Document:

Exhibit 10.1

 

WARRANT EXERCISE
AGREEMENT

September 27, 2006

 

Special Situations Fund
III QP, L.P.

Special Situations Fund
III, L.P.

Special Situations Cayman
Fund, L.P.

Special Situations
Private Equity Fund, L.P.

527 Madison Avenue, Suite
2600

New York, NY  10022

Attention:  Austin W. Marxe

Dear Austin:

Reference
is hereby made to the Purchase Agreement, dated as of August 7, 2002 (the “Purchase
Agreement”), among Iteris, Inc., as the successor to Odetics, Inc.
(collectively, the “Company”), and each of Special Situations Fund III QP,
L.P., Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P.
and Special Situations Private Equity Fund, L.P., as the successors to the
funds originally party thereto (each a “Fund” and, collectively, the “Funds”).  Pursuant to the terms of the Purchase
Agreement, the Funds hold Warrants (the “Warrants”) to purchase an aggregate of
1,250,000 shares of the Common Stock (the “Warrant Shares”), par value $0.10
per share, of the Company (“Common Stock”) at an exercise price of $1.61 per
share.  The number of Warrants held by
each Fund is set forth in Exhibit A hereto.

Subject
to the terms and conditions set forth herein, the Funds hereby exercise their
Warrants in full effective on the Closing Date (as defined below).  In consideration of such agreement to
exercise, on the Closing Date, the Company shall deliver to the Funds the
Warrant Shares, registered in the names and in the respective amounts set forth
in Exhibit A, and additional warrants (the “New Warrants”) to purchase
an aggregate of 246,250 shares of Common Stock (subject to adjustment) (the “New
Warrant Shares”) at an exercise price of $3.25 per share (subject to
adjustment).  The New Warrants shall be
in substantially the form attached hereto as Exhibit B hereto. The
number of New Warrants to be issued to each Fund is set forth in Exhibit A
hereto.  On the Closing Date, the parties
hereto will execute and deliver a Registration Rights Agreement, in
substantially the form attached hereto as Exhibit C (the “Registration
Rights Agreement”), pursuant to which the Company will provide certain
registration rights under the Securities Act of 1933, as amended (the “Act”),
and the rules and regulations promulgated thereunder, and applicable state
securities laws.  In the event that the
Closing Date does not occur prior to the close of business on September 29,
2006, this Warrant Exercise Agreement (this “Agreement”) shall be null and
void.

 

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

The
Company hereby represents and warrants to the Funds that:

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

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

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

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

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

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

(g)           No person or entity will have, as a
result of the transactions contemplated by the Transaction Documents, any valid
right, interest or claim against or upon the Company, any subsidiary or a Fund
for any commission, fee or other

 3
 

 

compensation
pursuant to any agreement, arrangement or understanding entered into by or on
behalf of the Company.

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

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

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

Each
of the Funds hereby severally, and not jointly, represents and warrants to the
Company that:

(a)           Such Fund is a validly existing
corporation, limited partnership or limited liability company and has all
requisite corporate, partnership or limited liability company power and
authority to enter into this Agreement and the other Transaction Documents and
to invest in the Securities pursuant to this Agreement.

(b)           The execution, delivery and
performance by such Fund of the Transaction Documents to which such Fund is a
party have been duly authorized and will each constitute the valid and legally
binding obligation of such Fund, enforceable against such Fund in accordance
with their respective terms, subject to (x) bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability,
relating to or affecting creditors’ rights generally, (y) laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies, and (z) the extent the indemnification or contribution provisions
contained in the Registration Rights Agreement may be limited by applicable
federal or state securities laws.

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

 4
 

 

Commission under
the Securities Exchange Act of 1934, as amended, or an entity engaged in a
business that would require it to be so registered.

(d)           Such Fund acknowledges that it can
bear the economic risk and complete loss of its investment in the Securities
and has such knowledge and experience in financial or business matters that it
is capable of evaluating the merits and risks of the investment contemplated
hereby.

(e)           Such Fund has had an opportunity to
receive all information related to the Company requested by it and to ask
questions of and receive answers from the Company regarding the Company, its
business and the terms and conditions of the offering of the Securities.  Neither such inquiries nor any other due
diligence investigation conducted by such Fund shall modify, limit or otherwise
affect such Fund’s right to rely on the Company’s representations and
warranties contained in this Agreement.

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

(g)           It is understood that, except as
provided below, certificates evidencing the Securities may bear the following
or any similar legend:

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

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

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

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

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

 5
 

 

upon official
notice of issuance.  Further, if the
Company applies to have its Common Stock or other securities traded on any
other principal stock exchange or market, it shall include in such application
the New Warrant Shares and will take such other action as is necessary to cause
such Common Stock to be so listed.  The
Company will use commercially reasonable efforts to continue the listing and
trading of its Common Stock on the American Stock Exchange and, in accordance,
therewith, will use commercially reasonable efforts to comply in all respects
with the Company’s reporting, filing and other obligations under the bylaws or
rules of such exchange.

Upon
the earlier of (i) registration for resale pursuant to the Registration Rights
Agreement or (ii) Rule 144(k) becoming available the Company shall (A) deliver
to the transfer agent for the Common Stock (the “Transfer Agent”) irrevocable
instructions that the Transfer Agent shall reissue a certificate representing
the New Warrant Shares without legends upon receipt by such Transfer Agent of
the legended certificates for such shares, together with either (1) a customary
representation by the applicable Fund that Rule 144(k) applies to the shares of
Common Stock represented thereby or (2) a statement by the applicable Fund that
such Fund has sold the shares of Common Stock represented thereby in accordance
with the Plan of Distribution contained in the Registration Statement, and (B)
cause its counsel to deliver to the Transfer Agent one or more blanket opinions
to the effect that the removal of such legends in such circumstances may be
effected under the Act.  From and after
the earlier of such dates, upon a Fund’s written request and compliance by the
Fund with the applicable provisions of clause (A)(1) or (A)(2) above, the
Company shall promptly cause certificates evidencing the Fund’s Securities to
be replaced with certificates which do not bear such restrictive legends, and
New Warrant Shares subsequently issued upon due exercise of the New Warrants
shall not bear such restrictive legends provided the provisions of either
clause (i) or clause (ii) above, as applicable, are satisfied with respect to
such New Warrant Shares, and provided further that in the case of clause (i)
the Registration Statement has not been suspended (including due to an Allowed
Delay, as such term is defined in the Registration Rights Agreement) and no
stop order has been issued with respect to such Registration Statement prior to
the sale or transfer by the Fund giving rise to such transfer request.  When the Company is required to cause
unlegended certificates to replace previously issued legended certificates, if
unlegended certificates are not delivered to a Fund within three (3) business
days of delivery by that Fund of legended certificate(s) to the Transfer Agent
as provided above (or to the Company, in the case of the New Warrants), the
Company shall be liable to the Fund for liquidated damages in an amount equal
to 1.0% of the aggregate exercise price paid or payable in respect of the
Securities evidenced by such certificate(s) for each thirty (30) day period (or
portion thereof) beyond such three (3) business days that the unlegended
certificates have not been so delivered.

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

 6
 

 

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

If
to the Company:

Iteris, Inc.

1515 South Manchester
Avenue

Anaheim, California 92802

Attention:  Jack Johnson

Fax:  (714)
780-7857

If
to the Funds:

Special Situations Funds

527 Madison Avenue, Suite
2600

New York, New York 10022

Attention:  Austin W. Marxe

Fax:  (212)
319-6677

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

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

 7
 

 

methods as are
specified for the giving of notices under this Agreement.  Each of the parties hereto irrevocably
consents to the jurisdiction of any such court in any such suit, action or
proceeding and to the laying of venue in such court.  Each party hereto irrevocably waives any
objection to the laying of venue of any such suit, action or proceeding brought
in such courts and irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient
forum.  EACH
OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY
LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN
CONSULTED SPECIFICALLY AS TO THIS WAIVER.

[Signature
Page Follows]

 8
 

 

If
the foregoing accurately reflects our agreement, please execute this letter in
the space provided below and return a copy to the undersigned.  This letter may be executed in counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.

	
   

  	
  ITERIS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /S/ JAMES
  S. MIELE

  	
   

  
	
   

  	
  Name:

  	
  James S. Miele

  
	
   

  	
  Title:

  	
  CFO

  
					

 

 

ACCEPTED AND
AGREED:

Special Situations Fund
III QP, L.P.

Special Situations Fund
III, L.P.

Special Situations Cayman
Fund, L.P.

Special Situations
Private Equity Fund, L.P.

	
  By:

  	
   

  	
  /S/ AUSTIN W. MARXE

  	
   

  
	
   

  	
   

  	
  Authorized Signatory

  

 

 9

 

Schedule 1

Exceptions to the Company’s

Representations
and Warranties

The issuance and
sale of the Securities will result in a reduction of less than $0.01 of the
following:

·              the
conversion price of 25% of the outstanding face amount of the convertible debentures
issued in May 2004; and

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

 

Exhibit
A

	
  Fund

  	
   

  	
  Number of

  Warrants

  	
   

  	
  Aggregate

  Exercise Price

  	
   

  	
  New

  Warrants

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Special Situations Fund
  III QP, L.P.

  	
   

  	
  651,263

  	
   

  	
  $

  	
  1,048,533.43

  	
   

  	
  128,299

  	
   

  
	
  Special Situations Fund
  III, L.P.

  	
   

  	
  57,087

  	
   

  	
  $

  	
  335,363.00

  	
   

  	
  11,246

  	
   

  
	
  Special Situations
  Cayman Fund, L.P.

  	
   

  	
  208,300

  	
   

  	
  $

  	
  335,363.00

  	
   

  	
  41,035

  	
   

  
	
  Special Situations
  Private Equity Fund, L.P.

  	
   

  	
  333,350

  	
   

  	
  $

  	
  536,693.50

  	
   

  	
  65,670

  	
   

  
	
  Total

  	
   

  	
  1,250,000

  	
   

  	
  $

  	
  2,012,500.00

  	
   

  	
  246,250

  	
   

  

 

Exhibit
B

Form
of New Warrant

 

 

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

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

ITERIS, INC.

WARRANT TO PURCHASE                 
SHARES OF

COMMON STOCK, PAR VALUE $0.10 PER SHARE

For VALUE RECEIVED,                                                  
(“Warrantholder”), is entitled to purchase, subject to the provisions of this
Warrant, from Iteris, Inc., a Delaware corporation (“Company”), at any time not
later than 5:00 P.M., Eastern time, on the Expiration Date (as defined above),
at an exercise price per share equal to $3.25 (the exercise price in effect
being herein called the “Warrant Price”),                       
shares (“Warrant Shares”) of the Company’s Common Stock, par value $0.10 per
share (“Common Stock”).  The number of
Warrant Shares purchasable upon exercise of this Warrant and the Warrant Price
shall be subject to adjustment from time to time as described herein.  This Warrant is being issued pursuant to the
terms of a Warrant Exercise Agreement among the Company, the initial
Warrantholder and the initial holders of the Company Warrants (as defined
below) (the “Warrant Exercise Agreement”).

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

Section 2.               Transfers.  As provided herein, this Warrant may be
transferred only pursuant to a registration statement filed under the
Securities Act of 1933, as amended (the “Securities Act”), or an exemption from
such registration.  Subject to such
restrictions, the Company shall transfer this Warrant from time to time upon
the books to be maintained by the Company for that purpose, upon surrender
hereof for transfer, properly endorsed or accompanied by appropriate
instructions for transfer and such other documents as may be reasonably
required by the Company, including, if required by the Company, an opinion of
counsel to the Warrantholder to the effect that such transfer is exempt from
the registration requirements of the Securities Act, to establish that such
transfer is being made in accordance with the terms hereof, and a new Warrant
shall be issued to the transferee and the surrendered Warrant shall be canceled
by the Company.

 

Section 3.               Exercise
of Warrant.  Subject to the
provisions hereof, the Warrantholder may exercise this Warrant, in whole or in
part, at any time prior to its expiration upon surrender of the Warrant,
together with delivery of a duly executed Warrant exercise form, in the form
attached hereto as Appendix A (the “Exercise Agreement”), and payment by cash,
certified check or wire transfer of funds (or, in certain circumstances, by
cashless exercise as provided below) of the aggregate Warrant Price for that
number of Warrant Shares then being purchased, to the Company during normal
business hours on any business day at the Company’s principal executive offices
(or such other office or agency of the Company as it may designate by notice to
the Warrantholder).  The Warrant Shares
so purchased shall be deemed to be issued to the Warrantholder or the
Warrantholder’s designee, as the record owner of such shares, as of the close
of business on the date on which this Warrant shall have been surrendered (or
the date evidence of loss, theft or destruction thereof and security or
indemnity satisfactory to the Company has been provided to the Company), the
Warrant Price shall have been paid and the completed Exercise Agreement shall
have been delivered.  Certificates for
the Warrant Shares so purchased shall be delivered to the Warrantholder within
a reasonable time, not exceeding three (3) business days, after this Warrant
shall have been so exercised.  The
certificates so delivered shall be in such denominations as may be requested by
the Warrantholder and shall be registered in the name of the Warrantholder or
such other name as shall be designated by the Warrantholder, as specified in
the Exercise Agreement.  If this Warrant
shall have been exercised only in part, then, unless this Warrant has expired,
the Company shall, at its expense, at the time of delivery of such
certificates, deliver to the Warrantholder a new Warrant representing the right
to purchase the number of shares with respect to which this Warrant shall not
then have been exercised.  As used
herein, “business day” means a day, other than a Saturday or Sunday, on which
banks in New York City are open for the general transaction of business.  Each exercise hereof shall constitute the re-affirmation
by the Warrantholder that the representations and warranties contained in the
Warrant Exercise Agreement are true and correct in all material respects with
respect to the Warrantholder as of the time of such exercise.

Section 4.               Compliance
with the Securities Act of 1933. Subject to the terms of the Warrant
Exercise Agreement, the Company may cause the legend set forth on the first
page of this Warrant to be set forth on each Warrant, and a similar legend on
any security issued or issuable upon exercise of this Warrant, unless counsel
for the Company is of the opinion as to any such security that such legend is
unnecessary.

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

 2
 

 

Section 6.               Mutilated
or Missing Warrants.  In case this
Warrant shall be mutilated, lost, stolen, or destroyed, the Company shall issue
in exchange and substitution of and upon surrender and cancellation of the
mutilated Warrant, or in lieu of and substitution for the Warrant lost, stolen
or destroyed, a new Warrant of like tenor and for the purchase of a like number
of Warrant Shares, but only upon receipt of evidence reasonably satisfactory to
the Company of such loss, theft or destruction of the Warrant, and with respect
to a lost, stolen or destroyed Warrant, reasonable indemnity or bond with
respect thereto, if requested by the Company.

Section 7.               Reservation
of Common Stock.  The Company hereby
represents and warrants that there have been reserved, and the Company shall at
all applicable times keep reserved until issued (if necessary) as contemplated
by this Section 7, out of the authorized and unissued shares of Common Stock,
sufficient shares to provide for the exercise of the rights of purchase represented
by this Warrant.  The Company agrees that
all Warrant Shares issued upon due exercise of the Warrant shall be, at the
time of delivery of the certificates for such Warrant Shares, duly authorized,
validly issued, fully paid and non-assessable shares of Common Stock of the
Company.

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

(a)           If
the Company shall, at any time or from time to time while this Warrant is
outstanding, pay a dividend or make a distribution on its Common Stock in
shares of Common Stock, subdivide its outstanding shares of Common Stock into a
greater number of shares or combine its outstanding shares of Common Stock into
a smaller number of shares or issue by reclassification of its outstanding
shares of Common Stock any shares of its capital stock (including any such
reclassification in connection with a consolidation or merger in which the
Company is the continuing corporation), then (i) the Warrant Price in effect
immediately prior to the date on which such change shall become effective shall
be adjusted by multiplying such Warrant Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such change and the denominator of which shall be the number of shares
of Common Stock outstanding immediately after giving effect to such change and
(ii) the number of Warrant Shares purchasable upon exercise of this Warrant
shall be adjusted by multiplying the number of Warrant Shares purchasable upon
exercise of this Warrant immediately prior to the date on which such change
shall become effective by a fraction, the numerator of which is shall be the
Warrant Price in effect immediately prior to the date on which such change
shall become effective and the denominator of which shall be the Warrant Price
in effect immediately after giving effect to such change, calculated in
accordance with clause (i) above.  Such
adjustments shall be made successively whenever any event listed above shall
occur.

(b)           If
any capital reorganization, reclassification of the capital stock of the
Company, consolidation or merger of the Company with another corporation in
which the Company is not the survivor, or sale, transfer or other disposition
of all or substantially all of the Company’s assets to another corporation
shall be effected, then, as a condition of such reorganization, reclassification,
consolidation, merger, sale, transfer or other disposition, lawful 

 3
 

 

and
adequate provision shall be made whereby each Warrantholder shall thereafter
have the right to purchase and receive upon the basis and upon the terms and
conditions herein specified and in lieu of the Warrant Shares immediately
theretofore issuable upon exercise of the Warrant, such shares of stock,
securities or assets as would have been issuable or payable with respect to or
in exchange for a number of Warrant Shares equal to the number of Warrant
Shares immediately theretofore issuable upon exercise of the Warrant, had such
reorganization, reclassification, consolidation, merger, sale, transfer or
other disposition not taken place, and in any such case appropriate provision
shall be made with respect to the rights and interests of each Warrantholder to
the end that the provisions hereof (including, without limitation, provision
for adjustment of the Warrant Price) shall thereafter be applicable, as nearly
equivalent as may be practicable in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof.  The Company shall not effect any such
consolidation, merger, sale, transfer or other disposition unless prior to or
simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger, or the
corporation purchasing or otherwise acquiring such assets or other appropriate
corporation or entity shall assume the obligation to deliver to the
Warrantholder, at the last address of the Warrantholder appearing on the books
of the Company, such shares of stock, securities or assets as, in accordance
with the foregoing provisions, the Warrantholder may be entitled to purchase,
and the other obligations under this Warrant. 
The provisions of this paragraph (b) shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, sales, transfers
or other dispositions.

(c)           In
case the Company shall fix a payment date for the making of a distribution to
all holders of Common Stock (including any such distribution made in connection
with a consolidation or merger in which the Company is the continuing
corporation) of evidences of indebtedness or assets (other than cash dividends
or cash distributions payable out of consolidated earnings or earned surplus or
dividends or distributions referred to in Section 8(a)), or subscription rights
or warrants, the Warrant Price to be in effect after such payment date shall be
determined by multiplying the Warrant Price in effect immediately prior to such
payment date by a fraction, the numerator of which shall be the total number of
shares of Common Stock outstanding multiplied by the Market Price (as defined
below) per share of Common Stock immediately prior to such payment date, less
the fair market value (as determined by the Company’s Board of Directors in
good faith) of said assets or evidences of indebtedness so distributed, or of
such subscription rights or warrants, and the denominator of which shall be the
total number of shares of Common Stock outstanding multiplied by such Market
Price per share of Common Stock immediately prior to such payment date.  “Market Price” as of a particular date (the
“Valuation Date”) shall mean the following: (i) if the Common Stock is then
listed on a national stock exchange, the closing sale price of one share of
Common Stock on such exchange on the last trading day prior to the Valuation
Date; (ii) if the Common Stock is then quoted on, the National Association of
Securities Dealers, Inc. OTC Bulletin Board (the “Bulletin Board”), the Pink
Sheets, LLC (the “Pink Sheets”) or such similar quotation system or
association, the closing sale price of one share of Common Stock on the
Bulletin Board, the Pink Sheets or such other quotation system or association
on the last trading day prior to the Valuation Date or, if no such closing sale
price is available, the average of the high bid and the low asked price quoted
thereon on the last trading day prior to the Valuation Date; or (iii) if the
Common Stock is not then listed on a national stock exchange or quoted on such
other quotation system or association,

 4
 

 

the
fair market value of one share of Common Stock as of the Valuation Date, as
determined in good faith by the Board of Directors of the Company and the
Warrantholder.  If the Common Stock is
not then listed on a national securities exchange, the Bulletin Board, the Pink
Sheets or such other quotation system or association, the Board of Directors of
the Company shall respond promptly, in writing, to an inquiry by the
Warrantholder prior to the exercise hereunder as to the fair market value of a
share of Common Stock as determined by the Board of Directors of the Company.  In the event that the Board of Directors of
the Company and the Warrantholder are unable to agree upon the fair market
value in respect of clause (iii) of this paragraph, the Company and the
Warrantholder shall jointly select an appraiser, who is experienced in such
matters.  The decision of such appraiser
shall be final and conclusive, and the cost of such appraiser shall be borne
equally by the Company and the Warrantholder. 
Such adjustment shall be made successively whenever such a payment date
is fixed.

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

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

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

Adjusted Warrant
Price = (A x B) + D

A+C

where

“A” equals the
number of shares of Common Stock outstanding, including Additional Shares of
Common Stock (as defined below) deemed to be issued hereunder, immediately
preceding such Trigger Issuance;

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

“C” equals the
number of Additional Shares of Common Stock issued or deemed issued hereunder
as a result of the Trigger Issuance; and

 5
 

 

“D” equals the
aggregate consideration, if any, received or deemed to be received by the
Company upon such Trigger Issuance;

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

For purposes of this subsection (f), “Additional
Shares of Common Stock” shall mean all shares of Common Stock issued by the
Company or deemed to be issued pursuant to this subsection (f), other than
Excluded Issuances (as defined in subsection (g) hereof).

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

(f)(1)  Issuance of Rights or Options.  In case at any time the Company shall in any
manner grant (directly and not by assumption in a merger or otherwise) any
warrants or other rights to subscribe for or to purchase, or any options for
the purchase of, Common Stock or any stock or security convertible into or
exchangeable for Common Stock (such warrants, rights or options being called
“Options” and such convertible or exchangeable stock or securities being called
“Convertible Securities”) whether or not such Options or the right to convert
or exchange any such Convertible Securities are immediately exercisable, and
the price per share for which Common Stock is issuable upon the exercise of
such Options or upon the conversion or exchange of such Convertible Securities
(determined by dividing (i) the sum (which sum shall constitute the applicable
consideration) of (x) the total amount, if any, received or receivable by the
Company as consideration for the granting of such Options, plus (y) the
aggregate amount of additional consideration payable to the Company upon the
exercise of all such Options, plus (z), in the case of such Options which
relate to Convertible Securities, the aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the Warrant
Price in effect immediately prior to the time of the granting of such Options,
then the total number of shares of Common Stock issuable upon the exercise of
such Options or upon conversion or exchange of the total amount of such
Convertible Securities issuable upon the exercise of such Options shall be
deemed to have been issued for such price per share as of the date of granting
of such Options or the issuance of such Convertible Securities and thereafter
shall be deemed to be outstanding for purposes of adjusting the Warrant Price.  Except as otherwise provided in subsection
8(f)(3), no adjustment of the Warrant Price shall be made upon the actual issue
of such Common Stock or of such Convertible Securities upon exercise of such
Options or upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities.

 6
 

 

(f)(2)  Issuance of Convertible Securities.  In case the Company shall in any manner issue
(directly and not by assumption in a merger or otherwise) or sell any
Convertible Securities, whether or not the rights to exchange or convert any
such Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon such conversion or exchange
(determined by dividing (i) the sum (which sum shall constitute the applicable
consideration) of (x) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus (y)
the aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (ii) the total number of
shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Warrant Price in effect
immediately prior to the time of such issue or sale, then the total maximum
number of shares of Common Stock issuable upon conversion or exchange of all
such Convertible Securities shall be deemed to have been issued for such price
per share as of the date of the issue or sale of such Convertible Securities and
thereafter shall be deemed to be outstanding for purposes of adjusting the
Warrant Price, provided that (a) except as otherwise provided in subsection
8(f)(3), no adjustment of the Warrant Price shall be made upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities and (b) no further adjustment of the Warrant Price shall be made by
reason of the issue or sale of Convertible Securities upon exercise of any
Options to purchase any such Convertible Securities for which adjustments of
the Warrant Price have been made pursuant to the other provisions of subsection
8(f).

(f)(3) Change in
Option Price or Conversion Rate.  Upon
the happening of any of the following events, namely, if the purchase price
provided for in any Option referred to in subsection 8(f)(l) hereof, the
additional consideration, if any, payable upon the conversion or exchange of
any Convertible Securities referred to in subsections 8(f)(l) or 8(f)(2), or
the rate at which Convertible Securities referred to in subsections 8(f)(l) or
8(f)(2) are convertible into or exchangeable for Common Stock shall change at
any time (including, but not limited to, changes under or by reason of
provisions designed to protect against dilution), the Warrant Price in effect
at the time of such event shall forthwith be readjusted to the Warrant Price
which would have been in effect at such time had such Options or Convertible
Securities still outstanding provided for such changed purchase price,
additional consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold.  On
the termination of any Option for which any adjustment was made pursuant to
this subsection 8(f) or any right to convert or exchange Convertible Securities
for which any adjustment was made pursuant to this subsection 8(f) (including
without limitation upon the redemption or purchase for consideration of such
Convertible Securities by the Company), the Warrant Price then in effect
hereunder shall forthwith be changed to the Warrant Price which would have been
in effect at the time of such termination had such Option or Convertible
Securities, to the extent outstanding immediately prior to such termination,
never been issued.

 7
 

 

(f)(4) Stock
Dividends.  Subject to the provisions of
this Section 8(f), in case the Company shall declare or pay a dividend or make
any other distribution upon any stock of the Company (other than the Common
Stock) payable in Common Stock, Options or Convertible Securities, then any
Common Stock, Options or Convertible Securities, as the case may be, issuable
in payment of such dividend or distribution shall be deemed to have been issued
or sold without consideration.

(f)(5)
Consideration for Stock.  In case any
shares of Common Stock, Options or Convertible Securities shall be issued or
sold for cash, the consideration received therefor shall be deemed to be the
net amount received by the Company therefor, after deduction therefrom of any
expenses incurred or any underwriting commissions or concessions paid or
allowed by the Company in connection therewith. 
In case any shares of Common Stock, Options or Convertible Securities
shall be issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company shall be deemed to be the
fair value of such consideration as determined in good faith by the Board of
Directors of the Company, after deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the Company in
connection therewith.  In case any
Options shall be issued in connection with the issue and sale of other
securities of the Company, together comprising one integral transaction in
which no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for such
consideration as determined in good faith by the Board of Directors of the
Company.  If Common Stock, Options or
Convertible Securities shall be issued or sold by the Company and, in connection
therewith, other Options or Convertible Securities (the “Additional Rights”)
are issued, then the consideration received or deemed to be received by the
Company shall be reduced by the fair market value of the Additional Rights (as
determined using the Black-Scholes option pricing model or another method
mutually agreed to by the Company and the Warrantholder).  The Board of Directors of the Company shall
respond promptly, in writing, to an inquiry by the Warrantholder as to the fair
market value of the Additional Rights. 
In the event that the Board of Directors of the Company and the
Warrantholder are unable to agree upon the fair market value of the Additional
Rights, the Company and the Warrantholder shall jointly select an appraiser,
who is experienced in such matters.  The
decision of such appraiser shall be final and conclusive, and the cost of such
appraiser shall be borne evenly by the Company and the Warrantholder.

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

 8
 

 

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

(f)(7) Treasury
Shares.  The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held by
or for the account of the Company or any of its wholly-owned subsidiaries, and
the disposition of any such shares (other than the cancellation or retirement
thereof) shall be considered an issue or sale of Common Stock for the purpose
of this subsection (f).

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

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

Section 9.               Fractional
Interest.  The Company shall not be
required to issue fractions of Warrant Shares upon the exercise of this
Warrant.  If any fractional share of
Common Stock would, except for the provisions of the first sentence of this
Section 9, be deliverable upon such exercise, the Company, in lieu of
delivering such fractional share, shall pay to the exercising Warrantholder an
amount in cash equal to the Market Price of such fractional share of Common
Stock on the date of exercise.

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

 9
 

 

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

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

Section 12.             Notices
to Warrantholder.  Upon the happening
of any event requiring an adjustment of the Warrant Price, the Company shall
promptly give written notice thereof to the Warrantholder at the address
appearing in the records of the Company, stating the adjusted Warrant Price and
the adjusted number of Warrant Shares resulting from such event and setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.  Failure to
give such notice to the Warrantholder or any defect therein shall not affect the
legality or validity of the subject adjustment.

Section 13.             Identity
of Transfer Agent.  The Transfer
Agent for the Common Stock is U.S. Stock Transfer Corporation.  Upon the appointment of any subsequent
transfer agent for the Common Stock or other shares of the Company’s capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrant, the Company will mail to the Warrantholder a statement setting forth
the name and address of such transfer agent.

Section 14.             Notices.  Unless otherwise provided, any notice required
or permitted under this Warrant shall be given in writing and shall be deemed
effectively given as hereinafter described (i) if given by personal delivery,
then such notice shall be deemed given upon such delivery, (ii) if given by
telex or facsimile, then such notice shall be deemed given upon receipt of
confirmation of complete transmittal, (iii) if given by mail, then such notice
shall be deemed given upon the earlier of (A) receipt of such notice by the
recipient or (B) three days after such notice is deposited in first class mail,
postage prepaid, and (iv) if given by an internationally recognized overnight
air courier, then such notice shall be deemed given one business day after
delivery to such carrier.  All notices
shall be addressed as follows: if to the Warrantholder, at its address as set
forth in the Company’s books and records and, if to the Company, at the address
as follows, or at such other address as the Warrantholder or the Company may
designate by ten days’ advance written notice to the other:

If to the Company:

Iteris, Inc.

1515 South Manchester
Avenue

Anaheim, California 92802

Attention:  Jack Johnson

Fax:  (714)
780-7857

Section 15.             Registration
Rights.  The initial Warrantholder is
entitled to the benefit of certain registration rights with respect to the
shares of Common Stock issuable upon the exercise 

 10
 

 

of
this Warrant as provided in the Registration Rights Agreement, and any
subsequent Warrantholder may be entitled to such rights.

Section 16.             Successors.  All the covenants and provisions hereof by or
for the benefit of the Warrantholder shall bind and inure to the benefit of its
respective successors and assigns hereunder.

Section 17.             Governing
Law; Consent to Jurisdiction; Waiver of Jury Trial.  This Warrant shall be governed by, and
construed in accordance with, the internal laws of the State of New York,
without reference to the choice of law provisions thereof.  The Company and, by accepting this Warrant,
the Warrantholder, each irrevocably submits to the exclusive jurisdiction of
the courts of the State of New York located in New York County and the United
States District Court for the Southern District of New York for the purpose of
any suit, action, proceeding or judgment relating to or arising out of this
Warrant and the transactions contemplated hereby.  Service of process in connection with any
such suit, action or proceeding may be served on each party hereto anywhere in
the world by the same methods as are specified for the giving of notices under
this Warrant.  The Company and, by
accepting this Warrant, the Warrantholder, each irrevocably consents to the
jurisdiction of any such court in any such suit, action or proceeding and to
the laying of venue in such court.  The
Company and, by accepting this Warrant, the Warrantholder, each irrevocably
waives any objection to the laying of venue of any such suit, action or
proceeding brought in such courts and irrevocably waives any claim that any
such suit, action or proceeding brought in any such court has been brought in
an inconvenient forum.  EACH OF THE COMPANY AND, BY ITS ACCEPTANCE
HEREOF, THE WARRANTHOLDER HEREBY WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN
ANY LITIGATION WITH RESPECT TO THIS WARRANT AND REPRESENTS THAT COUNSEL HAS
BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.

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

 11
 

 

Shares covered
hereby.  Notwithstanding any such notice
by the Company, the Warrantholder shall have the right to exercise this Warrant
prior to the end of the Notice Period.

Section 19.             Cashless
Exercise.  Notwithstanding any other
provision contained herein to the contrary, from and after the first
anniversary of the Closing Date (as defined in the Warrant Exercise Agreement)
and so long as the Company is required under the Registration Rights Agreement
to have effected and keep effective the registration of the Warrant Shares for
resale to the public pursuant to a Registration Statement (as such term is
defined in the Registration Rights Agreement), if the Warrant Shares may not be
freely sold to the public because such shares are not covered by an effective
Registration Statement which is not suspended and for which no stop order is in
effect, then during such period in which the Warrant Shares may not be freely
sold to the public (but excluding the period of any Allowed Delay (as defined
in the Registration Rights Agreement)), the Warrantholder may elect to receive,
without the payment by the Warrantholder of the aggregate Warrant Price in
respect of the shares of Common Stock to be acquired, shares of Common Stock of
equal value to the value of this Warrant, or any specified portion hereof, by
the surrender of this Warrant (or such portion of this Warrant being so
exercised) together with a Net Issue Election Notice, in the form annexed
hereto as Appendix B, duly executed, to the Company.  Thereupon, the Company shall issue to the
Warrantholder such number of fully paid, validly issued and nonassessable
shares of Common Stock as is computed using the following formula:

X = Y (A - B)

       A

where

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

Y =          the total number of shares of Common
Stock covered by this Warrant for which the Warrantholder has surrendered
purchase rights at such time for cashless exercise (including both shares to be
issued to the Warrantholder and shares as to which the purchase rights are to
be canceled as payment therefor);

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

B =          the
Warrant Price in effect under this Warrant at the time the net issue election
is made.

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

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

 12
 

 

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

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

[Signature
Page Follows]

 13
 

 

IN WITNESS WHEREOF, the Company has caused this
Warrant to be duly executed, as of the 28th day of September, 2006.

	
  

  	
  ITERIS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  James S. Miele

  
	
   

  	
  Title:

  	
  Chief Financial Officer

  
						

 

 

 14

 

APPENDIX A

ITERIS, INC.

WARRANT EXERCISE FORM

To Iteris, Inc.:

The
undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant (“Warrant”) for, and to purchase thereunder
by the payment of the Warrant Price and surrender of the Warrant,                                 
shares of Common Stock (“Warrant Shares”) provided for therein, and requests
that certificates for the Warrant Shares be issued as follows:

	
  

  	
   

  	
   

  
	
   

  	
  Name

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Federal Tax ID
  or Social Security No.

  	
   

  

 

	
  

  	
   

  
	
   

  	
  and delivered by:

  	
  o

  	
   certified
  mail to the above address, or

  
	
   

  	
  (check one)

  	
  o

  	
   electronically (provide DWAC Instructions:                           ),
  or

  
	
   

  	
  o

  	
   other
  (specify):                                                                                 .

  
	
   

  	
   

  

and, if the number
of Warrant Shares shall not be all the Warrant Shares purchasable upon exercise
of the Warrant, that a new Warrant for the balance of the Warrant Shares
purchasable upon exercise of this Warrant be registered in the name of the
undersigned Warrantholder or the undersigned’s Assignee as below indicated and
delivered to the address stated below.

	
  Dated:

  	
   

  	
  ,

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
  Note: The
  signature must correspond with

  	
  Signature:

  	
   

  	
   

  
	
  the name of the
  Warrantholder as written

  	
   

  
	
  on the first
  page of the Warrant in every

  	
   

  	
   

  
	
  particular,
  without alteration or enlargement

  	
  Name (please print)

  
	
  or any change
  whatever, unless the Warrant

  	
   

  
	
  has been
  assigned.

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Address

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Federal
  Identification or

  	
   

  
	
   

  	
  Social Security
  No.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Assignee:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
									

 

 

APPENDIX B

ITERIS, INC.

NET ISSUE ELECTION NOTICE

 

To: Iteris, Inc.

Date:[                                              ]

The undersigned
hereby elects under Section 19 of this Warrant to surrender the right to
purchase [                       ]
shares of Common Stock pursuant to this Warrant and hereby requests the
issuance of [                         ]
shares of Common Stock.  The
certificate(s) for the shares issuable upon such net issue election shall be
issued in the name of the undersigned or as otherwise indicated below.

	
  

  	
   

  
	
  Signature

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Name for
  Registration

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Mailing Address

  	
   

  

 

 

 

 

Exhibit
C

Registration
Rights AgreementExhibit 10.2

 

REGISTRATION
RIGHTS AGREEMENT

This Registration
Rights Agreement (the “Agreement”) is made and entered into as of this 28th day of September, 2006 by and among Iteris,
Inc., a Delaware corporation (the “Company”), and the “Funds” named in that
certain Warrant Exercise Agreement by and among the Company and the Funds (the “Warrant
Exercise Agreement”).

The parties hereby
agree as follows:

1.             Certain
Definitions.

As used in this
Agreement, the following terms shall have the following meanings:

“Affiliate”
means, with respect to any person, any other person which directly or
indirectly controls, is controlled by, or is under common control with, such
person.

“Business Day”
means a day, other than a Saturday or Sunday, on which banks in New York City
are open for the general transaction of business.

“Common Stock”
shall mean the Company’s common stock, par value $0.10 per share, and any
securities into which such shares may hereinafter be reclassified.

“Investors”
shall mean the Funds identified in the Warrant Exercise Agreement and any
Affiliate or permitted transferee of any Investor who is a subsequent holder of
any Warrants or Registrable Securities.

“Prospectus”
shall mean (i) the prospectus included in any Registration Statement, as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement and by all other amendments and supplements to the
prospectus, including post-effective amendments and all material incorporated
by reference in such prospectus, and (ii) any “free writing prospectus” as
defined in Rule 405 under the 1933 Act.

“Register,”
“registered” and “registration” refer to a registration made by
preparing and filing a Registration Statement or similar document in compliance
with the 1933 Act (as defined below), and the declaration or ordering of
effectiveness of such Registration Statement or document.

“Registrable
Securities” shall mean (i) the Warrant Shares and (ii) any other securities
issued or issuable with respect to or in exchange for Registrable Securities;
provided, that, a security shall cease to be a Registrable Security upon (A)
sale pursuant to a Registration Statement or Rule 144 under the 1933 Act, or (B)
such security becoming eligible for sale by the Investors pursuant to Rule
144(k).

“Registration
Statement” shall mean any registration statement of the Company filed under
the 1933 Act that covers the resale of any of the Registrable Securities
pursuant to the provisions of this Agreement, amendments and supplements to
such Registration Statement, including post-effective amendments, all exhibits
and all material incorporated by reference in such Registration Statement.

“Required
Investors” means the Investors holding a majority of the Registrable
Securities.

 

“SEC” means
the U.S. Securities and Exchange Commission.

“1933 Act”
means the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.

“1934 Act”
means the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder.

“Warrants”
means, the warrants to purchase shares of Common Stock issued to the Investors
pursuant to the Warrant Exercise Agreement.

“Warrant Shares”
means the shares of Common Stock issuable upon the exercise of the Warrants.

2.             Registration.

(a)      Registration
Statements.

(i)       Promptly
following the closing of the transactions contemplated by the Warrant Exercise
Agreement (the “Closing Date”) but no later than sixty (60) days after the
Closing Date (the “Filing Deadline”), the Company shall prepare and file with
the SEC one Registration Statement on Form S-3 (or, if Form S-3 is not then
available to the Company, on such form of registration statement as is then
available to effect a registration for resale of the Registrable Securities,
subject to the Required Investors’ consent, which shall not be unreasonably
withheld), covering the resale of the Registrable Securities in an amount at
least equal to the Warrant Shares set forth on the face of the Warrants.  Subject to any SEC comments, such
Registration Statement shall include the plan of distribution attached hereto
as Exhibit A.  Such Registration
Statement also shall cover, to the extent allowable under the 1933 Act and the
rules promulgated thereunder (including Rule 416), such indeterminate number of
additional shares of Common Stock resulting from stock splits, stock dividends
or similar transactions with respect to the Registrable Securities.  Such Registration Statement shall not include
any shares of Common Stock or other securities for the account of any other
holder without the prior written consent of the Required Investors.  The Registration Statement (and each amendment
or supplement thereto, and each request for acceleration of effectiveness
thereof) shall be provided in accordance with Section 3(c) to the Investors and
their counsel prior to its filing or other submission.  If a Registration Statement covering the Registrable
Securities is not filed with the SEC on or prior to the Filing Deadline, the
Company will make pro rata payments to each Investor, as liquidated damages and
not as a penalty, in an amount equal to 1.0% of the aggregate exercise price of
the Warrants acquired by such Investor for each 30-day period or pro rata for
any portion thereof following the Filing Deadline for which no Registration
Statement is filed with respect to the Registrable Securities.  Such payments shall constitute the Investors’
exclusive monetary remedy for such events, but shall not affect the right of
the Investors to seek injunctive relief. 
Such payments shall be made to each Investor in cash.

(ii)      Additional
Registrable Securities.  Upon the
written demand of any Investor and upon any change in the Warrant Price (as
defined in the Warrant) such that additional shares of Common Stock become
issuable upon the exercise of the Warrants (the “Additional Shares”), the
Company shall prepare and file with the SEC one or more Registration Statements
on Form S-3 or amend the Registration Statement filed pursuant to clause (i)
above, if such Registration Statement has not previously been declared
effective (or, if Form S-3 is not

 2
 

 

then available to
the Company, on such form of registration statement as is then available to
effect a registration for resale of the Additional Shares, subject to the
Required Investors’ consent, which shall not be unreasonably withheld) covering
the resale of the Additional Shares, but only to the extent the Additional
Shares are not at the time covered by an effective Registration Statement.  Subject to any SEC comments, such
Registration Statement shall include the plan of distribution attached hereto
as Exhibit A.  Such Registration
Statement also shall cover, to the extent allowable under the 1933 Act and the
rules promulgated thereunder (including Rule 416), such indeterminate number of
additional shares of Common Stock resulting from stock splits, stock dividends
or similar transactions with respect to the Additional Shares.  Such Registration Statement shall not include
any shares of Common Stock or other securities for the account of any other
holder without the prior written consent of the Required Investors.  The Registration Statement (and each
amendment or supplement thereto, and each request for acceleration of
effectiveness thereof) shall be provided in accordance with Section 3(c) to the
Investors and their counsel prior to its filing or other submission.  If a Registration Statement covering the Additional
Shares is required to be filed under this Section 2(a)(ii) and is not filed
with the SEC within thirty (30) days of the request of any Investor or upon the
occurrence of any of the events specified in this Section 2(a)(ii), the Company
will make pro rata payments to each Investor, as liquidated damages and not as
a penalty, in an amount equal to 1.0% of the aggregate exercise price of the
Warrants acquired by such Investor for each 30-day period or pro rata for any
portion thereof following the date by which such Registration Statement should
have been filed for which no Registration Statement is filed with respect to
the Additional Shares.  Such payments
shall constitute the Investors’ exclusive monetary remedy for such events, but
shall not affect the right of the Investors to seek injunctive relief.  Such payments shall be made to each Investor
in cash.

(b)      Expenses.  The Company will pay all expenses associated
with each registration, including filing and printing fees, the Company’s
counsel and accounting fees and expenses, costs associated with clearing the
Registrable Securities for sale under applicable state securities laws, listing
fees, fees and expenses of one counsel to the Investors, not to exceed $5,000,
and the Investors’ reasonable out-of-pocket expenses in connection with the
registration, but excluding discounts, commissions, fees of underwriters,
selling brokers, dealer managers or similar securities industry professionals
with respect to the Registrable Securities being sold.

(c)      Effectiveness.

(i)       The
Company shall use commercially reasonable efforts to have the Registration
Statement declared effective as soon as practicable.  The Company shall notify the Investors by
facsimile or e-mail as promptly as practicable, and in any event, within
twenty-four (24) hours, after any Registration Statement is declared effective
and shall provide the Investors promptly thereafter with copies of any related
Prospectus to be used in connection with the sale or other disposition of the
securities covered thereby.  If (A)(x) a
Registration Statement covering the Registrable Securities is not declared
effective by the SEC on or prior to the earlier of (i) five (5) Business Days
after the SEC shall have informed the Company that no review of the
Registration Statement will be made or that the SEC has no further comments on
the Registration Statement or (ii) the 120th day after the Closing Date (150 days after the
Closing Date in the event that the Registration Statement is reviewed by the
SEC) or (y) a Registration Statement covering Additional Shares is not declared
effective by the SEC within 60 days (90

 3
 

 

days in the event
that the Registration Statement is reviewed by the SEC) following the time such
Registration Statement was required to be filed pursuant to Section 2(a)(ii),
or (B) after a Registration Statement has been declared effective by the SEC,
sales cannot be made pursuant to such Registration Statement for any reason
(including without limitation by reason of a stop order, or the Company’s
failure to update the Registration Statement), but excluding the inability of
any Investor to sell the Registrable Securities covered thereby due to market
conditions and except as excused pursuant to subparagraph (ii) below, then the
Company will make pro rata payments to each Investor, as liquidated damages and
not as a penalty, in an amount equal to 1.0% of the aggregate exercise price of
the Warrants acquired by such Investor for each 30- day period or pro rata for
any portion thereof following the date by which such Registration Statement should
have been effective (the “Blackout Period”). 
Such payments shall constitute the Investors’ exclusive monetary remedy
for such events, but shall not affect the right of the Investors to seek
injunctive relief.  The amounts payable
as liquidated damages pursuant to this paragraph shall be paid monthly within
three (3) Business Days of the last day of each month following the
commencement of the Blackout Period until the termination of the Blackout
Period.  Such payments shall be made to
each Investor in cash.

(ii)      For not
more than twenty (20) consecutive days or for a total of not more than
forty-five (45) days in any twelve (12) month period, the Company may delay the
disclosure of material non-public information concerning the Company, by
suspending the use of any Prospectus included in any registration contemplated
by this Section containing such information, the disclosure of which at the
time is not, in the good faith opinion of the Company, in the best interests of
the Company (an “Allowed Delay”); provided, that the Company shall promptly (a)
notify the Investors in writing of the existence of (but in no event, without
the prior written consent of an Investor, shall the Company disclose to such
Investor any of the facts or circumstances regarding) material non-public
information giving rise to an Allowed Delay, (b) advise the Investors in
writing to cease all sales under the Registration Statement until the end of
the Allowed Delay and (c) use commercially reasonable efforts to resolve the
circumstances leading to the imposition of an Allowed Delay as promptly as
practicable.

(d)      Limitation
on Liquidated Damages. 
Notwithstanding any other provision of this Agreement, in no event shall
the Company be liable for liquidated damages pursuant to this Agreement in
excess of an aggregate of 12% of the aggregate exercise price of the Warrants.

3.             Company
Obligations.  The Company will use
commercially reasonable efforts to effect the registration of the Registrable
Securities in accordance with the terms hereof, and pursuant thereto the
Company will, as expeditiously as possible:

(a)      use
commercially reasonable efforts to cause such Registration Statement to become
effective and to remain continuously effective for a period that will terminate
upon the earlier of (i) the date on which all Registrable Securities covered by
such Registration Statement as amended from time to time, have been sold, and
(ii) the date on which all Registrable Securities covered by such Registration
Statement may be sold pursuant to Rule 144(k) (such period, the “Effectiveness
Period”) and advise the Investors in writing prior to terminating the
effectiveness of the Registration Statement following the conclusion of the
Effectiveness Period;

 4
 

 

(b)      prepare
and file with the SEC such amendments and post-effective amendments to the
Registration Statement and the Prospectus as may be necessary to keep the
Registration Statement effective for the Effectiveness Period and to comply
with the provisions of the 1933 Act and the 1934 Act with respect to the
distribution of all of the Registrable Securities covered thereby;

(c)      provide
copies to and permit counsel designated by the Investors to review each
Registration Statement and all amendments and supplements thereto no fewer than
seven (7) days prior to their filing with the SEC and not file any document to
which such counsel reasonably objects;

(d)      furnish
to the Investors and their legal counsel by e-mail, facsimile or other
equivalent method (i) promptly after the same is prepared and publicly
distributed, filed with the SEC, or received by the Company (but not later than
two (2) Business Days after the filing date, receipt date or sending date, as
the case may be) one (1) copy of any Registration Statement and any amendment
thereto, each preliminary prospectus and Prospectus and each amendment or
supplement thereto, and each letter written by or on behalf of the Company to
the SEC or the staff of the SEC, and each item of correspondence from the SEC
or the staff of the SEC, in each case relating to such Registration Statement
(other than any portion of any thereof which contains information for which the
Company has sought confidential treatment), and (ii) such number of copies of a
Prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as each Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor that are covered by the related Registration Statement;

(e)      use
commercially reasonable efforts to (i) prevent the issuance of any stop order
or other suspension of effectiveness and, (ii) if such order is issued, obtain
the withdrawal of any such order at the earliest possible moment;

(f)       prior
to any public offering of Registrable Securities, use commercially reasonable
efforts to register or qualify or cooperate with the Investors and their
counsel in connection with the registration or qualification of such
Registrable Securities for offer and sale under the securities or blue sky laws
of such jurisdictions requested by the Investors and do any and all other
commercially reasonable acts or things necessary or advisable to enable the
distribution in such jurisdictions of the Registrable Securities covered by the
Registration Statement; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (i) qualify to do
business in any jurisdiction where it would not otherwise be required to
qualify but for this Section 3(f), (ii) subject itself to general taxation in
any jurisdiction where it would not otherwise be so subject but for this
Section 3(f), or (iii) file a general consent to service of process in any such
jurisdiction;

(g)      use
commercially reasonable efforts to cause all Registrable Securities covered by
a Registration Statement to be listed on each securities exchange, interdealer
quotation system or other market on which similar securities issued by the
Company are then listed;

 5
 

 

(h)      immediately
notify the Investors, at any time prior to the end of the Effectiveness Period,
upon discovery that, or upon the happening of any event as a result of which,
the Prospectus includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing,
and promptly prepare, file with the SEC and furnish to such holder a supplement
to or an amendment of such Prospectus as may be necessary so that such
Prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing;
and

(i)       otherwise
use commercially reasonable efforts to comply with all applicable rules and
regulations of the SEC under the 1933 Act and the 1934 Act, including, without
limitation, Rule 172 under the 1933 Act, file any final Prospectus, including
any supplement or amendment thereof, with the SEC pursuant to Rule 424 under
the 1933 Act, promptly inform the Investors in writing if, at any time during
the Effectiveness Period, the Company does not satisfy the conditions specified
in Rule 172 and, as a result thereof, the Investors are required to deliver a
Prospectus in connection with any disposition of Registrable Securities and
take such other actions as may be reasonably necessary to facilitate the
registration of the Registrable Securities hereunder; and make available to its
security holders, as soon as reasonably practicable, but not later than the
Availability Date (as defined below), an earnings statement covering a period
of at least twelve (12) months, beginning after the effective date of each
Registration Statement, which earnings statement shall satisfy the provisions
of Section 11(a) of the 1933 Act, including Rule 158 promulgated thereunder
(for the purpose of this subsection 3(i), “Availability Date” means the 45th
day following the end of the fourth fiscal quarter that includes the effective
date of such Registration Statement, except that, if such fourth fiscal quarter
is the last quarter of the Company’s fiscal year, “Availability Date” means the
90th day after the end of such fourth fiscal quarter).

(j)       With a view to making available to the
Investors the benefits of Rule 144 (or its successor rule) and any other rule
or regulation of the SEC that may at any time permit the Investors to sell the
shares of Common Stock to the public without registration, the Company
covenants and agrees to:  (i) make and
keep public information available, as those terms are understood and defined in
Rule 144, until the earlier of (A) six months after such date as all of the
Registrable Securities may be resold pursuant to Rule 144(k) or any other rule
of similar effect or (B) such date as all of the Registrable Securities shall
have been resold; (ii) file with the SEC in a timely manner all reports and
other documents required of the Company under the 1934 Act; and (iii) furnish
to each Investor upon request, as long as such Investor owns any Registrable
Securities, (A) a written statement by the Company that it has complied with
the reporting requirements of the 1934 Act, (B) a copy of the Company’s most
recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q, and (C)
such other information as may be reasonably requested in order to avail such
Investor of any rule or regulation of the SEC that permits the selling of any
such Registrable Securities without registration.

4.             Due
Diligence Review; Information.  The
Company shall make available, during normal business hours, for inspection and
review by the Investors, advisors to and representatives of the Investors (who
may or may not be affiliated with the Investors and who are reasonably
acceptable to the Company), all financial and other records, all filings with
the SEC,

 6
 

 

and all other corporate documents and properties of the Company as may
be reasonably necessary for the purpose of such review, and cause the Company’s
officers, directors and employees, within a reasonable time period, to supply
all such information reasonably requested by the Investors or any such
representative, advisor or underwriter in connection with such Registration
Statement (including, without limitation, in response to all questions and
other inquiries reasonably made or submitted by any of them), prior to and from
time to time after the filing and effectiveness of the Registration Statement
for the sole purpose of enabling the Investors and such representatives,
advisors and underwriters and their respective accountants and attorneys to
conduct initial and ongoing due diligence with respect to the Company and the
accuracy of such Registration Statement.

The Company shall
not disclose material nonpublic information to the Investors, or to advisors to
or representatives of the Investors, unless prior to disclosure of such
information the Company identifies such information as being material nonpublic
information and provides the Investors, such advisors and representatives with
the opportunity to accept or refuse to accept such material nonpublic
information for review and any Investor wishing to obtain such information
enters into an appropriate confidentiality agreement with the Company with respect
thereto.

5.             Obligations
of the Investors.

(a)      Each
Investor shall furnish in writing to the Company such information regarding
itself, the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it, as shall be reasonably
required to effect the registration of such Registrable Securities and shall
execute such documents in connection with such registration as the Company may
reasonably request.  At least five (5)
Business Days prior to the first anticipated filing date of any Registration
Statement, the Company shall notify each Investor of the information the
Company requires from such Investor if such Investor elects to have any of the
Registrable Securities included in the Registration Statement.  An Investor shall provide such information to
the Company at least two (2) Business Days prior to the first anticipated
filing date of such Registration Statement if such Investor elects to have any
of the Registrable Securities included in the Registration Statement.

(b)      Each
Investor, by its acceptance of the Registrable Securities agrees to cooperate
with the Company as reasonably requested by the Company in connection with the
preparation and filing of a Registration Statement hereunder, unless such Investor
has notified the Company in writing of its election to exclude all of its
Registrable Securities from such Registration Statement.

(c)      Each
Investor agrees that, upon receipt of any notice from the Company of either (i)
the commencement of an Allowed Delay pursuant to Section 2(c)(ii) or (ii) the
happening of an event pursuant to Section 3(h) hereof, such Investor will
immediately discontinue disposition of Registrable Securities pursuant to the
Registration Statement covering such Registrable Securities, until the Investor
is advised by the Company that such dispositions may again be made.

 7
 

 

6.             Indemnification.

(a)      Indemnification
by the Company.  The Company will
indemnify and hold harmless each Investor and its officers, directors, members,
employees and agents, successors and assigns, and each other person, if any,
who controls such Investor within the meaning of the 1933 Act, against any
losses, claims, damages or liabilities, joint or several, to which they may
become subject under the 1933 Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon: (i) any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement, any preliminary
Prospectus or final Prospectus, or any amendment or supplement thereof; (ii)
any blue sky application or other document executed by the Company specifically
for that purpose or based upon written information furnished by the Company
filed in any state or other jurisdiction in order to qualify any or all of the
Registrable Securities under the securities laws thereof (any such application,
document or information herein called a “Blue Sky
Application”); (iii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; (iv) any violation by
the Company or its agents of any rule or regulation promulgated under the 1933
Act applicable to the Company or its agents and relating to action or inaction
required of the Company in connection with such registration; or (v) any
failure to register or qualify the Registrable Securities included in any such
Registration in any state where the Company or its agents has affirmatively
undertaken or agreed in writing that the Company will undertake such
registration or qualification on an Investor’s behalf and will reimburse such
Investor, and each such officer, director or member and each such controlling
person for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not
be liable in any such case if and to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission so made in conformity
with information furnished by such Investor or any such controlling person in
writing specifically for use in such Registration Statement or Prospectus.

(b)      Indemnification
by the Investors.  Each Investor
agrees, severally but not jointly, to indemnify and hold harmless, to the
fullest extent permitted by law, the Company, its directors, officers, employees,
stockholders and each person who controls the Company (within the meaning of
the 1933 Act) against any losses, claims, damages, liabilities and expense
(including reasonable attorney fees) resulting from any untrue statement of a
material fact or any omission of a material fact required to be stated in the
Registration Statement or Prospectus or preliminary Prospectus or amendment or
supplement thereto or necessary to make the statements therein not misleading,
to the extent, but only to the extent that such untrue statement or omission is
contained in any information furnished in writing by such Investor to the
Company specifically for inclusion in such Registration Statement or Prospectus
or amendment or supplement thereto.  In
no event shall the liability of an Investor be greater in amount than the
dollar amount of the proceeds (net of all expense paid by such Investor in
connection with any claim relating to this Section 6 and the amount of any
damages such Investor has otherwise been required to pay by reason of such
untrue statement or omission) received by such Investor upon the sale of the
Registrable Securities included in the Registration Statement giving rise to
such indemnification obligation.

 8
 

 

(c)      Conduct
of Indemnification Proceedings.  Any
person entitled to indemnification hereunder shall (i) give prompt notice to
the indemnifying party of any claim with respect to which it seeks
indemnification and (ii) permit such indemnifying party to assume the defense
of such claim with counsel reasonably satisfactory to the indemnified party; provided
that any person entitled to indemnification hereunder shall have the right to
employ separate counsel and to participate in the defense of such claim, but
the fees and expenses of such counsel shall be at the expense of such person
unless (a) the indemnifying party has agreed to pay such fees or expenses, or
(b) the indemnifying party shall have failed to assume the defense of such
claim and employ counsel reasonably satisfactory to such person or (c) in the
reasonable judgment of any such person, based upon written advice of its
counsel, a conflict of interest exists between such person and the indemnifying
party with respect to such claims (in which case, if the person notifies the
indemnifying party in writing that such person elects to employ separate
counsel at the expense of the indemnifying party, the indemnifying party shall
not have the right to assume the defense of such claim on behalf of such
person); and provided, further, that the failure of any
indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations hereunder, except to the extent that such
failure to give notice shall materially adversely affect the indemnifying party
in the defense of any such claim or litigation. 
It is understood that the indemnifying party shall not, in connection
with any proceeding in the same jurisdiction, be liable for fees or expenses of
more than one separate firm of attorneys at any time for all such indemnified
parties.  No indemnifying party will,
except with the consent of the indemnified party, consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect of such claim or litigation.

(d)      Contribution.  If for any reason the indemnification
provided for in the preceding paragraphs (a) and (b) is unavailable to an
indemnified party or insufficient to hold it harmless, other than as expressly
specified therein, then the indemnifying party shall contribute to the amount
paid or payable by the indemnified party as a result of such loss, claim,
damage or liability in such proportion as is appropriate to reflect the
relative fault of the indemnified party and the indemnifying party, as well as
any other relevant equitable considerations. 
No person guilty of fraudulent misrepresentation within the meaning of
Section 11(f) of the 1933 Act shall be entitled to contribution from any person
not guilty of such fraudulent misrepresentation.  In no event shall the contribution obligation
of a holder of Registrable Securities be greater in amount than the dollar
amount of the proceeds (net of all expenses paid by such holder in connection
with any claim relating to this Section 6 and the amount of any damages such
holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission) received by it upon the sale
of the Registrable Securities giving rise to such contribution obligation.

7.             Miscellaneous.

(a)      Amendments
and Waivers.  This Agreement may be
amended only by a writing signed by the Company and the Required
Investors.  The Company may take any action
herein prohibited, or omit to perform any act herein required to be performed
by it, only if the Company shall have obtained the written consent to such
amendment, action or omission to act, of the Required Investors.

 9

 

(b)      Notices.  Unless otherwise provided herein, all notices
and other communications provided for or permitted hereunder shall be made as
set forth in the Warrant Exercise Agreement.

(c)      Assignments
and Transfers by Investors.  The
provisions of this Agreement shall be binding upon and inure to the benefit of
the Investors and their respective successors and assigns.  An Investor may transfer or assign, in whole
or from time to time in part, to one or more persons its rights hereunder in
connection with the transfer of Registrable Securities by such Investor to such
person, provided that such Investor complies with all laws applicable thereto
and provides written notice of assignment to the Company promptly after such
assignment is effected and such transferee agrees to be bound by the terms and
conditions of this Agreement.

(d)      Assignments
and Transfers by the Company.  This
Agreement may not be assigned by the Company (whether by operation of law or
otherwise) without the prior written consent of the Required Investors,
provided, however, that the Company may assign its rights and delegate its
duties hereunder to any surviving or successor corporation in connection with a
merger or consolidation of the Company with another corporation, or a sale,
transfer or other disposition of all or substantially all of the Company’s
assets to another corporation, without the prior written consent of the
Required Investors, after notice duly given by the Company to each Investor.

(e)      Benefits
of the Agreement.  The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective permitted successors and assigns of the parties.  Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

(f)       Counterparts;
Faxes.  This Agreement may be
executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.  This Agreement may also be
executed via facsimile, which shall be deemed an original.

(g)      Titles
and Subtitles.  The titles and
subtitles used in this Agreement are used for convenience only and are not to
be considered in construing or interpreting this Agreement.

(h)      Severability.  Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof but shall be interpreted as if it
were written so as to be enforceable to the maximum extent permitted by applicable
law, and any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction.  To the extent permitted by
applicable law, the parties hereby waive any provision of law which renders any
provisions hereof prohibited or unenforceable in any respect.

 10
 

 

(i)       Further
Assurances.  The parties shall
execute and deliver all such further instruments and documents and take all
such other actions as may reasonably be required to carry out the transactions
contemplated hereby and to evidence the fulfillment of the agreements herein
contained.

(j)       Entire
Agreement.  This Agreement is
intended by the parties as a final expression of their agreement and intended
to be a complete and exclusive statement of the agreement and understanding of
the parties hereto in respect of the subject matter contained herein.  This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.

(k)      Governing
Law; Consent to Jurisdiction; Waiver of Jury Trial.  This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of New York
without regard to the choice of law principles thereof.  Each of the parties hereto irrevocably
submits to the exclusive jurisdiction of the courts of the State of New York
located in New York County and the United States District Court for the
Southern District of New York for the purpose of any suit, action, proceeding
or judgment relating to or arising out of this Agreement and the transactions
contemplated hereby.  Service of process
in connection with any such suit, action or proceeding may be served on each
party hereto anywhere in the world by the same methods as are specified for the
giving of notices under this Agreement. 
Each of the parties hereto irrevocably consents to the jurisdiction of
any such court in any such suit, action or proceeding and to the laying of
venue in such court.  Each party hereto
irrevocably waives any objection to the laying of venue of any such suit,
action or proceeding brought in such courts and irrevocably waives any claim
that any such suit, action or proceeding brought in any such court has been
brought in an inconvenient forum.  EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO
REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND
REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.

[Signature
Page Follows]

 11
 

 

IN WITNESS
WHEREOF, the parties have executed this Agreement or caused their duly
authorized officers to execute this Agreement as of the date first above
written.

	
  The Company:

  	
  ITERIS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
       /S/ JAMES S. MIELE

  	
   

  
	
   

  	
  Name:

  	
  James S. Miele

  	
   

  
	
   

  	
  Title:

  	
  CFO

  	
   

  
	
   

  	
   

  	
   

  
	
  The Investors:

  	
  SPECIAL SITUATIONS FUND III QP, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /S/ AUSTIN W.
  MARXE

  	
   

  
	
   

  	
  Name: Austin W. Marxe

  
	
   

  	
  Title: General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  SPECIAL SITUATIONS FUND III, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /S/ AUSTIN W.
  MARXE

  	
   

  
	
   

  	
  Name: Austin W. Marxe

  
	
   

  	
  Title: General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  SPECIAL SITUATIONS CAYMAN FUND, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /S/ AUSTIN W.
  MARXE

  	
   

  
	
   

  	
  Name: Austin W. Marxe

  
	
   

  	
  Title: General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
  SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /S/ AUSTIN W.
  MARXE

  	
   

  
	
   

  	
  Name: Austin W. Marxe

  
	
   

  	
  Title: General Partner

  
						

 

 12

Exhibit A

Plan
of Distribution

The
selling stockholders, which as used herein includes donees, pledgees,
transferees or other successors-in-interest selling shares of common stock or
interests in shares of common stock received after the date of this prospectus
from a selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell, transfer or otherwise dispose of any or
all of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are traded
or in private transactions.  These
dispositions may be at fixed prices, at prevailing market prices at the time of
sale, at prices related to the prevailing market price, at varying prices determined
at the time of sale, or at negotiated prices.

The
selling stockholders may use any one or more of the following methods when
disposing of shares or interests therein:

·      ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers;

·      block trades in which the broker-dealer
will attempt to sell the shares as agent, but may position and resell a portion
of the block as principal to facilitate the transaction;

·      purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;

·      an
exchange distribution in accordance with the rules of the applicable exchange;

·      privately
negotiated transactions;

·      short
sales effected after the date the registration statement of which this
Prospectus is a part is declared effective by the SEC;

·      through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise;

·      broker-dealers
may agree with the selling stockholders to sell a specified number of such shares
at a stipulated price per share; and

·      a
combination of any such methods of sale.

The selling
stockholders may, from time to time, pledge or grant a security interest in
some or all of the shares of common stock owned by them and, if they default in
the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock, from time to time, under this
prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act amending the list of selling
stockholders to include the pledgee, transferee or other successors in interest
as 

 13
 

 

selling stockholders
under this prospectus.  The selling
stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.

In connection with
the sale of our common stock or interests therein, the selling stockholders may
enter into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the common stock in
the course of hedging the positions they assume.  The selling stockholders may also sell shares
of our common stock short and deliver these securities to close out their short
positions, or loan or pledge the common stock to broker-dealers that in turn
may sell these securities.  The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).

The aggregate
proceeds to the selling stockholders from the sale of the common stock offered
by them will be the purchase price of the common stock less discounts or
commissions, if any.  Each of the selling
stockholders reserves the right to accept and, together with their agents from
time to time, to reject, in whole or in part, any proposed purchase of common
stock to be made directly or through agents. 
We will not receive any of the proceeds from this offering. Upon any
exercise of the warrants by payment of cash, however, we will receive the
exercise price of the warrants.

The selling
stockholders also may resell all or a portion of the shares in open market
transactions in reliance upon Rule 144 under the Securities Act of 1933,
provided that they meet the criteria and conform to the requirements of that
rule.

The selling
stockholders and any underwriters, broker-dealers or agents that participate in
the sale of the common stock or interests therein may be “underwriters” within
the meaning of Section 2(11) of the Securities Act.  Any discounts, commissions, concessions or
profit they earn on any resale of the shares may be underwriting discounts and
commissions under the Securities Act. 
Selling stockholders who are “underwriters” within the meaning of
Section 2(11) of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act.

To the extent required,
the shares of our common stock to be sold, the names of the selling
stockholders, the respective purchase prices and public offering prices, the
names of any agents, dealer or underwriter, any applicable commissions or
discounts with respect to a particular offer will be set forth in an
accompanying prospectus supplement or, if appropriate, a post-effective
amendment to the registration statement that includes this prospectus.

In order to comply
with the securities laws of some states, if applicable, the common stock may be
sold in these jurisdictions only through registered or licensed brokers or
dealers.  In addition, in some states the
common stock may not be sold unless it has been registered or qualified for
sale or an exemption from registration or qualification requirements is
available and is complied with.

 14
 

 

We have advised
the selling stockholders that the anti-manipulation rules of Regulation M under
the Exchange Act may apply to sales of shares in the market and to the
activities of the selling stockholders and their affiliates.  In addition, to the extent applicable we will
make copies of this prospectus (as it may be supplemented or amended from time
to time) available to the selling stockholders for the purpose of satisfying
the prospectus delivery requirements of the Securities Act.  The selling stockholders may indemnify any
broker-dealer that participates in transactions involving the sale of the
shares against certain liabilities, including liabilities arising under the
Securities Act.

We have agreed to
indemnify the selling stockholders against certain liabilities, including
liabilities under the Securities Act and state securities laws, relating to the
registration of the shares offered by this prospectus.

We have agreed
with the selling stockholders to keep the registration statement of which this
prospectus constitutes a part effective until the earlier of (1) such time as
all of the shares covered by this prospectus have been disposed of pursuant to
and in accordance with the registration statement or (2) the date on which the
shares may be sold pursuant to Rule 144(k) of the Securities Act.

 15

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