10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission file number: 001-08762

ITERIS, INC.

(Exact name of registrant as specified in its charter)

Delaware	95-2588496
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1700 Carnegie Avenue, Suite 100
Santa Ana, California	92705
(Address of principal executive office)	(Zip Code)

(949) 270-9400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

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

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

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

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

As of July 25, 2013, there were 32,470,331 shares of common stock outstanding.

ITERIS, INC.

Quarterly Report on Form 10-Q
For the Three Months Ended June 30, 2013

Table of Contents

PART I.	FINANCIAL INFORMATION	3
ITEM 1.	FINANCIAL STATEMENTS	3
	CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2013 (UNAUDITED) AND MARCH 31, 2013	3
	UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012	4
	UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012	5
	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	24
ITEM 4.	CONTROLS AND PROCEDURES	24
PART II.	OTHER INFORMATION	25
ITEM 1.	LEGAL PROCEEDINGS	25
ITEM 1A.	RISK FACTORS	25
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	34
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	34
ITEM 4.	MINE SAFETY DISCLOSURES	34
ITEM 5.	OTHER INFORMATION	34
ITEM 6.	EXHIBITS	35

Unless otherwise indicated in this report, the “Company,” “we,” “us” and “our” refer to Iteris, Inc. and its wholly-owned subsidiaries.

Iteris®, Vantage®, iPerform®, Abacus®, Vantage Vector®, Edge®, VersiCam™, Pico™, SmartCycle™, SmartScan™, iPeMS™, IterisPeMS™, RZ-4™, EdgeConnect™ and VantageView™ are among the trademarks of Iteris, Inc. Any other trademarks or trade names mentioned herein are the property of their respective owners.

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PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

Iteris, Inc.

Consolidated Balance Sheets

(In thousands, except par value)

	June 30,			March 31,
	2013			2013
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	19,092		$	19,137
Trade accounts receivable, net of allowance for doubtful accounts of $425 and $322 at June 30, 2013 and March 31, 2013, respectively	12,457			10,946
Costs in excess of billings on uncompleted contracts	5,171			6,346
Inventories	2,073			2,465
Deferred income taxes	2,363			2,363
Prepaid expenses and other current assets	782			852
Total current assets	41,938			42,109
Property and equipment, net	1,796			1,862
Deferred income taxes	5,655			5,888
Intangible assets, net	2,067			2,124
Goodwill	17,318			17,318
Other assets	230			210
Total assets	$	69,004		$	69,511
Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	4,556		$	5,411
Accrued payroll and related expenses	3,012			3,374
Accrued liabilities	1,840			1,979
Billings in excess of costs and estimated earnings on uncompleted contracts	2,654			1,958
Total current liabilities	12,062			12,722
Deferred rent	211			312
Unrecognized tax benefits	284			286
Other non-current liabilities	313			310
Total liabilities	12,870			13,630
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $1.00 par value:
Authorized shares - 2,000
Issued and outstanding shares - none	—			—
Common stock, $0.10 par value:
Authorized shares - 70,000 at June 30, 2013 and March 31, 2013
Issued and outstanding shares - 32,470 at June 30, 2013 and 32,626 at March 31, 2013	3,248			3,264
Additional paid-in capital	135,611			135,802
Accumulated deficit	(82,725		)	(83,185		)
Total stockholders’ equity	56,134			55,881
Total liabilities and stockholders’ equity	$	69,004		$	69,511

See accompanying notes.

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Iteris, Inc.

Unaudited Consolidated Statements of Operations

(In thousands, except per share amounts)

	Three Months Ended
	June 30,
	2013			2012
Total revenues	$	17,030		$	16,304
Cost of revenues	10,304			10,040
Gross profit	6,726			6,264
Operating expenses:
Selling, general and administrative	5,105			4,901
Research and development	784			633
Amortization of intangible assets	161			161
Change in fair value of contingent consideration	7			(334		)
Total operating expenses	6,057			5,361
Operating income	669			903
Non-operating income (expense):
Other income (expense), net	(3		)	5
Interest income (expense), net	(4		)	(5		)
Income from continuing operations before income taxes	662			903
Provision for income taxes	(232		)	(314		)
Income from continuing operations	430			589
Gain on sale of discontinued operation, net of tax	30			87
Net income	$	460		$	676
Income per share from continuing operations - basic and diluted	$	0.01		$	0.02
Gain per share from sale of discontinued operation - basic and diluted	$	0.00		$	0.00
Net income per share - basic and diluted	$	0.01		$	0.02
Shares used in basic per share calculations	32,520			33,809
Shares used in diluted per share calculations	32,716			33,863

See accompanying notes.

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Iteris, Inc.

Unaudited Consolidated Statements of Cash Flows

(In thousands)

	Three Months Ended
	June 30,
	2013			2012
Cash flows from operating activities
Net income	$	460		$	676
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	233			359
Depreciation of property and equipment	211			223
Stock-based compensation	68			67
Amortization of intangible assets	161			161
Change in fair value of contingent consideration	7			(334		)
Gain on sale of discontinued operation, net of tax	(30		)	(87		)
Changes in operating assets and liabilities, net of effects of discontinued operation:
Accounts receivable	(1,511		)	870
Net costs and estimated earnings in excess of billings	1,871			48
Inventories	392			84
Prepaid expenses and other assets	80			(242		)
Accounts payable and accrued expenses	(1,463		)	(862		)
Net cash provided by operating activities	479			963
Cash flows from investing activities
Purchases of property and equipment	(145		)	(113		)
Capitalized software	(104		)	(54		)
Net cash used in investing activities	(249		)	(167		)
Cash flows from financing activities
Payments on long-term debt	—			(634		)
Repurchases of common stock	(302		)	(442		)
Proceeds from stock option exercises	27			125
Net cash used in financing activities	(275		)	(951		)
Decrease in cash and cash equivalents	(45		)	(155		)
Cash and cash equivalents at beginning of period	19,137			18,701
Cash and cash equivalents at end of period	$	19,092		$	18,546

See accompanying notes.

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Iteris, Inc.

Notes to Unaudited Consolidated Financial Statements

June 30, 2013

1.Description of Business and Summary of Significant Accounting Policies

Description of Business

Iteris, Inc. (referred to collectively with our subsidiaries in these unaudited consolidated financial statements as “Iteris,” the “Company,” “we,” “our” and “us”) is a leading provider of intelligent information solutions to the traffic management market. We are focused on the development and application of advanced technologies and software-based information systems that reduce traffic congestion, provide measurement, management and predictive traffic analytics and improve the safety of surface transportation systems infrastructure. We also believe our products, services and solutions, in conjunction with sound traffic management, minimize the environmental impact of traffic congestion. We combine our unique intellectual property, products, decades of experience in traffic management and information technologies to offer a broad range of Intelligent Transportation Systems (“ITS”) solutions to customers throughout the U.S. and internationally. Iteris was originally incorporated in Delaware in 1987.

Basis of Presentation

Our unaudited consolidated financial statements include the accounts of Iteris, Inc. and our subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The results of continuing operations for all periods presented in the unaudited consolidated financial statements exclude the financial impact of discontinued operations. See Note 3, “Sale of Vehicle Sensors”, for further discussion related to discontinued operations presentation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in the preparation of the consolidated financial statements include the allowance for doubtful accounts, projections of taxable income used to assess realizability of deferred tax assets, inventory and warranty reserves, costs to complete long-term contracts, indirect cost rates used in cost-plus contracts, contract reserves, the valuation of purchased intangible asset and goodwill, the valuation of debt and equity instruments and estimates of future cash flows used to assess the recoverability of long-lived assets and the impairment of goodwill.

Revenue Recognition

Product revenues and related costs of sales are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery under the terms of the arrangement has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection of the receivable is reasonably assured. These criteria are typically met at the time of product shipment, but in certain circumstances, may not be met until receipt or acceptance by the customer. Accordingly, at the date revenue is recognized, the significant obligations or uncertainties concerning the sale have been resolved.

Transportation Systems revenues are derived primarily from long-term contracts with governmental agencies. When appropriate, revenues are recognized using the percentage of completion method of accounting, whereby revenue is recognized as contract performance progresses and is determined based on the relationship of costs incurred to total estimated costs. Any anticipated losses on contracts are charged to earnings when identified. Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. Certain of our revenues are recognized as services are performed and amounts are earned, which is measured by time incurred or other contractual milestones or output measures. Revenues accounted for in this manner generally relate to certain cost-plus fixed fee or time-and-materials contracts.

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We recognize revenue from the sale of deliverables that are part of a multiple-element arrangement in accordance with applicable accounting guidance that establishes a relative selling price hierarchy permitting the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple-element arrangement where neither vendor specific objective evidence (“VSOE”) nor third-party evidence (“TPE”) of fair value is available for that deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, we are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (both delivered and undelivered items) that has stand-alone value based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on our estimated selling prices.

We account for multiple-element arrangements that consist only of software and software-related services in accordance with applicable accounting guidance for software and software-related transactions. For such transactions, revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by VSOE. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements and the only undelivered element is post-contract customer support or maintenance, and VSOE of the fair value of such support or maintenance does not exist, revenue from the entire arrangement is recognized ratably over the support period. When the fair value of a delivered element has not been established but VSOE of fair value exists for the undelivered elements, we use the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.

Costs in Excess of Billings on Uncompleted Contracts

Costs in excess of billings on uncompleted contracts in the accompanying unaudited consolidated balance sheets represent unbilled amounts earned and reimbursable under services sales arrangements. At any given period-end, a large portion of the balance in this account represents the accumulation of labor, materials and other costs that have not been billed due to timing, whereby the accumulation of each month’s costs and earnings are not administratively billed until the subsequent month. Also included in this account are amounts that will become billable according to contract terms, which usually require the consideration of the passage of time, achievement of milestones or completion of the project. Such unbilled amounts are expected to be billed and collected within the next twelve months.

Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts

Billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying unaudited consolidated balance sheets is comprised of cash collected from customers and billings to customers on contracts in advance of work performed, advance payments negotiated as a contract condition, estimated losses on uncompleted contracts, project-related legal liabilities and other project-related reserves. The unearned amounts are expected to be earned within the next twelve months.

We record provisions for estimated losses on uncompleted contracts in the period in which such losses become known. The cumulative effects of revisions to contract revenues and estimated completion costs are recorded in the accounting period in which the amounts become evident and can be reasonably estimated. These revisions can include such items as the effects of change orders and claims, warranty claims, liquidated damages or other contractual penalties, adjustments for audit findings on contract closeout settlements.

Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable.

Cash and cash equivalents consist primarily of demand deposits and money market funds maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with high credit quality financial institutions and therefore are believed to have minimal credit risk.

Our accounts receivable are primarily derived from billings with customers located throughout North America, as well as in the Middle East, Europe, South America and Asia. We generally do not require collateral or other security from customers. We maintain an allowance for doubtful accounts for potential credit losses, which losses have historically been within management’s expectations.

Fair Values of Financial Instruments

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

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Cash and Cash Equivalents

Cash and cash equivalents consist of cash and short-term investments with initial maturities of ninety days or less. Included in cash and cash equivalents of $19.1 million, as of June 30, 2013 and March 31, 2013, is approximately $500,000 of cash designated as collateral on performance bonds, as required under certain of our Transportation Systems contracts in the Middle East. The performance bonds require us to maintain 100% cash value of the bonds as collateral in a bank that is local to the purchasing agency. The performance bond collateral is required throughout the delivery of our services and maintained in the local bank until the contract is closed by the purchasing agency. We expect these requirements, and the related cash collateral restrictions, to remain in place through calendar year 2014.

Allowance for Doubtful Accounts

The collectability of our accounts receivable is evaluated through review of outstanding invoices and ongoing credit evaluations of our customers’ financial condition. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. We also maintain an allowance based on our historical collections experience. When we determine that collection is not likely, we write off accounts receivable against the allowance for doubtful accounts.

Inventories

Inventories consist of finished goods, work-in-process and raw materials and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

Property and Equipment

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

Goodwill and Long-Lived Assets

We evaluate goodwill on an annual basis in our fourth fiscal quarter or more frequently if we believe indicators of impairment exist. We have determined that our reporting units for purposes of testing for goodwill impairment are identical to our reportable segments for financial reporting purposes. In the fiscal year ended March 31, 2012 (“Fiscal 2012”), we adopted the provisions issued by the Financial Accounting Standards Board (“FASB”) that were intended to simplify goodwill impairment testing. This guidance permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a two-step goodwill impairment test. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their carrying values. We determine the fair values of our reporting units using the income valuation approach, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. We monitor the indicators for goodwill impairment testing between annual tests. Certain adverse business conditions impacting one or more reporting units would cause us to test goodwill for impairment on an interim basis.

We test long-lived assets and purchased intangible assets (other than goodwill) for impairment if we believe indicators of impairment exist. We determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long lived assets and purchased intangible assets.

Income Taxes

We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more-likely-than-not that some or all of the deferred tax assets will not be realized, which increases our income tax expense in the period such determination is made.

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Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

Stock-Based Compensation

We record stock-based compensation in the unaudited consolidated statement of operations as an expense, based on the estimated grant date fair value of our stock-based awards, whereby such fair values are amortized over the requisite service period. Our stock-based awards are currently comprised of common stock options and restricted stock units. The fair value of our common stock option awards is estimated on the grant date using the Black-Scholes-Merton (“BSM”) option-pricing formula. While utilizing this model meets established requirements, the estimated fair values generated by it may not be indicative of the actual fair values of our common stock option awards as it does not consider certain factors important to those awards to employees, such as continued employment and periodic vesting requirements as well as limited transferability. The fair value of our restricted stock units is based on the closing market price of our common stock on the grant date. If there are any modifications or cancellations of the underlying unvested stock-based awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

Research and Development Expenditures

Research and development expenditures are charged to expense in the period incurred.

Shipping and Handling Costs

Shipping and handling costs are included as cost of revenues in the period during which the products ship.

Sales Taxes

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

Warranty

We generally provide a one to three year warranty from the original invoice date on all products, materials and workmanship. Products sold to various original equipment manufacturer customers sometimes carry longer warranties. Defective products will be either repaired or replaced, usually at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of revenues at the time revenue for that product is recognized. The accrued warranty reserve is included within accrued liabilities in the accompanying unaudited consolidated balance sheets.

Repair and Maintenance Costs

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

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends Accounting Standards Codification 820, Fair Value Measurements. ASU 2011-04 aims to eliminate certain differences that existed between U.S. and international fair value accounting concepts, and also clarifies existing guidance under GAAP. Additionally, among other disclosures, this ASU requires certain new quantitative and qualitative disclosures regarding unobservable fair value measurements. We adopted the amendments prescribed by ASU 2011-04 for our fiscal year ended March 31, 2013 (“Fiscal 2013”), which did not result in a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented; however, in

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December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which deferred this requirement. The amendments prescribed by ASU 2011-05 are now effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We adopted ASU 2011-05 in Fiscal 2013, which did not result in a material impact on our consolidated financial statements.

2.Supplemental Financial Information

Inventories

The following table presents details of our inventories:

	June 30,		March 31,
	2013		2013
	(In thousands)
Materials and supplies	$	1,307	$	1,504
Work in process	139		105
Finished goods	627		856
	$	2,073	$	2,465

Intangible Assets

The following table presents details of our intangible assets:

	June 30, 2013					March 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
	(In thousands)
Technology	$	1,856	$	(1,239	)	$	1,856	$	(1,178	)
Customer contracts / relationships	750		(278		)	750		(247		)
Trade names and non-compete agreements	1,110		(563		)	1,110		(495		)
Capitalized software development costs	431		—			328		—
Total	$	4,147	$	(2,080	)	$	4,044	$	(1,920	)

We do not have any intangible assets with indefinite useful lives. As of June 30, 2013, future estimated amortization expense is as follows:

Fiscal Year Ending March 31:
(In thousands)
Remainder of 2014	$	538
2015	575
2016	503
2017	354
2018	88
Thereafter	9
	$	2,067

If we acquire additional intangible assets in future periods, our future amortization expense will increase.

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Warranty Reserve Activity

The following table presents activity related to the warranty reserve:

	Three Months Ended
	June 30,
	2013			2012
	(In thousands)
Balance at beginning of period	$	169		$	231
Addition charged to cost of revenues	55			(6		)
Warranty claims	(46		)	(28		)
Balance at end of period	$	178		$	197

Comprehensive Income

Comprehensive income is equal to net income for all periods presented in the accompanying unaudited consolidated statements of operations.

Earnings Per Share

The following table sets forth the computation of basic and diluted income per share from continuing operations:

	Three Months Ended
	June 30,
	2013	2012
	(In thousands)
Denominator:
Weighted average common shares used in basic per share computation	32,520	33,809
Dilutive stock options	125	—
Dilutive restricted stock units	68	54
Dilutive warrants	3	—
Weighted average common shares used in diluted per share computation	32,716	33,863

The following instruments were excluded for purposes of calculating weighted average common share equivalents in the computation of diluted income from continuing operations per share as their effect would have been anti-dilutive:

	Three Months Ended
	June 30,
	2013	2012
	(In thousands)
Stock options	725	1,938
Restricted stock units	—	—
Warrants	—	15

3.Sale of Vehicle Sensors

On July 29, 2011, we completed the sale of substantially all of our assets used in connection with our Vehicle Sensors segment to Bendix Commercial Vehicle Systems LLC (“Bendix”), a member of Knorr-Bremse Group, pursuant to an Asset Purchase Agreement (the “Agreement”) signed on July 25, 2011 (the “Asset Sale”).

Under the terms of the Agreement, upon the closing of the Asset Sale, Bendix paid us $14 million in cash, subject to a $2 million holdback and adjustments based upon the working capital of the Vehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities of the Vehicle Sensors segment. In October 2012, we received approximately $1.7 million in connection with the resolution of the holdback provision. Furthermore, we are entitled to additional consideration in the form of the following performance and royalty-related earn-outs: Bendix is obligated to pay us an amount in cash equal to (i) 85% of revenue

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associated with royalties received under our license and distribution agreements with Audiovox Electronics Corporation and Valeo Schalter and Sensoren GmbH through December 31, 2017 and (ii) 30% of the amount, if any, by which the amount of revenue generated from the sale of our lane departure warning systems exceeds Bendix’s projection for such revenue for the two years following the closing, each subject to certain reductions and limitations set forth in the Agreement. Since July 2011, on a cumulative basis, we have earned approximately $1.0 million in connection with royalty-related earn-outs provisions for a total of $14.7 million in cash from the Asset Sale.

In accordance with applicable accounting guidance, we determined that the Vehicle Sensors segment, which constituted one of our operating segments, qualified as a discontinued operation. The applicable financial results of the Vehicle Sensors segment have been reported as a discontinued operation in the accompanying unaudited consolidated statements of operations for all periods presented. For the three months ended June 30, 2013 and 2012, we recorded a gain on sale of discontinued operation in the accompanying unaudited consolidated statements of operations of approximately $30,000 and $87,000, net of tax, respectively, related to the earn-out provisions of the Agreement.

4.Fair Value Measurements

We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities or prices quoted in inactive markets; and Level 3, defined as unobservable inputs that are significant to the fair value of the asset or liability, and for which little or no market data exists, therefore requiring management to utilize its own assumptions to provide its best estimate of what market participants would use in valuing the asset or liability.

The liability for the estimated fair value of the contingent consideration in connection with our acquisitions of Meridian Environmental Technology, Inc. (“MET”) and Berkeley Transportation Systems, Inc. (“BTS”) was determined using Level 3 inputs based on a probabilistic calculation whereby we assigned estimated probabilities to achieving the earn-out targets and then discounted the total contingent consideration to net present value. The following table reconciles this liability measured at fair value on a recurring basis for the three months ended June 30, 2013 (in thousands):

Balance at March 31, 2013	$	961
Change in fair value included in net income	7
Balance at June 30, 2013	$	968

The current portion of the liability at June 30, 2013 and March 31, 2013 was $0.7 million and is included within accrued liabilities in the accompanying unaudited consolidated balance sheets. The change in the estimated fair value of the liability for the three months ended June 30, 2013 and 2012 is included as part of operating expenses in the accompanying unaudited consolidated statements of operations.

Other than the above, we did not have any material financial assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as of June 30, 2013 or June 30, 2012.

Our non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value on a non-recurring basis, generally when there is a transaction involving those assets such as a purchase transaction, a business combination or an adjustment for impairment. No non-financial assets were measured at fair value during the three months ended June 30, 2013 and 2012.

5.Credit Facility

In October 2008, we entered into a $19.5 million credit facility with California Bank & Trust (“CB&T”). This credit facility provided for a two-year revolving line of credit with borrowings of up to $12.0 million and a $7.5 million 48-month term note. In September 2010, we entered into a modification agreement with CB&T to extend the expiration date of our revolving line of credit to October 1, 2012. We repaid in full all principal and interest payments under the term note in June 2012; the term note contained no early termination fees.

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In September 2012, we entered into a second modification agreement with CB&T to extend the expiration date of our revolving line of credit to October 1, 2014. Interest on borrowed amounts under the revolving line of credit is payable monthly at a rate equal to the current stated prime rate (3.25% at June 30, 2013) up to the current stated prime rate plus 0.25%, depending on aggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. We are obligated to pay an unused line fee of 0.25% per annum applied to the average unused portion of the revolving line of credit during the preceding month. The revolving line of credit does not contain early termination fees and is secured by substantially all of our assets.

As of June 30, 2013 and June 30, 2012, no amounts were outstanding under the revolving line of credit portion of the credit facility.  Availability under this line of credit may be reduced or otherwise limited as a result of our obligations to comply with certain financial covenants.

6.Income Taxes

The following table sets forth our provision for income taxes, along with the corresponding effective tax rates:

	Three Months Ended
	June 30,
	2013			2012
	(In thousands, except percentages)
Provision for income taxes	$	(232	)	$	(314	)
Effective tax rate	35.1		%	34.7		%

On an interim basis, we estimate what our anticipated annual effective tax rate will be, while also separately considering applicable discrete and other non-recurring items, and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we refine our estimates based on actual events and financial results during the year. This process can result in significant changes to our expected effective tax rate. When this occurs, we adjust our income tax provision during the quarter in which our estimates are refined so that the year-to-date provision reflects the expected annual effective tax rate. These changes, along with adjustments to our deferred taxes, among others, may create fluctuations in our overall effective tax rate from quarter to quarter. As of June 30, 2013 and March 31, 2013, we have recorded a valuation allowance against certain of our state net operating losses in the amount of $188,000.

7.Commitments and Contingencies

Litigation and Other Contingencies

As a provider of traffic engineering services, products and solutions, we are currently, and may in the future, from time to time, be involved in litigation relating to claims arising out of our operations in the normal course of business. While we cannot accurately predict the outcome of such litigation, we currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Related Party Transaction

We previously subleased office space to MAXxess Systems, Inc. (“MAXxess”), one of our former subsidiaries that we sold in September 2003. MAXxess is currently owned by an investor group that includes two of our directors, one of whom is the former Chief Executive Officer of MAXxess. The sublease terminated in September 2007, at which time MAXxess owed us an aggregate of $274,000 related to this sublease and certain ancillary corporate services that we provided to MAXxess. In August 2009, MAXxess executed a promissory note payable to Iteris in the original principal amount of $274,000. The promissory note bears interest at a rate of 6% per annum, compounded annually, with accrued interest to be paid annually on the first business day of each calendar year. Payments under the note may be made in bona fide services rendered by MAXxess to Iteris to the extent such services and amounts are pre-approved in writing by us. All amounts outstanding under the note will become due and payable on the earliest of (i) August 10, 2014, (ii) a change of control in MAXxess, or (iii) a financing by MAXxess resulting in gross proceeds of at least $10 million. As of June 30, 2013, approximately $259,000 of the original principal balance was outstanding and payable to Iteris.

On July 23, 2013, the promissory note was amended and restated. The amended and restated note bears interest at a rate of 6% per annum, compounded annually, with accrued interest to be paid quarterly on the first business day of each calendar quarter. Payments under the amended and restated note may only be paid in cash and all amounts outstanding will become due and payable on the earliest of (i) August 10, 2016, (ii) a change of control in MAXxess, or (iii) a financing by MAXxess resulting in gross proceeds of at least $10 million. We have previously fully reserved for amounts owed to us by MAXxess and all outstanding principal remains fully reserved.

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8.Employee Benefit Plans

We currently administer three separate stock incentive plans. Of these plans, we may only grant future awards from the 2007 Omnibus Incentive Plan (the “2007 Plan”). The 2007 Plan allows for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and other stock-based awards. At June 30, 2013, there were approximately 921,000 shares of common stock available for grant or issuance under the 2007 Plan.

Stock Options

A summary of activity with respect to our stock options for the three months ended June 30, 2013 is as follows:

	Number of Shares		Weighted- Average Exercise Price Per Share
	(In thousands)
Options outstanding at March 31, 2013	1,744		$	1.74
Granted	—		—
Exercised	(19	)	1.41
Forfeited	—		—
Expired	(31	)	2.28
Options outstanding at June 30, 2013	1,694		$	1.74

Restricted Stock Units

A summary of activity with respect to our RSUs, which entitle the holder to receive one share of our common stock for each RSU upon vesting, for the three months ended June 30, 2013 is as follows:

	Number of
	Shares
	(In thousands)
Restricted stock units ouststanding at March 31, 2013	210
Restricted stock units granted	—
Restricted stock units vested	—
Restricted stock units forfeited	—
Restricted stock units ouststanding at June 30, 2013	210

Stock-Based Compensation Expense

The following table presents stock-based compensation expense that is included in each functional line item on our unaudited consolidated statements of operations:

	Three Months Ended
	June 30,
	2013		2012
	(In thousands)
Cost of revenues	$	9	$	10
Selling, general and administrative expense	59		57
	$	68	$	67

At June 30, 2013, there was approximately $355,000 of unrecognized compensation expense related to unvested stock options and RSUs. This expense is currently expected to be recognized over a weighted average period of approximately 2.1 years. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock options, RSUs or other stock-based awards.

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9.Stock Repurchase Program

In August 2011, our Board of Directors approved a stock repurchase program pursuant to which we were authorized to acquire up to $3 million of our outstanding common stock from time to time through August 2012. On August 9, 2012, our Board of Directors approved a new stock repurchase program pursuant to which we may acquire up to $3 million of our outstanding common stock for an unspecified length of time. Under the new program, we may repurchase shares from time to time in open-market and privately negotiated transactions and block trades, and may also repurchase shares pursuant to a 10b5-1 trading plan during our closed trading windows. There is no guarantee as to the exact number of shares that will be repurchased. We may modify or terminate the repurchase program at any time without prior notice. For the three months ended June 30, 2013 and 2012, we repurchased approximately 175,000 and 308,000 shares of our common stock, respectively. As of June 30, 2013, $783,000 remains available for the repurchase of our common stock under our current program.

From inception of the program in August 2011 through June 30, 2013, we repurchased approximately 2,272,000 shares of our common stock for an aggregate of approximately $3.5 million at an average price per share of $1.54. All repurchased shares have been retired and resumed their status as authorized and unissued shares of our common stock as of June 30, 2013.

10.Business Segment Information

We operate in three reportable segments: Roadway Sensors, Transportation Systems and iPerform.

The Roadway Sensors segment includes, among other products, our Vantage, VersiCam, Pico, Vantage Vector, SmartCycle, SmartScan and Abacus vehicle detection systems for traffic intersection control, incident detection and certain highway traffic data collection applications.

The Transportation Systems segment includes transportation engineering and consulting services and the development of transportation management and traveler information systems for the ITS industry. During Fiscal 2012 and Fiscal 2013, this segment included the operations of MET, which specializes in 511 advanced traveler information systems and offers predictive weather and Maintenance Decision Support System (“MDSS”) management tools that allow users to create solutions to meet roadway maintenance decision needs. As of April 1, 2013, the predictive weather and MDSS services were reassigned to the iPerform segment to better align our predictive weather and traffic capabilities, resources and initiatives. Prior year segment information presented in the table below has been re-classified to reflect this change.

The iPerform segment includes our performance measurement and information management solutions, including all the operations of BTS, which specializes in transportation performance measurement, as well as the predictive weather and MDSS services reassigned from the Transportation Systems segment on April 1, 2013. During Fiscal 2012, we began the development of IterisPeMS.  IterisPeMS is a state-of-the-art, information management software suite that utilizes a wide range of data resources and analytical techniques to determine current and future traffic patterns, permitting the effective performance analysis and management of traffic infrastructure resources. This information can then be analyzed by traffic professionals to measure how a transportation network is performing and to identify potential areas of improvement. IterisPeMS is also capable of providing users with predictive traffic analytics and easy-to-use visualization and animation features based on historical traffic conditions.

The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies (Note 1). Certain corporate expenses, including interest and amortization of intangible assets, are not allocated to the segments. The reportable segments are each managed separately because they manufacture and distribute distinct products or provide services with different processes. All reported segment revenues are derived from external customers.

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The following table sets forth selected unaudited consolidated financial information for our reportable segments for the three months ended June 30, 2013 and 2012:

	Roadway Sensors		Transportation Systems		iPerform			Total
	(In thousands)
Three Months Ended June 30, 2013
Total revenues	$	7,529	$	8,258	$	1,243		$	17,030
Segment operating income (loss)	1,214		1,286		(246		)	2,254
Three Months Ended June 30, 2012
Total revenues	$	7,184	$	7,849	$	1,271		$	16,304
Segment operating income (loss)	1,392		856		(51		)	2,197

The following table reconciles total segment income to unaudited consolidated income from continuing operations before income taxes:

	Three Months Ended
	June 30,
	2013			2012
	(In thousands)
Segment operating income:
Total income from reportable segments	$	2,254		$	2,197
Unallocated amounts:
Corporate and other expenses	(1,417		)	(1,467		)
Amortization of intangible assets	(161		)	(161		)
Change in fair value of contingent consideration	(7		)	334
Other (expense) income, net	(3		)	5
Interest expense, net	(4		)	(5		)
Income from continuing operations before income taxes	$	662		$	903

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

This report, including the following discussion and analysis, contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on our current expectations, estimates and projections about our business and our industry, and reflect management’s beliefs and certain assumptions made by us based upon information available to us as of the date of this report. When used in this report and the information incorporated herein by reference, the words “expect(s),” “feel(s),” “believe(s),” “should,” “could,” “will,” “may,” “anticipate(s),” “estimate(s)” and similar expressions or variations of these words are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our anticipated growth, sales, revenue, expenses, profitability, capital needs, competition, the impact of any current or future litigation, the availability of governmental funding, the applications for and acceptance of our products and services, and the status of our facilities and product development. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause our actual results to differ materially from those projected. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof. We encourage you to carefully review and consider the various disclosures made by us which describe certain factors which could affect our business, including in “Risk Factors” set forth in Part II, Item 1A of this report, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

General. We are a leading provider of intelligent information solutions to the traffic management market. We are focused on the development and application of advanced technologies and software-based information systems that reduce traffic congestion, provide measurement, management and predictive traffic analytics and improve the safety of surface transportation systems infrastructure. We also believe our products, services and solutions, in conjunction with sound traffic management, minimize the environmental impact of traffic congestion. By combining our unique intellectual property, products, decades of experience in traffic management and information technologies, we offer a broad range of Intelligent Transportation Systems (“ITS”) solutions to customers throughout the U.S. and internationally.

Acquisitions. In January 2011, we acquired all of the capital stock of Meridian Environmental Technology, Inc. (“MET”) for an initial cash payment of approximately $1.6 million. MET specializes in 511 advanced traveler information systems and offers Maintenance Decision Support System (“MDSS”) management tools that allow users to create solutions to meet roadway maintenance decision needs. We also agreed to pay up to $1 million on each of the first two anniversaries of the closing of the acquisition upon the satisfaction of certain conditions, as well as up to an additional $2 million under a 24-month earn-out provision.

In January 2012, we made a cash payment of approximately $668,000 of the first deferred payment to the shareholders of MET and held back $250,000 in accordance with certain provisions of the purchase agreement. In June 2012, we determined the contingencies related to the release of the $250,000 holdback were not met. As a result, no portion of the $250,000 holdback was released and the entire amount was reversed into operating income during the second quarter of Fiscal 2013. Additionally, no amounts were earned by the MET shareholders related to the first and second year earn-out provisions, which ended on December 31, 2011 and 2012, respectively. The second deferred payment of $1 million was due in the fourth quarter of Fiscal 2013. As a result of certain holdback provisions and other deductions, we currently expect to pay approximately $409,000 to the MET shareholders in the second quarter of Fiscal 2014, which is recorded in our accrued liabilities in our unaudited consolidated balance sheet at June 30, 2013.

In November 2011, we acquired all of the outstanding capital stock of Berkeley Transportation Systems, Inc. (“BTS”), a privately-held company based in Berkeley, California which specializes in transportation performance measurement, for an initial cash payment of approximately $840,000. In the quarter ended December 31, 2012, the Company entered into an amendment to the BTS stock purchase agreement which modified certain earn-out provisions and, as a result, the Company paid $700,000 in cash to the BTS shareholders for achievement of those modified earn-out provisions in the fourth quarter of Fiscal 2013. The amendment did not have a material impact on previous estimated amounts accrued in connection with the earn-out provisions. This payment completed the Company’s obligation under the earn-out provisions of the agreement. Additionally, we are scheduled to pay to the BTS shareholders up to a total of approximately $585,000 by November 2014 pursuant to certain holdback and deferred payment provisions.

Sale of Vehicle Sensors. On July 29, 2011, we completed the sale of substantially all of our assets used in connection with our Vehicle Sensors segment to Bendix pursuant to an Asset Purchase Agreement signed on July 25, 2011 (the “Asset Sale”). Upon the closing, Bendix paid us $14 million in cash, subject to a $2 million holdback and adjustments based upon the working capital of the Vehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities of the Vehicle Sensors

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segment. In October 2012, we received approximately $1.7 million in connection with the resolution of the holdback provision. Furthermore, we are entitled to additional consideration in the form of certain performance and royalty-related earn-outs. As of June 30, 2013, we have received approximately $1.0 million in connection with royalty-related earn-outs provisions for a total of $14.7 million in cash from the Asset Sale. As a result of the Asset Sale, we no longer operate in the Vehicle Sensors segment, and we determined that the Vehicle Sensors segment, which previously constituted one of our operating segments, qualifies as a discontinued operation.

Business Segments. Subsequent to the Asset Sale and our acquisition of BTS, we now operate in three reportable segments: Roadway Sensors, Transportation Systems and iPerform.

Roadway Sensors

The Roadway Sensors segment includes, among other products, our Vantage, VersiCam, Pico, Vantage Vector, SmartCycle, SmartScan and Abacus vehicle detection systems for traffic intersection control, incident detection and certain highway traffic data collection applications.

Transportation Systems

The Transportation Systems segment includes transportation engineering and consulting services and the development of transportation management and traveler information systems for the ITS industry. During Fiscal 2012 and Fiscal 2013, this segment included the operations of MET, which specializes in 511 advanced traveler information systems and offers predictive weather and Maintenance Decision Support System (“MDSS”) management tools that allow users to create solutions to meet roadway maintenance decision needs. As of April 1, 2013, the predictive weather and MDSS services were reassigned to the iPerform segment to better align our predictive weather and traffic capabilities, resources and initiatives.

iPerform

The iPerform segment includes our performance measurement and information management solutions, including all the operations of BTS, which specializes in transportation performance measurement, as well as the predictive weather and MDSS services reassigned from the Transportation Systems segment on April 1, 2013. During Fiscal 2012, we began the development of IterisPeMS.  IterisPeMS is a state-of-the-art, information management software suite that utilizes a wide range of data resources and analytical techniques to determine current and future traffic patterns, permitting the effective performance analysis and management of traffic infrastructure resources. This information can then be analyzed by traffic professionals to measure how a transportation network is performing and to identify potential areas of improvement. IterisPeMS is also capable of providing users with predictive traffic analytics and easy-to-use visualization and animation features based on historical traffic conditions.

Business. Given the current ongoing uncertainties regarding global economic conditions, we continue to remain cautious about our overall business. We believe the overall ongoing unfavorable economic environment has negatively affected, and may continue to negatively affect, our financial results for the foreseeable future, and may impair our ability to accurately forecast our future financial performance and other business trends. In addition, since the end users of a majority of our products and services are governmental entities, we have been, and may continue to be, negatively affected by the budgetary issues and delays in purchasing decisions that many municipalities and other state and local agencies continue to face. Spending for new roadways, new systems to address traffic congestion and other transportation infrastructure improvements has been delayed or eliminated in some instances. However, we believe the need to rebuild and modernize aging transportation infrastructure will continue, and in addition to funds available through the federal highway bill, there exist various other funding mechanisms that support transportation infrastructure and related projects. These include bonds, dedicated sales and gas tax measures and other alternative funding sources.

Critical Accounting Policies and Estimates

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on our unaudited consolidated financial statements included herein, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates and assumptions, including, among others, those related to the collectability of accounts receivable, the valuation of inventories, the recoverability of long-lived assets and goodwill, the realizability of deferred tax assets, accounting for stock-based compensation, the valuation of equity instruments, the valuation of contingent acquisition consideration, warranty reserves and other contingencies. We base these estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and

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liabilities that are not readily apparent from other sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions are inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The accounting policies that affect our more significant judgments and estimates used in the preparation of our unaudited consolidated financial statements are those relating to revenue recognition, accounts receivable, inventory, intangible assets, goodwill, warranty, income taxes, and stock-based compensation. These policies are described in further detail in Note 1 of Notes to Unaudited Consolidated Financial Statements and in our Annual Report on Form 10-K for Fiscal 2013. There have been no significant changes in our critical accounting policies and estimates during the three months ended June 30, 2013 as compared to what was previously disclosed in our Annual Report on Form 10-K for Fiscal 2013.

Recent Accounting Pronouncements

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

Results of Operations

The following table sets forth statement of operations data as a percentage of total revenues for the periods indicated:

	Three Months Ended
	June 30,
	2013		2012
Total revenues	100.0	%	100.0	%
Cost of revenues	60.5		61.6
Gross profit	39.5	%	38.4	%
Operating expenses:
Selling, general and administrative	30.0		30.1
Research and development	4.6		3.9
Amortization of intangible assets	0.9		1.0
Change in fair value of contingent consideration	0.0		(2.0	)
Total operating expenses	35.6		32.9
Operating income	3.9		5.5
Non-operating income (expense):
Other income (expense), net	(0.0	)	0.0
Interest income (expense), net	(0.0	)	(0.0	)
Income from continuing operations before income taxes	3.9		5.5
Provision for income taxes	(1.4	)	(1.9	)
Income from continuing operations	2.5		3.6
Gain on sale of discontinued operation, net of tax	0.2		0.5
Net income	2.7	%	4.1	%

Analysis of Quarterly Results of Operations

Total Revenues. Total revenues are comprised of sales from our Roadway Sensors, Transportation Systems and iPerform segments.

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The following table presents our total revenues for the three months ended June 30, 2013 and 2012:

	Three Months Ended
	June 30,						%
	2013		2012		Increase		Change
	(In thousands, except percentages)
Total revenues	$	17,030	$	16,304	$	726	4.5	%

We have historically had a diverse customer base. For the three months ended June 30, 2013 and 2012, one individual customer represented approximately 11% and 18% of our total revenues, respectively, and no other individual customer represented greater than 10% of our total revenues.

Total revenues for the three months ended June 30, 2013 increased approximately 5% to $17.0 million, compared to $16.3 million in the corresponding period in the prior year, due primarily to increases of approximately 6% in Transportation Systems revenues and approximately 5% in Roadway Sensors revenues, which was partially offset by a decrease of approximately 2% in iPerform revenues.

Roadway Sensors revenues for the three months ended June 30, 2013 increased approximately $300,000 or 5% compared to the corresponding prior year period, primarily due to revenues generated by the distribution of certain third party traffic management products and higher unit sales of our manufactured products. Going forward, we plan to focus on our core domestic intersection market and refine and deliver products that address the needs of this market, namely our Vantage processor and camera systems and our Vantage Vector video/radar hybrid sensor, as well as our newly released SmartCycle and SmartScan products. Additionally, we expect to grow revenues generated through our distribution of third party products and we also plan to focus on international distribution channel expansion and expect to continue to refine products that address these markets, namely our Abacus and Pico products.

Transportation Systems revenues for the three months ended June 30, 2013 increased approximately $400,000 or 5% compared to the corresponding period in the prior year, primarily as a result of increased market demand and the fulfillment of backlog on certain projects. Going forward, we plan to continue to pursue larger contracts that may contain significant sub-consulting content, which will likely contribute to variability in the timing and amount of our Transportation Systems revenues from period to period. We also intend to continue to expand our foreign operations by pursuing additional international opportunities in the Middle East and other regions. Among other factors, we believe the ability of our Transportation Systems segment to grow and successfully win and service new contracts will be highly dependent upon our continued success in recruiting and retaining qualified personnel, as well as the continued availability of funding at the local, state and federal levels from the various agencies and departments of transportation.

iPerform revenues for the three months ended June 30, 2013 and June 30, 2012 remained relatively flat and were approximately $1.2 million and $1.3 million, respectively. Going forward, we plan to continue investing in this segment, particularly in research, development, sales and marketing of the IterisPeMS performance measurement solutions with a near-term focus on delivering IterisPeMS to public agencies.  We also plan for iPerform to pursue commercial opportunities in the media and automotive sectors, offering both data services and analytics.

Gross Profit.  The following table presents details of our gross profit for the three months ended June 30, 2013 and 2012:

	Three Months Ended
	June 30,								%
	2013			2012			Increase		Change
	(In thousands, except percentages)
Gross profit	$	6,726		$	6,264		$	462	7.4	%
Gross profit as a % of total revenues	39.5		%	38.4		%

Our gross profit as a percentage of total revenues increased for the three months ended June 30, 2013, as compared to the corresponding period in the prior year, primarily as a result of an approximate 1.8% increase in Transportation Systems profit margins primarily as a result of increased staff utilization which were off-set in part by a slight decline in iPeform margins.

Roadway Sensors gross margin can fluctuate in any specific quarter or year based on, among other factors, customer and product mix, competitive pricing requirements, product warranty costs and provisions for excess and obsolete inventories, as well as shifts of engineering resources from development activities to sustaining activities, which we record as cost of goods sold.

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We recognize a portion of our Transportation Systems revenues and related gross profit using percentage of completion contract accounting and the underlying mix of contract activity affects the related gross profit recognized in any given period. For the Transportation Systems segment, we expect to experience gross profit variability in future periods due to our contract mix and related sub-consulting content, as well as factors such as paid holidays and our ability to efficiently utilize our workforce, which could or may cause fluctuations in our margins from period to period.

Selling, General and Administrative Expense.  The following table presents selling, general and administrative expense for the three months ended June 30, 2013 and 2012:

	Three Months Ended				Three Months Ended
	June 30, 2013				June 30, 2012
			% of				% of				%
	Amount		Revenues		Amount		Revenues		Increase		Change
	(In thousands, except percentages)
Salary and personnel-related	$	3,253	19.1	%	$	3,251	19.9	%	$	2	0.1	%
Facilities, insurance and supplies	720		4.2		650		4.0		70		10.8
Travel and conferences	399		2.3		371		2.3		28		7.5
Professional and outside services	518		3.0		495		3.0		23		4.6
Other	215		1.3		134		0.8		81		60.4
Selling, general and administrative	$	5,105	30.0	%	$	4,901	30.1	%	$	204	4.2	%

The overall selling, general and administrative expenses for the three months ended June 30, 2013 increased approximately $200,000 compared to the corresponding period in the prior year, due to an increase in facility related costs, travel, supplies and other miscellaneous expenses as a result of an increase in our allowance for doubtful accounts.  Selling, general and administrative expenses as a percentage of revenues for the three months ended June 30, 2013 were flat compared to the corresponding prior year period.

Research and Development Expense.  The following table presents research and development expense for the three months ended June 30, 2013 and 2012:

	Three Months Ended				Three Months Ended
	June 30, 2013				June 30, 2012
			% of				% of		Increase			%
	Amount		Revenues		Amount		Revenues		(Decrease)			Change
	(In thousands, except percentages)
Salary and personnel-related	$	409	2.4	%	$	287	1.8	%	$	122		42.5	%
Facilities, development and supplies	292		1.7		299		1.8		(7		)	(2.3	)
Other	83		0.5		47		0.3		36			76.6
Research and development	$	784	4.6	%	$	633	3.9	%	$	151		23.9	%

Research and development expense for the three months ended June 30, 2013, increased approximately 24% compared to the corresponding period in the prior year, primarily due to certain expenditures related to software development in the iPeform segment.

The iPerform segment continued to develop an improved version of their flagship traffic analytics product iPeMS. This new offering will allow customers to seamlessly ingest traffic data from leading data providers, providing “plug-and-play” data ingestion capabilities and reduce the need for custom integration.

Going forward, iPerform expects to continue upgrading its performance management solution suite, which will require additional investments. Planned future releases include the integration of current and historic road-condition weather, arterial performance measurement capabilities and travel time fusion modules that allow for route travel times comprised of multiple data sources including 3rd party data and fixed-location sensors.

Fair Value of Contingent Acquisition Consideration.  During the three months ended June 30, 2013 and 2012, we recorded a net increase of approximately $7,000 and a net decrease of approximately $334,000, respectively, to operating expenses in the statement of operations for the change in estimated fair value of the contingent consideration related to our acquisitions of MET and BTS. The adjustment in the three months ended June 30, 2013 related to the amount of certain future deferred payments to BTS. The adjustment in the three months ended June 30, 2012 resulted primarily from revisions to our estimates regarding both the probability of achieving certain earn-out targets and the amounts of certain future deferred payments.

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Income Taxes.  The following tables present our provision for income taxes for the three months ended June 30, 2013 and 2012:

	Three Months Ended
	June 30,								%
	2013			2012			Decrease		Change
	(In thousands, except percentages)
Provision for income taxes	$	(232	)	$	(314	)	$	82	(26	)%
Effective tax rate	35.1		%	34.7		%

Our effective tax rates in the three months ended June 30, 2013 increased slightly over the corresponding prior year period primarily due to the impact of non-taxable changes in the estimated fair value of certain contingent consideration, the benefit of certain state tax credits recognized in the current period and a reduced level of certain non-deductible expenses.

On an interim basis, we estimate what our anticipated annual effective tax rate will be, while also separately considering applicable discrete and other non-recurring items, and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we refine our estimates based on actual events and financial results during the year. This process can result in significant changes to our expected effective tax rate. When this occurs, we adjust our income tax provision during the quarter in which our estimates are refined so that the year-to-date provision reflects the expected annual effective tax rate. These changes, along with adjustments to our deferred taxes, among others, may create fluctuations in our overall effective tax rate from quarter to quarter. As of June 30, 2013 and March 31, 2013, we have recorded a valuation allowance against certain of our state net operating losses in the amount of $188,000.

Liquidity and Capital Resources

Cash Flows

We have historically financed our operations with a combination of cash flows from operations, borrowings under credit facilities and the sale of equity securities. We currently rely on cash flows from operations and the availability of borrowings on a line of credit facility to fund our operations, which we believe to be sufficient to fund our operations for at least the next twelve months. However, we may need or choose to raise additional capital to fund potential future acquisitions and our future growth. We may raise such funds by selling equity or debt securities to the public or to selected investors, or by borrowing money from financial institutions. If we raise additional funds by issuing equity or convertible debt securities, our existing stockholders may experience significant dilution and any equity securities that may be issued may have rights senior to our existing stockholders.

At June 30, 2013, we had $29.9 million in working capital, which included $19.1 million in cash and cash equivalents and reflected no borrowings on our $12.0 million line of credit. This compares to working capital of $29.4 million at March 31, 2013, which included $19.1 million in cash and cash equivalents and reflected no borrowings on our line of credit.  Included in cash and cash equivalents of $19.1 million, at June 30, 2013 and March 31, 2013, is approximately $500,000 of cash designated as collateral on performance bonds, as required under certain of our Transportation Systems contracts in the Middle East. Refer to Note 1 of Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this report for a discussion of cash and cash equivalents.

The following table summarizes our cash flows for the three months ended June 30, 2013 and 2012:

	Three Months Ended
	June 30,
	2013			2012
	(In thousands)
Net cash provided by (used in):
Operating activities	$	479		$	963
Investing activities	(249		)	(167		)
Financing activities	(275		)	(951		)

Operating Activities.  Cash provided by our operations for the three months ended June 30, 2013 was primarily the result of our net income of approximately $460,000 and approximately $673,000 in non-cash items for depreciation, amortization, stock-based compensation expense and adjustments to deferred tax assets. This was offset by approximately $631,000 used in working capital and approximately $30,000 of gain on the sale of discontinued operation.

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Cash provided by our operations for the three months ended June 30, 2012 was primarily the result of our net income of approximately $676,000, along with approximately $810,000 in non-cash items for depreciation, amortization, stock-based compensation expense and adjustments to deferred tax assets. This was partially offset by approximately $334,000 in non-cash income due to the change in fair value of contingent consideration related to the MET and BTS acquisitions and approximately $102,000 used in working capital and approximately $87,000 of gain on the sale of discontinued operation.

Investing Activities.  Cash used in our investing activities during the three months ended June 30, 2013 consisted of approximately $145,000 for purchases of property and equipment and approximately $104,000 used for the development of software.

Cash used in our investing activities during the three months ended June 30, 2012 consisted of approximately $113,000 for purchases of property and equipment and approximately $54,000 used for the development of software.

Financing Activities.  Net cash used in financing activities during the three months ended June 30, 2013 was primarily the result of approximately $302,000 in cash used to repurchase shares of our common stock.  This was partially offset by our receipt of proceeds of $27,000 from stock option exercises in the current three month period.

Net cash used in financing activities during the three months ended June 30, 2012 was primarily the result of (i) $634,000 in payments on our long-term debt and (ii) $442,000 in cash used to repurchase shares of our common stock.  This was partially offset by proceeds of $125,000 from stock options exercises.

Borrowings

In October 2008, we entered into a $19.5 million credit facility with California Bank & Trust (“CB&T”). This credit facility provided for a two-year revolving line of credit with borrowings of up to $12.0 million and a $7.5 million 48-month term note. In September 2010, we entered into a modification agreement with CB&T to extend the expiration date of our revolving line of credit to October 1, 2012. We repaid in full all principal and interest payments under the term note in June 2012; the term note contained no early termination fees.

In September 2012, we entered into a second modification agreement with CB&T to extend the expiration date of our revolving line of credit to October 1, 2014. Interest on borrowed amounts under the revolving line of credit are payable monthly at a rate equal to the current stated prime rate (3.25% at June 30, 2013) up to the current stated prime rate plus 0.25%, depending on aggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. We are obligated to pay an unused line fee of 0.25% per annum applied to the average unused portion of the revolving line of credit during the preceding month. The revolving line of credit does not contain early termination fees and is secured by substantially all of our assets.

As of June 30, 2013 and March 31, 2013, no amounts were outstanding under the revolving line of credit portion of the credit facility.  Availability under this line of credit may be reduced or otherwise limited as a result of our obligations to comply with certain financial covenants.

In connection with our credit facility and loan agreement with CB&T, we are also required to comply with certain quarterly financial covenants. These include achieving ratios for working capital and debt service, as well as maintaining a level of profitability, all of which are further defined in the agreement. While we believe we are currently in compliance with all such financial covenants, we cannot assure you that we will not violate one or more covenants in the future. If we were to be in violation of covenants under this agreement, our lender could choose to accelerate payment on all outstanding loan balances and pursue its security interest in our assets. In this event, we cannot assure you that we would be able to quickly obtain equivalent or suitable replacement financing on acceptable terms, on a timely basis, or at all. If we were not able to secure alternative sources of financing, such acceleration could have a material adverse impact on our business and financial condition.

Off Balance Sheet Arrangements

Other than our operating leases, we do not believe we have any other material off balance sheet arrangements at June 30, 2013.

Seasonality

We have historically experienced seasonality, particularly with respect to our Roadway Sensors net sales in our third and fourth fiscal quarters due to a reduction in intersection construction and repairs during the winter months due to inclement weather conditions. With the addition of MET in January 2011, we have also experienced seasonality related to certain MDSS services in our first and second fiscal quarters mainly because these services are generally not required during spring and summer when weather conditions are comparatively milder.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to interest rate risk is limited to our line of credit, which bears interest equal to the prevailing prime rate plus 0% to 1.0%. We do not believe that a 10% increase in the interest rate on our line of credit would have a material impact on our financial position, operating results or cash flows.

ITEM 4.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our management necessarily applied its judgment in evaluating the cost-benefit relationship of such controls and procedures.

Changes in Internal Controls

During the fiscal quarter covered by this report, there have been no significant changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Inherent Limitations on Internal Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of management override or improper acts, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to management override, error or improper acts may occur and not be detected. Any resulting misstatement or loss may have an adverse and material effect on our business, financial condition and results of operations.

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PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

The information set forth under the heading “Litigation and Other Contingencies” in Note 7 of Notes to Unaudited Consolidated Financial Statements, included in Part I, Item 1 of this report, is incorporated herein by reference. For additional discussion of risks associated with legal proceedings, see “Risk Factors” below.

ITEM 1A.  RISK FACTORS

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

The economic slowdown has reduced and delayed government funding for transportation infrastructure projects and initiatives, decreased availability of financial capital for our customers and adversely impacted real estate development, all of which have adversely impacted our revenues. Decreased consumer spending, the failure of certain financial institutions and businesses, concerns about the availability and cost of credit, and reduced corporate profits and capital spending have resulted in a downturn in worldwide economic conditions, as well as budgetary shortfalls at all levels of government. These unfavorable economic conditions are having, and are expected to continue to have, a negative impact on customer orders and government funding of infrastructure projects incorporating our products and services. Such factors have resulted and may continue to result in delays, cancellations and rescheduling of backlog and customer orders. In addition, the decline in the U.S. real estate market, particularly in new home and commercial construction, has adversely impacted new road construction and has had and may continue to have adverse effects on revenues. Any of the foregoing economic conditions may adversely affect our revenues in future periods and make it extremely difficult for our customers, our suppliers and us to accurately forecast and plan future business activities. Additionally, there was uncertainty in the past few years regarding allotment of government funds due to delays in the passage of a federal highway bill, which adversely impacted our revenues and overall financial performance. Despite the recently enacted federal highway bill, delays in the allocation of funds, the priority of infrastructure projects and the availability of funds for ITS related projects could continue to adversely impact our revenues and overall financial performance.

Because we depend on government contracts and subcontracts, we face additional risks related to contracting with federal, state and local governments, including budgetary issues and fixed price contracts. A significant portion of our revenues are derived from contracts with governmental agencies, either as a general contractor, subcontractor or supplier. We anticipate that revenue from government contracts will continue to remain a significant portion of our revenues. Government business is, in general, subject to special risks and challenges, including:

·delays in funding and uncertainty regarding the allocation of funds to state and local agencies from the U.S. federal government as a result of delays in the expenditures from the federal highway bill, as well as delays or reductions in other state and local funding dedicated for transportation and ITS projects;

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

·performance bond requirements;

·long purchase cycles or approval processes;

·competitive bidding and qualification requirements;

·changes in government policies and political agendas;

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

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

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Governmental budgets and plans are subject to change without warning. Certain risks of selling to governmental entities include dependence on appropriations and administrative allocation of funds, changes in governmental procurement legislation and regulations and other policies that may reflect political developments or agendas, significant changes in contract scheduling, intense competition for government business and termination of purchase decisions for the convenience of the governmental entity. Substantial delays in purchase decisions by governmental entities, and the current constraints on government budgets at the federal, state and local level, could cause our revenues and income to drop substantially or to fluctuate significantly between fiscal periods.

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

California state budgetary constraints may have a material adverse impact on us. The state of California has experienced, and is continuing to experience, a significant budget shortfall and other related budgetary issues and constraints. The state of California has historically been and is considered to be a key geographic region for our Roadway Sensors and Transportation Systems segments. Ongoing uncertainty as to the timing and accessibility of budgetary funding, changes in state funding allocations to local agencies and municipalities, or other delays in purchasing for, or commencement of, transportation projects have had and may continue to have a negative impact on our revenues and our income.

If we do not keep pace with rapid technological changes and evolving industry standards, we will not be able to remain competitive and there will be no demand for our products. Our markets are in general characterized by the following factors:

·rapid technological advances;

·downward price pressures in the marketplace as technologies mature;

·changes in customer requirements;

·additional qualification requirements related to new products or components;

·frequent new product introductions and enhancements;

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

·evolving industry standards and changes in the regulatory environment.

Our future success will depend upon our ability to anticipate and adapt to changes in technology and industry standards, and to effectively develop, introduce, market and gain broad acceptance of new products and product enhancements incorporating the latest technological advancements.

If we are unable to develop and introduce new products and product enhancements successfully and in a cost-effective and timely manner, or are unable to achieve market acceptance of our new products, our operating results would be adversely affected. We believe our revenue growth and future operating results will depend on our ability to complete development of new products and enhancements, introduce these products in a timely, cost-effective manner, achieve broad market acceptance of these products and enhancements, and reduce our production costs. We cannot guarantee the success of these products, and we may not be able to introduce any new products, including the IterisPeMS software or any enhancements to our existing products on a timely basis, or at all. In addition, the introduction of any new products could adversely affect the sales of certain of our existing products.

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We believe that we must continue to make substantial investments to support ongoing research and development in order to remain competitive. We need to continue to develop and introduce new products that incorporate the latest technological advancements in outdoor image processing hardware, software and camera technologies in response to evolving customer requirements. We cannot assure you that we will be able to adequately manage product transition issues. Our business and results of operations could be adversely affected if we do not anticipate or respond adequately to technological developments or changing customer requirements or if we cannot adequately manage inventory issues typically related to new product transitions and introductions. We cannot assure you that any such investments in research and development will lead to any corresponding increase in revenue.

We recently entered into the software development market and may be subject to additional challenges and additional costs and delays. We have only been in the business of software development for a few years and may experience development and technical challenges. Our business and results of operations could also be seriously harmed by any significant delays in our software development and updates. Certain of our new products could contain undetected design faults and software errors or “bugs” when first released by us, despite our testing. We may not discover these faults or errors until after a product has been installed and used by our customers. Any faults or errors in our existing products or in any new products may cause delays in product introduction and shipments, require design modifications or harm customer relationships, any of which could adversely affect our business and competitive position. We cannot assure you that our customer base will broadly accept any of our new products, product enhancements or software related offerings such as IterisPeMS. In addition, the software development industry can frequently experience litigation concerning intellectual property disputes, which could be costly and distract our management.

The markets in which we operate are highly competitive and have many more established competitors, which could adversely affect our revenues or the market acceptance of our products. We compete with numerous other companies in our target markets including, but not limited to, large, multinational corporations and many smaller regional engineering firms.

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

The Transportation Systems market is highly fragmented and is subject to evolving national and regional quality and safety standards. Our competitors vary in size, number, scope and breadth of the products and services they offer, and include large multi-national engineering firms and smaller local regional firms.

The market for iPeform is nascent; however, we expect to compete with existing companies that are already providing consulting and traffic analytics services to public agencies, as well as certain companies performing real-time traffic collection data activities that we believe are attempting to provide related traffic analytics to public agencies.  We cannot assure you that our iPeform solutions, including IterisPeMS, will be broadly accepted by the market and that competitors’ software and analytics solutions will not take and/or gain market share. As such, increased competition in this area could result in loss of market share, price reductions and reduced gross margins, any of which could seriously harm this segment and our overall business.

In all of our segments, many of our competitors have far greater name recognition and greater financial, technological, marketing, and customer service resources than we do. This may allow them to respond more quickly to new or emerging technologies and changes in customer requirements. It may also allow them to devote greater resources to the development, promotion, sale and support of their products than we can. Consolidations of end users, distributors and manufacturers in our target markets exacerbate this problem. As a result of the foregoing factors, we may not be able to compete effectively in our target markets and competitive pressures could adversely affect our business, financial condition and results of operations.

We may be unable to attract and retain key personnel, which could seriously harm our business. Due to the specialized nature of our business, we are highly dependent on the continued service of our executive officers and other key management, engineering and technical personnel. The loss of any of our officers, or any of our other executives or key members of management could adversely affect our business, financial condition, or results of operations. Our success will also depend in large part upon our ability to continue to attract, retain and motivate qualified engineering and other highly skilled technical personnel. The future success of our Transportation Systems segment will depend on our ability to hire additional qualified engineers, planners and technical personnel. The future success of our iPerform segment will depend on our ability to hire additional software developers, qualified engineers and technical personnel. Competition for qualified employees, particularly development engineers and software developers, is intense. We may not be able to continue to attract and retain sufficient numbers of such highly skilled employees. Our inability to attract and retain additional key employees or the loss of one or more of our current key employees could adversely affect our business, financial condition and results of operations.

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

·our ability to transition employees from completed projects to new assignments and to hire and assimilate new employees;

·our ability to forecast demand for our services and thereby maintain an appropriate headcount in our various regions;

·our need to devote time and resources to training, business development, professional development and other non-chargeable activities; and

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

Our failure to successfully bid on new contracts and renew existing contracts could reduce our revenues and profits. Our business depends on our ability to successfully bid on new contracts and renew existing contracts with private and public sector customers. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which are affected by a number of factors, such as market conditions, financing arrangements and required governmental approvals. For example, a customer may require us to provide a surety bond or letter of credit to protect the client should we fail to perform under the terms of the contract. If negative market conditions continue, or if we fail to secure adequate financing arrangements or the required governmental approval or fail to meet other required conditions, we may not be able to pursue particular projects, which could reduce or eliminate our profitability.

If we experience declining or flat revenues and we fail to manage such declines effectively, we may be unable to execute our business plan and may experience future weaknesses in our operating results. Based on our business objectives, and in order to achieve future growth, we will need to continue to add additional qualified personnel, and invest in additional research and development and sales and marketing activities, which could lead to increases in our expenses and future declines in our operating results. In addition, our past expansion has placed, and future expansion is expected to place, a significant strain on our managerial, administrative, operational, financial and other resources. If we are unable to manage these activities or any revenue declines successfully, our growth, our business, our financial condition and our results of operations could continue to be adversely affected.

We may be unable to maintain profitability on a quarterly or annual basis. We cannot assure you that we will be able to sustain or improve our financial performance, or that we will be able to continue to achieve profitability on a quarterly or annual basis in the future. Our ability to maintain profitability in future periods could be impacted by budgetary constraints, government and political agendas, economic instability and other items that are not in our control. Furthermore, we rely on operating profits from the Company’s segments to fund investments in sales and marketing and research and development initiatives.  We cannot assure you that at any given time these profits will sustain a sufficient level to completely support those investments. Most of our expenses are fixed in advance. As such, we generally are unable to reduce our expenses significantly in the short-term to compensate for any unexpected delay or decrease in anticipated revenues or increases in planned investments. As a result, we may experience operating losses and net losses in the future, which would make it difficult to fund our operations and achieve our business plan, and could cause the market price of our common stock to decline.

Our quarterly operating results fluctuate as a result of many factors. Therefore, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline. Our quarterly revenues and operating results have fluctuated and are likely to continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. Factors that could affect our revenues include, among others, the following:

·delays in government contracts and funding from time to time and budgetary constraints at the federal, state and local levels;

·our ability to access stimulus funding, funding from the federal highway bill or other funding;

·declines in new home and commercial real estate construction and related road and other infrastructure construction;

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

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·the long lead times associated with government contracts;

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

·our ability to control costs;

·our ability to raise additional capital;

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

·seasonality due to winter weather conditions;

·seasonality with respect to revenues from our MDSS and related weather forecasting services due to the decrease in revenues generated for such services during the spring and summer time periods;

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

·market acceptance of the products incorporating our technologies and products;

·the introduction of new products by competitors;

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

·our success in expanding and implementing our sales and marketing programs;

·the effects of technological changes in our target markets;

·the amount of our backlog at any given time;

·the nature of our government contracts;

·decrease in revenues derived from key or significant customers;

·deferrals of customer orders in anticipation of new products, applications or product enhancements;

·risks and uncertainties associated with our international business;

·general economic and political conditions;

·international conflicts and acts of terrorism; and

·other factors beyond our control, including but not limited to, natural disasters.

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

We may be subject to traffic related litigation. The traffic industry in general is subject to litigation claims due to the nature of personal injuries that result from traffic accidents.  As a provider of traffic engineering services, products and solutions, we are, and could in the future continue to be, from time to time, subject to litigation for traffic related accidents, even if our products or services did not cause the particular accident.  While we generally carry insurance against these types of claims, some claims may not be covered by insurance or the damages resulting from such litigation could exceed our insurance coverage limits.  In the event that we are required to pay significant damages as a result of one or more lawsuits that are not covered by insurance or exceed our coverage limits, it could materially harm our business, financial condition or cash flows.  Even defending against unsuccessful claims could cause us to incur significant expenses and result in a diversion of management’s attention.

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We may experience production gaps that could materially and adversely impact our sales and financial results and the ultimate acceptance of our products. It is possible that we could experience unforeseen quality control issues or part shortages as we adjust production to meet current demand for our products. We have historically used single suppliers for certain significant components in our products. Should any such delay or disruption occur, or should a key supplier discontinue operations because of the current economic climate, our future sales will likely be materially and adversely affected. Additionally, we rely heavily on select contract manufacturers to produce many of our products and do not have any long-term contracts to guarantee supply of such products. Although we believe our contract manufacturers have sufficient capacity to meet our production schedules for the foreseeable future and we believe we could find alternative contract manufacturing sources for many of our products, if necessary, we could experience a production gap if for any reason our contract manufacturers were unable to meet our production requirements and our cost of goods sold could increase, adversely affecting our margins.

Our use of the percentage of completion method of accounting for our Transportation Systems revenues could result in a reduction or reversal of previously recorded revenues and profits. A significant portion of Transportation Systems revenues are measured and recognized using the percentage of completion method of accounting. Our use of this accounting method results in recognition of revenues and profits ratably over the life of a contract, based generally on the proportion of costs incurred to date to total costs expected to be incurred for the entire project. The effects of revisions to revenues and estimated costs are recorded when the amounts are known or can be reasonably estimated. Such revisions could occur in any period and their effects could be material. Although we have historically made reasonably reliable estimates of the progress towards completion of long-term engineering, program management, construction management or construction contracts, the uncertainties inherent in the estimating process make it possible for actual costs to vary materially from estimates, including reductions or reversals of previously recorded revenues and profits.

We may engage in acquisitions of companies or technologies that may require us to undertake significant capital infusions and could result in disruptions of our business and diversion of resources and management attention. We have completed three acquisitions since April 2009 and, in the future, we may acquire additional complementary businesses, products, and technologies. Acquisitions may require significant capital infusions and, in general, acquisitions also involve a number of special risks, including:

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

·the failure to retain or integrate key acquired personnel;

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

·increased costs to improve managerial, operational, financial and administrative systems and to eliminate duplicative services;

·the incurrence of unforeseen obligations or liabilities;

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

·increased interest expense and amortization of acquired intangible assets, as well as unanticipated accounting charges.

Our competitors are also soliciting potential acquisition candidates, which could both increase the price of any acquisition targets and decrease the number of attractive companies available for acquisition. Acquisitions may also materially and adversely affect our operating results due to large write-offs, contingent liabilities, substantial depreciation, deferred compensation charges or intangible asset amortization, or other adverse tax or accounting consequences. We cannot assure you that we will be able to identify or consummate any additional acquisitions, successfully integrate any acquisitions or realize the benefits anticipated from any acquisition.

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Our international business operations may be threatened by many factors that are outside of our control. While we historically have had limited international sales, revenues and operations experience, we began work on our first overseas contracts in the United Arab Emirates in the fiscal year ended March 31, 2010. We plan to expand our international efforts in the future with respect to all of our segments, and in particular, plan to expand or distribution channels in Latin American and the Middle East in general. We cannot assure you that we will be successful in our expansion efforts. International operations subject us to various inherent risks including, among others:

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

·inability to satisfy bonding requirements for certain international projects;

·longer accounts receivable payment cycles;

·import and export license requirements and restrictions of the U.S. and each other country in which we operate;

·currency fluctuations and restrictions, and our ability to repatriate currency from certain foreign regions;

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

·required compliance with existing and new foreign regulatory requirements and laws, more restrictive labor laws and obligations, including but not limited to the U.S. Foreign Corrupt Practices Act;

·difficulties in managing and staffing international operations;

·potentially adverse tax consequences; and

·reduced protection for intellectual property rights in some countries.

Substantially all of our international sales are denominated in U.S. dollars. As a result, an increase in the relative value of the dollar could make our products more expensive and potentially less price competitive in international markets. We do not currently engage in any transactions as a hedge against risks of loss due to foreign currency fluctuations.

Any of the factors mentioned above may adversely affect our future international revenues and, consequently, affect our business, financial condition and operating results. Additionally, as we pursue the expansion of our international business, certain fixed and other overhead costs could outpace our revenues, thus adversely affecting our results of operations. We may likewise face local competitors in certain international markets who are more established, have greater economies of scale and stronger customer relationships. Furthermore, as we increase our international sales, our total revenues may also be affected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of the world.

If our internal controls over financial reporting do not comply with the requirements of the Sarbanes-Oxley Act, our business and stock price could be adversely affected. Section 404 of the Sarbanes-Oxley Act of 2002 currently requires us to evaluate the effectiveness of our internal controls over financial reporting at the end of each fiscal year and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports. As a smaller reporting company, for Fiscal 2013, we were exempt from the auditor attestation requirement over our internal control over financial reporting; however, to the extent we do not qualify as a non-accelerated filer or smaller reporting company in subsequent fiscal years, we will be subject to the auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act. In such an event, we may not be able to complete the work required for such attestation on a timely basis and, even if we timely complete such requirements, our independent registered public accounting firm may still conclude that our internal controls over financial reporting are not effective.

Our management, including our CEO and CFO, does not expect that our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Iteris have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position. If we are not able to adequately protect or enforce the proprietary aspects of our technology, competitors could be able to access our proprietary technology and our business, financial condition and results of operations will likely be seriously harmed. We currently attempt to protect our technology through a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements and similar means. Despite our efforts, other parties may attempt to disclose, obtain or use our technologies or systems. Our competitors may also be able to independently develop products that are substantially equivalent or superior to our products or design around our patents. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the U.S. As a result, we may not be able to protect our proprietary rights adequately in the U.S. or abroad.

Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of infringement or invalidity by others. An adverse outcome in litigation or any similar proceedings could subject us to significant liabilities to third parties, require us to license disputed rights from others or require us to cease marketing or using certain products or technologies. We may not be able to obtain any licenses on terms acceptable to us, or at all. We also may have to indemnify certain customers or strategic partners if it is determined that we have infringed upon or misappropriated another party’s intellectual property. Our recent expansion into software development activities may subject us to increased possibility of litigation. Any of the foregoing could adversely affect our business, financial condition and results of operations. In addition, the cost of addressing any intellectual property litigation claim, including legal fees and expenses, and the diversion of management’s attention and resources, regardless of whether the claim is valid, could be significant and could seriously harm our business, financial condition and results of operations.

We may need to raise additional capital in the future, which may not be available on terms acceptable to us, or at all. We have historically experienced volatility in our earnings and cash flows from operations from year to year. Although we have a $12.0 million revolving line of credit, should we have an event of default, which includes, among other things, a failure to meet certain financial covenants and a material adverse change in the business, the bank could choose to limit or take away our ability to borrow these or any funds. Should this occur, or if the credit markets further tighten or our business declines, we may need or choose to raise additional capital to repay indebtedness, pursue acquisitions or expand our operations. Such additional capital may be raised through bank borrowings, or other debt or equity financings. We cannot assure you that any additional capital will be available on a timely basis, on acceptable terms, or at all, and such additional financing may result in further dilution to our stockholders.

Our capital requirements will depend on many factors, including, but not limited to:

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

·our ability to control costs;

·the supply of key components for our products;

·our ability to increase revenue and net income;

·increased research and development expenses and sales and marketing expenses;

·our need to respond to technological advancements and our competitors’ introductions of new products or technologies;

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

·potential acquisitions of businesses and product lines;

·our relationships with customers and suppliers;

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

·our ability to successfully negotiate credit arrangements with our bank and the state of the financial markets, in general; and

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

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

The trading price of our common stock is highly volatile. The trading price of our common stock has been subject to wide fluctuations in the past. Since April 2010, our common stock has traded at prices as low as $0.90 per share and as high as $2.25 per share. The market price of our common stock could continue to fluctuate in the future in response to various factors, including, but not limited to:

·quarterly variations in operating results;

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

·our ability to raise additional capital;

·shortages announced by suppliers;

·announcements of technological innovations or new products or applications by our competitors, customers or us;

·transitions to new products or product enhancements;

·acquisitions of businesses, products or technologies;

·the impact of any litigation;

·changes in investor perceptions;

·government funding, political agendas and other budgetary constraints;

·changes in earnings estimates or investment recommendations by securities analysts; and

·international conflicts, political unrest and acts of terrorism.

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

Certain provisions of our charter documents may discourage a third party from acquiring us and may adversely affect the price of our common stock. Certain provisions of our certificate of incorporation could make it difficult for a third party to acquire us, even though an acquisition might be beneficial to our stockholders. Such provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. Under the terms of our certificate of incorporation, our Board of Directors is authorized to issue, without stockholder approval, up to 2,000,000 shares of preferred stock with voting, conversion and other rights and preferences superior to those of our common stock. In August 2009, we adopted a new stockholder rights plan and declared a dividend of preferred stock purchase rights to our stockholders. Generally, the stockholder rights plan provides that if a person or group acquires 15% or more of our common stock, subject to certain exceptions and under certain circumstances, the rights may be exchanged by us for common stock or the holders of the rights, other than the acquiring person or group, could acquire additional shares of our capital stock at a discount off of the then current market price. Such exchanges or exercise of rights could cause substantial dilution to a particular acquirer and discourage the acquirer from pursuing our company. The mere existence of a stockholder rights plan often delays or makes a merger, tender offer or other acquisition more difficult.

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In August 2011, our Board of Directors approved a stock repurchase program pursuant to which we were authorized to acquire up to $3 million of our outstanding common stock from time to time through August 2012. On August 9, 2012, our Board of Directors approved a new stock repurchase program pursuant to which we may acquire up to $3 million of our outstanding common stock for an unspecified length of time. Under the new program, we may repurchase shares from time to time in open-market and privately negotiated transactions and block trades, and may also repurchase shares pursuant to an existing or future 10b5-1 trading plan to facilitate repurchases during our closed trading windows. There is no guarantee as to the exact number of shares that will be repurchased. We may modify or terminate the repurchase program at any time without prior notice. From inception of the program in August 2011 through June 30, 2013, we repurchased approximately 2,272,000 shares of our common stock for approximately $3.5 million at an average price per share of $1.54. The table below details our common stock repurchases during the three months ended June 30, 2013.  All repurchased shares have been retired and resumed their status as authorized and unissued shares of our common stock.

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
April 1-30, 2013	103,808	$	1.72	103,808
May 1-31, 2013	48,151	1.68		48,151
June 1-30, 2013	22,951	1.72		22,951
Total	174,910	$	1.71	174,910	$	783,000

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  OTHER INFORMATION

Amended and Restated Promissory Note

On July 23, 2013, the Company amended and restated its promissory note due from MAXxess. The amended and restated note bears interest at a rate of 6% per annum, compounded annually, with accrued interest to be paid quarterly on the first business day of each calendar quarter. Payments under the amended and restated note may only be paid in cash and all amounts outstanding will become due and payable on the earliest of (i) August 10, 2016, (ii) a change of control in MAXxess, or (iii) a financing by MAXxess resulting in gross proceeds of at least $10 million.

Agreement with Abbas Mohaddes

On July 29, 2013, we entered into an Employment Agreement (the “Employment Agreement”) with Abbas Mohaddes, our Chief Executive Officer, which combines and supersedes, to the extent such agreements were not previously terminated, his letter agreement with the Company dated July 27, 2010 and his Change in Control Agreement with the Company dated July 27, 2010 (collectively, the “Prior Agreements”).  The principal terms of the Employment Agreement are substantially similar to the Prior Agreements.  The Employment Agreement has an initial term of three years and thereafter renews automatically for successive one year periods until ten years after the effective date (such initial term together with any renewal periods, the “Employment Period”), unless either party provides written notice of nonrenewal at least 30 days prior to the end of the initial term or any renewal period.  Under the terms of the Employment Agreement, Mr. Mohaddes is entitled to an initial base salary of $380,000 per year, which may be increased from time to time at the sole discretion of the Compensation Committee of our Board of Directors.  In the event that he is terminated without cause (as defined in the Employment Agreement) during the Employment Period, Mr. Mohaddes is entitled to (i) salary continuation for 12 months following termination (or a lump sum payment equal to his base salary in the event the termination

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without cause occurs within 12 months after a Change in Control (as defined in the Employment Agreement)), (ii) a lump sum payment equal to 50% of his average annual target bonus for the two years immediately preceding the year of termination, payable no later than 30 days following termination, and (iii) reimbursement for the cost to continue health benefit coverage under COBRA for a period of up to one year following termination.  If his employment is terminated as a result of death or disability, then Mr. Mohaddes (or his estate) will be entitled to, in the case of death, a lump sum payment equal to 50% of his then effective base salary and, in the case of disability, salary continuation of up to 90 days until he is eligible for short-term disability payments.  In the event that he resigns for Good Reason (as defined in the Employment Agreement) after a Change in Control, in lieu of any other benefits under the Employment Agreement, Mr. Mohaddes will be entitled to (I) a lump sum payment equal to one year’s base salary plus an amount equal to 50% of his average annual target bonus for the two years immediately preceding the year of termination, payable no later than 30 days following termination, and (II) reimbursement for the cost to continue health benefit coverage under COBRA for a period of up to one year following termination.

ITEM 6.  EXHIBITS

The following exhibits are filed herewith or are incorporated by reference to the location indicated.

Exhibit  Number	Description	Where Located
10.1	Amended and Restated Promissory Note, effective July 23, 2013, by and between MAXxess Systems, Inc. in favor of Iteris, Inc.	Filed herewith
10.2	Employment Agreement, dated July 29, 2013, by and between Iteris, Inc. and Abbas Mohaddes	Filed herewith
31.1	Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of the Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.2	Certification of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
101.INS#	XBRL Instance Document	Filed herewith
101.SCH#	XBRL Taxonomy Extension Schema Document	Filed herewith
101.CAL#	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith
101.LAB#	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith
101.PRE#	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith
101.DEF#	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

#Pursuant to Rule 406T of Regulation S-T, these interactive data files (i) are not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, irrespective of any general incorporation language included in any such filings, and otherwise are not subject to liability under these sections; and (ii) are deemed to have complied with Rule 405 of Regulation S-T (“Rule 405”) and are not subject to liability under the anti-fraud provisions of the Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 or under any other liability provision if we have made a good faith attempt to comply with Rule 405 and, after we become aware that the interactive data files fail to comply with Rule 405, we promptly amend the interactive data files.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 1, 2013	ITERIS, INC.
	(Registrant)
	By	/S/ ABBAS MOHADDES
		Abbas Mohaddes
		Chief Executive Officer
		(Principal Executive Officer)
	By	/S/ JAMES S. MIELE
		James S. Miele
		Chief Financial Officer
		(Principal Financial Officer)

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Exhibit Index

Exhibit  Number	Description	Where Located
10.1	Amended and Restated Promissory Note, effective July 23, 2013, by and between MAXxess Systems, Inc. in favor of Iteris, Inc.	Filed herewith
10.2	Employment Agreement, dated July 29, 2013, by and between Iteris, Inc. and Abbas Mohaddes	Filed herewith
31.1	Certification of the Principal Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification of the Principal Financial Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Certification of the Chief Executive Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.2	Certification of the Chief Financial Officer, as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
101.INS#	XBRL Instance Document	Filed herewith
101.SCH#	XBRL Taxonomy Extension Schema Document	Filed herewith
101.CAL#	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith
101.LAB#	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith
101.PRE#	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith
101.DEF#	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

#Pursuant to Rule 406T of Regulation S-T, these interactive data files (i) are not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are not deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, irrespective of any general incorporation language included in any such filings, and otherwise are not subject to liability under these sections; and (ii) are deemed to have complied with Rule 405 of Regulation S-T (“Rule 405”) and are not subject to liability under the anti-fraud provisions of the Section 17(a)(1) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 or under any other liability provision if we have made a good faith attempt to comply with Rule 405 and, after we become aware that the interactive data files fail to comply with Rule 405, we promptly amend the interactive data files.

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EX-10.1

Exhibit 10.1

AMENDED AND RESTATED UNSECURED PROMISSORY NOTE

$259,059 — Original Principal Amount	Issue Date — July 23, 2013
	Santa Ana, California

For value received, Maxxess Systems, Inc., a California corporation and its successors and assigns (the “Company”), hereby promises to pay to Iteris, Inc., a Delaware corporation (together with its successors and assigns, the “Holder”), in lawful money of the United States at the address of Holder set forth below, the principal sum of Two Hundred Fifty-Nine Thousand and Fifty-Nine Dollars ($259,059), together with all accrued but unpaid interest thereon.  This Unsecured Promissory Note (the “Note”) memorializes the Company’s pre-existing business obligation owed to Holder for prior sublease payments and other services previously rendered to the Company.

1.Due Date.

Unless this Note is extended with the written consent of the Holder or is accelerated in accordance with the terms of this Note, the entire outstanding principal balance of this Note, together with all accrued and unpaid interest, shall be due and payable on August 10, 2016 (the “Due Date”).

2.Terms of Payment; Interest.

2.1Interest shall accrue on the principal outstanding under this Note from time to time, commencing from the Issue Date of this Note and continuing until repayment of this Note in full, at a rate equal to six percent (6%) per annum, compounded annually (computed on the basis of a year of three hundred sixty-five (365) days of actual days elapsed).  Accrued interest shall be payable quarterly on the first business day of each calendar quarter.  Notwithstanding anything herein to the contrary, if during any period for which interest is computed under this Note, the amount of interest computed on the basis provided for in this Note, together with all fees, charges and other payments that are treated as interest under applicable law, would exceed the amount of such interest computed on the basis of the Highest Lawful Rate, the Company’s obligations hereunder shall, automatically and retroactively, be deemed reduced to the Highest Lawful Rate (as defined below), and during any such period the interest payable under this Note shall be computed on the basis of the Highest Lawful Rate.  In the event Holder receives as interest an amount that would exceed the Highest Lawful Rate, then the amount of any excess interest shall not be applied to the payment of interest hereunder, but shall be applied to the reduction of the unpaid principal balance due hereunder.  As used herein, “Highest Lawful Rate” means the maximum non-usurious rate of interest, as in effect from time to time, which may be charged, contracted for, reserved, received or collected by the Holder in connection with this Note under applicable law.

2.2All payments under this Note shall be made (i) in lawful money of the United States of America at the principal office of the Company, or at such other place as Holder may from time to time designate in writing to the Company.  Payments under this Note shall be applied first to the payment of all accrued and unpaid interest and then to the payment of principal.  Prepayment of the principal amount of this Note, together with all accrued and unpaid interest on the portion of principal so prepaid, may be made in whole or in part at any time without penalty.

3.Subordination.

3.1Subordinated Amount.  The Holder and the Company agree that this Note and the Company’s obligations under this Note shall be subordinated to any debt financing by the Company with one or more lenders subsequent to the Issue Date of this Note, but only up to an aggregate subordinated amount of Five Million Dollars ($5,000,000) (the “Subordinated Amount”).  The Holder agrees to execute any documents reasonably requested by the investors in such financings to give effect to such subordination.

3.2Pari Passu Amount.  The Company and the Holder agree that this Note and the Company’s obligations under this Note shall be on pari passu with any debt financing by the Company in excess of the Subordinated Amount, and the Company agrees to execute (and to have such investor in the excess investor to execute as a condition to such financing) any documents (including, but not limited to, any related intercreditor agreements, security agreements. and financing statements) reasonably requested by the Holder to give effect to such pari passu treatment.

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3.3Notice of Financings.  For so long as any amount of this Note remains outstanding, the Company agrees to notify the Holder in writing at least five (5) business days prior to the closing of any debt or equity financing by the Company.  For the purposes of this Note, the term “financing” shall not include (a) any option exercises or stock issuance under the Company’s benefit plans, (b) trade payables incurred in the ordinary course of the Company’s business or (c) short-term bank borrowings or receivable factoring.

4.Representations and Warranties of Company.

The Company hereby represents and warrants to the Holder that this Note has been duly and validly executed and delivered by Company and constitutes a legal, valid and binding obligation of Company enforceable against Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent conveyance, or other similar laws relating to the enforcement of creditors’ rights generally and by general principles of equity.

5.Acceleration Upon Change in Control or Significant Financing.

For the purposes of this Note, a “Change in Control” shall be deemed to occur upon (i) the sale, lease, license or transfer, in a single transaction or a series of transactions, of all or substantially all of the Company’s assets; (ii) the sale or transfer, in a single transaction or a series of transactions, of 50% or more of the presently outstanding shares of capital stock of the Company, or (iii) the issuance by the Company of stock, whether in one or more transactions, which individually or in the aggregate results in the ownership, following such transaction or transactions, by the present stockholders of the Company of less than 50% of the issued and outstanding shares of voting stock of the Company.  In the event of a Change in Control or a Significant Financing (as defined below) while the Note is outstanding, all of the Company’s obligations under this Note shall be immediately accelerated and the Company shall pay to the Holder the outstanding principal balance under the Note and all accrued interest thereunder, which payments shall be paid in cash (by cashier’s check or wire transfer) to the Holder at the closing of such Change in Control or Significant Financing, as the case may be. For the purposes of this Note, a “Significant Financing” shall be deemed to occur upon the closing of one or a more debt or equity financings by the Company after the Issue Date with gross proceeds to the Company in the aggregate of at least $10.0 million.

6.General

6.1Saturdays, Sundays, or Holidays. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday, or a public holiday under the laws of the State of California, such payment shall be made on the next succeeding business day and such extension of time shall be included in computing interest in connection with such payment.

6.2Assignment. This Note may be transferred only upon surrender of the original Note for registration of transfer, duly endorsed, or accompanied by a duly executed written instrument of transfer in form reasonably satisfactory to the Company. Thereupon, a new Note for like principal amount and interest will be issued to, and registered in the name of, the transferee. Interest and principal are payable only to the registered holder of the Note.

6.3Cancellation Upon Payment in Full. Upon payment in full of all principal and interest payable hereunder, this Note shall be surrendered to the Company for cancellation.

6.4Presentment, Notice, etc. The Company waives presentment, demand for performance, notice of nonperformance, protest, notice of protest, and notice of dishonor. No delay on the part of Holder in exercising any right hereunder shall operate as a waiver of such right under this Note.

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6.5Events of Default and Acceleration.  Notwithstanding the provisions set forth above, the entire unpaid principal balance of this Note, together with all accrued and unpaid interest, shall become immediately due and payable prior to the Due Date upon the occurrence of one or more of the following events (each an “Event of Default”):

(a)The execution by the Company of a general assignment for the benefit of creditors, the filing by or against the Company of any petition in bankruptcy or any petition for relief under the provisions of the Federal bankruptcy act or any other state or Federal law for the relief of debtors and the continuation of such petition without dismissal for a period of 60 days or more, the appointment of a receiver or trustee to take possession of any property or assets of the Company or the attachment of or execution against any property or assets of the Company which is not discharged within 60 days from its inception;

(b)The Company approves or effects (i) the dissolution or liquidation of the Company, or (ii) the cessation or termination of all or substantially all of the Company’s operations or business; or

(c)The Company’s failure to timely make any payment of principal and/or interest hereunder or the Company’s breach of any material agreement, covenant, representation or warranty set forth in this Note and the failure to make such payment or remedy such breach for a period of 15 days from the receipt of notice of such failure or breach.

6.6Attorneys Fees.  If any party hereto incurs any legal fees, whether or not an action is instituted, to enforce the terms of this Note or to recover damages or injunctive relief for breach of this Note, it is agreed that the successful or prevailing parties shall be entitled to reasonable attorneys fees, expert witness fees and other costs in addition to any other relief to which it or they may be entitled.

6.7Notices.  Except as set forth below, all notices, deliveries or other communications required or permitted hereunder shall be in writing and shall be deemed to have been given: (i) upon personal delivery to the party to be notified; (ii) when sent by confirmed facsimile if sent during the normal business hours of the recipient, if not, then on the next business day; (iii) one (1) business day after deposit with a nationally recognized overnight courier designating next business day delivery; or (iv) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid.  All notices, deliveries or other communications shall be sent to the address or facsimile number as set forth below or at such other address as such party may designate by ten (10) days’ advance written notice to the other parties.

If to Holder:	Iteris, Inc.
	1700 Carnegie Ave., Ste. 100
	Santa Ana, CA 92705
	Attn: Chief Executive Officer
If to the Company:	Maxxess Systems, Inc.
	1040 N. Tustin Ave.
	Anaheim, CA 92087
	Attn: Chief Executive Officer

Notwithstanding the foregoing, any payment under this Note shall be deemed made upon receipt by Holder. Holder or the Company may change their address for purposes of this Section by giving to the other party notice in conformance with this Section of such new address.

6.8Governing Law; Counterparts; Assignability. This Note shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California.  This Note may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and a document signed and transmitted by facsimile shall be treated as an original document.  This Note shall be assignable by Holder (as security or otherwise), provided that Holder shall provide to the Company with ten (10) days’ advance written notice of its intention so to assign this Note, which notice shall identify the proposed assignee.

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6.9Time of the Essence; Remedies.  Time is of the essence of this Note.  The rights and remedies under this Note are cumulative and not exclusive of any rights, remedies, powers and privileges that may otherwise be available to the Holder.

6.10Entire Agreement.  This amended and restated unsecured promissory note supersedes the unsecured promissory note dated August 10, 2009 between the parties. This amended and restated note constitutes the full and entire understanding, promise and agreement between the Company and the Holder with respect to the subject matter hereof and thereof, and supersedes, merges and renders void every other prior written and/or oral understanding, promise or agreement between the Company and the Holder with respect to the subject matter hereof and thereof.

6.11Severability.  If one or more provisions of this Note are held to be unenforceable under applicable law, such provision shall be excluded from this Note, the balance of the Note shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.  The Company and the Holder shall use good faith to negotiate to substitute (or a court may a substitute) a valid and enforceable provision that replaces the excluded provision and that most nearly affects the parties’ intent in entering into this Note.

6.12Waiver; Amendment; Successors and Assigns.  Neither this Note nor any term hereof may be waived, amended, discharged, modified, changed or terminated except by an instrument in writing signed by the Company and the Holder.  No delay or omission by the Holder in exercising its rights under this Note shall constitute a waiver of or bar to exercising such right or any other rights in the future.  This Note shall be binding upon, inure to the benefit of and be enforceable by the Company, the Holder and their respective heirs, personal representatives, successors and assigns.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed and delivered on and as of the Issue Date set forth above.

		Maxxess Systems, Inc.
		By:	/s/ NANCY ISLAS
		Name:	Nancy Islas
		Title:	President
Accepted and agreed upon
as of the Issue Date set forth above.
Iteris, Inc.
By:	/s/ JAMES S. MIELE
Name:	James S. Miele
Title:	Chief Financial Officer

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EX-10.2

Exhibit 10.2

EMPLOYMENT AGREEMENT

This Employment Agreement (the “Agreement”) is entered into as of July 29, 2013 (the “Effective Date”) by and between Iteris, Inc., a Delaware corporation (the “Company”), and Abbas Mohaddes, an individual (the “Executive”).

1.Duties and Responsibilities.

1.1Executive shall serve as the Company’s President and Chief Executive Officer.  Executive shall report to and perform the duties and responsibilities assigned to him by the Company’s Board of Directors.

1.2Executive agrees to devote his full business time and attention to the Company, to use his best efforts to advance the business and welfare of the Company, to render his services under this Agreement fully, faithfully, diligently, competently and to the best of his ability, and not to engage in any other employment activities.  Notwithstanding the foregoing, Executive may also devote reasonable time and attention to civic, charitable or social organizations so long as such activities do not interfere with the performance of Executive’s duties to the Company.

1.3Executive shall be based at the Company’s office located in Santa Ana, California, but Executive may be required to travel from time to time to other geographic locations in connection with the performance of his executive duties.

2.Agreement Term.  The initial term of the Agreement shall be for a period of three years measured from the Effective Date (the “Initial Term”).  Following the Initial Term, the Agreement shall automatically renew for successive one year periods until the date that is ten years after the Effective Date (each, a “Renewal Term”) unless either the Company or Executive provides written notice to the other party of such nonrenewal at least thirty (30) days prior to the end of the Initial Term or the Renewal Term as applicable.  This Agreement shall remain in full force and effect for the lesser of (i) the Initial Term, together with all Renewal Terms or (ii) until Executive’s termination of employment with the Company for any reason or without reason (the “Employment Period”).  The parties agree that the Executive’s employment with the Company during the Initial Term and any Renewal Term shall be on an “at-will” basis, which means that notwithstanding the provisions of this Agreement, either the Executive or the Company may terminate the employment relationship and this Agreement at any time, for any or no reason, with or without Cause (as defined below).  The parties hereto each agree that (i) this Agreement shall replace and supersede that certain offer letter between the Company and Executive and that certain Change in Control Agreement between the Company and Executive, both dated July 27, 2010 (the “Former Agreements”), (ii) the Former Agreements shall be terminated immediately to the extent not previously terminated, and (iii) neither the Company nor Executive shall have any further rights or obligations under the Former Agreements.

3.Compensation and Benefits.

3.1Base Salary.  Executive’s initial base salary shall be Three Hundred Eighty Thousand Dollars ($380,000) per year (less applicable withholdings), which shall be payable in accordance with the Company’s standard payroll schedule (but in no event less frequent than on a monthly basis), together with such increases as may be approved by the Company’s Compensation Committee from time to time in its sole discretion.  Such annual base salary as increased from time to time shall be referred to herein as the “Base Salary.”

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3.2Bonus.  Executive shall be entitled to participate in any executive bonus plan of the Company then in effect and to receive any bonus compensation in the discretion of the Board or the Company’s Compensation Committee.  The term “Target Bonus” shall mean the bonus potential established for the Executive by the Board or a committee thereof for the applicable fiscal year. Executive will not be eligible for any bonus for any year in the event that his employment terminates at any time on or before the end of a fiscal year except for the Separation Bonus that is specifically provided for herein.

3.3Automobile Allowance.  Executive shall receive a car allowance of $500 per month during the Employment Period.

3.4Paid Time Off.  Executive shall receive five (5) weeks of paid time off (“PTO”) per calendar year, which amount shall accrue in accordance with and subject to any caps on accrual established by the Company’s vacation policy in effect from time to time for employees of the Company.  In addition, Executive shall be entitled to paid time off for all holidays provided under the Company’s regular holiday schedule.

3.5Group Benefit Plans.  Executive shall, throughout the Employment Period, be eligible to participate in all of the group term life insurance plans, group health plans, accidental death and dismemberment plans, short-term disability programs, retirement plans, profit sharing plans or other plans (for which Executive qualifies) that are available to the officers of the Company as provided under the terms of such plans.

3.6Withholdings.  The Company shall deduct and withhold from any compensation payable to Executive hereunder (including but not limited to, any payments or benefits under this Section 3 and any Separation Benefits, the Termination Benefits and the CIC Termination Benefits), any and all applicable Federal, State and local income and employment withholding taxes and any other amounts the Company determines are required to be deducted or withheld by the Company under applicable statutes, regulations, ordinances or orders governing or requiring the withholding or deduction of amounts otherwise payable as compensation or wages to employees.

4.Expense Reimbursement.  During the Employment Period, Executive shall be entitled, in accordance with the reimbursement policies in effect from time to time, to receive reimbursement from the Company for reasonable business expenses incurred by Executive in the performance of Executive’s duties hereunder, provided Executive furnishes the Company with vouchers, receipts and other details of such expenses in the form required by the Company sufficient to substantiate a deduction for such business expenses under all applicable rules and regulations of federal and state taxing authorities.

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5.Termination of Employment.  During the Employment Period, the Executive’s employment with the Company shall be at will and may be terminated by either the Company or Executive at any time, and for any reason.  Upon such termination, Executive (or, in the case of Executive’s death, Executive’s estate and beneficiaries) shall have no further rights to any other compensation or benefits from the Company on or after the termination of employment except as follows:

5.1Termination For Cause or Resignation by Executive.

(a)Separation Benefits.  In the event the Company terminates Executive’s employment with the Company prior to the expiration of the Employment Period for Cause (as defined below) or in the event the Executive resigns from the Company voluntarily (other than for Good Reason following a Change in Control), then the Company shall pay to Executive the following: (i) Executive’s unpaid Annual Salary that has been earned through the termination date of Executive’s employment (the “Termination Date”); (ii) Executive’s accrued but unused vacation; (iii) any accrued but unpaid expenses pursuant to Section 4 above, (iv) such vested accrued benefits, and other benefits and/or payments, if any, as to which the Executive (and his eligible dependents) may be entitled under, and in accordance with the terms and conditions of, the employee benefit arrangements, plans and programs of the Company as of the Termination Date (including, for example, the presentment of the right to continue health benefit coverage under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”), as applicable), but not including any severance pay plan; and (v) any other payments as may be required under applicable law.  The benefits provided under subsections (i) through (v) of this Section 5.1(a) are collectively referred to as the “Separation Benefits.”

(b)Definition of Cause.  For purposes of this Agreement, “Cause” shall mean any of the following:  (i) Executive’s misappropriation of the Company’s funds or property, or any attempt by Executive to secure any personal profit related to the business or business opportunities of the Company without the informed, written approval of the Audit Committee of the Company’s Board of Directors; (ii) any unauthorized use or disclosure by Executive of confidential information or trade secrets of the Company (or any parent or subsidiary of the Company); (iii) Executive’s gross negligence or reckless misconduct in the performance of Executive’s duties; (iv) Executive’s failure to perform, or continuing neglect in the performance of, duties lawfully assigned to Executive by the Board provided that the Company shall have provided Executive with written notice of such failure or neglect and the Executive has been afforded at least ten (10) Business days to cure such failure or neglect; (v) Executive’s conviction of, or plea of nolo contendre to, any felony or misdemeanor involving moral turpitude or fraud, or of any other crime involving material harm to the standing or reputation of the Company; (vi) any other willful misconduct by Executive that the Board determines in good faith has had a material adverse effect upon the business or reputation of the Company; (vii) any other material breach or violation by the Executive of this Agreement, the Company’s written code of conduct, written code of ethics or other written policy of the Company; provided, however, that the Company shall have provided the Executive with written notice that such actions are occurring and the Executive has been afforded at least ten (10) Business days to cure.  Notwithstanding the foregoing, in subparagraphs (iv) and (vii), (A) the cure period shall not apply to violations of the Company’s code of conduct, written code of ethics or prohibition against unlawful harassment, and (B) such cure period shall only apply to breaches, violations, failures or neglect that in the Board’s sole judgment are capable of or amenable to such cure.

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5.2Termination Upon Death.  If Executive dies during the Employment Period, the Executive’s employment with the Company shall be deemed terminated as of the date of death, and the obligations of the Company to or with respect to Executive shall terminate in their entirety upon such date except as otherwise provided under this Section.  Upon termination of employment due to death, Executive’s estate or beneficiaries shall be entitled to receive (a) the Separation Benefits and (b) salary continuation amount in the aggregate equal to one-half (1/2) Executive’s Base Salary in effect as of the Termination Date.  Subject to Section 8.2, the amount payable to the Executive (or his estate or beneficiaries) pursuant to this Section 5.2(b) shall be payable in a lump sum.

5.3Termination Upon Disability.  If Executive becomes subject to a Disability (as defined below), then the Company shall have the right, to the extent permitted by law, to terminate the employment of Executive upon thirty (30) days prior written notice in writing to Executive.  Upon termination of employment due to Disability, Executive shall be entitled to receive: (i) the Separation Benefits; (ii) continuation of Executive’s Base Salary (which shall be payable in accordance with the Company’s standard pay policies) until Executive is eligible for short-term disability payments under the Company’s group disability policies; provided however, that in no event shall such period of continued Base Salary exceed ninety (90) days following Executive’s termination of employment; and (iii) any other payments as may be required under applicable law.  For the purposes of this Agreement, the term, “Disability” shall mean a physical or mental impairment which, the Board determines, after consideration and implementation of reasonable accommodations, precludes the Executive from performing his essential job functions for a period longer than three consecutive months or a total of one hundred twenty (120) days in any twelve (12)-month period.

5.4Termination Without Cause.

(a)Termination Benefits.  Subject to Sections 5.4(b) and 6, if the Company terminates Executive’s employment during the Employment Period for any reason (other than for Cause, or in connection with a Change in Control or upon the Executive’s death or Disability), then the Company shall pay to Executive the Separation Benefits as well as the following compensation and benefits (the “Termination Benefits”):

(i)Salary Continuation.  The Company shall pay to Executive an amount in the aggregate equal to Executive’s Base Salary in effect as of the Termination Date.  Subject to Section 8.2, the amount payable to the Executive pursuant to this Section 5.4(a)(i) shall be payable in equal installments on the Company’s normal payroll dates for the twelve (12) months following the Final Revocation Date (as defined below) in accordance with the usual payroll practices of the Company.

(ii)Separation Bonus.  A lump sum payment equal to fifty percent (50%) of the average annual Target Bonus established by the Compensation Committee for the Executive for the two fiscal years preceding the year in which Executive’s employment was terminated (or in which Executive resigns for Good Reason following a Change in Control) (the “Separation Bonus”).  Subject to Section 8.2 below, the lump sum payment required by this Section shall be paid no later than thirty (30) days following the Termination Date.

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(iii)COBRA Reimbursement.  In the event that the Executive properly and timely elects to continue health benefit coverage under COBRA after the Termination Date and the Company received from Executive of a copy of such election and proof of Executive’s timely payment of each COBRA premium, the Company shall promptly reimburse Executive for the amount of each such premium paid by Executive.  Such COBRA premium reimbursements will be paid for by the Company coverage until the earlier of (i) the first twelve (12) months of COBRA continuation, or (ii) such time as Executive subsequently becomes covered by another group health plan.  Executive agrees to notify the Company immediately if he becomes covered by another group health plan.

(b)No Duplication.  Notwithstanding anything to the contrary in this Section 5.4, in no event shall the Executive be entitled to receive any payment or benefit pursuant to this Section 5.4 in connection with a termination of employment that would entitle the Executive to receive any payment or benefit pursuant to Section 5.5 below.

5.5Termination without Cause or Resignation for Good Reason Following a Change in Control.

(a)Termination Benefits.  If, during the twelve (12)-month period following a Change in Control (as defined below), the Executive voluntarily resigns for Good Reason or the Company terminates Executive’s employment for any reason other than for Cause, then the Company shall pay to the Executive the Separation Benefits as well as the following compensation and benefits (the “CIC Termination Benefits”), subject to the conditions set forth in Section 6:

(i)Severance Payment.  A lump sum payment equal to the sum of (A) Executive’s Base Salary, as in effect as of the Termination Date, plus (B) the Separation Bonus.  Subject to Section 8.2 below, the lump sum payment required by this Section shall be paid no later than thirty (30) days following the Termination Date.

(ii)COBRA Reimbursement.  In the event that the Executive properly and timely elects to continue health benefit coverage under COBRA after the Termination Date and the Company received from Executive of a copy of such election and proof of Executive’s timely payment of each COBRA premium, the Company shall promptly reimburse Executive for the amount of each such premium paid by Executive.  Such COBRA premium reimbursements will be paid by the Company for coverage until the earlier of (i) the first twelve (12) months of COBRA continuation, or (ii) such time as Executive subsequently becomes covered by another group health plan.  Executive agrees to notify the Company immediately if he becomes covered by another group health plan.

(b)Definition of Good Reason.  For the purposes of this Agreement, “Good Reason” shall mean Executive’s voluntary resignation upon any of the following events without Executive’s written consent:  (i) a material reduction in the Executive’s authority, duties or responsibilities (and not simply a change in title or reporting relationships); (ii) a material reduction by the Company in the Executive’s compensation (for avoidance of doubt, a five percent (5%) reduction in the combined level of Base Salary and annual target bonus opportunity shall constitute a material reduction in Executive’s compensation); (iii) a relocation of the

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Executive’s principal place of work to a location that would increase the Participant’s one-way commute from his or her personal residence to the new principal place of work by more than thirty (30) miles; or (iv) any breach by the Company of its obligations under this Agreement that results in a material negative change to Executive.  Notwithstanding the foregoing, “Good Reason” shall only be found to exist if the Executive provides written notice (each, a “Good Reason Notice”) to the Company identifying and describing the event resulting in Good Reason within ninety (90) days of the initial existence of such event, the Company does not cure such event within thirty (30) days following receipt of the Good Reason Notice from the Executive and the Executive terminates his employment during the ninety (90)-day period beginning ninety (90) days after the Executive’s delivery of the Good Reason Notice.

(c)Definition of Change in Control.  For the purposes of this Agreement, a “Change in Control” shall mean any of the following transactions effecting a change in ownership or control of the Company that also qualifies as a “change in control event” (as defined in Treasury Regulation Section 1.409A-3(i)(5)):

(i)a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization own immediately after such merger, consolidation or other reorganization more than fifty (50%) of the voting power of the outstanding securities of each of (A) the continuing or surviving entity and (B) any direct or indirect parent corporation of such continuing or surviving entity.

(ii)The sale, transfer or other disposition of all or substantially all of the Company’s assets;

(iii)the acquisition, directly or indirectly, by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by or in under common control with, the Company), of “beneficial ownership” as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of securities of the Company representing more than fifty (50%) of the total combined voting power represented by the Company’s then outstanding voting securities. For purposes of this subsection, the term “person” shall have the same meaning as when used in Sections 13(d) and 14(d) of the Exchange Act but shall exclude (i) a trustee or other fiduciary holding securities under an associate benefit plan of the Company or of a parent or subsidiary and (ii) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the common stock of the Company.

Notwithstanding anything to the contrary contained herein, a Change in Control be not be deemed to occur in connection with any underwritten public offering of the Company’s securities.

5.6No Mitigation.  The Executive shall not be required to mitigate the amount of any payment provided for in Sections 5.4(a) or 5.5(a) by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the Termination Date provided, however, that the COBRA reimbursement provided in Section 5.4(a)(iii) and 5.5(a)(ii) shall be reduced if required by Section 5.4(a)(iii) or 5.5(a)(ii), respectively.

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6.Condition to Termination Benefits - General Release.  Notwithstanding any provision to the contrary in this Agreement, the Company’s obligation to pay or provide the Executive with the Termination Benefits or the CIC Termination Benefits, as applicable, shall be conditioned on and subject to the Executive’s executing and not revoking a waiver and general release in a form acceptable to the Company in its sole discretion (the “Release”).  The Company shall provide the Release to the Executive within seven (7) days following the Termination Date. In order to receive the Termination Benefits or the CIC Termination Benefits, as applicable, the Executive will be required to sign and deliver the Release to the Company within twenty-one (21) days after the date it is provided to him, and not revoke it on or before the seventh (7th) day following the date on which the Release is signed by him (the “Final Revocation Date”).  Notwithstanding any provision of this Agreement to the contrary, in no event shall the timing of the Executive’s execution of the Release, directly or indirectly, result in the Executive designating the calendar year of payment of an amount that is subject to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations issued thereunder (“Section 409A”), and if a payment that is subject to execution of the release and is subject to Section 409A could be made in more than one taxable year, payment shall be made in the later taxable year to the extent required to comply with Section 409A.

7.Confidentiality, Non-Solicitation; Non-Disparagement and Cooperation.

7.1Confidentiality. The Company and the Executive acknowledge that the services to be performed by the Executive under this Agreement are unique and extraordinary and, as a result of such employment, the Executive shall be in possession of Confidential Information relating to the business practices of the Company and its subsidiaries and affiliates (collectively, the “Company Group”). The term “Confidential Information” shall mean any and all information (oral and written) relating to the Company Group, or any of their respective activities, or of the clients, customers, acquisition targets, investment models or business practices of the Company Group, other than such information which (i) is generally available to the public or within the relevant trade or industry, other than as the result of breach of the provisions of this Section, or (ii) the Executive is required to disclose under any applicable laws, regulations or directives of any government agency, tribunal or authority having jurisdiction in the matter or under subpoena or other process of law.  The Executive shall not, during his employment nor at any time thereafter (except as may be required in the course of the performance of his duties hereunder and except with respect to any litigation or arbitration involving this Agreement, including the enforcement hereof), directly or indirectly, use, communicate, disclose or disseminate to any person, firm or corporation any Confidential Information acquired by the Executive during, or as a result of, his employment with the Company, without the prior written consent of the Company.  The confidentiality obligations contained in this Section shall be in addition to any other confidentiality agreement entered into between the Company and Executive.

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7.2Non-Solicitation. The Executive shall not, except in the furtherance of the Executive’s duties hereunder, directly or indirectly, individually or on behalf of any other person, firm, corporation or other entity, during the Employment Period (except in the good faith performance of his duties) and for a period of one (1) year thereafter, solicit, aid or induce any employee, representative or agent of the Company Group to leave such employment or retention or to accept employment with or render services to or with any other person, firm, corporation or other entity unaffiliated with the Company Group, or take any action to materially assist or aid any other person, firm, corporation or other entity in identifying, hiring or soliciting any such employee, representative or agent.

7.3Non-Disparagement. At no time during or within three (3) years after Executive’s cessation of employment for any reason shall the Executive, directly or indirectly, disparage the Company Group or any of the Company Group’s past or present employees, officers, directors, attorneys, products or services.  Notwithstanding the foregoing, nothing in this Section shall prevent the Executive from making any truthful statement to the extent (a) necessary to rebut any untrue public statements made about him; (b) necessary with respect to any litigation, arbitration or mediation involving this Agreement, including, but not limited to, the enforcement of this Agreement; (c) required by law or by any court, arbitrator, mediator or administrative or legislative body (including any committee thereof) with jurisdiction over such person; or (d) made as good faith competitive statements in the ordinary course of business.

7.4Cooperation. Upon the receipt of reasonable notice from the Company (including the Company’s outside counsel), the Executive agrees that while employed by the Company and thereafter, the Executive will respond and provide information with regard to matters of which the Executive has knowledge as a result of the Executive’s employment with the Company, and will provide reasonable assistance to the Company Group and their respective representatives in defense of any claims that may be made against the Company Group (or any member thereof), and will provide reasonable assistance to the Company Group in the prosecution of any claims that may be made by the Company Group (or any member thereof), to the extent that such claims may relate to matters related to the Executive’s period of employment with the Company (or any predecessors).  If the Executive is required to provide any services pursuant to this Section following the cessation of his employment, then the Company: (i) shall promptly compensate the Executive for all time actually incurred in these activities at an hourly rate of pay equal to the Executive’s most recent annual Base Salary divided by 2080 hours; and (ii) shall promptly reimburse the Executive for reasonable out-of-pocket travel, lodging, communication and duplication expenses incurred in connection with the performance of such services and in accordance with the Company’s business expense reimbursement policies.

7.5Injunctive Relief.  Without intending to limit the remedies available to the Company, the Executive acknowledges that a breach of any of the covenants contained in this Section 7 may result in the material and irreparable injury to the Company, or their respective affiliates or subsidiaries, for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such breach or threat: (a) the Company shall be entitled to a temporary restraining order and/or a preliminary or permanent injunction restraining the Executive from engaging in activities prohibited by this Section 7; and (ii) any remaining Termination Benefits or CIC Termination Benefits due to the Executive under Section 5.4 or Section 5.5, respectively, shall be forfeited.  If for any reason it is held that the restrictions under this Section 2 are not reasonable or that consideration therefor is inadequate, such restrictions shall be interpreted or modified to include as much of the duration or scope of identified in this Section as will render such restrictions valid and enforceable.

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7.6Return of Company Property.  Upon the cessation of Executive’s employment for any reason or without reason, all Company Group property that is in the possession of the Executive shall be promptly returned to the Company, including, without limitation, all documents, records, notebooks, equipment, price lists, specifications, programs, customer and prospective customer lists, supplier lists and any other materials that contain Confidential Information which are in the possession of the Executive, including all copies thereof.  Anything to the contrary notwithstanding, the Executive shall be entitled to retain (i) papers and other materials of a personal nature, including, but not limited to, photographs, correspondence, personal diaries, calendars and rolodexes, personal files and phone books, (ii) information showing his compensation or relating to reimbursement of expenses, (iii) information that he reasonably believes may be needed for tax purposes and (iv) copies of plans, programs and agreements relating to his employment, or termination thereof, with the Company.

8.Section 409A.

8.1Interpretation. It is intended that the provisions of this Agreement comply with the requirements of Section 409A or an exemption therefrom and all provisions of this Agreement shall be construed in a manner consistent with the requirements for avoiding taxes or penalties under Section 409A.  The severance compensation payable under this Agreement is intended to be exempt from Section 409A under the “short-term deferral” exception or the “separation pay” exception.  Distributions upon termination of employment may only be made upon a “separation from service,” as required by Section 409A.  For purposes of Section 409A, each payment under this Agreement shall be treated as a separate payment.  In no event may the Employee, directly or indirectly, designate the calendar year of a payment.  If any provision of this Agreement (or of any award of compensation, including equity compensation or benefits) would cause the Executive to incur any additional tax or interest under Section 409A, the Company shall, upon the specific request of the Executive, use its reasonable business efforts to in good faith reform such provision to comply with Section 409A; provided, that to the maximum extent practicable, the original intent and economic benefit to the Executive and the Company of the applicable provision shall be maintained, but the Company shall have no obligation to make any changes that could create any additional economic cost or loss of benefit to the Company.  Notwithstanding the foregoing, the Company shall not have any liability with regard to any failure of this Agreement to comply with Section 409A so long as it has acted in good faith with regard to compliance therewith.

8.2Section 409A Delay.  If required by Section 409A (but only to the extent so required), notwithstanding anything to the contrary in this Agreement, the Termination Benefits and the CIC Termination Benefits to be made to Executive shall be paid or provided no sooner than the first day of the seventh month following the Executive’s termination date.

8.3Reimbursements and In-Kind Benefits.  With regard to any provision herein that provides for reimbursement of costs and expenses or in-kind benefits, except as permitted by Section 409A, (i) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, (ii) the amount of expenses eligible for reimbursement, or in-kind benefits, provided during any taxable year shall not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year, provided that the foregoing clause (ii) shall not be violated with regard to expenses reimbursed under any arrangement covered by Section 105(b) of the Code solely because such expenses are subject to a limit related to the period the arrangement is in effect and (iii) such payments shall be made on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred.

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9.Section 280G of the Code.

9.1Maximum Benefit.  In the event that any payment or benefit, either cash or non-cash, that the Executive has the right to receive from the Company pursuant to this agreement or otherwise (including, but not limited to, accelerated vesting or payment of any deferred compensation, options, restricted stock or any benefits payable to Executive under any plan for the benefit of employees) (the “Covered Payments”) would constitute a “parachute payment” (as defined in Section 280G of the Code), then such payments or other benefits shall be reduced to the largest amount that will not result in receipt by the Executive of an “excess parachute payment” under Section 280G of the Code.

9.2Order of Reductions.  Any such reduction shall be made in accordance with Section 409A and the following:

(a)the Covered Payments that do not constitute nonqualified deferred compensation subject to Section 409A shall be reduced first; and

(b)all other Covered Payments shall then be reduced as follows: (A) cash payments shall be reduced before non-cash payments; and (B) payments to be made on a later payment date shall be reduced before payments to be made on an earlier payment date.

9.3Recalculation. If, notwithstanding the initial application of this Section 9, the Internal Revenue Service determines that all or any portion of any Covered Payment constitutes an excess parachute payment (as defined in Section 280G(b) of the Code), this Section 9 will be reapplied based on the Internal Revenue Service’s determination, and the Executive will be required to promptly repay the portion of the Covered Payments required to avoid imposition of an excise tax under Section 4999 of the Code together with interest at the applicable federal rate (as defined in Section 7872(f)(2)(A) of the Code) from the date of the Executive’s receipt of the excess payments until the date of repayment).

9.4Determinations.  Any determination required under this Section 9 shall be made by the Company in its sole discretion.

10.Miscellaneous.

10.1Notices.  Any notice to be given under the terms of this Agreement shall be in writing and addressed to the Company at its principal executive office to the attention of the Secretary, and to the Executive at the address last reflected on the Company’s payroll records, or such other address as either party may hereafter designate in writing to the other. Any such notice shall be delivered in person or shall be enclosed in a properly sealed envelope addressed as aforesaid, registered or certified, and deposited (postage and registry or certification fee prepaid) in a post office or branch post office regularly maintained by the United States Government. Any such notice shall be deemed given only when received, but if the Executive is no longer employed by the Company or a subsidiary, such notice shall be deemed to have been duly given five business days after the date mailed in accordance with the foregoing provisions of this Section.

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10.2Severability. Each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

10.3Binding Effect; Benefits. The Executive may not delegate his duties or assign his rights hereunder.  This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and permitted assigns.

10.4Entire Agreement. This Agreement represents the entire agreement of the parties with respect to the subject matter hereof and shall supersede any and all previous contracts, arrangements or understandings between the Company and the Executive. This Agreement may be amended at any time by mutual written agreement of the parties hereto. In the case of any conflict between any express term of this Agreement and any statement contained in any plan, program, arrangement, employment manual, memo or rule of general applicability of the Company, this Agreement shall control.

10.5Governing Law and Jurisdiction. This Agreement and the performance of the parties hereunder shall be governed by the internal laws (and not the law of conflicts) of the State of California. The Company and Executive unconditionally consent to submit to the exclusive jurisdiction of any court, Federal or State, within the State of California having subject matter jurisdiction over any actions, suits or proceedings arising out of or relating to this Agreement and the transactions contemplated hereby (and agree not to commence any action, suit or proceeding relating thereto except in such courts), and further agree that service of any process, summons, notice or document by registered mail to the address set forth below shall be effective service of process for any action, suit or proceeding brought against the Company or the Executive, as the case may be, in any such court.

10.6Remedies.  All rights and remedies provided pursuant to this Agreement or by law shall be cumulative, and no such right or remedy shall be exclusive of any other.  A party may pursue any one or more rights or remedies hereunder or may seek damages or specific performance in the event of another party’s breach hereunder or may pursue any other remedy by law or equity, whether or not stated in this Agreement.

10.7Survivorship. Except as otherwise expressly set forth in this Agreement, the respective rights and obligations of the parties shall survive Executive’s cessation of employment to the extent necessary to carry out the intentions of the parties as embodied in this Agreement. This Agreement shall continue in effect until there are no further rights or obligations of the parties outstanding hereunder and shall not be terminated by either party without the express prior written consent of both parties, except as otherwise expressly set forth in this Agreement.

11

10.8No Waiver.  The waiver by either party of a breach of any provision of this Agreement shall not operate as, or be construed as, a waiver of any later breach of that provision.

10.9Taxes.  Except as otherwise specifically provided herein, each party agrees to be responsible for its own taxes and penalties.

10.10Counterparts. This Agreement may be executed in counterparts (including by fax or pdf) which, when taken together, shall constitute one and the same agreement of the parties.

10.11Representation of Executive.  Executive represents and warrants to the Company that Executive read and understands this Agreement, has had the opportunity to consult with independent counsel of his choice prior to agreeing to the terms of this Agreement and is entering into the agreement, knowingly, willingly and voluntarily.  The parties agree that this Agreement shall not be construed for or against either party in any interpretation thereof.

[End of Text - Signature page follows]

12

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

ITERIS, INC.
By:	/S/ KEVIN C. DALY
Print Name:	Kevin C. Daly
Title:	Chairman, Compensation Committee
	Board of Directors
/S/ ABBAS MOHADDES
ABBAS MOHADDES

13

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Abbas Mohaddes, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Iteris, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 1, 2013
	/S/ ABBAS MOHADDES
	Abbas Mohaddes
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, James S. Miele, certify that:

1.             I have reviewed this quarterly report on Form 10-Q of Iteris, Inc.;

2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 1, 2013
	/s/ JAMES S. MIELE
	James S. Miele
	Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Iteris, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Abbas Mohaddes, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ ABBAS MOHADDES

Abbas Mohaddes

Chief Executive Officer

August 1, 2013

A signed original of this written statement required by Section 906, or any other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. §1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Iteris, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James S. Miele, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ JAMES S. MIELE

James S. Miele

Chief Financial Officer

August 1, 2013

A signed original of this written statement required by Section 906, or any other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

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Supplemental Financial Information (Tables)

3 Months Ended

Jun. 30, 2013

Supplemental Financial Information

Schedule of inventories

	June 30,		March 31,
	2013		2013
	(In thousands)
Materials and supplies	$	1,307	$	1,504
Work in process	139		105
Finished goods	627		856
	$	2,073	$	2,465

Schedule of intangible assets

	June 30, 2013					March 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
	(In thousands)
Technology	$	1,856	$	(1,239	)	$	1,856	$	(1,178	)
Customer contracts / relationships	750		(278		)	750		(247		)
Trade names and non-compete agreements	1,110		(563		)	1,110		(495		)
Capitalized software development costs	431		—			328		—
Total	$	4,147	$	(2,080	)	$	4,044	$	(1,920	)

Schedule of future estimated amortization expense

We do not have any intangible assets with indefinite useful lives. As of June 30, 2013, future estimated amortization expense is as follows:

Fiscal Year Ending March 31:
(In thousands)
Remainder of 2014	$	538
2015	575
2016	503
2017	354
2018	88
Thereafter	9
	$	2,067

Schedule of warranty reserve activity

	Three Months Ended
	June 30,
	2013			2012
	(In thousands)
Balance at beginning of period	$	169		$	231
Addition charged to cost of revenues	55			(6		)
Warranty claims	(46		)	(28		)
Balance at end of period	$	178		$	197

Schedule of computation of basic and diluted income per share from continuing operations

	Three Months Ended
	June 30,
	2013	2012
	(In thousands)
Denominator:
Weighted average common shares used in basic per share computation	32,520	33,809
Dilutive stock options	125	—
Dilutive restricted stock units	68	54
Dilutive warrants	3	—
Weighted average common shares used in diluted per share computation	32,716	33,863

Schedule of instruments excluded in the computation of diluted income from continuing operations per share

	Three Months Ended
	June 30,
	2013	2012
	(In thousands)
Stock options	725	1,938
Restricted stock units	—	—
Warrants	—	15

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Consolidated Statements of Operations (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Consolidated Statements of Operations
Total revenues	$ 17,030	$ 16,304
Cost of revenues	10,304	10,040
Gross profit	6,726	6,264
Operating expenses:
Selling, general and administrative	5,105	4,901
Research and development	784	633
Amortization of intangible assets	161	161
Change in fair value of contingent consideration	7	(334)
Total operating expenses	6,057	5,361
Operating income	669	903
Non-operating income (expense):
Other income (expense), net	(3)	5
Interest income (expense), net	(4)	(5)
Income from continuing operations before income taxes	662	903
Provision for income taxes	(232)	(314)
Income from continuing operations	430	589
Gain on sale of discontinued operation, net of tax	30	87
Net income	$ 460	$ 676
Income per share from continuing operations - basic and diluted (in dollars per share)	$ 0.01	$ 0.02
Gain per share from sale of discontinued operation - basic and diluted (in dollars per share)	$ 0.00	$ 0.00
Net income per share - basic and diluted (in dollars per share)	$ 0.01	$ 0.02
Shares used in basic per share calculations (in shares)	32,520	33,809
Shares used in diluted per share calculations (in shares)	32,716	33,863

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Credit Facility

3 Months Ended

Jun. 30, 2013

Credit Facility

Credit Facility

5. Credit Facility

In October 2008, we entered into a $19.5 million credit facility with California Bank & Trust (“CB&T”). This credit facility provided for a two-year revolving line of credit with borrowings of up to $12.0 million and a $7.5 million 48-month term note. In September 2010, we entered into a modification agreement with CB&T to extend the expiration date of our revolving line of credit to October 1, 2012. We repaid in full all principal and interest payments under the term note in June 2012; the term note contained no early termination fees.

In September 2012, we entered into a second modification agreement with CB&T to extend the expiration date of our revolving line of credit to October 1, 2014. Interest on borrowed amounts under the revolving line of credit is payable monthly at a rate equal to the current stated prime rate (3.25% at June 30, 2013) up to the current stated prime rate plus 0.25%, depending on aggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. We are obligated to pay an unused line fee of 0.25% per annum applied to the average unused portion of the revolving line of credit during the preceding month. The revolving line of credit does not contain early termination fees and is secured by substantially all of our assets.

As of June 30, 2013 and June 30, 2012, no amounts were outstanding under the revolving line of credit portion of the credit facility.  Availability under this line of credit may be reduced or otherwise limited as a result of our obligations to comply with certain financial covenants.

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Supplemental Financial Information (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Intangible Assets
Gross Carrying Amount	$ 4,147	$ 4,044
Accumulated Amortization	(2,080)	(1,920)
Future estimated amortization expense
Remainder of 2014	538
2015	575
2016	503
2017	354
2018	88
Thereafter	9
Total	2,067	2,124
Technology
Intangible Assets
Gross Carrying Amount	1,856	1,856
Accumulated Amortization	(1,239)	(1,178)
Customer contracts / relationships
Intangible Assets
Gross Carrying Amount	750	750
Accumulated Amortization	(278)	(247)
Trade names and non-compete agreements
Intangible Assets
Gross Carrying Amount	1,110	1,110
Accumulated Amortization	(563)	(495)
Capitalized software development costs
Intangible Assets
Gross Carrying Amount	$ 431	$ 328

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Fair Value Measurements (Tables)

3 Months Ended

Jun. 30, 2013

Fair Value Measurements

Schedule of reconciliation of liability measured at fair value on a recurring basis

The following table reconciles this liability measured at fair value on a recurring basis for the three months ended June 30, 2013 (in thousands):

Balance at March 31, 2013	$	961
Change in fair value included in net income	7
Balance at June 30, 2013	$	968

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Sale of Vehicle Sensors (Details) (Vehicle Sensors segment, USD $)	0 Months Ended		1 Months Ended	3 Months Ended		24 Months Ended
	Jul. 29, 2011	Jul. 25, 2011	Oct. 31, 2012	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013
Vehicle Sensors segment
Sale of Vehicle Sensors
Aggregate proceeds received on sale		$ 14,000,000
Holdback amount		2,000,000
Additional cash consideration, percentage of revenue associated with royalties	85.00%
Additional cash consideration, percentage on excess of revenue over projected revenue	30.00%
Additional cash consideration, period for which revenue generated exceeds target revenue	2 years
Amount of earn-outs in connection with royalty						1,000,000
Cash received pursuant to resolution of the holdback provision			1,700,000
Proceeds from sale net of legal and other professional fees						14,700,000
Sale of Vehicle Sensors, additional disclosures
Gain on the sale related to the earn-out provisions, net of tax				$ 30,000	$ 87,000

XML

Supplemental Financial Information (Details 4) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Denominator:
Weighted average common shares used in basic per share computation	32,520	33,809
Dilutive stock options (in shares)	125
Dilutive restricted stock units (in shares)	68	54
Dilutive warrants (in shares)	3
Weighted average common shares used in diluted per share computation	32,716	33,863
Stock options
Shares excluded in the computation of income from continuing operations per share
Shares excluded in the computation of income from continuing operations per share	725	1,938
Warrants
Shares excluded in the computation of income from continuing operations per share
Shares excluded in the computation of income from continuing operations per share		15

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Stock Repurchase Program (Details) (USD $)	0 Months Ended	3 Months Ended		23 Months Ended	0 Months Ended	1 Months Ended
	Jun. 30, 2013	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Aug. 09, 2012 Maximum	Aug. 31, 2011 Maximum
Stock Repurchase Program
Value of common stock approved under stock repurchase program					$ 3,000,000	$ 3,000,000
Number of shares of common stock repurchased		175,000	308,000	2,272,000
Value of common stock available for repurchase under current program	783,000
Value of common stock repurchased				$ 3,500,000
Average price per share of common stock repurchased (in dollars per share)				$ 1.54

XML

Commitments and Contingencies (Details) (MAXxess, USD $)	0 Months Ended	3 Months Ended
	Jul. 23, 2013	Jun. 30, 2013 item	Aug. 31, 2009
Related Party Transaction
Number of directors included in investor group		2
Number of directors who are former Chief Executive Officers of the related parties		1
Promissory note payable issued to reporting entity for amounts previously owed under a sublease agreement			$ 274,000
Interest on promissory note (as a percent)	6.00%	6.00%
Principal amount on the note outstanding		259,000
Minimum
Related Party Transaction
Gross proceeds from financing by related party	$ 10,000,000	$ 10,000,000

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Supplemental Financial Information (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Activity related to warranty reserve
Balance at beginning of period	$ 169	$ 231
Addition charged to cost of revenues	55	(6)
Warranty claims	(46)	(28)
Balance at end of period	$ 178	$ 197

XML

Description of Business and Summary of Significant Accounting Policies

3 Months Ended

Jun. 30, 2013

Description of Business and Summary of Significant Accounting Policies

Description of Business and Summary of Significant Accounting Policies

1. Description of Business and Summary of Significant Accounting Policies

Description of Business

Iteris, Inc. (referred to collectively with our subsidiaries in these unaudited consolidated financial statements as “Iteris,” the “Company,” “we,” “our” and “us”) is a leading provider of intelligent information solutions to the traffic management market. We are focused on the development and application of advanced technologies and software-based information systems that reduce traffic congestion, provide measurement, management and predictive traffic analytics and improve the safety of surface transportation systems infrastructure. We also believe our products, services and solutions, in conjunction with sound traffic management, minimize the environmental impact of traffic congestion. We combine our unique intellectual property, products, decades of experience in traffic management and information technologies to offer a broad range of Intelligent Transportation Systems (“ITS”) solutions to customers throughout the U.S. and internationally. Iteris was originally incorporated in Delaware in 1987.

Basis of Presentation

Our unaudited consolidated financial statements include the accounts of Iteris, Inc. and our subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The results of continuing operations for all periods presented in the unaudited consolidated financial statements exclude the financial impact of discontinued operations. See Note 3, “Sale of Vehicle Sensors”, for further discussion related to discontinued operations presentation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in the preparation of the consolidated financial statements include the allowance for doubtful accounts, projections of taxable income used to assess realizability of deferred tax assets, inventory and warranty reserves, costs to complete long-term contracts, indirect cost rates used in cost-plus contracts, contract reserves, the valuation of purchased intangible asset and goodwill, the valuation of debt and equity instruments and estimates of future cash flows used to assess the recoverability of long-lived assets and the impairment of goodwill.

Revenue Recognition

Product revenues and related costs of sales are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery under the terms of the arrangement has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection of the receivable is reasonably assured. These criteria are typically met at the time of product shipment, but in certain circumstances, may not be met until receipt or acceptance by the customer. Accordingly, at the date revenue is recognized, the significant obligations or uncertainties concerning the sale have been resolved.

Transportation Systems revenues are derived primarily from long-term contracts with governmental agencies. When appropriate, revenues are recognized using the percentage of completion method of accounting, whereby revenue is recognized as contract performance progresses and is determined based on the relationship of costs incurred to total estimated costs. Any anticipated losses on contracts are charged to earnings when identified. Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. Certain of our revenues are recognized as services are performed and amounts are earned, which is measured by time incurred or other contractual milestones or output measures. Revenues accounted for in this manner generally relate to certain cost-plus fixed fee or time-and-materials contracts.

We recognize revenue from the sale of deliverables that are part of a multiple-element arrangement in accordance with applicable accounting guidance that establishes a relative selling price hierarchy permitting the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple-element arrangement where neither vendor specific objective evidence (“VSOE”) nor third-party evidence (“TPE”) of fair value is available for that deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, we are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (both delivered and undelivered items) that has stand-alone value based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on our estimated selling prices.

We account for multiple-element arrangements that consist only of software and software-related services in accordance with applicable accounting guidance for software and software-related transactions. For such transactions, revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by VSOE. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements and the only undelivered element is post-contract customer support or maintenance, and VSOE of the fair value of such support or maintenance does not exist, revenue from the entire arrangement is recognized ratably over the support period. When the fair value of a delivered element has not been established but VSOE of fair value exists for the undelivered elements, we use the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.

Costs in Excess of Billings on Uncompleted Contracts

Costs in excess of billings on uncompleted contracts in the accompanying unaudited consolidated balance sheets represent unbilled amounts earned and reimbursable under services sales arrangements. At any given period-end, a large portion of the balance in this account represents the accumulation of labor, materials and other costs that have not been billed due to timing, whereby the accumulation of each month’s costs and earnings are not administratively billed until the subsequent month. Also included in this account are amounts that will become billable according to contract terms, which usually require the consideration of the passage of time, achievement of milestones or completion of the project. Such unbilled amounts are expected to be billed and collected within the next twelve months.

Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts

Billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying unaudited consolidated balance sheets is comprised of cash collected from customers and billings to customers on contracts in advance of work performed, advance payments negotiated as a contract condition, estimated losses on uncompleted contracts, project-related legal liabilities and other project-related reserves. The unearned amounts are expected to be earned within the next twelve months.

We record provisions for estimated losses on uncompleted contracts in the period in which such losses become known. The cumulative effects of revisions to contract revenues and estimated completion costs are recorded in the accounting period in which the amounts become evident and can be reasonably estimated. These revisions can include such items as the effects of change orders and claims, warranty claims, liquidated damages or other contractual penalties, adjustments for audit findings on contract closeout settlements.

Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable.

Cash and cash equivalents consist primarily of demand deposits and money market funds maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with high credit quality financial institutions and therefore are believed to have minimal credit risk.

Our accounts receivable are primarily derived from billings with customers located throughout North America, as well as in the Middle East, Europe, South America and Asia. We generally do not require collateral or other security from customers. We maintain an allowance for doubtful accounts for potential credit losses, which losses have historically been within management’s expectations.

Fair Values of Financial Instruments

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

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and short-term investments with initial maturities of ninety days or less. Included in cash and cash equivalents of $19.1 million, as of June 30, 2013 and March 31, 2013, is approximately $500,000 of cash designated as collateral on performance bonds, as required under certain of our Transportation Systems contracts in the Middle East. The performance bonds require us to maintain 100% cash value of the bonds as collateral in a bank that is local to the purchasing agency. The performance bond collateral is required throughout the delivery of our services and maintained in the local bank until the contract is closed by the purchasing agency. We expect these requirements, and the related cash collateral restrictions, to remain in place through calendar year 2014.

Allowance for Doubtful Accounts

The collectability of our accounts receivable is evaluated through review of outstanding invoices and ongoing credit evaluations of our customers’ financial condition. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. We also maintain an allowance based on our historical collections experience. When we determine that collection is not likely, we write off accounts receivable against the allowance for doubtful accounts.

Inventories

Inventories consist of finished goods, work-in-process and raw materials and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

Property and Equipment

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

Goodwill and Long-Lived Assets

We evaluate goodwill on an annual basis in our fourth fiscal quarter or more frequently if we believe indicators of impairment exist. We have determined that our reporting units for purposes of testing for goodwill impairment are identical to our reportable segments for financial reporting purposes. In the fiscal year ended March 31, 2012 (“Fiscal 2012”), we adopted the provisions issued by the Financial Accounting Standards Board (“FASB”) that were intended to simplify goodwill impairment testing. This guidance permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a two-step goodwill impairment test. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their carrying values. We determine the fair values of our reporting units using the income valuation approach, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. We monitor the indicators for goodwill impairment testing between annual tests. Certain adverse business conditions impacting one or more reporting units would cause us to test goodwill for impairment on an interim basis.

We test long-lived assets and purchased intangible assets (other than goodwill) for impairment if we believe indicators of impairment exist. We determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long lived assets and purchased intangible assets.

Income Taxes

We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more-likely-than-not that some or all of the deferred tax assets will not be realized, which increases our income tax expense in the period such determination is made.

Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

Stock-Based Compensation

We record stock-based compensation in the unaudited consolidated statement of operations as an expense, based on the estimated grant date fair value of our stock-based awards, whereby such fair values are amortized over the requisite service period. Our stock-based awards are currently comprised of common stock options and restricted stock units. The fair value of our common stock option awards is estimated on the grant date using the Black-Scholes-Merton (“BSM”) option-pricing formula. While utilizing this model meets established requirements, the estimated fair values generated by it may not be indicative of the actual fair values of our common stock option awards as it does not consider certain factors important to those awards to employees, such as continued employment and periodic vesting requirements as well as limited transferability. The fair value of our restricted stock units is based on the closing market price of our common stock on the grant date. If there are any modifications or cancellations of the underlying unvested stock-based awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

Research and Development Expenditures

Research and development expenditures are charged to expense in the period incurred.

Shipping and Handling Costs

Shipping and handling costs are included as cost of revenues in the period during which the products ship.

Sales Taxes

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

Warranty

We generally provide a one to three year warranty from the original invoice date on all products, materials and workmanship. Products sold to various original equipment manufacturer customers sometimes carry longer warranties. Defective products will be either repaired or replaced, usually at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of revenues at the time revenue for that product is recognized. The accrued warranty reserve is included within accrued liabilities in the accompanying unaudited consolidated balance sheets.

Repair and Maintenance Costs

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

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends Accounting Standards Codification 820, Fair Value Measurements. ASU 2011-04 aims to eliminate certain differences that existed between U.S. and international fair value accounting concepts, and also clarifies existing guidance under GAAP. Additionally, among other disclosures, this ASU requires certain new quantitative and qualitative disclosures regarding unobservable fair value measurements. We adopted the amendments prescribed by ASU 2011-04 for our fiscal year ended March 31, 2013 (“Fiscal 2013”), which did not result in a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented; however, in

December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which deferred this requirement. The amendments prescribed by ASU 2011-05 are now effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We adopted ASU 2011-05 in Fiscal 2013, which did not result in a material impact on our consolidated financial statements.

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Sale of Vehicle Sensors

3 Months Ended

Jun. 30, 2013

Sale of Vehicle Sensors

Sale of Vehicle Sensors

3. Sale of Vehicle Sensors

On July 29, 2011, we completed the sale of substantially all of our assets used in connection with our Vehicle Sensors segment to Bendix Commercial Vehicle Systems LLC (“Bendix”), a member of Knorr-Bremse Group, pursuant to an Asset Purchase Agreement (the “Agreement”) signed on July 25, 2011 (the “Asset Sale”).

Under the terms of the Agreement, upon the closing of the Asset Sale, Bendix paid us $14 million in cash, subject to a $2 million holdback and adjustments based upon the working capital of the Vehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities of the Vehicle Sensors segment. In October 2012, we received approximately $1.7 million in connection with the resolution of the holdback provision. Furthermore, we are entitled to additional consideration in the form of the following performance and royalty-related earn-outs: Bendix is obligated to pay us an amount in cash equal to (i) 85% of revenue

associated with royalties received under our license and distribution agreements with Audiovox Electronics Corporation and Valeo Schalter and Sensoren GmbH through December 31, 2017 and (ii) 30% of the amount, if any, by which the amount of revenue generated from the sale of our lane departure warning systems exceeds Bendix’s projection for such revenue for the two years following the closing, each subject to certain reductions and limitations set forth in the Agreement. Since July 2011, on a cumulative basis, we have earned approximately $1.0 million in connection with royalty-related earn-outs provisions for a total of $14.7 million in cash from the Asset Sale.

In accordance with applicable accounting guidance, we determined that the Vehicle Sensors segment, which constituted one of our operating segments, qualified as a discontinued operation. The applicable financial results of the Vehicle Sensors segment have been reported as a discontinued operation in the accompanying unaudited consolidated statements of operations for all periods presented. For the three months ended June 30, 2013 and 2012, we recorded a gain on sale of discontinued operation in the accompanying unaudited consolidated statements of operations of approximately $30,000 and $87,000, net of tax, respectively, related to the earn-out provisions of the Agreement.

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Income Taxes

3 Months Ended

Jun. 30, 2013

Income Taxes

Income Taxes

6. Income Taxes

The following table sets forth our provision for income taxes, along with the corresponding effective tax rates:

	Three Months Ended
	June 30,
	2013			2012
	(In thousands, except percentages)
Provision for income taxes	$	(232	)	$	(314	)
Effective tax rate	35.1		%	34.7		%

On an interim basis, we estimate what our anticipated annual effective tax rate will be, while also separately considering applicable discrete and other non-recurring items, and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we refine our estimates based on actual events and financial results during the year. This process can result in significant changes to our expected effective tax rate. When this occurs, we adjust our income tax provision during the quarter in which our estimates are refined so that the year-to-date provision reflects the expected annual effective tax rate. These changes, along with adjustments to our deferred taxes, among others, may create fluctuations in our overall effective tax rate from quarter to quarter. As of June 30, 2013 and March 31, 2013, we have recorded a valuation allowance against certain of our state net operating losses in the amount of $188,000.

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Fair Value Measurements

3 Months Ended

Jun. 30, 2013

Fair Value Measurements

Fair Value Measurements

4. Fair Value Measurements

We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities or prices quoted in inactive markets; and Level 3, defined as unobservable inputs that are significant to the fair value of the asset or liability, and for which little or no market data exists, therefore requiring management to utilize its own assumptions to provide its best estimate of what market participants would use in valuing the asset or liability.

The liability for the estimated fair value of the contingent consideration in connection with our acquisitions of Meridian Environmental Technology, Inc. (“MET”) and Berkeley Transportation Systems, Inc. (“BTS”) was determined using Level 3 inputs based on a probabilistic calculation whereby we assigned estimated probabilities to achieving the earn-out targets and then discounted the total contingent consideration to net present value. The following table reconciles this liability measured at fair value on a recurring basis for the three months ended June 30, 2013 (in thousands):

Balance at March 31, 2013	$	961
Change in fair value included in net income	7
Balance at June 30, 2013	$	968

The current portion of the liability at June 30, 2013 and March 31, 2013 was $0.7 million and is included within accrued liabilities in the accompanying unaudited consolidated balance sheets. The change in the estimated fair value of the liability for the three months ended June 30, 2013 and 2012 is included as part of operating expenses in the accompanying unaudited consolidated statements of operations.

Other than the above, we did not have any material financial assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as of June 30, 2013 or June 30, 2012.

Our non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value on a non-recurring basis, generally when there is a transaction involving those assets such as a purchase transaction, a business combination or an adjustment for impairment. No non-financial assets were measured at fair value during the three months ended June 30, 2013 and 2012.

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Fair Value Measurements (Details) (USD $)			3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013 Commitments and contingencies	Mar. 31, 2013 Commitments and contingencies
Reconciliation of liability measured at fair value
Balance at the beginning of the period			$ 2,204,000
Change in fair value included in net income			7,000
Balance at the end of the period			2,211,000
Fair value disclosure of liabilities
Current portions of contingent consideration included within accrued liabilities			700,000	700,000
Non-financial assets measured at fair value
Non-financial assets measured at fair value	$ 0	$ 0

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Employee Benefit Plans (Details) (USD $)	3 Months Ended
	Jun. 30, 2013 item
Employee Benefit Plans
Number of stock incentive plans	3
Stock options
Number of Shares
Options outstanding at the beginning of the period (in shares)	1,744,000
Exercised (in shares)	(19,000)
Expired (in shares)	(31,000)
Options outstanding at the end of the period (in shares)	1,694,000
Weighted Average Exercise Price Per Share
Options outstanding at the beginning of the period (in dollars per share)	$ 1.74
Exercised (in dollars per share)	$ 1.41
Expired (in dollars per share)	$ 2.28
Options outstanding at the end of the period (in dollars per share)	$ 1.74
Restricted Stock Units
Weighted Average Exercise Price Per Share
Number of shares of common stock receivable upon vesting of each RSU	1
Number of Shares
Restricted stock units outstanding at the beginning of the period (in shares)	210,000
Restricted stock units outstanding at the end of the period (in shares)	210,000
2007 Plan
Employee Benefit Plans
Shares of common stock available for grant	921,000

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Consolidated Balance Sheets
Trade accounts receivable, allowance for doubtful accounts (in dollars)	$ 425	$ 322
Preferred stock, par value (in dollars per share)	$ 1.00	$ 1.00
Preferred stock, Authorized shares	2,000	2,000
Preferred stock, Issued shares	0	0
Preferred stock, outstanding shares	0	0
Common stock, par value (in dollars per share)	$ 0.10	$ 0.10
Common stock, Authorized shares	70,000	70,000
Common stock, Issued shares	32,470	32,626
Common stock, outstanding shares	32,470	32,626

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Stock Repurchase Program

3 Months Ended

Jun. 30, 2013

Stock Repurchase Program

Stock Repurchase Program

9. Stock Repurchase Program

In August 2011, our Board of Directors approved a stock repurchase program pursuant to which we were authorized to acquire up to $3 million of our outstanding common stock from time to time through August 2012. On August 9, 2012, our Board of Directors approved a new stock repurchase program pursuant to which we may acquire up to $3 million of our outstanding common stock for an unspecified length of time. Under the new program, we may repurchase shares from time to time in open-market and privately negotiated transactions and block trades, and may also repurchase shares pursuant to a 10b5-1 trading plan during our closed trading windows. There is no guarantee as to the exact number of shares that will be repurchased. We may modify or terminate the repurchase program at any time without prior notice. For the three months ended June 30, 2013 and 2012, we repurchased approximately 175,000 and 308,000 shares of our common stock, respectively. As of June 30, 2013, $783,000 remains available for the repurchase of our common stock under our current program.

From inception of the program in August 2011 through June 30, 2013, we repurchased approximately 2,272,000 shares of our common stock for an aggregate of approximately $3.5 million at an average price per share of $1.54. All repurchased shares have been retired and resumed their status as authorized and unissued shares of our common stock as of June 30, 2013.

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash flows from operating activities
Net income	$ 460	$ 676
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	233	359
Depreciation of property and equipment	211	223
Stock-based compensation	68	67
Amortization of intangible assets	161	161
Change in fair value of contingent consideration	7	(334)
Gain on sale of discontinued operation, net of tax	(30)	(87)
Changes in operating assets and liabilities, net of effects of discontinued operation:
Accounts receivable	(1,511)	870
Net costs and estimated earnings in excess of billings	1,871	48
Inventories	392	84
Prepaid expenses and other assets	80	(242)
Accounts payable and accrued expenses	(1,463)	(862)
Net cash provided by operating activities	479	963
Cash flows from investing activities
Purchases of property and equipment	(145)	(113)
Capitalized software	(104)	(54)
Net cash used in investing activities	(249)	(167)
Cash flows from financing activities
Payments on long-term debt		(634)
Repurchases of common stock	(302)	(442)
Proceeds from stock option exercises	27	125
Net cash used in financing activities	(275)	(951)
Decrease in cash and cash equivalents	(45)	(155)
Cash and cash equivalents at beginning of period	19,137	18,701
Cash and cash equivalents at end of period	$ 19,092	$ 18,546

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Current assets:
Cash and cash equivalents	$ 19,092	$ 19,137
Trade accounts receivable, net of allowance for doubtful accounts of $425 and $322 at June 30, 2013 and March 31, 2013, respectively	12,457	10,946
Costs in excess of billings on uncompleted contracts	5,171	6,346
Inventories	2,073	2,465
Deferred income taxes	2,363	2,363
Prepaid expenses and other current assets	782	852
Total current assets	41,938	42,109
Property and equipment, net	1,796	1,862
Deferred income taxes	5,655	5,888
Intangible assets, net	2,067	2,124
Goodwill	17,318	17,318
Other assets	230	210
Total assets	69,004	69,511
Current liabilities:
Trade accounts payable	4,556	5,411
Accrued payroll and related expenses	3,012	3,374
Accrued liabilities	1,840	1,979
Billings in excess of costs and estimated earnings on uncompleted contracts	2,654	1,958
Total current liabilities	12,062	12,722
Deferred rent	211	312
Unrecognized tax benefits	284	286
Other non-current liabilities	313	310
Total liabilities	12,870	13,630
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1.00 par value: Authorized shares - 2,000 Issued and outstanding shares - none
Common stock, $0.10 par value: Authorized shares - 70,000 at June 30, 2013 and March 31, 2013 Issued and outstanding shares - 32,470 at June 30, 2013 and 32,626 at March 31, 2013	3,248	3,264
Additional paid-in capital	135,611	135,802
Accumulated deficit	(82,725)	(83,185)
Total stockholders' equity	56,134	55,881
Total liabilities and stockholders' equity	$ 69,004	$ 69,511

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Credit Facility (Details) (USD $)		3 Months Ended			3 Months Ended	0 Months Ended	1 Months Ended
	Oct. 31, 2008 Credit facility	Jun. 30, 2013 Revolving Line of Credit	Jun. 30, 2012 Revolving Line of Credit	Oct. 31, 2008 Revolving Line of Credit	Jun. 30, 2013 Revolving Line of Credit Maximum	Oct. 31, 2008 Bank Term Note	Jun. 30, 2012 Bank Term Note
Revolving Line of Credit
Maximum borrowing capacity	$ 19,500,000			$ 12,000,000
Term of debt instrument		2 years				48 months
Principal amount						7,500,000
Early termination fees							0
Prime rate at the end of the period (as a percent)		3.25%
Monthly interest rate basis					prime rate
Basis points added to reference rate (as a percent)					0.25%
Unused line fee (as a percent)		0.25%
Amount outstanding		$ 0	$ 0

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Supplemental Financial Information (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Mar. 31, 2013
Inventories
Materials and supplies	$ 1,307	$ 1,504
Work in process	139	105
Finished goods	627	856
Total inventories	$ 2,073	$ 2,465

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Business Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Jun. 30, 2013 item	Jun. 30, 2012
Business Segment Information
Number of reportable segments	3
Business Segments
Total Revenues	$ 17,030	$ 16,304
Segment operating income (loss)	669	903
Unallocated amounts:
Amortization of intangible assets	(161)	(161)
Change in fair value of contingent consideration	(7)	334
Other (expense) income, net	(3)	5
Interest expense, net	(4)	(5)
Income from continuing operations before income taxes	662	903
Total reportable segments
Business Segments
Total Revenues	17,030	16,304
Segment operating income (loss)	2,254	2,197
Unallocated amounts:
Corporate and other expenses	(1,417)	(1,467)
Amortization of intangible assets	(161)	(161)
Change in fair value of contingent consideration	(7)	334
Other (expense) income, net	(3)	5
Interest expense, net	(4)	(5)
Income from continuing operations before income taxes	662	903
Roadway Sensors
Business Segments
Total Revenues	7,529	7,184
Segment operating income (loss)	1,214	1,392
Transportation Systems
Business Segments
Total Revenues	8,258	7,849
Segment operating income (loss)	1,286	856
Transportation Systems | Advanced traveler information systems
Unallocated amounts:
Number of advanced traveler information systems	511
iPerform
Business Segments
Total Revenues	1,243	1,271
Segment operating income (loss)	$ (246)	$ (51)

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Employee Benefit Plans

3 Months Ended

Jun. 30, 2013

Employee Benefit Plans

Employee Benefit Plans

8. Employee Benefit Plans

We currently administer three separate stock incentive plans. Of these plans, we may only grant future awards from the 2007 Omnibus Incentive Plan (the “2007 Plan”). The 2007 Plan allows for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and other stock-based awards. At June 30, 2013, there were approximately 921,000 shares of common stock available for grant or issuance under the 2007 Plan.

Stock Options

A summary of activity with respect to our stock options for the three months ended June 30, 2013 is as follows:

	Number of Shares		Weighted- Average Exercise Price Per Share
	(In thousands)
Options outstanding at March 31, 2013	1,744		$	1.74
Granted	—		—
Exercised	(19	)	1.41
Forfeited	—		—
Expired	(31	)	2.28
Options outstanding at June 30, 2013	1,694		$	1.74

Restricted Stock Units

A summary of activity with respect to our RSUs, which entitle the holder to receive one share of our common stock for each RSU upon vesting, for the three months ended June 30, 2013 is as follows:

	Number of
	Shares
	(In thousands)
Restricted stock units ouststanding at March 31, 2013	210
Restricted stock units granted	—
Restricted stock units vested	—
Restricted stock units forfeited	—
Restricted stock units ouststanding at June 30, 2013	210

Stock-Based Compensation Expense

The following table presents stock-based compensation expense that is included in each functional line item on our unaudited consolidated statements of operations:

	Three Months Ended
	June 30,
	2013		2012
	(In thousands)
Cost of revenues	$	9	$	10
Selling, general and administrative expense	59		57
	$	68	$	67

At June 30, 2013, there was approximately $355,000 of unrecognized compensation expense related to unvested stock options and RSUs. This expense is currently expected to be recognized over a weighted average period of approximately 2.1 years. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock options, RSUs or other stock-based awards.

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Income Taxes (Details) (USD $)	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Mar. 31, 2013
Income Taxes
Provision for income taxes	$ (232,000)	$ (314,000)
Effective tax rate (as a percent)	35.10%	34.70%
Valuation allowance on deferred tax assets	$ 188,000		$ 188,000

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Description of Business and Summary of Significant Accounting Policies (Policies)

3 Months Ended

Jun. 30, 2013

Description of Business and Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

Our unaudited consolidated financial statements include the accounts of Iteris, Inc. and our subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The results of continuing operations for all periods presented in the unaudited consolidated financial statements exclude the financial impact of discontinued operations. See Note 3, “Sale of Vehicle Sensors”, for further discussion related to discontinued operations presentation.

Use of Estimates

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in the preparation of the consolidated financial statements include the allowance for doubtful accounts, projections of taxable income used to assess realizability of deferred tax assets, inventory and warranty reserves, costs to complete long-term contracts, indirect cost rates used in cost-plus contracts, contract reserves, the valuation of purchased intangible asset and goodwill, the valuation of debt and equity instruments and estimates of future cash flows used to assess the recoverability of long-lived assets and the impairment of goodwill.

Revenue Recognition

Revenue Recognition

Product revenues and related costs of sales are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery under the terms of the arrangement has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection of the receivable is reasonably assured. These criteria are typically met at the time of product shipment, but in certain circumstances, may not be met until receipt or acceptance by the customer. Accordingly, at the date revenue is recognized, the significant obligations or uncertainties concerning the sale have been resolved.

Transportation Systems revenues are derived primarily from long-term contracts with governmental agencies. When appropriate, revenues are recognized using the percentage of completion method of accounting, whereby revenue is recognized as contract performance progresses and is determined based on the relationship of costs incurred to total estimated costs. Any anticipated losses on contracts are charged to earnings when identified. Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. Profit incentives are included in revenues when their realization is reasonably assured. Certain of our revenues are recognized as services are performed and amounts are earned, which is measured by time incurred or other contractual milestones or output measures. Revenues accounted for in this manner generally relate to certain cost-plus fixed fee or time-and-materials contracts.

We recognize revenue from the sale of deliverables that are part of a multiple-element arrangement in accordance with applicable accounting guidance that establishes a relative selling price hierarchy permitting the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple-element arrangement where neither vendor specific objective evidence (“VSOE”) nor third-party evidence (“TPE”) of fair value is available for that deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, we are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (both delivered and undelivered items) that has stand-alone value based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on our estimated selling prices.

We account for multiple-element arrangements that consist only of software and software-related services in accordance with applicable accounting guidance for software and software-related transactions. For such transactions, revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by VSOE. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements and the only undelivered element is post-contract customer support or maintenance, and VSOE of the fair value of such support or maintenance does not exist, revenue from the entire arrangement is recognized ratably over the support period. When the fair value of a delivered element has not been established but VSOE of fair value exists for the undelivered elements, we use the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.

Costs in Excess of Billings on Uncompleted Contracts

Costs in Excess of Billings on Uncompleted Contracts

Costs in excess of billings on uncompleted contracts in the accompanying unaudited consolidated balance sheets represent unbilled amounts earned and reimbursable under services sales arrangements. At any given period-end, a large portion of the balance in this account represents the accumulation of labor, materials and other costs that have not been billed due to timing, whereby the accumulation of each month’s costs and earnings are not administratively billed until the subsequent month. Also included in this account are amounts that will become billable according to contract terms, which usually require the consideration of the passage of time, achievement of milestones or completion of the project. Such unbilled amounts are expected to be billed and collected within the next twelve months.

Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts

Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts

Billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying unaudited consolidated balance sheets is comprised of cash collected from customers and billings to customers on contracts in advance of work performed, advance payments negotiated as a contract condition, estimated losses on uncompleted contracts, project-related legal liabilities and other project-related reserves. The unearned amounts are expected to be earned within the next twelve months.

We record provisions for estimated losses on uncompleted contracts in the period in which such losses become known. The cumulative effects of revisions to contract revenues and estimated completion costs are recorded in the accounting period in which the amounts become evident and can be reasonably estimated. These revisions can include such items as the effects of change orders and claims, warranty claims, liquidated damages or other contractual penalties, adjustments for audit findings on contract closeout settlements.

Concentration of Credit Risk

Concentration of Credit Risk

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable.

Cash and cash equivalents consist primarily of demand deposits and money market funds maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with high credit quality financial institutions and therefore are believed to have minimal credit risk.

Our accounts receivable are primarily derived from billings with customers located throughout North America, as well as in the Middle East, Europe, South America and Asia. We generally do not require collateral or other security from customers. We maintain an allowance for doubtful accounts for potential credit losses, which losses have historically been within management’s expectations.

Fair Values of Financial Instruments

Fair Values of Financial Instruments

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

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and short-term investments with initial maturities of ninety days or less. Included in cash and cash equivalents of $19.1 million, as of June 30, 2013 and March 31, 2013, is approximately $500,000 of cash designated as collateral on performance bonds, as required under certain of our Transportation Systems contracts in the Middle East. The performance bonds require us to maintain 100% cash value of the bonds as collateral in a bank that is local to the purchasing agency. The performance bond collateral is required throughout the delivery of our services and maintained in the local bank until the contract is closed by the purchasing agency. We expect these requirements, and the related cash collateral restrictions, to remain in place through calendar year 2014.

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts

The collectability of our accounts receivable is evaluated through review of outstanding invoices and ongoing credit evaluations of our customers’ financial condition. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. We also maintain an allowance based on our historical collections experience. When we determine that collection is not likely, we write off accounts receivable against the allowance for doubtful accounts.

Inventories

Inventories

Inventories consist of finished goods, work-in-process and raw materials and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

Property and Equipment

Property and Equipment

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

Goodwill and Long-Lived Assets

Goodwill and Long-Lived Assets

We evaluate goodwill on an annual basis in our fourth fiscal quarter or more frequently if we believe indicators of impairment exist. We have determined that our reporting units for purposes of testing for goodwill impairment are identical to our reportable segments for financial reporting purposes. In the fiscal year ended March 31, 2012 (“Fiscal 2012”), we adopted the provisions issued by the Financial Accounting Standards Board (“FASB”) that were intended to simplify goodwill impairment testing. This guidance permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we conduct a two-step goodwill impairment test. The first step of the impairment test involves comparing the fair values of the applicable reporting units with their carrying values. We determine the fair values of our reporting units using the income valuation approach, as well as other generally accepted valuation methodologies. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, we perform the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. We monitor the indicators for goodwill impairment testing between annual tests. Certain adverse business conditions impacting one or more reporting units would cause us to test goodwill for impairment on an interim basis.

We test long-lived assets and purchased intangible assets (other than goodwill) for impairment if we believe indicators of impairment exist. We determine whether the carrying value of an asset or asset group is recoverable, based on comparisons to undiscounted expected future cash flows the asset are expected to generate. If an asset is not recoverable, we record an impairment loss equal to the amount by which the carrying value of the asset exceeds its fair value. We primarily use the income valuation approach to determine the fair value of our long lived assets and purchased intangible assets.

Income Taxes

Income Taxes

We utilize the asset and liability method of accounting for income taxes, under which deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse. A valuation allowance is recorded when it is more-likely-than-not that some or all of the deferred tax assets will not be realized, which increases our income tax expense in the period such determination is made.

Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

Stock-Based Compensation

Stock-Based Compensation

We record stock-based compensation in the unaudited consolidated statement of operations as an expense, based on the estimated grant date fair value of our stock-based awards, whereby such fair values are amortized over the requisite service period. Our stock-based awards are currently comprised of common stock options and restricted stock units. The fair value of our common stock option awards is estimated on the grant date using the Black-Scholes-Merton (“BSM”) option-pricing formula. While utilizing this model meets established requirements, the estimated fair values generated by it may not be indicative of the actual fair values of our common stock option awards as it does not consider certain factors important to those awards to employees, such as continued employment and periodic vesting requirements as well as limited transferability. The fair value of our restricted stock units is based on the closing market price of our common stock on the grant date. If there are any modifications or cancellations of the underlying unvested stock-based awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense.

Research and Development Expenditures

Research and Development Expenditures

Research and development expenditures are charged to expense in the period incurred.

Shipping and Handling Costs

Shipping and Handling Costs

Shipping and handling costs are included as cost of revenues in the period during which the products ship.

Sales Taxes

Sales Taxes

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

Warranty

Warranty

We generally provide a one to three year warranty from the original invoice date on all products, materials and workmanship. Products sold to various original equipment manufacturer customers sometimes carry longer warranties. Defective products will be either repaired or replaced, usually at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of revenues at the time revenue for that product is recognized. The accrued warranty reserve is included within accrued liabilities in the accompanying unaudited consolidated balance sheets.

Repair and Maintenance Costs

Repair and Maintenance Costs

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

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends Accounting Standards Codification 820, Fair Value Measurements. ASU 2011-04 aims to eliminate certain differences that existed between U.S. and international fair value accounting concepts, and also clarifies existing guidance under GAAP. Additionally, among other disclosures, this ASU requires certain new quantitative and qualitative disclosures regarding unobservable fair value measurements. We adopted the amendments prescribed by ASU 2011-04 for our fiscal year ended March 31, 2013 (“Fiscal 2013”), which did not result in a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented; however, in

December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which deferred this requirement. The amendments prescribed by ASU 2011-05 are now effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We adopted ASU 2011-05 in Fiscal 2013, which did not result in a material impact on our consolidated financial statements.

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Commitments and Contingencies

3 Months Ended

Jun. 30, 2013

Commitments and Contingencies

Commitments and Contingencies

7. Commitments and Contingencies

Litigation and Other Contingencies

As a provider of traffic engineering services, products and solutions, we are currently, and may in the future, from time to time, be involved in litigation relating to claims arising out of our operations in the normal course of business. While we cannot accurately predict the outcome of such litigation, we currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Related Party Transaction

We previously subleased office space to MAXxess Systems, Inc. (“MAXxess”), one of our former subsidiaries that we sold in September 2003. MAXxess is currently owned by an investor group that includes two of our directors, one of whom is the former Chief Executive Officer of MAXxess. The sublease terminated in September 2007, at which time MAXxess owed us an aggregate of $274,000 related to this sublease and certain ancillary corporate services that we provided to MAXxess. In August 2009, MAXxess executed a promissory note payable to Iteris in the original principal amount of $274,000. The promissory note bears interest at a rate of 6% per annum, compounded annually, with accrued interest to be paid annually on the first business day of each calendar year. Payments under the note may be made in bona fide services rendered by MAXxess to Iteris to the extent such services and amounts are pre-approved in writing by us. All amounts outstanding under the note will become due and payable on the earliest of (i) August 10, 2014, (ii) a change of control in MAXxess, or (iii) a financing by MAXxess resulting in gross proceeds of at least $10 million. As of June 30, 2013, approximately $259,000 of the original principal balance was outstanding and payable to Iteris.

On July 23, 2013, the promissory note was amended and restated. The amended and restated note bears interest at a rate of 6% per annum, compounded annually, with accrued interest to be paid quarterly on the first business day of each calendar quarter. Payments under the amended and restated note may only be paid in cash and all amounts outstanding will become due and payable on the earliest of (i) August 10, 2016, (ii) a change of control in MAXxess, or (iii) a financing by MAXxess resulting in gross proceeds of at least $10 million. We have previously fully reserved for amounts owed to us by MAXxess and all outstanding principal remains fully reserved.

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Supplemental Financial Information

3 Months Ended

Jun. 30, 2013

Supplemental Financial Information

Supplemental Financial Information

2. Supplemental Financial Information

Inventories

The following table presents details of our inventories:

	June 30,		March 31,
	2013		2013
	(In thousands)
Materials and supplies	$	1,307	$	1,504
Work in process	139		105
Finished goods	627		856
	$	2,073	$	2,465

Intangible Assets

The following table presents details of our intangible assets:

	June 30, 2013					March 31, 2013
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
	(In thousands)
Technology	$	1,856	$	(1,239	)	$	1,856	$	(1,178	)
Customer contracts / relationships	750		(278		)	750		(247		)
Trade names and non-compete agreements	1,110		(563		)	1,110		(495		)
Capitalized software development costs	431		—			328		—
Total	$	4,147	$	(2,080	)	$	4,044	$	(1,920	)

We do not have any intangible assets with indefinite useful lives. As of June 30, 2013, future estimated amortization expense is as follows:

Fiscal Year Ending March 31:
(In thousands)
Remainder of 2014	$	538
2015	575
2016	503
2017	354
2018	88
Thereafter	9
	$	2,067

If we acquire additional intangible assets in future periods, our future amortization expense will increase.

Warranty Reserve Activity

The following table presents activity related to the warranty reserve:

	Three Months Ended
	June 30,
	2013			2012
	(In thousands)
Balance at beginning of period	$	169		$	231
Addition charged to cost of revenues	55			(6		)
Warranty claims	(46		)	(28		)
Balance at end of period	$	178		$	197

Comprehensive Income

Comprehensive income is equal to net income for all periods presented in the accompanying unaudited consolidated statements of operations.

Earnings Per Share

The following table sets forth the computation of basic and diluted income per share from continuing operations:

	Three Months Ended
	June 30,
	2013	2012
	(In thousands)
Denominator:
Weighted average common shares used in basic per share computation	32,520	33,809
Dilutive stock options	125	—
Dilutive restricted stock units	68	54
Dilutive warrants	3	—
Weighted average common shares used in diluted per share computation	32,716	33,863

The following instruments were excluded for purposes of calculating weighted average common share equivalents in the computation of diluted income from continuing operations per share as their effect would have been anti-dilutive:

	Three Months Ended
	June 30,
	2013	2012
	(In thousands)
Stock options	725	1,938
Restricted stock units	—	—
Warrants	—	15

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Employee Benefit Plans (Details 2) (USD $)	3 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Stock-Based Compensation
Stock-based compensation expense	$ 68,000	$ 67,000
Unrecognized compensation expense related to unvested stock options and RSUs	355,000
Weighted average period over which compensation expense is expected to be recognized	2 years 1 month 6 days
Cost of revenues
Stock-Based Compensation
Stock-based compensation expense	9,000	10,000
Selling, general and administrative expense
Stock-Based Compensation
Stock-based compensation expense	$ 59,000	$ 57,000

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Income Taxes (Tables)

3 Months Ended

Jun. 30, 2013

Income Taxes

Schedule of provision for income taxes and the corresponding effective tax rates

	Three Months Ended
	June 30,
	2013			2012
	(In thousands, except percentages)
Provision for income taxes	$	(232	)	$	(314	)
Effective tax rate	35.1		%	34.7		%

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Business Segment Information

3 Months Ended

Jun. 30, 2013

Business Segment Information

Business Segment Information

10. Business Segment Information

We operate in three reportable segments: Roadway Sensors, Transportation Systems and iPerform.

The Roadway Sensors segment includes, among other products, our Vantage, VersiCam, Pico, Vantage Vector, SmartCycle, SmartScan and Abacus vehicle detection systems for traffic intersection control, incident detection and certain highway traffic data collection applications.

The Transportation Systems segment includes transportation engineering and consulting services and the development of transportation management and traveler information systems for the ITS industry. During Fiscal 2012 and Fiscal 2013, this segment included the operations of MET, which specializes in 511 advanced traveler information systems and offers predictive weather and Maintenance Decision Support System (“MDSS”) management tools that allow users to create solutions to meet roadway maintenance decision needs. As of April 1, 2013, the predictive weather and MDSS services were reassigned to the iPerform segment to better align our predictive weather and traffic capabilities, resources and initiatives. Prior year segment information presented in the table below has been re-classified to reflect this change.

The iPerform segment includes our performance measurement and information management solutions, including all the operations of BTS, which specializes in transportation performance measurement, as well as the predictive weather and MDSS services reassigned from the Transportation Systems segment on April 1, 2013. During Fiscal 2012, we began the development of IterisPeMS.  IterisPeMS is a state-of-the-art, information management software suite that utilizes a wide range of data resources and analytical techniques to determine current and future traffic patterns, permitting the effective performance analysis and management of traffic infrastructure resources. This information can then be analyzed by traffic professionals to measure how a transportation network is performing and to identify potential areas of improvement. IterisPeMS is also capable of providing users with predictive traffic analytics and easy-to-use visualization and animation features based on historical traffic conditions.

The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies (Note 1). Certain corporate expenses, including interest and amortization of intangible assets, are not allocated to the segments. The reportable segments are each managed separately because they manufacture and distribute distinct products or provide services with different processes. All reported segment revenues are derived from external customers.

The following table sets forth selected unaudited consolidated financial information for our reportable segments for the three months ended June 30, 2013 and 2012:

	Roadway Sensors		Transportation Systems		iPerform			Total
	(In thousands)
Three Months Ended June 30, 2013
Total revenues	$	7,529	$	8,258	$	1,243		$	17,030
Segment operating income (loss)	1,214		1,286		(246		)	2,254
Three Months Ended June 30, 2012
Total revenues	$	7,184	$	7,849	$	1,271		$	16,304
Segment operating income (loss)	1,392		856		(51		)	2,197

The following table reconciles total segment income to unaudited consolidated income from continuing operations before income taxes:

	Three Months Ended
	June 30,
	2013			2012
	(In thousands)
Segment operating income:
Total income from reportable segments	$	2,254		$	2,197
Unallocated amounts:
Corporate and other expenses	(1,417		)	(1,467		)
Amortization of intangible assets	(161		)	(161		)
Change in fair value of contingent consideration	(7		)	334
Other (expense) income, net	(3		)	5
Interest expense, net	(4		)	(5		)
Income from continuing operations before income taxes	$	662		$	903

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Description of Business and Summary of Significant Accounting Policies (Details) (USD $)	3 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Jun. 30, 2012	Mar. 31, 2012
Cash and Cash Equivalents
Cash and cash equivalents	$ 19,092,000	$ 19,137,000	$ 18,546,000	$ 18,701,000
Cash designated as collateral on performance bonds	$ 500,000
Percentage of cash value of the bonds as collateral	100.00%
Maximum
Costs in Excess of Billings on Uncompleted Contracts
Expected period for unbilled amounts to be billed and collected	12 months
Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts
Expected period for unearned amounts to be earned	12 months
Warranty
Warranty period	3 years
Maximum | Property and equipment
Property and Equipment
Useful life	8 years
Minimum
Warranty
Warranty period	1 year
Minimum | Property and equipment
Property and Equipment
Useful life	3 years

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Employee Benefit Plans (Tables)

3 Months Ended

Jun. 30, 2013

Employee Benefit Plans

Summary of activity with respect to stock options

	Number of Shares		Weighted- Average Exercise Price Per Share
	(In thousands)
Options outstanding at March 31, 2013	1,744		$	1.74
Granted	—		—
Exercised	(19	)	1.41
Forfeited	—		—
Expired	(31	)	2.28
Options outstanding at June 30, 2013	1,694		$	1.74

Summary of activity with respect to RSUs

	Number of
	Shares
	(In thousands)
Restricted stock units ouststanding at March 31, 2013	210
Restricted stock units granted	—
Restricted stock units vested	—
Restricted stock units forfeited	—
Restricted stock units ouststanding at June 30, 2013	210

Schedule of stock-based compensation expense

	Three Months Ended
	June 30,
	2013		2012
	(In thousands)
Cost of revenues	$	9	$	10
Selling, general and administrative expense	59		57
	$	68	$	67

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Document and Entity Information	3 Months Ended
	Jun. 30, 2013	Jul. 25, 2013
Document and Entity Information
Entity Registrant Name	ITERIS, INC.
Entity Central Index Key	0000350868
Document Type	10-Q
Document Period End Date	Jun. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--03-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		32,470,331
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1

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Business Segment Information (Tables)

3 Months Ended

Jun. 30, 2013

Business Segment Information

Schedule of selected unaudited consolidated financial information for reportable segments

	Roadway Sensors		Transportation Systems		iPerform			Total
	(In thousands)
Three Months Ended June 30, 2013
Total revenues	$	7,529	$	8,258	$	1,243		$	17,030
Segment operating income (loss)	1,214		1,286		(246		)	2,254
Three Months Ended June 30, 2012
Total revenues	$	7,184	$	7,849	$	1,271		$	16,304
Segment operating income (loss)	1,392		856		(51		)	2,197

Schedule of reconciliation of total segment income to unaudited consolidated income from continuing operations before income taxes

	Three Months Ended
	June 30,
	2013			2012
	(In thousands)
Segment operating income:
Total income from reportable segments	$	2,254		$	2,197
Unallocated amounts:
Corporate and other expenses	(1,417		)	(1,467		)
Amortization of intangible assets	(161		)	(161		)
Change in fair value of contingent consideration	(7		)	334
Other (expense) income, net	(3		)	5
Interest expense, net	(4		)	(5		)
Income from continuing operations before income taxes	$	662		$	903