |       | (1,190                        | )          | 2,519 |   | (182 | ) |
| Net  cash provided by (used in) operating activities                                          |       | 6,390                         |       | 7,579 |   | (2,049 | ) |
|                                                                                          |       |                          |       |   |   |   |   |
| **Cash flows from investing activities**                                                      |       |                          |       |   |   |   |   |
| Purchases  of property and equipment                                                          |       | (795                          | )          | (739 | ) | (488 | ) |
|                                                                                          |       |                          |       |   |   |   |   |
| **Cash flows from financing activities**                                                      |       |                          |       |   |   |   |   |
| (Payments  on) proceeds from borrowings on lines of credit, net                               |       | —                        |       | (4,015 | ) | 1,353 |   |
| Borrowings  on long-term debt                                                                 |       | 6,543                         |       | — |   | — |   |
| Payments  on long-term debt                                                                   |       | (7,069                        | )          | (3,838 | ) | (1,843 | ) |
| Credit  facility commitment fees                                                              |       | —                        |       | (50 | ) | (40 | ) |
| Checks  drawn in excess of available bank balances                                            |       | —                        |       | (47 | ) | (628 | ) |
| Proceeds  from stock option exercises                                                         |       | 939                           |       | 1,374 |   | 1,120 |   |
| Proceeds  from warrant exercises                                                              |       | —                        |       | 122 |   | 2,435 |   |
| Proceeds  from notes receivable from employees                                                |       | —                        |       | — |   | 44 |   |
| Net  cash provided by (used in) financing activities                                          |       | 413                           |       | (6,454 | ) | 2,441 |   |
| Effect  of exchange rate changes on cash                                                      |       | (57                           | )          | — |   | — |   |
| Increase  (decrease) in cash and cash equivalents                                             |       | 5,951                         |       | 386 |   | (96 | ) |
| Cash  and cash equivalents at beginning of year                                               |       | 421                           |       | 35 |   | 131 |   |
| Cash  and cash equivalents at end of year                                                     |       | $                             | 6,372      |   | $ | 421 |   | $ | 35 |   |
|                                                                                          |       |                          |       |   |   |   |   |
| **Supplemental cash flow information:**                                                       |       |                          |       |   |   |   |   |
| Cash  paid during the year for:                                                               |       |                          |       |   |   |   |   |
| Interest                                                                                      |       | $                             | 545        |   | $ | 1,008 |   | $ | 1,263 |   |
| Income  taxes                                                                                 |       | 462                           |       | 24 |   | 39 |   |
|                                                                                          |       |                          |       |   |   |   |   |
| **Supplemental schedule of non-cash investing and financing  activities:**                    |       |                          |       |   |   |   |   |
| Fair  value of common stock issued in settlement of liabilities                               |       | $                             | 427        |   | $ | 350 |   | $ | — |   |
| Conversion  of redeemable common stock to common stock                                        |       | —                        |       | 3,414 |   | — |   |
| Lease  incentives in connection with new headquarters lease                                   |       | —                        |       | 1,772 |   | — |   |
| Write-off  of notes receivable from employees                                                 |       | —                        |       | (5 | ) | — |   |

 

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**Iteris, Inc.**

**Notes to Consolidated Financial Statements**

**March 31, 2009**

 

**1.****                                     ****Description of Business andSummary 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, minimize the environmental impact of traffic congestion andimprove the safety of surface transportation systems infrastructure.  By combining outdoor image processing,traffic engineering and information technology, we offer a broad range ofIntelligent Transportation Systems (“ITS”) and driver safety solutions tocustomers worldwide.  Iteris wasoriginally incorporated in Delaware in 1987.

 

**Basisof Presentation**

 

Our consolidated financial statements include the accounts of Iterisand our subsidiary, Iteris Europe GmbH. All significant intercompany accountsand transactions have been eliminated in consolidation.

 

**Useof Estimates**

 

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States (“U.S. GAAP”)requires our management to make certain estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosures of contingentassets and liabilities at the date of the financial statements, and reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. Significant estimates made in thepreparation of the consolidated financial statements include the allowance fordoubtful accounts, projections of taxable income used to assess realizabilityof deferred tax assets, inventory and warranty reserves, costs to completelong-term contracts, overhead rates used in cost-plus contracts, contract reserves,the valuation of equity instruments and estimates of future cash flows used toassess the recoverability of long-lived assets and the realization of goodwill.

 

**Reclassifications**

 

Certain reclassificationshave been made to the prior year financial statements to conform to the currentyear presentation.

 

**RevenueRecognition**

 

Product revenues and related costs of sales are recognized upon thetransfer of title, which generally occurs upon shipment or, if required, uponacceptance by the customer, provided that we believe collectibility of the netsales amount is reasonably assured. Accordingly, at the date revenue isrecognized, the significant uncertainties concerning the sale have beenresolved.

 

Contract revenues are derived primarily from long-term contracts withgovernmental agencies. Contract revenues include costs incurred plus a portionof estimated fees or profits determined on the percentage of completion methodof accounting 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 costs and revenues and are recognized in the periodin which the revisions are determined. Profit incentives are included inrevenue when their realization is reasonably assured. Costs and estimatedearnings in excess of billings at March 31, 2009 and 2008 include $684,000and $828,000, respectively, that were not billable as certain milestoneobjectives specified in the contracts had not been attained. Substantially allcosts and estimated earnings in excess of billings at March 31, 2009 areexpected to be billed and collected during the fiscal year ending March 31,2010.

 

In addition to product and contract revenue, we derive revenue fromtechnology access fees, the provision of specific non-recurring contractengineering services and royalties. Technology access fee revenues arerecognized evenly over the period in which they are earned. 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 our products. Technology accessfee revenues, contract engineering revenues and royalty revenues are includedin net sales in the accompanying consolidated statements of operations.

 

Revenues from follow-on service and support, for which we chargeseparately, are recorded in the period in which the services are performed.

 

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**Concentrationof Credit Risk**

 

Financial instruments that potentially subject us to a concentration ofcredit risk consist principally of cash and cash equivalents and trade accountsreceivable.

 

Cash and cash equivalents consist primarily of demand deposits andmoney 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.

 

Accounts receivable are primarily derived from revenues earned fromcustomers located throughout North America and Europe. We generally do notrequire collateral or other security from customers. Collectibility ofreceivable balances is estimated through review of invoices outstanding greaterthan a certain period of time and ongoing credit evaluations of our customers’financial condition. Reserves are maintained for potential credit losses, andsuch losses have historically been within management’s expectations.

 

**FairValues of Financial Instruments**

 

The fair value of cashand cash equivalents, receivables, inventories, accounts payable and accruedexpenses approximate carrying value because of the short period of time tomaturity. The fair value of line of credit agreements, long-term debt andconvertible debentures approximate carrying value because the related effectiverates of interest approximate current market rates available to us for debtwith similar terms and similar remaining maturities.

 

**Cash andCash Equivalents**

 

Cash and cash equivalents consist of cash and short-term investmentswith initial maturities of ninety days or less.

 

**Inventories**

 

Inventories are stated atthe lower of cost or market. Cost is determined using the first-in, first-outmethod.

 

**Propertyand Equipment**

 

Property and equipmentare recorded at cost and are depreciated over the estimated useful life rangingfrom three to eight years.  Leaseholdimprovements are depreciated over the term of the related lease or theestimated useful life of the improvement, whichever is shorter.

 

**Goodwilland Long-Lived Assets**

 

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill and Intangible Assets* (“SFAS 142”), goodwill istested for impairment on an annual basis in our fourth fiscal quarter or morefrequently if indicators of impairment exist. The performance of the test involves a two-step process.  The first step of the impairment test involvescomparing the fair value of our reporting units with each respective reportingunit’s carrying amount, including goodwill. We determine the fair value of reporting units using the incomeapproach.  If the carrying amount of areporting unit exceeds the reporting unit’s fair value, the second step of thegoodwill impairment test is performed to determine the amount of any impairmentloss.  The second step of the goodwillimpairment test involves comparing the implied fair value of the reporting unit’sgoodwill with the carrying amount of that goodwill. We performed annualimpairment assessments of the carrying value of goodwill for each of the yearsended March 31, 2009, 2008 and 2007. Based on these assessments, wedetermined that no impairment was indicated as the estimated fair value of eachof our reporting units exceeded its respective carrying value.

 

We evaluate long-livedassets for impairment in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*,which requires impairment evaluation on long-lived assets used in operationswhen indicators of impairment are present. Reviews are performed to determine whether the carrying value of assetsis impaired, based on a comparison to undiscounted expected future cashflows.  If this comparison indicates thatthere is impairment, the impaired asset is written down to fair value, which istypically calculated using discounted expected future cash flows and a discountrate based upon our weighted average cost of capital adjusted for risksassociated with the related operations. Impairment is based on the excess of the carrying amount over the fairvalue of those assets.

 

**IncomeTaxes**

 

We utilize the liabilitymethod of accounting for income taxes as set forth in SFAS No. 109, *Accounting for Income Taxes* (“SFAS 109”).  Under the liability method, deferred taxesare determined based on the temporary differences between the financialstatement and tax bases of assets and liabilities using enacted tax rates.  A valuation allowance is recorded when it ismore likely than not that all or a portion of the deferred tax assets will notbe realized. See Note 4.

 

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On April 1, 2007, weadopted the provisions of Financial Accounting Standards Board (“FASB”)Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes — an Interpretation of FASB Statement No. 109* (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes byestablishing minimum standards for the recognition and measurement of taxpositions taken or expected to be taken in a tax return. Under the requirementsof FIN 48, we must review all of our tax positions and make a determination asto whether each position is more-likely-than-not to be sustained uponexamination by regulatory authorities. If a tax position meets themore-likely-than-not standard, then the related tax benefit is measured basedon a cumulative probability analysis of the amount that is more-likely-than-notto be realized upon ultimate settlement or disposition of the underlying issue.

 

## **Stock-BasedCompensation**

##  

Effective April 1, 2006, we adopted SFAS No. 123 (revised2004), *Share-Based Payment* (“SFAS 123R”), whichreplaced SFAS No. 123, *Accounting for Stock-BasedCompensation* (“SFAS 123”), superseded Accounting Principles Board (“APB”)Opinion No. 25, *Accounting for StockIssued to Employees* (“APB 25”), and amended SFAS No. 95, *Statement of Cash Flows*. SFAS 123R requires all stock-based payments, including grants ofemployee stock options, to be recognized in the statement of operations as anexpense, based on their grant date fair values with such fair values amortizedover the requisite service period.  Weelected to use the modified prospective transition method for transition toSFAS 123R.  Under the modifiedprospective method, SFAS 123R applies to all awards granted or modified afterthe date of adoption.  In addition, underthe modified prospective method, compensation expense will be recognized forall stock-based compensation awards granted prior to but not yet vested as of April 1,2006, based on grant-date fair values estimated in accordance with the originalprovisions of SFAS 123.

 

The fair value concepts were not changed significantly as a result ofimplementing SFAS 123R; however, in adopting SFAS 123R, companies must chooseamong alternative valuation models and amortization assumptions.  The fair value of each stock-based award isestimated on the grant date using the Black-Scholes-Merton (“BSM”)option-pricing formula. Expected volatility is based on the historicalvolatility of our stock price. The expected life of options granted subsequentto the adoption of SFAS 123R is derived based on the historical life of ouroptions.  The risk-free interest rate forperiods within the expected life of the option is based on the U.S. Treasuryinterest rates in effect at the time of grant. Additionally, SFAS 123 did not require the estimation of forfeitures inthe calculation of stock compensation expense; however, SFAS 123R does requiresuch estimation and upon adoption of SFAS 123R, we changed our methodology toinclude an estimate of forfeitures.

 

In addition, inaccordance with SFAS 123R, SFAS 109 and Emerging Issues Task Force (“EITF”)Topic D-32, *Intraperiod Tax Allocation ofthe Tax Effect of Pretax Income from Continuing Operations*, we haveelected to recognize excess income tax benefits from stock option exercises inadditional paid-in capital only if an incremental income tax benefit would berealized after considering all other tax attributes presently available to us.We measure the tax benefit associated with excess tax deductions related tostock-based compensation expense by multiplying the excess tax deductions bythe statutory tax rates.

 

**Researchand Development Expenditures**

 

Research and development expenditures are charged to expensein the period incurred.

 

**Shippingand Handling Costs**

 

Shipping and handling costs are included as cost of sales in the periodduring which the products ship.

 

**Sales Taxes**

 

Sales taxes are presented on a net basis (excluded from net sales andcontract revenues) in the consolidated statements of operations.

 

**AdvertisingExpenses**

 

Advertising costs are expensed in the period incurred and totaled$202,000, $172,000 and $152,000 in the years ended March 31, 2009, 2008and 2007, respectively.

 

**Warranty**

 

We generallyprovide a one to three year warranty from the original invoice date on allproducts, materials and workmanship. Products sold to certain original equipment manufacturer (“OEM”)customers sometimes carry longer warranties. Defective products will be eitherrepaired or replaced, generally at our option, upon meeting certain criteria. Weaccrue a provision for the estimated costs that may be incurred for productwarranties relating to a product as a component of cost of sales at the timerevenue for that product is recognized. The accrued warranty provision is included within accrued expenses inthe accompanying consolidated balance sheets.

 

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**Repairand Maintenance Costs**

 

We incur repair and maintenance costs in the normal course of business.Should the activity result in a permanent improvement to one of our leasedfacilities, the cost is capitalized as a leasehold improvement and amortizedover its useful life or the remainder of the lease period, whichever isshorter. Non-permanent repair and maintenance costs are charged to expense asincurred.

 

**ComprehensiveIncome**

 

Theonly component of accumulated other comprehensive income is foreign currencytranslation adjustments.

 

**Recent Accounting Pronouncements**

 

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

 

In December 2007,the FASB issued SFAS No. 141R, *Business Combinations*(“SFAS 141R”). SFAS 141R establishes principles and requirements forhow the acquirer of a business recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree. The statement also provides guidancefor recognizing and measuring the goodwill acquired in the business combinationand determines what information to disclose to enable users of financialstatements to evaluate the nature and financial effects of the businesscombination. Additionally, in April 2009, the FASB issued FSP 141R-1, *Accounting for Assets Acquired and Liabilities Assumed in a BusinessCombination that Arise from Contingencies*(“FSP 141R-1”), whichamends SFAS 141R to require that assets acquired and liabilities assumed in abusiness combination that are from contingencies be recognized in accordancewith SFAS 157 if the fair value can be determined during the measurementperiod.  SFAS 141R and FSP 141R-1are both effective for financial statements issued for fiscal years beginningafter December 15, 2008. The nature and magnitude of the specific effectsof adopting SFAS 141R and FSP 141R-1 will depend upon the nature, terms andsize of any acquisitions we may consummate after the effective date of ouradoption of SFAS 141R in the first fiscal quarter of our fiscal year ending March 31,2010.

 

In April 2008, theFASB issued FSP No. 142-3, *Determination of theUseful Life of Intangible Assets* (“FSP 142-3”), which amends theguidance about estimating the useful lives of recognized intangible assets andrequires additional disclosures related to renewing or extending the terms ofrecognized intangible assets under SFAS 142. FSP 142-3 is effective forfinancial statements issued for fiscal years, and interim periods within thosefiscal years, beginning after December 15, 2008. We currently do notexpect the adoption of FSP 142-3 will have a material impact on ourconsolidated financial statements.

 

In May 2008, theFASB issued SFAS No. 162, *TheHierarchy of Generally Accepted Accounting Principles* (“SFAS 162”).SFAS 162 identifies the sources of accounting principles to be used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with U.S. GAAP. SFAS 162 is effective60 days following the SEC approval of the Public Company AccountingOversight Board amendments to AU Section 411, *The Meaning of Present Fairly in Conformity with Generally AcceptedAccounting Principles.* We currently adhere to the hierarchy of U.S.GAAP as presented in SFAS 162, and adoption is not expected to have amaterial impact on our consolidated financial statements.

 

In May 2008, theFASB issued FSP APB 14-1, *Accounting for ConvertibleDebt Instruments That May Be Settled in Cash upon Conversion (IncludingPartial Cash Settlement)* (“FSP APB 14-1”). FSP APB 14-1 clarifiesthat convertible debt instruments that may be settled in cash upon eithermandatory or optional conversion (including partial cash settlement) are notaddressed by paragraph 12 of APB Opinion No. 14, *Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants*.Additionally, FSP APB 14-1 specifies that issuers of such instruments shouldseparately account for the liability and equity components in a manner thatwill reflect the entity’s nonconvertible debt borrowing rate when interest costis recognized in subsequent periods. FSP APB 14-1 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years, and must be applied on aretrospective basis. We plan to adopt FSP APB 14-1 in the first fiscal quarterof our fiscal year ending March 31, 2010 and are currently evaluating theimpact to our consolidated financial statements.

 

In June 2008, theFASB issued EITF Issue No. 07-5, *Determining Whether anInstrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock*(“EITF 07-5”). EITF 07-5 clarifies how to determine whether certain instrumentsor features were indexed to an entity’s own stock under EITF Issue No. 01-6,*The Meaning of “Indexed to a Company’s Own Stock”*(“EITF01-6”), and provides guidance to determine what accounting literature may applyto a particular equity linked instrument or feature. EITF 07-5 will become

 

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effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years, and must be applied to allinstruments outstanding on the date of adoption. We plan to adopt EITF 07-5 inthe first quarter of our fiscal year ending March 31, 2010 and arecurrently evaluating the impact to our consolidated financial statements.

 

In May 2009, theFASB issued SFAS No. 165, *Subsequent Events*(“SFAS 165”). SFAS 165 provides authoritative accounting literature related toevaluating subsequent events that was previously addressed only in the auditingliterature, and is largely similar to the current guidance in the auditingliterature with some exceptions that are not intended to result in significantchanges in practice. SFAS 165 defines subsequent events and also requires thedisclosure of the date through which an entity has evaluated subsequent eventsand the basis for that date. SFAS 165 is effective on a prospective basis forinterim or annual financial periods ending after June 15, 2009. We plan toadopt SFAS 165 in the first quarter of our fiscal year ending March 31,2010 and do not expect it to have a material impact on our consolidatedfinancial statements.

 

**2.****                                     ****Supplementary FinancialInformation**

 

**Inventories**

 

The following table presents details regarding our inventories:

 
| ** **              | ** ** | **March 31,** | ** **  |
|-------------------------|------------|--------------------|-------------|
| ** **              | ** ** | **2009**           | ** **  | **2008** | ** ** |
| ** **              | ** ** | **(In thousands)** | ** **  |
| Materials  and supplies |       | $                  |  4,820 |   | $ |  3,031 |   |
| Work  in process        |       | 198                |        | 345 |   |
| Finished  goods         |       | 663                |        | 850 |   |
|                    |       | $                  |  5,681 |   | $ |  4,226 |   |

 

**IntangibleAssets**

 

Thefollowing table presents details regarding our intangible assets:

 
| ** **                                  | ** ** | **March 31, 2009**     | ** ** | **March 31, 2008**       | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                                  | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| ** **                                  | ** ** | **(In thousands)**          | ** ** |
| Intangible  assets subject to amortization: |       |                        |       |                          |       |   |   |   |   |
| Developed  technology                       |       | $                           |  495  |                          | $          |  (482 | ) | $ |  495 |   | $ |  (381 | ) |
| Patents                                     |       | 317                         |       | (220                          | )          | 317 |   | (174 | ) |
| Total                                       |       | $                           |  812  |                          | $          |  (702 | ) | $ |  812 |   | $ |  (555 | ) |

 

Amortization expense forintangible assets subject to amortization was $147,000 for each of the yearsended March 31, 2009, 2008 and 2007. Future estimated amortization expenseis as follows:

 
| **Year Ending March 31:** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|
| **(In thousands)**             | ** ** | ** ** | ** ** |
| 2010                           |       | $          |  58   |   |
| 2011                           |       | 46         |       |
| 2012                           |       | 6          |       |
|                           |       | $          |  110  |   |

 

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**WarrantyReserve Activity**

 

The following table presents activity with respect to ouraccrued warranty obligations:

 
| ** **                          | ** ** | **Year Ended March 31,** | ** ** |
|-------------------------------------|------------|-------------------------------|------------|
| ** **                          | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                          | ** ** | **(In thousands)**            | ** ** |
| Balance  at beginning of year       |       | $                             |  494  |   | $ |  520 |   | $ |  519 |   |
| Additions  charged to cost of sales |       | 342                           |       | 347 |   | 630 |   |
| Warranty  claims                    |       | (254                          | )          | (373 | ) | (629 | ) |
| Balance  at end of year             |       | $                             |  582  |   | $ |  494 |   | $ |  520 |   |

 

**EarningsPer Share**

 

The following table sets forth the computation of basic and dilutedincome per share:

 
| ** **                                                  | ** ** | **Year Ended March 31,**                 | ** **   |
|-------------------------------------------------------------|------------|-----------------------------------------------|--------------|
| ** **                                                  | ** ** | **2009**                                      | ** **   | **2008** | ** ** | **2007** | ** ** |
| ** **                                                  | ** ** | **(In  thousands, except per share amounts)** | ** **   |
| Numerator:                                                  | ** ** | ** **                                    | ** **   | ** ** | ** ** | ** ** | ** ** |
| Net  income                                                 |       | $                                             |  10,474 |   | $ |  12,163 |   | $ |  2,918 |   |
|                                                        |       |                                          |         |   |   |   |   |
| Denominator:                                                |       |                                          |         |   |   |   |   |
| Weighted  average common shares used in basic computation   |       | 33,964                                        |         | 32,723 |   | 29,698 |   |
| Dilutive  stock options                                     |       | 671                                           |         | 1,973 |   | 3,346 |   |
| Dilutive  warrants                                          |       | 3                                             |         | 17 |   | 304 |   |
| Weighted  average common shares used in diluted computation |       | 34,638                                        |         | 34,713 |   | 33,348 |   |
|                                                        |       |                                          |         |   |   |   |   |
| Earnings  per share:                                        |       |                                          |         |   |   |   |   |
| Basic                                                       |       | $                                             |  0.31   |   | $ |  0.37 |   | $ |  0.10 |   |
| Diluted                                                     |       | $                                             |  0.30   |   | $ |  0.35 |   | $ |  0.09 |   |

 

The following shares wereexcluded from the computation of diluted earnings per share as their effectwould have been anti-dilutive:

 
| ** **              | ** ** | **Year Ended March 31,** | ** ** |
|-------------------------|------------|-------------------------------|------------|
| ** **              | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **              | ** ** | **(In thousands)**            | ** ** |
|                    |       |                          |       |   |   |   |   |
| Stock  options          |       | 1,518                         |       | 520 |   | 582 |   |
| Warrants                |       | 1,158                         |       | 1,170 |   | 1,240 |   |
| Convertible  debentures |       | 1,281                         |       | 2,661 |   | 2,729 |   |

 

**3.****                                    ****Revolving Line of Creditand Long-Term Debt**

 

**Revolving Line of Credit**

 

Prior to October 16,2008, we had a credit facility with a bank that provided for line of creditborrowings of up to $10.0 million. Under this credit facility, we could borrowagainst our eligible accounts receivable and eligible inventory, as defined inthe credit agreement. Interest on borrowed amounts under the line of credit waspayable monthly at the current stated prime rate plus 1.00%. Additionally, wewere obligated to pay an unused line fee of 0.25% per annum applied to theamount by which the maximum credit amount exceeded the average daily principalbalance during the preceding month. The credit facility required $2,000 inmonthly collateral management fees and included an early termination fee equalto 2% of the total facility during the first year of the agreement and 1% ofthe total facility in the second year of the agreement. The credit facility wassecured by substantially all of our assets. This credit facility expired on October 15, 2008.

 

Effective October 16,2008, we entered into a new $19.5 million credit facility with a differentbank, which replaced our existing credit facility.  This new credit facility 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 amounts under therevolving line of credit will be payable monthly at a rate equal to the currentstated prime rate up to the current stated prime rate plus 0.50%, depending onaggregate deposit balances maintained at the bank in relation to the total loancommitment under the credit facility (3.75% at March 31, 2009).  We are obligated to pay an unused line fee of0.25% per annum applied to the average unused portion of the revolving line ofcredit during the preceding month.  Therevolving line of credit does not contain any early termination fees and issecured by substantially

 

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all of our assets.  As of March 31,2009, no amounts were borrowed under the revolving line of credit portion ofthe facility. As part of this credit facility, we may also borrow up to $7.5 million in the form ofa 48-month term note to retire our convertible debentures asdiscussed below under “Long-Term Debt — Bank Term Notes.”

 

On March 31,2009, the available credit under the revolving line of credit was $12.0million, all of which was unused.

 

**Long-Term Debt**

 

Our long-term debt consists of the following:

 
| ** **                   | ** ** | **March 31,** | ** ** |
|------------------------------|------------|--------------------|------------|
| ** **                   | ** ** | **2009**           | ** ** | **2008** | ** ** |
| ** **                   | ** ** | **(In thousands)** | ** ** |
| Convertible  debentures, net |       | $                  | 750        |   | $ | 7,566 |   |
| Bank  term note              |       | 6,543              |       | 210 |   |
| Other                        |       | —             |       | 34 |   |
|                         |       | 7,293              |       | 7,810 |   |
| Less  current portion        |       | (2,019             | )          | (244 | ) |
|                         |       | $                  | 5,274      |   | $ | 7,566 |   |

 

*ConvertibleDebentures, Net.*InMay 2004, we sold and issued subordinated convertible debentures in theaggregate original principal amount of $10.1 million. In connection with theissuance of the debentures, we issued warrants to purchase an aggregate of639,847 shares of our common stock, the value of which was recorded as a debtdiscount against the face amount of the debentures on the date of issuance andis being amortized to interest expense over the term of the convertibledebentures.

 

The debentureswere due in full on May 19, 2009, provided for 6.0% annual interest,payable quarterly, and were convertible into our common stock at an initialconversion price of $3.61 per share, subject to certain adjustments, includingadjustments for dilutive issuances. From May 19, 2008 until the maturitydate, we were permitted to redeem the debentures at 110% of the principalamount. Through March 31, 2009, $250,000 of debentures had been convertedinto 69,252 shares of our common stock.

 

During the yearended March 31, 2008, at the holders’ request, we paid $1.8 million incash to retire $2.1 million of convertible debentures early, for which werecorded a net gain of $224,000.  Duringthe year ended March 31, 2009, we early-retired an additional $7.0 millionof outstanding convertible debentures, also at the holders’ request, for a netgain of approximately $50,000. For this retirement we used $300,000 of our cashand financed $6.5 million under our new bank term note, which is describedbelow under the caption “Bank Term Notes.” The net gains above were recordedwithin other income for their respective fiscal years within the accompanyingconsolidated statements of operations.

 

As of March 31,2009, $750,000 of convertible debentures remained outstanding. Subsequently, onMay 18, 2009, we retired this outstanding balance, which was also financedunder our bank term note. In accordance with SFAS No. 6, *Classifications of Short-Term Obligations Expected to Be Refinanced*,we have classified the portion of the remaining outstanding convertibledebentures financed under our term note subsequent to March 31, 2009 aslong-term debt in the accompanying condensed consolidated balance sheet as of March 31,2009.

 

*Bank TermNotes.*In October 2004,we entered into a $5.0 million term note payable with a bank. The note was dueon May 27, 2008, and provided for monthly principal payments ofapproximately $104,000.  The finalpayment against this term note was made in June 2008.

 

Effective October 16,2008, we entered into a new $19.5 million credit facility with a differentbank, as described above.  Under this newcredit facility, we may borrow up to $7.5 million in the form of a 48-monthterm note to retire all outstanding convertible debentures.  Principal payments under this term note arerequired to be repaid in 48 monthly installments commencing on June 1,2009.  Interest on the term note ispayable monthly at a rate equal to the current stated prime rate plus 0.50% upto the current stated prime rate plus 1.00%, depending on aggregate depositbalances maintained at the bank in relation to the total loan commitment underthe credit facility (4.25% at March 31, 2009).  We paid an upfront loan commitment fee of$28,000 for the term note. The term note contains no early termination fees and,along with the new revolving line of credit under the same credit agreement(above), is secured by substantially all of our assets. As of March 31,2009, $6.5 million had been borrowed against this term note to repayconvertible debentures.

 

On February 4,2009 we entered into an Amended and Restated Loan and Security Agreement withour bank which supersedes the agreements entered into on October 16, 2008in their entirety. The October 16, 2008 documents were amended andrestated to clarify certain ambiguities and remove non-applicablelanguage.  No modifications were made toany significant provisions related to the overall amount of the creditfacility, interest rate calculations, or any financial or non-financial covenant.

 

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Scheduled aggregate maturities of long-term debt principal as of March 31,2009 were as follows:

 
| **Year Ending March 31:** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|
| **(In thousands)**             | ** ** | ** ** | ** ** |
| 2010                           |       | $          | 2,019      |   |
| 2011                           |       | 2,323      |       |
| 2012                           |       | 2,323      |       |
| 2013                           |       | 628        |       |
|                           |       | $          | 7,293      |   |

 

**4.****                                    ****Income Taxes**

 

For financial reporting purposes, income before income taxes includesthe following components:

 
|           |   | **Year  Ended March 31,** |       |
|----------------|--------|--------------------------------|------------|
|           |   | **2009**                       | ** ** | **2008** | ** ** | **2007** |   |
|           |   | **(In  thousands)**            |       |
| United  States |   | $                              | 4,927      |   | $ | 6,119 |   | $ | 1,517 |   |
| Foreign        |   | 250                            |       | 144 |   | 58 |   |
|           |   | $                              | 5,177      |   | $ | 6,263 |   | $ | 1,575 |   |

 

The reconciliation of our income tax benefit to taxes computed at U.S.federal statutory rates is as follows:

 
| ** **                                                                 | ** ** | **Year Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                 | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                 | ** ** | **(In thousands)**            | ** ** |
| Income  tax provision at statutory rates                                   |       | $                             | 1,761      |   | $ | 2,131 |   | $ | 536 |   |
| State  income taxes net of federal benefit                                 |       | 57                            |       | (675 | ) | (147 | ) |
| Change  in valuation allowance associated with federal deferred tax assets |       | (6,915                        | )          | (7,558 | ) | (1,895 | ) |
| Compensation  charges                                                      |       | (4                            | )          | 194 |   | — |   |
| Unrecognized  tax benefits                                                 |       | (290                          | )          | (133 | ) | — |   |
| AMT  and foreign taxes                                                     |       | (8                            | )          | 40 |   | 24 |   |
| Other  permanent differences                                               |       | 102                           |       | 101 |   | 139 |   |
| Income  tax benefit                                                        |       | $                             | (5,297     | ) | $ | (5,900 | ) | $ | (1,343 | ) |

 

The components of deferred tax assets and liabilities are as follows:

 

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| ** **                             | ** ** | **March 31,** | ** ** |
|----------------------------------------|------------|--------------------|------------|
| ** **                             | ** ** | **2009**           | ** ** | **2008** | ** ** |
| ** **                             | ** ** | **(In thousands)** | ** ** |
| Deferred  tax assets:                  |       |               |       |   |   |
| Net  operating losses                  |       | $                  | 13,942     |   | $ | 16,777 |   |
| Credit  carry forwards                 |       | 247                |       | 164 |   |
| Deferred  compensation and payroll     |       | 1,035              |       | 1,359 |   |
| Bad  debt allowance and other reserves |       | 672                |       | 601 |   |
| Other,  net                            |       | 264                |       | 167 |   |
| Total  deferred tax assets             |       | 16,160             |       | 19,068 |   |
| Valuation  allowance                   |       | —             |       | (7,887 | ) |
| Net  deferred tax assets               |       | 16,160             |       | 11,181 |   |
|                                   |       |               |       |   |   |
| Deferred  tax liabilities:             |       |               |       |   |   |
| Property  and equipment                |       | (104               | )          | (160 | ) |
| Acquired  intangibles                  |       | (341               | )          | (183 | ) |
| Other,  net                            |       | 31                 |       | (490 | ) |
| Total  deferred tax liabilities        |       | (414               | )          | (833 | ) |
| Net  deferred tax assets               |       | $                  | 15,746     |   | $ | 10,348 |   |

 

Thecomponents of current and deferred federal and state income tax benefits andprovisions are as follows:

 
| ** **                     | ** ** | **Year Ended March 31,** | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                     | ** ** | **(In thousands)**            | ** ** |
| Current  income tax provision: |       |                          |       |   |   |   |   |
| Federal                        |       | $                             | (200       | ) | $ | 94 |   | $ | 25 |   |
| State                          |       | 223                           |       | 40 |   | 32 |   |
| Foreign                        |       | 78                            |       | 40 |   | 24 |   |
| Deferred  income tax benefit:  |       |                          |       |   |   |   |   |
| Federal                        |       | (5,261                        | )          | (5,011 | ) | (1,170 | ) |
| State                          |       | (137                          | )          | (1,063 | ) | (254 | ) |
| Net  income tax benefit        |       | $                             | (5,297     | ) | $ | (5,900 | ) | $ | (1,343 | ) |

 

At March 31, 2009, we had approximately $184,000 in federalalternative minimum tax credit carryforwards and $30,000 in state alternativeminimum tax credit carryforwards that can be carried forward indefinitely. Wehad $40.8 million of federal net operating loss carryforwards at March 31,2009 that begin to expire in 2019 and $18.4 million of state net operating losscarryforwards that begin to expire in 2013.

 

In May 2004, we acquired a greater than 80% ownership interest ina former subsidiary and from that date forward, our income taxes are providedon a consolidated basis for federal income tax purposes. Due to changes instock ownership, the prior year $44.4 million of federal net operating losscarryforwards and other federal tax attributes of Iteris are subject to a Section 382limitation estimated at approximately $7.8 million annually which can be utilizedto offset federal consolidated taxable income. To the extent such limitation isnot exceeded in a particular year, the excess limitation accumulates and addsto subsequent years’ limitations.

 

Pursuant to SFAS 123R, our deferred tax assets at March 31, 2009do not include $2.4 million of excess tax benefits from employee stock optionexercises that are a component of our net operating loss carryforwards. If andwhen such excess tax benefits are realized, stockholders’ equity will beadjusted.

 

At March 31, 2009, we determined that it is more likely than notthat our deferred tax assets will be realized. In making such determination, wereviewed all available positive and negative evidence, including reversal ofdeferred tax liabilities, potential carrybacks, projected future taxableincome, tax planning strategies and recent financial performance. As a result,at March 31, 2009, we recorded a reduction to income tax expense of $7.4million.

 

Unremitted earnings of our foreign subsidiary have been included in theconsolidated financial statements without giving effect to the United Statestaxes that may be payable on distribution to the United States because it isnot anticipated that such earnings will be remitted to the United States.  If remitted, the additional United Statestaxes would not be material.

 

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**FIN 48**

 

As of April 1, 2007,we recognized the cumulative impact of the adoption of FIN 48 as a $224,000increase to our liability for unrecognized tax benefits with a correspondingincrease to our accumulated deficit balance. As of March 31, 2009 and2008, our gross unrecognized tax benefits were $2.5 million and $2.8 million,respectively, of which $1.1 million and $88,000 respectively, if recognized,would affect our effective tax rate. The gross unrecognized tax benefits differfrom the amount that would affect our effective tax rate due primarily to the impactof the valuation allowance on such differences.

 

Our continuing practiceis to recognize interest and/or penalties related to income tax matters inincome tax expense.  As of March 31,2009 and 2008, we had accrued cumulatively $39,000 and $28,000, respectively,for the payment of interest and penalties.

 

A reconciliation of thebeginning and ending balances of the total amounts of gross unrecognized taxbenefits is as follows (in thousands):

 
| Gross  unrecognized tax benefits at April 1, 2007  |   | $     | 1,584  |   |
|---------------------------------------------------------|--------|-------|--------|--------|
| Increases  in tax positions for prior year              |   | 1,160 |   |
| Decreases  in tax positions for prior year              |   | (147  | )      |
| Increases  in tax positions for current year            |   | 327   |   |
| Lapse  in statute of limitations                        |   | (136  | )      |
| Gross  unrecognized tax benefits at March 31, 2008 |   | 2,788 |   |
| Increases  in tax positions for prior year              |   | 155   |   |
| Decreases  in tax positions for prior year              |   | (36   | )      |
| Increases  in tax positions for current year            |   | 22    |   |
| Lapse  in statute of limitations                        |   | (404  | )      |
| Gross  unrecognized tax benefits at March 31, 2009 |   | $     | 2,525  |   |

 

We anticipate a decreasein gross unrecognized tax benefits of approximately $300,000 within the nexttwelve months based on federal and state statute expirations in variousjurisdictions.

 

We are subject totaxation in the United States and various states.  We are subject to U.S. federal taxexamination for fiscal tax years ended March 31, 2006 and state as well aslocal income tax examination for fiscal tax years ended March 31, 2005.

 

**5.****                                    ****Commitments and Contingencies**

 

**Litigation**

 

On June 29,2004, a supplier to Mariner Networks, Inc., a former subsidiary of Iteristhat was discontinued in the fiscal year ended March 31, 2002, filed acomplaint in Orange County Superior Court against us alleging various breachesof written contract claims arising out of alleged purchase orders.  On July 20, 2006, we entered into asettlement agreement in connection with this matter.  The dispute was settled in full for $688,000payable as follows:  (i) we issued88,912 shares of our common stock on August 18, 2006 valued at $213,000based on the closing sales price of our common stock on the date of issuance; (ii) wemade a cash payment of $125,000 on October 20, 2006; and (iii) we areobligated to pay $350,000 in cash in equal monthly installments of $9,700 overthree years beginning in November 2006 through October 2009.  In connection with this settlement, werecorded a charge of $635,000, representing the fair value of the settlement,within other expense in the accompanying consolidated statement of operationsfor the year ended March 31, 2007.

 

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.  Forexample, we have been the subject of a number of routine tax audits for timeperiods and jurisdictions related to the businesses of our former subsidiaries,some of which are still in process. Although the development and ultimate outcome of these and otherunforeseen matters cannot be predicted with any certainty, our management doesnot believe that we are presently involved in any matters related to our formersubsidiaries that would have a material adverse effect on our consolidatedresults of operations, financial position or cash flows.

 

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**OperatingLeases**

 

In May 2007, we entered into an agreement to lease 52,000 squarefeet of space in Santa Ana, California for a term of 88 months. In September 2007,we relocated our headquarters and principal operations into this space. Themonthly lease rate is $102,000 during the first year of the lease and increaseseach year thereafter, up to a maximum of $120,000 during the last year of thelease. The lease may be extended for a period of five years, at our option, ata lease rate to be based on the market lease rate for comparable propertydetermined as of the commencement date of the extension period. Additionally,the lease agreement provides for $1.8 million in incentives in the form oftenant improvement allowances, which we recorded as deferred rent andcapitalized leasehold improvements in our consolidated balance sheet.  The deferred rent amount will reduce futurerent expense over the term of the lease, and the capitalized leaseholdimprovements amount will be depreciated over the initial term of the lease (theestimated useful life of the related leasehold improvements).

 

We have lease commitments for facilities in various locationsthroughout the United States as well as certain other equipment.  Future minimum rental payments under thesenoncancelable operating leases at March 31, 2009 were as follows:

 
| **Year Ending March 31:** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|
| **(In thousands)**             | ** ** | ** ** | ** ** |
| 2010                           |       | $          | 2,010      |   |
| 2011                           |       | 1,741      |       |
| 2012                           |       | 1,468      |       |
| 2013                           |       | 1,371      |       |
| 2014                           |       | 1,393      |       |
| Thereafter                     |       | 1,064      |       |
|                           |       | $          | 9,047      |   |

 

Rent expense totaled $1.8 million, $2.1 million and $2.2 million forthe years ended March 31, 2009, 2008 and 2007, respectively.

 

We previously had recorded on our consolidated balance sheet a deferredgain related to the May 2002 sale and leaseback of our prior headquartersin Anaheim, California.  The deferredgain was amortized over the term of the underlying lease, which terminated in September 2007,and resulted in a realized gain of $165,000 in the fiscal year ended March 31,2008 and $284,000 in the fiscal year ended March 31, 2007.

 

We previously subleased office space to MAXxess Systems, Inc. (“MAXxess”),one of our former subsidiaries that we sold in September 2003 and iscurrently owned by an investor group that includes two of our directors, one ofwhich is the Chief Executive Officer of MAXxess. At March 31, 2009, MAXxessowed us an aggregate of $274,000 related to this sublease, which terminated in September 2007,and certain related ancillary services that we provided to MAXxess.  Although we have fully reserved for amountsowed to us by MAXxess under the terms of this sublease, we intend to continueto pursue full payment of any and all amounts due from MAXxess.

 

**InventoryPurchase Commitments**

 

At March 31, 2009, we had firm commitments to purchaseapproximately $3.8 million of inventory during the first and second quarters ofour fiscal year ending March 31, 2010.

 

**DeferredCompensation Plan**

 

In 1986, weadopted the Executive Deferral Plan (the “1986 Plan”) under which certainexecutives were able to defer a portion of their annual compensation into the1986 Plan. All deferred amounts earned interest, generally with no guaranteedrate of return.  During the year ended March 31,2003, we adopted the Deferred Compensation Plan, and all assets of the 1986Plan were transferred into the Deferred Compensation Plan.  No compensation withholdings were deferredunder the 1986 Plan or the Deferred Compensation Plan in the years ended March 31,2009, 2008 and 2007.

 

At March 31, 2009, the Deferred Compensation Plan held 23,844shares of our common stock, which we have presented as an aggregated $31,000deferred compensation plan liability in the accompanying consolidated balancesheet. At March 31, 2008, the Deferred Compensation Plan held 167,177shares of our common stock and $5,000 in cash. Changes in the value of Iteris common stock held by the DeferredCompensation Plan are determined based on changes in the quoted market price ofour common stock at the close of each reporting period and presented withinoperating expenses in the accompanying consolidated statements of operations.As a result of such changes in the value of Iteris common stock, we recordedexpense of $72,000, expense of $21,000 and a benefit of $91,000 in the yearsended March 31, 2009, 2008 and 2007, respectively.  The original $31,000 cost basis of shares ofIteris common stock held in the Deferred Compensation Plan at March 31,2009 has been recorded as a contra-equity account in the accompanyingconsolidated financial statements.

 

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**6.****                                    ****Stockholders’ Equity**

 

**PreferredStock**

 

Our certificate of incorporation provides for the issuance of up to2,000,000 shares of preferred stock. As of March 31, 2009 and 2008, therewere no outstanding shares of preferred stock, and we do not currently have anyplans to issue any shares of preferred stock. Our Board of Directors isauthorized to issue from time to time such authorized but unissued shares ofpreferred stock in one or more series and to fix or alter the designations,preferences, rights and any qualifications, limitations or restrictions of theshares of each such series, including the dividend, conversion, voting,redemption and liquidation rights.

 

**CommonStock and Common Stock Warrants**

 

On September 28,2006, we issued warrants to purchase an aggregate 246,250 shares of commonstock at an exercise price of $3.25 with a five-year life to an existingshareholder in exchange for the early exercise of 1,250,000 outstanding warrantswith an exercise price of $1.61.  Thesenew warrants were immediately exercisable and are callable by us if the marketprice of our common stock trades for 20 consecutive days at a price greaterthan or equal to two times the exercise price of the warrants.  The fair value of these new warrants was$320,000 calculated using the BSM option-pricing formula.  The warrants were considered a cost ofraising capital and were recorded in equity.

 

Inconnection with the issuance of the above-described warrants, we are party to aregistration rights agreement that contains provisions under which we could besubjected to liquidated damages should it fail to maintain effectiveregistration statements for the shares of common stock issuable upon exerciseof the warrants.  These warrants havebeen accounted for within equity in the consolidated balance sheets as of March 31,2009 and 2008 in accordance with EITF Issue No. 00-19 *Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock*, and, accordingly, no liabilities have beenrecorded in connection therewith.  As of March 31,2009, no liquidated damages were payable under the provisions of theregistration rights agreement associated with these warrants.

 

The following table summarizes information regarding outstandingwarrants to purchase our common stock as of March 31, 2009:

 
| **Range of Exercise Prices** | ** ** | **Warrants  Outstanding** | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Weighted  Average Exercise  Price** | ** ** |
|------------------------------|------------|---------------------------|------------|---------------------------------------------------|------------|---------------------------------------|------------|
| ** **                   | ** ** | **(In thousands)**        | ** ** | **(Years)**                                       | ** ** | ** **                            | ** ** |
| $1.42                        |       | 15                        |       | 4.4                                               |       | $                                     | 1.42       |   |
| $3.25                        |       | 246                       |       | 1.9                                               |       | 3.25                                  |       |
| $3.61  to $4.03              |       | 674                       |       | 0.1                                               |       | 3.93                                  |       |
| $5.00  to $5.26              |       | 230                       |       | 0.7                                               |       | 5.18                                  |       |
|                         |       | 1,165                     |       | 0.7                                               |       | $                                     | 4.00       |   |

 

All of the outstanding warrants were exercisable at March 31,2009.  Warrants to purchase an aggregateof 246,260 shares of common stock at an exercise price of $3.25 per shareare callable by us if the market price of our common stock trades for 20consecutive days at a price equal to or greater than two times the exerciseprice of the warrants. Warrants to purchase an aggregate of 75,000 sharesof common stock at an exercise price of $5.00 per share are callable by us ifthe market price of our common stock trades for 20 consecutive days at aprice equal to or greater than one and a half times the exercise price of thewarrants.

 

In May 2009, 673,883 warrants associated with our convertibledebentures (see Note 3) with a weighted average exercise price of $3.93 expiredunexercised.

 

Thefollowing summarizes common stock reserved for future issuance at March 31,2009:

 
| ** **                                      | ** ** | **(In thousands)** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| Shares  issuable under stock options plans      |       | 3,760              |       |
| Shares  issuable under the exercise of warrants |       | 1,165              |       |
|                                            |       | 4,925              |       |

 

Upon the exercise of warrants or stock options, weissue new shares of common stock from our authorized shares.

 

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**7.****                                    ****Associate Benefit Plans**

 

**StockOption Plans**

 

On September 21,2007, our stockholders approved the 2007 Omnibus Incentive Plan (the “2007 Plan”),which provides that options to purchase shares of our unissued common stock maybe granted to our employees, officers, consultants and directors at exerciseprices which are equal to or greater than the fair market value of our commonstock on the date of grant. Options expire no more than ten years after thedate of grant and generally vest at the rate of 25% on each of the first fouranniversaries of the grant date. The 2007 Plan also allows for the issuance ofstock appreciation rights, restricted stock, restricted stock units and otherstock-based awards based on the value of our common stock. New shares areissued to satisfy stock option exercises and share issuances under the 2007Plan. As of March 31, 2009, options to purchase approximately 404,000shares of common stock were outstanding under the 2007 Plan.

 

Our 1997 StockIncentive Plan (the “1997 Plan”) terminated in September 2007; however,all stock options outstanding under the 1997 Plan will remain outstandingpursuant to the terms of such stock options. As of March 31, 2009, optionsto purchase approximately 1.3 million shares of our common stock wereoutstanding under the 1997 Plan.

 

In connection withour merger with the Iteris Subsidiary in 2004, we assumed the 1998 StockIncentive Plan (the “1998 Plan”) of the Iteris Subsidiary and all outstandingoptions granted thereunder. As of March 31, 2009, options to purchaseapproximately 1.6 million shares of our common stock were outstanding under the1998 Plan. No further options may be granted under the 1998 Plan.

 

Certain optionsgranted under the 2007 Plan, the 1997 Plan and the 1998 Plan (collectively, the“Plans”) provide for accelerated vesting of unvested options in the event of achange in control under certain circumstances. These change-in-controlprovisions meet the criteria of a performance condition under SFAS 123R.

 

A summary ofactivity in the Plans for the year ended March 31, 2009 is as follows:

 
| ** **                                                                  | ** ** | **Options**        | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** | **Weigthed  Average  Remaining  Contractual  Life** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **(In thousands)** | ** ** | ** **                                        | ** ** | **(Years)**                                         | ** ** | **(In thousands)**              | ** ** |
| Options  outstanding at March 31, 2008                                 |       | 4,524              |       | $                                                 | 1.83       |                                                |       |                            |       |   |
| Granted                                                                     |       | 30                 |       | 2.10                                              |       |                                                |       |                            |       |
| Exercised                                                                   |       | (785               | )          | 1.20                                              |       |                                                |       |                            |       |
| Forfeited                                                                   |       | (20                | )          | 2.58                                              |       |                                                |       |                            |       |
| Expired                                                                     |       | (435               | )          | 2.28                                              |       |                                                |       |                            |       |
| Options  outstanding at March 31, 2009                                 |       | 3,314              |       | $                                                 | 1.92       |                                                | 4.0        |                            | $          | 346 |   |
| Vested  and expected to vest at March 31, 2009                         |       | 3,245              |       | $                                                 | 1.91       |                                                | 3.9        |                            | $          | 346 |   |
| Options  exercisable at March 31, 2009                                 |       | 2,857              |       | $                                                 | 1.85       |                                                | 3.4        |                            | $          | 346 |   |
| Options  exercisable at March 31, 2009 pursuant to a change-in-control |       | 3,314              |       | $                                                 | 1.92       |                                                | 4.0        |                            | $          | 346 |   |

 

At March 31,2009, there were approximately 446,000 shares of common stock available forgrant under the 2007 Plan.

 

**Stock-Based Compensation**

 

The grant date fair value of options granted was estimated using thefollowing weighted-average assumptions:

 
| ** **                           | ** ** | **Year Ended March 31,** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                 |       |                          |       |   |   |   |   |
| Dividend  yield                      |       | —                        | %          | — | % | — | % |
| Expected  life - years               |       | 7.0                           |       | 7.0 |   | 7.0 |   |
| Risk-free  interest rate             |       | 3.3                           | %          | 3.8 | % | 4.7 | % |
| Expected  volatility of common stock |       | 0.75                          |       | 0.80 |   | 0.90 |   |

 

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A summary ofcertain fair value and intrinsic value information is as follows:

 
| ** **                                                               | ** ** | **Year Ended March 31,**                 | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **2009**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                               | ** ** | **(In thousands, except per share  amounts)** | ** ** |
| Weighted  average grant date fair value per share of****options  granted | ** ** | $                                             | 1.50       | ** ** | $ | 1.83 | ** ** | $ | 1.92 | ** ** |
| Intrinsic  value of options exercised                                    |       | 771                                           |       | 2,555 |   | 2,288 |   |
|                                                                          |            |                                               |            |  |  |  |  |  |  |  |

 

At March 31,2009, there was approximately $836,000 of total unrecognized compensationexpense related to unvested stock options. This expense is expected to be recognized over a weighted-average periodof approximately 2.7 years. If there are any modifications or cancellations ofthe underlying unvested stock options, we may be required to accelerate,increase or cancel any remaining unearned stock-based compensation expense.Future stock-based compensation expense and unearned stock-based compensationwill increase to the extent that we issue additional stock options or otherstock-based awards.

 

**Associate Incentive Programs**

 

Under the terms of a Profit Sharing Plan, we may contribute to a trustfund such amounts as are determined annually by the Board of Directors. Nocontributions were made during the years ended March 31, 2009, 2008 and2007.

 

In May 1990, we adopted a 401(k) Plan as an amendment andreplacement of the former Associate Stock Purchase Plan that was an additionalfeature of the Profit Sharing Plan. Under the 401(k) Plan, eligibleassociates voluntarily contribute to the plan, up to IRS maximums, throughpayroll deductions. We match up to 90% of contributions, based on years ofservice, up to a stated limit. Under the provisions of the 401(k) Plan,associates have various investment choices, one of which is the purchase ofIteris common stock at market price. Our matching contributions wereapproximately $753,000, $401,000 and $480,000 for the years ended March 31,2009, 2008 and 2007, respectively.

 

**8.****                                    ****Business Segment andGeographic Information**

 

We currently operate in three reportable segments: Roadway Sensors,Vehicle Sensors and Transportation Systems. The Roadway Sensors segmentincludes our Vantage and VersiCam vehicle detection products and systems fortraffic intersection control, incident detection and certain highwaytraffic data collection applications. The Vehicle Sensors segment includes ourlane departure warning products and is comprised of all activities related tovehicle safety. The Transportation Systems segment includes transportationengineering and consulting services, and the development of transportationmanagement and traveler information systems for the ITS industry. The accountingpolicies of our reportable segments are the same as those described in thesummary of significant accounting policies in Note 1.  Beginning April 1, 2007, we increasedthe portion of our corporate expenses that we allocate to our segments suchthat substantially all corporate expenses are allocated.  Interest, amortization of certain intangiblesand certain corporate expenses are still not allocated to the segments. Thereportable segments are each managed separately because they manufacture anddistribute distinct products or provide services with different processes. Allsegment revenues are derived from external customers. Segment assets are notdisclosed because the discrete financial information provided to and reviewedby our chief operating decision maker does not separately identify segmentassets.

 

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Selected financial information for our reportable segments as of andfor the years ended March 31, 2009, 2008 and 2007 is as follows:

 
| ** **                         | ** ** | **Roadway  Sensors** | ** ** | **Vehicle  Sensors** | ** ** | **Transportation  Systems** | ** ** | **Total**  | ** ** |
|------------------------------------|------------|----------------------|------------|----------------------|------------|-----------------------------|------------|------------|------------|
| ** **                         | ** ** | **(In thousands)**   | ** ** |
| **Year Ended March 31, 2009** | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Product  revenue                   |       | $                    | 27,197     |                 | $          | 9,913                       |       | $          | —     |   | $ | 37,110 |   |
| Service  and other revenue         |       | —               |       | 1,317                |       | 30,932                      |       | 32,249     |       |
| Stock-based  compensation          |       | 30                   |       | 48                   |       | 50                          |       | 128        |       |
| Depreciation  and amortization     |       | 198                  |       | 137                  |       | 249                         |       | 584        |       |
| Allocated  goodwill                |       | 8,197                |       | 4,671                |       | 14,906                      |       | 27,774     |       |
| Segment  income                    |       | 3,415                |       | 569                  |       | 2,216                       |       | 6,200      |       |
| ** **                         | ** ** | ** **           | ** ** | ** **           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Year Ended March 31, 2008** |       |                 |       |                 |       |                        |       |       |       |
| Product  revenue                   |       | $                    | 28,452     |                 | $          | 10,016                      |       | $          | —     |   | $ | 38,468 |   |
| Service  and other revenue         |       | —               |       | 1,858                |       | 24,837                      |       | 26,695     |       |
| Stock-based  compensation          |       | 18                   |       | 45                   |       | 27                          |       | 90         |       |
| Depreciation  and amortization     |       | 107                  |       | 130                  |       | 147                         |       | 384        |       |
| Allocated  goodwill                |       | 8,197                |       | 4,671                |       | 14,906                      |       | 27,774     |       |
| Segment  income                    |       | 5,062                |       | 552                  |       | 2,094                       |       | 7,708      |       |
|                               |       |                 |       |                 |       |                        |       |       |       |
| **Year Ended March 31, 2007** |       |                 |       |                 |       |                        |       |       |       |
| Product  revenue                   |       | $                    | 27,261     |                 | $          | 6,408                       |       | $          | —     |   | $ | 33,669 |   |
| Service  and other revenue         |       | —               |       | 2,579                |       | 22,049                      |       | 24,628     |       |
| Stock-based  compensation          |       | 37                   |       | 54                   |       | 78                          |       | 169        |       |
| Depreciation  and amortization     |       | 82                   |       | 138                  |       | 126                         |       | 346        |       |
| Allocated  goodwill                |       | 8,197                |       | 4,671                |       | 14,906                      |       | 27,774     |       |
| Segment  income (loss)             |       | 6,035                |       | (2,625               | )          | 2,551                       |       | 5,961      |       |

 

The following reconciles segment income to consolidated income beforeincome taxes:

 
| ** **                             | ** ** | **Year Ended March 31,** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2009**                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                             | ** ** | **(In thousands)**            | ** ** |
| **Segment income:**                    |       |                          |       |   |   |   |   |
| Total  income from reportable segments |       | $                             | 6,200      |   | $ | 7,708 |   | $ | 5,961 |   |
| **Unallocated amounts:**               |       |                          |       |   |   |   |   |
| Corporate  and other expenses          |       | (346                          | )          | (266 | ) | (1,986 | ) |
| Amortization  of intangible assets     |       | (147                          | )          | (147 | ) | (147 | ) |
| Other  income, net                     |       | 116                           |       | 252 |   | (653 | ) |
| Interest  expense, net                 |       | (646                          | )          | (1,284 | ) | (1,600 | ) |
| Income  before income taxes            |       | $                             | 5,177      |   | $ | 6,263 |   | $ | 1,575 |   |

 

**Significant Customer and Geographic Information**

 

No single customer accounted for more than 10% of our total net salesand contract revenues for the years ended March 31, 2009 and 2008. Onecustomer within our Roadway Sensors segment accounted for approximately 12.4%of our total net sales and contract revenues for the year ended March 31,2007.

 

The Roadway Sensors segment had one customer who accounted for 19.3%,16.9% and 26.5% of total segment revenue for the years ended March 31,2009, 2008 and 2007, respectively.

 

The Vehicle Sensors segment had three customers who accounted for anaggregate of 63.3% of total segment revenue for the year ended March 31,2009; three customers who accounted for an aggregate of 60.9% of total segmentrevenue for the year ended March 31, 2008; and three customers whoaccounted for an aggregate of 64.2% of total segment revenue for the year endedMarch 31, 2007.

 

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The Transportation Systems segment had one customer who accounted for11.5% of segment revenue for the year ended March 31, 2009 and onecustomer who accounted for 13.3% of total segment revenue for the year ended March 31,2007.

 

At March 31, 2009 and 2008, our gross accounts receivable fromgovernmental agencies and prime government contractors were approximately $6.5million and $6.4 million, respectively. No individual customer or governmentagency had a receivable balance at March 31, 2009 or 2008 greater than 10%of our total trade accounts receivable balances as of March 31, 2009 and2008, respectively.

 

Our total net sales and contract revenues derived from all independentcustomers located outside the United States approximated 15%, 12% and 6% forthe years ended March 31, 2009, 2008 and 2007, respectively.

 

Our assets are held substantially in the United States.

** **

**9.**                                     Quarterly Financial Data (Unaudited)

 
| **Quarter Ended:**       | ** ** | **Total Net  Sales and  Contract  Revenues** | ** ** | **Gross Profit** | ** ** | **Net  Income** | ** ** | **Basic  Earnings  per Share** | ** ** | **Diluted  Earnings  per Share** | ** ** |
|--------------------------|------------|----------------------------------------------|------------|------------------|------------|-----------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **(In thousands, except per share amounts)** | ** ** |
| June 30,  2008      |       | $                                            | 17,442     |             | $          | 7,752           |       | $                              | 666        |                             | $          | 0.02 |   | $ | 0.02 |   |
| September 30,  2008 |       | 19,066                                       |       | 7,875            |       | 1,067           |       | 0.03                           |       | 0.03                             |       |
| December 31,  2008  |       | 16,462                                       |       | 6,504            |       | 741             |       | 0.02                           |       | 0.02                             |       |
| March 31,  2009     |       | 16,389                                       |       | 5,788            |       | 8,000           |       | 0.23                           |       | 0.23                             |       |
|                     |       | $                                            | 69,359     |             | $          | 27,919          |       | $                              | 10,474     |                             | $          | 0.31 | * | $ | 0.30 | * |
|                     |       |                                         |       |             |       |            |       |                           |       |                             |       |
| June 30,  2007      |       | $                                            | 15,757     |             | $          | 7,094           |       | $                              | 1,096      |                             | $          | 0.03 |   | $ | 0.03 |   |
| September 30,  2007 |       | 16,976                                       |       | 7,262            |       | 2,170           |       | 0.07                           |       | 0.06                             |       |
| December 31,  2007  |       | 15,363                                       |       | 6,500            |       | 954             |       | 0.03                           |       | 0.03                             |       |
| March 31,  2008     |       | 17,067                                       |       | 7,441            |       | 7,943           |       | 0.24                           |       | 0.23                             |       |
|                     |       | $                                            | 65,163     |             | $          | 28,297          |       | $                              | 12,163     |                             | $          | 0.37 | * | $ | 0.35 | * |

 

----

*            Annual per share amounts may not agree tothe sum of the quarterly per share amounts due to differences between averageshares outstanding during the periods.

 

**10.**                              Subsequent Events

 

**Purchase Acquisition**

 

In April 2009,we completed the acquisition of certain assets of Hamilton Signal, Inc., aprivately-held developer of video processing algorithms enabling state andlocal governments to conduct real-time analysis on fixed and Pan-Tilt-Zoomcamera feeds. The total purchase consideration was approximately $518,000, forwhich we paid $300,000 in cash upon execution of the purchase agreement (the “Closing”),and for which we are scheduled to pay an additional (i) $106,000 on the one-yearanniversary of the Closing and (ii) approximately $112,000 on the two-yearanniversary of the Closing, pursuant to the purchase agreement. The seller isalso eligible to receive additional consideration based on future net sales ofcertain products, subject to certain limitations, as further described in thepurchase agreement.

 

**Employment****Termination**

 

In May 2009,as part of an internal reorganization, we terminated the employment of theSenior Vice President and General Manager of our Vehicle Sensors segment. Weexpect to incur a charge of approximately $100,000 in the first quarter of thefiscal year ending March 31, 2010 related to certain severance benefits tobe paid in connection with the termination agreement.

 

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**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                       | ** ** | **Where Located**                                                                                                                                                                                      |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                            | ** ** | ** **                                                                                                                                                                                                  |
| 3.1                 |       | Amended and Restated Certificate of Incorporation of  the registrant                                                                                                  | * *   | *Exhibit 3.1 to the registrant’s Current  Report on Form 8-K as filed with the SEC on October 28, 2004*                                                                                 |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 3.2                 |       | Certificate of Amendment to Amended and Restated  Certificate of Incorporation effective September 26, 2007                                                      | * *   | *Exhibit 3.2 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2007 as  filed with the SEC on November 13, 2007*                              |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 3.3                 |       | Bylaws of the registrant, as amended                                                                                                                                  | * *   | *Exhibit 4.2 to the registrant’s Registration  Statement on Form S-1 (Reg. No. 033-67932) as filed with the SEC on  July 6, 1993*                                                  |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 3.4                 |       | Certificates of Amendment to Bylaws of the  registrant dated April 24, 1998 and August 10, 2001                                                             | * *   | *Exhibit 3.4 to the registrant’s Annual  Report on Form 10-K/A for the year ended March 31, 2003 as filed  with the SEC on July 29, 2003*                                          |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 3.5                 |       | Certificate of Amendment to Bylaws of registrant  dated September 9, 2004                                                                                        | * *   | *Exhibit 3.1 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2004 as  filed with the SEC on November 15, 2004*                              |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 3.6                 |       | Certificate of Amendment to Bylaws of registrant  effective September 16, 2005                                                                                   | * *   | *Exhibit 3.5 to the registrant’s Annual  Report on Form 10-K for the year ended March 31, 2007*                                                                                         |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 3.7                 |       | Certificate of Amendment to Bylaws of registrant  effective December 7, 2007                                                                                     | * *   | *Exhibit 3.1 to the registrant’s Current  Report on Form 8-K as filed with the SEC on December 13, 2007*                                                                                |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 4.1                 |       | Specimen of common stock certificate                                                                                                                                  | * *   | *Exhibit 4.1 to registrant’s Registration  Statement on Form 8-A as filed with the SEC on December 8, 2004*                                                                             |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 4.2                 |       | Amended and Restated Rights Agreement, dated as of  May 10, 2004, by and between the registrant and U.S. Stock Transfer  Corporation, including exhibits thereto | * *   | *Exhibit 99.1 to the registrant’s  Registration Statement on Form 8-A/A as field with the SEC on June 18,  2004*                                                                        |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 10.1*               |       | Profit Sharing Plan and Trust                                                                                                                                         | * *   | *Exhibit 10.3 to the registrant’s Amendment  No. 2 to the Registration Statement on Form S-8 (Reg.  No. 002-98656) as filed with the SEC on May 5, 1988*                      |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 10.2*               |       | Amendment Nos. 3 and 4 to the Profit Sharing Plan  and Trust                                                                                                          | * *   | *Exhibits 4.3.1 and 4.3.2, respectively, to  Amendment No. 3 to the registrant’s Registration Statement on  Form S-3 (Reg. No. 002-86220) as filed with the SEC on  June 13, 1990* |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 10.3*               |       | Form of Executive Deferral Plan between the  registrant and certain employees of the registrant                                                                  | * *   | *Exhibit 10.4 to the registrant’s Annual  Report on Form 10-K for the year ended March 31, 1988*                                                                                        |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 10.4                |       | Form of Indemnity Agreement entered into by the  registrant and certain of its officers and directors                                                            | * *   | *Exhibit 19.4 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 1988*                                                                              |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 10.5                |       | Form of Indemnification Agreement entered into  by the registrant and certain of its officers and directors                                                      | * *   | *Exhibit 10.5 to the registrant’s Annual  Report on Form 10-K for the year ended March 31, 2004 as filed with  the SEC on June 29, 2004*                                           |
|                |       |                                                                                                                                                                  |       |                                                                                                                                                                                                        |
| 10.6*               |       | 1997 Stock Incentive Plan (the “1997 Plan”) as  amended on May 3, 2003, as further amended on December 15, 2004                                   | * *   | *Exhibit 10.32 to the registrant’s Annual  Report on Form 10-K for the year ended March 31, 2005 as filed with  the SEC on July 14, 2005*                                          |

 

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Tableof Contents

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                            | ** ** | **Where Located**                                                                                                                                                            |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                                                                                                                                       | * *   | * *                                                                                                                                                                          |
| 10.7*              |       | Form of Notice of Grant of Stock Option                                                                                                                                                                                                                                                                                               | * *   | *Exhibit 99.2 to the registrant’s  Registration Statement on Form S-8 (File No. 333-30396) as filed  with the SEC on February 14, 2000*                  |
|               |       |                                                                                                                                                                                                                                                                                                                                       |       |                                                                                                                                                                              |
| 10.8*              |       | Form of Stock Option Agreement                                                                                                                                                                                                                                                                                                        | * *   | *Exhibit 99.3 to the registrant’s  Registration Statement on Form S-8 (File No. 333-30396) as filed  with the SEC on February 14, 2000*                  |
|               |       |                                                                                                                                                                                                                                                                                                                                       |       |                                                                                                                                                                              |
| 10.9*              |       | Form of Addendum to Stock Option  Agreement—Involuntary Termination Following Corporate Transaction or Change  in Control                                                                                                                                                                                                        | * *   | *Exhibit 99.4 to the registrant’s  Registration Statement on Form S-8 (File No. 333-30396) as filed  with the SEC on February 14, 2000*                  |
|               |       |                                                                                                                                                                                                                                                                                                                                       |       |                                                                                                                                                                              |
| 10.10*             |       | Form of Addendum to Stock Option  Agreement—Limited Stock Appreciation Rights                                                                                                                                                                                                                                                    | * *   | *Exhibit 99.5 to the registrant’s  Registration Statement on Form S-8 (File No. 333-30396) as filed  with the SEC on February 14, 2000*                  |
|               |       |                                                                                                                                                                                                                                                                                                                                       | * *   | * *                                                                                                                                                                          |
| 10.11*             |       | Form of Stock Issuance Agreement                                                                                                                                                                                                                                                                                                      | * *   | *Exhibit 99.6 to the registrant’s  Registration Statement on Form S-8 (File No. 333-30396) as filed  with the SEC on February 14, 2000*                  |
|               |       |                                                                                                                                                                                                                                                                                                                                       | * *   | * *                                                                                                                                                                          |
| 10.12*             |       | Form of Addendum to Stock Issuance  Agreement—Involuntary Termination Following Corporate Transaction/Change in  Control                                                                                                                                                                                                         | * *   | *Exhibit 99.7 to the registrant’s  Registration Statement on Form S-8 (File No. 333-30396) as filed  with the SEC on February 14, 2000*                  |
|               |       |                                                                                                                                                                                                                                                                                                                                       | * *   | * *                                                                                                                                                                          |
| 10.13*             |       | Form of Notice of Grant of Automatic Stock  Option—Initial Grant                                                                                                                                                                                                                                                                 | * *   | *Exhibit 99.8 to Exhibit 99.8 to  registrant’s Registration Statement on Form S-8 (File  No. 333-30396) as filed with the SEC on February 14, 2000* |
|               |       |                                                                                                                                                                                                                                                                                                                                       | * *   | * *                                                                                                                                                                          |
| 10.14*             |       | Form of Notice of Grant of Automatic Stock  Option—Annual Grant                                                                                                                                                                                                                                                                  | * *   | *Exhibit 99.9 to the registrant’s  Registration Statement on Form S-8 (File No. 333-30396) as filed  with the SEC on February 14, 2000*                  |
|               |       |                                                                                                                                                                                                                                                                                                                                       | * *   | * *                                                                                                                                                                          |
| 10.15*             |       | Form of Automatic Stock Option Agreement.                                                                                                                                                                                                                                                                                             | * *   | *Exhibit 99.10 to the registrant’s  Registration Statement on Form S-8 (File No. 333-30396) as filed  with the SEC on February 19, 2000*                 |
|               |       |                                                                                                                                                                                                                                                                                                                                       | * *   | * *                                                                                                                                                                          |
| 10.16              |       | Amended and Restated Agreement of Purchase and Sale  and Escrow Instructions, dated February 19, 2002, by and between  Iteris, Inc. and 1515 South Manchester, LLC                                                                                                                                                               | * *   | *Exhibit 2.1 to the registrant’s Current  Report on Form 8-K as filed with the SEC on June 12, 2002*                                                          |
|               |       |                                                                                                                                                                                                                                                                                                                                       | * *   | * *                                                                                                                                                                          |
| 10.17*             |       | Iteris Inc. 1998 Stock Incentive Plan (as amended on  February 7, 2000)                                                                                                                                                                                                                                                               | * *   | *Exhibit 10.24 to the registrant’s Annual  Report on Form 10-K for the year ended March 31, 2005 as filed with  the SEC on July 14, 2005*                |
|               |       |                                                                                                                                                                                                                                                                                                                                       | * *   | * *                                                                                                                                                                          |
| 10.18*             |       | Form of Notice of Grant, including forms of  Option Agreement and Stock Purchase Agreement for the following directors and  executive officers: Gary Hernandez, Dr. Hartmut Marwitz, Paul E. Wright,  Jack Johnson, Richard D. Crawshaw, Gregory McKhann, Francis Memole, James S.  Miele, Abbas Mohaddes and Stephen Edwin Rowe | * *   | *Exhibit 99.2 to the registrant’s  Registration Statement on Form S-8 (File No. 333-126834) as filed  with the SEC on July 22, 2005*                     |
|               |       |                                                                                                                                                                                                                                                                                                                                       | * *   | * *                                                                                                                                                                          |
| 10.19*             |       | Form of Addendum to Stock Option Agreement                                                                                                                                                                                                                                                                                            | * *   | *Exhibit 99.3 to the registrant’s  Registration Statement on Form S-8 (File No. 333-126834) as filed  with the SEC on July 22, 2005*                     |

 

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Tableof Contents

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                               | ** ** | **Where Located**                                                                                                                                                           |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20*             |       | Form of 1997 Stock Option Agreements                                                                                                                                                                                                                     | * *   | *Exhibit 99.4 to the registrant’s  Registration Statement on Form S-8 (File No. 333-126834) as filed  with the SEC on July 22, 2005*                    |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.21*             |       | Iteris, Inc. Deferred Compensation Savings Plan  and Grantor Trust                                                                                                                                                                                       | * *   | *Exhibit 10.31 to the registrant’s Annual  Report on Form 10-K for the year ended March 31, 2005 as filed with  the SEC on July 14, 2005*               |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.22+             |       | Cooperative Agreement for Development, Manufacture,  Marketing and Sale of Products to the Class 1 and Class 2 Vehicle  Markets Incorporating Iteris’ LDWS Technology (Valeo Schalter and Sensoren  GmbH)                                      | * *   | *Exhibit 10.1 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2004 as filed  with the SEC on August 16, 2004*         |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.23              |       | Warrant Exercise Agreement dated September 27,  2006 by and among the registrant and Special Situations Fund III QP, L.P.,  Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P. and  Special Situations Private Equity Fund, L.P.    | * *   | *Exhibit 10.1 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2006 as  filed with the SEC on November 14, 2006.* |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.24              |       | Registration Rights Agreement dated  September 28, 2006 by and among the registrant and Special Situations  Fund III QP, L.P., Special Situations Fund III, L.P., Special Situations  Cayman Fund, L.P. and Special Situations Private Equity Fund, L.P. | * *   | *Exhibit 10.2 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2006 as  filed with the SEC on November 14, 2006.* |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.25+             |       | National Intelligent Transportation Systems (ITS)  Architecture Evolution and Support Award/Contract effective as of  October 1, 2006 by and between the registrant and the Federal Highway  Administration                                              | * *   | *Exhibit 10.3 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2006 as  filed with the SEC on November 14, 2006.* |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.26              |       | Loan and Security Agreement effective as of  October 16, 2006 by and between the registrant and Silicon Valley Bank                                                                                                                                      | * *   | *Exhibit 10.4 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2006 as  filed with the SEC on November 14, 2006.* |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.27              |       | Intellectual Property Security Agreement dated  October 9, 2006 by and between the registrant and Silicon Valley Bank                                                                                                                                    | * *   | *Exhibit 10.5 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2006 as  filed with the SEC on November 14, 2006.* |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.28+             |       | Settlement Agreement, effective August 15,  2006, by and between the registrant and Delta Networks, Inc.                                                                                                                                            | * *   | *Exhibit 10.1 to the registrant’s Current  Report on Form 8-K as filed with the SEC on August 21, 2006*                                                      |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.29*             |       | Offer letter effective February 28, 2007 by and  between the registrant and Abbas Mohaddes                                                                                                                                                               | * *   | *Exhibit 10.1 to the registrant’s Current  Report on Form 8-K as filed with the SEC on March 6, 2007*                                                        |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.30*             |       | Separation Agreement and Release of Claims dated  March 1, 2007 by and between the registrant and Jack Johnson                                                                                                                                           | * *   | *Exhibit 10.2 to the registrant’s Current  Report on Form 8-K as filed with the SEC on March 6, 2007*                                                        |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.31              |       | Sublease Agreement, dated September 30, 2003,  by and between Odetics, Inc. and Maij, Inc.                                                                                                                                                     | * *   | *Exhibit 10.1 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2007 as filed  with the SEC on August 14, 2007*         |
|               |       |                                                                                                                                                                                                                                                          | * *   | * *                                                                                                                                                                         |
| 10.32              |       | Office Lease Agreement, dated May 24, 2007, by  and between Crown Carnegie Associates, LLC and Iteris, Inc.                                                                                                                                         | * *   | *Exhibit 10.2 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2007 as filed  with the SEC on August 14, 2007*         |

 

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Tableof Contents

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                    | ** ** | **Where Located**                                                                                                                                                         |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.33              |       | Termination Agreement, dated May 30, 2007, by  and among Transportation Planning Group, Inc., Abbas Mohaddes and  Iteris, Inc.                                                      | * *   | *Exhibit 10.3 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2007 as filed  with the SEC on August 14, 2007*       |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.34*             |       | 2007 Omnibus Incentive Plan and forms of agreements                                                                                                                                                | * *   | *Appendix A to the registrant’s Definitive Proxy  Statement on Schedule 14A as filed with the SEC on August 10, 2007*                                                |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.35              |       | Amendment to Loan and Security Agreement, dated  October 17, 2007, by and between Silicon Valley Bank and  Iteris, Inc.                                                                  | * *   | *Exhibit 10.1 to the registrant’s Current  Report on Form 8-K as filed with the SEC on October 23, 2007*                                                   |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.36              |       | Debenture Redemption Agreement, dated  February 11, 2008, by and among Potomac Capital Partners, LP, Potomac  Capital International Ltd. and Iteris, Inc.                                | * *   | *Exhibit 10.1 to the registrant’s Current  Report on Form 8-K as filed with the SEC on February 15, 2008*                                                  |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.37              |       | Debenture Redemption Agreement, dated  February 27, 2008, by and between Gruber & McBaine  International and Iteris, Inc.                                                       | * *   | *Exhibit 10.1 to the registrant’s Current  Report on Form 8-K as filed with the SEC on February 29, 2008*                                                  |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.38              |       | Debenture Redemption Agreement, dated  February 27, 2008, by and between Lagunitas Partners, LP and  Iteris, Inc.                                                                        | * *   | *Exhibit 10.2 to the registrant’s Current  Report on Form 8-K as filed with the SEC on February 29, 2008*                                                  |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.39              |       | Debenture Redemption Agreement, dated  February 27, 2008, by and between Jon D. and Linda W. Gruber Trust and  Iteris, Inc.                                                              | * *   | *Exhibit 10.3 to the registrant’s Current  Report on Form 8-K as filed with the SEC on February 29, 2008*                                                  |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.40*             |       | Change in Control Agreement dated June 11, 2008  by and between James S. Miele and Iteris, Inc.                                                                                          | * *   | *Exhibit 10.42 to the registrant’s Annual  Report on Form 10-K for the year ended March 31, 2008 as filed with  the SEC on June 12, 2008*             |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.41              |       | Amended and Restated Loan and Security Agreement  dated February 4, 2009 by and between California Bank & Trust  and the registrant                                                  | * *   | *Exhibit 10.1 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended December 31, 2008 as  filed with the SEC on February 13, 2009* |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.42              |       | Debenture Redemption Agreement, dated  October 17, 2008, by and between the registrant and certain affiliates  of Bryant R. Riley                                                             | * *   | *Exhibit 10.2 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended December 31, 2008 as  filed with the SEC on February 13, 2009* |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.43              |       | Debenture Redemption Agreement, dated  October 27, 2008, by and between the registrant and each of Lloyd I.  Miller, III, Lloyd I. Miller Trust A-4, Milfam I, L.P. and Milfam II,  L.P. | * *   | *Exhibit 10.3 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended December 31, 2008 as  filed with the SEC on February 13, 2009* |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 10.44              |       | Debenture Redemption Agreement, dated  January 9, 2009, by and between the registrant and each of Irvin Kessler  and Provident Premier Master Fund Ltd.                                       | * *   | *Exhibit 10.4 to the registrant’s Quarterly  Report on Form 10-Q for the quarter ended December 31, 2008 as  filed with the SEC on February 13, 2009* |
| ** **         | ** ** | ** **                                                                                                                                                                                         | ** ** | ** **                                                                                                                                                                     |
| 10.45              |       | Separation Agreement and Release of All Claims,  dated May 20, 2009, by and between Francis Memole and the registrant                                                                         | * *   | *Filed Herewith*                                                                                                                                                               |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 21                 |       | Subsidiaries of the registrant                                                                                                                                                                     | * *   | *Filed Herewith*                                                                                                                                                               |
|               |       |                                                                                                                                                                                               | * *   | * *                                                                                                                                                                       |
| 23                 |       | Consent of Independent Registered Public Accounting  Firm                                                                                                                                          | * *   | *Filed Herewith*                                                                                                                                                               |

 

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Tableof Contents

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                   | ** ** | **Where Located** |
|--------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|
| 31.1               |       | Certification of the Chief Executive Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                      | * *   | *Filed Herewith*       |
|               |       |                                                                                                                                                              | * *   | * *               |
| 31.2               |       | Certification of the Chief Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                      | * *   | *Filed Herewith*       |
|               |       |                                                                                                                                                              | * *   | * *               |
| 32.1               |       | Certification of the Chief Executive Officer  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 | * *   | *Filed Herewith*       |
|               |       |                                                                                                                                                              | * *   | * *               |
| 32.2               |       | Certification of the Chief Financial Officer  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 | * *   | *Filed Herewith*       |

 

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* Indicates a management contract or compensatory planor arrangement

+ Confidential treatment has been requested forcertain confidential portions of this exhibit pursuant to Rule 24b-2 ofthe Securities Exchange Act of 1934, as amended. In accordance with Rule 24b-2,these confidential portions have been omitted from the exhibit and filedseparately with the SEC.

 

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