Document:

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                                                                   EXHIBIT 10.17

                                  ITERIS,INC.

                           SUBORDINATED CONVERTIBLE
                            NOTE PURCHASE AGREEMENT

                                January 25, 2000
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                                 ITERIS, INC.

               SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT

     This Agreement is made as of January 25, 2000 by and between Iteris, Inc.,
a Delaware corporation (the "Company"), and DaimlerChrysler Venture GmbH, a
German limited liability company ("Purchaser").

                                   RECITALS

     A.  Purchaser is not a U.S. Person as defined in Rule 902(k) of Regulation
S (`Regulation S"), as promulgated under the Securities Act of 1933, as amended
(the "Securities Act").

     B.  The Company desires to sell to Purchaser and Purchaser desires to
purchase from the Company the subordinated convertible promissory note described
herein, the offer and sale of which is being made in reliance upon the
provisions of Regulation S.

                                   AGREEMENT

                                  SECTION 1.
                        AUTHORIZATION AND SALE OF NOTE

          1.1  Authorization. The Company has authorized the sale and issuance
               -------------
of an 8% subordinated convertible promissory note in the principal amount of
$3.75 million (the "Note"), substantially in the form attached hereto as Exhibit
A.

          1.2  Sale of Note. Subject to the terms and conditions hereof, the
               ------------
Company will issue and sell to the Purchaser and the Purchaser will buy from the
Company the Note for an amount of $3.75 million. Such purchase price shall be
paid in the manner set forth in Section 2.2. The number of shares of Common
Stock into which the Note is convertible shall be subject to certain adjustment
provisions.

          1.3  Company Records and Use of Proceeds. Upon issuance, the Note will
               -----------------------------------
be registered in the Purchaser's name in the Company's records. The proceeds
from the sale and issuance of the Note shall be used for general corporate
purposes and not for the retirement of any shareholder debt, except as
authorized in this Agreement.

                                  Section 2.
                            CLOSING DATE & DELIVERY

          2.1  Closing. The closing of the purchase and sale of the Note
               -------
hereunder (the "Closing") shall be held at the offices of DaimlerChrysler
Venture GmbH, Stuttgart, Germany, promptly after the execution of this Agreement
or at such other time and place upon which the Company and the Purchaser shall
agree (the date of the Closing is hereinafter referred to as the "Closing
Date").

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          2.2  Payment and Delivery. At the Closing, the Company will deliver to
               --------------------
Purchaser the Note, against payment of the purchase price therefor, by check
payable to the Company, or by wire transfer per the Company's instructions.

                                  Section 3.
                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     The Company represents and warrants to the Purchaser as follows as of the
execution of this Agreement and the Closing:

          3.1  Organization and Standing: Certificate and Bylaws. The Company is
               -------------------------
a corporation duly organized, validly existing and in good standing under the
laws of the state of Delaware. The Company has all requisite corporate power and
authority to own and operate its properties and assets, and to carry on its
business as presently conducted and as proposed to be conducted. The Company is
qualified to do business as a foreign corporation in each jurisdiction where
failure to be so qualified would have a material adverse effect on the Company's
business as presently conducted and as currently proposed to be conducted. The
Company has made available to the Purchaser copies of the Company's Certificate
of Incorporation and Bylaws, as amended to date. Said copies are true, correct
and complete and contain all amendments through the date hereof.

          3.2  Corporate Power. The Company has all requisite corporate power
               ---------------
and authority to execute and deliver the Registration Rights Agreement (as
defined in Section 5.10 hereof) and this Agreement, to sell and issue the Note
hereunder, to issue the Common Stock issuable upon conversion of the Note (the
"Conversion Stock"), and to carry out and perform its obligations under the
terms of this Agreement and the Registration Rights Agreement.

          3.3  Capitalization. The authorized capital stock of the Company
               --------------
consists of 40,000,000 shares of Common Stock, $0.01 par value (the "Common
Stock"), of which 6,432,100 shares are issued and outstanding as of the Closing
Date, and 5,000,000 shares of Preferred Stock, $0.01 par value, none of which
are outstanding. The Company has reserved a sufficient number of shares of
Common Stock for issuance upon conversion of the Note. Shares of the Conversion
Stock have the rights, preferences, privileges and restrictions set forth in the
Certificate of Incorporation. Except as set forth above and options to purchase
[1,400,000] shares of Common Stock, there are no options, warrants, conversion
privileges or other rights to purchase or otherwise acquire any of the Company's
authorized and unissued capital stock. The outstanding shares of the capital
stock of the Company are duly and validly issued, fully paid and nonassessable,
and such shares have been issued in compliance with the Securities Act and any
applicable state securities law, or in compliance with applicable exemptions
therefrom.

          3.4  Subsidiaries. Except for Meyer, Mohaddes Associates, Inc., a
               ------------
wholly owned subsidiary of the Company, the Company has no subsidiaries.

          3.5  Financial Statements. The Company has delivered at or prior to
the Closing to the Purchaser the Company's unaudited financial statements for
the fiscal period ended December 31, 1999 (the "Financial Statements"). The
Financial Statements are complete and correct in all material respects and have
been prepared in accordance with

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generally accepted accounting principles ("GAAP") applied on a basis consistent
with prior accounting periods, except to the extent that the unaudited financial
statements are subject to normal and recurring year-end adjustments. The
Financial Statements present fairly the financial condition and operating
results of the Company as of the date and during the periods indicated therein.
Except to the extent reflected or reserved against or disclosed in the Financial
Statements, the Company as of the date of the Financial Statements had no
material liabilities or obligations of any kind, whether accrued, absolute,
contingent or otherwise, which under GAAP should have been reflected or reserved
against or disclosed.

          3.6  Absence of Certain Changes. Since December 31, 1999, and at all
               --------------------------
times up to the Closing, there has not been, nor, so far as reasonably can be
foreseen at this time, is there reasonably likely to be, any event or condition
of any character which has materially adversely affected, or is likely to
materially affect, the Company's consolidated business operations, assets,
condition (financial or otherwise), liabilities, earnings or prospects including
but not limited to:

               (a)  any event which materially, adversely affects the Company's
business as it is currently being conducted;

               (b)  any declaration, setting aside or payment or other
distribution in respect of any of the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition of any of such stock by the
Company, other than the repurchase of unvested shares of Common Stock of the
Company issued to employees, officers or directors of or consultants to the
Company;

               (c)  any waiver by the Company of a valuable right or of a
material debt owed to it;

               (d)  any material change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject;

               (e)  any material commitment, transaction or other action by the
Company other than in the ordinary course of business and consistent with past
practice;

               (f)  any amendment or other change to the Certificate of
Incorporation or Bylaws of the Company (except as contemplated by this
Agreement);

               (g)  any sale or other disposition of any right, title or
interest in or to any material assets or properties of the Company or any
revenues derived therefrom other than in the ordinary course of business and
consistent with past practice;

               (h)  any creation, incurrence or assumption of any indebtedness
for money borrowed by the Company exceeding $50,000 (not including net increases
in accounts payable or intercompany debt incurred in the ordinary course of the
Company's business);

               (i)  any material capital expenditures by the Company not in the
ordinary course of business;

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               (j)  any material change in any accounting principle or method or
election for federal income tax purposes used by the Company;

               (k)  any change in the assets, liabilities, prospects, financial
condition or operations of the Company from those reflected in the Financial
Statements, except changes in the ordinary course of business which have not
been, either in any case or in the aggregate, materially adverse;

               (l)  any material change in the outstanding indebtedness owed by
the Company;

               (m)  any material change in the contingent obligations of the
Company by way of guaranty, endorsement, indemnity, warranty or otherwise;

               (n)  any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the properties or business of the
Company;

               (o)  any loans made by the Company to its employees, officers or
directors other than advances of expenses made in the ordinary course of
business;

               (p)  any agreements made with any affiliates of the Company,
other than agreements relating to or contemplated by the Separation and
Distribution Agreement between the Company and Odetics, Inc. dated December 31,
1999; or

               (q)  any authorization, approval, agreement or commitment to do
any of the foregoing.

          3.7  Absence of Undisclosed Liabilities. The Company does not have any
               ----------------------------------
material obligation or material liability arising out of any transaction entered
into at or prior to the Closing, or any act or omission to act at or prior to
the Closing, except (a) to the extent set forth or reserved against in the
Financial Statements, (b) as disclosed in the Disclosure Schedule, and (c)
current liabilities incurred and obligations under agreements entered into in
the usual and ordinary course of business since December 31, 1999, none of which
(individually or in the aggregate) materially and adversely affects the
business, properties, finances or prospects (financial or otherwise) of the
Company.

          3.8  Authorization, No Breach. The execution, delivery and performance
               ------------------------
of this Agreement and the Registration Rights Agreement and the consummation of
all transactions contemplated hereby or thereby, including but not limited to
the offering, sale and issuance of the Note pursuant to this Agreement has been
duly authorized by all required corporate actions of the Company and its
shareholders and the Company has taken all corporate acts necessary for the due
and valid authorization, execution, issuance and performance of the Agreement,
the Registration Rights Agreement, the Note and the Conversion Stock. This
Agreement, the Registration Rights Agreement and the Note constitute valid and
binding obligations of the Company enforceable in accordance with their
respective terms, except as the indemnification provisions of Section 2.7 of the
Registration Rights Agreement may be limited by principles of public policy, and
subject to laws of general application relating to bankruptcy, insolvency
reorganization, moratorium and the relief of debtors and rules of law governing
specific performance, injunctive relief or

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other equitable remedies. The Note, when issued in compliance with the
provisions of this Agreement, will be validly issued, fully paid and
nonassessable, and will have the rights, preferences and privileges described
therein; the Conversion Stock has been duly and validly reserved and, when
issued in compliance with the provisions of this Agreement and the Certificate
of Incorporation, will be duly and validly authorized, validly issued and
outstanding, fully paid and nonassessable; and the Note and such Conversion
Stock will be free of any liens or encumbrances, other than any liens or
encumbrances created by or imposed upon the holders; provided, however, that the
Note and the Conversion Stock may be subject to restrictions on transfer under
state and/or federal securities laws as set forth herein.

          3.9   Material Contracts and Commitments. A list of and copies of the
                ----------------------------------
contracts, mortgages, indentures, agreements, instruments, leases and
transactions to which the Company is a party or by which it is bound which
involve obligations of, or payments to, the Company in excess of Two Hundred
Thousand Dollars ($200,000) and all agreements between the Company and its
officers, directors, consultants and employees (the "Material Contracts"), have
been delivered to the Purchaser. All of the Material Contracts are valid,
binding and in full force and effect in all material respects and enforceable by
the Company in accordance with their respective terms in all material respects,
subject to the effect of applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application relating to or affecting
enforcement of creditors' fights and rules or laws concerning equitable
remedies. To the Company's knowledge, the Company is not in material default
under any of such Material Contracts and no other party to any of the Material
Contracts is in material default thereunder.

          3.10  Litigation, etc.  There are no actions, suits, proceedings or
                ---------------
investigations pending or claims asserted (or, to the Company's knowledge, any
basis therefor or threat thereof), to which the Company is a party or its
property is subject or, to the Company's knowledge, against any officer,
director or employee of the Company in connection with such person's
relationship with or actions taken on behalf of the Company or which question
the validity or enforceability of this Agreement, the Registration Rights
Agreement or the Note which might result in (i) any material adverse change in
the business, prospects or financial condition of the Company or any of its
properties or assets, (ii) any material impairment of the right or ability of
the Company to carry on its business as now conducted or as proposed to be
conducted or to pay amounts under the Note as they become due or (iii) in any
material liability on the part of the Company, and none which question the
validity of this Agreement or any action taken or to be taken in connection
herewith.

          3.11  Consents. No consent, approval, qualification, order or
                --------
authorization of, or filing with, any governmental authority is required in
connection with the Company's valid execution, delivery or performance of this
Agreement or the Registration Rights Agreement, or the offer, sale or issuance
of the Note by the Company, the issuance of Conversion Stock, or the
consummation of any other transaction contemplated on the part of the Company
hereby, except such filings as may be required under the applicable securities
laws.

          3.12  Title to Properties; Liens and Encumbrances. The Company has
                -------------------------------------------
good and marketable title to its properties and assets and, with respect to the
property and assets leased by the Company, holds valid leasehold interests
therein, in each case subject to

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no mortgage, pledge, lien, security interest, conditional sale agreement,
encumbrance or charge or other equitable interest, except (i) tax, materialmens'
or like liens for obligations not yet due or payable or being contested in good
faith by appropriate proceedings, (ii) security interests granted to
Transamerica Business Credit Corporation pursuant to that certain Loan and
Security Agreement to which the Company is a party dated December 28, 1998, and
related documentation, or (iii) liens or encumbrances which do not individually
or the aggregate in any case materially impair the Company's use thereof or
materially detract from the value of the Company and which have arisen in the
ordinary course of business.

          3.13  Proprietary Information and Other Rights. The Company uses
                ----------------------------------------
patents, trade secrets, including know-how, concepts, computer programs and
other technical data (the "Proprietary Information") for the development,
manufacture and sale of its products. The Company owns or has the right to use
all such Proprietary Information necessary for its business as now conducted
and, to the knowledge of the Company, the Proprietary Information under
development or intended to be used by the Company in its business as currently
proposed, will not infringe upon the proprietary rights of third parties.
Reasonable security measures have been taken by the Company to protect the
secrecy, confidentiality and value of the Proprietary Information referred to in
this Section 3.13. Each officer of the Company or subsidiary has executed a
proprietary information agreement, copies of which have been provided to
Purchaser. The Company, after reasonable investigation, is not aware that any of
its officers is in violation thereof, and the Company will use its best efforts
to prevent any such violation.

          3.14  Insurance. The Company maintains insurance of the types and in
                ---------
the amounts generally deemed adequate for its business and consistent with
insurance coverage maintained by similar companies in similar businesses,
including but not limited to, insurance covering real and personal property
owned or leased by the Company against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect and all premiums with respect thereto are
currently paid.

          3.15  Brokers or Finders. The Company has not incurred, and will not
                ------------------
incur, directly or indirectly, as a result of any action taken by the Company,
any liability for brokerage or finders' fees or agents' commissions or any
similar charges in connection with this Agreement.

          3.16  Compliance With Other Instruments.
                ---------------------------------

                (a)  The Company is not in violation or default of any
provisions of its Certificate of Incorporation or Bylaws or of any judgment,
order, writ, decree or Material Contract to which it is a party or by which it
is bound or, to its knowledge, of any provision of federal or state statute,
rule or regulation applicable to the Company or its subsidiaries, except to the
extent that such violation or default would not have a material adverse effect
on the Company, its business or its operations. The execution, delivery and
performance of this Agreement, the Registration Rights Agreement or the Note and
the consummation of the transactions contemplated herein will not result in any
such violation nor be in conflict with or constitute, with or without the
passing of time and giving of notice, either a default under any such provision,
judgment, order, writ, decree or Material Contract or any event which results in
the creation of any lien, charge or encumbrance upon any assets of the Company
or any of its subsidiaries (other than such liens as are contemplated hereby).

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               (b)  The Company has avoided every condition, and has not
performed any act, the occurrence of which would result in its loss of any right
granted under any license, distribution or other agreement. The Company believes
that has received fair value for all licenses assigned or transferred to third
parties.

          3.17  Registration Rights. Except as set forth in the Registration
                -------------------
Rights Agreement and the Registration Rights Agreement dated October 16, 1998,
among the Company, Michael P. Meyer, Abbas Mohaddes, Viggen Davidian and Gary
Hamrick, the Company is not under any contractual obligation to register any of
its securities which are outstanding or any of its securities which may
hereafter be issued.

          3.18  Offering.  Subject to the accuracy of the Purchaser's
                --------
representations in Section 4 hereof, the offer, sale and issuance of the Note
and the issuance of the Conversion Stock, constitute transactions exempt from
the registration requirement of Section 5 of the Securities Act and applicable
state securities laws.

          3.19  Disclosure. There is no fact known to the Company that has not
                ----------
been disclosed to the Purchaser which the Company reasonably expects will have a
material adverse effect upon the financial condition, operating results or
assets of the Company, taken as a whole. The Company has fully provided the
Purchaser with all the information which the Purchaser has requested for
deciding whether to purchase the Note and, to the extent applicable, the
Conversion Stock and all information which the Company believes is reasonably
necessary to enable the Purchaser to make such decision.

          3.20  Minute Books. The minute books of the Company contain copies of
                ------------
minutes for all meetings of directors and shareholders since the time of
incorporation. The Purchaser (or its counsel) has been provided with an
opportunity to review the minute books or copies of such minutes.

          3.21  Employees; Proprietary Information Agreement. To the best of the
                --------------------------------------------
Company's knowledge, no employee of the Company is in violation of any term of
any employment contract, patent disclosure agreement or any other contract,
agreement, order or decree relating to the relationship of such employee with
the Company or any other party because of the nature of the business conducted
or to be conducted by the Company. To the best of the Company's knowledge, none
of its employees is obligated under any contact, agreement or judgment that
would interfere with such employee exercising his or her best efforts to promote
the interests of the Company or that would conflict with the Company's business
as currently proposed.

          3.22  Dividends. The Company has not declared or paid any dividends,
                ---------
or authorized or made any distribution upon or with respect to any class or
series of its capital stock.

          3.23  Intellectual Property Rights. The Company (a) owns or has the
                ----------------------------
right to use, free and clear of all liens, charges, claims and restrictions
(except for those disclosed in Section 3.13), all patents, trademarks, service
marks, trade names, copyrights, computer software programs, databases, domain
names, licenses, trade secrets and rights and any other intellectual property
necessary to its business as now conducted and, to the Company's knowledge, is
not infringing upon or otherwise acting adversely to the right or

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claimed right of any person under or with respect to any of the foregoing and
(b) is not obligated or under any liability whatsoever to make any payments by
way of royalties, fees or otherwise to any owner of, licensor of, other claimant
to, any patent, trademark, trade name, copyright, database, domain name, or
other intangible asset, except pursuant to the Cooperative Development Agreement
for a Lane Departure Detection and Warning System between the Company and
DaimlerChrysler Corporation dated July 22, 1998, and the Asset Sale Agreement
between the Company and Rockwell Collins, Inc. dated June 20, 1997 (the "License
Agreements"). There are no outstanding options, licenses, or agreements of any
kind relating to the foregoing nor, is the Company bound by or a party to any
options, licenses or agreements of any kind with respect to the patents,
trademarks, service marks, trade names, copyrights, databases, domain names,
trade secrets, licenses, information, computer software programs, proprietary
rights and processes of any other person or entity, except for the License
Agreements the Agreement between Freightliner Corporation and the Company dated
January 11, 1999,confidential nondisclosure agreements and the like.

          3.24  Operating Rights. The Company has all operating authority,
                ----------------
licenses, franchises, permits, certificates, consents, rights and privileges as
are necessary or appropriate to the operation of its business as now or as
proposed to be conducted, the absence of which would have a material and adverse
effect on the business of the Company ("collectively, the "Permits"). Such
Permits are in full force and effect, no violations have been or are expected to
have been recorded in respect of any such Permits, and no proceeding is pending
or, to the Company's knowledge, threatened that could result in the revocation
or limitation of any of such Permits. The Company has conducted its business so
as to comply in all material respects with all such Permits.

          3.25  Related Party Transactions. Except for officers or directors of
                --------------------------
the Company who are also officers or directors of Odetics, Inc., no officer or
director of the Company (a) is an officer, director or general partner of, or
directly or indirectly owns beneficially more than 5% of the equity of, any
business which (i) furnishes or sells services or products which compete with
services or products furnished or sold by the Company or (ii) purchases from or
sells or furnishes to the Company any goods or services, or (b) has a beneficial
interest in any contract or agreement to which the Company is a party or by
which it may be bound or affected involving the payment or receipt of in excess
of $50,000, other than any agreements governing the purchase of shares of the
Company's Common Stock and agreements relating to the employment of such
persons, copies of which agreements have been delivered to the Purchaser'
counsel. The Company is not a guarantor or indemnitor of an indebtedness of any
other person, firm or corporation.

          3.26  Environmental Regulations. The Company has met, and continues to
                -------------------------
meet in all material respects, all applicable local, state and federal
environmental regulations. The Company has disposed of its waste products and
effluents, and has used reasonable efforts to cause others to dispose of waste
products and effluents for the Company, in accordance with, in all material
respects, all applicable state, local and federal environmental regulations and
in such a manner that, to the best of the Company's knowledge, no harm has
resulted or will result to any of the employees or properties of the Company or
to any other persons or entities or their properties.

          3.27  Taxes. The Company believes that it has accurately prepared in
                -----
all material respects and has filed all tax returns that are required to have
been filed on or before

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the Closing with appropriate federal, state, county and local governmental
agencies or instrumentalities. The Company has paid or established adequate
reserves for all material income, franchise and other taxes, assessments,
governmental charges, penalties, interest and fines due and payable by it on or
before the Closing. There is no pending dispute with any taxing authority
relating to any of such returns, and the Company has no knowledge of any
proposed liability for any tax to be imposed upon the properties or assets of
the Company.

          3.28  Inventory. All inventory is of a quality and quantity usable in
                ---------
the ordinary course of business, except for obsolete items, or materials below
standard quality, which, in the aggregate, are not material in amount and have
been written off or written down to net realizable value on the books of the
Company.

          3.29  Returns and Complaints. The Company has not received any
                ----------------------
customer complaints concerning its products or services that have not been
resolved and which are indicative of a problem that is reasonably likely to
result in a material adverse effect on the Company, its business or its
operations.

          3.30  Foreign Corrupt Practices Act. The Company has not made, offered
                -----------------------------
or agreed to offer anything of value to any governmental official, political
party or candidate for political office (or any person that the Company knows or
has reason to know will offer anything of value to any such person) in violation
of the Foreign Corrupt Practices Act of 1977, as amended.

          3.31  No Cancelled Contracts. No Material Contracts or purchase orders
                ----------------------
have been cancelled, rescinded, continued or modified in any material respect
which would have a material adverse effect on the Company, its business or its
operations.

                                  Section 4.
                REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

     Purchaser hereby represents and warrants to the Company with respect to the
purchase of the Note as follows:

          4.1   Accredited Investor. It is an "accredited investor" as such term
                -------------------
is defined in Rule 501(a) of Regulation D of the Securities Act.

          4.2   Experience. It has substantial experience in evaluating and
                ----------
investing in private placement transactions of securities in companies similar
to the Company so that it is capable of evaluating the merits and risks of its
Investment in the Company and has the capacity to protect its own interests.

          4.3   Economic Risk. It understands that the purchase of the Note
                -------------
hereunder is a speculative investment which involves a high degree of risk of
loss of its investment therein. It is able to bear the economic risk of its
investment in the Note for an indefinite period of time, including the risk of a
complete loss of its investment in such securities. It acknowledges that such
Note and the Conversion Stock have not been registered under the Securities Act
and, therefore, cannot be sold unless subsequently registered under the
Securities Act or an exemption from such registration is available. The
foregoing does

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not, however, limit or modify the representations and warranties of the Company
set forth in Section 3 of this Agreement or the fight of the Purchaser to rely
thereon.

          4.4  Strategic Investment. It is acquiring the Note and the underlying
               --------------------
Common Stock for investment for its own account, not as a nominee or agent, not
for the account or benefit of any U.S. Person and not with the view to, or for
resale in connection with, any distribution thereof. It understands that the
Note and the underlying Common Stock have not been, and will not be, registered
under the Securities Act by reason of a specific exemption from the registration
provisions of the Securities Act, the availability of which depends upon, among
other things, the bona fide nature of the investment intent and the accuracy of
its representations as expressed herein.

          4.5  Execution, Delivery and Performance. It has full right, power and
               -----------------------------------
authority to execute and deliver this Agreement and the Registration Rights
Agreement and to perform its obligations hereunder and thereunder. At or before
the Closing hereunder, it will execute and deliver to the Company the
Registration Rights Agreement, and it acknowledges and agrees that the Note
purchased will be subject to the terms and provisions of the Registration Rights
Agreement, and the Company's Certificate of Incorporation and Bylaws. This
Agreement and the Registration Rights Agreement, when so executed and delivered
by the Purchaser, will constitute valid and binding obligations of each
Purchaser enforceable in accordance with their respective terms, except as the
indemnification provisions of the Registration Rights Agreement may be limited
by principles of public policy, and subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
No consent, approval, authorization, order, filing, registration or
qualification of or with any court, governmental authority or third person is
required to be obtained by the Purchaser in connection with the execution and
delivery of this Agreement or the Registration Rights Agreement or the
performance of each Purchaser's obligations hereunder or thereunder.

          4.6  Regulation S and Rule 144. Purchaser acknowledges that the Note
               -------------------------
and the underlying Common Stock are being purchased in reliance upon Regulation
S and that the Note and the Conversion Stock must be held indefinitely unless
subsequently transferred in accordance with Regulation S, registered under the
Securities Act or an exemption from such registration is available. Purchaser is
aware of the provisions of Regulation S, which prohibits the offer or sale of
the Note and the Conversion Stock to or for the benefit or account of any U.S.
Person for a period of one year following the Closing, and Rule 144 promulgated
under the Securities Act ("Rule 144") which permit limited resale of securities
purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things, the existence of a public market for
the securities, the availability of certain current public information about the
Company, the resale occurring not less than one year after a party has purchased
and paid for the security to be sold, the sale being effected through a
"broker's transaction" or in transactions directly with a "market maker" and the
number of securities being sold during any three (3) month period not exceeding
specified limitations.

          4.7  No Public Market. Purchaser understands that no public market now
               ----------------
exists for any of the securities issued by the Company and that the Company has
made no assurances that a public market will ever exist for the Company's
securities.

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          4.8  Access to Data. Purchaser acknowledges that it has had a full
               --------------
opportunity to ask questions and receive answers concerning the terms and
conditions of the offering of the Note and has had full access to the Company's
officers and such other information concerning the Company as it has requested.

          4.9  Brokers or Finders. Purchaser has not incurred and will not
               ------------------
incur, directly or indirectly, as a result of any action taken by the Purchaser,
any liability for brokerage or finder's fees or agent's commissions or any
similar charges in connection with this Agreement.

          4.10 Tax Liability. Purchaser has reviewed with its own tax advisors
               -------------
the federal, state, local and foreign tax consequences of this investment and
the transactions contemplated by this Agreement. It relies solely on such
advisors and not on any statements or representations of the Company or any of
its agents. It understands that it (and not the Company) shall be responsible
for any of its own tax liability that may arise as a result of this investment
or the transactions contemplated by this Agreement.

          4.11 Investor Counsel. Purchaser acknowledges that it has had the
               ----------------
opportunity to review this Agreement, the exhibits attached hereto and the
transaction contemplated by this Agreement with its own legal counsel. It is
relying solely on such counsel and not on any statements or representations of
the Company, Stradling Yocca Carlson & Rauth (counsel solely to the Company) or
any of its agents for legal advice with respect to this investment or the
transactions contemplated by this Agreement.

          4.12 Foreign Investor. Purchaser is a German limited liability company
               ----------------
with its principal place of business in Stuttgart, Germany, has no branch or
other operations within the United States and is not a U.S. Person. All
decisions concerning the purchase of the Note and the acquisition, if any, of
the Conversion Stock, have been and will be made at Purchaser's principal place
of business where this Agreement and the Registration Rights Agreement will be
executed and delivered and where the Note will be received. The Note was not
offered to Purchaser in the United States and at the time of execution of this
Agreement and the time of any offer to Purchaser to purchase the Note, the
Purchaser was physically outside of the United States.

                                  Section 5.
                    CONDITIONS TO CLOSING OF THE PURCHASER

     The Purchaser's obligations to purchase the Note at the Closing are, at the
option of the Purchaser, subject to the fulfillment on or prior to the Closing
Date of the following conditions:

          5.1  Representations and Warranties Correct. The representations and
               --------------------------------------
warranties made by the Company in Section 3 hereof shall be true and correct as
of the Closing Date with the same force and effect as if made on such date.

          5.2  Covenants. All covenants, agreements and conditions contained in
               ---------
this Agreement to be performed by the Company on or prior to the Closing Date
shall have been performed or complied with.

                                       11
<PAGE>

          5.3  Compliance Certificate. The Company shall have delivered to the
               ----------------------
Purchaser a certificate of the Company, executed by the President of the
Company, dated the Closing Date, and certifying as to the fulfillment of the
conditions specified in Sections 5.1 and 5.2 of this Agreement.

          5.4  Good Standing Certificates. The Company shall have delivered to
               --------------------------
the Purchaser certificates dated as of the most recent practicable date prior to
the Closing Date issued by the Delaware Secretary of State to the effect that
the Company is legally existing and in good standing, and similar good standing
certificates from the state of incorporation for each of the subsidiaries.

          5.5  Secretary's Certificate. The Company shall have delivered to the
               -----------------------
Purchaser a certificate executed by the Secretary of the Company dated as of the
Closing, certifying the following matters: (a) resolutions adopted by the Board
approving the transactions contemplated by this Agreement; (b) Certificate of
Incorporation of the Company; (c) Bylaws of the Company; (d) incumbency of those
officers of the Company signing the various agreements; and (e) such other
matters as the Purchaser may reasonably request.

          5.6  Note. A Note substantially in the form of Exhibit A shall have
               ----
been executed and delivered by the Company and the Purchaser and shall be in
full force and effect as of the Closing.

          5.7  Registration Rights Agreement.  An Registration Rights Agreement
               -----------------------------
substantially in the form of Exhibit B (the "Registration Rights Agreement")
shall have been executed and delivered by the Company and the Purchaser and
shall be in full force and effect as of the Closing.

          5.8  Legal Opinion. The Purchaser shall have received from Stradling
               -------------
Yocca Carlson & Rauth, counsel to the Company, a legal opinion addressed to them
substantially in the form of Exhibit C.

          5.9  Debt Conversion. Odetics, Inc. shall have agreed to contribute to
               ---------------
the capital of the Company a portion of the amount of debt owed by the Company
to Odetics, Inc.

                                  Section 6.
                       CONDITIONS TO CLOSING OF COMPANY

     The Company's obligation to sell and issue the Note at the Closing is, at
the option of the Company, subject to the fulfillment as of the Closing Date of
the following conditions with the same force and effect as if made on such date:

          6.1  Representations. The representations and warranties made by the
               ---------------
Purchaser in Section 4 hereof shall be true and correct as of the Closing Date.

          6.2  Registration Rights Agreement. The Purchaser shall have executed
               -----------------------------
and delivered the Registration Rights Agreement.

                                       12
<PAGE>

          6.3  Payment of Purchase Price. The Purchaser shall have delivered to
               -------------------------
the Company the purchase price for the Note being purchased at such Closing.

          6.4  Forms W-9 or W-8. Each Purchaser shall have delivered to the
               ----------------
Company a complete and executed Internal Revenue Service Form W-8 or Form W-9,
as applicable.

                                  Section 7.
            AFFIRMATIVE COVENANTS OF THE COMPANY AND THE PURCHASER

          7.1  Compliance with Documents. The Company will perform and observe
               -------------------------
all of its obligations to the holders of the Note (and the Conversion Stock) set
forth in this Agreement, the Certificate of Incorporation, the Bylaws, and all
of its obligations set forth in the Investor Rights Agreement.

          7.2  Observation of Board of Directors. For as long as the Note
               ---------------------------------
remains outstanding or Purchaser holds at least 200,000 shares of Common Stock,
if Purchaser so requests, the Company will permit a representative of Purchaser
to receive notice of and attend all Board meetings and to receive all documents
provided generally to the Board at the same time as such materials are provided
to the Board. Purchaser's representative shall be capable of discussing
strategic objectives and implementation relating to the Company's business and
shall be permitted to attend portions of any Board meeting related specifically
to operations or financial matters. Purchaser's representative shall be able to
attend any other portions of Board meeting at the sole discretion of the Board.
Notwithstanding the foregoing, Purchaser acknowledges and agrees that the
Company's management will have the right to exclude any such representative from
all or portions of meetings of the Board, or omit to provide such representative
with certain information, if the Company's management believes it is necessary
in order to preserve the attorney-client privilege, or fulfill the Company's
obligations with respect to confidential or proprietary information of third
parties, or if such meeting or information involves matters where a director
would customarily not participate in a meeting or be provided such information.
In addition, Purchaser acknowledges and agrees that any such representative will
maintain the confidentiality of all information obtained through such
representative's position and will be bound by the same obligations of
confidentiality as Purchaser is bound.

          7.3  Information Rights. In addition to the rights set forth in the
               ------------------
Investor Rights Agreement, the Company hereby covenants and agrees to the
following with Purchaser:

               (a)  The Company shall provide to Purchaser (i) as soon as
available and in any event within ninety (90) days after the end of each fiscal
year of the Company, a balance sheet of the Company as of the end of such fiscal
year and the related statements of income, retained earnings and changes in
financial position for such fiscal year, setting forth in each case in
comparative form the figures for the previous fiscal year, all reported on by a
firm of independent public accountants of nationally recognized standing, (ii)
as soon as available and in any event within 30 days after the end of each of
month, internal balance sheet and income statement as are produced in the
ordinary course of business by the Company.

                                       13
<PAGE>

               (b)  The Company will permit representatives of the Purchaser to
visit and inspect any of its properties and to examine and make copies of any of
its books and records and to discuss its affairs, finances and accounts with its
officers, employees and agents all at such reasonable times and as often as may
reasonably be desired, provided Purchaser provides the Company with reasonable
notice in advance of such visit.

               (c)  The information rights under this Section 7.3 shall
terminate upon the closing of the Company's initial public offering registered
under the Securities Act.

          7.4  Advancement of Strategic Relationship. The parties intend to
               -------------------------------------
cooperate in the following areas:

               (a)  Purchaser will support and use its international networks to
facilitate the adoption of the AutoVue product in DaimlerChrysler commercial
vehicles and passenger cars.

               (b)  Purchaser will support and use its international networks to
facilitate joint initiatives between DaimlerChrysler and the Company to bring
eBusiness solutions, such as Personalized Traveler Information, to mobile
internet users in DaimlerChrysler commercial vehicles and passenger cars.

          7.5  Publicity. Purchaser and the Company agree that neither shall
               ---------
publicly disclose, whether by a press release or otherwise, the existence of or
the terms and conditions of this Agreement until the Closing, at which time the
Purchaser and the Company shall cooperate in the drafting and issuance of press
releases in the United States and Europe. Neither party shall issue a press
release without the prior consent of the other party. Purchaser acknowledges
that the company may be required to file this Agreement and the agreements
contemplated hereby with the Securities Exchange Commission in connection with
its initial Public Offering, and Purchaser hereby consents to such filing.

                                  Section 8.
                RESTRICTIONS ON TRANSFERABILITY OF SECURITIES;
                        COMPLIANCE WITH SECURITIES ACT

          8.1  Restrictions on Transferability. In addition to the restrictions
               -------------------------------
set forth in Section 8.2, Purchaser agrees that all offers and sales of the Note
and the Conversion Stock prior to the expiration of a period commencing on the
Closing Date and ending one year thereafter shall not be made to U.S. Persons or
for the account or benefit of any U.S. Person and shall otherwise be made in
compliance with Regulation S. Purchaser will cause any proposed purchaser,
assignee, transferee, or pledgee of the Note or the Conversion Stock held by
such Purchaser to agree to take and hold such securities subject to the
provisions and upon the conditions specified in this Section 8.

          8.2  Lock Up Agreement. For the period commencing on the Closing Date
               -----------------
and ending fifteen (15) months following the Closing Date (the "Lock Up
Period"), Purchaser will not, without the prior written consent of the Company,
(which consent may be withheld in its sole discretion), directly or indirectly,
issue, sell, offer or agree to sell, grant any option for the sale of, pledge,
make any short sale or maintain any short position, establish or maintain a "put
equivalent position" (within the meaning of Rule 16-a-1(h) under

                                       14
<PAGE>

the Securities Exchange Act of 1934, as amended), enter into any swap,
derivative transaction or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of the Note or the
Conversion Stock; provided, however, that in the event the Company has not
consummated an initial public offering of its Common Stock prior to nine (9)
months following the Closing Date, the Lock Up Period shall be extended such
that the Lock Up Period extends to a date that is 180 days following the date of
the Company's final prospectus delivered in connection with its initial public
offering. Notwithstanding the foregoing, Purchaser may transfer the Note or the
Conversion Stock, subject to applicable securities laws, to any entity directly
or indirectly controlling or controlled by or under common control with, the
Purchaser.

          8.3  Restrictive Legend. Each certificate or instrument representing
               ------------------
(i) the Note, (ii) the Conversion Stock, and (iii) any other securities issued
in respect of the Note or the Conversion Stock upon a stock split, stock
dividend, stock exchange or similar event (collectively the "Restricted
Securities"), shall (unless otherwise permitted by the provisions of Rule 144)
be stamped or otherwise imprinted with a legend in the following form (in
addition to any legend required under applicable state securities laws):

    "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
    FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE
    SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE
    EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED
    THERETO OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
    CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
    SECURITIES ACT OF 1933, AS AMENDED.

    THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES
    SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF
    1933, AS AMENDED (THE "ACT"), OR THE SECURITIES COMMISSION OF ANY
    STATE UNDER ANY STATE SECURITIES LAW. THEY ARE BEING OFFERED
    PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION S
    ("REGULATION S") PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT
    BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR
    TO U. S. PERSONS (AS SUCH TERM IS DEFINED IN REGULATION S) UNLESS
    THE SECURITIES ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE
    SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE
    PURSUANT TO AN AVAILABLE EXEMPTION OR SAFE HARBOR FORM THE
    REGISTRATION REQUIREMENTS OF THOSE LAWS.

    THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
    CERTAIN RESTRICTIONS ON TRANSFER AND CERTAIN MARKET STAND-OFF
    PROVISIONS WHICH ARE CONTAINED IN A SUBORDINATED CONVERTIBLE NOTE
    PURCHASE AGREEMENT, DATED AS OF JANUARY 25, 2000, COPIES

                                       15
<PAGE>

     OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION."

     Purchaser consents to the Company making a notation on its records and
giving instructions to any transfer agent of the Note or the Conversion Stock in
order to implement the restrictions on transfer established in this Section 8.

          8.4  Notice of Proposed Transfers. The holder of each certificate
               ----------------------------
representing Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 8.3. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities (other than a
transfer not involving a change in beneficial ownership), the holder thereof
shall give written notice to the Company of such Purchaser's intention to effect
such transfer, sale, assignment or pledge. Each such notice shall describe the
manner and circumstances of the proposed transfer, sale, assignment or pledge in
sufficient detail, and shall be accompanied, at such holder's expense, by either
(i) a written opinion of legal counsel, who shall be and whose legal opinion
shall be reasonably satisfactory to the Company, addressed to the Company, to
the effect that the proposed transfer of the Restricted Securities may be
effected without registration under the Securities Act or (ii) a "no action"
letter from the Commission to the effect that the transfer of such securities
without registration will not result in a recommendation by the staff of the
Commission that action be taken with respect thereto, whereupon the holder of
such Restricted Securities shall be entitled to transfer such Restricted
Securities in accordance with the terms of the notice delivered by the holder to
the Company. Each certificate evidencing the Restricted Securities transferred
as above provided shall bear, except if such transfer is made pursuant to Rule
144, the appropriate restrictive legend set forth in Section 8.2 above, except
that such certificate shall not bear such restrictive legend if in the opinion
of counsel for such holder and the Company such legend is not required in order
to establish compliance with any provision of the Securities Act.

                                  Section 9.
                                 MISCELLANEOUS

          9.1  Governing Law. This Agreement shall be governed and construed in
               -------------
all respects in accordance with the laws of the State of California so applied
to agreements made and performed in California by residents of the State of
California.

          9.2  Survival. The representations, warranties, covenants and
               --------
agreements made herein shall survive any investigation made by the Purchaser and
the closing of the transactions contemplated hereby for a period of two (2)
years.

          9.3  Successors and Assigns. Except as otherwise expressly provided
               ----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto will bind and inure to the benefit of the
respective successors and assigns of such parties whether so expressed or not.
In addition, and whether or not any express assignment has been made, the
provisions of this Agreement which are for the Purchaser's benefit as the
purchaser or holder of Note or the Conversion Stock are also for the benefit of
and enforceable by any subsequent holder of Note or the Conversion Stock.

                                       16
<PAGE>

          9.4  Entire Agreement; Amendment. This Agreement and the other
               ---------------------------
documents delivered pursuant hereto at the Closing constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof, and no party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.

          9.5  Notices, etc. All notices and other communications required or
               ------------
permitted hereunder shall be in writing, including facsimile, or electronic
communications and shall be effective upon receipt.

          9.6  Delays or Omissions. Except as expressly provided herein, no
               -------------------
delay or omission to exercise any right, power or remedy accruing to any holder
of any Note, upon any breach or default of the Company under this Agreement,
shall impair any such right, power or remedy of such holder nor shall it be
construed to be a waiver of any such breach or default, or an acquiescence
therein, or of or in any similar breach or default thereafter occurring; nor
shall any waiver of any single breach or default be deemed a waiver of any other
breach or default theretofore or thereafter occurring. Any waiver, permit,
consent or approval of any kind or character on the part of any holder of any
breach or default under this Agreement, or any waiver on the part of any holder
of any provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.

          9.7  Remedies. Purchaser will have all of the rights and remedies set
               --------
forth in this Agreement, the Investor Rights Agreement and the Certificate of
Incorporation, as the case may be, and all of the rights and remedies which
Purchaser may have under any law. The Purchaser, having any rights under any
provision of this Agreement or the Investor Rights Agreement, will be entitled
to enforce such rights specifically, to recover damages by reason of any breach
of any provision of this Agreement or the Investor Rights Agreement and to
exercise all other rights granted by law.

          9.8  Severability. If any provision of this Agreement becomes or is
               ------------
declared by a court of competent jurisdiction to be illegal, invalid,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision. In such event, the parties shall negotiate, in good
faith, a legal, valid and enforceable substitute provision which most nearly
effects the intent of the parties in entering into this Agreement.

          9.9  Expenses. The Company shall pay all of Purchaser's expenses in
               --------
connection with the transactions contemplated hereby, provided that the Closing
and the Company's initial public offering of Common Stock registered under the
Securities Act have occurred, including the fees and disbursements of the
Purchaser's counsel, Baker & McKenzie. Total expenses shall not exceed the
amount of $25,000 in the aggregate.

                                       17
<PAGE>

Dated this 25th of January 2000         Dated this 25th of January 2000
At Anaheim, California                  At Stuttgart, Germany

ITERIS, INC.                            DAIMLERCHRYSLER VENTURE
                                        GMBH

By:  /S/ Jack Johnson                   By:  /s/ Dr. Marianne Tumpen
     ----------------                        -----------------------
         Jack Johnson,                           Dr. Marianne Tumpen,
         President                               Managing Director

                                       18<PAGE>

                                                                   EXHIBIT 10.18

     "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
     INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
     DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT
     AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF
     COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT SUCH REGISTRATION
     IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

     THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES
     AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
     "ACT"), OR THE SECURITIES COMMISSION OF ANY STATE UNDER ANY STATE
     SECURITIES LAW. THEY ARE BEING OFFERED PURSUANT TO A SAFE HARBOR FROM
     REGISTRATION UNDER REGULATION S ("REGULATION S") PROMULGATED UNDER THE ACT.
     THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
     UNITED STATES OR TO U. S. PERSONS (AS SUCH TERM IS DEFINED IN REGULATION S)
     UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE
     SECURITIES LAWS, OR SUCH OFFERS, SALES AND TRANSFERS ARE MADE PURSUANT TO
     AN AVAILABLE EXEMPTION OR SAFE HARBOR FORM THE REGISTRATION REQUIREMENTS OF
     THOSE LAWS.

     THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
     RESTRICTIONS ON TRANSFER AND CERTAIN MARKET STAND-OFF PROVISIONS WHICH ARE
     CONTAINED IN A SUBORDINATED CONVERTIBLE NOTE PURCHASE AGREEMENT, DATED AS
     OF JANUARY 25, 2000, COPIES OF WHICH ARE ON FILE AT THE PRINCIPAL OFFICE OF
     THE CORPORATION."

                                 ITERIS, INC.

                   Subordinated Convertible Promissory Note

$3,750,000                                                 January 25, 2000
                                                           Anaheim, California

     FOR VALUE RECEIVED, Iteris, Inc., a Delaware corporation ("Company"),
promises to pay to DaimlerChrysler Venture GmbH ("Holder"), or its registered
assigns, the principal sum of Three Million Seven Hundred and Fifty Thousand
Dollars ($3,750,000.00), or such lesser amount as shall equal the outstanding
principal amount hereof, together with interest from the date of this
subordinated convertible promissory note ("Note") on the unpaid principal
balance calculated in accordance with Section 2 hereof. All unpaid principal,
                                      ---------
together with any then unpaid and accrued interest and other amounts payable
hereunder, shall be due and payable on
<PAGE>

the earlier of (i) the second anniversary of the date of this Note, or (ii)
when, upon or after the occurrence of an Event of Default (as defined below),
such amounts are declared due and payable by Holder. This Note is issued
pursuant to the Note Purchase Agreement (as defined below).

     1.   Definitions.  As used in this Note, the following capitalized terms
          -----------
have the following meanings:

          (a)  "Affiliate," with respect to any Person, means (i) any director,
officer or employee of such Person, (ii) any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person, and (iii) any Person beneficially owning or holding 10% or more of
any class of voting securities of such Person or any corporation of which such
Person beneficially owns or holds, in the aggregate, 10% or more of any class of
voting securities The term "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities, by
contract or otherwise. The term "Affiliate," when used herein without reference
to any Person, shall mean an Affiliate of Company.

          (b)  "Company" includes the corporation initially executing this Note
and any Person which shall succeed to or assume the obligations of Company under
this Note.

          (c)  "Certificate" shall mean the Certificate of Incorporation of
Company as amended and/or restated and effective immediately prior to the
redemption or conversion of all of this Note.

          (d)  "Equity Securities" of any Person shall mean (a) all common
stock, preferred stock, participations, shares, partnership interests or other
equity interests in and of such Person (regardless of how designated and whether
or not voting or non-voting) and (b) all warrants, options and other rights to
acquire any of the foregoing.

          (e)  "Event of Default" has the meaning given in Section 5 hereof.
                                                           ---------

          (f)  "GAAP" shall mean generally accepted accounting principles as in
effect in the United States of America from time to time.

          (g)  "Holder" shall mean the Person specified in the introductory
paragraph of this Note or any Person who shall at the time be the registered
holder of this Note.

          (h)  "Indebtedness" shall mean and include the aggregate amount of,
without duplication (i) all obligations for borrowed money, (ii) all obligations
evidenced by bonds, debentures, notes or other similar instruments, (iii) all
obligations to pay the deferred purchase price of property or services (other
than accounts payable incurred in the ordinary course of business determined in
accordance with GAAP), (iv) all obligations with respect to capital leases, (v)
all obligations created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person, (vi) all
reimbursement and other payment obligations, contingent or otherwise, in respect
of letters of credit and similar surety instruments; and (vii) all guaranty
obligations with respect to the types of Indebtedness listed in clauses (i)
through (vi) above.

          (i)  [Intentionally Omitted]

                                       2
<PAGE>

          (j)  "Material Adverse Effect" shall mean a material adverse effect on
(a) the business, assets, operations, or financial condition of Company; or (b)
the ability of Company to pay or perform the Obligations in accordance with the
terms of this Note and the other Transaction Documents and to avoid an Event of
Default, or an event which, with the giving of notice or the passage of time or
both, would constitute an Event of Default, under any Transaction Document.

          (k)  "Note Purchase Agreement" shall mean the Note Purchase Agreement
dated January 25, 2000 between Company and the Holder (as amended, modified or
supplemented from time to time).

          (l)  "Obligations" shall mean and include all loans, advances, debts,
liabilities and financial obligations, howsoever arising, owed by Company to
Holder of every kind and description (whether or not evidenced by any note or
instrument and whether or not for the payment of money), now existing or
hereafter arising under or pursuant to the terms of the Transaction Documents,
including, all interest, fees, charges, expenses, attorneys' fees and costs and
accountants' fees and costs chargeable to and payable by Company hereunder and
thereunder, in each case, whether direct or indirect, absolute or contingent,
due or to become due, and whether or not arising after the commencement of a
proceeding under Title 11 of the United States Code (11 U. S. C. Section 101 et
                                                                             --
seq.), as amended from time to time (including post-petition interest) and
---
whether or not allowed or allowable as a claim in any such proceeding.

          (m)  "Person" shall mean and include an individual, a partnership, a
corporation (including a business trust), a joint stock company, a limited
liability company, an unincorporated association, a joint venture or other
entity or a governmental authority.

          (n)  "Senior Indebtedness" shall mean, unless expressly subordinated
to or made on a parity with the amounts due under this Note, the principal of
(and premium, if any), unpaid interest on and amounts reimbursable, fees,
expenses, costs of enforcement and other amounts due in connection with, (i)
indebtedness of Company, to banks, commercial finance lenders, insurance
companies, leasing or equipment financing institutions or other lending
institutions regularly engaged in the business of lending money (excluding debt
that is convertible or exercisable into equity through venture capital,
investment banking or similar institutions which sometimes engage in lending
activities but which are primarily engaged in investments in equity securities),
which is for money borrowed, or purchase or leasing of equipment in the case of
lease or other equipment financing, whether or not secured, and (ii) any such
indebtedness or any debentures, notes or other evidence of indebtedness issued
in exchange for such Senior Indebtedness, or any indebtedness arising from the
satisfaction of such Senior Indebtedness by a guarantor.

          (o)  "Subsidiary" shall mean (a) any corporation of which more than
50% of the issued and outstanding equity securities having ordinary voting power
to elect a majority of the Board of Directors of such corporation is at the time
directly or indirectly owned or controlled by Company, (b) any partnership,
joint venture, or other association of which more than 50% of the equity
interest having the power to vote, direct or control the management of such
partnership, joint venture or other association is at the time directly or
indirectly owned and controlled by Company, (c) any other entity included in the
financial statements of Company on a consolidated basis.

          (p)  "Transaction Documents" shall mean this Note and the Note
Purchase Agreement and any other documents that may be exchanged between Company
and Holder in connection with the issuance of the Note.

                                       3
<PAGE>

     2.   Interest. The interest rate to be applied to the unpaid principal
          --------
balance of this Note shall be eight percent per annum. The interest rate on this
Note shall be increased in accordance with Section 15 upon the occurrence of an
Event of Default. In the event this Note is automatically converted into Common
Stock in accordance with Section 8(b), all interest accrued under this Note
shall be forgiven and Holder shall not be entitled to receive interest in cash
or in the form of Common Stock upon such conversion.

     3.   Prepayment. Upon fifteen days prior written notice to Holder, Company
          ----------
may prepay this Note in whole or in part, unless Holder elects to convert the
Note in accordance with Section 8(a) of this Note; provided that any such
prepayment will be applied first to the payment of expenses due under this Note,
second to interest accrued on this Note and third, if the amount of prepayment
exceeds the amount of all such expenses and accrued interest, to the payment of
principal of this Note.

     4.   Certain Covenants. While any amount is outstanding under the Note,
          -----------------
without the prior written consent of Holder:

          (a)  Dividends, Redemptions, Etc. Neither Company nor any of its
Subsidiaries shall (i) pay any dividends or make any distributions on its Equity
Securities; (ii) purchase, redeem, retire, defease or otherwise acquire for
value any of its equity securities, other than the repurchase of shares of
common stock under option agreements or restricted stock purchase agreements
with employees, directors or consultants; (iii) return any capital to any holder
of its equity securities; (iv) make any distribution of assets, Equity
Securities, obligations or securities to any holder of its Equity Securities; or
(v) set apart any sum for any such purpose; provided, however, that any
Subsidiary may pay cash dividends to Company.

          (b)  Indebtedness Payments. Neither Company nor any of its
Subsidiaries shall as to any Indebtedness which is not Senior Indebtedness (i)
prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to
the scheduled repayment thereof any Indebtedness for borrowed money (other than
amounts due under this Note or the other Notes issued under the Note Purchase
Agreement) or lease obligations, (ii) amend, modify or otherwise change the
terms of any Indebtedness for borrowed money (other than the Obligations) or
lease obligations so as to accelerate the scheduled repayment thereof or (iii)
repay any principal or interest on any notes to officers, directors or
shareholders, including, without limitation, obligations to Odetics, Inc.

          (c)  Affiliate Transactions. Neither Company nor any of its
Subsidiaries shall enter into any contractual obligation with any Affiliate or
engage in any other transaction with any Affiliate except upon terms at least as
favorable to Company or such Subsidiary as an arms-length transaction with
unaffiliated Persons. Holder acknowledges and agrees that the Separation and
Distribution Agreement and the agreements contemplated thereby are on terms at
least as favorable to the Company as arms-length transactions with unaffiliated
Persons.

     5.   Events of Default. The occurrence of any of the following shall
          -----------------
constitute an "Event of Default" under this Note and the other Transaction
Documents. Promptly upon the occurrence thereof, the Company shall provide
Holder with written notice of the occurrence of any Event of Default hereunder
or any event of default with respect to any Senior Indebtedness.

          (a)  Failure to Pay. Company shall fail to pay (i) when due any
principal payment on the due date hereunder or (ii) any interest or other
payment required under the terms of

                                       4
<PAGE>

this Note or any other Transaction Document on the date due and such payment
shall not have been made within five (5) days of Company's receipt of Holder's
written notice to Company of such failure to pay; or

          (b)  Other Payment Obligations. Company or any of its Subsidiaries
shall (i) fail to make any payment when due under the terms of any bond,
debenture, note or other evidence of Indebtedness, including the Senior
Indebtedness, to be paid by such Person (excluding this Note and the other
Transaction Documents but including any other evidence of Indebtedness of
Company or any of its Subsidiaries to Holder) and such failure shall continue
beyond any period of grace provided with respect thereto or thirty (30) days,
whichever is longer, or (ii) default in the observance or performance of any
other agreement, term or condition contained in any such bond, debenture, note
or other evidence of Indebtedness, and the effect of such failure or default is
to cause, or permit the holder or holders thereof to cause, Indebtedness in an
aggregate amount of One Hundred Thousand Dollars ($100,000) or more to become
due prior to its stated date of maturity; or

          (c)  Voluntary Bankruptcy or Insolvency Proceedings. Company or any of
its Subsidiaries shall (i) apply for or consent to the appointment of a
receiver, trustee, liquidator or custodian of itself or of all or a substantial
part of its property, (ii) be unable, or admit in writing its inability, to pay
its debts generally as they mature, (iii) make a general assignment for the
benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v)
become insolvent (as such term may be defined or interpreted under any
applicable statute), (vi) commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or consent to any such relief or to the appointment of or taking possession of
its property by any official in an involuntary case or other proceeding
commenced against it, or (vii) take any action for the purpose of effecting any
of the foregoing; or

          (d)  Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for
the appointment of a receiver, trustee, liquidator or custodian of Company or
any of its Subsidiaries or of all or a substantial part of the property thereof,
or an involuntary case or other proceedings seeking liquidation, reorganization
or other relief with respect to Company or any of its Subsidiaries or the debts
thereof under any bankruptcy, insolvency or other similar law now or hereafter
in effect shall be commenced and an order for relief entered or such proceeding
shall not be dismissed or discharged within thirty (30) days of commencement; or

          (e)  Judgments. A final judgment or order for the payment of money in
excess of One Hundred Thousand Dollars ($100,000) (exclusive of amounts covered
by insurance issued by an insurer not an Affiliate of Company) shall be rendered
against Company or any of its Subsidiaries and the same shall remain
undischarged for a period of thirty (30) days during which execution shall not
be effectively stayed, or any judgment, writ, assessment, warrant of attachment,
or execution or similar process shall be issued or levied against a substantial
part of the property of Company or any of its Subsidiaries and such judgment,
writ, or similar process shall not be released, stayed, vacated or otherwise
dismissed within thirty (30) days after issue or levy.

     6.   Rights of Holder upon Default. Upon the occurrence or existence of any
          -----------------------------
Event of Default (other than an Event of Default referred to in Sections 5(c)
                                                                -------------
and 5(d)) and at any time thereafter during the continuance of such Event of
--------
Default, Holder may, by written notice to Company, declare all outstanding
Obligations payable by Company hereunder to be immediately due and payable
without presentment, demand, protest or any other notice of any kind, all of
which are

                                       5
<PAGE>

hereby expressly waived, anything contained herein or in the other Transaction
Documents to the contrary notwithstanding. In addition to the foregoing
remedies, upon the occurrence or existence of any Event of Default, Holder may
exercise any other right power or remedy granted to it by the Transaction
Documents or otherwise permitted to it by law, either by suit in equity or by
action at law, or both.

     7.   Subordination. The indebtedness evidenced by this Note is hereby
          -------------
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all of Company's Senior
Indebtedness.

          (a)  Insolvency Proceedings. If there shall occur any receivership,
insolvency, assignment for the benefit of creditors, bankruptcy, reorganization,
or arrangements with creditors (whether or not pursuant to bankruptcy or other
insolvency laws), sale of all or substantially all of the assets, dissolution,
liquidation, or any other marshaling of the assets and liabilities of Company,
(i) no amount shall be paid by Company in respect of the principal of, interest
on or other amounts due with respect to this Note at the time outstanding,
unless and until the principal of and interest on the Senior Indebtedness then
outstanding shall be paid in full, and (ii) no claim or proof of claim shall be
filed with Company by or on behalf of Holder of this Note which shall assert any
right to receive any payments in respect of the principal of and interest on
this Note except subject to the payment in full of the principal of and interest
on all of the Senior Indebtedness then outstanding.

          (b)  Default on Senior Indebtedness. If there shall occur an event of
default which has been declared in writing with respect to any Senior
Indebtedness, as defined therein, or in the instrument under which it is
outstanding, permitting the holder to accelerate the maturity thereof and Holder
shall have received written notice thereof from the holder of such Senior
Indebtedness, then, unless and until such event of default shall have been cured
or waived or shall have ceased to exist, or all Senior Indebtedness shall have
been paid in full, no payment shall be made in respect of the principal of or
interest on this Note, unless within one hundred eighty (180) days after the
happening of such event of default, the maturity of such Senior Indebtedness
shall not have been accelerated. Not more than one notice may be given to Holder
pursuant to the terms of this Section 7(b) during any 360 day period.
                              ------------

          (c)  Further Assurances. By acceptance of this Note, Holder agrees to
execute and deliver customary forms of subordination agreements requested from
time to time by holders of Senior Indebtedness, and as a condition to Holder's
rights hereunder, Company may require that Holder execute such forms of
subordination agreements; provided that such forms shall not impose on Holder
terms less favorable than those provided herein.

          (d)  Other Indebtedness. No indebtedness which does not constitute
Senior Indebtedness shall be senior in any respect to the indebtedness
represented by this Note.

          (e)  Subrogation. Subject to the payment in full of all Senior
Indebtedness, Holder shall be subrogated to the rights of the holder(s) of such
Senior Indebtedness (to the extent of the payments or distributions made to the
holder(s) of such Senior Indebtedness pursuant to the provisions of this Section
                                                                         -------
7) to receive payments and distributions of assets of Company applicable to the
-
Senior Indebtedness. No such payments or distributions applicable to the Senior
Indebtedness shall, as between Company and its creditors, other than the holders
of Senior Indebtedness and Holder, be deemed to be a payment by Company to or on
account of this Note; and for purposes of such subrogation, no payments or
distributions to the holders of Senior Indebtedness to which Holder

                                       6
<PAGE>

would be entitled except for the provisions of this Section 7 shall, as between
Company and its creditors, other than the holders of Senior Indebtedness and
Holder, be deemed to be a payment by Company to or on account of the Senior
Indebtedness.

          (f)  No Impairment. Subject to the rights, if any, of the holders of
Senior Indebtedness under this Section 7 to receive cash, securities or other
properties otherwise payable or deliverable to Holder, nothing contained in this
Section 7 shall impair, as between Company and Holder, the obligation of
Company, subject to the terms and conditions hereof, to pay to Holder the
principal hereof and interest hereon as and when the same become due and
payable, or shall prevent Holder, upon default hereunder, from exercising all
rights, powers and remedies otherwise provided herein or by applicable law.

          (g)  Reliance of Holders of Senior Indebtedness. Holder, by its
acceptance hereof, shall be deemed to acknowledge and agree that the foregoing
subordination provisions are, and are intended to be, an inducement to and a
consideration of each holder of Senior Indebtedness, whether such Senior
Indebtedness was created or acquired before or after the creation of the
indebtedness evidenced by this Note, and each such holder of Senior Indebtedness
shall be deemed conclusively to have relied on such subordination provisions in
acquiring and holding, or in continuing to hold, such Senior Indebtedness.

     8.   Conversion.
          ----------

          (a)  Voluntary Conversion. Holder has the right, at Holder's option,
at any time prior to payment in full of this Note or conversion pursuant to
Section 8(b) below, to convert the Note at the office of the Company or any
transfer agent for the shares of Common Stock, into the number of shares of
Common Stock which is equal to the quotient obtained by dividing (A) the entire
unpaid amount of this Note, together with all accrued but unpaid interest and
other fees due under the Note, by (B) the Note Conversion Price. For purposes of
this Section 8(a), the "Note Conversion Price" shall be the fair market value of
the Common Stock at the time of conversion multiplied by .75. The fair market
value of the Common Stock at the time of conversion shall be determined by
mutual agreement of the Holder and the Company, and if no such agreement can be
reached in good faith, by Bear, Stearns & Co., Inc. If the fair market value is
determined by Bear, Stearns & Co. Inc., the Holder and the Company shall share
the burden of expenses incurred in making such determination equally.

          (b)  Automatic Conversion. The entire unpaid principal amount of this
Note, shall be automatically converted into Common Stock (subject to subsection
(c), below), immediately prior to (i) any consolidation or merger of Company
with or into any Person, any corporate reorganizations in which the Company
shall not be the continuing or surviving entity of such consolidation, merger or
reorganization and in which the holders of the outstanding voting capital stock
of the Company immediately prior to such consolidation, merger or reorganization
hold less than 50% of the outstanding voting capital stock of the surviving
company immediately following such transaction, any transaction or series of
related transactions by Company in which in excess of 50% of Company's voting
power is transferred or a sale of all or substantially all of the assets of
Company (each, a "Sale Transaction"); or (ii) the closing of a firmly
underwritten public offering pursuant to a registration statement filed by
Company under the Securities Act of 1933, as amended (the "Act"), with aggregate
gross proceeds in excess of $20 million and at a price of not less than $10.00
per share of Common Stock (as presently constituted, subject to proportionate
adjustment in the event of any stock split, stock dividend, reverse stock split,
combination, consolidation, reclassification or

                                       7
<PAGE>

similar event) (a "Qualified Public Offering"). The number of shares into which
this Note shall be converted in the event of an automatic conversion pursuant to
this Section 8(b) shall be equal to the product of (A) .025 multiplied by (B)
the number of issued and outstanding shares of Common Stock of the Company at
the time of conversion, including shares of Common Stock issued upon conversion
of this Note and shares issued in a Qualified Public Offering, plus the number
of shares of Common Stock purchasable pursuant to outstanding options to
purchase Common Stock that are vested at the time of conversion.

          (c)  Adjustments for Valuation. In the event the Acquisition Value of
the Company is less than $200 million, Holder shall elect at the time of
conversion to either (1) receive a cash payment, representing a return of
principal, equal to an amount calculated under the following formula (the "Cash
Payment"):

          Outstanding principal amount under this Note - [.75 * (Acquisition
Value * .025)]; or

(2) receive such number of additional shares of Common Stock equal to the number
of shares calculated under the following formula:

                                 Cash Payment
                                 ------------
                            Per Share Value * $.75

In the event the Acquisition Value of the Company is more than $200 million,
Holder shall either (1) pay an additional amount of cash to the Company on the
date of conversion equal to an amount calculated under the following formula
(the "Additional Payment"):

          [.75 * (Acquisition Value * .025)] - Outstanding principal amount
under this Note; or

(2) reduce the number of shares otherwise issuable under 8(b) by such number of
shares equal to the number of shares calculated under the following formula:

                              Additional Payment
                              ------------------
                            Per Share Value * $.75

     For purposes of this Section 8, the following terms shall have the meanings
set forth below:

     "Acquisition Value" means (a) in the event of a Qualified Public Offering,
the Total Market Capitalization of the Company plus the aggregate exercise price
of all options outstanding and that are vested on the date of conversion, and
(b) in the event of a Sale Transaction, the aggregate consideration being paid,
assuming the purchase of 100% of the capital stock or assets of the Company,
less liabilities not assumed in the Sale Transaction, and plus the aggregate
exercise price of all options outstanding and that are vested on the date of
conversion.

     "Per Share Value" means, in the event of a Qualified Public Offering, the
initial public offering price, and in the event of a Sale Transaction, the
Acquisition Value divided by the total number of shares of Common Stock
outstanding after giving effect to this conversion and including the total
number of shares issuable pursuant to options to purchase Common Stock of the
Company that are vested at the time of conversion.

                                       8
<PAGE>

          (d)  Adjustment for Stock Splits and Combinations. If the Company at
any time or from time to time after the date of this Note (the "Effective Date")
effects a division of the outstanding shares of Common Stock, then the Note
Conversion Price shall be proportionately decreased and, conversely, if this
Company at any time, or from time to time, after the Effective Date combines the
outstanding shares of Common Stock, then the Note Conversion Price shall be
proportionately increased. Any adjustment under this Section 8(d) shall be
                                                     ------------
effective on the close of business on the date such division or combination
becomes effective.

          (e)  Adjustment for Certain Dividends and Distributions. If the
Company at any time or from time to time after the Effective Date pays or fixes
a record date for the determination of holders of shares of Common Stock
entitled to receive a dividend or other distribution in the form of shares of
Common Stock, or rights or options for the purchase of, or securities
convertible into, Common Stock, then in each such event the Note Conversion
Price shall be decreased, as of the time of such payment or, in the event a
record date is fixed, as of the close of business of such record date, by
multiplying the Note Conversion Price by a fraction (i) the numerator of which
shall be the total number of shares of Common Stock outstanding immediately
prior to the time of such payment or the close of business on such record date,
as the case may be, and (ii) the denominator of which shall be the sum of (A)
                                                               ----------
the total number of shares of Common Stock outstanding immediately prior to the
time of such payment or the close of business on such record date, as the case
may be, plus (B) the number of shares of Common Stock issuable in payment of
        ----
such dividend or distribution or upon exercise of such option or right of
conversion; provided, however, that if a record date is fixed and such dividend
is not fully paid or such other distribution is not fully made on the date fixed
therefor, then the Note Conversion Price shall not be decreased as of the close
of business on such record date as hereinabove provided as to the portion not
fully paid or distributed and thereafter the Note Conversion Price shall be
decreased pursuant to this Section 8(e) as of the date or dates of actual
                           ------------
payment of such dividend or distribution.

          (f)  Adjustments for Other Dividends and Distributions. If the Company
at any time or from time to time after the Effective Date pays, or fixes a
record date for the determination of holders of shares of Common Stock entitled
to receive, a dividend or other distribution in the form of securities of the
Company other than shares of Common Stock or rights or options for the purchase
of, or securities convertible into, Common Stock, then in each such event
provision shall be made so that the Holder shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable
thereupon, the amount of securities of the Company which they would have
received had the Note been converted into shares of Common Stock on the date one
day before such event (adjusted to account for any additional accrued by unpaid
interest and other fees due under the Note) and had Holder thereafter, from the
date of such event to and including the actual date of conversion of their
shares, retained such securities, subject to all other adjustments called for
during such period under this Section 8 with respect to the rights of the
                              ---------
Holder.

          (g)  Adjustment for Reclassification, Exchange and Substitution. If at
any time or from time to time after the Effective Date the number of shares of
Common Stock issuable upon conversion of the Note, is changed into the same or a
different number of shares of any other class or classes of stock or other
securities, whether by recapitalization, reclassification or otherwise (other
than a recapitalization, division or combination of shares or a stock dividend,
or a reorganization, merger, consolidation or sale of assets provided for
elsewhere in this Section 8), then in any such event the Holder shall have the
right thereafter to convert the Note into the same kind and amount of stock and
other securities receivable upon such recapitalization, reclassification or
other change, as the maximum number of shares of Common Stock into which the
Note, could have been converted

                                       9
<PAGE>

immediately prior to such recapitalization (adjusted to account for any
additional accrued but unpaid interest and other fees due under the Note),
reclassification or change, all subject to further adjustment as provided
herein.

          (h)  Reorganizations, Mergers, Consolidations or Sales of Assets. If
at any time or from time to time after the Effective Date there is a capital
reorganization of the Common Stock (other than a recapitalization, division,
combination, reclassification or exchange of shares provided for elsewhere in
this Section 8) or a merger or consolidation of this Company into or with
another corporation (except as provided for in section 8(b)), then, as a part of
such capital reorganization, merger or consolidation, provision shall be made so
that the Holder shall thereafter receive upon conversion thereof the number of
shares of stock or other securities or property of this Company, or of the
successor corporation resulting from such merger or consolidation or sale, to
which a holder of the number of shares of Common Stock into which the Note would
have been entitled on such capital reorganization, merger, consolidation or sale
(adjusted to account for any additional accrued but unpaid interest and other
fees due under the Note). In any such case, appropriate adjustment shall be made
in the application of the provisions of this Section 8 with respect to the
                                             ---------
rights of the Holder after such capital reorganization, merger, consolidation,
or sale. The provisions of this Section 8 (including adjustment of the Note
                                ---------
Conversion Price and the number of shares into which the Note may be converted)
shall be applicable after that event and be as nearly equivalent to such
Conversion Prices and number of shares as may be practicable.

          (i)  Conversion Procedure.

               (i)  Conversion Pursuant to Section 8(a). Before Holder shall be
                    -----------------------------------
     entitled to convert this Note into Common Stock, it shall surrender this
     Note, duly endorsed, at the office of Company and shall give written notice
     by registered or certified mail, postage prepaid, to Company at its
     principal corporate office, of the election to convert the same pursuant to
     Section 8(a), and shall state therein the name or names in which the
     ------------
     certificate or certificates for the Common Stock are to be issued. Company
     shall, as soon as practicable thereafter, issue and deliver at such office
     to Holder of this Note a certificate or certificates for the Common Stock
     to which Holder shall be entitled upon conversion (bearing such legends as
     are required by the Note Purchase Agreement and applicable state and
     federal securities laws in the opinion of counsel to Company), and any
     other securities and property to which Holder is entitled upon such
     conversion under the terms of this Note. The conversion shall be deemed to
     have been made immediately prior to the close of business on the date of
     the surrender of this Note, and the Person or Persons entitled to receive
     the Common Stock upon such conversion shall be treated for all purposes as
     the record holder or holders of such shares of Common Stock as of such
     date.

               (ii) Conversion Pursuant to Section 8(b). If this Note is
                    -----------------------------------
     automatically converted, written notice shall be delivered to Holder at the
     address last shown on the records of Company for Holder or given by Holder
     to Company for the purpose of notice or, if no such address appears or is
     given, at the place where the principal executive office of Company is
     located, notifying Holder of the conversion to be effected, the amount and
     kind of Common Stock to be issued upon conversion, the date on which such
     conversion is expected to occur and calling upon such Holder to surrender
     to Company, in the manner and at the place designated, the Note. Upon such
     conversion of this Note, Holder shall surrender this Note, duly endorsed,
     at the principal office of Company. At its expense, Company shall, as soon
     as practicable thereafter, issue and deliver to such Holder at such
     principal office a

                                       10
<PAGE>

     certificate or certificates for the Common Stock to which Holder shall be
     entitled upon such conversion (bearing such legends as are required by the
     Note Purchase Agreement and applicable state and federal securities laws in
     the opinion of counsel to Company), together with any other securities and
     property to which Holder is entitled upon such conversion under the terms
     of this Note. Any conversion of this Note pursuant to Section 8(b) shall be
                                                           ------------
     deemed to have been made immediately prior to the closing of the issuance
     and sale of Common Stock as described in Section 8(b) and on and after such
     date the Persons entitled to receive the Common Stock issuable upon such
     conversion shall be treated for all purposes as the record Holder of such
     Common Stock and a purchaser of such Common Stock under the Note Purchase
     Agreement and shall be bound by the terms of the Note Purchase Agreement.

          (j)  Fractional Shares; Effect of Conversion. The Company may, but
shall not be obligated to, issue any fractional shares upon conversion of this
Note. In the event that Company elects not to issue fractional shares, Company
shall round the number of shares to the nearest whole share of each type of
Common Stock, provided that if such rounding would result in holder receiving
less than 99.9% of the amount of such Common Stock to which he is entitled,
pursuant to this Section 8, such fraction shall be rounded up to the next whole
                 ---------
share of Common Stock.

          (k)  Reservation of Stock Issuable Upon Conversion. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
this Note, such number of shares of Common Stock as shall from time to time be
sufficient to effect the conversion of the Note.

     9.   Successors and Assigns. Subject to the restrictions on transfer
          ----------------------
described in the Note Purchase Agreement, the rights and obligations of Company
and Holder of this Note shall be binding upon and benefit the successors,
assigns, heirs, administrators and transferees of the parties.

     10.  Assignment by Company. Neither this Note nor any of the rights,
          ---------------------
interests or obligations hereunder may be assigned, by operation of law or
otherwise, in whole or in part, by Company without the prior written consent of
Holder.

     11.  Waiver. Company hereby waives presentment, demand, or protest and any
          ------
notice of any kind in connection with the delivery, acceptance, performance,
default, acceleration, or collection of this Note.

     12.  Notices. Any notice, request or other communication required or
          -------
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by recognized overnight courier or
personal delivery at the respective addresses of the parties as set forth in the
Note Purchase Agreement or on the register maintained by Company. Any party
hereto may by notice so given change its address for future notice hereunder.
Notice shall conclusively be deemed to have been given when received.

     13.  No Intent of Usury. It is the express intentions of the parties that
          ------------------
the payments under this Note are based upon the success and profitability of a
speculative venture, and are therefore exempt from applicable usury
restrictions. Holder understands and acknowledges that all payments under this
Note are contingent upon the profitability of the Company. Nothing contained in
this Note or in the Agreement shall be deemed to require the payment by the
Company or the retention by Holder of interest in excess of the maximum legal
rate (the "Maximum Legal Rate"). All agreements between Holder and Company
pertaining to the obligation evidenced hereby (the "Loan") are expressly limited

                                       11
<PAGE>

so that in no contingency or event, whether by reason of acceleration of the
maturity of the Loan or otherwise, shall the amount paid or agreed to be paid to
Holder for the use, forbearance, or detention of money to be loaned hereunder
exceed the Maximum Legal Rate. If, under any circumstance whatsoever, the
fulfillment of any provision of this Note or the Agreement shall involve
transcending the limits of validity prescribed by law, then, ipso facto, the
                                                             ---- -----
obligation to be fulfilled by Company shall be reduced to the limit of such
validity. This provision shall control every provision of all agreements between
Company and Holder. In the event at any time the interest paid shall exceed the
Maximum Legal Rate, the excess amount shall be deemed to be held in trust by
Holder for the exclusive use and benefit of Company; provided, however, that
such amounts held in trust may be applied to interest or other lawful
consideration payable under the terms of this Note and the Agreement if such
amounts can be so applied without violating applicable laws and without
exceeding the Maximum Legal Rate. Holder may commingle any such amounts with its
own funds. If at the time the Note is paid, the total amount deemed to be
interest under applicable laws exceeds the Maximum Legal Rate, the maximum
liability of Company shall be expressly limited to the legal maximum amounts,
and in the event any excess sums have been paid or are payable such amounts
shall be promptly repaid or credited to Company. In the event the interest or
other consideration payable by Company hereunder is exempt from applicable usury
statutes, or for any other reason is not limited by law, none of the provisions
of this paragraph shall be construed so as to limit the interest or other
consideration payable under the terms of this Note or the Agreement.

     14.  Payment. Payment shall be made in lawful tender of the United States.
          -------

     15.  Default Rate, Usury. In the event that any payment of principal or
          -------------------
interest provided for herein is not paid by Company when due (including the
entire unpaid balance of this Note in the event such amount is made immediately
due and payable pursuant to the terms hereof), then Company shall pay interest
after the date of default on such amounts not paid when due at a rate per annum
equal to the rate otherwise applicable hereunder plus four percent (4%). In the
event any interest is paid on this Note which is deemed to be in excess of the
then legal maximum rate, then that portion of the interest payment representing
an amount in excess of the then legal maximum rate shall be deemed a payment of
principal and applied against the principal of this Note.

     16.  Expenses. If action is instituted to collect this Note, Company
          --------
promises to pay all costs and expenses, including, without limitation,
reasonable attorneys' fees and costs, incurred in connection with such action if
Holder prevails.

     17.  Governing Law. This Note and all actions arising out of or in
          -------------
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California, or of any other state.

                                       12
<PAGE>

          IN WITNESS WHEREOF, Company has caused this Note to be issued as of
the date first written above.

                                        ITERIS, INC.
                                        a Delaware corporation

                                        By: /s/ Jack Johnson
                                            ----------------
                                            Jack Johnson, President

                                       13

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